FIDELITY FEDERAL BANCORP AND SUBSIDIARIES
Financial Highlights
(Dollars in Thousands, Except Share and Per Share Data)
Six months
December 31, ended
2000 December 31, Change
1999
- ------------------------------------------------------------------------------------------------------
Per Share
Basic net income (loss) $ (.29) $ (.66) (56.06)%
Diluted net income (loss) (.29) (.66) (56.06)
Book value at year end 1.90 1.72 10.47
Market price (bid) at year end 1.31 1.25 4.80
For the Year
Net interest income $ 3,643 $ 1,751 108.05%
Provision for loan losses 670 1,345 (50.19)
Non-interest income 1,816 1,001 81.42
Non-interest expense 7,314 5,148 42.07
Net income (loss) (1,156) (2,070) (44.15)
At Year End
Total assets $ 166,466 $ 171,457 (2.91)%
Loans (net) 107,842 96,919 11.27
Total deposits 126,944 135,016 (5.98)
Total stockholders' equity 8,775 5,427 61.69
Averages
Total assets $ 163,925 $ 170,719 (3.98)%
Total earning assets 146,492 155,301 (5.67)
Total loans 106,599 108,455 (1.71)
Total deposits 124,970 128,882 (3.04)
Total stockholders' equity 7,164 7,992 (10.36)
Profitability Ratios
Return on average assets (.71)% (2.41)%
Return on average stockholders' equity (16.14) (51.37)
Net interest margin 2.49 2.24
Loan Quality Ratios
Net charge offs to average loans (.72)% 5.20%
Allowance for loan losses to loans at end of period 1.75 2.04
Valuation allowance for letters of
credit to total letters of credit 11.80 13.00
Savings Bank Capital Ratios
Tangible capital to adjusted total assets 8.42% 6.80%
Risk-based capital ratios
Tier I capital 10.31 9.10
Total capital 13.80 14.30
Other Data
Average common and common equivalent shares outstanding 4,057,168 3,147,662
Number of full-time equivalent employees at year end 66 90
Number of banking offices 5 4
2
FIDELITY FEDERAL BANCORP AND SUBSIDIARIES
Letter To Our Shareholders
Your company, Fidelity Federal Bancorp, is the parent company of United Fidelity
Bank, fsb, which is a community bank providing financial services through its
five banking offices in the Evansville area.
Your company saw significant change during the year 2000, including:
o The completion of the stock sale to Pedcor Holdings, LLC, which raised $4.3
million in equity capital for Fidelity Federal;
o The opening by United Fidelity Bank of a new branch banking office in
Warrick County;
o The adoption and ongoing implementation of a strategic plan which provides
for significant improvement in overall profitability and balance sheet
quality;
o The reduction in outstanding bank debt of the parent company, Fidelity
Federal;
o An increased focus by United Fidelity Bank on core banking activities,
including our consumer lending area;
o The successful implementation of "Y2K" procedures at the beginning of the
year with no disruptions to service;
o An increased level of community involvement by Fidelity Federal and its
associates;
o An improvement in the tangible capital ratio of United Fidelity Bank, and
o A return to profitable operations for Fidelity Federal in the fourth
quarter of 2000.
Much of this change resulted from our continuing commitment to providing an
unsurpassed level of service to our customers and our community. Our mission
statement provides:
United Fidelity Bank shall be the premier community banking institution
providing financial services for our market by surpassing customer expectations
and fulfilling community needs in a manner that enhances value.
We recognize that although improvements were made in 2000, there is still much
work to be completed. Over the course of 2001, we will continue our efforts to
improve the quality of our balance sheet. We also plan to upgrade our data
processing systems and product delivery channels to further enhance the level of
our customer service. The opening of our new banking office serving the growing
Warrick County area marks the first new office of United Fidelity in many years.
This office will be a focal point for management in 2001 as we introduce our
products and our level of customer service to the Warrick County area.
In closing, we recognize that the accomplishments of the past year could not
have been completed without the exceptional efforts of our associates, who are
committed to maximizing both the value of your investment and our impact in the
community. We also would like to extend our collective thanks to our
shareholders for their continuing support of our efforts.
Jack Cunningham Donald R. Neel
Chairman President and CEO
Fidelity Federal Bancorp United Fidelity Bank
3
FIDELITY FEDERAL BANCORP AND SUBSIDIARIES
MARKET SUMMARY
MARKET FOR COMMON STOCK AND RELATED STOCKHOLDER MATTERS
Fidelity's common stock is traded on the NASDAQ National Market System under the
symbol FFED. The following table sets forth, for the periods indicated, the high
and low bid prices per share as reported by NASDAQ. The bid prices represent
prices between dealers, do not include retail mark-up, mark-down, or commissions
and may not represent actual transactions.
2000 1999
------------------------------------------------------
Common Stock Bid Prices Common Stock Bid Prices
------------------------------------------------------
Year Ended June 30 High Low High Low
- -----------------------------------------------------------------------------
First quarter $3 5/16 $1 1/4 $3 1/16 $2 5/8
Second quarter 2 7/8 1 3/4 2 7/8 1 1/4
Third quarter 2 5/8 2
Fourth quarter 2 1/8 1 1/4
We have not paid any cash dividends on our common stock since July 6, 1998 and
do not anticipate paying cash dividends in the foreseeable future, since we are
dependent upon United for funds for dividends and, under the terms of the
Supervisory Agreement, United cannot pay a dividend to Fidelity without approval
of the OTS. For the foreseeable future, we anticipate that United will retain
any earnings which it generates or, subject to OTS approval, pay a portion of
these earnings to us in order for us to service our existing debt. Unlike
United, Fidelity is not subject to any regulatory restriction on future
dividends. Fidelity's dividend policy is to pay cash or distribute stock
dividends when the 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. Refer to the "Other
Restrictions" footnote in Fidelity's consolidated financial statements for
further details.
4
FIDELITY FEDERAL BANCORP AND SUBSIDIARIES
Selected Statistical Information
(Dollars in Thousands, Except Share and Per Share Data)
Six months
ended
December 31, December 31, June 30, June 30, June 30,
Selected Financial Data as of 2000 1999 1999 1998 1997
- ---------------------------------------------------------------------------------------------------------------------
Total assets $ 166,466 $ 171,457 $ 172,253 $ 197,046 $ 240,819
Interest-bearing deposits 14,718 22,911 14,668 6,266 1,765
Investment securities available 21,001 24,305 27,325 9,854 13,790
for sale
Loans, net 107,842 96,919 110,436 156,683 203,183
Deposits 126,944 135,016 128,596 148,939 181,787
Short-term borrowings 28 89 128 2,531 5,191
Long-term debt 23,842 23,504 29,149 29,488 38,089
Stockholders' equity 8,775 5,427 7,814 7,515 12,936
Selected Operations Data for Year Ended
Interest income $ 12,100 $ 6,019 $ 14,094 $ 17,192 $ 20,282
Interest expense 8,457 4,268 9,730 11,586 13,831
---------------------------------------------------------------------------
Net interest income 3,643 1,751 4,364 5,606 6,451
Provision for loan losses 670 1,345 (138) 4,543 975
---------------------------------------------------------------------------
Net interest income after
provision 2,973 406 4,502 1,063 5,476
for loan losses
Non-interest income 1,816 1,001 2,663 3,025 3,856
Non-interest expense 7,314 5,148 6,878 16,076 9,474
---------------------------------------------------------------------------
Income (loss) before income tax (2,525) (3,741) 287 (11,988) (142)
Income tax expense (benefit) (1,369) (1,671) (338) (5,194) (255)
---------------------------------------------------------------------------
Net income (loss) $ (1,156) $ (2,070) $ 625 $ (6,794) $ 113
===========================================================================
Selected Financial Ratios
Return on average assets (.71)% (2.41)% .33% (3.12)% .04%
Return on stockholders' equity (16.14) (51.37) 7.58 (50.68) .83
Net interest margin 2.49 2.24 2.48 2.79 2.72
Net interest spread 2.38 2.05 2.24 2.62 2.57
Tangible equity to assets at year 8.42 6.78 8.49 6.31 6.93
end
Allowance for loan losses to loans 1.75 2.04 3.09 1.91 .87
Allowance for loan losses to
non-performing loans 222.27 179.96 69.57 532.11 624.91
Dividend payout ratio N/A N/A N/A N/A 1,500.00
Per Share Data
Diluted net income (loss) $ (.29) $ (.66) $ .20 $ (2.30) $ .04
Basic net income (loss) (.29) (.66) .20 (2.30) .05
Cash dividends declared .35 .60
Book value at year end 1.90 1.72 2.48 2.40 5.20
Closing market price (bid) at year 1.31 1.25 2.88 6.50 8.75
end
Number of average common and
common equivalent shares 4,057,168 3,147,662 3,143,179 2,956,157 2,655,181
outstanding
5
FIDELITY FEDERAL BANCORP AND SUBSIDIARIES
Management's Discussion and Analysis
of Results of Operations and Financial Condition
General
Fidelity Federal Bancorp ("Fidelity"), incorporated in 1993 under the laws of
the State of Indiana, is a registered savings and loan holding company with its
principal office in Evansville, Indiana. Fidelity's savings bank subsidiary,
United Fidelity Bank, fsb ("United"), was organized in 1914 and is a
federally-chartered stock savings bank located in Evansville, Indiana, 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 housing, and recently, in 2001, acquired certain
real estate from United and its subsidiaries to assist in United's divestiture
efforts.
United's subsidiaries, Village Housing Corporation and Village Management
Corporation (the "Affordable Housing Group"), and Village Capital Corporation,
have been involved in various aspects of financing, owning, developing, and
managing affordable housing projects. Currently, they are involved only in the
business of owning affordable housing properties. In May 2000, Pedcor Management
Corporation, an affiliate of Pedcor Holdings, LLC, began providing management
and certain accounting services for the properties previously managed by Village
Management Corporation. Village Management completed this transition by the end
of June 2000 and is currently inactive. Village Capital Corporation has earned
fees by providing real estate mortgage banking services but has not provided any
new services for the past two years. Another subsidiary of United, Village
Insurance Corporation, receives fee income for credit life and accident health
insurance sales.
In January 2000, Fidelity signed a definitive stock purchase agreement, as
amended and restated in April 2000, to sell 1,460,000 shares of its common stock
to Pedcor Holdings, LLC, a limited liability company ("Pedcor"). One of the
principals of Pedcor, Bruce A. Cordingley, was a director of Fidelity until his
resignation as a director in December 1999.
In May 2000, the shareholders ratified the approval of the stock purchase
agreement. The consideration paid by Pedcor included $3,000,000 in cash ($3.00
per share), a five-year guarantee to United in an aggregate amount up to
$1,500,000 against any negative cash flow from operations of certain specified
affordable housing properties in United's portfolio, and an agreement to provide
management and certain accounting services for the specified properties for ten
years at no fee to United or Fidelity. In addition, three Pedcor principals
(including Cordingley) were named to Fidelity's board of directors.
In December 1999, Fidelity's Board of Directors voted to change Fidelity's
fiscal year end from June 30 to December 31. Accordingly, the following
discussion analyzes the results of operations for the six months ended December
31, 1999 compared to the twelve months ended December 31, 2000 and June 30, 1999
(fiscal 1999) and the financial position as of December 31, 2000 to the
financial position as of December 31, 1999. Fluctuations in the results of
operations are significant in part because there are two quarters less in the
period ended December 31, 1999 compared to calendar year 2000 and fiscal 1999.
All references to percentage changes in income or expense items have been
annualized.
The following table details average balances, interest income/expense and
average rates/yield for Fidelity's earning assets and interest bearing
liabilities for the year ended and six months ended December 31, 2000 and 1999,
and year ended June 30, 1999. The average rates for the six months ended
December 31, 1999 were adjusted to reflect annualized percentages.
6
Fidelity Federal Bancorp and Subsidiaries
Management's Discussion and Analysis
of Results of Operations and Financial Condition
Average Balance Sheet and Net Interest Analysis
(Dollars In Thousands on Fully Taxable Equivalent Basis)
December 2000 December 1999 June 1999
-------------------------------------------------------------------------------------------------
Average Average Average Average Average Average
Year Ended: Balances Interest Rates Balances Interest Rates Balances Interest Rates
- ----------------------------------------------------------------------------------------------------------------------------
Assets
Federal funds sold and
other short-term money $ 13,909 $ 873 6.28% $ 17,069 $ 454 5.28% $ 18,962 $ 964 5.08%
market investments
Investment securities
available for 22,658 1,518 6.70 25,857 849 6.51 15,455 955 6.18
sale-taxable
Loans held for sale
Federal Home Loan Bank
stock 3,326 273 8.21 3,920 158 8.00 3,920 314 8.01
Loans (1) (2)
Commercial loans 3,273 341 10.42 5,512 276 9.93 8,055 791 9.82
Multi-family loans 13,435 1,399 10.41 24,525 1,026 8.30 33,918 2,999 8.84
Home equity loans 4,635 465 10.03 4,959 250 10.00 4,914 490 9.97
Real estate mortgages 50,196 3,926 7.82 51,414 1,944 7.50 63,980 4,956 7.75
Consumer loans 35,060 3,305 9.43 22,045 1,062 9.56 26,926 2,625 9.75
---------------------- ---------------------- -----------------------
Total loans 106,599 9,436 8.85 108,455 4,558 8.33 137,793 11,861 8.61
---------------------- ---------------------- -----------------------
Total earning assets 146,492 12,100 8.26 155,301 6,019 7.69 176,130 14,094 8.00
Allowance for loan (1,989) (2,868) (3,414)
losses
Cash and due from banks 2,893 4,193 2,680
Premises and equipment 5,145 5,747 5,749
Other assets 11,384 8,346 10,426
---------- ---------- ----------
Total assets $163,925 $170,719 $191,571
========== ========== ==========
Liabilities
Interest-bearing
deposits
Interest-bearing $ 17,159 $ 551 3.21% $ 19,107 $ 327 3.39% $ 20,436 $ 716 3.50%
checking
Money market accounts 2,058 41 1.99 2,545 26 2.03 2,733 61 2.23
Savings accounts 4,349 98 2.25 4,657 53 2.26 5,082 118 2.32
Certificates of
deposit 96,268 5,752 5.98 96,476 2,745 5.64 112,539 6,572 5.84
---------------------- ---------------------- -----------------------
Total
interest-bearing
deposits 119,834 6,442 5.38 122,785 3,151 5.09 140,790 7,467 5.30
Federal funds purchased
Other borrowings 14,396 1,375 9.55 16,505 760 9.13 15,167 1,384 9.13
Federal Home Loan Bank
advances 9,488 640 6.75 10,844 357 6.53 13,103 879 6.71
---------------------- ---------------------- -----------------------
Total
interest-bearing 143,718 8,457 5.88 150,134 4,268 5.64 169,060 9,730 5.76
liabilities
Non-interest bearing
demand deposits 5,136 6,097 5,724
Advances by borrowers
for taxes and insurance 421 463 457
Other liabilities 7,486 6,033 8,079
---------- ---------- ----------
Total liabilities 156,761 162,727 183,320
Stockholders' Equity 7,164 7,992 8,251
---------- ---------- ----------
Total liabilities and
stockholders' equity $163,925 $170,719 $191,571
========== ========== ==========
Recap: (2)
Interest income 12,100 8.26% 6,019 7.69% 14,094 8.00%
Interest expense 8,457 5.77 4,268 5.45 9,730 5.52
-------------------- -------------------- ---------------------
Net interest
income/margin $ 3,643 2.49% $ 1,751 2.24% $ 4,364 2.48%
==================== ==================== =====================
Interest rate spread (3) 2.38% 2.05% 2.24%
Average interest-bearing
assets to average 101.93% 103.44% 104.18%
interest-bearing
liabilities
(1) Nonaccrual loans have been included in the average balances.
(2) Loan income includes interest and fees on loans.
(3) Interest rate spread is calculated by subtracting combined weighted average
interest rate cost from combined weighted average interest rate earned for
the period indicated.
7
FIDELITY FEDERAL BANCORP AND SUBSIDIARIES
Management's Discussion and Analysis
of Results of Operations and Financial Condition
Results of Operations
Net Interest Income
Net interest income, Fidelity's largest component of income, represents the
difference between interest and fees earned on loans, investments and other
interest-earning assets, and interest paid on interest-bearing liabilities. It
also measures how effectively management has balanced and allocated Fidelity's
interest rate-sensitive assets and liabilities. In addition, certain external
factors such as the overall condition of the economy, credit demand strength,
Federal Reserve Board monetary policy, changes in tax laws, and the Supervisory
Agreement that United currently operates under, can also have significant
effects on changes in net interest income from one period to another.
Net interest income increased $141,000 for the period ended December 31, 2000
compared to the same period ended at December 31, 1999 on an annualized basis.
Despite the decrease in average earning assets of $8.8 million the net interest
margin increased to 2.49% at December 31, 2000 compared to 2.24% a year ago.
Fidelity's reduction in average earning assets was composed of reductions in
fixed-rate 1-4 family mortgage, multifamily and commercial real estate loans.
Average multifamily and commercial real estate loans decreased $13.3 million,
resulting in a decrease of interest income of $864,000 on an annualized basis
from the prior year. The decrease in commercial and multifamily loans is
expected to continue during the time that United operates under the Supervisory
Agreement. Please refer to the footnote "Other Restrictions" in the Notes to
Consolidated Financial Statements for further details.
These decreases were offset by a $13.0 million increase in average consumer
loans, resulting in an increase of interest income of $1.2 million compared to
the previous year, on an annualized basis. Average interest bearing liabilities
decreased $6.4 million from December 31, 1999 to $143.7 million at December 31,
2000. Total average interest bearing deposits decreased $3.0 million, while
borrowings and FHLB advances decreased $3.5 million from December 31, 1999.
These decreases contributed to an overall decrease in interest expense of
$79,000 compared to the period ended December 31, 1999 on an annualized basis.
The average balance of agent-acquired certificates of deposit, which had an
average rate of 5.88% in 1999, was reduced from $18.1 million for the six months
ended December 31, 1999 to $9.2 million at December 31, 2000 with an average
rate of 6.00%. During the current year United's cost to retain or replace
scheduled certificate of deposit maturities has increased due to the rising
interest rate environment. The average rate on total deposits has increased to
5.38% from 5.09% since December 31, 1999.
Despite management's efforts, the net interest margin is expected to be
relatively constant or potentially decline during the term of the Supervisory
Agreement between United and the OTS, due to certain lending restrictions. The
increase in the net interest margin during calendar 2000 came despite the
Supervisory Agreement between United and the OTS, and was primarily due to
increased activity in consumer lending. There can be no assurance that the net
interest margin will continue to increase.
The reduction in net interest income during the six months ended December 31,
1999 compared to the year ended June 30, 1999 was primarily due to the continued
reduction in average earning assets of $20.8 million, which was partially offset
by a decrease in average interest-bearing liabilities of $18.9 million.
Fidelity's reduction in average earning assets and average interest-bearing
liabilities occurred in fixed rate 1-4 family mortgage loans, multifamily loans
and certificates of deposit, primarily agent-acquired deposits. Average real
estate mortgage loans decreased $12.6 million, resulting in a decrease of $1.1
million in interest income on an annualized basis. Average multifamily loans
also decreased $9.4 million which resulted in a decrease in interest income of
$947,000 on an annualized basis. Certificates of deposit and borrowings
partially offset this reduction in assets with a decrease of $16.1 million in
certificates and $921,000 in borrowings. This resulted in decreased interest
expense, on an annualized basis of $1.1 million and $29,000, respectively.
Interest income on an annualized basis for the six months ended December 31,
1999 was $12.0 million compared to $14.1 million for the year ended June 30,
1999, a decrease of $2.1 million or approximately 14.9%. Interest expense on an
annualized basis for the year ended December 31, 1999 was $8.5 million compared
to $9.7 million for the year ended June 30, 1999, a decrease of $1.2 million or
12.4%. The reduction in average earning assets was attributable to multifamily
loans and conventional real estate mortgage loan payoffs.
8
FIDELITY FEDERAL BANCORP AND SUBSIDIARIES
Management's Discussion and Analysis
of Results of Operations and Financial Condition
The average balance of agent-acquired certificates of deposit, which had an
average rate of 6.02% in 1999, was reduced from $33.5 million in fiscal 1999 to
$18.1 million for the six months ended December 31, 1999 with an average rate of
5.88%. The net interest margin decreased during the six month period to 2.24%
from 2.48% in fiscal 1999. The average yield on interest-earning assets and
average rate paid on interest-bearing liabilities of 7.69% and 5.64% declined
from the prior period's average rates of 8.00% and 5.76%.
Quarterly Results of Operations
March 31 June 30 September 30 December 31 Total
- -------------------------------------------------------------------------------------------------
(In Thousands)
December 31, 2000
Interest income $ 2,974 $ 3,025 $ 2,998 $ 3,103 $ 12,100
Interest expense 2,095 1,999 2,132 2,231 8,457
-----------------------------------------------------------
Net interest income 879 1,026 866 872 3,643
Provision for loan losses 75 100 375 120 670
Non-interest income 435 376 444 561 1,816
Non-interest expense 1,673 1,679 2,625 1,337 7,314
-----------------------------------------------------------
Income (loss) before income tax (434) (377) (1,690) (24) (2,525)
Income tax benefit (266) (244) (765) (94) (1,369)
-----------------------------------------------------------
Net income $ (168) $ (133) (925) 70 $ (1,156)
===========================================================
Net income per share
Diluted net income $ (.05) $ (.04) $ (.20) .$02 $ (.29)
Basic net income (.05) (.04) (.20) .02 (.29)
Cash dividends*
December 31, 1999
Interest income $ 2,990 $ 3,029 $ 6,019
Interest expense 2,085 2,183 4,268
-----------------------------------------------------------
Net interest income 905 846 1,751
Provision for loan losses 75 1,270 1,345
Non-interest income 488 513 1,001
Non-interest expense 1,302 3,846 5,148
-----------------------------------------------------------
Income (loss) before income tax 16 (3,757) (3,741)
Income tax benefit (88) (1,583) (1,671)
-----------------------------------------------------------
Net income $ 104 $ (2,174) $ (2,070)
===========================================================
Net income per share
Diluted net income $ .03 $ (.69) $ (.66)
Basic net income .03 (.69) (.66)
Cash dividends*
*No cash dividends were paid for the year ended December 31, 2000 or for the six
months ended December 31, 1999.
9
FIDELITY FEDERAL BANCORP AND SUBSIDIARIES
Management's Discussion and Analysis
of Results of Operations and Financial Condition
Rate/Volume Analysis
The following table sets forth an analysis of volume and rate changes in
interest income and interest expense of Fidelity's average earning assets and
average interest-bearing liabilities. The table distinguishes between the
changes related to average outstanding balances of assets and liabilities
(changes in volume holding the initial interest rate constant) and the changes
related to average interest rates (changes in average rate holding the initial
outstanding balance constant). The change in interest due to both volume and
rate has been allocated to volume and rate changes in proportion to the
relationship of the absolute dollar amounts of the change in each. The column
labeled, "Change in fiscal year," represents the change in net interest income
due to Fidelity changing the fiscal year from June 30 to December 31.
December 31, 2000 December 31, 1999
Compared to December 31, 1999 Compared to June 30, 1999
Increase (Decrease) Due To Increase (Decrease) Due To
-------------------------------------------------------------------------------------
Change in Change in
Volume Rate Fiscal Year Total Volume Rate Fiscal Year Total
- -------------------------------------------------------------------------------------------------------------------------------
(Dollars In Thousands)
Interest income on average earning assets
Loans $ (155) $ 549 $ 4,484 $ 4,878 $(2,525) $ (294) $(4,484) ($7,303)
Investment securities (208) 42 835 669 643 86 (835) (106)
Federal Home Loan Bank stock (47) 7 155 115 (1) (155) (156)
Federal funds sold and other
short-term money market investments (167) 139 447 419 (96) 33 (447) (510)
-----------------------------------------------------------------------------------
Total interest income (577) 737 5,921 6,081 (1,978) (176) (5,921) (8,075)
-----------------------------------------------------------------------------------
Interest expense on average interest-
bearing liabilities
Interest bearing accounts (66) (2) 322 254 (47) (21) (322) (390)
Money market deposit accounts (10) (1) 26 15 (4) (5) (26) (35)
Savings accounts (7) (0) 52 45 (10) (3) (52) (65)
Certificates of deposit (12) 291 2,700 2,979 (937) (189) (2,700) (3,826)
Federal funds purchased
Other borrowings (193) 60 748 615 122 2 (748) (624)
Federal Home Loan Bank advances (89) 19 351 281 (152) (19) (351) (522)
-----------------------------------------------------------------------------------
Total interest expense (377) 367 4,199 4,189 (1,028) (235) (4,199) (5,462)
-----------------------------------------------------------------------------------
Changes in net interest income $ (200) $ 370 $ 1,722 $ 1,892 $ (950) $ 59 $(1,722) $(2,613)
===================================================================================
10
FIDELITY FEDERAL BANCORP AND SUBSIDIARIES
Management's Discussion and Analysis
of Results of Operations and Financial Condition
Provision for Loan Losses and Letter of Credit Reserves
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. The provision for loan
losses for the year ended December 31, 2000 was $670,000 compared to $1,345,000
for the six months ended December 1999, a decrease of $675,000 or $2.0 million
on an annualized basis. During the twelve months ended December 31, 2000,
Fidelity provided an additional $470,000 for the consumer allowance for loan
losses. As a result of recent loss levels in consumer loans originated prior to
1999 and the growth of the portfolio in 2000, the provision for consumer loan
losses was increased to a level approximating 1.5% of consumer loans
outstanding. An additional $200,000 provision was provided for loans to the
affordable housing limited partnerships. The additional provision on the
partnership loans is due to routine maintenance on Fidelity's affordable housing
portfolio that had been deferred by the previous property manager, Village
Management Corporation, a subsidiary of Fidelity. Since these items were
deferred by the previous property manager, they are not eligible for the cash
deficit guarantees by Pedcor according to the Stock Purchase Agreement.
Management feels that these items have been identified and adequately reserved
for at December 31, 2000. The ratio of allowance for loan losses to
nonperforming loans was 222.3% at December 31, 2000 compared to 180.0% at
December 31, 1999.
The method used beginning in the third quarter of fiscal 1998 to determine the
amount of required reserves for affordable housing industry permanent and
general partner loans, equity investments and letters of credit used past
monthly cash flows as a determinant as to how much debt service the projects
could support. Specifically, the method determined the amount of debt service
for fiscal 1998, 1999, the six months ended December 31, 1999 and the year ended
December 31, 2000 as follows:
1. Cash flows from the projects were scheduled from internal project records.
These were used to project annualized cash flows that were based on periods
of time that were considered to be best reflective of future performance of
that project. Certain items affecting cash flows during only certain months
of the year, such as the payment of real estate taxes, were subtracted from
the calculated annualized amounts so that monthly cash flows would be
reflective of actual monthly operation.
2. A projected loan amount that could be supported by current cash flows was
calculated using the computed cash flows for the most appropriate period
(converted to a monthly cash flow amount), the current rate, and a 25-year
amortization period. This amount was added to the computed residual value
of the project at the end of a 15-year amortization period to reflect the
total value of the project in fiscal 1998 and 1999. In the period ended
December 31, 1999, the project loan amounts that could be supported by cash
flows were adjusted to provide for a 1.15:1 debt service coverage ratio,
due to the continued aging of the loan portfolio, and historical volatility
of the cash flows. This adjustment, along with recent deterioration in cash
flows in a segment of the affordable housing loan portfolio, significantly
reduced the total value of certain projects, and thus increased the
required reserves for those projects in 1999.
3. This information was used to determine proper classifications, and
ultimately reserves, for the loan, letter of credit, general partner loan
and equity investment amounts. A "potential tax credit market adjustment"
was computed in fiscal 1998 and 1999 by taking the difference between the
price paid by investors for tax credits at the project's inception and an
amount that was determined to be better reflective of the true value of the
credits. This market adjustment was used to determine what portion of the
loans, letters of credit, general partner loans and equity investments
would be classified as doubtful, which included a 50 percent reserve, and
loss, which included a 100 percent reserve or charge-off of the related
asset or reserve for the letter of credit. This market adjustment was not
used to compute the appropriate level of reserves at December 31, 1999. The
elimination of the market value adjustment with respect to determining the
overall reserve level, resulted in a significant increase in the reserves
required for the six months ending December 31, 1999.
11
FIDELITY FEDERAL BANCORP AND SUBSIDIARIES
Management's Discussion and Analysis
of Results of Operations and Financial Condition
The assignment was originally based on the possibility of limited partner
participation in operating deficits of the partnerships due to the market
value appreciation of the tax credits held by the limited partners in the
respective partnerships. Since this participation did not occur, management
classified the potential adjustment as loss, despite continued appreciation
of the remaining tax credits.
4. The analyses are updated quarterly for current operating information of the
actual projects. Except for the market value adjustment and the increased
debt service coverage requirement noted above for the December 31, 1999
review, the assumptions used to compute reserves were not changed for any
of the quarters in fiscal 1999; only the data used to compute
classifications was changed. The period of cash flows used was changed in
certain instances if it was determined that the period used more closely
approximated future projected results. For the periods ended December 31,
1999 and 2000, calendar 1999 and 2000 data was used to compute the required
reserves based on the above methodology.
Specific reserves are assigned to certain credits. The reserves are determined
by management's evaluation of those credits. The results of internal loan
reviews, OTS evaluations 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. During the year 2000 the only additional
provisions for loan losses associated with the affordable housing industry loans
was $200,000 due to additional loans for routine maintenance on Fidelity's
affordable housing portfolio as mentioned above.
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, consumer and credit card 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.
12
FIDELITY FEDERAL BANCORP AND SUBSIDIARIES
Management's Discussion and Analysis
of Results of Operations and Financial Condition
Non-Interest Income
Non-interest income for the year ended December 31, 2000 increased by $815,000
or decreased $186,000 compared to December 31, 1999 on an annualized basis.
Non-interest income decreased by $1.7 million or $661,000 on an annualized basis
for the six months ending December 31, 1999 compared to June 30, 1999. The
percent change for December 31, 2000 and 1999 have been annualized. The
following table summarizes non-interest income for the following time periods:
Change From Prior Year
Increase (Decrease)
-------------------------------------------------
Amount December 31, 2000 December 31, 1999
---------------------------------------------------------------------------------------------
Six months
Year ended ended Year ended
December 31, December 31, June 30, Annualized Annualized
2000 1999 1999 Amount Percent Amount Percent
- ------------------------------------------------------------------------------------------------------------------------------
(Dollars In Thousands)
Fee income from real estate
management $ 88 $ 88 $ 196 (50%) $ (108) (10.2)%
Service charges on deposit
accounts 311 201 437 $110 (22.6) (236) (8.0)
Gain on sale of
real estate loans 54 110 343 (56) (75.5) (233) (35.9)
Letter of credit fees 530 291 582 239 (8.9) (291)
Servicing fees on loans sold 109 55 91 54 (.9) (36) 20.9
Release fees on multifamily loans 34 20 82 14 (15.0) (62) (51.2)
Real estate investment
banking fees 78 13 78 65 200.0 (65) (66.7)
Agent fee income 240 4 333 236 2900.0 (329) (97.6)
Title fee income 16 18 72 (2) (55.6) (54) (50.0)
Other 356 201 449 155 (11.4) (248) (10.5)
---------------------------------------------------------------------------------------------
Total non-interest income $1,816 $1,001 $2,663 $815 (9.3)% $(1,662) (24.8)%
=============================================================================================
Fidelity's level of activity in Section 42 real estate activities has continued
to decrease, and since June 2000, has been limited to management activities. Fee
income from management activities for the year ended December 31, 2000 decreased
approximately $88,000 on an annualized basis due to the discontinuance of
management activities. The stock purchase agreement approved by the shareholders
in May 2000 calls for Pedcor to provide management services to the affordable
housing property at no fee to the property or Fidelity. Therefore, no management
fees will be collected in the future by Fidelity's subsidiary, Village
Management Corporation, and expenses will also no longer be incurred to manage
these properties. Service charges on deposit accounts decreased $91,000 for the
year ended December 31, 2000, compared to the six months ended December 31, 1999
on an annualized basis due to a decline in checking deposit accounts. Gains on
sale of real estate loans decreased $166,000 to $54,000 on a annualized basis
during the year ended December 31, 2000. Higher interest rates caused a
significant reduction in volume. Gain on sale of loans during the six months
ending December 31, 1999 also declined by $123,000 on an annualized basis
compared to the year ended June 30, 1999, due to the decline in mortgage loan
originations. Letter of credit fees decreased $52,000 from the annualized amount
at December 31, 1999 and the year ended June 30, 1999. Real estate investment
banking fees increased $52,000 over the six months ending December 31, 1999 on
an annualized basis as fees are recorded on transactions previously completed
when received. These fees are expected to be minimal in the foreseeable future.
Title fee income decreased $20,000 on an annualized basis for year-end December
31, 2000 compared to the six months ending December 31, 1999 and $56,000 from
June 30, 1999.
13
Fidelity Federal Bancorp and Subsidiaries
Management's Discussion and Analysis
of Results of Operations and Financial Condition
United has participated in an arrangement in which automobile loans are
originated on behalf of another organization for the last three fiscal years.
Agent fee income, which represents earned fees from these transactions,
decreased by $325,000, on an annualized basis, for the six months ending
December 31, 1999 compared to June 30, 1999. In January 1999, the head of
United's consumer loan division and key members of the consumer loan division
staff resigned to accept employment with a local competitor. As such, United's
revenue from consumer loans was sharply reduced. During the fourth quarter of
fiscal 1999, United hired a manager and staff to resume this lending activity.
United commenced certain types of consumer lending, such as home equity lending
as of June 30, 1999. United fully resumed its consumer lending activities,
including the acquisition of automobile loans through its network of automobile
dealers during the first quarter of the fiscal period ended December 31, 1999.
Agent fees annualized for the six months ended December 31, 1999 were only
$8,000 compared to $240,000 for the year ended December 31, 2000. United is
continuing its efforts to expand its automobile dealer network.
Non-Interest Expense
Non-interest expense on an annualized basis decreased $3.0 million or 29.0% for
the year ended December 31, 2000, compared to the six months ending December 31,
1999. The following table summarizes non-interest expense for the year ended
December 31, 2000 and the six months ending December 31, 1999, and year ended
June 30, 1999. The percent change for December 31, 2000 and 1999 has been
annualized.
Change From Prior Year
Increase (Decrease)
--------------------------------------------------
December 1999 June 1999
-----------------------------------------------------------------------------------------------
Six Months
Year Ended Ended Year Ended
December 31, December 31, June 30, Annualized Annualized
2000 1999 1999 Amount Percent Amount Percent
- --------------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
Salaries and employee benefits $3,370 $1,747 $ 3,414 $ 1,623 (3.5)% $(1,667) 2.3%
Letter of credit valuation
provision (85) 1,069 (715) (1,154) (104.0) 1,784 (399.0)
Loss on investment 352 356 831 (4) (50.6) (475) (14.3)
Legal and professional 544 379 379 165 (28.2) 100.0
Occupancy expense 364 192 394 172 (5.2) (202) (2.5)
Equipment expense 250 166 299 84 (24.7) (133) 11.0
Data processing expense 339 247 407 92 (31.4) (160) 21.4
Advertising 198 78 202 120 26.9 (124) (22.8)
Deposit insurance 243 156 244 87 (22.1) (88) 27.9
Correspondent bank charges 156 79 154 77 (1.3) (75) 2.6
Printing and supplies 89 57 104 32 (21.9) (47) 9.6
Telephone 89 48 74 41 (7.3) (26) 29.7
Postage 87 42 95 45 3.6 (53) (11.6)
Travel and lodging 30 30 44 (50.0) (14) 36.4
Amortization of intangible asset 139 139 100.0
Other operating expense 1,149 502 952 647 14.4 (450) 5.5
-----------------------------------------------------------------------------------------------
Total non-interest expense $7,314 $5,148 $6,878 $2,166 (29.0)% $(1,730) 49.7%
===============================================================================================
14
FIDELITY FEDERAL BANCORP AND SUBSIDIARIES
Management's Discussion and Analysis
of Results of Operations and Financial Condition
The decrease in total non-interest expense for the year ended December 31, 2000,
as compared to the annualized non-interest expense for the six months ending
December 31, 1999, relates primarily to expenses associated with Fidelity's
Section 42 tax credit real estate development program. Due to a deterioration in
cash flows and occupancy during the six months ending December 31, 1999, an
additional letter of credit provision of $1.1 million was recognized compared to
a credit of $85,000 in 2000. Volatility in cash flows, occupancy, and other
performance measurements can create large variances in reserves that are
necessary based on quarterly loan and letters of credit reviews of the
affordable housing credits as discussed in the provision for loan losses and
letter of credit reserve section. Fidelity records the percentage share of
losses for the investments in various affordable housing partnerships under the
equity method of accounting in addition to any additional writedowns due to the
performance of the properties. Losses on investment in affordable housing
partnerships were $356,000 for the six months ended December 31, 1999 or
$712,000 annualized, compared to only $352,000 for 2000. Fidelity continues to
monitor these partnerships very closely and has taken steps to assist these
partnerships to increase their cash flows through various refinancing efforts.
In 1999, Fidelity completed the refinancing of two affordable housing
developments. In early 2001, Fidelity completed the refinancing of four
additional affordable housing developments, and is in varying stages of
completing refinancing an additional six affordable housing developments.
Fidelity expects these to be completed by end of 2001. The refinancing of the
debt at lower fixed rates and/or longer terms will allow the properties to
improve their cash flows and improve the performance of the properties. Also, in
May 2000, a subsidiary of Pedcor initiated management and certain accounting
services for the properties previously managed by Village Management
Corporation.
Salaries and employee benefits on an annualized basis decreased $124,000 from
the six months ending December 31, 1999 due to staff reductions. Fidelity
announced in September 2000, that former President and CEO M. Brian Davis would
terminate employment effective immediately. In conjunction with this
announcement, Fidelity recognized severance expense of approximately $527,000,
pursuant to an employment agreement executed between Fidelity and Davis. The
severance payments are subject to OTS and FDIC approval prior to payment.
Excluding the $527,000, pursuant to an employment agreement expense, salaries
would have decreased $651,000 from the prior year due to staff reductions
completed during the year ended December 31, 2000. A portion of these savings
resulted from the transition of affordable housing management to Pedcor, as well
as reductions in United's staffing levels.
Legal and professional fees decreased $214,000 from the prior year on an
annualized basis. Last year an additional $103,000 in legal fees associated with
the terminated Lincolnshire transaction was incurred during the six month
period. In addition to routine legal expenses additional legal expenses for 2000
were generated by the Pedcor transaction, Fidelity's commitment to continue
workout activities, and other legal actions commenced by Fidelity. Also, during
2000 an additional $125,000 was accrued for anticipated legal and professional
expenses in connection with the defense of litigation related to a large
multifamily loan that was paid off in 1998. After repaying the loan, the
Borrower sued United alleging that United had agreed to make a second loan for
another apartment development. United determined that the suit was likely to go
to trial, but unreasonable in terms of its content. United, at December 31,
2000, determined that there was not a reasonable possibility that a material
loss had occurred by internally evaluating the merits of the suit and by
engaging legal counsel to assist in the evaluation as well as the defense for
this suit.
Equipment expense on an annualized basis decreased $82,000 due to a decrease in
depreciation and maintenance expense. Data processing expense decreased
$155,000, annualized, due to the decreases in expenses connected with Year 2000
preparedness efforts during the prior year. Deposit insurance decreased $69,000
from the prior year due to a decrease in deposits of $8.1 million since December
31, 1999. Advertising increased $42,000 over the prior year primarily due to
increased promotional activities. Printing and supplies decreased $25,000 due to
the staff reductions and redundancy in supplies for operating various
subsidiaries at separate locations, which have been consolidated. In conjunction
with the stock sale to Pedcor, intangible assets totaling $1.3 million were
recorded. Amortization of these assets resulted in expense of $139,000 for the
year ended December 31, 2000. Other operating expense increased $145,000 over
last years expense, on an annualized basis, primarily due to adjustments to the
values of several surplus real estate properties to record them at their
appraised values and interest expense payable to the Internal Revenue Service
(IRS) in connection with a recently completed examination. Certain prior year
deductions were disallowed, reducing the amount of the tax refund that Fidelity
received two years ago. These deductions are expected to be taken by Fidelity in
future years.
15
FIDELITY FEDERAL BANCORP AND SUBSIDIARIES
Management's Discussion and Analysis
of Results of Operations and Financial Condition
Income Tax Benefit
The income tax benefit was $1.4 million for the year ended December 31, 2000
compared to $1.7 million or $3.3 million annualized for the six months ending
December 31, 1999, primarily due to an increase in taxable income. Included in
the tax benefit of $1.4 million for the year ended December 31, 2000 are tax
credits of $375,000. These credits are received from Fidelity's investment in
affordable housing properties and comprise a portion of the return on these
investments. Fidelity also receives the tax benefit on its percentage of the
operating losses for those projects. Some of the benefits associated with these
tax credits are partially offset by reductions of the investment in the
affordable housing properties, which are included in the above table under the
caption "Loss on Investment". The effective tax rate for the year ended December
31, 2000, was 54.2%, compared to the six months ended December 31, 1999 of 44.7%
and 117.8% for fiscal 1999, due to the benefits accrued for the tax credits.
Consideration of the need for a valuation allowance for the deferred tax asset
was made at December 31, 2000 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. The analyses 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 including 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 December 31, 2000 decreased $5.0 million to $166.5 million from
$171.5 million in December 1999. Average assets for the year ended December 31,
2000 decreased 4.0% from average assets for the six months ended December 31,
1999 to $163.9 million. Average interest-bearing liabilities at December 31,
2000 decreased $6.4 million as Fidelity used loan payoff proceeds to reduce
borrowings and agent-acquired certificates of deposit, which represent a
higher-cost source of funds for Fidelity. The decrease in total assets is
primarily the result of loan payoffs, refinancing and payments received on
commercial, multifamily and fixed 1-4 family mortgage loans. The decrease in
total liabilities was due to a reduction in interest-bearing demand deposits and
the continued maturities of agent acquired certificates of deposit.
16
FIDELITY FEDERAL BANCORP AND SUBSIDIARIES
Management's Discussion and Analysis
of Results of Operations and Financial Condition
Loans
The following table shows the composition of Fidelity's loan portfolio:
December December June June June
2000 1999 1999 1998 1997
- ----------------------------------------------------------------------------------------------------------------------------
(In Thousands)
Real estate mortgage loans
First mortgage loans
Conventional $ 47,809 $ 48,845 $ 49,733 $ 71,343 $ 94,293
Construction 1,274 1,867 6,732 16,110 32,577
Commercial 6,873 8,576 14,140 20,753 26,668
Multi-family loans 4,350 3,629 7,597 5,742 9,602
Home equity loans 5,274 5,567 4,819 4,946 5,111
First mortgage real estate loans
purchased 1,753 1,899 2,061 2,704 3,184
------------------------------------------------------------------------------------
67,333 70,383 85,082 121,598 171,435
Commercial loans, other than
secured by real estate 2,305 4,154 6,076 11,568 12,522
Consumer loans 40,125 24,403 22,799 26,566 21,007
------------------------------------------------------------------------------------
Total loans 109,763 98,940 113,957 159,732 204,964
Allowance for loan losses (1,921) (2,021) (3,521) (3,049) (1,781)
------------------------------------------------------------------------------------
Net loans $107,842 $96,919 $110,436 $156,683 $203,183
====================================================================================
Total assets $166,466 $171,457 $172,253 $197,046 $240,819
====================================================================================
Total loans to total assets 65.9% 57.7% 66.2% 81.1% 85.1%
====================================================================================
Fidelity began selling its current production of 1-4 family loans in 1997,
recording the gain or loss and using the proceeds to fund new products. As a
result, conventional real estate mortgage loans decreased $46.5 million from
June 30, 1997 to December 31, 2000.
Multi-family loans increased slightly over the prior year due to the conversion
of multifamily construction loans to permanent loans.
Commercial real estate loans and commercial loans have continued to decline as a
result of the Supervisory Agreement's restriction of new commercial lending.
Refer to the "Other Restrictions" footnote to the financial statements for
additional information. The focus of United's commercial lending department has
been to develop and execute action plans to monitor the portfolio and minimize
potential losses relating to its remaining classified commercial credits and its
letter of credit exposure.
The increase in loans is primarily due to an increase in consumer loans of $15.7
million from December 31, 1999 to $40.1 million at December 31, 2000. Staffing
added to the consumer loan department in 1999 has enabled Fidelity to
substantially increase the portfolio of direct and indirect automobile loans,
net interest income, and fee income. The level of growth in the consumer loan
portfolio during 2000 is not expected to continue. Currently, consumer loans
represent 24.8% of United's total assets at December 31, 2000.
17
FIDELITY FEDERAL BANCORP AND SUBSIDIARIES
Management's Discussion and Analysis
of Results of Operations and Financial Condition
Fidelity's loan portfolio contains no loans to foreign governments, foreign
enterprises, foreign operations of domestic companies or highly leveraged
transactions, nor any concentration to borrowers engaged in the same or similar
industries that exceed ten percent of total loans.
Loan Maturities
The following table sets forth the remaining maturities for commercial loans as
of December 31, 2000:
Within One One to Five After Five
Year Years Years Total
- -------------------------------------------------------------------------------------------------------
(In Thousands)
Predetermined interest rates $432 $1,644 $88 $2,164
Floating interest rates 23 118 141
------------------------------------------------------------------
$455 $1,762 $88 $2,305
==================================================================
Non-Performing Loans
Fidelity discontinues the accrual of interest income on loans when, in the
opinion of management, there is reasonable doubt as to the timely collectibility
of interest or principal. When a loan reaches a ninety day or more past due
status, the asset is generally repossessed or sold, if applicable, or the
foreclosure process is initiated and the loan is re-classified to other real
estate owned to be sold. A loan could be placed in a nonaccrual status sooner
than ninety days, if management knows the customer has abandoned the collateral
and has no intention of repaying the loan. At this point, management
discontinues the accrual of interest and Fidelity would initiate the
repossession or foreclosure process. Typically, when a loan reaches nonaccrual
status, the accrued interest is reversed from income, unless strong evidence
exists that the value of the collateral would support the collection of interest
in a foreclosure situation. Nonaccrual loans are returned to an accrual status
when, in the opinion of management, the financial position of the borrower
indicates that there is no longer any reasonable doubt as to the timely payment
of principal and interest. Income received on nonaccrual and restructured loans
was $33,000 for the year ended December 31, 2000, $18,000 for the six months
ended December 31, 1999 and $157,000 in fiscal 1999. Additional interest income
of approximately $49,000, $13,000 and $214,000 for the year ended December 31,
2000, the six months ended December 31, 1999 and fiscal 1999, respectively would
have been recorded had income on nonaccruing and restructured loans been
considered collectible and accounted for on an accrual basis.
18
FIDELITY FEDERAL BANCORP AND SUBSIDIARIES
Management's Discussion and Analysis
of Results of Operations and Financial Condition
The following table provides information on Fidelity's non-performing loans.
December 31, December 31, June 30, June 30, June 30,
2000 1999 1999 1998 1997
---------------------------------------------------------------------------
(Dollars In Thousands)
Non-accrual loans
Real estate mortgage $ 253 $ 76 $461 $256
Multi-family $ 148 229 4,112
Commercial 472
---------------------------------------------------------------------------
Total non-accrued loans 620 482 4,188 461 256
Restructured
Real estate mortgage
Consumer 115 75 77
Commercial 119 118
---------------------------------------------------------------------------
Total restructured loans 234 193 77
90 days or more past due and accruing
Consumer 10 135 164 86 29
Commercial - 313 632 26
---------------------------------------------------------------------------
Total 90 days or more past due and accruing 10 448 796 112 29
---------------------------------------------------------------------------
Total non-performing loans $ 864 $1,123 $5,061 $573 $285
===========================================================================
Ratio of non-performing loans to total loans .79% 1.14% 4.44% .36% .14%
===========================================================================
Non-performing loans were .79% of total loans at December 31, 2000, as compared
to 1.14% of total loans at December 31, 1999 and 4.44% at June 30, 1999 and
consisted primarily of commercial and multi-family loans. The decrease in
non-performing loans since June 30, 1999 is primarily due to one large
multifamily loan to an unaffiliated borrower which was paid in full in October
1999.
Multi-family affordable housing loans, for which specific and general reserves
have been computed, are currently performing with respect to debt service and
are therefore not included in the above "non-performing loans" totals. The
ability of the multi-family loans to remain performing is in part due to general
partner or other advances made by Fidelity to support cash flow deficits
incurred by the affordable housing projects. There is no assurance that general
partner advances will not be necessary in the future to support further cash
flow deficits, or that Fidelity will not have to extend funds in order to
protect its collateral position with respect to the loans. The likelihood that
Fidelity will be required to make additional advances is expected to decline in
future periods due to the guarantees provided by Pedcor, the management of the
affordable housing portfolio by Pedcor, and because of completed refinancing
efforts.
Analysis of Allowance for Loan Losses and Letter of Credit Valuation Allowance
Fidelity establishes its provision for loan losses and evaluates the adequacy of
the allowance for loan losses based on management's evaluation of the
performance of its loan and letter of credit portfolio. Such evaluation, which
includes a review of all loans and letters of credit for which full
collectibility may not be reasonably assured, considers among other matters, the
present value of capitalized cash flows, the estimated fair value of the
underlying collateral, economic conditions, historical loss experience, the
composition of the portfolios and other factors that warrant recognition in
providing for an adequate loan loss allowance and letter of credit valuation
allowance. This evaluation is performed on a quarterly basis and is designed to
ensure that all relevant matters affecting collectibility will consistently be
identified in a detailed review and that the outcome of the review will be
considered in a disciplined manner by management in determining the necessary
allowances and related provisions. The amounts actually reported in each period
will vary with the outcome of this detailed review.
19
FIDELITY FEDERAL BANCORP AND SUBSIDIARIES
Management's Discussion and Analysis
of Results of Operations and Financial Condition
Classified Assets and Letters of Credit
(in thousands)
December 31, December 31,
2000 1999
-------------------------------------
Classified assets $ 8,754 $ 8,991
Classified letters of credit 11,773 13,218
------ ------
Total classified assets/letters of credit $20,527 $22,209
======= =======
Classified assets and letters of credit of Fidelity totaled $20.5 million at
December 31, 2000 compared to $22.2 million at December 31, 1999 and $40.7
million at June 30, 1999, a decrease of 7.7% and 45.5%, respectively. Classified
assets and letters of credit were 129.5% and 167.8% of Fidelity's capital and
reserves at December 31, 2000 and December 31, 1999, respectively. Classified
assets and letters of credit were 69.9% and 75.8% of United's core capital and
reserves at December 31, 2000 and December 31, 1999, respectively. The
Supervisory Agreement originally established a target level to reduce its
classified assets to 50% of core capital plus the allowance for loan losses and
the letter of credit valuation reserves by December 31, 1999. United was not in
compliance with this requirement at December 31, 1999, however, this deadline
was extended by the OTS to March 31, 2001. United expects to be in full
compliance on March 31, 2001. In addition to the classified assets and letters
of credit, there were other assets and letters of credit totaling $18.6 million
for which management was closely monitoring the borrowers' abilities to comply
with payment terms.
Impaired loans are those that management believes will not perform under the
original loan terms. At December 31, 2000 and December 31, 1999, Fidelity had
impaired loans totaling $3.7 million and $7.4 million respectively. The
allowance for losses on such impaired loans totaled $384,000 and $1.1 million,
which are included in Fidelity's allowance for loan losses at December 31, 2000
and December 31, 1999, respectively. In addition, using similar guidelines for
impaired loans, impaired letters of credit at December 31, 2000 and December 31,
1999 totaled $11.8 million and $13.2 million, respectively. The valuation
allowance on such impaired letters of credit totaled $5.2 million and $5.8
million, respectively at December 31, 2000 and December 31, 1999. Impaired loans
do not include large groups of homogeneous loans that are collectively evaluated
for impairment, such as, residential mortgage and consumer installment loans.
20
FIDELITY FEDERAL BANCORP AND SUBSIDIARIES
Management's Discussion and Analysis
of Results of Operations and Financial Condition
The following table sets forth loan charge-offs and recoveries by the type of
loan and an analysis of the allowance for loan losses at December 31, 2000 and
1999 and the fiscal years ended June 30:
December 31, December 31, June 30, June 30, June 30,
2000 1999 1999 1998 1997
- ----------------------------------------------------------------------------------------------------------------------------
(In Thousands)
Allowance for loan losses
at beginning of period $ 2,021 $ 3,521 $ 3,049 $ 1,781 $ 1,059
----------------------------------------------------------------------------------------
Loan charge offs
Real estate mortgage 80 15 100
Multi-family 683 2,631 3,089
Commercial 12 11 14 25
Consumer 391 235 324 195 142
----------------------------------------------------------------------------------------
Total loan charge offs 1,166 2,877 338 3,299 267
----------------------------------------------------------------------------------------
Loan recoveries
Real estate mortgage 15 3
Multi-family 317 3
Commercial 20 3 3
Consumer 59 26 35 24 11
----------------------------------------------------------------------------------------
Total loan recoveries 396 32 53 24 14
----------------------------------------------------------------------------------------
Net charge offs 770 2,845 285 3,275 253
Reclassifications 895
Provision for loan losses 670 1,345 (138) 4,543 975
----------------------------------------------------------------------------------------
Allowance for loan losses
at end of period $ 1,921 $ 2,021 $ 3,521 $ 3,049 $ 1,781
========================================================================================
Ratio of net charge offs to
average loans outstanding
during period .72% 5.20% .21% 1.81% .12%
========================================================================================
Ratio of provision for loan
losses to average loans
outstanding during period .63% 2.46% (.10)% 2.52% .46%
========================================================================================
Ratio of allowance for loan
losses to total loans
outstanding at year end 1.75% 2.04% 3.09% 1.91% .87%
========================================================================================
Average amount of loans
outstanding for the period $106,599 $108,455 $137,793 $180,530 $213,793
========================================================================================
Amount of loans outstanding
at end of period $109,763 $98,940 $113,957 $159,732 $204,964
========================================================================================
21
FIDELITY FEDERAL BANCORP AND SUBSIDIARIES
Management's Discussion and Analysis
of Results of Operations and Financial Condition
The allowance for loan losses was $1.9 million at December 31, 2000 compared to
$2.0 million at December 31, 1999. Net loan charge-offs were $770,000 or .72% of
average loans for the year ended December 31, 2000 compared to $2.8 million or
5.20% of average loans for the six months ended December 31, 1999. During the
year ended December 31, 2000, net charge-offs consisted primarily of multifamily
and consumer loans. Of the $683,000 multifamily charge-offs, $317,000 was later
recovered during 2000. Payments under operating deficit guarantees provided by
Pedcor are limited to $300,000 per year. Through December 2000 $240,000 in
payments had been received. Total provision for loan losses for the period ended
December 31, 2000 were $670,000. Included in this total were provisions totaling
$275,000 taken in the third quarter of 2000, due to routine maintenance of
Fidelity's affordable housing portfolio that had been deferred by the previous
property manager, and for recent growth in consumer loans. During the six months
ended December 31, 1999, Fidelity reevaluated some of the loans that it had
previously established reserves for in fiscal 1998 and charged off $2.8 million
in loans. In addition, it was determined that a $3.2 million loan originated for
the financing of a hotel was not meeting its cash flow projections, and thus a
$470,000 reserve was established. Consumer loan net charge-offs of $249,000 were
related primarily to loans originated prior to 1999. Based on loss experience in
United's consumer loan portfolio originated prior to 1999, United increased the
allowance for loan losses to $496,000 at December 31, 1999, or approximately
1.5% of consumer loans outstanding. Due to the growth in the consumer loan
portfolio the allowance for consumer loan losses grew to $628,000 at December
31, 2000.
During the six months ended December 31, 1999 an additional letter of credit
valuation provision of $1.1 million was recognized due to deterioration in the
affordable housing portfolio. A letter of credit was funded during the first
quarter of fiscal 1999 and was classified as a non-accrual loan upon conversion.
This loan was previously classified as a substandard letter of credit with a
specific reserve of $895,000. The loan was paid in full during the second
quarter of fiscal 1999 and Fidelity reclassified the $895,000 specific reserve
to the general allowance for loan losses. As discussed previously, Fidelity has
loans and letters of credit securing third-party loans to certain Section 42
tax-credit projects and also has other loans and letters of credit outstanding
that are related to other multi-family developments, most of which are outside
Fidelity's geographic market.
Fidelity also recorded a letter of credit valuation allowance and related
provision of $6.8 million in fiscal 1998, the balance of which is $5.2 million
at December 31, 2000. The decrease is primarily due to the transfer of $895,000
from the letter of credit valuation allowance to the allowance for loan losses.
An additional $600,000 was funded during 2000 to assist in the refinancing
efforts on two partnerships. Multi-family letters of credit, an off-balance
sheet item, carry the same risk characteristics as conventional loans and
totaled $43.8 million at December 31, 2000, compared to $44.5 million at
December 31, 1999 and $45 million at June 30, 1999. The valuation allowance for
letters of credit totaled 11.8% of outstanding letters of credit at December 31,
2000 compared to 13.0% at December 31, 1999. Allowance for loan losses and
valuation allowance for letters of credit to total loans and letters of credit
at December 31, 2000 and 1999 was 4.61% and 5.44%, respectively. Management is
not currently aware of any additional letters of credit that are expected to be
called or funded. Management considers the allowance for loan losses and letter
of credit valuation reserve adequate to meet losses inherent in the loan
portfolio as of December 31, 2000.
22
FIDELITY FEDERAL BANCORP AND SUBSIDIARIES
Management's Discussion and Analysis
of Results of Operations and Financial Condition
Allocation of Allowance for Loan Losses
The allocation for loan losses and the percentage of loans within each category
to total loans at December 31, 2000 and 1999 and at June 30, 1999, 1998, and
1997 are as follows:
Allocation of Amount
-------------------------------------------------------------------------------------
December 31, December 31, June 30, June 30, June 30,
2000 1999 1999 1998 1997
- -------------------------------------------------------------------------------------------------------------------------
(In Thousands)
Real estate mortgage $ 49 $ 49 $ 51 $ 124 $ 102
Home equity 53 54 48 49 51
Multi-family 514 482 2,177 1,868 994
Consumer 628 496 182 275 168
Commercial 677 940 1,063 733 466
-------------------------------------------------------------------------------------
Total $1,921 $2,021 $3,521 $3,049 $1,781
=====================================================================================
Percentage of Loans to Total Loans
-------------------------------------------------------------------------------------
December 31, December 31, June 30, June 30, June 30,
2000 1999 1999 1998 1997
- -------------------------------------------------------------------------------------------------------------------------
Real estate mortgage 45.2% 45.7% 42.0% 45.6% 51.4%
Home equity 4.8 5.5 4.2 3.1 2.5
Multi-family 3.4 5.9 11.5 11.4 14.3
Consumer 36.6 30.0 24.2 19.7 12.7
Commercial 10.0 12.9 18.1 20.2 19.1
-------------------------------------------------------------------------------------
Total 100.0% 100.0% 100.0% 100.0% 100.0%
=====================================================================================
23
FIDELITY FEDERAL BANCORP AND SUBSIDIARIES
Management's Discussion and Analysis
of Results of Operations and Financial Condition
Association with Section 42
As noted previously, Fidelity has various investments in seventeen real estate
development projects located throughout Indiana, Illinois and Kentucky.
Management considers the projects and properties to be in good condition.
Fidelity has various Section 42 loans, general partner loans, equity investments
and letters of credit associated with these projects. The following table
summarizes Fidelity's association with these projects:
Activities associated with Section 42
Conventional General
Bank Financing Partner Additional Equity Letters of
Loans Notes Investments Credit
----------------------------------------------------------------------------
Balance at June 30, 1998 $5,325 $606 $1,686 $19,423
Increases 61 13 $284
Paydowns, payoffs, or loss on investment (563) (369) (262)
Payoffs of financing secured by letters of credit (2,757)
Charge-offs (545)
----------------------------------------------------------------------------
Balance at June 30, 1999 4,823 250 284 879 16,666
Increases 58 1
Paydowns, payoffs, or loss on investment (1,401) (152) (77)
Charge-offs or funding on
outstanding letters of credit (994) (85) (151) (235) (450)
----------------------------------------------------------------------------
Balance at December 31, 1999 2,428 13 56 702 16,217
Increases 63 624
Sale of partnership interests (301)
Paydowns, payoffs, or loss on investment (29) (5) (75) (4)
Charge-offs or funding on
outstanding letters of credit (8) (680) (43) (600)
----------------------------------------------------------------------------
Balance at December 31, 2000 $2,462 $ 0 $ 0 $ 283 $15,613
============================================================================
Specific reserves included in allowance for
loan losses
-------------------------------------------
Specific Valuation
Conventional General Allowance Reserves Allowance
Bank financing Partner additional for equity for letters
loans notes Investments of credit
---------------------------------------------------------------------------
Balance at June 30, 1998 $878 $56 75 $5,300
Provision-year ended June 30, 1999 (205) 69 44 470 (532)
Charge-offs (545)
---------------------------------------------------------------------------
Balance at June 30, 1999 673 125 44 4,768
Provision-six months ended December 31, 1999 651 (40) 111 253 606
Funding on outstanding letter of credit (450)
Charge-offs (994) (85) (151) (235)
---------------------------------------------------------------------------
Balance at December 31, 1999 330 4 18 4,924
Provision-year ended December 31, 2000 106 2 430
Funding on outstanding letter of credit (600)
Reclassification (188) 8 674 25
Charge-offs (8) (680) (43)
---------------------------------------------------------------------------
Balance at December 31, 2000 $ 248 $ 0 $ 0 $ 0 $4,754
===========================================================================
24
Fidelity Federal Bancorp and Subsidiaries
Management's Discussion and Analysis
of Results of Operations and Financial Condition
Investment Securities
United's investment policy is annually reviewed by its Board of Directors. Any
significant changes to the policy must be approved by the Board. The Board has
an interest rate risk management committee, which is responsible for keeping the
investment policy current.
At December 31, 2000, the investment portfolio represented 12.6% of Fidelity's
assets, compared to 14.2% at December 31, 1999, and is managed in a manner
designed to meet the Board's investment policy objectives. During fiscal 1999
due to continued reductions in the loan portfolio, excess liquidity was
reinvested in lower risk investment securities. The primary objectives, in order
of priority, are to further the safety and soundness of Fidelity, to provide the
liquidity necessary to meet day to day, cyclical, and long-term changes in the
mix of Fidelity's assets and liabilities and to provide for diversification of
risk and management of interest rate and economic risk. At December 31, 2000,
the entire investment portfolio was classified as available for sale. The net
unrealized loss at December 31, 2000, which is included as a component of
stockholders' equity, was $536,000 and was comprised of gross unrealized losses
of $887,000 and a tax benefit of $351,000. The decrease in the unrealized loss
was caused primarily by market interest rate changes during the period and the
decline in the portfolio. Although the entire portfolio is available for sale,
management has not identified specific investments for sale in future periods.
The following table sets forth the components of United's available-for-sale
investment portfolio as of December 31, 2000 and 1999 and at June 30, 1999:
December 31, December 31, June 30,
2000 1999 1999
- -----------------------------------------------------------------------------------------------------------------------
(dollars in thousands)
Federal Home Loan Mortgage Corporation
mortgage-backed securities $ 805 $ 1,043 $ 1,202
Federal National Mortgage Association mortgage-backed securities 1,095 1,377 1,510
Government National Mortgage Association
mortgage-backed securities 19,101 21,885 24,613
------------------------------------------------
Total securities available for sale $21,001 $24,305 $27,325
================================================
For the year ended December 31, 2000, United's investment securities portfolio
decreased by $3.3 million to $21.0 million compared to $24.3 million at December
31, 1999. The current year's decrease is the result of maturities and paydowns
received during the year. United holds various types of securities, including
mortgage-backed securities. Inherent in mortgage-backed securities is prepayment
risk. Prepayment rates generally can be expected to increase during periods of
lower interest rates as some of the underlying mortgages are refinanced at lower
rates. Conversely, the average lives of these securities generally are extended
as interest rates increase.
25
FIDELITY FEDERAL BANCORP AND SUBSIDIARIES
Management's Discussion and Analysis
of Results of Operations and Financial Condition
The following table sets forth the contractual maturities of investment and
mortgage-backed securities as of December 31, 2000, and the weighted average
yields of such securities. The contractual maturities of mortgage-backed
securities are not typically indicative of the actual holding period for such
investments, as pre-payments on the underlying mortgage loans will reduce the
average life of the investment, based on prevailing market interest rates.
------------------------------------------------------------------------------
After One But After Five But
Within One Year Within Five Years Within Ten Years Over Ten Years Total
- -------------------------------------------------------------------------------------------------------------------------
Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield
- -------------------------------------------------------------------------------------------------------------------------
Federal Home Loan Mortgage
Corporation $252 7.00% $ 30 7.53% $ 523 6.45% $ 805 6.66%
Federal National Mortgage
Association 307 7.00 788 6.14 1,095 6.38
Government National
Mortgage $ 4,178 6.75% 14,923 6.97 19,101 6.92
Association
------- ------- -------- --------- ---------
Total $559 7.00% $ 30 7.53% $ 4,178 6.75% $ 16,234 6.91% $ 21,001 6.88%
====== ======= ======== ========= =========
Percent of total 2.7% .1% 19.9% 77.3% 100%
====== ======= ======== ========= =========
Funding Sources
Deposits
Fidelity attracts both short-term and long-term deposits from the retail market
by offering a wide assortment of accounts with different terms and different
interest rates. These deposit alternatives include checking accounts, regular
savings accounts, money market deposit accounts, fixed rate certificates with
varying maturities, variable interest rate certificates, negotiable rate jumbo
certificates ($99,000 or more), and variable rate IRA certificates.
Average deposits decreased by $3.9 million for the year ended December 31, 2000.
Average retail certificates of deposit, for which the average balance increased
$8.7 million but was offset by a decrease in NOW accounts and agent-acquired
certificates of deposit of $1.9 million and $8.9 million, respectively.
According to the provisions of the Supervisory Agreement, Fidelity is unable to
use agent-acquired certificates as a funding source. Existing agent-acquired
certificates of deposit were acquired at rates higher than the current local
market for retail deposits, but generally below rates charged for FHLB advances.
As these agent-acquired certificates mature, United has been successful in
replacing the majority of these deposits with retail certificate of deposit
products. Due to the rise in interest rates during 2000, the average rate on
total deposits has increased 30 basis points since December 31, 1999 to 5.15% at
December 31, 2000.
26
FIDELITY FEDERAL BANCORP AND SUBSIDIARIES
Management's Discussion and Analysis
of Results of Operations and Financial Condition
The following table sets forth the average balances of and the average rate paid
on deposits by deposit category for the years ended December 31, 2000 and 1999
and June 30, 1999.
December 31, December 31, June 30,
2000 1999 1999
---------------------------------------------------------------------------------
Average Deposits Amount Rate Amount Rate Amount Rate
- -------------------------------------------------------------------------------------------------------------------------
(In Thousands)
Demand $ 5,136 $ 6,097 $ 5,724
NOW accounts 17,159 3.21% 19,107 3.39% 20,436 3.50%
Money market accounts 2,058 1.99 2,545 2.03 2,733 2.23
Savings accounts 4,349 2.25 4,657 2.26 5,082 2.32
Certificates of deposit 87,027 5.97 78,329 5.60 79,072 5.76
Agent-acquired certificates of deposit 9,241 6.00 18,147 5.88 33,467 6.02
--------------- --------------- ---------------
Totals $124,970 5.15% $128,882 4.85% $146,514 5.10%
=============== =============== ===============
The following table summarizes certificates of deposit in amounts of $100,000 or
more by maturity as of the following dates:
December 31, December 31, June 30,
2000 1999 1999
- ------------------------------------------------------------------------------------------------------------------
(In Thousands)
Three months or less $1,692 $ 5,656 $ 4,218
Three to six months 1,359 7,727 1,364
Six to twelve months 5,093 2,766 7,760
Over twelve months 4,882 6,825 3,763
--------------------------------------------------
Totals $13,026 $22,974 $17,105
==================================================
Borrowings
Fidelity's long-term debt increased $338,000 from the year ended December 31,
1999, primarily due to a new $2.0 million FHLB advance for a 10 year term
obtained in the second quarter of 2000, which has been partially offset during
the year by paydowns on other FHLB advances secured by specific single-family
loans. During the year an agreement was entered into on an existing $2.0 million
note payable for Fidelity to reduce the principal balance by $500,000 in return
for the extension of the maturity date from June 2001 to June 2003. As noted in
the liquidity section, Fidelity is in the process of negotiating agreements to
extend maturities on certain other debt obligations. Alternative funding sources
for United are provided by loan sales, loan payoffs, Federal Home Loan Bank
advances as well as through retail deposits.
27
FIDELITY FEDERAL BANCORP AND SUBSIDIARIES
Management's Discussion and Analysis
of Results of Operations and Financial Condition
Capital Resources
Fidelity's stockholders' equity increased $3.4 million to $8.8 million at
December 31, 2000, compared to $5.4 million at December 31, 1999. The change in
stockholders' equity was accounted for by a net loss of $1.2 million, a decrease
in the net unrealized loss on securities available for sale of $239,000 and the
sale of stock to Pedcor for $3.0 million (at $3.00 per share) and the issuance
of additional $1.3 million in stock for cash flow deficit guarantees and
property management services to be provided by Pedcor.
Total capital for United consists of Tier I capital plus the allowance for loan
losses. Minimum capital levels are 4% for the leverage ratio, which is, defined
as Tier I capital as a percentage of total assets less goodwill and other
identifiable intangible assets; 4% for Tier I to risk-weighted assets; and 8%
for total capital to risk-weighted assets. United's capital ratios exceed each
of these levels. The leverage ratio was 8.4% for the year ended December 31,
2000 and 6.8% for December 31, 1999, tier I capital to risk-weighted assets was
10.3% and 9.1% and total capital to risk-weighted assets was 13.8% and 14.3% at
December 31, 2000 and December 31, 1999 respectively. Book value per share,
increased to $1.90 at December 31, 2000, compared to $1.72 at December 31, 1999
due to the changes noted above in stockholder's equity.
The capital category assigned to an entity can also be affected by qualitative
judgements made by regulatory agencies about the risk inherent in the entity's
activities that are not part of the calculated ratios. At December 31, 2000 and
1999, the Bank is categorized as well capitalized and met all capital adequacy
requirements; however, United's primary regulator, the OTS felt that additional
capital was necessary based on overall asset quality. United has evaluated and
pursued alternatives to improve its capital ratios since it entered into the
Supervisory Agreement. There are no specific targets for capital levels included
or agreed to within the Supervisory Agreement between United and the OTS, only a
requirement that United include capital targets within a strategic plan. The
strategic plan established capital targets of 8.12% for tangible, leverage and
core capital and 13.75% for risk-based capital. At December 31, 2000 United has
improved its capital ratios to 8.4% and 13.8% respectively at December 31, 2000
compared to 6.3% and 10.8%, respectively at June 30, 1998.
In May 2000 a Stock Purchase Agreement was approved by the shareholders, which
added an additional $4.3 million in capital for Fidelity. In addition, under the
Stock Purchase Agreement, Pedcor is entitled to purchase additional shares from
Fidelity in an aggregate amount up to $5.0 million. For shares purchased in the
first year following the closing, Pedcor will pay $3.00 per share. For shares
purchased in the second and third year following the closing, Pedcor will pay
the fair market value of the shares. Fidelity recently filed with the Securities
and Exchange Commission a registration statement for a common stock rights
offering to existing shareholders. The approximate date of commencement of the
proposed sale of securities would be as soon as practical after the effective
date of the Registration Statement.
28
FIDELITY FEDERAL BANCORP AND SUBSIDIARIES
Management's Discussion and Analysis
of Results of Operations and Financial Condition
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.
The Stock Purchase Agreement approved by shareholders in May 2000 added an
additional $3.0 million in cash for Fidelity. In addition, for 3 years following
the approval of the stock purchase agreement, approved on May 19, 2000, Pedcor
is entitled under the terms of the Stock Purchase Agreement to purchase
additional shares from Fidelity in an aggregate amount up to $5.0 million. For
shares purchased in the first year following the closing, Pedcor will pay $3.00
per share. For shares purchased in the second and third year following the
closing, Pedcor will pay the fair market value of the shares. Fidelity recently
obtained a $1.5 million line of credit and can draw on this line until its
expiration in September 2001. Absent the line of credit, the potential issuance
of additional stock to Pedcor, potential execution of additional debt or equity
financing, or dividends from United (with OTS approval), the holding company
would have depleted its available cash in April 2001. Fidelity filed, in January
2001, with the Securities and Exchange Commission a registration statement for a
common stock rights offering to existing shareholders. The approximate date of
commencement of the proposed sale of the securities would be as soon as
practical after the effective date of the Registration Statement. The common
stock rights offering will be for existing shareholders as of a certain record
date. Fidelity is also in the process of negotiating agreements to extend
maturities on certain debt obligations coming due in 2001 and 2002. Fidelity
filed with the Securities and Exchange Commission a registration statement in
March 2001 to exchange all outstanding 9 1/8% junior subordinated notes due
totaling, $1,476,000 in principal, in April 2001 for 12% junior subordinated
notes due in April 2004. These actions excluding letter of credit issues noted
below will facilitate the acquisition of sufficient cash to meet projected cash
flow shortfalls, if successful.
Fidelity has issued letters of credit that back tax-exempt bond financing for
three Section 42 multifamily housing developments. The municipal bonds are
periodically re-marketed to current or new bondholders. Beginning in July 2001
through October 2001, approximately $8.7 million in bonds are due to be
re-marketed. In the event that some of the bonds cannot successfully be
re-marketed, 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 re-financing 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 outstanding utilizing this program, however, there is
no assurance that this effort will be successful.
United is required by federal regulations to maintain specified levels of
"liquid" assets consisting of cash and other eligible investments. Currently,
liquid assets must equal at least four percent of net withdrawable savings plus
borrowings payable upon demand or due within one year or less. As of December
31, 2000 and December 31, 1999, United's liquidity ratios were 19.1% and 31.4%.
United's significant increase in liquidity at December 31, 1999 was the result
of United's cash contingency plan for Year 2000. United has reduced the
liquidity throughout the year 2000. Management believes that the remaining level
of liquidity is sufficient to meet any anticipated requirements for United's
operations.
The primary sources of funds for operations are principal and interest payments
on loans, deposits from customers, and sales and maturities of investment
securities. In addition, United is authorized to borrow money from the FHLB and
other sources as needed. United's borrowings increased slightly from the FHLB
from $9.0 million at December 31, 1999, to $9.9 million at December 31, 2000.
Fidelity has also decreased its utilization of agency-acquired certificates of
deposit as total loans have decreased and the need for these types of funds has
also decreased.
Supervisory Agreement
Management has expended significant time and effort ensuring that United
continues to operate in compliance with the Supervisory Agreement. While the
Supervisory Agreement remains in place, it is likely that total loans
outstanding will continue to decline, and management efforts will be
concentrated on compliance, rather than business development. This will likely
continue to impact the financial condition and the operating results of United
and Fidelity until the Agreement is lifted. As noted previously and discussed in
the footnotes under "Other Restrictions", United is currently operating under
restrictions imposed by the Supervisory Agreement entered into with the OTS. The
restrictions regarding certain activities
29
FIDELITY FEDERAL BANCORP AND SUBSIDIARIES
Management's Discussion and Analysis
of Results of Operations and Financial Condition
in the Supervisory Agreement have had a significant impact on United's net
interest margin, net interest income, and net income as a result of United's
inability to participate in new commercial lending. The supervisory agreement
currently requires United to:
o reduce its level of classified assets to core capital and allowance
for loan and lease losses to 50% or less by December 31, 1999, (this
was extended to March 31, 2001);
o refrain from making any commercial loans without OTS approval;
o refrain from engaging in any "sub prime" lending activity;
o not increase the size of the consumer loan portfolio in excess of 30%
of United's assets;
o refrain from paying dividends without OTS approval;
o adopt a strategic plan including:
oo capital targets, which United set at 8.12% for tangible,
leverage and core capital ratios and 13.75% for total
risk-based capital;
oo establish concentration limits for all assets; and
oo develop a plan to reduce its concentration of high risk
assets.
o refrain from making additional investments in equity securities or
real estate for development without OTS approval;
o develop a plan to divest real estate held for development;
o develop a plan to reduce employee turnover and obtain OTS approval
before hiring any additional or replacing any directors or senior
executive officers;
o develop a conflicts of interest policy and refrain from engaging in
any transaction with or distribution of funds to Fidelity or its
subsidiaries or selling any assets to an affiliate without OTS
approval;
o develop a plan to increase liquidity and manage liquidity and cash
flow;
o refrain from increasing the level of executive compensation in excess
of the greater of $5,000 or the annual cost of living without OTS
approval;
o not increase its assets in excess of net interest credited on its
deposit liabilities without OTS approval;
o not engage in new activities not included in its strategic plan
without OTS approval;
o maintain a fully-staffed and functioning internal audit and internal
loan review process;
o adopt a policy to administer the general partnerships held by the
subsidiaries of United; and
o adopt a policy to administer its mortgage brokerage activities.
30
FIDELITY FEDERAL BANCORP AND SUBSIDIARIES
Management's Discussion and Analysis
of Results of Operations and Financial Condition
United currently is in compliance with all provisions of the supervisory
agreement, and expects to meet the March 31, 2001 deadline to reduce its level
of classified assets to core capital and allowance for loan and lease losses to
50% or less.
Accounting Pronouncements
The Financial Accounting Standards Board has issued Statement No. 133,
Accounting for Derivative Instruments and Hedge Activities, which provides a
comprehensive and consistent standard for the recognition and measurement of
derivatives and hedging activities. The provisions of this statement were to
become effective for fiscal years beginning after June 15, 1999. The effective
date of the statement has been delayed by Statement No. 137 to fiscal years
beginning after June 15, 2000. Fidelity does not expect the statement to have a
material impact on Fidelity's financial condition or results of operations.
Asset/Liability Management
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 than
average assets 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 offset 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 a 12% risk-based capital ratio are required to
file 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 is not required to file a CMR since it exceeds the
risk-based capital requirement and its assets are less than $300 million, but
does so on a voluntary basis. 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.
Presented below, at December 31, 2000 and December 31, 1999, is an analysis
performed by the OTS of United's interest rate risk as measured by changes in
NPV for instantaneous and sustained parallel shifts in the yield curve, in 100
basis point increments, up and down 300 basis points. At December 31, 2000 and
December 31, 1999, 2% of the present value of United's assets was approximately
$3.2 million and $3.4 million for December 31, 2000 and 1999, respectively.
Because the interest rate risk of a 200 basis point increase in market rates
(which was greater than the interest rate risk of a 200 basis point decrease)
was $2.3 million at December 31, 2000 and $2.9 million at December 31, 1999,
United would not have been required to make a deduction from its total capital
available to calculate its risk based capital requirement. The decrease in
interest rate risk from December 31, 1999 to December 31, 2000 is due to
interest rate changes and a change in United's balance sheet mix.
31
FIDELITY FEDERAL BANCORP AND SUBSIDIARIES
Management's Discussion and Analysis
of Results of Operations and Financial Condition
Interest Rate Risk as of December 31, 2000
NPV as Percent of Present
Net Portfolio Value Value of Assets
-------------------------------------------------------------------------------------------------
Change Dollar Dollar Percentage
in Rates Amount Change Change NPV Ratio Change
- ----------------------------------------------------------------------------------------------------------------------
+ 300 bp $11,424 $(3,799) (25)% 7.41% - 198 bp
+ 200 bp 12,848 (2,375) (16) 8.19 - 120 bp
+ 100 bp 14,154 (1,068) (7) 8.87 - 52 bp
0 bp 15,223 9.40
- 100 bp 15,578 356 2 9.51 11 bp
- 200 bp 15,567 345 2 9.42 3 bp
- 300 bp 15,912 689 5 9.53 13 bp
Interest Rate Risk as of December 31, 1999
NPV as Percent of Present
Net Portfolio Value Value of Assets
-------------------------------------------------------------------------------------------------
Change Dollar Dollar Percentage
in Rates Amount Change Change NPV Ratio Change
- ----------------------------------------------------------------------------------------------------------------------
+ 300 bp $10,879 $(4,685) (30)% 6.75% - 242 bp
+ 200 bp 12,622 (2,942) (19) 7.69 - 148 bp
+ 100 bp 14,256 (1,308) (8) 8.53 - 64 bp
0 bp 15,564 9.17
- 100 bp 16,148 585 4 9.41 24 bp
- 200 bp 16,023 459 3 9.27 10 bp
- 300 bp 16,010 446 3 9.19 2 bp
As with any method of measuring interest rate risk, certain shortcomings are
inherent in the methods of analysis presented above. For example, although
certain assets and liabilities may have similar maturities or periods to
repricing, they may react in different degrees to changes in market rates. Also,
the interest rates on certain types of assets and liabilities may fluctuate in
advance of changes in market interest rates, while interest rates on other types
may lag behind changes in market rates. Additionally, certain assets, such as
adjustable-rate loans, have features, which restrict changes in interest rates
on a short-term basis and over the life of the assets. Further, in the event of
a change in interest rates, expected rates of prepayments on loans and early
withdrawals from certificates could likely deviate significantly from those
assumptions used in calculating the table.
32
[LOGO OF OLIVE LLP]
Independent Auditor's Report
Stockholders and Board of Directors
Fidelity Federal Bancorp
Evansville, Indiana
We have audited the accompanying consolidated balance sheet of
Fidelity Federal Bancorp and subsidiaries as of December 31,
2000 and 1999 and the related consolidated statements of
income, changes in stockholders' equity and cash flows for the
year and six months ended December 31, 2000 and 1999 and for
the year ended June 30, 1999. These consolidated financial
statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used
and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements
described above present fairly, in all material respects, the
consolidated financial position of Fidelity Federal Bancorp
and subsidiaries as of December 31, 2000 and 1999, and the
results of their operations and their cash flows for the year
and six months ended December 31, 2000 and 1999 and for the
year ended June 30, 1999 in conformity with generally accepted
accounting principles.
/s/ Olive LLP
Evansville, Indiana
January 12, 2001
33
FIDELITY FEDERAL BANCORP AND SUBSIDIARIES
Consolidated Balance Sheet
(In Thousands, Except Share Data)
December 31 2000 1999
- ----------------------------------------------------------------------------------------
Assets
Cash and due from banks $ 1,926 $ 8,003
Interest-bearing demand deposits 14,718 22,911
------------------------------------
Cash and cash equivalents 16,644 30,914
Investment securities available for sale 21,001 24,305
Loans, net of allowance for loan losses of $1,921 and $2,021 107,842 96,919
Premises and equipment 5,847 5,727
Federal Home Loan Bank of Indianapolis stock 2,620 3,920
Deferred income tax receivable 7,245 5,372
Interest receivable and other assets 5,267 4,300
------------------------------------
Total assets $ 166,466 $ 171,457
====================================
Liabilities
Deposits
Non-interest bearing $ 4,291 $ 6,593
Interest bearing 122,653 128,423
------------------------------------
Total deposits 126,944 135,016
Long-term debt 23,842 23,504
Advances by borrowers for taxes and insurance 362 409
Valuation allowance for letters of credit 5,153 5,787
Other liabilities 1,390 1,314
------------------------------------
Total liabilities 157,691 166,030
------------------------------------
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--4,607,658 and 3,147,662 shares 4,607 3,147
Additional paid-in capital 13,674 10,869
Stock warrants 11 11
Retained earnings (8,981) (7,825)
Accumulated other comprehensive loss (536) (775)
------------------------------------
Total stockholders' equity 8,775 5,427
------------------------------------
Total liabilities and stockholders' equity $ 166,466 $ 171,457
====================================
See notes to consolidated financial statements.
34
FIDELITY FEDERAL BANCORP AND SUBSIDIARIES
Consolidated Statement of Income
(In Thousands, Except Share Data)
Six Months
Year Ended Ended Year Ended
December 31, December 31, June 30,
2000 1999 1999
- -------------------------------------------------------------------------------
Interest Income
Loans receivable $ 9,436 $ 4,558 $ 11,861
Investment securities--taxable 1,518 849 955
Federal funds sold 25
Deposits with financial institutions 873 454 939
Other dividend income 273 158 314
-----------------------------------
Total interest income 12,100 6,019 14,094
-----------------------------------
Interest Expense
Deposits 6,442 3,151 7,467
Long-term debt 2,015 1,117 2,263
-----------------------------------
Total interest expense 8,457 4,268 9,730
-----------------------------------
Net Interest Income 3,643 1,751 4,364
Provision for loan losses 670 1,345 (138)
-----------------------------------
Net Interest Income After Provision for
Loan Losses 2,973 406 4,502
-----------------------------------
Other Income
Fee income--management fees 88 88 196
Service charges on deposit accounts 311 201 437
Net gains on loan sales 54 110 343
Letter of credit fees 530 291 582
Real estate investment banking fees 78 13 78
Agent fee income 240 4 333
Title fee income 16 18 72
Servicing fees on loans sold 109 55 91
Release fees on multifamily loans 34 20 82
Other income 356 201 449
-----------------------------------
Total non-interest income 1,816 1,001 2,663
-----------------------------------
35
FIDELITY FEDERAL BANCORP AND SUBSIDIARIES
Consolidated Statement of Income
(In Thousands, Except Share Data)
(Continued)
Six Months
Year Ended Ended Year Ended
December 31, December 31, June 30,
2000 1999 1999
- -------------------------------------------------------------------------------
Other Expenses
Salaries and employee benefits $ 3,370 $ 1,747 $ 3,414
Net occupancy expenses 364 192 394
Equipment expenses 250 166 299
Data processing fees 339 247 407
Deposit insurance expense 243 156 244
Legal and professional fees 544 379 379
Advertising 198 78 202
Letter of credit valuation provision (85) 1,069 (715)
Loss on investment in partnerships 352 356 831
Amortization of intangible assets 139
Correspondent bank charges 156 79 154
Other expense 1,444 679 1,269
-------------------------------------
Total non-interest expense 7,314 5,148 6,878
-------------------------------------
Income (Loss) Before Income Tax (2,525) (3,741) 287
Income tax benefit (1,369) (1,671) (338)
-------------------------------------
Net Income (Loss) $(1,156) $(2,070) $ 625
=====================================
Basic Earnings (Loss) Per Share $ (.29) $ (.66) $ .20
Diluted Earnings (Loss) Per Share (.29) (.66) .20
See notes to consolidated financial statements.
36
FIDELITY FEDERAL BANCORP AND SUBSIDIARIES
Consolidated Statement of Changes in Stockholders' Equity
(In Thousands, Except Share Data)
Accumulated
Common Stock Comprehensive Other
--------------------- Paid-in Stock Income Retained Comprehensive
Shares Amount Capital Warrants (Loss) Earnings Income (Loss) Total
---------------------------------------------------------------------------------------
Balances, July 1, 1998 3,127,208 $3,127 $10,799 $11 $(6,380) $ (42) $7,515
Comprehensive income
Net income $625 625 625
Other comprehensive loss, net of tax
Unrealized loss on securities (416) (416) (416)
-------
Comprehensive income $209
=======
Sale of stock 20,458 20 70 90
Purchase of stock (4)
---------------------------------------- --------------------------------
Balances, June 30, 1999 3,147,662 3,147 10,869 11 (5,755) (458) 7,814
Comprehensive loss
Net loss
Other comprehensive loss, net of tax $(2,070) (2,070) (2,070)
Unrealized loss on securities (317) (317) (317)
--------
Comprehensive loss $(2,387)
========
---------------------------------------- --------------------------------
Balances, December 31, 1999 3,147,662 3,147 10,869 11 (7,825) (775) 5,427
Comprehensive loss
Net loss $(1,156) (1,156) (1,156)
Other comprehensive income, net of tax
Unrealized gain on securities 239 239 239
--------
Comprehensive loss $ (917)
========
Sale of stock 1,460,000 1,460 2,805 4,265
Purchase of stock (4)
---------------------------------------- --------------------------------
Balances, December 31, 2000 4,607,658 $4,607 $13,674 $11 $(8,981) $(536) $8,775
======================================== ================================
See notes to consolidated financial statements.
37
FIDELITY FEDERAL BANCORP AND SUBSIDIARIES
Consolidated Statement of Cash Flows
(In Thousands)
Six Months
Year Ended Ended Year Ended
December 31, December 31, June 30,
2000 1999 1999
- ----------------------------------------------------------------------------------------------------
Operating Activities
Net income (loss) $ (1,156) $ (2,070) $ 625
Adjustments to reconcile net income (loss) to net
cash provided (used) by operating activities
Provision for loan losses 670 1,345 (138)
Letter of credit valuation provision (85) 1,069 (715)
Depreciation and amortization 491 196 402
Valuation allowance--affordable housing investments 69 331 545
Loans originated for sale (5,395) (4,527) (25,474)
Proceeds from sale of loans 5,384 4,542 25,342
Deferred income tax benefit (2,031) (1,673) (6)
Changes in
Interest payable and other liabilities (114) 219 66
Interest receivable and other assets 247 594 3,642
Other 261 17 (43)
-----------------------------------------
Net cash provided (used) by operating activities (1,659) 43 4,246
-----------------------------------------
Investing Activities
Purchases of securities available for sale (25,388)
Proceeds from maturities of securities available for sale 3,639 2,463 7,189
Proceeds from redemption of FHLB stock 1,300
Net change in loans (11,484) 12,069 45,683
Purchase of premises and equipment (794) (231) (267)
Proceeds from sales of premises and equipment 110 40
Funding on outstanding letter of credit (600) (450)
-----------------------------------------
Net cash provided (used) by investing activities (7,829) 13,851 27,257
-----------------------------------------
Financing Activities
Net change in
Noninterest-bearing, interest-bearing
demand and savings deposits (2,030) (2,022) (1,430)
Certificates of deposit (6,042) 8,442 (18,913)
Short-term borrowings (2,403)
Proceeds of long-term debt 2,000 5,000
Repayment of long-term debt (1,663) (5,684) (5,339)
Net change in advances by borrowers for
taxes and insurance (47) 17 (34)
Sale of stock 3,000 90
Cash dividends (156)
-----------------------------------------
Net cash provided (used) by financing activities (4,782) 753 (23,185)
-----------------------------------------
38
FIDELITY FEDERAL BANCORP AND SUBSIDIARIES
Consolidated Statement of Cash Flows
(In Thousands)
(Continued)
Six Months
Year Ended Ended Year Ended
December 31, December 31, June 30,
2000 1999 1999
- ------------------------------------------------------------------------------------------------
Net Change in Cash and Cash Equivalents $(14,270) $ 14,647 $ 8,318
Cash and Cash Equivalents, Beginning of Period 30,914 16,267 7,949
---------------------------------------
Cash and Cash Equivalents, End of Period $ 16,644 $ 30,914 $ 16,267
=======================================
Additional Cash Flows Information
Interest paid $ 8,448 $ 4,211 $ 9,879
Income tax paid (refunded) 727 (3,013)
Stock issued in exchange for partnership operating
cash flow deficit guarantees and management services 1,265
See notes to consolidated financial statements.
39
FIDELITY FEDERAL BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar Amounts in Thousands, Except Share Data)
>> Nature of Operations and Summary of Significant Accounting Policies
The accounting and reporting policies of Fidelity Federal Bancorp (Fidelity) and
its wholly-owned subsidiaries conform to generally accepted accounting
principles and reporting practices followed by the thrift industry. The more
significant of the policies are described below.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Fidelity is a registered thrift holding company whose principal activity is the
ownership and management of United Fidelity Bank, fsb (United). United operates
under a national thrift charter and provides full banking services. As a
federally chartered thrift, United is subject to regulation by the Office of
Thrift Supervision (OTS) and the Federal Deposit Insurance Corporation.
Fidelity's other subsidiary is Village Affordable Housing Corporation, which was
formed during 1999 for the purpose of owning interests in real estate housing,
and is currently inactive.
United generates mortgage, consumer and commercial loans and receives deposits
from customers located primarily in Vanderburgh County, Indiana and surrounding
counties. Fidelity's loans are generally secured by specific items of collateral
including real property, consumer assets and business assets. United's
subsidiaries, Village Housing Corporation and Village Management Corporation
(Affordable Housing Group) and Village Capital Corporation have been involved in
various aspects of financing, owning, developing and managing affordable housing
projects. Currently, they are involved only in the business of owning affordable
housing properties. In May 2000, a subsidiary of Pedcor Holdings, LLC began
providing management and certain accounting services for the properties
previously managed by Village Management Corporation. Village Management is
currently inactive. Village Capital Corporation earns fees by providing real
estate mortgage banking services to unaffiliated borrowers. Village Capital has
not provided any new banking services for the past two years, but records fee
income on transactions previously completed. Another United subsidiary, Village
Insurance Corporation, is engaged in the business of selling credit life and
accident health insurance in conjunction with United's lending activities.
Consolidation--The consolidated financial statements include the accounts of
Fidelity and its subsidiaries after elimination of all material intercompany
transactions.
Securities available for sale are carried at fair value, with unrealized gains
and losses reported separately in accumulated other comprehensive income, net of
tax.
Amortization of premiums and accretion of discounts are recorded as interest
income from securities. Realized gains and losses are recorded as net security
gains (losses). Gains and losses of securities are recorded on the
specific-identification method.
Loans held for sale are carried at the lower of aggregate cost or market value.
Market is determined using the aggregate method. Net unrealized losses, if any,
are recognized through a valuation allowance by charges to income, based on the
difference between estimated sales proceeds and aggregate cost.
40
FIDELITY FEDERAL BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar Amounts in Thousands, Except Share Data)
Loans are carried at the principal amount outstanding. Interest income is
accrued on the principal balances of loans. The accrual of interest on impaired
loans is discontinued when, in management's opinion, the borrower may be unable
to meet payments as they become due. When interest accrual is discontinued, all
unpaid accrued interest is reversed when considered uncollectible. Interest
income is subsequently recognized only to the extent cash payments are received.
Certain loan fees and related direct costs are being deferred and amortized over
the lives of the loans as an adjustment of yield on the loans.
Allowance for loan losses and letter of credit valuation allowance are
maintained for credit losses to absorb losses inherent in the loan portfolio.
The allowances are based on ongoing quarterly assessments of the probable
estimated losses inherent in the loan portfolios. The allowance for loan losses
is increased by the provision for credit losses, which is charged against
current period operating results and decreased by the amount of chargeoffs, net
of recoveries. Fidelity's methodology for assessing the appropriateness of the
allowance for loan losses consists of several key elements, which include the
formula allowance, specific allowances for identified problem loans, and the
unallocated allowance.
The formula allowance is calculated by applying loss factors to outstanding
loans and certain unused commitments, in each case based on the internal risk
grade of such loans, pools of loans, or commitments. Changes in risk grades of
both performing and nonperforming loans affect the amount of the formula
allowance. Loss factors are based on historical loss experience and may be
adjusted for significant factors that, in management's judgement, affect the
collectibility of the portfolio as of the evaluation date.
Specific loan and letter of credit valuation reserves are established in cases
where management has identified significant conditions or circumstances related
to a loan or letter of credit that management believes indicate the probability
that a loss has been incurred in excess of the amount determined by the
application of, in the case of the allowance for loan losses, the formula
allowance.
The unallocated allowance for loan losses is based upon management's evaluation
of various conditions, the effects of which are not directly measured in the
determination of the formula and specific allowances. The evaluation of the
inherent loss with respect to these conditions is subject to a higher degree of
uncertainty because they are not identified with specific credits. The
conditions evaluated in connection with the unallocated allowance for loan
losses and the letter of credit valuation reserve may include existing general
economic and business conditions affecting Fidelity's key lending areas, credit
quality trends, collateral values, loan volumes and concentrations, seasoning of
the loan and letter of credit portfolios, specific industry conditions within
portfolio segments, recent loss experience in particular segments of the
portfolios, duration of the current business cycle, regulatory examination
results, and findings of an independent third party conducting quarterly reviews
of the loan and letter of credit portfolios.
The allowance for loan losses also incorporates the results of measuring
impaired loans as provided in SFAS No. 114 and SFAS No. 118. A loan is
considered impaired when management determines that it is probable that the Bank
will be unable to collect all amounts due according to the original contractual
terms of the loan agreement. Impairment is measured by the difference between
the recorded investment in the loan and the estimated present value of total
expected future cash flows, discounted at the loan's effective rate, or the fair
value of the collateral of the loan, if collateral dependent. Impairment is
recognized by adjusting an allocation of the existing allowance for loan losses.
41
FIDELITY FEDERAL BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar Amounts in Thousands, Except Share Data)
The determination of the adequacy of the allowance for loan losses and the
letter of credit valuation allowance is based on estimates that are particularly
susceptible to significant changes in the economic environment and market
conditions. Management believes that, as of December 31, 2000, the allowance for
loan losses and the letter of credit valuation allowance is adequate based on
information currently available. A worsening or protracted economic decline in
the area within which Fidelity operates could affect the possibility of
additional losses due to credit and market risks and could create the need for
additional loss reserves.
Premises and equipment are carried at cost, net of accumulated depreciation.
Depreciation is computed using the straight-line method based principally on the
estimated useful lives of the assets. Maintenance and repairs are expensed as
incurred while major additions and improvements are capitalized. Gains and
losses on dispositions are included in current operations.
Federal Home Loan Bank (FHLB) stock is a required investment for institutions
that are members of the FHLB system. The required investment in the common stock
is based on a predetermined formula.
Income tax in the consolidated statement of income includes deferred income tax
provisions or benefits for all significant temporary differences in recognizing
income and expenses for financial reporting and income tax purposes. Fidelity
files consolidated income tax returns with its subsidiaries.
Mortgage servicing rights on originated loans are capitalized by allocating the
total cost of the mortgage loans between the mortgage servicing rights and the
loans based on their relative fair values. Capitalized servicing rights, which
includes purchased servicing rights, are amortized in proportion to and over the
period of estimated servicing revenues.
Intangible assets are being amortized on the straight-line basis over periods
ranging from five to ten years. Such assets are periodically evaluated as to the
recoverability of their carrying value.
Stock options are granted for a fixed number of shares to employees with an
exercise price equal to the fair value of the shares at the date of grant.
Fidelity accounts for stock option grants in accordance with Accounting
Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees,
and, accordingly, recognized no compensation expense for the stock option
grants.
Earnings per share have been computed based upon the weighted-average common
shares outstanding during the year. The effect of outstanding options and
warrants are included in diluted earnings per share if they are not
anti-dilutive.
Reclassification of certain amounts in the 1999 consolidated financial
statements have been made to conform to the 2000 presentation.
42
FIDELITY FEDERAL BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar Amounts in Thousands, Except Share Data)
>> Restriction on Cash and Due From Banks
United is required to maintain reserve funds in cash and/or on deposit with the
Federal Reserve Bank. The reserve required at December 31, 2000 was $173.
>> Investment Securities Available for Sale
Gross
Amortized Unrealized Fair
Cost Losses Value
-----------------------------------------------
December 31, 2000
Mortgage-backed securities $21,888 $ (887) $21,001
===============================================
December 31, 1999
Mortgage-backed securities $25,589 $(1,284) $24,305
===============================================
Securities with a carrying value of $20,727 and $23,650 were pledged at December
31, 2000 and 1999 to secure certain deposits, outstanding Federal Home Loan Bank
advances, and for other purposes as permitted or required by law.
>> Loans and Allowance
December 31 2000 1999
- ---------------------------------------------------------------------------------------------------
Real estate mortgage loans
First mortgage loans
Conventional $ 47,809 $48,845
Construction 1,274 1,867
Commercial 6,873 8,576
Multi-family 4,350 3,629
Home equity loans 5,274 5,567
First mortgage real estate loans purchased 1,753 1,899
Commercial loans--other than secured by real estate 2,305 4,154
Consumer loans 40,125 24,403
-------------------------------
Total loans 109,763 98,940
Allowance for loan losses (1,921) (2,021)
-------------------------------
Total loans, net of the allowance for loan losses $107,842 $96,919
===============================
43
FIDELITY FEDERAL BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar Amounts in Thousands, Except Share Data)
Multi-family first mortgage loans are loans made to affordable housing
developments. An additional $973 and $1,529 in multi-family loans is included in
construction loans at December 31, 2000 and 1999.
Six Months
Year Ended Ended Year Ended
December 31, December 31, June 30,
2000 1999 1999
- ---------------------------------------------------------------------------------------------------------------
Allowance for Loan Losses
Balances, beginning of period $2,021 $3,521 $3,049
Provision for losses 670 1,345 (138)
Transfer from letter of credit valuation reserve 895
Recoveries on loans 396 32 53
Loans charged off (1,166) (2,877) (338)
--------------------------------------------------
Balances, end of period $1,921 $2,021 $3,521
==================================================
Information on impaired loans is summarized below:
December 31 2000 1999
- ------------------------------------------------------------------------------------------------------
Impaired loans with an allowance $3,696 $7,351
===============================
Allowance for impaired loans (included in allowance for loan losses) $ 384 $1,055
===============================
Six Months
Year Ended Ended Year Ended
December 31, December 31, June 30,
2000 1999 1999
- ------------------------------------------------------------------------------------------------------------
Average balance of impaired loans $7,298 $13,548 $13,868
Interest income recognized on impaired loans 1,008 663 1,396
Cash-basis interest included above 1,045 614 1,396
44
FIDELITY FEDERAL BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar Amounts in Thousands, Except Share Data)
>> Letter of Credit Valuation Allowance
Reserves related to letters of credit issued by Fidelity and United relate to
the permanent financing for certain affordable housing projects. Multi-family
letters of credit, an off-balance sheet item, carry the same risk
characteristics as conventional loans and totaled $43,800 and $44,463 at
December 31, 2000 and 1999, respectively.
Six Months
Year Ended Ended Year Ended
December 31, December 31, June 30,
2000 1999 1999
- -----------------------------------------------------------------------------------------------------------
Letter of credit valuation allowance
Balances, beginning of year $5,787 $5,168 $6,778
Provision (85) 1,069 (715)
Recoveries 51
Transfer to allowance for loan losses (895)
Funding of outstanding letters of credit (600) (450)
----------------------------------------------
Balances, end of year $5,153 $5,787 $5,168
==============================================
During the year ended December 31, 2000 and the six months ended December 31,
1999, Fidelity disbursed $600 and $450 to holders of bond obligations of limited
partnerships in which Fidelity is a general partner. This was done in an effort
to place the partnerships' debt service coverage ratio at a level that would
support full repayment of the obligation. Fidelity funded one letter of credit
totaling $4,200 during the year ended June 30, 1999. The valuation allowance for
this letter of credit, totaling $895, was transferred to the allowance for loan
losses.
>> Premises and Equipment
December 31 2000 1999
- -----------------------------------------------------------------------------------------
Land $1,695 $1,620
Building and land improvements 5,727 5,369
Furniture, fixtures and equipment 2,454 2,455
-----------------------------
Total cost 9,876 9,444
Accumulated depreciation (4,029) (3,717)
-----------------------------
Net $5,847 $5,727
=============================
45
FIDELITY FEDERAL BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar Amounts in Thousands, Except Share Data)
>> Other Assets and Investments in Limited Partnerships
Included in other assets at December 31, 2000 and 1999 are investments of $791
and $1,302 in limited partnerships which are organized to build, own and operate
apartment complexes. The carrying amounts of these investments approximates
Fidelity's equity in the net assets of the partnerships. The investments at
December 31, 2000 are as follows:
Percentage and Type of Amount of Number of
Partnership Interest Investment Partnerships
-----------------------------------------------------------
1%--General $ (41) 15
1%--General and
31%--Limited 159 1
1%--General and
26%--Limited 165 1
10%--Limited 308 1
10%--Limited 125 1
99%--Limited 75 2
Fidelity records income on the equity method in the income and losses of the
limited partnerships, which resulted in losses of $283, $25 and $246 during the
year and six months ended December 31, 2000 and 1999 and year ended June 30,
1999. In addition to recording its equity in the losses of these projects,
Fidelity has recorded the benefit of low-income housing tax credits of $375,
$193 and $460 for the year and six months ended December 31, 2000 and 1999 and
year ended June 30, 1999. In certain cases, Fidelity could reduce the carrying
value of its investments in and related loans to these partnerships, should its
share of net losses materially exceed the net investments in and loans to these
partnerships. Combined condensed financial statements (unaudited) for the
limited partnerships as of December 31, 2000 and 1999 and June 30, 1999 and for
the year and six months ended December 31, 2000 and 1999 and year ended June 30
1999 are as follows:
December 31 2000 1999
- ----------------------------------------------------------------------------------------------
Combined condensed balance sheet (unaudited)
Assets
Cash $ 412 $ 322
Land and property 53,226 54,531
Other assets 1,832 1,733
--------------------------------
Total assets $55,470 $56,586
================================
Liabilities
Notes payable $40,958 $40,015
Other liabilities 3,133 2,575
--------------------------------
Total liabilities 44,091 42,590
Partners' equity 11,379 13,996
--------------------------------
Total liabilities and partners' equity $55,470 $56,586
================================
46
FIDELITY FEDERAL BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar Amounts in Thousands, Except Share Data)
Six Months
Year Ended Ended Year Ended
December 31, December 31, June 30,
2000 1999 1999
- -----------------------------------------------------------------------------------------------------------------
Combined condensed statement of operations (unaudited)
Total revenue $ 5,681 $ 3,481 $ 5,734
Total expenses 8,094 4,539 7,161
---------------------------------------------------
Net loss $(2,413) $(1,058) $(1,427)
===================================================
Approximately $2,647 and $2,459 of the notes payable are due to Fidelity from
these partnerships at December 31, 2000 and 1999, and specific reserves on these
notes receivable of $237 and $334 are included in the Company's allowance for
loan losses at December 31, 2000 and 1999.
Fidelity wrote down the investments in limited partnerships by $352, $356 and
$831 during the year ended December 31, 2000 and six months ended December 31,
1999 and year ended June 30, 1999, based on the performance of the underlying
real estate operations.
Included in other assets is interest receivable as follows:
December 31 2000 1999
- ----------------------------------------------------------------------------------------------------
Interest receivable on loans $580 $570
Interest receivable on investment securities and other 148 170
-------------------------------
Total interest receivable $728 $740
===============================
>> Deposits
December 31 2000 1999
- ----------------------------------------------------------------------------------------------------
Non-interest bearing transaction accounts $ 4,305 $ 6,593
Interest-bearing transaction accounts 18,840 17,766
Money market deposit accounts 1,795 2,072
Savings accounts 4,020 4,559
Certificates of $100 or more 13,026 22,974
Other certificates and time deposits 84,958 81,052
-------------------------------
Total deposits $126,944 $135,016
===============================
47
FIDELITY FEDERAL BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar Amounts in Thousands, Except Share Data)
Certificates maturing in years ending December 31:
2001 $58,402
2002 16,164
2003 21,551
2004 1,158
2005 709
-----------
$97,984
===========
>> Long-Term Debt
December 31 2000 1999
- ---------------------------------------------------------------------------------------------------------------------
Note payable, 9.45% adjusted annually, payable $8 per month, including interest,
due September 2010, secured by specific
multi-family mortgages $ 975 $ 985
Note payable, 9.45% adjusted annually, payable $13 per month,
including interest, due September 2010, secured by specific
multi-family mortgages 1,494 1,510
Note payable, 10.50%, interest paid quarterly, due June 2003,
secured by United stock 1,500 2,000
Junior subordinated notes, 9.125%, interest paid semi-annually,
due April 2001, unsecured 1,476 1,476
Junior subordinated notes, 9.25%, interest paid semi-annually,
due January 2002, unsecured 1,494 1,494
Senior subordinated notes, 10.00%, interest paid semi-annually,
due June 2005, unsecured 7,000 7,000
Federal Home Loan Bank advances, due at various dates through
2010 (weighted-average rates of 6.72% and 6.59% at December 31,
2000 and 1999) 9,903 9,039
-------------------------------
Total long-term debt $23,842 $23,504
===============================
The terms of a security agreement with the FHLB require United to pledge as
collateral qualifying first mortgage loans in an amount equal to at least 125%
of these advances and all stock in the FHLB or eligible securities with a market
value in an amount equal to at least 110% of these advances. In addition to
first mortgage loans pledged of $42,455, Fidelity had $20,626 of investment
securities pledged at December 31, 2000. Certain advances are subject to
restrictions or penalties in the event of prepayment.
All long-term debt, except for Federal Home Loan Bank advances, is debt of the
parent company and totals $13,939.
The scheduled principal reduction of borrowings at December 31, 2000, is as
follows: 2001, $5,070; 2002, $5,854; 2003, $1,529; 2004, $31; 2005, $7,031; and
thereafter, $4,327.
48
FIDELITY FEDERAL BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar Amounts in Thousands, Except Share Data)
>> Loan Servicing
Loans serviced for others are not included in the accompanying consolidated
balance sheet. The unpaid principal balances of mortgage loans serviced for
others totaled $40,858, $40,693 and $38,646 at December 31, 2000 and 1999 and
June 30, 1999.
The aggregate fair value of capitalized mortgage servicing rights at December
31, 2000 and 1999 approximated $511 and $509. Comparable market prices were used
to estimate fair value.
Six Months
Year Ended Ended Year Ended
December 31, December 31, June 30,
2000 1999 1999
- -----------------------------------------------------------------------------------------------------------------
Mortgage servicing rights
Balances, beginning of period $430 $409 $226
Servicing rights capitalized 54 45 250
Amortization of servicing rights (53) (24) (67)
------------------------------------------------
Balances, end of period $431 $430 $409
================================================
>> Income Tax
Six Months
Year Ended Ended Year Ended
December 31, December 31, June 30,
2000 1999 1999
- -----------------------------------------------------------------------------------------------------------------
Income tax benefit
Currently payable
Federal $ 662 $(330)
State $ 2 (2)
Deferred
Federal (1,822) (1,356) (39)
State (209) (317) 33
-------------------------------------------------
Total income tax benefit $(1,369) $(1,671) $(338)
=================================================
Reconciliation of federal statutory to actual tax benefit
Federal statutory income tax at 34% $ (859) $(1,272) $ 98
Effect of state income taxes (138) (208) 21
Nondeductible expenses 3
Affordable housing tax credits and other (375) (191) (457)
-------------------------------------------------
Actual tax benefit $(1,369) $(1,671) $ (338)
=================================================
49
FIDELITY FEDERAL BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar Amounts in Thousands, Except Share Data)
The components of the deferred tax asset are as follows:
December 31 2000 1999
- ---------------------------------------------------------------------------------------------------------
Assets
Differences in accounting for certain accrued liabilities $ 3 $ 12
Allowance for loan losses 3,054 2,391
Letter of credit allowance for loss 1,498 926
Loan fees 32
Unrealized gain/loss on available-for-sale securities 351 509
Alternative minimum tax credit 71 147
Low income housing credit carryforward 1,311 1,337
State net operating loss carryforward 834 805
Federal net operating loss carryforward 1,386 761
State income tax 105
Other 3 39
-------------------------------
Total assets 8,616 6,959
-------------------------------
Liabilities
Depreciation and amortization (6) (40)
State income tax (273)
Differences in basis of FHLB stock (66) (66)
Basis differential on certain partnership interests (1,128) (1,038)
Differences in accounting for mortgage servicing rights (171) (170)
-------------------------------
Total liabilities (1,371) (1,587)
-------------------------------
$7,245 $5,372
===============================
At December 31, 2000, Fidelity has federal net operating loss carryforwards for
tax purposes totaling $4,076. These loss carryforwards expire in varying amounts
through the year 2020. Fidelity has state net operating loss carryforwards for
tax purposes of $9,809. These loss carryforwards expire in varying amounts
through the year 2015. Fidelity has affordable housing credit carryforwards of
$1,311. These carryforwards expire in varying amounts through the year 2020. In
addition, Fidelity has an alternative minimum tax credit carryforward of $71.
Retained earnings include approximately $1,870 for which no deferred income tax
liability has been recognized. This amount represents an allocation of income to
bad debt deductions as of December 31, 1987 for tax purposes only. Reduction of
amounts so allocated for purposes other than tax bad debt losses, including
redemption of bank stock or excess dividends, or loss of "bank" status, would
create income for tax purposes only, which income would be subject to the
then-current corporate income tax rate. The unrecorded deferred income tax
liability on the above amount was approximately $635.
The Company has recorded a deferred tax asset of $2,220 for the expected benefit
to be realized from the federal and state net operating loss carryovers
discussed above. In addition, a deferred tax asset of $1,311 for low income
housing tax credits is recorded. Realization depends upon the ability of the
Company to generate sufficient taxable income before the expiration of the
carryover periods. The amount that management considers to be realizable is
reevaluated at each financial statement date. That estimate could be reduced in
the near term if management lowers its estimate of future taxable income during
the carryover period.
50
FIDELITY FEDERAL BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar Amounts in Thousands, Except Share Data)
>> Commitments and Contingent Liabilities
In the normal course of business, there are outstanding commitments and
contingent liabilities, such as commitments to extend credit and standby letters
of credit, which are not included in the accompanying consolidated financial
statements. Fidelity's exposure to credit loss in the event of nonperformance by
the other party to the financial instruments for commitments to extend credit
and standby letters of credit is represented by the contractual or notional
amount of those instruments. Fidelity uses the same credit policies in making
such commitments as it does for instruments that are included on the
consolidated balance sheet.
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since many of the commitments are expected to expire
without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. Fidelity evaluates each customer's credit
worthiness on a case-by-case basis. The amount of collateral obtained, if deemed
necessary by Fidelity upon extension of credit, is based on management's credit
evaluation. Collateral held varies, but may include residential real estate,
income-producing commercial properties, or other assets of the borrower. At
December 31, 2000 and 1999, commitments to extend credit, which represent
financial instruments whose contract amount represents credit risk, were $8,518
and $8,098.
Fidelity has issued standby letters of credit on affordable housing developments
in which one of Fidelity's subsidiaries has a partnership interest. The letters
of credit secure tax exempt bond issues and other permanent financing of limited
partnerships in which one of Fidelity's subsidiaries owns a one percent general
partner interest. The amount outstanding on these letters of credit at December
31, 2000 and 1999 was $15,612 and $16,240.
Fidelity has also issued standby letters of credit on affordable housing
developments in which the borrowers are not affiliated with Fidelity. The
letters of credit secure tax-exempt bond issues and other permanent financing of
limited partnerships. The amount outstanding on the letters of credit at
December 31, 2000 and 1999 was $28,188 and $28,223. Fidelity also has standby
letters of credit to guarantee the performance of a customer to a third party.
The amount outstanding on the standby letters of credit at December 31, 2000 and
1999 was $96 and $115.
Fidelity, in its role as general partner on various affordable housing
developments through its subsidiaries, is committed to advance certain amounts
to limited partnerships. These commitments potentially include short-term loans
to the limited partners or an increase in the general partner's equity
investment.
Fidelity has entered into change in control agreements with one of its employees
which provide for the continuation of a multiple of the employee's existing
salary and certain benefits for a two-year period of time under certain
conditions following a change in control. The agreement becomes effective if
there is a change in control that is accompanied by a significant change in job
responsibilities and/or compensation.
Fidelity and its subsidiaries are also subject to claims and lawsuits which
arise primarily in the ordinary course of business. It is the opinion of
management that the disposition or ultimate resolution of such claims and
lawsuits will not have a material adverse effect on the consolidated financial
position of Fidelity.
51
FIDELITY FEDERAL BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar Amounts in Thousands, Except Share Data)
>> Dividend and Capital Restrictions
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. Fidelity's primary source of
income is dividends from United.
United has entered into a Supervisory Agreement (Agreement) with the OTS. The
Agreement restricts the payments of dividends from United to Fidelity without
prior written OTS approval. The OTS, in 1999, permitted the payment of dividends
to assist Fidelity in meeting interest payments on its outstanding debt;
however, there can be no assurance that this approval will be granted going
forward. Fidelity is uncertain when it will pay dividends in the future and the
amount of such dividends, if any.
>> Regulatory Capital
United is subject to various regulatory capital requirements administered by the
federal banking agencies and is assigned to a capital category. The assigned
capital category is largely determined by three ratios that are calculated
according to the regulations: total risk adjusted capital, Tier 1 capital, and
Tier 1 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 December 31, 2000 and 1999,
United is categorized as well capitalized and met all subject capital adequacy
requirements at those dates.
There are no specific targets for capital levels included or agreed to within
the Supervisory Agreement (Agreement) between United and the OTS, only a
requirement that United include capital targets within a strategic plan. The
strategic plan that was developed by United in 2000, and approved by the OTS,
sets capital targets of 8.12% for tangible, leverage and core capital and 13.75%
for risk-based capital. At December 31, 2000, United's tangible, leverage and
core capital was 8.4% and risk-based capital was 13.8%. United's classified
assets to core capital plus the allowance for loan losses and letter of credit
valuation reserves was 69.9% at December 31, 2000. The Agreement did set a
target level to reduce its classified assets to 50% of core capital plus the
allowance for loan losses and the letter of credit valuation reserves by
December 31, 1999, but this was subsequently extended until March 31, 2001 by
the OTS. At December 31, 1999, United's tangible, leverage and core capital was
6.8% and risk-based capital was 14.3%. United's classified assets to core
capital plus the allowance for loan losses and letter of credit valuation
reserves was 85.8% at December 31, 1999.
52
FIDELITY FEDERAL BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar Amounts in Thousands, Except Share Data)
United's actual and required capital amounts and ratios are as follows:
Required for To Be Well
Actual Adequate Capital* Capitalized*
--------------------------------------------------------------------------
Amount Ratio Amount Ratio Amount Ratio
--------------------------------------------------------------------------
As of December 31, 2000
Total risk-based capital* (to risk-
weighted assets) $17,830 13.8% $10,337 8.0% $12,921 10.0%
Tier 1 capital* (to risk-weighted assets) 13,327 10.3 5,168 4.0 7,753 6.0
Core capital* (to adjusted total assets) 13,327 8.4 6,333 4.0 7,916 5.0
Core capital (to adjusted tangible assets) 13,327 8.4 3,166 2.0 N/A N/A
Tangible capital (to adjusted total 13,327 8.4 2,375 1.5 N/A N/A
assets)
As of December 31, 1999
Total risk-based capital* (to risk-
weighted assets) 17,603 14.3 9,839 8.0 12,298 10.0
Tier 1 capital* (to risk-weighted assets) 11,167 9.1 4,919 4.0 7,379 6.0
Core capital* (to adjusted total assets) 11,167 6.8 6,593 4.0 8,241 5.0
Core capital (to adjusted tangible assets) 11,167 6.8 3,296 2.0 N/A N/A
Tangible capital (to adjusted total 11,167 6.8 2,472 1.5 N/A N/A
assets)
*As defined by regulatory agencies
>> Other Restrictions
United entered into a Supervisory Agreement with the OTS on February 3, 1999
which is in effect until terminated, modified or suspended by the OTS. The
agreement was modified by United and approved by the OTS in the fourth quarter
of 2000.
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, take other
specified actions within specified time frames. These actions include, among
others, 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.
53
FIDELITY FEDERAL BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar Amounts in Thousands, Except Share Data)
United is also prohibited from taking certain actions without prior approval,
including but not limited to: investing in, purchasing, or committing to make or
purchase any additional commercial loans or commercial real estate loans;
requesting permission from the OTS to engage in additional commercial loan
activity until United has hired an experienced loan staff and credit analyst;
refinancing or extending classified or criticized commercial loans without the
prior approval of the OTS; engaging in "sub prime" consumer lending activities;
making capital distributions, including dividends to Fidelity; making any
additional equity investments; developing any real estate 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; engaging in any new activities not included in the
strategic plan; and, refinancing or extending any non-classified or criticized
commercial loan if additional funds are extended.
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 begun taking, or refraining from taking, as applicable,
the actions requested by the OTS. United was in compliance with all of the
provisions of the Agreement at December 31, 1999, except for the targeted
capital levels it set forth in its strategic plan and the targeted reduction in
classified asset levels set forth in the Agreement. The deadline to reduce the
level of classified assets was subsequently extended by the OTS to March 31,
2001. United is in compliance with the provisions of the supervisory agreement
at December 31, 2000.
>> Stockholders' Equity and Capital Infusion
In connection with Fidelity's first debt and equity rights offering completed
April 30, 1994, Fidelity reserved 415,500 shares of its common stock for
issuance upon exercise of 1,500 outstanding warrants. Each warrant represents
the right to purchase 277 shares of common stock. The warrants were valued at
$100 per warrant, carrying an exercise price of $6.22 per share, and expire on
April 30, 2004. At December 31, 2000, a total of 397,218 of the shares
originally reserved had been issued and 18,282 remained reserved and unissued.
In connection with Fidelity's second debt and equity offering completed on
January 31, 1995, Fidelity reserved 346,500 shares of its common stock for
issuance upon exercise of 1,500 outstanding warrants. Each warrant represents
the right to purchase 231 shares of common stock. The warrants were valued at
$100 per warrant, carrying an exercise price of $8.93 per share, and expire on
January 31, 2005. At December 31, 2000, a total of 337,029 of the shares
originally reserved had been issued and 9,471 remained reserved and unissued.
In 2000 Fidelity and its stockholders agreed to sell 1,460,000 shares of its
common stock to Pedcor Holdings, LLC, a limited liability company (Pedcor).
54
FIDELITY FEDERAL BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar Amounts in Thousands, Except Share Data)
The consideration paid by Pedcor included $3,000,000 in cash $(3.00 per share),
a five-year guarantee to United in an aggregate amount up to $1,500,000 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. Pedcor, as a result of this transaction, has the ability to exercise
an option to purchase up to $5 million of additional stock for a period of three
years from the closing date. All purchases completed within one year of the
execution of the Agreement must be executed at $3.00 per share. Thereafter,
Pedcor may purchase shares from Fidelity at fair market value through May 2003.
In addition, three Pedcor principals were named to Fidelity's Board of
Directors. Intangible assets of $1,265 were recognized as a result of this
transaction. These assets are being amortized over periods ranging from five to
ten years. The net unamortized balance of these intangibles at December 31, 2000
was $1,126 and is included in other assets.
In January 2001, the Company 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.
>> Benefit Plans
Fidelity is a participant in the Financial Institutions Retirement Fund (FIRF).
This defined-benefit plan is a multi-employer plan; separate actuarial
valuations are not made with respect to each participating employer. According
to FIRF administrators, the market value of the fund's assets exceeded the value
of vested benefits in the aggregate as of June 30, 2000, the date of the latest
actuarial valuation. The plan provides pension benefits for substantially all of
Fidelity's employees. No plan expense was recorded for Fidelity during the year
and six months ended December 31, 2000 and 1999 or the year ended June 30, 1999.
Fidelity has a retirement savings 401(k) plan in which substantially all
employees may participate. Fidelity matches employees' contributions at the rate
of 25% up to 6% of the participant's salary. Fidelity's expense for the plan was
$15, $8, and $17 for the year and six months ended December 31, 2000 and 1999
and the year ended June 30, 1999.
>> Related Party Transactions
Fidelity has entered into transactions with certain directors, executive
officers, significant stockholders and limited partnerships in which Fidelity is
an investor and their affiliates and associates. Such transactions were made in
the ordinary course of business on substantially the same terms and conditions,
including interest rates and collateral, as those prevailing at the same time
for comparable transactions with other customers, and did not, in the opinion of
management, involve more than normal credit risk or present other unfavorable
features.
The aggregate amount of loans, as defined, to such related parties were as
follows:
Balances, beginning of year $2,968
Loans charged off (683)
New loans, including renewals 752
Payments, etc., including renewals (79)
------------
Balances, end of year $2,958
============
55
FIDELITY FEDERAL BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar Amounts in Thousands, Except Share Data)
Total internally classified related party loans included in the total related
party loans at December 31, 2000 and 1999 were $2,951 and $2,943. Reserves for
these classified related party loans totaled $254 and are included in the
allowance for loan losses.
Deposits from related parties held by the Company at December 31, 2000 totaled
$593.
Fidelity has also executed a purchase agreement to sell a parcel of real estate
in Adrian, Michigan to Pedcor Investments, a related entity of Pedcor Holdings,
for $165,000. The transaction is subject to certain contingencies and there is
no assurance that it will be completed.
>> Stock Option Plans
Under Fidelity's stock option plans, Fidelity grants stock option awards which
vest and become exercisable at various dates. During the year and six months
ended December 31, 2000 and 1999 and year ended June 30, 1999, Fidelity
authorized the grant of options for up to 111,000, 3,000 and 12,500 shares of
its common stock. The exercise price of each option, which has a 10-year life,
was greater than the market price of Fidelity's stock on the date of grant;
therefore, no compensation expense was recognized.
Although Fidelity has elected to follow APB No. 25, SFAS No. 123 requires
proforma disclosures of net income and earnings per share as if Fidelity had
accounted for its employee stock options under that Statement. The fair value of
each option grant was estimated on the grant date using an option-pricing model
with the following assumptions:
Six Months
Year Ended Ended Year Ended
December 31, December 31, June 30,
2000 1999 1999
- -----------------------------------------------------------------------------------------------------------------
Risk-free interest rates 6.5% 6.0% 5.2%
Dividend yields 0.0% 0.0% 0.0%
Volatility factors of expected market price of common stock 29.6% 28.9% 26.9%
Weighted-average expected life of the options 10 years 10 years 10 years
56
FIDELITY FEDERAL BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar Amounts in Thousands, Except Share Data)
Under SFAS No. 123, compensation cost is recognized in the amount of the
estimated fair value of the options and amortized to expense over the options'
vesting period. The pro forma effect on net income and earnings per share of
this statement is as follows:
Six Months
Year Ended Ended Year Ended
December 31, December 31, June 30,
2000 1999 1999
- -----------------------------------------------------------------------------------------------------------------
Net income (loss) As reported $(1,156) $(2,070) $625
Pro forma $(1,227) $(2,076) $611
Basic earnings (loss) per share As reported $ (.29) $(.66) $.20
Pro forma $ (.31) $(.66) $.20
Diluted earnings (loss) per share As reported $ (.29) $(.66) $.20
Pro forma $ (.31) $(.66) $.20
The following is a summary of the status of the Fidelity's stock option plans
and changes in the plans as of and for the year and six months ended December
31, 2000 and 1999 and the year ended June 30, 1999.
Directors' Plan
Fidelity has a non-qualified stock option plan (Directors' Plan) which provides
for the grant of non-qualified stock options to individuals who are directors of
Fidelity, or any of its subsidiaries. The Directors' Plan provides for the grant
of non-qualified stock options to acquire shares of common stock of Fidelity for
the price of not less than $2 above the average of the high and low bid
quotations, as reported by NASDAQ, for the common stock of Fidelity for the five
trading days immediately preceding the date the option is granted. A total of
233,779 shares have been reserved for issuance under the Directors' Plan.
57
FIDELITY FEDERAL BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar Amounts in Thousands, Except Share Data)
At December 31, 2000, there were 81,466 options available for grant. A summary
of the stock options activity for the Directors' Plan is as follows:
December 31,
---------------------------------- June 30
2000 1999 1999
- ------------------------------------------------------------------------------------------------------
Shares under option
Outstanding at beginning of year 118,293 118,293 118,293
Granted 36,000
Forfeited/expired (1,980)
Outstanding at end of year 152,313 118,293 118,293
Exercisable at end of year 152,313 118,293 118,293
Weighted option price per share
Exercisable $7.05 $ 7.92 $ 7.92
Granted 4.46
Weighted-average fair value of options granted
during the year $1.03
1995 Key Employees' Stock Option Plan
The 1995 Key Employees' Stock Option Plan (1995 Plan) provides for the granting
of either incentive stock options (ISOs) pursuant to Section 422A of the
Internal Revenue Code of 1986, as amended (Code), or stock options which do not
qualify as incentive stock options (ISOs), or any combination thereof. Options
may be granted to key employees and officers of Fidelity and its subsidiaries.
The option price per share for ISOs will not be less than the fair market value
of a share on the date the option is granted. The option price per share for
ISOs granted to an employee owning 10 percent or more of the common stock of
Fidelity will be not less than 110 percent of the fair market value of a share
on the date the option is granted. The option price per share for ISOs will be
determined by the compensation committee, but may not be less than 100 percent
of the fair market value on the date of grant. A total of 236,500 shares have
been reserved for issuance under the 1995 Plan.
58
FIDELITY FEDERAL BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar Amounts in Thousands, Except Share Data)
At December 31, 2000, there were 139,670 options available for grant. A summary
of the stock options activity for the 1995 Plan is as follows:
December 31,
---------------------------------- June 30
2000 1999 1999
- ------------------------------------------------------------------------------------------------------
Shares under option
Outstanding at beginning of year 80,278 77,278 64,220
Granted 75,000 3,000 23,058
Forfeited/expired (58,855) (10,000)
Outstanding at end of year 96,423 80,278 77,278
Exercisable at end of year 30,523 47,620 47,020
Weighted option price per share
Exercisable $ 5.26 $ 10.16 $10.26
Granted 4.00 3.01 3.22
Weighted-average fair value of options granted
during the year $ 0.82 $ 1.64 $ 1.43
>> Fair Value of Financial Instruments
The following methods and assumptions were used to estimate the fair value of
each class of financial instrument:
Cash and Cash Equivalents--The fair value of cash and cash equivalents
approximates carrying value.
Interest-bearing Time Deposits--The fair value of interest-bearing time deposits
approximates carrying value.
Investment Securities--Fair values are based on quoted market prices.
Loans--For both short-term loans and variable-rate loans that reprice frequently
and with no significant change in credit risk, fair values are based on carrying
values. The fair values for certain mortgage loans, including one-to-four family
residential, are based on quoted market prices of similar loans sold in
conjunction with securitization transactions, adjusted for differences in loan
characteristics. The fair value for other loans is estimated using discounted
cash flow analyses, using interest rates currently being offered for loans with
similar terms to borrowers of similar credit quality.
Interest Receivable/Payable--The fair values of interest receivable/payable
approximate carrying values.
59
FIDELITY FEDERAL BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar Amounts in Thousands, Except Share Data)
FHLB Stock--The fair value is estimated to be the carrying value, which is par.
All transactions in the capital stock of the FHLB of Indianapolis are executed
at par.
Deposits--The fair values of non-interest-bearing, interest-bearing demand and
savings accounts are equal to the amount payable on demand at the balance sheet
date. The carrying amounts for variable rate, fixed-term certificates of deposit
approximate their fair values at the balance sheet date. Fair values for
fixed-rate certificates of deposit are estimated using a discounted cash flow
calculation that applies interest rates currently being offered on certificates
to a schedule of aggregated expected monthly maturities on such time deposits.
Long-Term Debt--The fair value of these borrowings is estimated using a
discounted cash flow calculation, based on current rates for similar debt.
Long-term debt consists of adjustable instruments tied to a variable market
interest rate.
Off-Balance-Sheet Commitments--Commitments include commitments to purchase and
originate mortgage loans, commitments to sell mortgage loans, and standby
letters of credit and are generally of a short-term nature. The fair value of
the loan commitments are based on fees currently charged to enter into similar
agreements, taking into account the remaining terms of the agreements and the
counterparties' credit standing. The carrying amounts of the commitments to
purchase and originate mortgage loans and to sell mortgage loans, which are
immaterial, are reasonable estimates of the fair value of these financial
instruments. The carrying amount of the standby letters of credit, which consist
of a letter of credit valuation allowance of $5,153, is a reasonable estimate of
the fair value of those off-balance sheet items.
The estimated fair values of Fidelity's financial instruments are as follows:
2000 1999
-------------------------------------------------------------------
Carrying Fair Carrying Fair
December 31 Amount Value Amount Value
- --------------------------------------------------------------------------------------------------------------------
Assets
Cash and cash equivalents $ 16,644 $ 16,644 $ 30,914 $ 30,914
Investment securities available for sale 21,001 21,001 24,305 24,305
Loans, net 107,842 107,806 96,919 96,194
Interest receivable 728 728 740 740
FHLB stock 2,620 2,620 3,920 3,920
Liabilities
Deposits 126,944 127,488 135,016 135,077
Long-term debt 23,842 24,188 23,504 23,515
Interest payable 338 338 329 329
Standby letters of credit 5,153 5,153 5,787 5,787
60
FIDELITY FEDERAL BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar Amounts in Thousands, Except Share Data)
>> Condensed Financial Information (Parent Company Only)
Presented below is condensed financial information as to financial position,
results of operations and cash flows of Fidelity:
Condensed Balance Sheet
December 31 2000 1999
- -----------------------------------------------------------------------------------------------------------
Assets
Cash and cash equivalents $ 971 $ 444
Investment in common stock of subsidiaries 15,008 12,541
Loans, net 2,452 2,161
Subordinated debentures and other loan receivables
from subsidiaries 2,875 4,875
Income tax receivable 2,508 1,723
Other assets 1,474 471
----------------------------------
Total assets $ 25,288 $ 22,215
==================================
Liabilities
Long-term debt $ 14,416 $ 14,948
Letter of credit valuation allowance 1,370 1,670
Other liabilities 727 170
----------------------------------
Total liabilities 16,513 16,788
Stockholders' Equity 8,775 5,427
----------------------------------
Total liabilities and stockholders' equity $ 25,288 $ 22,215
==================================
61
FIDELITY FEDERAL BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar Amounts in Thousands, Except Share Data)
Condensed Statement of Income
Six Months
Year Ended Ended Year Ended
December 31, December 31, June 30,
2000 1999 1999
- -------------------------------------------------------------------------------------------------------------------------
Income
Dividends from subsidiaries $ 150
Interest income $ 711 $ 485 1,010
Other income 21 2 8
---------------------------------------------------
Total income 732 487 1,168
---------------------------------------------------
Expense
Interest expense 1,412 777 1,400
Provision for loan losses 100 284 424
Letter of credit valuation provision (735) (434)
Other expenses 1,186 293 461
---------------------------------------------------
Total expense 2,698 619 1,851
---------------------------------------------------
Loss Before Income Tax and Equity in
Undistributed (Distributions in Excess of)
Income of Subsidiaries (1,966) (132) (683)
Income Tax Benefit (779) (52) (330)
---------------------------------------------------
Loss Before Equity in Undistributed (Distributions in Excess of)
Income of Subsidiaries (1,187) (80) (353)
Equity in Undistributed (Distributions in Excess of) Income of
Subsidiaries 31 (1,990) 978
---------------------------------------------------
Net Income (Loss) $(1,156) $(2,070) $ 625
===================================================
62
FIDELITY FEDERAL BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar Amounts in Thousands, Except Share Data)
Condensed Statement of Cash Flows
Six Months
Year Ended Ended Year Ended
December 31, December 31, June 30,
2000 1999 1999
- ----------------------------------------------------------------------------------------------------------------------------
Operating Activities
Net income (loss) $ (1,156) $ (2,070) $ 625
Adjustments to reconcile net income (loss) to net
cash provided (used) by operating activities
Depreciation and amortization 13 8 24
Provision for loan losses 100 284 424
Letter of credit valuation provision (735) (434)
Funding on outstanding letters of credit (300) (450)
Undistributed net income of subsidiaries (31) 1,990 (978)
(Increase) decrease in other assets (1,801) 127 371
(Increase) decrease in other liabilities 557 (97) 123
----------------------------------------------------
Net cash provided (used) by operating activities (2,618) (943) 155
----------------------------------------------------
Investing Activities
Decrease in interest-bearing deposits in other banks 6
Capital contributions to subsidiaries (2,197) (1,094)
Principal payments received on notes from subsidiaries 2,000 1,188
Net change in loans (391) 1,363 (160)
----------------------------------------------------
Net cash provided (used) by investing activities (588) 1,363 (60)
----------------------------------------------------
Financing Activities
Repayment of long-term debt (532) (2,196) (51)
Proceeds from issuance of long-term debt 2,000
Cash dividends (156)
Sale of common stock 4,265 90
----------------------------------------------------
Net cash provided (used) by financing activities 3,733 (2,196) 1,883
----------------------------------------------------
Change in Cash and Cash Equivalents 527 (1,776) 1,978
Cash and Cash Equivalents, Beginning of Period 444 2,220 242
----------------------------------------------------
Cash and Cash Equivalents, End of Period $ 971 $ 444 $ 2,220
====================================================
63
FIDELITY FEDERAL BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar Amounts in Thousands, Except Share Data)
>> Business Segment Information
Fidelity operates principally in two industries, banking and real estate
development and management. United offers traditional banking products, such as
checking, savings and certificates of deposit, as well as mortgage, commercial
and consumer loans. The Affordable Housing Group is involved in various aspects
of developing, building, renting and managing affordable housing units.
Banking revenue consists primarily of interest and fee income, while real estate
development and management fee income consists primarily of real estate
management, investment banking, development and other fees. All revenue is
earned in the United States.
Operating profit is total revenue less operating expenses. In computing
operating profit, income taxes have been deducted. Identified assets are
principally those used in each segment and are all held in the United States.
Real estate development and management activities conducted by Fidelity are not
asset intensive.
Presented below is condensed financial information relating to Fidelity's
business segments:
2000
---------------------------------------------------------------------------
Real Estate
As of and for the Development
Year Ended December 31 Banking and Management Eliminations Total
- ------------------------------------------------------------------------------------------------------------------------
Interest income $ 12,100 $ 8 $ (8) $ 12,100
Other income 1,681 152 (17) 1,816
Interest expense 8,457 8 (8) 8,457
Other expense 6,878 453 (17) 7,314
Provision for loan losses 670 670
Loss before tax (2,224) (301) (2,525)
Income tax benefit (1,152) (217) (1,369)
Total assets 167,125 2,940 (3,599) 166,466
Capital expenditures 794 794
Depreciation and amortization 484 7 491
64
FIDELITY FEDERAL BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar Amounts in Thousands, Except Share Data)
1999
---------------------------------------------------------------------------
Real Estate
As of and for the Development
Six Months Ended December 31 Banking and Management Eliminations Total
- ------------------------------------------------------------------------------------------------------------------------
Interest income $ 6,019 $ 3 $ (3) $ 6,019
Other income 854 167 (20) 1,001
Interest expense 4,268 3 (3) 4,268
Other expense 4,731 437 (20) 5,148
Provision for loan losses 1,345 1,345
Loss before tax (3,471) (270) (3,741)
Income tax benefit (1,283) (388) (1,671)
Total assets 172,044 3,089 (3,676) 171,457
Capital expenditures 231 231
Depreciation and amortization 192 4 196
1999
---------------------------------------------------------------------------
Real Estate
As of and for the Development
Year Ended June 30 Banking and Management Eliminations Total
- ------------------------------------------------------------------------------------------------------------------------
Interest income $ 14,175 $ 197 $ (278) $ 14,094
Other income 2,368 335 (40) 2,663
Interest expense 9,730 278 (278) 9,730
Other expense 5,916 1,002 (40) 6,878
Provision for loan losses (454) 316 (138)
Income (loss) before tax 1,351 (1,064) 287
Income tax expense (benefit) 112 (450) (338)
Total assets 172,864 2,975 (3,586) 172,253
Capital expenditures 263 4 267
Depreciation and amortization 390 12 402
Eliminations in the above tables include, for total assets, the elimination of
the Bank's investment in its affordable housing subsidiaries.
65
Corporate Information
Toll-Free Shareholder Common Stock Information
Inquiries: 1-800-280-8280 NASDAQ
If you have inquiries or questions regarding Ticker Symbol: FFED
your Fidelity Federal Bancorp Shareholder
account, call shareholder relations at Market Makers
1-800-280-8280 or 812-424-0921 ext. 2226.
Natcity Investments, Inc.
Stock Transfers, Dividend Payments Fleet Trading/Division Fleet Securities
Dividend Reinvestment Hoefer & Arnett, Incorporated
Spear, Leeds & Kellogg
Fidelity Federal Bancorp
Attn: Debbie Fritz, Shareholder Relations Products and Services
18 NW Fourth St. For specific information on products and
PO Box 1347 services offered by the Company's banking
Evansville, IN 47706-1347 subsidiary, United Fidelity Bank, fsb, call
1-800-280-8280 or
Fidelity Federal Bancorp offers its Common (812) 424-0921
shareholders a no-cost way to purchase
stock, and when applicable, reinvest cash Corporate Headquarters
dividends. For additional information about Fidelity Federal Bancorp
this plan, contact us at the above address 18 NW Fourth St.
or phone number. PO Box 1347
Evansville, IN 47706-1347
Financial Information 1-800-280-8280
812-424-0921
If you are seeking financial information, contact:
Mark A. Isaac, Controller Annual Meeting
Fidelity Federal Bancorp
18 NW Fourth St. Monday, April 30, 2001
PO Box 1347 10:00 am (Central Daylight Time)
Evansville, IN 47706-1347 Sheraton Inn
812-424-0921 ext. 3319 8787 Keystone Crossing
Indianapolis, Indiana 46240
All other requests, including requests for the
Annual Report, Form 10-K, Form 10-Q, etc. should
be directed to:
Debbie Fritz, Shareholder Relations
Fidelity Federal Bancorp
18 NW Fourth St.
PO Box 1347
Evansville, IN 47706-1347
812-424-0921 ext. 2226
Internet
Information on Fidelity Federal Bancorp is available
on the Internet at:
http://www.unitedfidelity.com
66
Fidelity Federal Bancorp and Subsidiaries
Corporate Information
Board of Directors
William R. Baugh
Chairman Emeritus, Fidelity Federal Bancorp
Director, United Fidelity Bank, fsb
Retired President, United Fidelity Bank, fsb
Bruce A. Cordingley
President, Chief Executive Officer, Pedcor Investments
President, Chief Executive Officer, Pedcor Bancorp
Director, International City Bank, N.A. (Long Beach, CA)
President, Chief Executive Officer, Village Housing Corporation
Jack Cunningham
Chairman of the Board, United Fidelity Bank, fsb
Chairman of the Board, Fidelity Federal Bancorp
Port of Evansville Wharfmaster
Donald R. Neel
Executive Vice President, Chief Financial Officer and
Treasurer, Fidelity Federal Bancorp
President, Chief Executive Officer, and Director, United Fidelity Bank, fsb
Gerald K. Pedigo
Chairman, Pedcor Bancorp
Director, International City Bank, N.A. (Long Beach, CA)
Barry A. Schnakenburg
President, U.S. Industries Group, Inc.
President, Barry Inc.
Director, United Fidelity Bank, fsb
Phillip J. Stoffregen
Executive Vice President, Pedcor Investments
67
Fidelity Federal Bancorp and Subsidiaries
Corporate Information
Officers
Jack Cunningham Mark A. Isaac
Chairman, Secretary Vice President, Controller
Bruce A. Cordingley Debbie M. Fritz
Chairman, Executive Committee Assistant Vice President,
Shareholder Relations
Donald R. Neel
Executive Vice President,
Chief Financial Officer and Treasurer
United Fidelity Bank, fsb
Officers
Donald R. Neel Debbie M. Fritz
President and Chief Executive Officer Assistant Vice President,
Facilities and Purchasing
Thomas D. Wuerth
Senior Vice President, Retail Banking Dannel R. Garness
Assistant Vice President,
Mark A. Isaac Loan Administration
Senior Vice President, Chief
Financial Officer James W. Goodwin
Assistant Vice President,
Karen F. Carter Consumer Loans
Vice President, Loan Administration
G. Andrew Jenkins
Richard J. Goebel Assistant Vice President,
Vice President, Operations Mortgage Lending
Nancy K. Sweazey Jeffery T. Racey
Vice President, Human Resources Assistant Vice President,
Mortgage Lending
William P. Wisuri
Vice President, Consumer Lending Diane T. Tabor
Assistant Vice President,
Gregory W. Brown Assistant Controller
Assistant Vice President,
Assistant Controller D. Brent Taylor
Assistant Vice President,
W. Ray Buckman Branch Administration
Assistant Vice President,
Consumer Lending Timothy J. Wagner
Assistant Vice President,
Lawrence H. Coffman Loan Operations
Assistant Vice President,
Consumer Lending Cheryl L. Wolf
Assistant Vice President,
Shanon L. DeLong Deposit Operations
Assistant Vice President,
Assistant Controller Carrie L. Howard
Bank Officer,
Marilyn A. Doyle Consumer Lending
Assistant Vice President,
Marketing and Sales Lesa A. Osborne
Bank Officer,
Deposit Operations
Joanne E. Smallwood
Bank Officer,
Accounting
68