UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the Quarter Ended March 31, 2001
FIDELITY FEDERAL BANCORP
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Indiana 0-22880 35-1894432
------- ------- ----------
(State of other jurisdiction Commission (IRS Employer
of Incorporation of File No. Identification No.)
Organization)
18 NW Fourth Street
Evansville, Indiana 47708
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(Address of principal executive offices) (Zip Code)
(812) 424-0921
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Registrant's telephone number, including area code
Indicate by checkmark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding twelve months and (2) has been subject to such filing requirements
for the past 90 days.
YES NO X
--- ---
As of May 2, 2001, there were 4,607,658 shares of the Registrant's common stock,
$1 stated value, issued and outstanding.
FIDELITY FEDERAL BANCORP
AND SUBSIDIARIES
Index
Page
PART I - FINANCIAL INFORMATION
ITEM 1--Financial Statements:
Condensed Consolidated Balance Sheet.................................. 3
Condensed Consolidated Statement of Income............................ 4
Condensed Consolidated Statement of Stockholders' Equity.............. 5
Condensed Consolidated Statement of Cash Flows........................ 6
Notes to Condensed Consolidated Financial Statements.................. 7
ITEM 2--Management's Discussion and Analysis of Results of Operations
and Financial Condition............................................... 10-21
ITEM 3--Quantitative and Qualitative Disclosures about Market Risk..... 21-22
PART II - OTHER INFORMATION.............................................. 23
SIGNATURES............................................................... 24
2
Item 1 - Financial Statements
Part I - Financial Information
Fidelity Federal Bancorp
and Subsidiaries
The Condensed Consolidated Balance Sheet
(In thousands)
(Unaudited)
March 31, December 31,
2001 2000
Assets
Cash and due from banks $ 2,055 $ 1,926
Interest-bearing demand deposits 17,000 14,718
--------- ---------
Cash and cash equivalents 19,055 16,644
Investment securities available for sale 20,482 21,001
Loans, net of allowance for loan losses of $1,474 and $1,921 108,681 107,842
Premises and equipment 5,855 5,847
Federal Home Loan Bank of Indianapolis stock 2,620 2,620
Deferred income tax receivable 7,129 7,245
Interest receivable and other assets 5,376 5,267
--------- ---------
Total assets $ 169,198 $ 166,466
========= =========
Liabilities
Deposits
Non-interest bearing $ 3,637 $ 4,291
Interest bearing 127,075 122,653
--------- ---------
Total deposits 130,712 126,944
Long-term debt 23,835 23,842
Advances by borrowers for taxes and insurance 598 362
Valuation allowance for letters of credit 2,684 5,153
Other liabilities 2,214 1,390
--------- ---------
Total liabilities 160,043 157,691
--------- ---------
Stockholders' Equity
Preferred stock, no par or stated value
Authorized and unissued--5,000,000 shares
Common stock, $1 stated value
Authorized--5,000,000 shares
Issued and outstanding--4,607,658 shares 4,607 4,607
7Additional paid-in capital 13,674 13,674
Stock warrants 11 11
Retained earnings (8,957) (8,981)
Accumulated other comprehensive loss (180) (536)
--------- ---------
Total stockholders' equity 9,155 8,775
--------- ---------
Total liabilities and stockholders' equity 169,198 $ 166,466
========= =========
See notes to condensed consolidated financial statements.
3
FIDELITY FEDERAL BANCORP AND SUBSIDIARIES
Condensed Consolidated Statement of Income
(In Thousands, Except Share Data)
(Unaudited)
Three Months Ended
March 31,
2001 2000
- --------------------------------------------------------------------------
Interest Income
Loans receivable $ 2,426 2,190
Investment securities--taxable 344 401
Deposits with financial institutions 212 305
Other dividend income 52 78
------- -------
Total interest income 3,034 2,974
------- -------
Interest Expense
Deposits 1,776 1,610
Long-term debt 507 485
------- -------
Total interest expense 2,283 2,095
------- -------
Net Interest Income 751 879
Provision for loan losses 284 75
------- -------
Net Interest Income After Provision for Loan Losses 467 804
------- -------
Other Income
Fee income--management fees -- 44
Service charges on deposit accounts 83 77
Net gains on loan sales 63 7
Letter of credit fees 129 145
Agent fee income 233 7
Servicing fees on loans sold 27 28
Other income 141 127
------- -------
Total non-interest income 676 435
------- -------
Other Expenses
Salaries and employee benefits 696 763
Net occupancy expenses 91 92
Equipment expenses 60 69
Data processing fees 91 84
Deposit insurance expense 62 60
Legal and professional fees 55 133
Advertising 55 30
Letter of credit valuation provision (284) --
Amortization of intangible assets 52 --
Loss on investment in partnerships 55 83
Other expense 313 359
------- -------
Total non-interest expense 1,246 1,673
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Income (Loss) Before Income Tax (103) (434)
Income tax benefit (127) (266)
------- -------
Net Income (Loss) 24 (168)
======= =======
Basic Earnings (Loss) Per Share 0.01 (0.05)
Diluted Earnings (Loss) Per Share 0.01 (0.05)
4
FIDELITY FEDERAL BANCORP AND SUBSIDIARIES
Consolidated Statement of Changes in Stockholders' Equity
(In Thousands, Except Share Data)
Three Months Ended
March 31,
-----------------------
2001 2000
-----------------------
Beginning Balance $ 8,775 $ 5,427
Comprehensive income
Net income (loss) 24 (168)
Other comprehensive income - net of tax
Unrealized gain on securities 356 219
------- -------
Comprehensive income 380 51
Purchase of stock
------- -------
Balances, March 31 $ 9,155 $ 5,478
======= =======
See notes to consolidated financial statements.
5
FIDELITY FEDERAL BANCORP AND SUBSIDIARIES
Condensed Consolidated Statement of Cash Flows
(Unaudited)
Three Months Ended
March 31,
2001 2000
- -------------------------------------------------------------------------------------------
Operating Activities
Net income (loss) $ 24 $ (168)
Adjustments to reconcile net income (loss) to net
cash provided (used) by operating activities
Provision for loan losses 284 75
Letter of credit valuation provision (284)
Depreciation 82 92
Investment securities amortization (accretion), net 14 15
Valuation allowance--affordable housing investments 14 21
Loans originated for sale (3,476) (1,437)
Proceeds from sale of loans 3,497 1,424
Amortization of net loan origination fees and points (1) (4)
Deferred income tax benefit 116 55
Changes in
Interest payable and other liabilities 590 (330)
Interest receivable and other assets (123) 996
-------------------------------
Net cash provided by operating activities 737 739
-------------------------------
Investing Activities
Proceeds from maturities of securities available for sale 1,094 842
Net change in loans (1,143) (8,387)
Purchase of premises and equipment (89) (21)
Funding on outstanding letters of credit (2,185) --
Proceeds from sales of premises and equipment -- 108
-------------------------------
Net cash used by investing activities (2,323) (7,458)
-------------------------------
Financing Activities
Net change in
Noninterest-bearing, interest-bearing demand
and savings deposits 2,989 (1,679)
Certificates of deposit 779 (7,889)
Short-term borrowings (59)
Proceeds of long-term debt
Repayment of long-term debt (7) (516)
Net change in advances by borrowers for
taxes and insurance 236 195
-------------------------------
Net cash provided (used) by financing activities 3,997 (9,948)
-------------------------------
Net Change in Cash and Cash Equivalents $ 2,411 $(16,667)
Cash and Cash Equivalents, Beginning of Period 16,644 30,914
-------------------------------
Cash and Cash Equivalents, End of Period $ 19,055 $ 14,247
===============================
Additional Cash Flows Information
Interest paid $ 1,292 $ 1,211
See notes to consolidated financial statements.
6
Fidelity Federal Bancorp
and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
o Accounting Policies
The significant accounting policies followed by Fidelity Federal Bancorp
("Fidelity") and its wholly owned subsidiaries for interim financial reporting
are consistent with the accounting policies followed for annual financial
reporting. All adjustments which are necessary for a fair presentation of the
results for the periods reported, consist only of normal recurring adjustments,
and have been included in the accompanying unaudited condensed consolidated
financial statements. The results of operations for the three months ended March
31, 2001 are not necessarily indicative of those expected for the remainder of
the year. The condensed consolidated balance sheet at December 31, 2000 has been
derived from the audited financial statements.
o Stockholders' Equity and Capital Infusion
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). 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. An intangible asset of $1,265,000 was recorded as a result of this
transaction. These assets are being amortized over periods ranging from five to
ten years depending on their estimated lives. The net unamortized balance of
these intangible assets at March 31, 2001 was $1,073,000 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. The filing was effective with
the SEC on April 25, 2001. The rights offering is available to existing
shareholders as of April 26, 2001, the record date. For every 4.6 shares of
Fidelity held on the record date, the shareholder may purchase one share of
Fidelity at $1.55 representing their basic subscription right. All shareholders
have the right to oversubscribe for shares not purchased by other shareholders
based on their pro-rated ownership in Fidelity. Existing directors expect to
purchase at least $698,387 shares.
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 March 31, 2001, 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 March 31, 2001, a total of 337,029 of the shares originally
reserved had been issued and 9,471 remained reserved and unissued.
7
o Cash Dividend
Fidelity's dividend policy is to pay cash or distribute stock dividends when its
Board of Directors deems it to be appropriate, taking into account Fidelity's
financial condition and results of operations, economic and market conditions,
industry standards, and other factors, including regulatory capital requirements
of its savings bank subsidiary. Fidelity is not subject to any regulatory
restrictions on payments to its stockholders. Fidelity's primary source of
income is dividends from United Fidelity Bank ("United").
United has entered into a Supervisory Agreement ("Agreement") with the Office of
Thrift Supervision ("OTS"). One of the provisions of 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 if
necessary. Fidelity is uncertain when it will pay dividends in the future and
the amount of such dividends, if any.
o Company Subsidiaries
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
acquired certain real estate from United and its subsidiaries to assist in
United's divestiture efforts in the first quarter of 2001.
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 mortgage banking services for the past two years. Another subsidiary of
United, Village Insurance Corporation, receives fee income for credit life and
accident health insurance sales.
o 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.
Under the terms of the Agreement, United developed and submitted to the OTS for
approval a strategic plan which includes, 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.
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 possible 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 terminated, modified, or suspended. The
restrictions regarding certain activities 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:
8
o reduce its level of classified assets to core capital and
allowance for loan and lease losses to 50% or less by 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.
United currently is in compliance with all provisions of the supervisory
agreement at March 31, 2001.
o Segment Information
Fidelity operates principally in two industries, banking and real estate
activities. Through United, Fidelity offers traditional banking products, such
as checking, savings and certificates of deposit, as well as mortgage,
commercial and consumer loans. Through the Affordable Housing Group, Fidelity
was previously involved in various aspects of developing, building, renting and
managing affordable housing units. On May 19, 2000, a stock purchase agreement
was approved by the shareholders, which calls for Pedcor to provide management
services to the affordable housing properties at no fee to the properties or
Fidelity.
The Affordable Housing Group's remaining activities consist of holding a general
partner interest in various properties and recognizing income or loss under the
equity method of accounting.
9
Banking revenue consists primarily of interest and fee income, while the real
estate activities income or loss is generated through the percentage of
ownership in various partnerships. 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.
Item 2 - Management's Discussion and Analysis of Results of Operations and
Financial Condition
Special Note Regarding Forward-Looking Statements
Certain matters discussed in this Quarterly Report on Form 10-Q are
"forward-looking statements" intended to qualify for the safe harbors from
liability established by the Private Securities Litigation Reform Act of 1995.
These forward-looking statements can generally be identified as such because the
context of the statement will include words such as Fidelity "believes",
"anticipates", "expects", "estimates" or words of similar import. Similarly,
statements that describe Fidelity's future plans, objectives or goals are also
forward-looking statements. Such forward-looking statements are subject to
certain risks and uncertainties which are described in close proximity to such
statements and which could cause actual results to differ materially from those
anticipated as of the date of this report. Shareholders, potential investors and
other readers are urged to consider these factors in evaluating the
forward-looking statements and are cautioned not to place undue reliance on such
forward-looking statements. The forward-looking statements included herein are
only made as of the date of this report and Fidelity undertakes no obligation to
publicly update such forward-looking statements to reflect subsequent events or
circumstances.
o Results of Operations
The net income for the three months ended March 31, 2001 was $24,000, compared
to a net loss of $168,000 for the same period last year. Basic and diluted net
income per share was $.01 per share for the three months ended March 31, 2001,
compared to a net loss of $0.05 per share in 2000. Interest income increased
slightly from the prior year primarily due to an increase in consumer loan
activity which helped offset a portion of the payoffs in higher yielding
multifamily and commercial real estate loans, and a reduction in residential
mortgage loans, due to refinancing activity. Interest income increased $60,000
for the three months ended March 31, 2001. The net interest margin was impacted
by the .50% reduction in the federal funds rate during the quarter by the
Federal reserve Board. The negative effect was magnified by Fidelity's
significant holdings of short-term deposits. Interest expense increased
approximately $188,000 for the period. Yields on liabilities are anticipated to
decrease in the 2nd half of 2001 due to the lower interest rate environment
during 2001. Fidelity's assets have increased $2.7 million from December 31,
2000 to $169.2 million at March 31, 2001 due to an increase in deposits.
Non-interest income for the three months ended March 31, 2001, increased
$241,000 from the three months ended March 31, 2000 primarily due to an increase
in agent fee income generated through consumer lending activities. Non-interest
expense decreased $427,000 to $1.2 million due primarily to a decrease in the
letter of credit valuation provision of $284,000, and a decrease in other
operating expense of $143,000.
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. For
the quarter ended March 31, 2001 net interest income decreased $128,000 from the
quarter ended March 31, 2000. The net interest margin decreased during the three
month period to 2.06% from 2.35% a year ago. Fidelity's reduction in average
earning assets of $2.6 million from a year ago was primarily composed of
reductions in commercial loans, multifamily loans and commercial real estate
loans. Average multifamily, commercial and commercial real estate loans
decreased $3.9 million. These decreases were offset by a $7.6 million increase
in average consumer loans, resulting in an increase of interest income of
$306,000. 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.
Average interest bearing liabilities increased $1.8 million from March 31, 2000
to $149.1 million at March 31, 2001. Total average interest bearing deposits
increased $1.0 million, while borrowings and FHLB advances increased $746,000
over March 31, 2000. This resulted in an increase in interest expense of
10
$169,000 over the three months ending March 31, 2000. The average balance of
agent-acquired certificates of deposit, which had an average rate of 5.92% at
March 2000, was reduced from $13.3 million at March 31, 2000 to $5.3 million at
March 31, 2001 with an average rate of 6.07%. Due to the rising interest rate
environment in 2000, the average rate on total deposits has increased to 5.63%
from 4.97% since March 31, 2000.
Despite management's efforts, the net interest margin is expected to be
relatively constant or decline during the term of the Supervisory Agreement
between United and the OTS, due to certain lending restrictions.
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 three months ending March 31, 2001 was $284,000 compared to
$75,000 in the prior year, an increase of $209,000. During the three months
ended March 31, 2001 Fidelity increased its allowance for loan losses and
reduced its letters of credit valuation reserve by $284,000 due to refinancing
activities completed during the first quarter of 2001. During the first quarter
of 2001, Fidelity successfully closed on new financing for four affordable
housing letters of credit, in which Fidelity or United provided letters of
credit. The ratio of allowance for loan losses to non-performing loans was
182.8% at March 31, 2001 compared to 189.9% at March 31, 2000.
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 recent events assist Fidelity in making that
evaluation. The independent support for the allowance for loan losses and
letters of credit valuation reserve includes documentation that supports the
amount of recorded reserves for these credits.
General reserves for loans and letters of credit not specifically reserved are
also determined. Fidelity computes general reserves for the commercial,
commercial mortgage, residential mortgage, 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.
Non-interest income. Non-interest income for the quarter ended March 31, 2001,
was $676,000 compared to $435,000 for the same period in 2000, an increase of
$241,000.
The following table summarizes non-interest income for the quarter ended March
31, 2001 and 2000:
(in thousands)
Three months ended
March 31,
- ----------------------------------------------------------------------
Increase
2001 2000 (Decrease)
- ----------------------------------------------------------------------
(Dollars In Thousands)
Fee income management fees $ 44 $ (44)
Service charges on deposit accounts $ 83 77 6
Net gains on sale of real estate loans 63 7 56
Letter of credit fees 129 145 (16)
Servicing fees on loans sold 27 28 (1)
Agent fee income 233 7 226
Other 141 127 14
--------------------------
Total non-interest income $ 676 $ 435 $ 241
==========================
Fee income from real estate management decreased $44,000 from the prior year.
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 were collected
for the three months ended March 31, 2001
11
compared to the same period last year. Service charges on deposit accounts
increased $6,000 for the three months ended March 31, 2001 compared to the prior
fiscal year due to an increase in the number of checking deposit accounts. Net
gain on sale of real estate loans increased $56,000 over the prior year due to
an increase in mortgage loan activity. Letter of credit fees decreased $16,000
from the prior year. United has participated in an arrangement in which
automobiles are originated and sold for a fee to another organization. Agent
fees for the three months ended March 31, 2001 were $233,000 compared to $7,000
last year. United fully resumed its consumer lending activities in late 1999 and
has continued to increase its network of automobile dealers during 2000 and
2001. The continued expansion and penetration of its automobile network has been
instrumental in the increase in agent fees over the prior year.
Non-Interest Expense
Non-interest expense decreased $427,000 or 25.5% for the three months ended
March 31, 2001, compared to the three months ended March 31, 2000.
The following table summarizes non-interest expense for the three months ending
March 31, 2001 and 2000:
(in thousands)
Three Months Ended
March 31
----------------------------------
Increase
2001 2000 (Decrease)
---- ---- ----------
Salaries and employee benefits $696 $763 $ (67)
Letter of credit valuation provision (284) (-) (284)
Legal and professional 55 133 (78)
Net occupancy expenses 91 92 (1)
Equipment expenses 60 69 (9)
Data processing fees 91 84 7
Advertising 55 30 25
Deposit insurance expense 62 60 2
Correspondent bank charges 38 38 (-)
Printing and supplies 26 21 5
Loss on investment in partnerships 55 83 (28)
Telephone 19 34 (15)
Postage 28 24 4
Amortization of intangible assets 52 (-) 52
Other operating expense 202 242 (40)
----------------------------------
Total non-interest expense $1,246 $1,673 $ (427)
==================================
Salaries and employee benefits decreased $67,000 for the three months ended
March 31, 2001, due to staff reductions completed since March 31, 2000. During
the three months ended March 31, 2001 a $284,000 letter of credit valuation
provision reversal was recognized due to the refinancing activities completed
during the first quarter of 2001. This reversal was fully offset by an increase
in the provision for loan losses. Fidelity successfully closed on new financing
for four affordable housing letters of credit, in which Fidelity or United
provided letters of credit. Fidelity recorded its percentage share of losses for
its investments in various affordable housing properties under the equity method
of accounting. Fidelity's losses were $55,000 and $83,000 for the three months
ended March 31, 2001 and March 31, 2000, respectively. These writedowns are
partially offset by tax credits received and recorded as reductions of income
tax expense. 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. Fidelity is in varying stages of completing
refinancing on an additional five affordable housing developments, which should
be completed by the end of 2001. Legal and professional fees decreased $78,000
for the three months ended March 31, 2001 due to increased legal expenses for
the same period last year relating to workout activities with respect to various
classified assets. Equipment expense decreased $9,000 from the prior year due to
a decrease in depreciation expense. Advertising increased $25,000 from the prior
year primarily due to increased promotional activities with respect to increased
activities in the consumer lending and mortgage areas, as well as the opening of
a new branch in Warrick County, Indiana. Telephone expense decreased by $15,000
for the three months ended March 31, 2001 due to increased
12
expenses for a new system in the prior year. In conjunction with the stock sale
to Pedcor Holdings, LLC, intangible assets totaling $1.3 million were recorded.
Amortization of these assets resulted in expense of $52,000 for the three months
ended March 31, 2001. Other operating expense decreased $40,000 from the prior
year. Management continues to monitor expenses closely.
Income Tax Benefit
The income tax benefit was $127,000 for the three months ending March 31, 2001
compared to $266,000 in the same period last year, primarily due to an increase
in taxable income. Included in the tax benefit of $127,000 for the three months
ending March 31, 2001 are tax credits of $80,000. These credits are received
from Fidelity's investment in affordable housing properties and are a component
of the overall 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 in
partnerships". The effective tax rate for the three months ended March 31, 2001,
was 123.3%, due to the benefits accrued from the tax credits.
Consideration of the need for a valuation allowance for the deferred tax asset
was made at March 31, 2001 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 targets for increased revenues, cost reductions, the potential
loss of key employees, ability to maintain projected interest rate margins, and
the potential disruption of activities in key income-producing areas.
Financial Condition
Total assets at March 31, 2001 increased $2.7 million to $169.2 million from
$166.5 million in December 2000. Average assets for the three months ended March
31, 2001 increased by $3.8 million from $163.9 million at December 31, 2000 to
$167.8 million at March 31, 2001. Interest-bearing liabilities increased $5.4
million due to an increase in NOW accounts and retail certificates in an effort
to retain and replace $12.9 million in maturing agent-acquired and retail
certificates of deposit during the first quarter of 2001. The increase in total
assets is primarily due to an increase in short-term interest-bearing deposits
and an increase in consumer loans offset by loan payoffs, refinancing and
payments received on commercial, multifamily and fixed 1-4 family mortgage
loans. The increase in total liabilities was primarily due to an increase in a
high-balance money market product bearing a higher interest rate than United's
traditional money market accounts and retail certificates bearing a premium
market rate. These increases were partially offset by the reduction of letter of
credit valuation reserves due to refinancing activities.
13
Loans
The following table shows the composition of Fidelity's loan portfolio as of
March 31, 2001 and December 31, 2000:
March 31, December 31,
2001 2000
- -----------------------------------------------------------------------------
Real estate mortgage loans
First mortgage loans
Conventional $ 47,750 $ 47,809
Construction 1,157 1,274
Commercial 6,750 6,873
Multi-family loans 3,785 4,350
Home equity loans 5,137 5,274
First mortgage real estate loans purchased 1,483 1,753
-------------------------
66,062 67,333
Commercial loans, other than
secured by real estate 2,257 2,305
Consumer loans 41,835 40,125
-------------------------
Total loans 110,154 109,763
Allowance for loan losses (1,474) (1,921)
-------------------------
Net loans $108,680 $107,842
=========================
Total loans to total assets 65.1% 65.9%
=========================
Fidelity sells a portion of its current production of 1-4 family loans,
recording the gain or loss and using the proceeds to fund new loan originations.
The amount of loans retained are typically less than principal payments received
on outstanding accounts.
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 assist in the acquisition of outside financing for certain loans or
letters of credit, develop 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 $1.7
million from December 31, 2000 to $41.8 million at March 31, 2001. Staffing
added to the consumer loan department in 1999 has enabled Fidelity to
substantially increase the number of direct and indirect automobile loans
financed. The level of growth achieved in the consumer loan portfolio during
2000 is not expected to continue during 2001, although activity could increase
as a result of the sale of automobiles loans for a fee to a non-affiliated
organization.
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.
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
14
position of the borrower indicates that there is no longer any reasonable doubt
as to the timely payment of principal and interest.
The following table provides information on Fidelity's non-performing loans as
of March 31, 2001 and December 31, 2000:
March 31, December 31,
2001 2000
-----------------------------------------------------------------------------
(Dollars in Thousands)
Non-accrual loans
Consumer
Commercial $ 235 $472
Real estate mortgage
Multi-family 143 148
----- -----
Total non-accrual loans 378 620
Restructured
Consumer 131 115
Commercial 119 119
----- -----
Total restructured loans 250 234
90 days or more past due and accruing
Mortgage 112 -
Consumer 36 10
Commercial 30 -
----- -------
Total 90 days or more past due and accruing 178 10
---- -----
Total non-performing loans $806 $864
==== ====
Ratio of non-performing loans to total loans .73% 0.79%
Non-performing loans were .73% of total loans at March 31, 2001, as compared to
.79% of total loans at December 31, 2000 and consisted primarily of commercial
and multi-family loans. Commercial non-performing loans decreased during the
quarter due to the charge-down in the balance of one commercial loan but was
partially offset by an increase in non-performing mortgage loans.
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 amount of
additional advances should be reduced in future periods due to the operating
deficit 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.
15
Classified Assets and Letters of Credit
(in thousands)
March 31, December 31,
2001 2000
-----------------------------
Classified assets $ 7,012 $ 8,754
Classified letters of credit 4,721 11,773
------- -------
Total classified assets/letters of credit $11,733 $20,527
======= =======
Classified assets and letters of credit of Fidelity totaled $11.7 million at
March 31, 2001 compared to $20.5 million at December 31, 2000 a decrease of
42.9%. Classified assets and letters of credit were 102.4% and 129.5% of
Fidelity's capital and reserves at March 31, 2001 and December 31, 2000,
respectively. Classified assets and letters of credit were 34.6% and 69.9% of
United's capital and reserves at March 31, 2001 and December 31, 2000,
respectively. In addition to the classified assets and letters of credit, there
were other assets and letters of credit totaling $10.8 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 March 31, 2001 and December 31, 2000, Fidelity had
impaired loans totaling $3.7 million compared to $7.4 million at December 31,
1999, a decrease of 50%. The large decrease in impaired loans recognizes
Fidelity's ongoing efforts to reduce classified loans. The allowance for losses
on such impaired loans totaled $286,000 and $384,000, which are included in
Fidelity's allowance for loan losses at March 31, 2001 and December 31, 2000,
respectively. In addition, using similar guidelines for impaired loans, impaired
letters of credit at March 31, 2001 total $8.2 million, versus $11.8 million at
December 31, 2000, a decrease of 32.1%. The valuation allowance on such impaired
letters of credit totaled $2.7 million and is included in Fidelity's letter of
credit valuation allowance at March 31, 2001 compared to $5.2 million at
December 31, 2000. Impaired loans do not include large groups of homogeneous
loans that are collectively evaluated for impairment, such as, residential
mortgage and consumer installment loans.
16
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 March 31, 2001 and
December 31, 2000:
Three months ended Year ended
March 31, December 31,
2001 2000
- --------------------------------------------------------------------------------
(dollars in thousands)
Allowance for loan losses
at beginning of period $ 1,921 $ 2,021
------------------------
Loan charge offs
Real estate mortgage 80
Multi-family 638 683
Commercial 238 12
Consumer 121 391
------------------------
Total loan charge offs 997 1,166
------------------------
Loan recoveries
Real estate mortgage
Multi-family 261 317
Commercial (12) 20
Consumer 16 59
------------------------
Total loan recoveries 265 396
------------------------
Net charge offs 732 770
Provision for loan losses 284 670
------------------------
Allowance for loan losses at end of period $ 1,473 $ 1,921
========================
Ratio of net charge offs to average loans outstanding
during period (annualized) 2.67% .72%
========================
Ratio of provision for loan losses to average loans
outstanding during period (annualized) 1.03% .63%
========================
Ratio of allowance for loan losses to total loans
outstanding at year end 1.34% 1.75%
========================
Average amount of loans
outstanding for the period $ 110,457 $ 106,599
========================
Amount of loans outstanding
at end of period $ 110,206 $ 109,763
========================
The allowance for loan losses was $1.5 million at March 31, 2001 compared to
$1.9 million at December 31, 2000. Net loan charge-offs were $732,000 or 2.67%
of average loans for the three months ended March 31, 2001 compared to $770,000
or 0.72% of average loans for the year ended December 31, 2000. During the three
months ended March 31, 2001, Fidelity charged-off $638,000 of multifamily loans
and $238,000 of commercial loans that reserves were previously provided for.
Consumer loan charge-offs of $121,000, were related primarily to loans
originated prior to 1999.
Multi-family letters of credit, an off-balance sheet item, carry the same risk
characteristics as conventional loans and totaled $38.2 million at March 31,
2001 and $43.8 million at December 31, 2000. Specific allocations for letters of
credit totaled 7.0% of outstanding letters of credit at March 31, 2001 compared
to 11.8% at December 31, 2000. During the first quarter of 2001 approximately
$1.9 million was funded to assist in the refinancing efforts on four
partnerships. These funds were charged against previous reserves that were
established in prior periods. An additional $284,000 of excess reserves were
reversed during the current quarter for re-allocation to the provision for loan
losses. Management is not currently aware of any additional letters of credit
that are expected to be called or funded. Management considers
17
the allowance for loan losses and letter of credit valuation reserve adequate to
meet losses inherent in the loan and letter of credit portfolios as of March 31,
2001.
Allocation of Allowance for Loan Losses
The allocation for loan losses and the percentage of loans within each category
to total loans at March 31, 2001 and at December 31, 2000 are as follows:
Allocation of Amount
March 31, December 31,
2001 2000
- -----------------------------------------------------------------------
(dollars in thousands)
Real Estate Mortgage $ 86 $ 49
Home equity 26 53
Multi-family 22 514
Consumer 678 628
Commercial 662 677
---------------------------
Total $1,474 $1,921
===========================
Percentage of Loans to Total Loans
March 31, December 31,
2001 2000
- -----------------------------------------------------------------------
Real Estate Mortgage 44.9% 45.2%
Home equity 4.7 4.8
Multi-family 3.4 3.4
Consumer 38.0 36.6
Commercial 9.0 10.0
---------------------------
Total 100.0% 100.0%
===========================
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 March 31, 2001, the investment portfolio represented 12.1% of Fidelity's
assets, compared to 12.6% at December 31, 2000, and is managed in a manner
designed to meet the Board's investment policy objectives. 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 March 31, 2001, the entire investment portfolio was classified as available
for sale. The net unrealized loss at March 31, 2001, which is included as a
component of stockholders' equity, was $180,000 and was comprised of gross
unrealized losses of $298,000 and a tax benefit of $118,000. 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 March 31, 2001 and December 31, 2000:
March 31, December 31,
2001 2000
- --------------------------------------------------------------------------------
(dollars in thousands)
Federal Home Loan Mortgage Corporation
mortgage-backed securities $ 771 $ 805
Federal National Mortgage Association
mortgage-backed securities 1,049 1,095
Government National Mortgage Association
Mortgage-backed securities 18,662 19,101
--------------------------
Total securities available for sale $20,482 $21,001
==========================
18
For the three months ended March 31, 2001, United's investment securities
portfolio decreased by $.5 million to $20.5 million compared to $21.0 million at
December 31, 2000. The current year's decrease is the result of maturities and
paydowns received during the three months. 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.
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 increased by $2.8 million during the first three months of
2001. The average balance of retail certificates of deposit and NOW accounts
increased $6.7 million and $3.4 million, respectively. These increases were
partially offset by a decrease in agent-acquired certificates of deposit and
demand accounts of $3.9 million and $2.5 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 deposits 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 deposit products. Due to
the rise in interest rates in 2000, the average rate on total deposits has
increased 48 basis points since December 31, 2000 to 5.63% at March 31, 2001.
The following table sets forth the average balances of and the average rate paid
on deposits by deposit category for the three months ended March 31, 2001 and
the year ended December 31, 2000.
Three months ended Year ended
March 31, December 31,
2001 2000
Average Deposits Amount Rate Amount Rate
- ------------------------------------------------------------------------------
(dollars in thousands)
Demand $ 2,612 $ 5,136
NOW accounts 20,608 3.93% 17,159 3.21%
Money market accounts 1,673 1.99 2,058 1.99
Savings accounts 3,842 2.31 4,349 2.25
Certificates of deposit 93,716 6.34 87,027 5.97
Agent-acquired certificates of deposit 5,325 6.07 9,241 6.00
-------- --------
Totals $127,776 5.63 $124,970 5.15%
======== ========
Borrowings
Fidelity's long-term debt decreased $7,000 during the first three months of 2001
primarily due to paydowns on other FHLB advances secured by specific
single-family loans. Alternate funding sources for United are provided by loan
sales, loan payoffs, Federal Home Loan Bank advances as well as through retail
deposits. In the following table, all notes, except for the Federal Home Loan
Bank advances, are debt of the Parent Company both secured and unsecured, and
total $13.9 million.
19
The following table summarizes Fidelity's borrowings as of March 31, 2001 and
December 31, 2000.
March 31, December 31,
(dollars in thousands) 2001 2000
- -----------------------------------------------------------------------------------------
Note payable, 9.45% adjusted annually, payable $8 per month,
including interest, due September 2010, secured by specific
multi-family mortgages $ 972 975
Note payable, 9.45% adjusted annually, payable $13 per month,
including interest, due September 2010, secured by specific
multi-family mortgages 1,490 1,494
Note payable, 10.50%, interest paid quarterly, due June 2003,
secured by United stock 1,500 1,500
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 both at March 31, 2001
and December 31, 2000) 9,903 9,903
-------------------
Total long-term debt $23,835 $23,842
===================
Fidelity filed with the Securities and Exchange Commission a registration
statement, effective April 2001, to exchange all outstanding 9 1/8% junior
subordinated notes due totaling, 1,476,000 in principal on April 30, 2001 for
12% junior subordinated notes due in April 2004.
In February 2001, Fidelity established a $1.5 million line of credit with
another financial institution that may be called upon at anytime prior to its
expiration of September 2001. The interest rate is 8.5% and is tied to the prime
rate plus one percent (1.0%).
Capital Resources
Fidelity's stockholders' equity increased $380,000 to $9.2 million at March 31,
2001, compared to $8.8 million at December 31, 2000. The change in stockholders'
equity was accounted for by net income of $24,000, and a decrease in the net
unrealized loss on securities available for sale of $356,000.
- ------------------------------------------------------------------------------------------------------------
Required for To be well
Actual adequate capital Capitalized
- ------------------------------------------------------------------------------------------------------------
Amount Ratio Amount Percent Amount Percent
- ----------------------------------------------------------------------------------------------------------
As of March 31, 2001
- ----------------------------------------------------------------------------------------------------------
Total risk-based capital (to risk-weighted assets) $17,280 14.0% $9,886 8.0% $12,357 10.0%
- ----------------------------------------------------------------------------------------------------------
Tier 1 capital (to risk-weighted assets) 12,852 10.4 4,943 4.0 7,414 6.0
- ----------------------------------------------------------------------------------------------------------
Core capital (to adjusted total assets) 12,852 8.0 6,399 4.0 7,999 5.0
- ----------------------------------------------------------------------------------------------------------
Core capital (to adjusted tangible assets) 12,852 8.0 3,200 2.0 N/A
- ----------------------------------------------------------------------------------------------------------
Tangible capital (to adjusted total assets) 12,852 8.0 2,400 1.5 N/A
- ----------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------
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
- ----------------------------------------------------------------------------------------------------------
Tangible capital (to adjusted total assets) 13,327 8.4 2,375 1.5 N/A
- ----------------------------------------------------------------------------------------------------------
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 have exceeded
each of these levels. The leverage ratio was 8.0% at March 31, 2001 and 8.4% for
December 31, 2000, tier I capital to risk-weighted assets was 10.4% and 10.3%
and total capital to risk-weighted assets was 14.0% and 13.8% at March 31, 2001
and December 31,
20
2000, respectively. Book value per share, including unrealized losses on
investment securities, increased to $1.99 at March 31, 2001, compared to $1.90
at December 31, 2000.
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 March 31, 2001 and
December 31, 2000, the Bank is categorized as well capitalized and met all
capital adequacy requirements at those dates.
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 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. In January 2001, Fidelity filed a
registration statement with the Securities and Exchange Commission for a common
stock rights offering to existing shareholders, effective April 25, 2001. The
common stock rights offering will be for existing shareholders as of the April
26, 2001 record date. The offering will end at 5:00 pm (CDT) on June 29, 2001.
Fidelity is also in the process of negotiating agreements to extend maturities
on certain other debt obligations coming due in 2002. Fidelity filed a
registration statement in March 2001 with the Securities and Exchange Commission
to exchange all outstanding 9 1/8% junior subordinated notes due totaling,
$1,476,000 in principal, on April 30, 2001 for 12% junior subordinated notes due
in April 2004. This offering is open until May 14, 2001, to allow noteholders
the opportunity to participate. 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.
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. 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.
Item 3 - Asset/Liability Management--Quantitative and Qualitative Disclosures
about Market Risk
Fidelity is subject to interest rate risk to the degree that its interest
bearing liabilities, primarily deposits with short and medium term maturities,
mature or reprice at different rates than its interest-earning assets. Although
having liabilities that mature or reprice less frequently will be beneficial in
times of rising interest rates, such an asset/liability structure will result in
lower net income during periods of declining interest rates, unless off-set by
other factors.
The OTS utilizes a model, the "Office of Thrift Supervision Net Portfolio Value"
("NPV") model, which uses a net market value methodology to measure the interest
rate risk exposure of savings associations.
21
Under this model, an institution's "normal" level of interest rate risk in the
event of an assumed change in interest rates is a decrease in the institution's
NPV in an amount not exceeding 2% of the present value of its assets. Savings
associations with over $300 million in assets or less than 12% risk-based
capital ratio are required to file the OTS Schedule CMR. Data from Schedule CMR
is used by the OTS to calculate changes in NPV (and the related "normal" level
of interest rate risk) based upon certain interest rate changes (discussed
below). Associations which do not meet either of the filing requirements are not
required to file OTS Schedule CMR, but may do so voluntarily. United voluntarily
submits a CMR quarterly to the OTS. Under the regulation, associations which
must file are required to take a deduction (the interest rate risk capital
component) from their total capital available to calculate their risk based
capital requirement if their interest rate exposure is greater than "normal".
The amount of that deduction is one-half of the difference between (a) the
institution's actual calculated exposure to a 200 basis point interest rate
increase or decrease (whichever results in the greater pro forma decrease in
NPV) and (b) its "normal" level of exposure which is 2% of the present value of
its assets.
The data for March 31, 2001 is not required to be filed with the OTS until 45
day after quarter end, which coincides with the 10-Q filing. Management monitors
its interest rate sensitivity during the quarter and will request the OTS to run
scenarios on the NPV model to determine the change in interest rate sensitivity
for management in an effort to assist management on various decision making
regarding products, maturities, repricing, etc. United should have an internal
model completed in the second quarter of 2001 to assist in interest rate risk
management.
Although United has not yet submitted its CMR to the OTS for March 31, 2001,
management anticipates there has been no material change from the information
disclosed in Fidelity's annual report to shareholders at December 31, 2000.
22
PART II -- OTHER INFORMATION
ITEM 1 Legal Proceedings:
------------------
There are no material pending legal proceedings, other than ordinary
routine litigation incidental to the Registrant's business, to which
the Registrant or its subsidiaries are a party of or which any of
their property is the subject.
ITEM 2 Changes in Securities and Use of Proceeds:
------------------------------------------
Not applicable.
ITEM 3 Defaults Upon Senior Securities:
--------------------------------
Not applicable.
ITEM 4 Submission of Matters to a Vote of Security Holders:
----------------------------------------------------
Submission of Matters to a Vote of Security Holders:
On April 30, 2001 at 10:00 am at the Sheraton Keystone Crossing
8787 Keystone Crossing, Indianapolis, Indiana, the Annual meeting of
Shareholders was held in order to vote on two matters.
Matter 1 was to elect six directors to the Board of Directors to
serve until their successors are duly elected and qualified.
The vote tabulation for the election of William R. Baugh was
3,381,586 for and 986,303 shares against; Bruce A. Cordingley was
3,415,426 for and 952,463 shares against; Donald R. Neel was
3,419,953 for and 947,798 shares against; Gerald K. Pedigo was
3,415,682 for and 952,204 shares against; Barry A. Schnakenburg was
3,388,314 for and 979,482 shares against; Phillip J. Stoffregen was
3,416,286 for and 951,372 shares against
The following directors term continued after the meeting;
William Baugh, Jack Cunningham, Bruce A. Cordingley, Gerald K.
Pedigo, Donald R. Neel, Barry A. Schnakenburg and Phillip
Stoffregen.
Matter 2 was the ratification of the appointment of the auditor of
Fidelity. The vote tabulation for Olive LLP was 4,142,002 for,
223,522 shares against, and 2,271 shares abstained.
ITEM 5 Other Information:
------------------
None
ITEM 6 Exhibits and Reports on Form 8-K:
---------------------------------
None
23
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FIDELITY FEDERAL BANCORP
Date: MAY 14, 2001 By: /s/ BRUCE A. CORDINGLEY
------------ -----------------------
Bruce A. Cordingley
Executive Committee Chairman
(Acting Principal Executive Officer)
By: /s/ DONALD R. NEEL
------------------
Donald R. Neel,
Executive Vice President,
CFO and Treasurer
(Principal Financial Officer)
24