UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the Quarter Ended June 30, 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
---------------------------------------------------
(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 August 1, 2001, there were 5,607,658 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
PART II - OTHER INFORMATION.............................................. 22
SIGNATURES............................................................... 23
2
Item 1 - Financial Statements
Part I - Financial Information
Fidelity Federal Bancorp
and Subsidiaries
Condensed Consolidated Balance Sheet
(In thousands)
(Unaudited)
June 30, December 31,
2001 2000
--------- ---------
Assets
Cash and due from banks $ 2,795 $ 1,926
Interest-bearing demand deposits 15,774 14,718
--------- ---------
Cash and cash equivalents 18,569 16,644
Investment securities available for sale 18,961 21,001
Loans, net of allowance for loan losses of $1,420 and $1,921 112,931 107,842
Premises and equipment 5,797 5,847
Federal Home Loan Bank of Indianapolis stock 2,620 2,620
Deferred income tax receivable 7,203 7,245
Interest receivable and other assets 5,160 5,267
--------- ---------
Total assets $ 171,241 $ 166,466
========= =========
Liabilities
Deposits
Non-interest bearing $ 4,141 $ 4,291
Interest bearing 129,071 122,653
--------- ---------
Total deposits 133,212 126,944
Long-term debt 23,240 23,842
Advances by borrowers for taxes and insurance 367 362
Valuation allowance for letters of credit 1,998 5,153
Other liabilities 1,664 1,390
--------- ---------
Total liabilities 160,481 157,691
--------- ---------
Stockholders' Equity
Preferred stock, no par or stated value
Authorized and unissued--15,000,000 shares
Common stock, $1 stated value
Authorized--15,000,000 shares
Issued and outstanding--4,607,658 shares 4,607 4,607
Common stock subscribed - 1,000,000 shares 1,000
Additional paid-in capital 14,184 13,674
Stock warrants 11 11
Retained earnings (8,914) (8,981)
Accumulated other comprehensive loss (128) (536)
--------- ---------
Total stockholders' equity 10,760 8,775
--------- ---------
Total liabilities and stockholders' equity $ 171,241 $ 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 Six Months Ended
June 30, June 30,
2001 2000 2001 2000
----------- ----------- ----------- -----------
Interest Income
Loans receivable $ 2,471 $ 2,412 $ 4,897 $ 4,602
Investment securities--taxable 320 385 664 786
Deposits with financial institutions 153 150 365 454
Other dividend income 51 78 102 156
----------- ----------- ----------- -----------
Total interest income 2,995 3,025 6,028 5,998
----------- ----------- ----------- -----------
Interest Expense
Deposits 1,794 1,508 3,569 3,117
Long-term debt 503 491 1,010 977
----------- ----------- ----------- -----------
Total interest expense 2,297 1,999 4,579 4,094
----------- ----------- ----------- -----------
Net Interest Income 698 1,026 1,449 1,904
Provision for loan losses 63 100 347 175
----------- ----------- ----------- -----------
Net Interest Income After Provision for Loan Losses 635 926 1,102 1,729
----------- ----------- ----------- -----------
Other Income
Service charges on deposit accounts 90 63 173 140
Net gains on loan sales 91 6 154 13
Letter of credit fees 127 121 256 266
Agent fee income 362 39 595 46
Other income 264 147 433 345
----------- ----------- ----------- -----------
Total non-interest income 934 376 1,611 810
----------- ----------- ----------- -----------
Other Expenses
Salaries and employee benefits 763 782 1,459 1,545
Net occupancy expenses 93 92 184 184
Equipment expenses 68 64 128 132
Data processing fees 89 82 180 166
Deposit insurance expense 61 65 122 124
Legal and professional fees 29 98 84 232
Advertising 87 53 142 83
Letter of credit valuation provision (63) (347)
Loss on investments in partnerships 56 104 111 187
Amortization of intangible assets 52 35 105 35
Other expense 399 304 713 662
----------- ----------- ----------- -----------
Total non-interest expense 1,634 1,679 2,881 3,350
----------- ----------- ----------- -----------
Income (Loss) Before Income Tax (65) (377) (168) (811)
Income tax benefit (108) (244) (235) (510)
----------- ----------- ----------- -----------
Net Income (Loss) $ 43 $ (133) $ 67 $ (301)
=========== =========== =========== ===========
Basic Earnings (Loss) Per Share 0.01 (0.04) 0.02 (0.09)
Diluted Earnings (Loss) Per Share 0.01 (0.04) 0.02 (0.09)
Average Common and Common Equivalent shares outstanding 4,618,647 3,853,595 4,613,183 3,500,629
See notes to condensed consolidated financial statements
4
FIDELITY FEDERAL BANCORP AND SUBSIDIARIES
Condensed Consolidated Statement of Changes in Stockholders' Equity
(In Thousands, Except Share Data)
(Unaudited)
Six Months Ended
June 30,
2001 2000
------------------------- -------------------------
Beginning Balance $8,775 $5,427
Comprehensive income:
Net income (loss) 67 (301)
Other comprehensive income - net of tax
Unrealized gain on securities 408 127
------------ ----------
Comprehensive income 475 (174)
Issuance of stock 1,510 4,266
------------ ------------
Balances, June 30 $10,760 $9,519
============ ============
See notes to condensed consolidated financial statements.
5
FIDELITY FEDERAL BANCORP AND SUBSIDIARIES
Condensed Consolidated Statement of Cash Flows
(Unaudited)
Six Months Ended
June 30,
2001 2000
- --------------------------------------------------------------------------------------------
Operating Activities
Net income (loss) $ 67 $ (301)
Adjustments to reconcile net income (loss) to net
cash provided (used) by operating activities
Provision for loan losses 347 175
Letter of credit valuation provision (347)
Depreciation and amortization 199 214
Valuation allowance--affordable housing investments 30 41
Loans originated for sale (11,680) (2,803)
Proceeds from sale of loans 11,695 2,782
Changes in
Interest payable and other liabilities 7 (544)
Interest receivable and other assets 119 (432)
----------------------
Net cash provided (used) by operating activities 437 (868)
----------------------
Investing Activities
Proceeds from maturities of securities available for sale 2,687 1,868
Net change in loans (5,451) (11,517)
Purchase of premises and equipment (221) (21)
Proceeds from sales of premises and equipment 100 108
Funding on outstanding letters of credit (2,808)
----------------------
Net cash used by investing activities (5,693) (9,562)
----------------------
Financing Activities
Net change in
Noninterest-bearing, interest-bearing demand
and savings deposits 5,275 (2,424)
Certificates of deposit 993 (13,232)
Short-term borrowings 8
Proceeds of long-term debt 3,874
Repayment of long-term debt (4,476) 1,449
Net change in advances by borrowers for
taxes and insurance 5 (41)
Cash received from stock subscriptions, net of expenses 1,510
Sale of stock 3,000
----------------------
Net cash provided (used) by financing activities 7,181 (11,240)
----------------------
Net Change in Cash and Cash Equivalents $ 1,925 $(21,670)
Cash and Cash Equivalents, Beginning of Period 16,644 30,914
----------------------
Cash and Cash Equivalents, End of Period $ 18,569 $ 9,244
======================
Additional Cash Flows Information
Interest paid $ 4,502 $ 4,165
Stock issued in exchange for partnership operating cash flow
deficit guarantees and management services 1,265
See notes to condensed consolidated financial statements.
6
Fidelity Federal Bancorp
and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
o Accounting Policies
The significant accounting policies followed by Fidelity Federal Bancorp
("Fidelity") and its wholly owned subsidiaries for interim financial reporting
are consistent with the accounting policies followed for annual financial
reporting. All adjustments which are necessary for a fair presentation of the
results for the periods reported, consist only of normal recurring adjustments,
and have been included in the accompanying unaudited condensed consolidated
financial statements. The results of operations for the six months ended June
30, 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 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. For every 4.6 shares of Fidelity held on the record
date, shareholders could subscribe to purchase one share of Fidelity at $1.55.
All shareholders had the right to oversubscribe for shares not purchased by
other shareholders based on their pro-rated ownership in Fidelity. The rights
offering was oversubscribed and completed on June 29, 2001. Fidelity raised $1.5
million, net of costs associated with the offering. The shares purchased by
shareholders with these funds were issued in July 2001.
In 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 Fidelity Bank ("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 totaling $1.3 million were 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 June 30, 2001 was $1.0 million
and is included in other assets.
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 in the future, if
necessary. Fidelity is uncertain when it will pay dividends in the future and
the amount of such dividends, if any.
7
o Company Subsidiaries
Fidelity's savings bank subsidiary, United Fidelity Bank, fsb ("United"), was
organized in 1914, is a federally-chartered stock savings bank located in
Evansville, Indiana, and is regulated by the Office of Thrift Supervision
("OTS"). Fidelity, through its savings bank subsidiary, is engaged in the
business of obtaining funds in the form of savings deposits and other borrowings
and investing such funds in consumer, commercial, and mortgage loans, and in
investment and money market securities. Village Affordable Housing Corporation,
the other subsidiary of Fidelity, was formed during the third quarter of fiscal
1998 for the purpose of owning interests in real estate housing, and recently
acquired certain real estate from United and its subsidiaries to assist in
United's divestiture efforts of surplus real estate 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:
o reduce its level of classified assets to core capital and allowance
for loan and lease losses to 50% or less;
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;
8
oo establishment of concentration limits for all assets; and
oo development of 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 June 30, 2001, except for the targeted capital levels set forth in
United's strategic plan. These target levels were established for the period
ending December 31, 2001 and United expects to achieve these levels at that
time.
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.
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.
9
2001
---------------------------------------------------------
Real Estate
As of and for the Development
Six Months Ended June 30 Banking and Management Eliminations Total
- -----------------------------------------------------------------------------------------
Interest income $ 6,028 $ 4 $ (4) $ 6,028
Other income 1,557 54 1,611
Interest expense 4,579 4 (4) 4,579
Other expense 2,826 55 2,881
Provision for loan losses 347 347
Income (loss) before tax (167) (1) (168)
Income tax expense (benefit) (186) (49) (235)
Total assets 172,034 2,687 (3,480) 171,241
Capital expenditures 221 221
Depreciation and amortization 196 3 199
2000
---------------------------------------------------------
Real Estate
As of and for the Development
Six Months Ended June 30 Banking and Management Eliminations Total
- -----------------------------------------------------------------------------------------
Interest income $ 5,998 $ 4 $ (4) $ 5,998
Other income 697 130 (17) 810
Interest expense 4,094 4 (4) 4,094
Other expense 3,116 252 (17) 3,350
Provision for loan losses 592 (417) 175
Loss before tax (1,107) 295 (811)
Income tax benefit (579) 69 (510)
Total assets 161,457 2,827 (3,435) 160,849
Capital expenditures 21 21
Depreciation and amortization 210 4 214
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
Net income for the three months ended June 30, 2001 was $43,000, compared to a
net loss of $133,000 for the same period last year. Basic and diluted net income
per share was $.01 per share for the three months ended June 30, 2001, compared
to a net loss of $0.04 per share in 2000.
Net income for the six months ended June 30, 2001 was $67,000 compared to a net
loss of $301,000 for the six months ended June 30, 2000. Basic and diluted net
income per share was $0.02 per share for the
10
six months ended June 30, 2001, compared to a net loss of $0.09 per share in
2000. Interest income, for the six month period increased $30,000 from the prior
year primarily due to an increase in average consumer loan balances 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. The net interest margin has been negatively impacted by
the 275 basis point reduction in the federal funds rate during the first six
months by the Federal Reserve Board. The negative effect was magnified by
Fidelity's significant holdings of short-term investments. Interest expense
increased approximately $485,000 for the six months ended June 30, 2001. Yields
on liabilities are anticipated to decrease in the second half of 2001 due to the
maturities and repricing of liabilities during a lower interest rate
environment. Non-interest income for the six months ended June 30, 2001,
increased $801,000 over the six months ended June 30, 2000 primarily due to an
increase in agent fee income generated through consumer lending activities.
Non-interest expense decreased $469,000 to $2.9 million due primarily to a
decrease in the letter of credit valuation provision of $347,000 and a decrease
in legal and professional expense of $148,000.
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 June 30, 2001 net interest income decreased $328,000 from the
quarter ended June 30, 2000.
Net interest income for the six months ended June 30, 2001 decreased $455,000
from the same period last year. The net interest margin decreased for the six
month period to 1.98% from 2.59% a year ago. Average multifamily, commercial and
commercial real estate loans decreased $5.0 million. These decreases were offset
by a $11.1 million increase in average consumer loans, resulting in an increase
of interest income of $591,000. The decrease in commercial and multifamily loans
is expected to continue during the time that United operates under the
Supervisory Agreement.
Average interest bearing liabilities increased $7.9 million from June 30, 2000
to $151.1 million at June 30, 2001. Total average interest bearing deposits
increased $7.2 million, while borrowings and FHLB advances increased $636,000
over June 30, 2000. This resulted in an increase in interest expense of $485,000
over the six months ending June 30, 2000. Due to the rising interest rate
environment experience in 2000, the average rate on total deposits increased to
5.58% from 4.96% since June 30, 2000. As a result of the reduction in market
interest rates in 2001, United has continued to reduce interest rates on deposit
products as local market conditions allowed, which was at a pace slower than
that on loans and investments.
Provision for Loan Losses and Letter of Credit Valuation Provision
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 six months ending June 30, 2001 was $347,000 compared to $175,000
in the prior year, an increase of $172,000. During the first two quarters of
2001, Fidelity successfully assisted seven of the partnerships in which Fidelity
or United had outstanding classified letters of credit, in obtaining new
financing. This refinancing resulted in the bond holders backed by United and
Fidelity's letters of credit to be paid in full by a combination of FHA
financing obtained by the partnerships and a total paid by Fidelity and United
of $2.8 million. The $2.8 million funded by Fidelity and United consisted of
previously reserved for amounts within the valuation allowance for letters of
credit. As a result of this refinancing, total classified letters of credit have
been reduced from $11.8 million at December 31, 2000 to $1.4 million at June 30,
2001. The ratio of allowance for loan losses to non-performing loans was 175.3%
at June 30, 2001 compared to 139.6% at June 30, 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
valuation allowance for letters of credit includes documentation that supports
the amount of recorded reserves for these credits.
Fidelity computes general reserves for the commercial, commercial mortgage,
residential mortgage, consumer and credit card loan portfolios by utilizing
historical information and information currently
11
available about the loans within those portfolios that provides information as
to the likelihood of loss. The potential effect of current economic conditions
is also considered with respect to establishing general reserve amounts.
Non-interest income
Non-interest income for the quarter ended June 30, 2001, was $934,000 compared
to $376,000 for the same period in 2000, an increase of $558,000.
Non-interest income for the six months ended June 30, 2001, was $1,611,000
compared to $810,000 for the same period in 2000, a 98.9% increase. Fee income
from real estate management decreased $88,000 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 properties at no fee to
the property or Fidelity. Therefore, no management fees were collected for the
six months ended June 30, 2001 compared to the same period last year. Service
charges on deposit accounts increased $33,000 for the six months ended June 30,
2001 compared to the prior fiscal year due to an increase in the number of
deposit accounts, higher activity fees and new fee sources combined with
improved efforts to collect a greater percentage of assessed fees. Net gains on
sale of real estate loans increased $141,000 over the prior year due to an
increase in mortgage loan activity that has resulted primarily from a higher
level of loan refinancings because of lower market interest rates. Other income
includes gains on sales of land of $134,000. United participates in an
arrangement in which automobile loans are originated on behalf of another
organization. Agent fee income, which represents earned fees from these
transactions for the six months ended June 30, 2001 were $595,000 compared to
$46,000 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 dealer
network has been instrumental in the increase in agent fees over the prior year.
Non-Interest Expense
Non-interest expense decreased $45,000 for the three months ended June 30, 2001,
compared to the three months ended June 30, 2000. Non-interest expense decreased
$469,000 or 14% for the six months ended June 30, 2001, compared to the six
months ended June 30, 2000.
Salaries and employee benefits decreased $86,000 for the six months ended June
30, 2001, due to staff reductions completed since March 31, 2000. During the six
months ended June 30, 2001 the valuation allowance for letters of credit was
reduced by $347,000 to reflect a reduction in loss exposure obtained as a result
of the previously discussed refinancing activities completed during the first
half of 2001. Fidelity records its percentage share of losses for its
investments in various affordable housing properties under the equity method of
accounting. These losses were $111,000 and $187,000 for the six months ended
June 30, 2001 and June 30, 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 take steps to
assist these partnerships in increasing their cash flows. The results of
refinancing efforts and a change in the property manager last year have started
to impact the reduction in the loss on investment in partnerships compared to
the prior year. Fidelity is in varying stages of completing refinancing on an
additional affordable housing development, which should be completed during the
third quarter.
Legal and professional fees decreased $148,000 for the six months ended June 30,
2001 due to increased legal expenses for the same period last year relating to
workout activities with respect to various classified assets. Advertising
increased $59,000 from the prior year primarily due to increased promotional
activities with respect to the consumer lending and mortgage areas, as well as
the opening of a new branch in Warrick County, Indiana during the first quarter.
Telephone expense decreased by $22,000 for the six months ended June 30, 2001
due to increased expenses for a new system in the prior year. Amortization of
intangible assets resulted in expense of $105,000 for the six months ended June
30, 2001 compared to $35,000 for the six months ended June 30, 2000. Other
operating expense increased $51,000 from the prior year.
Income Tax Benefit
The income tax benefit was $235,000 for the six months ending June 30, 2001
compared to $510,000 in the same period last year, primarily due to an increase
in taxable income. Included in the tax benefit of
12
$235,000 for the six months ending June 30, 2001 are tax credits of $160,000.
These credits are received from Fidelity's investment in affordable housing
properties and are a component of the overall return on these investments.
Consideration of the need for a valuation allowance for the deferred tax asset
was made at June 30, 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. At June 30, 2001, Fidelity's operating results were
slightly ahead of those contemplated by the business plan.
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.
o Financial Condition
Total assets at June 30, 2001 increased $4.7 million to $171.2 million from
$166.5 million in December 2000. Average assets for the six months ended June
30, 2001 increased by $4.4 million from $163.9 million at December 31, 2000 to
$168.3 million at June 30, 2001. The increase in total assets is primarily due
to an increase in consumer loans offset by loan payoffs, refinancing and
payments received on commercial, multifamily and fixed 1-4 family mortgage loans
and proceeds from maturities of investments securities. Interest-bearing
liabilities increased $5.8 million due to an increase in a high-balance money
market product bearing a higher interest rate than United's traditional money
market accounts. Retail certificates bearing a premium market rate were issued
in an effort to retain and replace $25.2 million in maturing agent-acquired and
retail certificates of deposit during the first half of 2001. These increases
were partially offset by the reduction of the valuation allowance for letters of
credit previously discussed.
13
Loans
The following table shows the composition of Fidelity's loan portfolio as of
June 30, 2001 and December 31, 2000:
June 30, December 31,
2001 2000
- -------------------------------------------------------------------------------
Real estate mortgage loans
First mortgage loans
Conventional $ 46,924 $ 47,809
Construction 919 1,274
Commercial 6,538 6,873
Multi-family loans 3,807 4,350
Home equity loans 4,742 5,274
First mortgage real estate loans purchased 1,707 1,753
---------------------------
64,637 67,333
Commercial loans, other than
secured by real estate 2,104 2,305
Consumer loans 47,610 40,125
---------------------------
Total loans 114,351 109,763
Allowance for loan losses (1,420) (1,921)
---------------------------
Net loans $112,931 $107,842
===========================
Total loans to total assets 66.8% 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.
Commercial real estate loans and commercial loans have continued to decline as a
result of the supervisory agreement's restriction of new commercial lending. 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 $7.5
million from December 31, 2000 to $47.6 million at June 30, 2001. The level of
growth achieved in the consumer loan portfolio during 2001 is not expected to
continue at the same level for the remainder of 2001. Originations activity
could continue to increase as a result of the origination of automobile loans
for a fee for 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 position of the borrower
indicates that there is no longer any reasonable doubt as to the timely payment
of principal and interest.
14
The following table provides information on Fidelity's non-performing loans as
of June 30, 2001 and December 31, 2000:
June 30, December 31,
2001 2000
-----------------------------------------------------------------------------
(Dollars in Thousands)
Non-accrual loans
Consumer
Commercial $ 235 $472
Multi-family 136 148
----- -----
Total non-accrual loans 371 620
Restructured
Consumer 116 115
Commercial 119 119
----- -----
Total restructured loans 235 234
90 days or more past due and accruing
Mortgage 167
Consumer 37 10
Commercial
----- -----
Total 90 days or more past due and accruing 204 10
----- -----
Total non-performing loans $810 $864
===== =====
Ratio of non-performing loans to total loans .71% 0.79%
Non-performing loans were .71% of total loans at June 30, 2001, as compared to
.79% of total loans at December 31, 2000. Commercial non-performing loans
decreased during the quarter due to a charge-down 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 Valuation Allowance for Letters
of Credit
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)
June 30, December 31,
2001 2000
----------- -------------
Classified assets $5,991 $8,754
Classified letters of credit 1,389 11,773
------ ------
Total classified assets/letters of credit $7,380 $20,527
====== =======
Classified assets and letters of credit were 55.6% and 129.5% of Fidelity's
capital and reserves at June 30, 2001 and December 31, 2000, respectively.
Classified assets and letters of credit were 22.5% and 69.9% of United's capital
and reserves at June 30, 2001 and December 31, 2000, respectively. In addition
to the classified assets and letters of credit, there were non-classified assets
and letters of credit totaling $9.2 million compared to $18.6 million at
December 31, 2000 for which management was closely monitoring the borrowers'
abilities to comply with payment terms. This reduction is a result of
refinancing activity and improvements in various commercial and multifamily
loans and letters of credit, in particular one letter of credit for $6.9
million. These refinancing activities are discussed under the heading,
"Provision for Loan Losses and Letter of Credit Valuation Provisions" and
relieved Fidelity of its off balance sheet liabilities related to the credits
that were refinanced.
Impaired loans are those that management believes will not perform under the
original loan terms. At June 30, 2001 and December 31, 2000, Fidelity had
impaired loans totaling $3.8 million compared to $3.7 million at December 31,
2000. The allowance for losses on such impaired loans totaled $398,000 and
$384,000, which are included in Fidelity's allowance for loan losses at June 30,
2001 and December 31, 2000, respectively. In addition, using similar guidelines
for impaired loans, impaired letters of credit at June 30, 2001 total $1.4
million, versus $11.8 million at December 31, 2000, a decrease of 88.1%. The
valuation allowance on such impaired letters of credit totaled $2.0 million and
is included in Fidelity's letter of credit valuation allowance at June 30, 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 June 30, 2001 and
December 31, 2000:
Six months ended Year ended
June 30, 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
Home equity 1
Multi-family 736 683
Commercial 337 12
Consumer 204 391
------------------------------
Total loan charge offs 1,278 1,166
------------------------------
Loan recoveries
Real estate mortgage 7
Multi-family 396 317
Commercial 20
Consumer 27 59
------------------------------
Total loan recoveries 430 396
------------------------------
Net charge offs 848 770
Provision for loan losses 347 670
------------------------------
Allowance for loan losses at end of period $ 1,420 $ 1,921
==============================
Ratio of net charge offs to average loans outstanding
during period (annualized) 1.53% .72%
==============================
Ratio of provision for loan losses to average loans
outstanding during period (annualized) .63% .63%
==============================
Ratio of allowance for loan losses to total loans
outstanding at year end 1.24% 1.75%
==============================
Average amount of loans
Outstanding for the period $111,630 $106,599
==============================
Amount of loans outstanding
at end of period $114,351 $109,763
==============================
Multi-family letters of credit, an off-balance sheet item, carry the same risk
characteristics as conventional loans and totaled $30.6 million at June 30, 2001
and $43.8 million at December 31, 2000. Specific allocations for letters of
credit totaled 6.5% of outstanding letters of credit at June 30, 2001 compared
to 11.8% at December 31, 2000. Management considers the allowance for loan
losses and valuation allowance for letters of credit adequate to meet losses
inherent in the loan and letter of credit portfolios as of June 30, 2001.
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.
17
At June 30, 2001, the investment portfolio represented 11.1% 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 June 30, 2001, the entire investment portfolio was classified as available
for sale. The net unrealized loss at June 30, 2001, which is included as a
component of stockholders' equity, was $128,000 and was comprised of gross gains
of $10,000, gross unrealized losses of $222,000 and a tax benefit of $84,000.
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 June 30, 2001 and December 31, 2000:
June 30, December 31,
2001 2000
- --------------------------------------------------------------------------------
(dollars in thousands)
Federal Home Loan Mortgage Corporation
mortgage-backed securities $ 712 $ 805
Federal National Mortgage Association mortgage-backed
securities 597 1,095
Government National Mortgage Association
Mortgage-backed securities 17,652 19,101
---------------------
Total securities available for sale $18,961 $21,001
=====================
The current year's decrease is the result of maturities and paydowns received
during the six 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.
The following table sets forth the average balances of and the average rate paid
on deposits by deposit category for the three months ended June 30, 2001 and the
year ended December 31, 2000.
Six months ended Year ended
June 30, December 31,
2001 2000
Average Deposits Amount Rate Amount Rate
- -----------------------------------------------------------------------------------------------------
(dollars in thousands)
Demand $ 1,705 $ 5,136
NOW accounts 22,804 3.71% 17,159 3.21%
Money market accounts 1,635 1.99 2,058 1.99
Savings accounts 3,959 2.17 4,349 2.25
Certificates of deposit 94,706 6.32 87,027 5.97
Agent-acquired certificates of deposit 4,084 6.08 9,241 6.00
--------------- ---------------
Totals $128,893 5.58 $124,970 5.15%
=============== ===============
18
Because of the provisions of the Supervisory Agreement, Fidelity is unable to
use agent-acquired certificates as a funding source. As these agent-acquired
certificates mature, United has been successful in replacing the majority of
these deposits with retail deposit products. The average rate on total deposits
has increased 43 basis points since December 31, 2000 to 5.58% at June 30, 2001.
The average rate on total deposits is expected to decrease in the last half of
2001 due to the lower interest rate environment.
Borrowings
Fidelity's long-term debt decreased $602,000 during the first six months of 2001
primarily due to the maturity of the 9.125% junior notes totaling $1.5 million
and partial replacement by a $750,000 draw on a line of credit and $124,000 in
new junior notes bearing 12% which were offered to existing 9.125% note holders
prior to maturity. In the following table, all notes, except for the Federal
Home Loan Bank advances, are debt of the Parent Company, and total $13.4
million.
The following table summarizes Fidelity's borrowings as of June 30, 2001 and
December 31, 2000.
June 30, 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 $ 970 975
Note payable, 9.42% adjusted annually, payable $13 per month,
including interest, due September 2010, secured by specific
multi-family mortgages 1,486 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
Junior subordinated notes, 9.25%, interest paid semi-annually,
due January 2002, unsecured 1,494 1,494
Junior subordinated notes, 12.00%, interest paid semi-annually,
due April 2004, unsecured 124
Line of credit, 7.75%, interest paid monthly, due September 2001,
secured by guarantors 750
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 6.19 and 6.72% at June 30, 2001
and December 31, 2000) 9,877 9,903
Other 39
-----------------------------
Total long-term debt $23,240 $23,842
=============================
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 7.75%, the prime rate plus
one percent (1.0%). At June 30, 2001, Fidelity has $750,000 outstanding on the
line of credit.
Capital Resources
Fidelity's stockholders' equity increased $2.0 million to $10.8 million at June
30, 2001, compared to $8.8 million at December 31, 2000. The change in
stockholders' equity was accounted for by net income of $67,000, a decrease in
the net unrealized loss on securities available for sale of $408,000 and $1.5
million from the recently completed rights offering in June 2001. A total of
1,000,000 shares at $1.55 were issued upon the completion of the rights
offering. Stockholders equity increased $1.5 million, net of expenses associated
with the offering.
19
Required for To be well
Actual adequate capital Capitalized
Amount Ratio Amount Percent Amount Percent
As of June 30, 2001
Total risk-based capital (to risk-weighted assets) $17,195 13.7% $10,055 8.0% $12,568 10.0%
Tier 1 capital (to risk-weighted assets) 12,738 10.1 5,027 4.0 7,541 6.0
Core capital (to adjusted total assets) 12,738 7.9 6,467 4.0 8,083 5.0
Core capital (to adjusted tangible assets) 12,738 7.9 3,233 2.0 N/A
Tangible capital (to adjusted total assets) 12,738 7.9 2,425 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 exceed each
of these levels. Book value per share, including unrealized losses on investment
securities, increased to $1.92 at June 30, 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 June 30, 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 three years
following the approval of the stock purchase agreement, 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. Fidelity obtained a $1.5
million line of credit in the first quarter of 2001 and can draw on this line
until its expiration in September 2001. At June 30, 2001, $750,000 was
outstanding on the line of credit. Fidelity has improved its liquidity position
by obtaining a line of credit. Its position may be further improved by the
potential issuance of additional stock to Pedcor, potential of additional debt
or equity financing, or dividends from United (with OTS approval), to the
holding company. In Fidelity's recently completed common stock rights offering
it received subscriptions for all 1,000,000 shares associated with the offering
at a $1.55 per share. A portion of these proceeds will be used to pay down
various debt obligations, refinance certain letters of credit and for general
corporate purposes. Fidelity believes with the above actions it will meet its
future liquidity needs.
The holding company has issued letters of credit that back tax-exempt bond
financing for two remaining Section 42 multifamily housing developments. The
municipal bonds are periodically re-marketed to current or new bondholders.
Beginning in July 2001 through September 2001, approximately $2.1 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 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. United has also decreased its utilization of
agency-
20
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. 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. Associations which do not meet either of the
filing requirements are not required to file OTS Schedule CMR, but may do so
voluntarily. United voluntarily submits a CMR quarterly to the OTS. Under the
regulation, associations which must file are required to take a deduction (the
interest rate risk capital component) from their total capital available to
calculate their risk based capital requirement if their interest rate exposure
is greater than "normal". The amount of that deduction is one-half of the
difference between (a) the institution's actual calculated exposure to a 200
basis point interest rate increase or decrease (whichever results in the greater
pro forma decrease in NPV) and (b) its "normal" level of exposure which is 2% of
the present value of its assets.
The data for June 30, 2001 is not required to be filed with the OTS until 45
days after quarter end, which coincides with the 10-Q filing. Management
monitors its interest rate sensitivity during the quarter and will request the
OTS to run scenarios on the NPV model to determine the change in interest rate
sensitivity for management in an effort to assist management on various decision
making regarding products, maturities, repricing, etc. United has recently
developed an internal model to assist in interest rate risk management. The
model will continue to be developed to as closely mirror the OTS's NPV model as
possible.
Although United has not yet submitted its CMR to the OTS for June 30, 2001,
management anticipates there has been no material change from the information
disclosed in Fidelity's annual report to shareholders at December 31, 2000.
21
PART II -- OTHER INFORMATION
ITEM 1 Legal Proceedings:
------------------
There are no material pending legal proceedings, other than ordinary routine
litigation incidental to the Registrant's business, to which the Registrant or
its subsidiaries are a party of or which any of their property is the subject.
ITEM 2 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:
----------------------------------------------------
Not applicable.
ITEM 5 Other Information:
------------------
None
ITEM 6 Exhibits and Reports on Form 8-K:
---------------------------------
None
22
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FIDELITY FEDERAL BANCORP
Date: AUGUST 13, 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)