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 September 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
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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 October 31, 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............................................. 10-20
ITEM 3--Quantitative and Qualitative Disclosures about Market Risk... 20
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)
September 30, December 31,
2001 2000
------------- -------------
Assets
Cash and due from banks $ 1,531 $ 1,926
Interest-bearing demand deposits 20,269 14,718
--------- ---------
Cash and cash equivalents 21,800 16,644
Investment securities available for sale 17,786 21,001
Loans, net of allowance for loan losses of $2,085 and $1,921 107,998 107,842
Premises and equipment 5,862 5,847
Federal Home Loan Bank of Indianapolis stock 2,620 2,620
Deferred income tax receivable 7,209 7,245
Interest receivable and other assets 4,964 5,267
--------- ---------
Total assets $ 168,239 $ 166,466
========= =========
Liabilities
Deposits
Non-interest bearing $ 4,935 $ 4,291
Interest bearing 118,637 122,653
--------- ---------
Total deposits 123,572 126,944
Short-term borrowings 4,500
Long-term debt 25,573 23,842
Advances by borrowers for taxes and insurance 266 362
Valuation allowance for letters of credit 938 5,153
Other liabilities 2,445 1,390
--------- ---------
Total liabilities 157,294 157,691
--------- ---------
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--5,607,658 shares 5,607 4,607
Additional paid-in capital 14,184 13,674
Stock warrants 11 11
Retained earnings (8,834) (8,981)
Accumulated other comprehensive loss (23) (536)
--------- ---------
Total stockholders' equity 10,945 8,775
--------- ---------
Total liabilities and stockholders' equity $ 168,239 $ 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 Nine Months Ended
September 30, September 30,
2001 2000 2001 2000
---------------------------- ----------------------------
Interest Income
Loans receivable $ 2,347 $ 2,385 $ 7,244 $ 6,987
Investment securities--taxable 290 373 954 1,158
Deposits with financial institutions 93 179 458 633
Other dividend income 49 61 151 217
----------- ----------- ----------- -----------
Total interest income 2,779 2,998 8,807 8,995
----------- ----------- ----------- -----------
Interest Expense
Deposits 1,589 1,609 5,158 4,726
Short-term borrowings 0 1 2 3
Long-term debt 517 522 1,525 1,496
----------- ----------- ----------- -----------
Total interest expense 2,106 2,132 6,685 6,225
----------- ----------- ----------- -----------
Net Interest Income 673 866 2,122 2,770
Provision for loan losses 800 375 1,147 550
----------- ----------- ----------- -----------
Net Interest Income (Loss) After Provision for Loan Losses (127) 491 975 2,220
----------- ----------- ----------- -----------
Other Income
Service charges on deposit accounts 95 79 268 219
Net gains on loan sales 101 18 255 30
Letter of credit fees 125 134 381 400
Agent fee income 464 86 1,059 133
Other income 129 127 562 473
----------- ----------- ----------- -----------
Total non-interest income 914 444 2,525 1,255
----------- ----------- ----------- -----------
Other Expenses
Salaries and employee benefits 904 1,205 2,363 2,749
Net occupancy 101 107 286 291
Equipment 71 65 199 197
Data processing 92 86 271 252
Deposit insurance 63 60 185 185
Legal and professional 53 261 137 492
Advertising 87 64 228 148
Partnership equity and amortization expense 80 92 225 279
Letter of credit valuation provision (825) (1,172)
Amortization of intangible assets 52 52 157 87
Other expense 428 633 1,107 1,296
----------- ----------- ----------- -----------
Total non-interest expense 1,106 2,625 3,986 5,976
----------- ----------- ----------- -----------
Loss Before Income Tax (319) (1,690) (486) (2,501)
Income tax benefit (203) (765) (437) (1,275)
----------- ----------- ----------- -----------
Loss Before Extraordinary Item (116) (925) (49) (1,226)
Gain on extraordinary item, net of tax 196 0 196 0
----------- ----------- ----------- -----------
Net Income (Loss) $ 80 $ (925) $ 147 $ (1,226)
=========== =========== =========== ===========
Basic Earnings (Loss) Per Share 0.01 (0.20) 0.03 (0.32)
Diluted Earnings (Loss) Per Share 0.01 (0.20) 0.03 (0.32)
Average Common and Common Equivalent shares outstanding 5,607,658 4,607,659 4,948,317 3,872,332
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)
Nine Months Ended
September 30,
2001 2000
------------------------ ------------------------
Beginning Balance $8,775 $5,427
Comprehensive income:
Net income (loss) 147 (1,226)
Other comprehensive income - net of tax
Unrealized gain on securities 513 74
------------ ----------
Comprehensive income 660 (1,152)
Issuance of stock 1,510 4,266
------------ ------------
Balance, September 30 $10,945 $8,541
============ ============
See notes to condensed consolidated financial statements.
5
FIDELITY FEDERAL BANCORP AND SUBSIDIARIES
Condensed Consolidated Statement of Cash Flows
(Unaudited)
Nine Months Ended
September 30,
2001 2000
- -------------------------------------------------------------------------------------------
Operating Activities
Net income (loss) $ 147 $ (1,226)
Adjustments to reconcile net income (loss) to net
cash provided (used) by operating activities
Provision for loan losses 1,147 550
Letter of credit valuation provision (1,172)
Gain on extraordinary item, net of tax (196)
Gain on sale of land (134)
Depreciation and amortization 303 315
Valuation allowance--affordable housing investments 44 55
Loans originated for sale (19,115) (4,011)
Proceeds from sale of loans 19,148 3,992
Changes in
Interest payable and other liabilities 720 498
Interest receivable and other assets 275 (1,415)
----------------------
Net cash provided (used) by operating activities 1,167 (1,242)
----------------------
Investing Activities
Proceeds from maturities of securities available for sale 4,023 2,824
Net change in loans (1,336) (11,775)
Proceeds from redemption of FHLB Stock 1,300
Purchase of premises and equipment (378) (48)
Proceeds from sales of premises and equipment 100 105
Funding on outstanding letters of credit (3,043)
----------------------
Net cash used by investing activities (634) (7,594)
----------------------
Financing Activities
Net change in
Noninterest-bearing, interest-bearing demand
and savings deposits 5,802 2,883
Certificates of deposit (9,174) (10,972)
Short-term borrowings 4,500
Proceeds of long-term debt 7,470 2,000
Repayment of long-term debt (5,389) (814)
Net change in advances by borrowers for
taxes and insurance (96) 138
Sale of stock 1,510 3,000
----------------------
Net cash provided (used) by financing activities 4,623 (3,765)
----------------------
Net Change in Cash and Cash Equivalents $ 5,156 $(12,601)
Cash and Cash Equivalents, Beginning of Period 16,644 30,914
----------------------
Cash and Cash Equivalents, End of Period $ 21,800 $ 18,313
======================
Additional Cash Flows Information
Interest paid $ 5,367 $ 5,324
Income tax paid (refunded) 727
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 nine months ended
September 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 September 2001, Fidelity filed a registration statement for a stockholder
rights offering with the Securities and Exchange Commission. A total of 650,000
shares were registered in this filing. For every 4.6 shares of Fidelity held on
the record date, shareholders could subscribe to purchase one share of Fidelity
at $2.50. All shareholders have the right to oversubscribe for shares not
purchased by other shareholders based on their pro-rated ownership in Fidelity.
The rights offering will expire on November 27, 2001. Fidelity expects to raise
approximately $1.6 million if all 650,000 shares are sold.
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. 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 in June 2001.
Fidelity raised $1.5 million, net of costs associated with the offering. The
shares purchased by shareholders with these funds were issued in July 2001.
In 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 September 30, 2001 was
$969,000 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").
7
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. 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, is a federally-chartered stock savings bank located in
Evansville, Indiana, and is regulated by the Office of Thrift Supervision
("OTS"). Fidelity, through United, 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 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 likely that total commercial and
multifamily loans outstanding will continue to decline, and management efforts
in this area will continue to 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:
8
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 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 September 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 Reclassification
Certain amounts in the 2000 consolidated financial statements have been made to
conform to the 2001 presentation.
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. In May 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.
9
Operating profit is total revenue less operating expenses. In computing
operating profit, income taxes have been deducted.
2001
---------------------------------------------------------------------------
Real Estate
As of and for the Development
Nine Months Ended September 30 Banking and Management Eliminations Total
- -------------------------------------------------------------------------------------------------------------------
Interest income $ 8,807 $ 5 $ (5) $ 8,807
Other income 2,471 54 2,525
Interest expense 6,685 5 (5) 6,685
Other expense 3,903 83 3,986
Provision for loan losses 1,147 1,147
Loss before tax (457) (29) (486)
Income tax benefit (352) (85) (437)
Income (loss) before extraordinary item
(105) 56 (49)
Gain on extraordinary item, net of tax 196 196
Net income 91 56 147
Total assets 169,024 2,696 (3,481) 168,239
Capital expenditures 378 378
Depreciation and amortization 299 4 303
2000
------------------------------------------------------------------------
Real Estate
As of and for the Development
Nine Months Ended September 30 Banking and Management Eliminations Total
- ---------------------------------------------------------------------------------------------------------------
Interest income $ 8,995 $ 6 $ (6) $ 8,995
Other income 1,125 147 (17) 1,255
Interest expense 6,225 6 (6) 6,225
Other expense 5,577 416 (17) 5,976
Provision for loan losses 550 550
Loss before tax (2,232) (269) (2,501)
Income tax benefit (1,095) (180) (1,275)
Total assets 169,005 2,933 (3,584) 168,354
Capital expenditures 48 48
Depreciation and amortization 309 6 315
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.
10
o Results of Operations
Net income for the three months ended September 30, 2001 was $80,000, compared
to a net loss of $925,000 for the same period last year. Basic and diluted net
income per share was $.01 per share for the three months ended September 30,
2001, compared to a net loss of $0.20 per share in 2000.
Net income for the nine months ended September 30, 2001 was $147,000 compared to
a net loss of $1,226,000 for the nine months ended September 30, 2000. Basic and
diluted net income per share was $0.03 per share for the nine months ended
September 30, 2001, compared to a net loss of $0.32 per share in 2000.
The net interest margin has been negatively impacted by the 350 basis point
reduction in the federal funds rate during the first nine months by the Federal
Reserve Board (FRB) and the placement of one non-residential real estate loan on
non-accrual status during the third quarter of 2001. The impact was magnified by
Fidelity's significant holdings of short-term investments. Rates on liabilities
have began to decline 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 nine months ended September 30, 2001, increased
$1,270,000 over the nine months ended September 30, 2000 primarily due to an
increase in agent fee income generated through consumer lending activities.
Non-interest expense decreased $2.0 million to $4.0 million due primarily to a
decrease in the letter of credit valuation provision of $1.2 million, a decrease
in legal and professional expense of $355,000 and a decrease in salaries and
benefits of $386,000. During the third quarter an extraordinary gain was
recognized, net of tax, of $196,000 that reflects the early redemption of
outstanding senior subordinated notes at a discount from their face value.
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 September 30, 2001 net interest income decreased $193,000 from
the quarter ended September 30, 2000.
Net interest income for the nine months ended September 30, 2001 decreased
$648,000 from the same period last year. The net interest margin decreased for
the nine month period to 1.94% from 2.51% a year ago. The margin has been
negatively impacted by the 350 basis point reduction in federal funds rate
during the year by the FRB and the classification of a $3.1 million
non-residential real estate loan as non-accrual during the third quarter of
2001. Average multifamily, commercial, commercial real estate and mortgage loans
decreased $6.3 million. These decreases were offset by a $11.0 million increase
in average consumer loans, resulting in an increase of consumer loan interest
income of $858,000.
Average interest bearing liabilities increased $5.3 million from September 30,
2000 to $148.9 million at September 30, 2001. Total average interest bearing
deposits increased $2.6 million. The increase resulted in a $460,000 increase in
interest expense over the nine months ending September 30, 2000. The average
rate on total deposits increased to 5.42% at September 30, 2001 from 5.06% at
September 30, 2000 primarily due to the maturity of lower costing deposits being
replaced with higher costing deposits in the fourth quarter of 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.
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 nine months ending September 30, 2001 was $1,147,000 compared to
$550,000 in the prior year, an increase of $597,000. During the first two
quarters of 2001, Fidelity successfully assisted seven 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
11
consisted of previously reserved for amounts within the valuation allowance for
letters of credit. Fidelity refinanced one additional letter of credit during
the third quarter through a commercial bank to be paid in full by a combination
of financing obtained by the partnership and a total paid by Fidelity of
$235,000, which consisted of previously reserved amounts. As a result of this
refinancing activity, total classified letters of credit have been reduced from
$11.8 million at December 31, 2000 to $350,000 at September 30, 2001. The ratio
of allowance for loan losses to non-performing loans was 53.3% at September 30,
2001 compared to 201.7% at September 30, 2000. The increase in non-performing
loans from the previous quarter was primarily the result of a non-residential
real estate loan totaling $3.1 million that was moved to non-accrual status
during the third quarter.
Specific loss 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, and consumer loan and letter of credit 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 September 30, 2001, was $914,000
compared to $444,000 for the same period in 2000, an increase of $470,000.
Non-interest income for the nine months ended September 30, 2001, was $2,525,000
compared to $1,255,000 for the same period in 2000, a 101.2% increase. Service
charges on deposit accounts increased $49,000 for the nine months ended
September 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 monitoring of fee waivers. Net gains on the sale of real estate
loans increased $225,000 over the prior year due to an increase in mortgage loan
activity, in particular loan refinancings, because of lower market interest
rates. 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 nine months ended September 30, 2001
were $1,059,000 compared to $133,000 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. Other income includes gains on sales
of land of $134,000. A reduction in management fees of $88,000 partially offset
the total increase in fee income. 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 nine months ended September 30, 2001
compared to the same period last year.
Non-Interest Expense
Non-interest expense decreased $1,519,000 for the quarter ended September 30,
2001, compared to the quarter ended September 30, 2000.
Salaries and employee benefits decreased $386,000 for the nine months ended
September 30, 2001, primarily due to Fidelity recognizing $527,000 in the salary
expense in the prior year in conjunction with the announcement that Fidelity and
former President and CEO M. Brian Davis could not come to resolution on an
existing employment contract modification and that Davis would cease to serve in
those roles. During the nine months ended September 30, 2001 the valuation
allowance for letters of credit was reduced by $1,172,000 to reflect a reduction
in loss exposure achieved as a result of the previously discussed refinancing
activities completed during 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 $225,000 and $279,000 for the
nine months ended September 30, 2001 and September 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
12
steps to assist these partnerships in increasing their cash flows. The results
of refinancing efforts, a lower interest rate environment, and a change in the
property manager last year have started to positively impact the performance of
these partnerships. Fidelity is in varying stages of completing refinancing on
additional affordable housing developments, which should be completed during the
first quarter of 2002.
Legal and professional fees decreased $355,000 for the nine months ended
September 30, 2001 due to workout activities with respect to various classified
assets in 2000. Advertising increased $80,000 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. Amortization of intangible assets resulted in
expense of $157,000 for the nine months ended September 30, 2001 compared to
$87,000 for the nine months ended September 30, 2000. Other operating expense
decreased $189,000 from the prior year primarily due to the recognition of
$100,000 in interest expense paid to the Internal Revenue Service (IRS) in the
previous year in connection with an exam completed in 2001.
Income Tax Benefit
The income tax benefit was $437,000 for the nine months ending September 30,
2001 compared to $1,275,000 in the same period last year, primarily due to a
reduction of the before tax loss. Included in the tax benefit of $437,000 for
the nine months ending September 30, 2001 are tax credits of $239,000. 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 September 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 September 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 September 30, 2001 increased $1.7 million to $168.2 million from
$166.5 million in December 2000. Average assets for the nine months ended
September 30, 2001 increased by $2.6 million from $163.9 million at December 31,
2000 to $166.5 million at September 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.
Average interest-bearing liabilities increased $5.2 million due to an increase
in a high-balance money market product bearing a higher interest rate than
United's traditional money market accounts. 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
September 30, 2001 and December 31, 2000:
September 30, December 31,
2001 2000
- -------------------------------------------------------------------------------------------
Real estate mortgage loans
First mortgage loans
Conventional $ 43,513 $ 47,809
Construction 151 1,274
Commercial 6,610 6,873
Multi-family loans 3,874 4,350
Home equity loans 4,612 5,274
First mortgage real estate loans purchased 1,223 1,753
------------------------------------
59,983 67,333
Commercial loans, other than
secured by real estate 1,753 2,305
Consumer loans 48,347 40,125
------------------------------------
Total loans 110,083 109,763
Allowance for loan losses (2,085) (1,921)
------------------------------------
Net loans $107,998 $107,842
====================================
Total loans to total assets 65.4% 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 declined
based on regulatory limitations. 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 $8.2
million from December 31, 2000 to $48.3 million at September 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 on
behalf of 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 September 30, 2001 and December 31, 2000:
September 30, December 31,
2001 2000
-------------------------------------------------------------------------------------------
(Dollars in Thousands)
Non-accrual loans
Commercial $3,397 $472
Multi-family 148
------- -----
Total non-accrual loans 3,397 620
Restructured
Consumer 188 115
Commercial 54 119
------- -----
Total restructured loans 242 234
90 days or more past due and accruing
Mortgage 155
Consumer 120 10
------- -----
Total 90 days or more past due and accruing 275 10
------- -----
Total non-performing loans $3,914 $864
======= =====
Ratio of non-performing loans to total loans 3.56% 0.79%
Non-performing loans increased to 3.56% of total loans at September 30, 2001, as
compared to .79% of total loans at December 31, 2000. Commercial non-accrual
loans increased $2.9 million over December 31, 2000 due primarily to a
non-residential loan totaling $3.1 million that management ceased the accrual of
interest income during the third quarter.
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)
September 30, December 31,
2001 2000
---------------------------
Classified assets $7,376 $8,754
Classified letters of credit 350 11,773
------ ------
Total classified assets/letters of credit $7,726 $20,527
====== =======
Classified assets and letters of credit were 58.6% and 129.5% of Fidelity's
capital and reserves at September 30, 2001 and December 31, 2000, respectively.
Classified assets and letters of credit were 27.6% and 69.9% of United's capital
and reserves at September 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 $10.3 million compared to
$18.6 million at December 31, 2000 for which management was closely monitoring
the borrowers' abilities to comply with payment terms. The reduction in
classified assets is a result of refinancing activity and improvements in
various commercial and multifamily loans and letters of credit. 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 September 30, 2001 and December 31, 2000, Fidelity had
impaired loans totaling $6.9 million compared to $3.7 million at December 31,
2000. The increase is primarily due to one non-residential real estate loan
totaling $3.1 million that management ceased the accrual of interest income. The
allowance for loan losses on such impaired loans totaled $1.3 million and
$384,000, which are included in Fidelity's allowance for loan losses at
September 30, 2001 and December 31, 2000, respectively. In addition, using
similar guidelines for impaired loans, impaired letters of credit at September
30, 2001 total $350,000, versus $11.8 million at December 31, 2000. The
valuation allowance on such impaired letters of credit totaled $35,000 at
September 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 September 30, 2001 and
December 31, 2000:
Nine months ended Year ended
September 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 822 683
Commercial 337 12
Consumer 334 391
----------------------------------
Total loan charge offs 1,494 1,166
----------------------------------
Loan recoveries
Real estate mortgage 7
Home equity 1
Multi-family 462 317
Commercial 20
Consumer 41 59
----------------------------------
Total loan recoveries 511 396
----------------------------------
Net charge offs 983 770
Provision for loan losses 1,147 670
----------------------------------
Allowance for loan losses at end of period $ 2,085 $ 1,921
==================================
Ratio of net charge offs to average loans outstanding
during period (annualized) 1.17% .72%
==================================
Ratio of provision for loan losses to average loans
outstanding during period (annualized) 1.37% .63%
==================================
Ratio of allowance for loan losses to total loans
outstanding at period end 1.89% 1.75%
==================================
Average amount of loans
Outstanding for the period $111,850 $106,599
==================================
Amount of loans outstanding
at end of period $110,083 $109,763
==================================
Multi-family letters of credit, an off-balance sheet item, carry the same risk
characteristics as conventional loans and totaled $30.5 million at September 30,
2001 and $43.8 million at December 31, 2000. Specific allocations for letters of
credit totaled 3.1% of outstanding letters of credit at September 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 September 30,
2001.
17
Investment Securities
At September 30, 2001, the investment portfolio represented 10.6% of Fidelity's
assets, compared to 12.6% at December 31, 2000.
The following table sets forth the components of United's available-for-sale
investment portfolio as of September 30, 2001 and December 31, 2000:
September 30, December 31,
2001 2000
- -------------------------------------------------------------------------------------------------------
(dollars in thousands)
Federal Home Loan Mortgage Corporation
mortgage-backed securities $ 666 $ 805
Federal National Mortgage Association mortgage-backed securities 482 1,095
Government National Mortgage Association
Mortgage-backed securities 16,638 19,101
--------------------------------
Total securities available for sale $17,786 $21,001
================================
The decrease in balance is the result of maturities and paydowns received during
the nine months. Inherent in mortgage-backed securities is prepayment risk.
Prepayment rates generally can be expected to increase during periods of lower
interest rates in which we are currently experiencing 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 average
rate on total deposits has increased 27 basis points since December 31, 2000 to
5.42% at September 30, 2001. The average rate on total deposits has begun to
decline in the last half of 2001 due to the lower interest rate environment in
2001.
Borrowings
United recently accessed $3.0 million in long-term advances and $3.5 million in
short-term advances from the Federal Home Loan Bank to replace higher interest
bearing maturing deposits. The maturity of $1.5 million in junior subordinated
notes and the early extinguishment of $1.0 million in senior subordinated notes
offset a portion of the increase in borrowings during the third quarter of 2001.
In the following table, all notes, except for the Federal Home Loan Bank
advances, are debt of the Parent Company, and total $12.9 million.
18
The following table summarizes Fidelity's long-term debt as of September 30,
2001 and December 31, 2000.
September 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 $ 980 975
Note payable, 9.42% adjusted annually, payable $13 per month,
including interest, due September 2010, secured by specific
multi-family mortgages 1,497 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
Note payable, 7.00%, interest paid monthly, due September 2002,
secured by guarantors 1,325
Senior subordinated notes, 10.00%, interest paid semi-annually,
due June 2005, unsecured 6,000 7,000
Federal Home Loan Bank advances, due at various dates through
2010 (weighted average rates of 5.51 and 6.72% at September 30,
2001 and December 31, 2000) 12,645 9,903
Other 8
----------------------------
Total long-term debt $25,573 $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 in September 2002. At September 30, 2001, Fidelity has $1.3 million
outstanding on the line of credit.
Fidelity also had short-term borrowings of $4.5 million, which consisted of the
$3.5 million in short-term advances mentioned above and $1.0 million in federal
funds purchased at September 30, 2001.
Capital Resources
Fidelity's stockholders' equity increased $2.1 million to $10.9 million at
September 30, 2001, compared to $8.8 million at December 31, 2000. The change in
stockholders' equity was accounted for by net income of $147,000, a decrease in
the net unrealized loss on securities available for sale of $513,000 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.
Required for To be well
Actual adequate capital Capitalized
Amount Ratio Amount Percent Amount Percent
As of September 30, 2001
Total risk-based capital
(to risk-weighted assets) $17,179 13.9% $9,869 8.0% $12,336 10.0%
Tier 1 capital (to risk-weighted assets) 12,751 10.3 4,934 4.0 7,402 6.0
Core capital (to adjusted total assets) 12,751 8.0 6,347 4.0 7,934 5.0
Core capital (to adjusted tangible assets) 12,751 8.0 3,174 2.0 N/A
Tangible capital (to adjusted total assets) 12,751 8.0 2,380 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
19
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. 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 as
well as required levels to achieve "well capitalized" status. Book value per
share, including unrealized losses on investment securities, increased to $1.95
at September 30, 2001, compared to $1.90 at December 31, 2000.
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 2002. At September 30, 2001, $1.3 million was
outstanding on the line of credit. Fidelity's liquidity position may be further
improved by the potential issuance of additional stock to Pedcor, additional
debt or equity financing, or dividends from United (with OTS approval), to the
holding company. 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. Fidelity went effective with another rights offering in
September 2001. Approximately 650,000 shares are being offered at $2.50 per
share in order to raise $1.6 million. Proceeds of at least $715,000 based on
director and affiliate participation is expected. The offer expires on November
27, 2001. Fidelity believes that the above action 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
bonds are periodically re-marketed to current or potential bondholders.
Beginning in December 2001 through September 2002, 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-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
20
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 September 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 September 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: NOVEMBER 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,
President and CFO
(Principal Financial Officer)
23