UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the Quarter Ended March 31, 2002
FIDELITY FEDERAL BANCORP
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Indiana 0-22880 35-1894432
- ---------------------------- ---------- -------------
(State of other jurisdiction Commission (IRS Employer
of Incorporation of File No. Identification No.)
Organization)
18 NW Fourth Street
Evansville, Indiana 47708
---------------------------------------------------
(Address of principal executive offices) (Zip Code)
(812) 424-0921
--------------------------------------------------
Registrant's telephone number, including area code
Indicate by checkmark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding twelve months and (2) has been subject to such filing requirements
for the past 90 days.
YES X NO
--- ---
As of April 30, 2002, there were 6,061,914 shares of the Registrant's common
stock, $1 stated value, issued and outstanding.
FIDELITY FEDERAL BANCORP AND SUBSIDIARIES
Index
Page
PART I - FINANCIAL INFORMATION
ITEM 1--Financial Statements:
Condensed Consolidated Balance Sheets.................................. 3
Condensed Consolidated Statements of Income............................ 4
Condensed Consolidated Statements of Changes in Stockholders' Equity... 5
Condensed Consolidated Statements of Cash Flows........................ 6
Notes to Condensed Consolidated Financial Statements................... 7
ITEM 2--Management's Discussion and Analysis of Results of Operations
and Financial Condition................................................ 9-15
ITEM 3--Quantitative and Qualitative Disclosures about Market Risk...... 15
PART II - OTHER INFORMATION............................................... 16
SIGNATURES................................................................ 17
2
Item 1 - Financial Statements
Part I - Financial Information
Fidelity Federal Bancorp And Subsidiaries
Condensed Consolidated Balance Sheets
(In thousands except share data)
March 31, December 31,
2002 2001
--------- ------------
(Unaudited)
Assets
Cash and due from banks $ 1,013 $ 1,711
Interest-bearing demand deposits 14,126 14,605
--------- ---------
Cash and cash equivalents 15,139 16,316
Investment securities available for sale 26,718 18,074
Notes receivable 235 0
Loans, net of allowance for loan losses of $871 and $2,138 99,961 104,432
Premises and equipment 5,944 6,009
Federal Home Loan Bank of Indianapolis stock 2,620 2,620
Deferred income tax receivable 7,384 7,214
Other real estate owned 1,910 0
Interest receivable and other assets 5,175 4,994
--------- ---------
Total assets $ 165,086 $ 159,659
========= =========
Liabilities
Deposits
Non-interest bearing $ 5,150 $ 5,008
Interest bearing 108,470 115,147
--------- ---------
Total deposits 113,620 120,155
Short-term borrowings 11,000 0
Long-term debt 24,930 24,650
Valuation allowance for letters of credit 431 665
Other liabilities 2,862 2,294
--------- ---------
Total liabilities 152,843 147,764
--------- ---------
Commitments and Contingencies -- --
Stockholders' Equity
Preferred stock, no par or stated value
Authorized and unissued--5,000,000 shares
Common stock, $1 stated value
Authorized--15,000,000 shares
Issued and outstanding--6,061,915 shares 6,062 5,987
Additional paid-in capital 14,780 14,692
Stock warrants 261 11
Retained earnings (8,672) (8,757)
Accumulated other comprehensive loss (188) (38)
--------- ---------
Total stockholders' equity 12,243 11,895
--------- ---------
Total liabilities and stockholders' equity $ 165,086 $ 159,659
========= =========
See notes to condensed consolidated financial statements.
3
FIDELITY FEDERAL BANCORP AND SUBSIDIARIES
Condensed Consolidated Statements of Income
(In Thousands, Except Share Data)
(Unaudited)
Three Months Ended
March 31,
--------------------
2002 2001
------- -------
Interest Income
Loans receivable $ 2,173 $ 2,426
Investment securities--taxable 310 344
Deposits with financial institutions 50 212
Other dividend income 40 52
------- -------
Total interest income 2,573 3,034
------- -------
Interest Expense
Deposits 1,133 1,775
Short-term borrowings 14 1
Long-term debt 455 507
------- -------
Total interest expense 1,602 2,283
------- -------
Net Interest Income 971 751
Provision for loan losses 0 284
------- -------
Net Interest Income After Provision for Loan Losses 971 467
------- -------
Other Income
Service charges on deposit accounts 86 83
Net gains on loan sales 264 63
Letter of credit fees 125 129
Agent fee income 255 233
Gain on disposition of rate swap 72 0
Servicing fees on loans sold 37 27
Other income 91 141
------- -------
Total non-interest income 930 676
------- -------
Other Expenses
Salaries and employee benefits 937 696
Net occupancy 95 91
Equipment 87 60
Data processing 80 91
Deposit insurance 15 62
Legal and professional 62 55
Advertising 90 55
Letter of credit valuation provision 0 (284)
Amortization of intangible assets 52 52
Loss on investment in partnerships 36 55
Correspondent bank charges 33 38
Other expense 399 275
------- -------
Total non-interest expense 1,886 1,246
------- -------
Income (Loss) Before Income Tax 15 (103)
Income tax benefit (71) (127)
------- -------
Net Income $ 86 $ 24
======= =======
Basic Earnings Per Share $ 0.01 $ 0.01
Diluted Earnings Per Share $ 0.01 $ 0.01
See notes to condensed consolidated financial statements
4
FIDELITY FEDERAL BANCORP AND SUBSIDIARIES
Consolidated Statements of Changes in Stockholders' Equity
(In Thousands, Except Share Data)
Three Months Ended
March 31,
----------------------
2002 2001
-------- --------
Beginning Balance $ 11,895 $ 8,775
Comprehensive income
Net income 86 24
Other comprehensive income - net of tax
Unrealized gain (loss) on securities (150) 356
-------- --------
Comprehensive income (64) 380
Issuance of stock 162
Issuance of stock warrants 250
-------- --------
Balances, March 31 (unaudited) $ 12,243 $ 9,155
======== ========
See notes to consolidated financial statements.
5
FIDELITY FEDERAL BANCORP AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Unaudited)
Three Months Ended
March 31,
----------------------
2002 2001
-------- --------
Operating Activities
Net income $ 86 $ 24
Adjustments to reconcile net income to net
cash provided (used) by operating activities
Provision for loan losses 284
Letter of credit valuation provision (284)
Depreciation 154 95
Valuation allowance--affordable housing investments 14 14
Loans originated for sale (5,622) (3,476)
Proceeds from sale of loans 5,623 3,497
Changes in
Interest payable and other liabilities 568 826
Interest receivable and other assets (319) (7)
Other 8
-------- --------
Net cash provided (used) by operating activities (512) 973
-------- --------
Investing Activities
Purchases of securities available for sale (10,209)
Proceeds from maturities of securities available for sale 1,298 1,094
Notes receivable (235)
Net change in loans 2,571 (1,143)
Purchase of premises and equipment (37) (89)
Funding on outstanding letters of credit (234) (2,185)
-------- --------
Net cash used by investing activities (6,846) (2,323)
-------- --------
Financing Activities
Net change in
Noninterest-bearing, interest-bearing demand
and savings deposits (923) 2,989
Certificates of deposit (5,612) 779
Short-term borrowings 11,000
Proceeds of long-term debt 1,777
Repayment of long-term debt (1,497) (7)
Issuance of stock 162
Issuance of stock warrants 250
-------- --------
Net cash provided by financing activities 5,157 3,761
-------- --------
Net Change in Cash and Cash Equivalents (1,177) 2,411
Cash and Cash Equivalents, Beginning of Period 16,316 16,644
-------- --------
Cash and Cash Equivalents, End of Period $ 15,139 $ 19,055
======== ========
Additional Cash Flows Information
Interest paid $ 1,533 $ 1,292
Supplemental schedule of non-cash investing activity:
Transfers from loans to Real Estate Owned $ 1,910
See notes to consolidated financial statements.
6
Fidelity Federal Bancorp
and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
o Accounting Policies
The significant accounting policies followed by Fidelity Federal Bancorp
("Fidelity") and its wholly owned subsidiaries for interim financial reporting
are consistent with the accounting policies followed for annual financial
reporting. All adjustments which are necessary for a fair presentation of the
results for the periods reported, consist only of normal recurring adjustments,
and have been included in the accompanying unaudited condensed consolidated
financial statements. The results of operations for the three months ended March
31, 2002 are not necessarily indicative of those expected for the remainder of
the year. The condensed consolidated balance sheet at December 31, 2001 has been
derived from the audited financial statements.
Certain information and note disclosures normally included in the company's
annual financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted. These condensed
consolidated financial statements should be read in conjunction with the
consolidated financial statements and notes thereto included in the company's
Form 10-K annual report for 2001 filed with the Securities and Exchange
Commission.
o Company Subsidiaries
Fidelity's savings bank subsidiary, United Fidelity Bank, fsb ("United"), was
organized in 1914, is a federally-chartered stock savings bank located in
Evansville, Indiana, and is regulated by the Office of Thrift Supervision
("OTS"). Fidelity, through its savings bank subsidiary, is engaged in the
business of obtaining funds in the form of savings deposits and other borrowings
and investing such funds in consumer, commercial, and mortgage loans, and in
investment and money market securities. 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.
o Stockholders' Equity
In January 2001, Fidelity 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. 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 September 2001, Fidelity filed a second 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 8.6 shares of
Fidelity held on the record date, shareholders could subscribe to purchase one
share of Fidelity at $2.50. The rights offering was completed in November 2001.
Fidelity raised $888,000, net of costs associated with the offering. The shares
purchased by shareholders with these funds were issued in December 2001.
In December 2001, Fidelity filed a third registration statement for a debt and
equity rights offering with the Securities and Exchange Commission. Subscription
rights were distributed to persons who owned common stock as of the close of
business on December 19, 2001 to purchase $1.5 million of 9.00% unsecured junior
subordinated notes due February 28, 2009 and 500,000 warrants representing the
right to purchase shares of common stock at $3.00 per share, less the purchase
price of $0.50 per warrant. The offering was completed on February 28, 2002.
Fidelity issued approximately $1.0 million in 9% notes and all of the 500,000
warrants, raising an additional $250,000.
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
7
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. Fidelity is uncertain when it will pay dividends in the future and the
amount of such dividends, if any.
o Other Restrictions
The Supervisory Agreement with the OTS is in effect until terminated, modified
or suspended by the OTS. The agreement was entered into in February 1999 and was
modified by United and approved by the OTS in the fourth quarter of 2000.
Under the terms of the Agreement, United developed and submitted to the OTS for
approval a strategic plan which included, at a minimum, capital targets;
specific strategies; the completion of quarterly projections for a three-year
period; concentration limits for all assets; a plan for reducing United's
concentrations of high risk assets; review of infrastructure, staffing and
expertise with respect to each area of United's operations; and capital
planning.
The agreement indicated that United must, among other things, have taken other
specified actions within specified time frames. These actions include the
development of and adherence to a written plan for the reduction of classified
and criticized assets to specified levels; maintenance of sufficient allowances
for loan and lease losses; quarterly reporting to the OTS relating to classified
assets and workout plans; restriction of its growth in total assets to an amount
not in excess of an amount equal to the net interest credited on deposit
liabilities without prior OTS approval; limiting growth of its consumer loan
portfolio to an amount not in excess of 30 percent of its total assets;
development of a written plan to divest all real estate held for development;
adoption of policies and procedures designed to avoid potential conflicts of
interest; development of policies and procedures to increase liquidity; adoption
of a policy with respect to its mortgage brokerage activity, which would address
its operation and methods for risk management; development of a policy to
administer the general partnerships held by Village Housing Corporation; and
maintenance of fully staffed and functioning internal audit and independent loan
review processes.
Previously, United was to refrain from commercial lending, but United received
OTS approval in the first quarter of 2002 to resume commercial lending in
accordance with its business plan.
At March 31, 2002, United is also prohibited from taking certain actions without
prior approval, including but not limited to: engaging in "sub prime" consumer
lending activities; making capital distributions, including dividends to
Fidelity; making any additional equity investments; real estate development
without specific approval of the OTS; acquiring any additional real estate for
future development; selling any asset to an affiliated party without prior
written approval of the OTS; and engaging in any new activities not included in
the strategic plan.
United is also required to obtain OTS approval prior to adding or replacing any
director or senior executive officer. United is also prohibited, without prior
OTS approval, from entering into any contract with any executive officer or
director which would require a golden-parachute payment and from increasing any
executive benefit package in an amount in excess of the annual cost of living.
United also developed a plan to reduce employee turnover, build an experienced
staff, and provide for management succession.
Management of United has taken, or has refrained from taking, as applicable, the
actions requested by the OTS. United believes it is in compliance with the
provisions of the supervisory agreement at March 31, 2002.
o Related Party
During the first quarter of 2002, a related party transaction resulted in a gain
on the sale of two notes held in conjunction with advances made by the Company
to certain multifamily housing partnerships in conjunction with refinancing
activities previously completed. The advances had been previously charged off
and had no value on Fidelity's books. The gain on the note sale totaled $223,000
along with a $72,000 gain on sale of a position in an interest rate swap. The
related party was Pedcor Funding Corporation and the purchase price consisted of
a 20% down payment with the remainder financed by a 10 year note totaling
$235,000 at a rate of 5.25% for five years, and 6.50% for the last five years
with principal paid annually and interest paid quarterly.
8
o Reclassifications
Reclassifications of certain amounts in the March 31, 2001 consolidated
statement have been made to conform to the March 31, 2002 presentation.
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 March 31, 2002 was $86,000, compared to
$24,000 for the same period last year. Book value per share increased to $2.02
from $1.99, while shareholders' equity increased 32.6% to $12.2 million from
$9.2 million. This was due primarily to stock offerings completed in 2002 and
2001.
Net Interest Income
The following table summarizes Fidelity's average interest-earning assets and
average interest-bearing liabilities with the accompanying average rates for the
first quarter of 2002 and 2001:
Three Months Ended
March 31,
(dollars in thousands)
-----------------------------
2002 2001
----------- -----------
Interest-earning assets $ 138,350 $ 148,004
Interest-bearing liabilities $ 139,525 $ 147,246
----------- -----------
Net interest-earning assets or (interest-bearing liabilities) (1,175) 758
=========== ===========
Average yield on:
Interest-earning assets 7.09% 8.31%
Interest-bearing liabilities 4.66 6.29
----------- -----------
Net interest spread 2.43% 2.02%
Net interest margin 2.39% 2.06%
The yield on interest-earning assets in the above table does not include the
collection of $156,000 in interest on previously charged off loans. A company
subsidiary owns general partnership interests in multi-family housing. Cash
flows of certain partnerships have increased to allow repayment of interest and
then principal on previously advanced loans to the partnerships. Net interest
income for the first quarter of 2002 was $971,000 and was $220,000 or 29.3% more
than $751,000 during the first quarter of 2001. Exclusive of the $156,000 of
interest collected during the quarter, net interest income increased $64,000
over 2001 due to interest expense decreasing more than interest income, as rates
have declined in 2001 and 2002. The $681,000 decrease in interest expense is a
combination of a decrease of $150,000 from a lower average balance of
outstanding interest-bearing liabilities plus
9
$531,000 because of decreased rates on average interest-bearing liabilities. The
decrease of $617,000 in interest income exclusive of the $156,000 discussed
above, is a combination of a decrease of $192,000 because of the decrease in the
volume mix of average outstanding interest-bearing assets plus $425,000 because
of decreased rates on average interest-earning assets.
The following table sets forth the details of the rate and volume change for the
first quarter of 2002 compared to the first quarter of 2001. The table does not
include $156,000 of interest collected on previously charged-off loans discussed
above.
Three Months Ended March 31,
2002 vs 2001
Increase (Decrease)
Due to change in
----------------------------
Volume Rate Total
------ ---- -----
Interest Income:
Loans and mortgage-backed securities $(144) $(298) $(442)
Other interest-earning assets (48) (127) (175)
----- ----- -----
Total interest-earning assets (192) (425) (617)
Interest Expense:
Deposits (214) (427) (641)
FHLB advances and other borrowings 64 (104) (40)
----- ----- -----
Total interest-bearing liabilities (150) (531) (681)
----- ----- -----
Change in net interest income $ (42) $ 106 $ 64
===== ===== =====
Provision for Loan Losses and Letters of Credit Valuation Provision
The provision for loan losses decreased $284,000 for the three months ended
March 31, 2002 compared to the first quarter of 2001. During the three months
ended March 31, 2001 Fidelity increased its allowance for loan losses and
reduced its letters of credit valuation reserve by $284,000 due to refinancing
activities completed during the first quarter of 2001. During the first quarter
of 2001, four multi-family partnerships in which Fidelity or United had
outstanding classified, or impaired letters of credit, obtained non-recourse
financing outside of Fidelity. One such partnership obtained alternate financing
during the first quarter of 2002. Fidelity provided $234,000 and $2.2 million
during the first quarters of 2002 and 2001 in previously reserved funds in order
to complete the refinancing transactions. Fidelity anticipates additional
refinancing activities related to multi-family loans in the second half of 2002
as efforts continue to reduce classified assets and letters of credit. The ratio
of the allowance for loan losses to non-performing assets was 32.0% at March 31,
2002 compared to 182.2% at March 31, 2001.
Fidelity makes provisions for loan losses in amounts estimated to be sufficient
to maintain the allowance for loan losses at a level considered necessary by
management to absorb losses in the loan portfolios. Specific reserves are
assigned to certain credits. The reserves are determined by management's
evaluation of those credits, which include evaluations of borrower's ability to
repay outstanding debt, as well as the value of supporting collateral. The
results of internal loan reviews, previous regulatory reviews, and past events
assist Fidelity in making that evaluation. The independent support for the
allowance for loan losses and letter of credit valuation reserve includes
documentation that supports the amount of recorded reserves for these credits.
General reserves for loans and letters of credit not specifically reserved are
also determined. Fidelity computes general reserves for the commercial,
commercial mortgage, residential mortgage and consumer loan portfolios by
utilizing historical information and information currently available about the
loans within those portfolios that provides information as to the likelihood of
loss. The potential effect of current economic conditions is also considered
with respect to establishing general reserve amounts.
Non-interest income
Non-interest income for the quarter ended March 31, 2002, was $930,000 compared
to $676,000 for the same period in 2001. This increase was primarily due to a
gain on the sale of two notes totaling $223,000 and a $72,000
10
gain on sale of a position in an interest rate swap. Agent fees increased
$22,000 over the first quarter of 2001. Other income decreased $50,000 to
$91,000 for the three months ended March 31, 2002.
Non-interest expense
Total non-interest expense increased by $640,000 over the first quarter of 2001.
Salaries and employee benefits increased $241,000 due to growth in United's
consumer loan activity, the opening of a new branch late in the first quarter of
2001, and the addition of a senior commercial lending officer in anticipation of
United's resumption of commercial lending activity. In February 2002, United
received authority from the OTS to engage in commercial lending as outlined in
United's business plan.
The increase was also caused by a letter of credit valuation provision credit of
$284,000 during the first quarter of 2001 which offset total expense in 2001.
There was no such item in 2002.
Federal deposit insurance expense decreased $47,000 in the first quarter of 2002
compared to 2001. This decrease was associated with a reduction in United's risk
assessment rate in 2002. Other real estate expense increased $33,000 over the
first quarter of 2001 in connection with the foreclosure of a $3.1 million
non-accrual, non-residential real estate loan in the first quarter of 2002.
Finally, there was a $22,000 increase in indirect dealer promotions compared to
last year.
Income tax benefit
The income tax benefit was $71,000 for the three months ending March 31, 2002
compared to $127,000 in the same period last year, primarily due to a reduction
in pre-taxable loss for the first quarter of 2002. Included in this tax benefit
are tax credits of $80,000. These credits are received from Fidelity's
investment in affordable housing properties and are a component of the overall
return on these investments.
Consideration of the need for a valuation allowance for the deferred tax asset
was made at March 31, 2002 after projecting the reversal of the deferred items.
These analyses were based on projected operating income in future years, action
plans developed and partially implemented included in Fidelity's business plan
and cost reductions. These analyses showed that it was more likely than not that
all carryforwards would be utilized within the carryforward periods (federal and
state) and therefore no valuation allowance was recorded. The analyses assume
that Fidelity will execute approximately 75% of the initiatives included within
its current business plan and then achieve 5 to 10% growth in annual earnings
thereafter. The conservative level of earnings contemplated by these analyses,
if achieved, will constitute for the majority of the carryforward periods,
earnings levels that are below other thrift holding companies included within
Fidelity's peer group.
The Company, at December 31, 2001 and March 31, 2002, has not established a
valuation allowance to reflect the possibility that all of these assets will not
be utilized. Utilization of these deferred tax assets is based significantly
upon the future profitability of the Company. Although the Company has prepared
a model that indicates the deferred tax assets will be fully utilized,
profitability for the three-months ended March 31, 2002, is less than that
projected by the model prepared at December 31, 2001 supporting these assets. To
the extent profitability does not improve, valuation allowance would be required
to be established in order for the financial statements to be in conformity with
accounting principles generally accepted in the United States of America. The
Company has set forth reasonable plans indicating that future period
profitability will increase and be more in line with the original projections,
the ultimate outcome of this uncertainty on net income or earnings per share, if
any, is unknown.
The assumptions used to help consider the need for a valuation allowance for the
deferred tax asset are subject to certain risks and uncertainties that could
impact the final determination regarding the amount of the valuation allowance.
These risks include the failure to implement the business plan targets for
increased revenues, cost reductions, the potential loss of key employees,
ability to maintain projected interest rate margins, and the potential
disruption of activities in key income-producing areas.
Financial Condition
Total assets at March 31, 2002 were $165.1 million, an increase of $5.4 million
from $159.7 at December 31, 2001. The increase in total assets was primarily
attributable to an increase in investment securities available for sale of $8.6
million, partially offset by a $4.5 million decrease in net loans.
With the liquidity created by the refinancing of fixed rate 1-4 family
mortgages, and with short-term FHLB advances, United invested in adjustable rate
GNMA and FNMA adjustable-rate mortgage-backed securities. United has
11
chosen to sell 1-4 family fixed rate products in the secondary market and has
therefore experienced declines in the amounts of those assets held. In order to
replace the loss of mortgage loans outstanding, United purchased $10.2 million
of adjustable-rate mortgage-backed securities at an average yield of 5.5% and
projected average life of 3.5 years during the three months ended March 31,
2002. United has also committed to purchase an additional $7.7 million and $5.0
million in adjustable-rate mortgage-backed securities during April and May of
2002, respectively.
Net loans decreased $4.5 during the first quarter of 2002 compared to December
31, 2001. During the first quarter of 2002 a $3.1 million non-accrual,
non-residential real estate loan was foreclosed. The loan was reclassified to
other real estate owned and is currently being marketed for sale. Continued
paydowns received on fixed rate 1-4 family loans accounted for an additional
$2.5 million decrease, which was offset partially by a $1.1 million increase in
consumer loans. Late in the first quarter of 2002, United received OTS approval
to resume commercial lending activities in accordance with its business plan.
Total liabilities at March 31, 2002 were $152.8 million, an increase of $5.0
million from $147.8 million at December 31, 2001. The increase in total
liabilities was due to increases in advances from the FHLB and federal funds
purchased, which were partially offset by declines in interest-bearing deposits.
Short-term borrowings increased $11.0 million since December 31, 2001 as United
positioned its liability structure in an effort to improve the net interest
margin in the current interest rate environment.
Certificates of deposit decreased by $5.6 million since December 31, 2001 which
was primarily due to the low interest rate environment and the apparent shift of
funds into MMDA and other accounts that provide higher liquidity.
Long-term borrowings increased slightly to $24.9 million at March 31, 2002
compared to $24.7 million at December 31, 2001. During the quarter approximately
$1.5 million in 9.25% junior notes matured and were replaced with $1.0 million
of 9% junior notes. A total of $775,000 was drawn on Fidelity's line of credit
during the quarter to service existing debt and provide liquidity.
Stockholder's equity at March 31, 2002 was $12.2 million, an increase of
$348,000 from $11.9 million at December 31, 2001. The increase was primarily
attributable to net income of $86,000, the completion of Fidelity's notes and
warrants offering in February 2002, which provided $250,000 and the issuance of
stock of $162,000. These increases were offset by a $150,000 increase in
unrealized losses on securities.
12
Non-Performing Assets
Non-performing assets decreased $1.1 million from December 31, 2001 to $2.7
million or 2.70% of total loans at March 31, 2002. The decrease is due to the
charge down of a $3.1 million non-accrual, non-residential real estate loan to
$1.9 million when foreclosed and placed in other real estate owned.
The following table provides information on Fidelity's non-performing assets as
of March 31, 2002 and December 31, 2001:
March 31, December 31,
2002 2001
- --------------------------------------------------------------------------
(Dollars in Thousands)
Non-accrual loans
Consumer $ 103 $ 116
Commercial 287 3,291
Real estate mortgage 284 130
------ ------
Total non-accrual loans 674 3,537
Restructured
Consumer 104 190
Commercial -- 53
------ ------
Total restructured loans 104 243
90 days or more past due and accruing
Consumer 14 23
Commercial 21 22
------ ------
Total 90 days or more past due and accruing 35 45
Other real estate owned $1,910 --
------ ------
Total non-performing assets $2,723 $3,825
====== ======
Ratio of non-performing assets to total loans 2.70% 3.59%
Classified Assets and Letters of Credit
March 31, December 31
2002 2001
--------- -----------
Classified assets $6,166 $7,357
Classified letters of credit 350
------ ------
Total classified assets $6,166 $7,707
====== ======
Classified assets and letters of credit of Fidelity totaled $6.2 million at
March 31, 2002 compared to $7.7 million at December 31, 2001, a decrease of
19.5%. Total classified assets were 45.7% and 53.3% of Fidelity's capital and
reserves at March 31, 2002 and December 31, 2001, respectively, and 25.6% and
31.5% of United's core capital and reserves. In addition to the classified
assets and letters of credit, there are other assets and letters of credit
totaling $10.3 million at March 31, 2002 for which management was closely
monitoring the borrower's abilities to comply with payment terms.
Multi-family letters of credit, an off-balance sheet item, carry the same risk
characteristics as conventional loans and totaled $29.9 million at March 31,
2002 and $30.5 million at December 31, 2001. Specific allocations for letters of
credit totaled 1.4% of outstanding letters of credit at March 31, 2002 compared
to 2.2% at December 31, 2001. Management considers the allowance for loan losses
and letter of credit valuation reserve adequate to meet losses inherent in the
loan and letter of credit portfolios as of March 31, 2002.
13
The following table sets forth an analysis of the allowance for loan losses for
the three months ended March 31, 2002 and the year ended December 31, 2001:
Three months
ended Year ended
March 31, December 31,
2002 2001
--------- ------------
(dollars in thousands)
Allowance for loan losses at beginning of period $ 2,138 $ 1,921
Provision for losses 1,349
Loans charged off (1,322) (1,401)
Recoveries on loans 55 269
------- -------
Allowance for loan losses at end of period $ 871 $ 2,138
======= =======
Capital Resources
United is subject to various regulatory capital requirements administered by the
federal banking agencies and is assigned to a capital category. The assigned
category is largely determined by three ratios that are calculated according to
the regulations: total risk adjusted capital, Tier I capital, and Tier I
leverage ratios. The ratios are intended to measure capital relative to assets
and credit risk associated with those assets and off balance sheet exposures of
the entity. The capital category assigned to an entity can also be affected by
qualitative judgments made by regulatory agencies about the risk inherent in the
entity's activities that are not part of the calculated ratios.
There are five capital categories defined in the regulations, ranging from well
capitalized to critically undercapitalized. Classification of a bank in any of
the undercapitalized categories can result in actions by regulators that could
have a material effect on a bank's operations. At March 31, 2002 and December
31, 2001, United is categorized as well capitalized and met all subject capital
adequacy requirements.
Bank Capital Ratios
Required for To be well
Actual adequate capital Capitalized
Amount Ratio Amount Percent Amount Percent
As of March 31, 2002
Total risk-based capital (to risk-weighted assets) $16,040 13.6% $9,428 8.0% $11,785 10.0%
Tier 1 capital (to risk-weighted assets) 12,020 10.2 4,714 4.0 7,071 6.0
Core capital (to adjusted total assets) 12,020 7.8 6,172 4.0 5,892 5.0
Core capital (to adjusted tangible assets) 12,020 7.8 3,086 2.0 N/A
Tangible capital (to adjusted total assets) 12,020 7.8 2,315 1.5 N/A
As of December 31, 2001
Total risk-based capital (to risk-weighted assets) $17,085 14.4% $9,497 8.0% $11,871 10.0%
Tier 1 capital (to risk-weighted assets) 12,716 10.7 4,748 4.0 7,122 6.0
Core capital (to adjusted total assets) 12,716 8.5 5,998 4.0 7,497 5.0
Core capital (to adjusted tangible assets) 12,716 8.5 2,999 2.0 N/A
Tangible capital (to adjusted total assets) 12,716 8.5 2,249 1.5 N/A
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 order the terms of the
Supervisory Agreement.
The Stock Purchase Agreement approved by Fidelity's shareholders in May 2000
indicates that, for three years following the approval of the stock purchase
agreement, Pedcor is entitled 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 2003. At March 31, 2002, $1.5 million was outstanding on
the line of credit. Fidelity's liquidity position may be further improved by the
potential issuance of
14
additional stock to Pedcor, additional debt or equity financing, or dividends
from United (with OTS approval), to the holding company. Fidelity completed two
successful stock offerings in 2001 and raised approximately $2.4 million and
completed a third offering in 2002 raising an additional $1.2 million. Fidelity
believes that the above actions will assist it in meeting its future liquidity
needs.
Fidelity has one letter of credit outstanding that backs tax-exempt bond
financing for a housing development. The bonds are periodically re-marketed to
current or potential bondholders. In June 2002 approximately $1.7 million in
bonds are due to be re-marketed. In the event that some of the bonds cannot
successfully be re-marketed for their face amounts, 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 refinancing 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.
Item 3 - Asset/Liability Management--Quantitative and Qualitative Disclosures
about Market Risk
Fidelity is subject to interest rate risk to the degree that its interest
bearing liabilities, primarily deposits with short and medium term maturities,
mature or reprice at different rates than its interest-earning assets. Although
having liabilities that mature or reprice less frequently will be beneficial in
times of rising interest rates, such an asset/liability structure will result in
lower net income during periods of declining interest rates, unless off-set by
other factors.
The OTS utilizes a model, the "Office of Thrift Supervision Net Portfolio Value"
("NPV") model, which uses a net market value methodology to measure the interest
rate risk exposure of savings associations. Under this model, an institution's
"normal" level of interest rate risk in the event of an assumed change in
interest rates is a decrease in the institution's NPV in an amount not exceeding
2% of the present value of its assets. Savings associations with over $300
million in assets or less than 12% risk-based capital ratio are required to file
the OTS Schedule CMR. Data from Schedule CMR is used by the OTS to calculate
changes in NPV (and the related "normal" level of interest rate risk) based upon
certain interest rate changes (discussed below). Associations which do not meet
either of the filing requirements are not required to file OTS Schedule CMR, but
may do so voluntarily. United voluntarily submits a CMR quarterly to the OTS.
Under the regulation, associations which must file are required to take a
deduction (the interest rate risk capital component) from their total capital
available to calculate their risk based capital requirement if their interest
rate exposure is greater than "normal". The amount of that deduction is one-half
of the difference between (a) the institution's actual calculated exposure to a
200 basis point interest rate increase or decrease (whichever results in the
greater pro forma decrease in NPV) and (b) its "normal" level of exposure which
is 2% of the present value of its assets.
The data for March 31, 2002 is not required to be filed with the OTS until 45
day after quarter end, which coincides with the 10-Q filing. Management monitors
its interest rate sensitivity during the quarter and will request the OTS to run
scenarios on the NPV model to determine the change in interest rate sensitivity
for management in an effort to assist management with its decision making
regarding the maturities and pricing of its products.
Although United has not yet submitted its CMR to the OTS for March 31, 2002,
management anticipates there has been no material change from the information
disclosed in Fidelity's annual report to shareholders at December 31, 2001.
15
PART II -- OTHER INFORMATION
ITEM 1 Legal Proceedings:
------------------
There are no material pending legal proceedings, other than ordinary
routine litigation incidental to the Registrant's business, to which
the Registrant or its subsidiaries are a party of or which any of
their property is the subject.
ITEM 2 Changes in Securities and Use of Proceeds:
------------------------------------------
Not applicable.
ITEM 3 Defaults Upon Senior Securities:
--------------------------------
Not applicable.
ITEM 4 Submission of Matters to a Vote of Security Holders:
----------------------------------------------------
Submission of Matters to a Vote of Security Holders:
On April 30, 2002 at 10:00 am at the Sheraton Keystone Crossing
8787 Keystone Crossing, Indianapolis, Indiana, the Annual meeting of
Shareholders was held in order to vote on two matters.
Matter 1 was to elect eight directors to the Board of Directors to
serve until their successors are duly elected and qualified.
The vote tabulation for the election of William R. Baugh was
4,876,069 for and 951,003 shares against;
Paul E. Becker was 4,881,736 for and 945,366 shares against;
Bruce A. Cordingley was 5,529,043 for and 298,031 shares against;
Jack Cunningham was 5,526,199 for and 300,873 shares against;
Donald R. Neel was 4,881,554 for and 945,518 shares against;
Gerald K. Pedigo was 5,530,691 for and 296,381 shares against;
Barry A. Schnakenburg was 5,530,639 for and 296,433 shares against;
Phillip J. Stoffregen was 5,529,041 for and 298,031 shares against
The following directors term continued after the meeting; William
Baugh, Paul E. Becker, Jack Cunningham, Bruce A. Cordingley, Gerald
K. Pedigo, Donald R. Neel, Barry A. Schnakenburg and Phillip
Stoffregen.
Matter 2 was the ratification of the appointment of the auditor of
Fidelity. The vote tabulation for BKD LLP was 5,533,162 for, 55,707
shares against, and 238,203 shares abstained.
ITEM 5 Other Information:
------------------
None
ITEM 6 Exhibits and Reports on Form 8-K:
---------------------------------
None
16
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FIDELITY FEDERAL BANCORP
Date: MAY 15, 2002 By: /s/ BRUCE A. CORDINGLEY
------------ ------------------------------------
Bruce A. Cordingley
Executive Committee Chairman
(Acting Principal Executive Officer)
By: /s/ DONALD R. NEEL
------------------------------------
Donald R. Neel,
President, CFO and Treasurer
(Principal Financial Officer)
17