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, 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 November 6, 2002, there were 6,607,422 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............................................... 11-18
ITEM 3--Quantitative and Qualitative Disclosures about Market Risk..... 18
ITEM 4--Controls and Procedures........................................ 18
PART II - OTHER INFORMATION.............................................. 19
SIGNATURES............................................................... 20
CERTIFICATIONS........................................................... 21-22
2
Item 1 - Financial Statements
Part I - Financial Information
Fidelity Federal Bancorp And Subsidiaries
Condensed Consolidated Balance Sheets
(In thousands except share data)
September 30, December 31,
2002 2001
--------- ---------
(Unaudited)
Assets
Cash and due from banks $ 1,274 $ 1,711
Interest-bearing demand deposits 9,753 14,605
--------- ---------
Cash and cash equivalents 11,027 16,316
Investment securities available for sale 39,354 18,074
Notes receivable 235
Loans, net of allowance for loan losses of $974 and $2,138 70,561 104,432
Premises and equipment 5,802 6,009
Federal Home Loan Bank of Indianapolis stock 2,674 2,620
Deferred income tax receivable 7,008 7,214
Other real estate owned 1,810
Interest receivable and other assets 5,947 4,994
--------- ---------
Total assets $ 144,418 $ 159,659
========= =========
Liabilities
Deposits
Non-interest bearing $ 4,885 $ 5,008
Interest bearing 112,909 115,147
--------- ---------
Total deposits 117,794 120,155
Long-term debt 10,856 24,650
Valuation allowance for letters of credit 440 665
Other liabilities 4,220 2,294
--------- ---------
Total liabilities 133,310 147,764
--------- ---------
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--6,607,423 and 5,987,009 shares 6,622 5,987
Additional paid-in capital 15,252 14,692
Stock warrants 261 11
Retained earnings (11,176) (8,757)
Accumulated other comprehensive income (loss) 149 (38)
--------- ---------
Total stockholders' equity 11,108 11,895
--------- ---------
Total liabilities and stockholders' equity $ 144,418 $ 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 Nine Months Ended
September 30, September 30,
2002 2001 2002 2001
---------------------------------------------------------
Interest Income
Loans receivable $ 1,896 $ 2,347 $ 6,033 $ 7,244
Investment securities--taxable 463 290 1,248 954
Deposits with financial institutions 25 93 107 458
Other dividend income 42 49 121 151
----------- ----------- ----------- -----------
Total interest income 2,426 2,779 7,509 8,807
----------- ----------- ----------- -----------
Interest Expense
Deposits 1,127 1,589 3,400 5,158
Short-term borrowings 4 -- 25 2
Long-term debt 378 517 1,316 1,525
----------- ----------- ----------- -----------
Total interest expense 1,509 2,106 4,741 6,685
----------- ----------- ----------- -----------
Net Interest Income 917 673 2,768 2,122
Provision for loan losses (400) 800 (400) 1,147
----------- ----------- ----------- -----------
Net Interest Income After Provision for Loan Losses 1,317 (127) 3,168 975
----------- ----------- ----------- -----------
Other Income
Service charges on deposit accounts 121 95 319 268
Net gains on loan sales 79 101 155 255
Net gains on investment sales -- -- 73 --
Letter of credit fees 124 125 374 381
Agent fee income 151 464 578 1,059
Gain on disposition of rate swap -- -- 72 --
Servicing fees on loans sold 36 33 110 90
Other income 91 96 532 472
----------- ----------- ----------- -----------
Total non-interest income 602 914 2,213 2,525
----------- ----------- ----------- -----------
Other Expenses
Salaries and employee benefits 978 904 2,781 2,363
Net occupancy expenses 93 101 278 286
Equipment expenses 85 71 255 199
Data processing fees 83 92 247 271
Deposit insurance expense 13 63 43 185
Legal and professional fees 121 53 248 137
Advertising 33 50 108 103
Letter of credit valuation provision -- (825) -- (1,172)
Loss on investments in partnerships 40 80 134 225
Amortization of intangible assets -- 52 53 157
Correspondent bank charges 31 39 97 118
Loss on impairment of assets held for sale and changes in
estimated useful lives of intangible assets 1,184 1,184
Other expense 1,474 426 2,347 1,114
----------- ----------- ----------- -----------
Total non-interest expense 4,135 1,106 7,775 3,986
----------- ----------- ----------- -----------
Loss Before Income Tax (2,216) (319) (2,394) (486)
Income tax expense (benefit) 333 (203) 112 (437)
----------- ----------- ----------- -----------
Loss Before Extraordinary Item (2,549) (116) (2,506) (49)
Net gain on extraordinary item -- 196 87 196
----------- ----------- ----------- -----------
Net Income (Loss) $ (2,549) $ 80 (2,419) $ 147
=========== =========== =========== ===========
Basic Earnings (Loss) per Share $ (0.41) $ 0.01 $ (0.40) $ 0.03
Diluted Earnings (Loss) per Share $ (0.41) $ 0.01 $ (0.40) $ 0.03
Average Common and Common Equivalent shares outstanding 6,167,681 5,607,658 6,087,925 4,948,317
See notes to condensed consolidated financial statements
4
FIDELITY FEDERAL BANCORP AND SUBSIDIARIES
Condensed Consolidated Statements of Changes in Stockholders' Equity
(In Thousands, Except Share Data)
Nine Months Ended
September 30,
---------------------------------------------------
2002 2001
---------- ----------
Beginning Balance $11,895 $8,775
Comprehensive income (loss)
Net income (2,419) 147
Other comprehensive income - net of tax 188 513
------ ------
Comprehensive income (loss) (2,231) 660
Issuance of stock 1,194 1,510
Issuance of stock warrants 250
-------- --------
Balances, September 30 (unaudited) $11,108 $10,945
======== ========
See notes to condensed consolidated financial statements.
5
FIDELITY FEDERAL BANCORP AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
Nine Months Ended
September 30,
----------------------
2002 2001
-------- --------
Operating Activities
Net income $ (2,419) $ 147
Adjustments to reconcile net income to net
cash provided (used) by operating activities
Provision for loan losses (400) 1,147
Letter of credit valuation provision (1,172)
Gain on extraordinary item, net of tax (87) (196)
Gain on sale of land (134)
Gain on sale of investment securities (73)
Loss on impairment of assets held for sale and changes in
estimated useful lives of intangible assets 1,184
Depreciation and amortization 360 303
Valuation allowance--affordable housing investments 40 44
Loans originated for sale (11,975) (19,115)
Proceeds from sale of loans 12,019 19,148
Changes in
Interest payable and other liabilities 1,926 624
Interest receivable and other assets (2,007) 275
Other (226) --
-------- --------
Net cash provided (used) by operating activities (1,658) 1,071
-------- --------
Investing Activities
Purchases of securities available for sale (33,803) --
Proceeds from maturities of securities available for sale 13,107 4,023
Notes receivable (235) --
Net change in loans 32,342 (1,336)
Purchase of premises and equipment (192) (378)
Proceeds from sales of premises and equipment 100
Purchasers of Federal Home Loan Bank stock (54) --
Funding on outstanding letters of credit (225) (3,043)
-------- --------
Net cash provided (used) by investing activities 10,940 (634)
-------- --------
Financing Activities
Net change in
Noninterest-bearing, interest-bearing demand
and savings deposits (2,939) 5,802
Certificates of deposit 578 (9,174)
Short-term borrowings -- 4,500
Proceeds of long-term debt 10,778 7,470
Repayment of long-term debt (24,432) (5,389)
Issuance of stock 1,194 1,510
Issuance of stock warrants 250 --
-------- --------
Net cash provided (used) by financing activities (14,571) 4,719
-------- --------
Net Change in Cash and Cash Equivalents (5,289) 5,156
Cash and Cash Equivalents, Beginning of Period 16,316 16,644
-------- --------
Cash and Cash Equivalents, End of Period $ 11,027 $ 21,800
======== ========
Additional Cash Flows Information
Interest paid $ 4,711 $ 5,367
Supplemental schedule of non-cash inventory activity:
Transfer from loans to Real Estate Owned $ 1,910
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, 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 accounting principles
generally accepted in the United States of America 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 July 2002, Fidelity filed a registration statement for a stockholder rights
offering with the Securities and Exchange Commission. A total of 750,000 shares
were registered in this filing. For every 8.1 shares of Fidelity held on the
record date, shareholders could subscribe to purchase one share of Fidelity at
$2.00. The rights offering was completed in September 2002. Fidelity raised
$770,000, net of costs associated with the offering. The shares purchased by
shareholders with these funds were issued in September 2002.
During the third quarter, Pedcor Investments, LLC ("Investments") exercised a
portion of their option that was granted under the stock purchase agreement in
May 2000 and purchased $259,000 in common stock resulting in 137,765 shares
being issued. Investments and its affiliates have a remaining option to purchase
up to $4.5 million of Fidelity common stock at the current fair market value,
which expires in May 2003.
In December 2001, Fidelity filed a 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.
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 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 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.
7
The shares purchased by shareholders with these funds were issued in July 2001.
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. United has entered into a
Supervisory Agreement ("Agreement") with the Office of Thrift Supervision
("OTS"). One of the provisions of the Agreement requires prior approval from OTS
for payments of dividends from United to Fidelity. 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. The
agreement as written has been modified by mutual agreement to eliminate certain
restrictions. 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 September 30, 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 Agreement at September 30, 2002.
o Related Party Transaction
During the first quarter of 2002, Fidelity sold two notes held in conjunction
with advances made by Fidelity to certain multifamily housing partnerships to a
related party. The advances were made to facilitate refinancing activities and
resulted in loans subordinated to the first mortgage loans. The advances had
been previously charged off and had no value on Fidelity's books. The gain on
the note sale totaled $223,000. Fidelity also sold a position in an interest
rate swap for a $72,000 gain. The instruments were acquired by Pedcor Funding
Corporation and the
8
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.
On September 30, 2002, Fidelity signed a definitive agreement to sell its wholly
owned affordable housing subsidiary, Village Affordable Housing Corporation and
United's wholly owned affordable housing subsidiary, Village Housing Corporation
and certain other related affordable housing assets to Pedcor Funding
Corporation ("Funding"). Funding is a company controlled by three directors of
Fidelity and are members of a group that beneficially owns approximately 60.7%
of Fidelity's issued and outstanding stock.
The sale price is approximately $1.7 million in cash and is expected to be
consummated during the fourth quarter of 2002. It is expected to result in a
consolidated after-tax gain under generally accepted accounting principles of
approximately $138,000, which consists of a gain from the sale of the affordable
housing assets held by Fidelity and United offset by a loss from United's
subsidiary, Village Housing Corporation, resulting from the sale of its 1%
investment in the general partnerships.
o Sale of Village Housing Corporation and Village Affordable Housing
Corporation
As previously discussed in the Related Party footnote, Fidelity executed a
definitive agreement to sell its wholly owned affordable housing subsidiary,
Village Housing Affordable Corporation and United's wholly owned affordable
housing subsidiary, Village Housing Corporation and certain other related
affordable housing assets to Pedcor Funding Corporation.
Completion of this transaction is subject to receipt of all required regulatory
approvals and receipt of a fairness opinion by Fidelity that the transaction is
fair, from a financial point of view, to Fidelity and United. The transaction is
expected to be consummated during the fourth quarter of 2002.
o Impairment of Assets
Upon determination of the purchase price, certain assets including
surplus land, a development fee receivable and an interest rate swap
were deemed impaired and an expense of $320,000 was recognized during
the quarter to write down these assets to their estimated fair values.
o Change in the Estimated Useful Lives of Intangible Assets
Upon execution of the definitive agreement with Pedcor Funding
Corporation, the useful lives of certain intangible assets were
determined to have changed. The intangible assets were originally
recorded as a result of a five-year guarantee to United from Pedcor
Holdings, LLC (Holdings) during 2000 in an aggregate amount up to $1.5
million 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. The useful
life of the assets is now expected to end in the fourth quarter. As a
result, approximately $864,000 in expense was recorded in the third
quarter, and will result in the termination of monthly amortization
expense of approximately $18,000.
o Securitization
United completed its first auto securitization transaction during the quarter
for $50 million. The transaction resulted in the sale of $49 million of rated
class A notes. Financial Security Assurance (FSA) provided a financial guaranty
policy on the class A notes. The transaction also resulted in the sale of
$500,000 in un-rated class B notes. The transaction was effected through a
wholly-owned subsidiary, United Fidelity Finance, LLC. Krieg Devault LLP served
as issuer's counsel and City Securities of Indianapolis served as the lead
manager and Underwriter on the transaction.
In the transaction, auto loan receivables were transferred to an independent
trust (the Trust) that issued certificates representing ownership interests in
the Trust, primarily to institutional investors. Although United continues to
service the underlying accounts and maintain the customer relationships, this
transaction is treated as a sale for financial reporting purposes to the extent
of the investors interest in the Trust. Accordingly, the receivables associated
with the investors interests are not reflected on the balance sheet. In
connection with this transaction, United enhanced the credit protection of the
certificate holders by funding a cash reserve account.
Due to prepayment risk, the retained interests are measured as
available-for-sale securities. Accordingly, the retained interest is reported at
fair value, which at September 30, 2002 approximates the net carrying amount of
9
such assets totaling $2.7 million. Unrealized holding gains or losses on the
retained interest, if any, are excluded from earnings and reported, net of
taxes, as a separate component of shareholders equity, except that, if a decline
in fair value is judged to be other than temporary, such a decline is accounted
for as a realized loss and is presented as a reduction of securitization income
in the accompanying statement of operations.
United estimates the fair value of the retained interest at the date of the
transfer and during the period of the transaction based on a discounted cash
flow analysis. United receives annual servicing fees based on the loan balances
outstanding the rights to future cash flows arising after investors in the
securitization trust have received their contractual return and after certain
administrative costs of operating the trust. These cash flows are estimated over
the life of the loans using prepayment, default and interest rate assumptions
that market participants would use for financial instruments subject to similar
levels of prepayment, credit and interest rate risk.
o Earnings per share
Earnings per share (EPS) were computed as follows:
Nine Months Ended September 30, 2002
-----------------------------------------------------------
Loss Weighted-Average Per Share
Shares Amount
-----------------------------------------------------------
Net loss $ (2,419)
----------------
Basic earnings per share
Income (loss) available to common
stockholders $ (2,419) 6,079,474 $ (0.40)
==============
Effect of dilutive securities
Stock options -- 8,451
---------------- ---------------
Diluted earnings per share
Income (loss) available to common
stockholders and assumed conversions $ (2,419) 6,087,925 $ (0.40)
================ =============== ==============
Nine Months Ended September 30, 2001
-----------------------------------------------------------
Income Weighted-Average Per Share Amount
Shares
-----------------------------------------------------------
Net income $ 147
----------------
Basic earnings per share
Income available to common
stockholders $ 147 4,948,317 $ 0.03
==============
Effect of dilutive securities
Stock options -- 2,712
---------------- ---------------
Diluted earnings per share
Income available to common
stockholders and assumed conversions $ 147 4,951,029 $ 0.03
================ =============== ==============
o Reclassifications
Reclassifications of certain amounts from the condensed consolidated income
statements for the three-month periods ended September 30, 2002 and 2001 and for
the nine-month period ended September 30, 2001 have been made to conform to the
presentation of the nine-month period ended September 30, 2002. These
reclassifications had no effect on net income.
10
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 loss for the three months ended September 30, 2002 was $2.5 million,
compared to $80,000 net income for the same period last year. Net loss for the
nine months ended September 30, 2002 was $2.4 million, compared to $147,000 net
income for the nine months ended September 30, 2001. Book value per share
decreased to $1.68 from $1.99 at December 31, 2001, while shareholders' equity
decreased to $11.1 million from $11.9 million. The decrease in stockholders
equity was due to the loss for the first nine months, but was partially offset
by the completion of two stock offerings completed during 2002, as well as the
decrease in the unrealized loss on securities.
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 nine months of 2002 and 2001:
Nine Months Ended
September 30,
(dollars in thousands)
-----------------------------------
2002 2001
---------------- --------------
Interest-earning assets $143,161 $146,188
Interest-bearing liabilities $143,872 $148,913
----------------
--------------
Net interest-earning assets or (interest-bearing liabilities) (711) (2,725)
================ ==============
Average yield on:
Interest-earning assets 6.87% 8.06%
Interest-bearing liabilities 4.41 6.00
---------------- --------------
Net interest spread 2.46% 2.06%
Net interest margin 2.44% 1.95%
Net interest income for the first nine months of 2002 was $2.8 million and was
$646,000 or 30.4% higher than the $2.1 million earned during the first nine
months of 2001. Exclusive of the $156,000 of interest collected during the first
nine months of 2002 on loans previously charged off, net interest income
increased $490,000 over 2001 as United reduced its liquid assets compared to
last year. The $1.9 million decrease in interest expense is a combination of a
decrease of $269,000 from a lower average balance of outstanding
interest-bearing liabilities plus $1.7 million due to lower interest rates on
average interest-bearing liabilities. The decrease of $1.5 million in interest
income, is a combination of a decrease of $256,000 because of the decrease in
the volume mix of average outstanding interest-bearing assets plus $1.2 million
because of decreased rates on average interest-earning assets. 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. The following table sets
forth the details of the rate and volume change for the first nine months of
2002 compared to the same period in 2001, excluding the $156,000 of interest
collected on previously charged-off loans.
11
Nine Months Ended September 30,
2002 vs 2001
Increase (Decrease)
Due to change in
-----------------------------------------------------
Volume Rate Total
------------ ---------------- ----------------
Interest Income:
Loans and mortgage-backed securities $( 99) $(974) $(1,073)
Other interest-earning assets (157) (224) (381)
------------ ---------------- ----------------
Total interest-earning assets (256) (1,198) (1,454)
Interest Expense:
Deposits (405) (1,353) (1,758)
FHLB advances and other borrowings 136 (322) (186)
------------ ---------------- ----------------
Total interest-bearing liabilities (269) (1,675) (1,944)
------------ ---------------- ----------------
Change in net interest income $ 13 $477 $ 490
============ ================ ================
Net interest income for the three months ended September 30, 2002 was $917,000
compared to $673,000 for the three months ended September 30, 2001. As discussed
above this is primarily due to the decrease in rates compared to last year.
Provision for Loan Losses and Letters of Credit Valuation Provision
The provision for loan losses for the nine months ended September 30, 2002 was a
credit of $400,000 compared to $1.1 million in expense for the nine months ended
September 30, 2001. During the nine months ended September 30, 2001, Fidelity
increased its allowance for loan losses and reduced its letters of credit
valuation reserve by $1.1 milliion due to refinancing activities related to
letters of credit outstanding completed during the first nine months of 2001.
During the first nine months of 2001, eight multi-family partnerships in which
Fidelity or United had outstanding classified or impaired letters of credit,
obtained non-recourse financing outside of Fidelity. Two such partnerships
obtained alternate financing during the first nine months of 2002 with an
additional refinancing completed in October 2002. Fidelity provided $225,000 and
$3.0 million during the first nine months of 2002 and 2001, respectively, in
previously reserved funds in order to complete the refinancing transactions.
As a result of the securitization of automobile loans completed during the third
quarter of 2002, the allowance for automobile loan losses was reduced during the
third quarter of 2002, resulting in a credit provision of $400,000, compared to
$800,000 in loan loss provision expense for the three months ended September 30,
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 September 30, 2002, was $602,000
compared to $914,000 for the same period in 2001. The $312,000 decline in
non-interest income for the quarter was primarily the result of the decrease in
the volume of automobile loans that are originated for a fee when compared to
the three months ended at September 30, 2001.
Non-interest income for the nine months ended September 30, 2002 and 2001, was
$2.2 million and $2.5 million, respectively. Agent fees decreased $481,000 from
the first nine months of 2001 primarily due to the decrease in the volume of
loans originated for a fee, and the completion of the securitization
transaction. Gains on sales of
12
loans decreased $100,000 compared to the nine months ended September 30, 2001.
The net gain on new loans sold was lower in the first nine months of 2002 when
compared to the same period last year. During the second quarter of 2002, a
$73,000 gain was recognized on the sale of an investment security. Servicing
fees on loans sold increased $20,000 over last year due to the continuing growth
of the loan-servicing portfolio. Deposit service charges increased $51,000 over
last year due to an increase in overdraft activity and fees charged on its
transaction accounts. Other income increased $60,000 to $532,000 for the nine
months ended September 30, 2002 partially due to a $35,000 increase in mortgage
loan underwriting fees due to the increase in refinancing activity associated
with the low interest rate environment.
Non-interest expense
Non-interest expense was $4.1 million for the quarter ended September 30, 2002
compared to $1.1 million for the same period in 2001.
Total non-interest expense increased by $3.8 million over the first nine months
of 2001. Salaries and employee benefits increased $418,000 due to growth in
United's consumer lending activity, the opening of a new branch late in the
first quarter of 2001, the addition of commercial lending staff due to the
resumption of commercial lending and an additional $100,000 increase in expense
for the Company's defined benefit pension plan. Federal deposit insurance
expense decreased $142,000 in the first nine months of 2002 compared to 2001.
This decrease was associated with a reduction in United's FDIC risk assessment
rate in 2002. Legal and professional fees increased $111,000 over last year due
to expenses related to workout activities with respect to various classified
assets and expenses associated with the executed definitive agreement to sell
certain assets to Pedcor Funding. Loss on impairment of assets held for sale and
changes in the estimated useful lives of intangible assets were $1.2 million
compared to zero last year and are discussed in the Sale of Village Housing
Corporation and Village Affordable Housing Corporation footnote. Other expense
increased $1.2 million over the nine months ended September 30, 2002, which
includes the following items. Prepayment fees on FHLB advances of $488,000 were
recognized during the quarter end and $504,000 for the nine months ended
September 30, 2002. During the third quarter, the Bank repaid FHLB advances that
had substantially higher interest rates than advance rates currently offered.
The completion of the securitization transaction created liquidity which were
used to payoff these higher interest bearing liabilities. It is expected that
these higher cost borrowings will be replaced with deposits and borrowings at a
much lower rate. This is expected to result in a much lower overall cost of
funds for the Company. Expenses of $187,000 have been incurred in connection
with the foreclosure of a $3.1 million non-accrual, commercial real estate loan.
Net expenses, offset by the reduction in the allowance for loan losses, of
$265,000 were recorded in other non-interest expense as a result of the
securitization transaction in 2002. Finally, non-interest expense was reduced
last year as a result of letter of credit valuation provision credit of $1.2
million during the first nine months of 2001.
Extraordinary Gain
During the second quarter of 2002, Fidelity liquidated a $500,000 senior note
for $360,000 and recorded a gain of $140,000. Tax of $53,000 was recorded and
the net gain of $87,000 is reflected as an extraordinary gain. This represents
approximately $0.01 per basic and diluted share. There were no liquidations of
these notes in the third quarter of 2002.
Income tax benefit
The income tax expense was $112,000 for the nine months ending September 30,
2002 compared to a $437,000 benefit in the same period last year. Included in
this expense are tax credits of $129,000. These credits are received from
Fidelity's investment in affordable housing properties and are a component of
the overall return on these investments. Offsetting the previously accrued tax
benefits this year and tax credits was a valuation allowance that was
established for $985,000 at September 30, 2002.
Consideration of the need for a valuation allowance for the deferred tax asset
was made at September 30, 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 not all carryforwards would
be utilized within the carryforward periods (federal and state) and a valuation
allowance would be necessary. 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.
13
Fidelity, at December 31, 2001 had 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 Fidelity. Although Fidelity had prepared a model that indicates
the deferred tax assets will be fully utilized, profitability for the
nine-months ended September 30, 2002, is less than that projected by the model
prepared at December 31, 2001 supporting these assets. Due to capital losses
that will be generated as a result of the sale of two Company subsidiaries, and
a level of projected profitability for 2002 being less than originally
anticipated, Fidelity established a valuation allowance of $985,000 until such
time that Fidelity meets its future period profitability forecasts. Although
profitability is currently less than forecast, the sale of certain assets to
Pedcor Funding during the fourth quarter is expected to reduce the deferred tax
asset by approximately $1.0 million which will increase the likelihood that
Fidelity will ultimately utilize the tax carryforwards represented on the
balance sheet. Fidelity 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 September 30, 2002 were $144.4 million, a decrease of $15.3
million from $159.7 million at December 31, 2001. The decrease in total assets
was primarily attributable to the sale of $34.5 million in consumer loans in
connection with the securitization transaction, partially offset by an increase
in investment securities available for sale of $21.3 million.
Utilizing excess liquidity attributable to mortgage loan refinancing activity
over the past year and the increase in certificate of deposits, United invested
in GNMA and FNMA adjustable-rate mortgage-backed securities. United has chosen
to sell fixed rate 1-4 family mortgage loans in the secondary market and has
therefore experienced declines in the amounts of those assets held. In order to
replace the reduction in 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 first quarter of 2002.
United also purchased an additional $7.7 million and $5.0 million in
adjustable-rate mortgage-backed securities during April and May of 2002,
respectively. These securities have an average yield of 5.0% and projected
average life of less than four years. During the third quarter of 2002, United
purchased approximately $11.1 million in adjustable rate mortgage-backed
securities at an average yield of 5.4%.
Net loans decreased $33.9 million during the first nine months of 2002 compared
to December 31, 2001. Consumer loans decreased $29.4 million, which is primarily
associated with the $34.5 million in consumer loans sold in connection with the
securitization transaction. Continued paydowns received on fixed rate 1-4 family
loans accounted for an additional $4.5 million decrease in total loans
outstanding. New commercial loan originations of approximately $5.2 million have
been generated thus far in 2002 as United resumed commercial lending in
accordance with its business plan in the first quarter of 2002.
Premises and equipment decreased $207,000 from December 31, 2001 primarily due
to the write-down of certain impaired assets totaling approximately $120,000 and
the current years depreciation expense. Further discussion of the write-down is
included in the footnotes.
Other assets increased $1.0 million over December 31, 2001 primarily due to an
interest only STRIP and subordinated interest of approximately $2.7 million
recognized in connection with the securitization transaction. See the
securitization footnote for additional details. Offsetting a portion of this
increase was a decrease in prepaid assets of $872,000, which was primarily
associated with the decrease in prepaid dealer interest in connection with the
securitization transaction. Intangible assets, which are included in other
assets, also decreased $917,000 from the prior year due to the change in the
useful lives of these assets, which is discussed in the footnotes.
Total liabilities at September 30, 2002 were $133.3 million, a decrease of $14.5
million from $147.8 million at December 31, 2001. This decrease in primarily
attributable to a reduction of $13.8 million in long-term debt. Liquidity
generated from the securitization transaction was utilized to pay off United's
FHLB advances. The remaining decrease is associated with maturing public funds
which were not replaced.
14
In the first quarter, approximately $1.5 million in 9.25% junior notes matured
and were replaced with $1.0 million of 9% junior notes. As previously mentioned
senior notes decreased by $0.5 million that were retired early for a $87,000
gain, net of tax.
Stockholder's equity at September 30, 2002 was $11.2 million, a decrease of
$675,000 from $11.9 million at December 31, 2001. The decrease was primarily
attributable to a net loss of $2.3 million, the completion of Fidelity's notes
and warrants offering in 2002, which provided $250,000 for warrants and the
issuance of stock of $1.2 million. In addition the net unrealized loss on
securities decreased $187,000 from December 31, 2001.
Non-Performing Assets
Non-performing assets decreased $1.1 million from December 31, 2001 to $2.7
million or 1.8% of total assets at September 30, 2002. The decrease is due to
the reclassification of a $3.1 million non-accrual, non-residential real estate
loan to other real estate owned for $1.9 million. In September 2002, an
additional $100,000 allowance was accrued for the property. See "Other Real
Estate Owned" for further details.
The following table provides information on Fidelity's non-performing assets as
of September 30, 2002 and December 31, 2001:
September 30, December 31,
2002 2001
-----------------------------------------------------------------------------------------
(Dollars in Thousands)
Non-accrual loans
Consumer $ 115 $ 116
Commercial 233 3,291
Real estate mortgage 228 130
Multifamily 155 -
----- -----
Total non-accrual loans 731 3,537
Restructured
Consumer 76 190
Commercial - 53
----- -----
Total restructured loans 76 243
90 days or more past due and accruing
Mortgage 1 -
Consumer - 23
Commercial - 22
----- -----
Total 90 days or more past due and accruing 1 45
Repossessed assets 52 -
Other real estate owned 1,810 -
----- -----
Total other non-performing assets 1,862 -
----- -----
Total non-performing assets $2,670 $3,825
====== ======
Ratio of non-performing assets to total assets 1.85% 2.40%
Other Real Estate Owned
Other real estate owned totaled $1.8 million at September 30, 2002, which is
primarily due to one non-residential loan that was foreclosed in the first
quarter of 2002. In September 2002 an additional $100,000 allowance was recorded
to bring the property to its estimated net realizable value.
United has employed the services of an independent hotel management company
while United aggressively seeks disposition of the property. Occupancy rate has
improved from approximately 40% when United took possession of the property and
is currently averaging approximately 52%. The Company has received surplus cash
disbursements from operations of the property.
15
Classified Assets and Letters of Credit
September 30, December 31,
2002 2001
------------- -----------
Classified assets $4,136 $7,357
Classified letters of credit -- 350
------ ------
Total classified assets $4,136 $7,707
====== ======
Classified assets and letters of credit of Fidelity totaled $4.1 million at
September 30, 2002 compared to $7.7 million at December 31, 2001, a decrease of
46.8%. Total classified assets were 33.0% and 53.3% of Fidelity's capital and
reserves at September 30, 2002 and December 31, 2001, respectively, and 30.5%
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 $15.2 million at September 30, 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 $29.7 million at September 30,
2002 and $30.5 million at December 31, 2001. Specific allocations for letters of
credit totaled 1.5% of outstanding letters of credit at September 30, 2002
compared to 2.2% at December 31, 2001. Lower interest rates have reduced debt
service requirements and overall credit risk on the letters of credit.
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 September 30, 2002.
The following table sets forth an analysis of the allowance for loan losses for
the nine months ended September 30, 2002 and the year ended December 31, 2001:
Nine months
ended Year ended
September 30, December 31,
2002 2001
------------- ------------
(dollars in thousands)
Allowance for loan losses at beginning of period $ 2,138 $ 1,921
Provision for losses (400) 1,349
Loans charged off (1,758) (1,401)
Recoveries on loans 994 269
------- -------
Allowance for loan losses at end of period $ 974 $ 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 September 30, 2002 and
December 31, 2001, United is categorized as well capitalized and met all subject
capital adequacy requirements.
United's Capital Ratios
Required for To be well
Actual Adequate capital Capitalized
Amount Ratio Amount Percent Amount Percent
As of September 30, 2002
Total risk-based capital (to risk-weighted assets) $11,572 12.6% $7,335 8.0% $9,168 10.0%
Tier 1 capital (to risk-weighted assets) 9,254 10.1 3,667 4.0 5,501 6.0
Core capital (to adjusted total assets) 11,961 8.8 5,407 4.0 4,584 5.0
Core capital (to adjusted tangible assets) 11,961 8.8 2,704 2.0 N/A
Tangible capital (to adjusted total assets) 11,456 8.5 2,020 1.5 N/A
16
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 under 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 September 30, 2002, $265,000 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.
Fidelity completed two successful stock offerings in 2001 raising approximately
$2.4 million and has completed two offerings in 2002 raising an additional $1.4
million in liquidity. Fidelity will receive approximately $416,000 in cash upon
the completion of the sale of certain assets to Pedcor Funding Corporation.
Fidelity believes that the above actions will assist it in meeting its future
liquidity needs.
During the second quarter of 2002, United received approval from the OTS
permitting repayment of $1.4 million of the $2.9 million subordinated debt owed
to Fidelity. The proceeds of the debt are to reduce, by an equal amount,
Fidelity's outstanding debt. During the second and third quarter of 2002, United
repaid the permitted amount to Fidelity, assisting Fidelity in retiring $1.5
million in debt.
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 were re-marketed successfully and will be re-marketed again in November
2002. 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
Company believes that it would have the resources to fund all bonds not
successfully remarketed, if any.
Critical Accounting Policies
Allowance for Loan Losses
The allowance for loan losses is established through a provision for loan losses
charged to earnings as losses are estimated to have occurred. Loan losses are
charged against the allowance when management believes the uncollectibility of a
loan balance is confirmed. Subsequent recoveries, if any, are credited to the
allowance.
The allowance for loan losses is evaluated on a regular basis by management and
is based upon management's periodic review of the collectibility of the loans in
light of historical experience, the nature and volume of the loan portfolio,
adverse situations that may affect the borrower's ability to repay, estimated
value of any underlying collateral and prevailing economic conditions. This
evaluation is inherently subjective as it requires estimates that are
susceptible to significant revision as more information becomes available.
A loan is considered impaired when, based on current information and events, it
is probable that Fidelity or any of its wholly owned subsidiaries will be unable
to collect the scheduled payments of principal or interest when due according to
the contractual terms of the loan agreement. Factors considered by management in
determining impairment include payment status, collateral value and the
probability of collecting scheduled principal and interest payments when due.
Loans that experience insignificant payment delays and payment shortfalls
generally are not classified as impaired. Management determines the significance
of payment delays and payment shortfalls on a case-by-case basis, taking into
consideration all of the circumstances surrounding the loan and the borrower,
including the length of the delay, the reasons for the delay, the borrower's
prior payment record and the amount of the shortfall in relation to the
principal and interest owed. Impairment is measured on a loan-by-loan basis for
commercial and construction loans by either the present value of expected future
cash flows discounted at the
17
loan's effective interest rate, the loan's obtainable market price or the fair
value of the collateral if the loan is collateral dependent.
Large groups of smaller balance homogenous loans are collectively evaluated for
impairment. Accordingly, United does not separately identify individual consumer
and residential loans for impairment disclosures.
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 September 30, 2002 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 with its decision
making regarding the maturities and pricing of its products.
Although United has not yet submitted its CMR to the OTS for September 30, 2002,
management anticipates there has been no material change from the information
disclosed in Fidelity's annual report to shareholders at December 31, 2001.
Item 4 Controls and Procedures
a. Evaluation of Disclosure Controls and Procedures. The Corporation's
principal executive officer and principal financial officer have concluded
that the Corporation's disclosure controls and procedures (as defined in
Rule 13a-14(c) under the Securities Exchange Act of 1934, as amended),
based on their evaluation of these controls and procedures as of a date
within ninety (90) days prior to the filing date of this Form 10-Q, are
effective.
b. Changes in Internal Controls. There have been no significant changes in the
Corporation's internal controls or in other factors that could
significantly affect these controls subsequent to the date of the
evaluation thereof, including any corrective actions with regard to
significant deficiencies and material weaknesses.
18
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:
---------------------------------
Exhibit Number Description
-------------- -----------
a. 3(i) (a) Articles of Incorporation of Fidelity, filed as exhibit
3(a) to Fidelity's 1995 Annual Report on Form 10-K, are
incorporated herein by reference
3(i) (b) Articles of Amendment of the Articles of Incorporation,
filed as exhibit 4.1 with Fidelity's Registration Statement
on Form S-3 (file no. 333-53668), are incorporated by
reference
3(ii) By-Laws of Fidelity, filed as exhibit 4.2 with Fidelity's
Registration Statement on Form S-3 (file no. 333-53668), are
incorporated by reference
10 (a) The 1993 Director's Stock Option Plan, filed as exhibit
10(d) to Fidelity's 1995 Annual Report on Form 10-K, is
incorporated herein by reference.
(b) The 1995 Key Employee's Stock Option Plan, filed as exhibit
10(c) to Fidelity's 1996 Annual Report on Form 10-K, is
incorporated herein by reference.
(c) Employment agreement between Fidelity and Donald R. Neel,
filed as exhibit 10(d) to Fidelity's 2000 Annual Report on
Form 10-K, is incorporated herein by reference
b. A form 8-K was filed on August 13, 2002
On August 12, 2002, Fidelity filed with the Securities and
Exchange Commission its Quarterly Report on Form 10-Q for
the period ended June 30, 2002. The certification by
Fidelity's chief executive officer and chief financial
officer required pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes - Oxley Act
of 2002, accompanies such Quarterly Report.
A form 8-K was filed on July 15, 2002
On July 12, 2002, Fidelity issued a press release that it
had entered into a non-binding letter of intent to sell all
of the stock of its wholly-owned subsidiary Village Housing
Corporation and the assets related to the affordable housing
line of business to Pedcor Funding Corporation.
19
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, 2002 By: /s/ DONALD R. NEEL
- ---------------------------- --------------------------------
Donald R. Neel
President and CEO
By: /s/ MARK A. ISAAC
--------------------------------
Mark A. Isaac
Vice President and CFO
(Principal Financial Officer)
20
CERTIFICATIONS
I, Donald R. Neel, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Fidelity Federal
Bancorp;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a. all significant deficiencies in the design or operation of the
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data and
have identified for the registrant's auditors any material weaknesses
in internal controls; and
b. any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect the internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 14, 2002 /s/ Donald R. Neel
-----------------------------
Donald R. Neel
President and CEO
(principal executive officer)
21
I, Mark A. Isaac, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Fidelity Federal
Bancorp;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a. all significant deficiencies in the design or operation of the
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data and
have identified for the registrant's auditors any material weaknesses
in internal controls; and
b. any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect the internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 14, 2002 /s/ Mark A. Isaac
------------------------------
Mark A. Isaac
Vice President and CFO
(principal financial officer)
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