FIDELITY FEDERAL BANCORP AND SUBSIDIARIES
2002 Annual Report
Contents
Page
- -------------------------------------------------------------------------------
Financial Highlights 2
Letter to our Shareholders 3
Market Summary 4
Selected Statistical Information 5
Management's Discussion and Analysis 6
Independent Auditor's Report 27
Consolidated Balance Sheets 28
Consolidated Statements of Income 29
Consolidated Statements of Changes in Stockholders' Equity 32
Consolidated Statements of Cash Flows 33
Notes to Consolidated Financial Statements 35
Corporate Information 63
FIDELITY FEDERAL BANCORP AND SUBSIDIARIES
Financial Highlights
(Dollars in Thousands, Except Share and Per Share Data)
December 31, December 31,
2002 2001 Change
- -----------------------------------------------------------------------------------------------------------
Per Share
Basic net income (loss) from continuing operations $ (.39) $ .04 (1,075.00)%
Basic net income (loss) from discontinuing operations (.32) (100.00)%
Basic net income (loss) (.71) $ .04 (1,875.00)%
Diluted net income (loss) from continuing operations (.39) .04 (1,075.00)
Diluted net income (loss) from discontinued operations (.32) (100.00)
Diluted net income (loss) (.71) .04 (1,875.00)
Book value at year end 1.42 1.99 (28.64)
Market price (bid) at year end 1.47 2.30 (36.09)
For the Year
Net interest income $ 3,012 $ 2,954 1.96%
Provision for loan losses (360) 1,349 (126.69)
Non-interest income 3,507 3,933 (10.83)
Non-interest expense 9,927 5,698 74.22
Net income (loss) from continuing operations (2,407) 224 (1,174.55)
Net income (loss) from discontinued operations (1,988) (100.00)
Net income (loss) (4,395) 224 (2,062.05)
At Year End
Total assets $132,290 $159,659 (17.14)%
Loans (net) 73,087 104,432 (30.01)
Total deposits 106,791 120,155 (11.12)
Total stockholders' equity 9,588 11,895 (19.39)
Averages
Total assets $159,625 $165,592 (3.60)%
Total earning assets 138,033 145,342 (5.03)
Total loans 94,821 111,572 (15.01)
Total deposits 119,085 125,853 (5.38)
Total stockholders' equity 11,936 10,288 16.02
Profitability Ratios
Return on average assets (2.75)% .14%
Return on average stockholders' equity (36.82) 2.18
Net interest margin 2.18 2.03
Loan Quality Ratios
Net charge offs to average loans .99% 1.02%
Allowance for loan losses to loans at end of period 1.13 2.01
Valuation allowance for letters of
credit to total letters of credit 1.50 2.18
Savings Bank Capital Ratios
Tangible capital to adjusted total assets 8.52% 8.48%
Risk-based capital ratios
Tier I capital 9.95 10.71
Total risk-based capital 12.53 14.39
Other Data
Average common and common equivalent shares outstanding 6,183,269 5,146,726
Number of full-time equivalent employees at year end 73 83
Number of banking offices 5 5
2
Letter To Our Shareholders
The year 2002 was an extremely challenging one for business as the geopolitical
landscape significantly challenged the national and regional economy. Conflict
in Afghanistan, the specter of war with Iraq, uncertainty on the Korean
peninsula, and the possibility of additional terrorist attacks served to dampen
capital spending and weaken consumer confidence and equity markets. All of these
factors have contributed to a U.S. economy that has grown at a much slower pace
than expected. Rising unemployment, a byproduct of the economy's sluggishness,
has also impacted economic growth.
Against this landscape, the year 2002 saw the completion of significant
activities for Fidelity Federal Bancorp ("Company") and its subsidiary, United
Fidelity Bank, but also provided disappointing operating results. While we are
not pleased with these results, we would like to report that we believe the
overall risk level in the organization has been reduced by our actions,
providing the Company an opportunity to achieve profitable growth in the future.
Interest rates continued their descent to historic lows in 2002 resulting in
record mortgage lending activity for the Company. The decline in interest rates
has accounted for an unprecedented wave of mortgage refinancing that has, in
turn, helped consumers by reducing their payments or loan terms. Unfortunately,
financial institutions have, in some cases, been negatively impacted by the
early payoffs of mortgage and consumer loans. The Company recorded charges
during the second half of the year to mark down the value of mortgage-related
assets, as well as its retained interests in securitized consumer loans. Also
due to the decline in interest rates, the Bank prepaid borrowings at much higher
interest rates, but was required to pay substantial fees to do so. Prepaying
higher rate debt will have a positive impact on the Company's margin in the
periods to come.
There has been substantial improvement noted in the Company's risk profile from
prior years. Classified or problem assets have declined in each of the last
three years, the Company divested all of its remaining active interests in
affordable housing, and management has worked aggressively to reduce its
non-performing assets. The Company also mitigated liquidity risk by completing
an automobile loan securitization transaction during the year. These risk
reduction efforts, however necessary in nature, contributed significantly to the
reported financial results in 2002. Because of past problems and the
uncertainties in the U.S. economy, management is consistently engagedin
assessing the risks remaining in the Company's balance sheet.
The process of constructing a strong community banking franchise is a long-term
venture, and progress toward this goal cannot always be adequately measured on a
quarter-to-quarter basis. While we are pleased with the profitable results that
we achieved in 2001, we believe that our efforts in 2002, despite the financial
accounting results reported by the Company, will give us an even greater
opportunity to build a strong and profitable community banking franchise for the
future.
Jack Cunningham Donald R. Neel
Chairman of the Board President and CEO
3
FIDELITY FEDERAL BANCORP AND SUBSIDIARIES
MARKET SUMMARY
MARKET FOR COMMON STOCK AND RELATED STOCKHOLDER MATTERS
Fidelity's common stock is traded on the NASDAQ System under the symbol FFED.
The following table sets forth, for the periods indicated, the high and low bid
prices per share as reported by NASDAQ. The bid prices represent prices between
dealers, do not include retail mark-up, mark-down, or commissions and may not
represent actual transactions.
2002 2001
--------------------------------------------------------
Common Stock Bid Prices Common Stock Bid Prices
--------------------------------------------------------
Year Ended December 31 High Low High Low
- --------------------------------------------------------------------------------------
First quarter $3.15 $2.30 $1.81 $1.31
Second quarter 2.95 2.15 1.75 1.50
Third quarter 2.50 1.75 3.70 1.75
Fourth quarter 2.15 1.30 2.55 2.00
We did not pay any cash dividends on our common stock in 2002 or 2001.
Fidelity's dividend policy is to pay cash or distribute stock dividends when the
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. We do not anticipate paying cash dividends in
the foreseeable future. As of February 14, 2003, shares were held of record by
approximately 445 shareholders.
4
FIDELITY FEDERAL BANCORP AND SUBSIDIARIES
Selected Statistical Information
(Dollars in Thousands, Except Share and Per Share Data)
Six months
ended
December 31, December 31, December 31, December 31, June 30,
Selected Financial Data as of 2002 2001 2000 1999 1999
- --------------------------------------------------------------------------------------------------------------------------
Total assets $132,290 $159,659 $166,466 $171,457 $172,253
Interest-bearing deposits 2,369 14,605 14,718 22,911 14,668
Investment securities available for sale 34,912 18,074 21,001 24,305 27,325
Loans, net 73,087 104,432 107,842 96,919 110,436
Deposits 106,791 120,155 126,944 135,016 128,596
Long-term debt 13,586 24,650 23,842 23,504 29,149
Stockholders' equity 9,588 11,895 8,775 5,427 7,814
Selected Operations Data for
Year Ended
Interest income $ 9,034 $ 11,455 $ 12,100 $ 6,019 $ 14,094
Interest expense 6,022 8,501 8,457 4,268 9,730
-----------------------------------------------------------------------------
Net interest income 3,012 2,954 3,643 1,751 4,364
Provision for loan losses (360) 1,349 670 1,345 (138)
-----------------------------------------------------------------------------
Net interest income after provision for
loan losses 3,372 1,605 2,973 406 4,502
Non-interest income 3,507 3,933 1,816 1,001 2,663
Non-interest expense 9,927 5,698 7,314 5,148 6,878
-----------------------------------------------------------------------------
Income (loss) from continuing operations
before tax (3,048) (160) (2,525) (3,741) 287
Income tax benefit (641) (384) (1,369) (1,671) (338)
-----------------------------------------------------------------------------
Income (loss) from continuing operations (2,407) 224 (1,156) (2,070) 625
-----------------------------------------------------------------------------
Loss from discontinued operations before tax (1,537)
Income tax expense 451
-----------------------------------------------------------------------------
Loss from discontinued operations (1,988)
-----------------------------------------------------------------------------
Net income (loss) $ (4,395) $ 224 $ (1,156) $ (2,070) $ 625
=============================================================================
Selected Financial Ratios
Return on average assets (2.75)% .14% (.71)% (2.41)% .33%
Return on stockholders' equity (36.82) 2.18 (16.14) (51.37) 7.58
Net interest margin 2.18 2.03 2.49 2.24 2.48
Net interest spread 2.23 2.12 2.33 2.00 2.24
Tangible equity to assets at year end 8.52 8.48 8.42 6.78 8.49
Allowance for loan losses to loans 1.13 2.01 1.75 2.04 3.09
Allowance for loan losses to
non-performing loans 91.48 55.90 222.27 179.96 69.57
Dividend payout ratio N/A N/A N/A N/A N/A
Per Share Data
Diluted net income (loss) from continuing
operations $ (.39) $ .04 $ (.29) $ (.66) $ .20
Diluted net income (loss) from
discontinued operations (.32)
Diluted net income (loss) (.71) .04 (.29) (.66) .20
Basic net income (loss) from continuing
operations (.39) .04 (.29) (.66) .20
Basic net income (loss) from discontinued
operations (.32)
Basic net income (loss) (.71) .04 (.29) (.66) .20
Cash dividends declared
Book value at year end 1.42 1.99 1.90 1.72 2.48
Closing market price (bid) at year end 1.47 2.30 1.31 1.25 2.88
Number of average common and common
equivalent shares outstanding 6,183,269 5,146,726 4,057,168 3,147,662 3,143,179
5
Fidelity Federal Bancorp and Subsidiaries
Management's Discussion and Analysis
of Results of Operations and Financial Condition
Management's discussion and analysis of financial condition and results of
operations is intended to assist in understanding the financial condition and
results of operations of Fidelity Federal. The information contained in this
section should be read in conjunction with the consolidated financial statements
and accompanying notes contained in this report.
Portions of this Management's Discussion and Analysis, as well as the notes to
the consolidated financial statements and the Letter To Our Shareholders,
contain certain forward-looking statements (as defined in the Private Securities
Litigation Reform Act of 1995), which reflect management's current beliefs and
expectations and are intended to benefit the reader. These forward-looking
statements are inherently subject to various risks and uncertainties which may
cause actual results to differ materially from expected results. Such risks and
uncertainties include, but are not limited to, economic conditions, generally
and in the market areas of the Company, increased competition in the financial
services industry, actions by the Federal Reserve Board, changes in interest
rates and governmental regulation and legislation.
General
Fidelity Federal Bancorp ("Fidelity"), incorporated in 1993 under the laws of
the State of Indiana, is a registered savings and loan holding company with its
principal office in Evansville, Indiana. 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 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, but was subsequently sold in December 2002.
Overview
Income
Fidelity generates two sources of pre-tax income. The first is net interest
income. Net interest income is the difference between interest income - which is
the income that Fidelity earns on its loans and investments - and interest
expense - which is the interest that Fidelity pays on its deposits and
borrowings.
Fidelity's second source of pre-tax income is noninterest income. This includes
fee income - the compensation we receive from providing products and services -
and gain on the sales of loans. Most of Fidelity's fee income comes from loan
sales, letter of credit fees, service charges and overdraft fees.
Fidelity may occasionally recognize gain or loss as a result of the sale of
investment securities or foreclosed real estate. These gains and losses are not
a regular part of Fidelity's income.
Expenses
The expenses Fidelity incurs in operating its business consist of salaries and
employee benefits, occupancy and equipment expenses, deposit insurance premiums,
data processing fees and other miscellaneous expenses.
Salaries and employee benefits consist primarily of the salaries and wages paid
to our employees, as well as expenses for retirement and other employee
benefits.
Occupancy and equipment expenses, the fixed and variable costs of building and
equipment, consist primarily of depreciation of property and equipment, real
estate taxes, maintenance and insurance.
Deposit insurance premiums are calculated as a percentage of assessable
deposits.
Data processing fees depend on the number of accounts and transaction volume.
Other expenses consist of professional fees, advertising and promotions,
printing, supplies, postage and other miscellaneous operating expenses.
6
FIDELITY FEDERAL BANCORP AND SUBSIDIARIES
Management's Discussion and Analysis
of Results of Operations and Financial Condition
Legal and professional fees incurred over the past two years have primarily been
related to workout activities with respect to various classified assets and
expenses associated with the sale of certain real estate assets.
In addition to operating expenses noted above, Fidelity also occasionally
recognizes expense that is not anticipated by management to be recurring. Such
expenses that occurred in 2002 were changes in estimated useful lives of
intangible assets, prepayment fees on FHLB advances, start up costs associated
with United's first securitization transaction and expenses incurred in
connection with the sale of two of its subsidiaries.
Operating Strategy
Fidelity's strategy is to continue to operate as an independent,
community-oriented financial institution dedicated to meeting the financing and
servicing needs of consumers and businesses in its market area. Fidelity prides
itself in meeting or exceeding customer expectations. Fidelity's current
business strategy includes an emphasis on increasing consumer loan and loan
servicing activities and increasing its mortgage and commercial lending
activities. It also includes continued management of its investment portfolio of
investment grade mortgage-backed securities, and to increase core deposit growth
to support the growth in loans and investments.
Comparison of Financial Condition at December 31, 2002 and December 31, 2001
Total assets at December 31, 2002 decreased $27.4 million to $132.3 million from
$159.7 million in December 2001, primarily due to the sales of $56.8 million in
consumer loans, partially offset by increases in mortgage-backed securities
available for sale. Average assets for the year ended December 31, 2002
decreased by $6.0 million from $165.6 million at December 31, 2001 to $159.6
million at December 31, 2002. The decrease in total average assets is primarily
due to decreases in several loan categories and short-term investments.
Loans
The following table shows the composition of Fidelity's loan portfolio:
December December December December June
2002 2001 2000 1999 1999
- ----------------------------------------------------------------------------------------------------------------------------
(In Thousands)
Real estate mortgage loans
First mortgage loans
Conventional $ 36,157 $ 43,929 $ 47,809 $ 48,845 $ 49,733
Construction 1,909 513 1,274 1,867 6,732
Commercial 5,645 6,114 6,873 8,576 14,140
Multi-family loans 3,083 3,856 4,350 3,629 7,597
Home equity loans 4,586 4,577 5,274 5,567 4,819
First mortgage real estate loans
Purchased 627 745 1,753 1,899 2,061
------------------------------------------------------------------------------------
52,007 59,734 67,333 70,383 85,082
Commercial loans, other than
secured by real estate 2,210 1,848 2,305 4,154 6,076
Consumer loans 19,707 44,988 40,125 24,403 22,799
------------------------------------------------------------------------------------
Total loans 73,924 106,570 109,763 98,940 113,957
Allowance for loan losses (837) (2,138) (1,921) (2,021) (3,521)
------------------------------------------------------------------------------------
Net loans $ 73,087 $104,432 $107,842 $ 96,919 $110,436
====================================================================================
Total assets $132,290 $159,659 $166,466 $171,457 $172,253
====================================================================================
Total loans to total assets 55.9% 66.7% 65.9% 57.7% 66.2%
Fidelity has continued to sell its current production of fixed-rate 1-4 family
loans recording the gain or loss and using the proceeds to fund future
originations. As a result, conventional real estate mortgage loans have
decreased by $7.8 million in 2002.
7
FIDELITY FEDERAL BANCORP AND SUBSIDIARIES
Management's Discussion and Analysis
of Results of Operations and Financial Condition
Commercial real estate loans and multifamily loans declined in 2002, despite
approval to resume commercial lending activity on a limited basis, as outlined
in United's business plan.
Consumer loans decreased by $25.3 million to $19.7 million at December 31, 2002.
As previously mentioned United completed a securitization transaction during
2002 totaling approximately $49.5 million, in addition to sales of consumer
loans of $44.9 million during 2002.
Fidelity's has no loans to foreign governments, foreign enterprises, foreign
operations of domestic companies or highly leveraged transactions, nor any
concentration to borrowers engaged in the same or similar industries that exceed
ten percent of total loans.
Loan Maturities
The following table sets forth the remaining maturities for commercial loans as
of December 31, 2002:
Within One One to Five After Five
Year Years Years Total
-------------------------------------------------
(In Thousands)
Predetermined interest rates $32 $161 $193
Floating interest rates 1,064 718 $235 2,017
-------------------------------------------------
$1,096 $879 $235 $2,210
=================================================
Non-Performing Loans
Fidelity discontinues the accrual of interest income on loans when, in the
opinion of management, there is reasonable doubt as to the timely collectibility
of interest or principal. When a loan reaches a ninety day or more past due
status, the asset is generally repossessed or sold, if applicable, or the
foreclosure process is initiated and the loan is re-classified to other real
estate owned to be sold. A loan could be placed in a nonaccrual status sooner
than ninety days, if management knows the customer has abandoned the collateral
and has no intention of repaying the loan and discontinues the accrual of
interest. Typically, when a loan reaches nonaccrual status, the accrued interest
is reversed from income, unless strong evidence exists that the value of the
collateral would support the collection of interest in a foreclosure situation.
Nonaccrual loans are returned to an accrual status when, in the opinion of
management, the financial position of the borrower indicates that there is no
longer any reasonable doubt as to the timely payment of principal and interest.
Income received on nonaccrual and restructured loans was $23,000 for the year
ended December 31, 2002, $22,000 for the year ended December 31, 2001 and
$33,000 for the year ended December 31, 2000. Additional interest income of
approximately $63,000, $237,000 and $49,000 for the years ended December 31,
2002, 2001 and December 31, 2000, respectively would have been recorded had
income on nonaccruing and restructured loans been considered collectible and
accounted for on an accrual basis.
8
FIDELITY FEDERAL BANCORP AND SUBSIDIARIES
Management's Discussion and Analysis
of Results of Operations and Financial Condition
The following table provides information on Fidelity's non-performing loans.
December 31, December 31, December 31, December 31, June 30,
2002 2001 2000 1999 1999
--------------------------------------------------------------------------
(Dollars In Thousands)
Non-accrual loans
Real estate mortgage $ 356 $ 130 $ 253 $ 76
Consumer 131 116
Multi-family $ 148 229 4,112
Commercial 388 3,291 472
--------------------------------------------------------------------------
Total non-accrual loans 875 3,537 620 482 4,188
Restructured
Consumer 39 190 115 75 77
Commercial 53 119 118
Total restructured loans 39 243 234 193 77
90 days or more past due and accruing
Consumer 23 10 135 164
Commercial 22 313 632
Mortgage 1
--------------------------------------------------------------------------
Total 90 days or more past due and accruing 1 45 10 448 796
--------------------------------------------------------------------------
Total non-performing loans $915 $3,825 $ 864 $1,123 $5,061
==========================================================================
Ratio of non-performing loans to total loans 1.24% 3.59% .79% 1.14% 4.44%
==========================================================================
The decrease in non-performing loans in 2002 is primarily due to one
non-residential real estate loan totaling $3.1 million in which accrual of
interest income was ceased during the third quarter of 2001. This loan was
subsequently charged down to $1.9 million, using existing reserves set aside for
the loan, and reclassified to other real estate owned during the first quarter
of 2002.
Multi-family affordable housing loans, for which specific and general reserves
had previously been computed, were sold during the fourth quarter of 2002. In
the past the ability of the multi-family loans to perform was in part due to
general partner or other advances made by Fidelity or United to support cash
flow deficits incurred by the affordable housing projects. However this
contingent liability of Fidelity or United was eliminated upon the sale of the
seventeen general partnership interests during the fourth quarter of 2002.
Analysis of Allowance for Loan Losses and Letter of Credit Valuation Allowance
Fidelity establishes its provision for loan losses and letter of credit
valuation provision and evaluates the adequacy of the allowance for loan losses
and its letter of credit valuation reserve based on management's evaluation of
the performance of its loan and letter of credit portfolios. This evaluation,
which includes a review of all loans and letters of credit for which full
collectibility may not be reasonably assured, considers among other matters, the
present value of expected cash flows, the estimated fair value of the underlying
collateral, economic conditions, historical loss experience, the composition of
the portfolios and other factors that warrant recognition in providing for an
adequate loan loss allowance and letter of credit valuation allowance. This
evaluation is performed on a quarterly basis and is designed to ensure that all
relevant matters affecting collectibility will consistently be identified in a
detailed review and that the outcome of the review will be considered in a
disciplined manner by management in determining the necessary allowances and
related provisions. The amounts actually reported in each period will vary with
the outcome of this detailed review.
9
FIDELITY FEDERAL BANCORP AND SUBSIDIARIES
Management's Discussion and Analysis
of Results of Operations and Financial Condition
Classified Assets and Letters of Credit
(in thousands)
December 31, December 31, December 31,
2002 2001 2000
-----------------------------------------------
Classified assets $6,024 $7,357 $ 8,754
Classified letters of credit 350 11,773
-----------------------------------------------
Total classified assets $6,024 $7,707 $20,527
===============================================
Classified assets and letters of credit of Fidelity totaled $6.0 million at
December 31, 2002 compared to $7.7 million at December 31, 2001, a decrease of
21.8%. Total classified assets were 55.4% and 53.3% of Fidelity's capital and
reserves at December 31, 2002 and December 31, 2001, respectively, and 27.5% 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 $11.9 million at December 31, 2002 for which management was closely
monitoring the borrowers' abilities to comply with payment terms.
Impaired loans are those that management believes will not perform in accordance
with the original loan terms. At December 31, 2002 and December 31, 2001,
Fidelity had impaired loans totaling $3.5 million and $6.8 million respectively.
The allowances for loan losses on such impaired loans totaled $332,000 and $1.3
million, which were included in Fidelity's allowance for loan losses at December
31, 2002 and December 31, 2001 respectively. Using similar guidelines for
impaired loans, impaired letters of credit at December 31, 2002 and December 31,
2001 totaled $0 and $350,000, respectively. The valuation allowance on such
impaired letters of credit totaled $0 and $700,000, respectively at December 31,
2002 and December 31, 2001. Impaired loans do not include large groups of
homogeneous loans that are collectively evaluated for impairment, such as
residential mortgage and consumer installment loans.
Other Real Estate Owned
Other real estate owned totaled $2.1 million at December 31, 2002, which is
primarily due to one non-residential loan totaling $1.9 million that was
foreclosed in the first quarter of 2002. In September 2002, an additional
$100,000 allowance was recorded on the property.
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 received surplus cash
disbursements from operations of the property in 2002, which were used to repay
advances made to the property.
10
Fidelity Federal Bancorp and Subsidiaries
Management's Discussion and Analysis
of Results of Operations and Financial Condition
The following table sets forth loan charge-offs and recoveries by the type of
loan and an analysis of the allowance for loan losses for the years ended
December 31, 2002, 2001 and 2000, the six months ended December 31, 1999 and the
fiscal year ended June 30, 1999:
December 31, December 31, December 31, December 31, June 30,
2002 2001 2000 1999 1999
- ----------------------------------------------------------------------------------------------------------------------------
(In Thousands)
Allowance for loan losses
at beginning of period $ 2,138 $ 1,921 $ 2,021 $ 3,521 $ 3,049
----------------------------------------------------------------------------------------
Loan charge offs
Real estate mortgage 80
Multi-family 469 606 683 2,631
Commercial 1,158 354 12 11 14
Consumer 327 441 391 235 324
----------------------------------------------------------------------------------------
Total loan charge offs 1,954 1,401 1,166 2,877 338
----------------------------------------------------------------------------------------
Loan recoveries
Real estate mortgage 7 15
Multi-family 937 200 317 3
Commercial 20 3 3
Consumer 76 62 59 26 35
----------------------------------------------------------------------------------------
Total loan recoveries 1,013 269 396 32 53
----------------------------------------------------------------------------------------
Net charge offs 941 1,132 770 2,845 285
Reclassifications 895
Provision for loan losses (360) 1,349 670 1,345 (138)
----------------------------------------------------------------------------------------
Allowance for loan losses
at end of period $ 837 $ 2,138 $ 1,921 $ 2,021 $ 3,521
========================================================================================
Ratio of net charge offs to
average loans outstanding
during period .99% 1.02% .72% 5.20% .21%
========================================================================================
Ratio of provision for loan
losses to average loans
outstanding during period (.38)% 1.21% .63% 2.46% (.10)%
========================================================================================
Ratio of allowance for loan
losses to total loans
outstanding at year end 1.13% 2.01% 1.75% 2.04% 3.09%
========================================================================================
Average amount of loans $94,821 $111,572 $106,599
outstanding for the period $108,455 $137,793
========================================================================================
Amount of loans outstanding $73,924 $106,570
at end of period $109,763 $98,940 $113,957
========================================================================================
11
FIDELITY FEDERAL BANCORP AND SUBSIDIARIES
Management's Discussion and Analysis
of Results of Operations and Financial Condition
During the year ended December 31, 2002 and 2001, net charge-offs consisted
primarily of multifamily, commercial and consumer loans. Operating deficit
guarantees provided by Pedcor resulted in payments being made to Fidelity in the
event that cash flows from properties were negative, based on a pre-determined
computation. Payments under operating deficit guarantees provided by Pedcor were
limited to $300,000 per year. For the twelve months ended May 31, 2002, Fidelity
received $204,000 in payments from Pedcor. These guarantees and contingent
liabilities were terminated upon the sale of the partnerships during the fourth
quarter of 2002.
Fidelity's letter of credit valuation allowance was $445,000 at December 31,
2002 compared to $665,000 at December 31, 2001. The decrease is primarily due to
the reduction in classified letters of credit, primarily due to efforts to
refinance the credits on a non recourse basis in 2001 and 2002. Multi-family
letters of credit, an off-balance sheet item, carry the same risk
characteristics as conventional loans and totaled $29.7 million at December 31,
2002, compared to $30.5 million at December 31, 2001 and $43.8 million at
December 31, 2000. The valuation allowance for letters of credit totaled 1.5% of
outstanding letters of credit at December 31, 2002 compared to 2.2% at December
31, 2001. The allowance for loan losses and letters of credit to total loans and
letters of credit at December 31, 2002 and 2001 was 1.24% and 2.05%,
respectively. Management is not currently aware of any additional letters of
credit that are expected to be called or funded. Management considers the
allowance for loan losses and valuation allowance for letters of credit adequate
to meet losses inherent in the loan and letter of credit portfolios at December
31, 2002.
Commercial loan charge-offs increased $804,000 over 2001 as Fidelity continued
to reduce its classified assets, however these were previously established
reserves that were set aside for these loans.
Recoveries of $937,000 on multifamily loans were received during 2002 primarily
from improvements in partnership cash flows related to refinancing activities.
The provision for loan losses had a credit balance of $360,000 for 2002 compared
to expense of $1.3 million in 2001. The credit during 2002 is primarily
attributable to the reduction in unallocated reserves previously set aside for
consumer loans as a result of completing the consumer loan sales.
Allocation of Allowance for Loan Losses
The allocation for loan losses and the percentage of loans within each category
to total loans at December 31, 2002, 2001, 2000 and 1999 and at June 30, 1999
are as follows:
Allocation of Amount
--------------------------------------------------------------------------------------
December 31, December 31, December 31, December 31, June 30,
2002 2001 2000 1999 1999
- ----------------------------------------------------------------------------------------------------------------
(In Thousands)
Real estate mortgage $ 91 $ 80 $ 49 $ 49 $ 51
Home equity 23 23 53 54 48
Multi-family 150 258 514 482 2,177
Consumer 247 505 628 496 182
Commercial 326 1,272 677 940 1,063
--------------------------------------------------------------------------------------
Total $ 837 $2,138 $1,921 $2,021 $3,521
======================================================================================
Percentage of Loans to Total Loans
--------------------------------------------------------------------------------------
December 31, December 31, December 31, December 31, June 30,
2002 2001 2000 1999 1999
- ----------------------------------------------------------------------------------------------------------------
Real estate mortgage 52.3% 42.4% 45.2% 45.7% 42.0%
Home equity 6.2 4.3 4.8 5.5 4.2
Multi-family 4.2 3.6 3.4 5.9 11.5
Consumer 26.7 42.2 36.6 30.0 24.2
Commercial 10.6 7.5 10.0 12.9 18.1
--------------------------------------------------------------------------------------
Total 100.0% 100.0% 100.0% 100.0% 100.0%
======================================================================================
12
FIDELITY FEDERAL BANCORP AND SUBSIDIARIES
Management's Discussion and Analysis
of Results of Operations and Financial Condition
Association with Affordable Housing
Fidelity previously held a general partnership in seventeen affordable housing
real estate development projects located throughout Indiana, Illinois and
Kentucky. Management considers the projects and properties to be in good
condition. As previously discussed, Fidelity sold its general partnerships
investments in these seventeen partnerships but retained limited partnership
interests in two of the seventeen sold. The following table summarizes
Fidelity's reduction in current and contingent liabilities associated with these
projects:
Activities associated with Section 42
Conventional General
Bank Partner Additional Equity Letters of
Financing Loans Notes Investments Credit
-----------------------------------------------------------------------------
Balance at December 31, 1999 $2,723 $ 13 $ 56 $ 702 $ 16,217
Increases 63 624
Sale of partnership interest (301)
Paydowns, payoffs, or loss on investment (29) (5) (75)
Charge-offs or funding on (4)
outstanding letters of credit (8) (680) (43) (600)
-----------------------------------------------------------------------------
Balance at December 31, 2000 2,757 283 15,613
Disbursements/investments 585
Paydowns, payoffs, or loss on investment (14) (105) (10,081)
Charge-offs or funding on
outstanding letters of credit (1) (585) (88) (2,976)
-----------------------------------------------------------------------------
Balance at December 31, 2001 2,742 90 2,556
Disbursements/investments 99 277
Sale of partnership interest 78
Paydowns, payoffs, or loss on investment (176) (64) (315)
Charge-offs or funding on
outstanding letters of credit (99) (277) (37) (35)
-----------------------------------------------------------------------------
Balance at December 31, 2002 $2,566 $ 0 $ 0 $ 67 $ 2,206
=============================================================================
Specific reserves included in allowance for
loan losses
----------------------------------------------
Specific Valuation
Conventional General Allowance Reserves Allowance
Bank Financing Partner Additional for equity for Letters
Loans Notes Investments of Credit
-------------------------------------------------------------------------------
Balance at December 31, 1999 $330 $ 4 $ 18 $ 4,924
Provision-year ended December 31, 2000 106 2 430
Funding on outstanding letter of credit (600)
Reclassification (188) $ 8 674 25
Charge-offs (8) (680) (43)
-------------------------------------------------------------------------------
Balance at December 31, 2000 248 4,754
Provision-year ended December 31, 2001 216 585 (1,493)
Funding on outstanding letter of credit (2,976)
Reclassification (219)
Charge-offs (585)
-------------------------------------------------------------------------------
Balance at December 31, 2001 245 285
Provision-year ended December 31, 2002 9 277 (61)
Charge-offs (126) (277) (224)
-------------------------------------------------------------------------------
Balance at December 31, 2002 $ 128 $ 0 $ 0 $ 0 $ 0
===============================================================================
13
Fidelity Federal Bancorp and Subsidiaries
Management's Discussion and Analysis
of Results of Operations and Financial Condition
Investment Securities
United's investment policy is annually reviewed by its Board of Directors. Any
significant changes to the policy must be approved by the Board. The Board has
an interest rate risk management committee, which is responsible for keeping the
investment policy current.
At December 31, 2002, the investment portfolio represented 26.4% of Fidelity's
assets, compared to 11.3% at December 31, 2001, and is managed in a manner
designed to meet the Board's investment policy objectives. During 2002, due to
continued reductions in the loan portfolio, excess liquidity was reinvested in
lower risk investment securities. The primary objectives, in order of priority,
are to further the safety and soundness of Fidelity, to provide for the
liquidity necessary to meet day to day, cyclical, and long-term changes in the
mix of Fidelity's assets and liabilities and to provide for diversification of
risk and management of interest rate and economic risk. At December 31, 2002,
the entire investment portfolio was classified as available for sale. The net
unrealized gain at December 31, 2002, which is included as a component of
stockholders' equity, was $379,000 and was comprised of gross unrealized gains
of $621,000 and gross unrealized losses of $2,000 and tax expense of $240,000.
The change in the unrealized loss from December 31, 2001, was caused primarily
by market interest rate changes during the period. Although the entire portfolio
is classified as available for sale, management has not identified specific
investments for sale in future periods.
The following table sets forth the components of United's available-for-sale
investment portfolio as of December 31, 2002, 2001, and 2000:
December 31, December 31, December 31,
2002 2001 2000
- -----------------------------------------------------------------------------------------------------------------
(dollars in thousands)
Federal Home Loan Mortgage Corporation
mortgage-backed securities $ 17,148 $ 443 $ 805
Federal National Mortgage Association mortgage-backed securities 3,382 625 1,095
Government National Mortgage Association
mortgage-backed securities 14,382 17,006 19,101
-------------------------------------------
Total securities available for sale $34,912 $18,074 $21,001
===========================================
In 2002, United's investment securities portfolio increased by $16.8 million to
$34.9 million compared to $18.1 million at December 31, 2001. The increase is
the result of United investing its excess cash received throughout 2002 from
mortgage loan payoffs and consumer loan sales. Prepayment rates generally can be
expected to increase during periods of lower interest rates as some of the
underlying mortgages are refinanced at lower rates. Conversely, the average
lives of these securities generally are extended as interest rates increase.
The following table sets forth the contractual maturities of investment and
mortgage-backed securities as of December 31, 2002, and the weighted average
yields of such securities. The contractual maturities of mortgage-backed
securities are not typically indicative of the actual holding period for such
investments, as pre-payments on the underlying mortgage loans will reduce the
average life of the investment, based on prevailing market interest rates.
-----------------------------------------------------------------------------------------------
After One But After Five But
Within One Year Within Five Years Within Ten Years Over Ten Years Total
- --------------------------------------------------------------------------------------------------------------------------
Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield
- --------------------------------------------------------------------------------------------------------------------------
Federal Home Loan Mortgage
Corporation $ 1 7.24% $1,784 5.50% $ 1,597 5.08% $ 3,382 5.31%
Federal National Mortgage
Association $4,134 5.50% 13,013 5.51 17,147 5.50
Government National
Mortgage 2,289 6.71 12,094 6.19 14,383 6.27
Association
----------- ----------- ------------ ----------- -----------
Total $ 1 7.24% $1,784 5.50% $6,423 5.93% $26,704 5.78% $34,912 5.80%
=========== =========== ============ =========== ===========
Percent of total 0.00% 5.11% 18.40% 76.49% 100.00%
=========== =========== ============ =========== ===========
14
FIDELITY FEDERAL BANCORP AND SUBSIDIARIES
Management's Discussion and Analysis
of Results of Operations and Financial Condition
Funding Sources
Deposits
Fidelity attracts both short-term and long-term deposits from the retail market
by offering a wide assortment of accounts with different terms and different
interest rates. These deposit alternatives include checking accounts, regular
savings accounts, money market deposit accounts, fixed rate certificates with
varying maturities, variable interest rate certificates, negotiable rate jumbo
certificates ($99,000 or more), and variable rate IRA certificates.
Average deposits decreased by $6.8 million for the year ended December 31, 2002.
Average retail and agent acquired certificates of deposit and money market
accounts, decreased $5.2 million, $1.9 million and $4.1 million, respectfully,
but were partially offset by increases in demand deposits, and NOW accounts of
$2.3 million, and $1.7 million, respectively. The average rate on deposits
increased 0.01% during 2001 to 5.16%, compared to a 1.48% decrease in average
rate on deposits in 2002. United began experiencing significant repricing
opportunities in its certificate of deposit portfolio during the last half of
2001 and continued to see impact from the lower interest rate environment in
2002. The current interest rate environment and local market conditions
presented significant repricing opportunities during 2002, resulting in an
overall average yield of 3.68% on the deposit portfolio compared to 5.16% in
2001.
The following table sets forth the average balances of and the average rate paid
on deposits by deposit category for the years ended December 31, 2002, 2001 and
2000.
December 31, December 31, December 31,
2002 2001 2000
-------------------------------------------------------------------------
Average Deposits Amount Rate Amount Rate Amount Rate
- -----------------------------------------------------------------------------------------------------------------
(In Thousands)
Demand $ 4,964 $ 2,654 $ 6,179
NOW accounts 12,720 .90% 11,009 1.78% 14,915 3.07%
Money market accounts 9,664 1.42 13,808 3.59 2,919 4.62
Savings accounts 4,958 .75 4,497 1.60 4,689 2.09
Certificates of deposit 86,531 4.71 91,706 6.10 87,027 5.97
Agent-acquired certificates of deposit 248 6.05 2,179 6.06 9,241 6.00
------------- ------------- --------------
Totals $119,085 3.68% $125,853 5.16% $124,970 5.15%
============= ============= ==============
The following table summarizes certificates of deposit in amounts of $100,000 or
more by maturity as of the following dates:
December 31, December 31, December 31,
2002 2001 2000
- -----------------------------------------------------------------------------
(In Thousands)
Three months or less $ 5,486 $ 3,661 $ 1,692
Three to six months 4,591 3,877 1,359
Six to twelve months 1,139 1,067 5,093
Over twelve months 3,955 5,773 4,882
-----------------------------------------------
Totals $15,171 $14,378 $13,026
===============================================
Borrowings
Fidelity's long-term debt decreased $11.1 million for the year ended December
31, 2002, primarily due to a $9.3 million reduction in higher interest bearing
FHLB advances when compared to 2001. An additional $500,000 in early
extinguishment of debt was completed in addition to paying off a line of credit
that totaled $725,000 at December 31, 2001. Alternative funding sources for
United are provided by loan sales, loan payoffs, Federal Home Loan Bank advances
as well as through retail deposits. The long-term debt footnote, in the audited
financial statements, provides additional information on Fidelity's borrowings.
15
FIDELITY FEDERAL BANCORP AND SUBSIDIARIES
Management's Discussion and Analysis
of Results of Operations and Financial Condition
Capital Resources
Fidelity's stockholders' equity decreased $2.3 million to $9.6 million at
December 31, 2002, compared to $11.9 million at December 31, 2001. The change in
stockholders' equity was accounted for by the net loss of $4.4 million, an
increase in the net unrealized gain on securities available for sale of
$417,000, and $1.4 million from completed stock offerings during 2002. In
addition, a $1.0 million notes offering with attached warrants totaling 500,000
was completed in 2002, thus raising an additional $250,000. A total of 753,874
shares at an average price $1.88, net of expenses, were issued upon the
completion of the rights offerings and exercise of stock options in 2002.
Total capital, as defined for regulatory purpose, for United consists of Tier I
capital plus the allowance for loan losses. Minimum capital levels are 4% for
the leverage ratio, which is, defined as Tier I capital as a percentage of total
assets less goodwill and other identifiable intangible assets; 4% for Tier I to
risk-weighted assets; and 8% for total capital to risk-weighted assets. United's
capital ratios exceed each of these levels. The leverage ratio was 8.5% for the
year ended December 31, 2002 and 2001, tier I capital to risk-weighted assets
was 10.0% and 10.7% and total risk-based capital to risk-weighted assets was
12.5% and 14.4% at December 31, 2002 and December 31, 2001 respectively. Book
value per share, decreased to $1.42 at December 31, 2002, compared to $1.99 at
December 31, 2001 due to the changes noted above in stockholder's equity.
The capital rating assigned to an entity can also be affected by qualitative
judgements made by regulatory agencies about the risk inherent in the entity's
activities that are not part of the calculated ratios. At December 31, 2002 and
2001, the Bank is categorized as well capitalized and met all capital adequacy
requirements. However, United continues to evaluate and pursue opportunities to
improve its capital ratios. There are no specific targets for capital levels
included or agreed to within the Supervisory Agreement between United and the
OTS, only a requirement that United include capital targets within a strategic
plan. The strategic plan established capital targets of 7.5% for tangible,
leverage and core capital and 12.5% for risk-based capital, which United met or
exceeded at December 31, 2002.
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. Approximately $4.4 million remains
available under the option to Pedcor thru May 2003. 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 December 31, 2002, no amount 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 raised additional capital of approximately $1.4
million in 2002 by issuing stock in connection with completing a successful
stock offering and exercise of stock options. Fidelity also completed a note
offering to issue $1.5 million in 9% unsecured junior subordinated notes in
addition to 500,000 warrants representing the right to purchase 500,000 shares
of common stock at $3.00 per share. The offering was completed in the first
quarter of 2002. 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.
At December 31, 2002, 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 November 2002 approximately
$1.7 million in bonds were re-marketed successfully. This letter of credit was
refinanced on non-recourse basis subsequent to the end of the year.
The primary sources of funds for operations are principal and interest payments
on loans, deposits from customers, and sales and maturities of investment
securities. In addition, United is authorized to borrow money from the FHLB and
other sources as needed.
16
FIDELITY FEDERAL BANCORP AND SUBSIDIARIES
Management's Discussion and Analysis
of Results of Operations and Financial Condition
Supervisory Agreement
Management has expended significant time and effort ensuring that United
continues to operate in compliance with the Supervisory Agreement. The agreement
as written has been modified by mutual agreement to eliminate or modify certain
restrictions. Previously, United was to refrain from commercial lending, but
United received OTS approval in the first quarter of 2002 to resume commercial
lending on a limited basis in accordance with its business plan. The agreement
will likely continue to impact the financial condition and the operating results
of United and Fidelity until it is terminated, modified, or suspended. The
"Other Restrictions" footnote to the financial statements provides details as to
the restrictions included within the Agreement.
Asset/Liability Management
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 than
average assets 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 such as those experienced in 2002, unless offset 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 a 12% risk-based capital ratio are required to
file 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 is not required to file a CMR since it exceeds the
risk-based capital requirement and its assets are less than $300 million, but
does so on a voluntary basis. 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.
During the current historically low interest rate environment a 200 basis point
decrease is not meaningful, therefore a 100 basis point decrease is currently
used by the OTS.
Presented below, at December 31, 2002 and December 31, 2001, is an analysis
performed by the OTS of United's interest rate risk as measured by changes in
NPV for instantaneous and sustained parallel shifts in the yield curve, in 100
basis point increments, up 300 basis points and down 100 basis points. On
December 31, 2002, the yield on the three month Treasury bill was 1.19%. As a
result, the NPV model did not produce results for the minus 200 or 300 basis
points scenarios for the quarter ending December 31, 2002. At December 31, 2002
and December 31, 2001, 2% of the present value of United's assets was
approximately $2.5 million and $3.1 million respectively. Because the interest
rate risk of a 200 basis point increase in 2002 and 2001 (which was greater than
the interest rate risk of a 100 or 200 basis point decrease) was $1.1 million at
December 31, 2002 and $2.0 million at December 31, 2001, United would not have
been required to make a deduction from its total capital available to calculate
its risk based capital requirement. The decrease in interest rate risk from
December 31, 2001 to December 31, 2002 is due to interest rate changes and a
change in United's balance sheet mix.
17
FIDELITY FEDERAL BANCORP AND SUBSIDIARIES
Management's Discussion and Analysis
of Results of Operations and Financial Condition
Interest Rate Risk as of December 31, 2002
NPV as Percent of Present
Net Portfolio Value Value of Assets
------------------------------------------------------------------------------
Change Dollar Dollar Percentage
in Rates Amount Change Change NPV Ratio Change
- ----------------------------------------------------------------------------------------------
+ 300 bp $9,677 $(2,304) (19)% 7.87% - 151 bp
+ 200 bp 10,812 (1,169) (10) 8.66 - 73 bp
+ 100 bp 11,676 (305) (3) 9.23 - 16 bp
0 bp 11,981 9.38
- 100 bp 11,969 (12) 0 9.31 - 7 bp
Interest Rate Risk as of December 31, 2001
NPV as Percent of Present
Net Portfolio Value Value of Assets
------------------------------------------------------------------------------
Change Dollar Dollar Percentage
in Rates Amount Change Change NPV Ratio Change
- ----------------------------------------------------------------------------------------------
+ 300 bp $13,067 $(3,129) (19)% 8.71% - 160 bp
+ 200 bp 14,149 (2,047) (13) 9.28 - 103 bp
+ 100 bp 15,261 (935) (6) 9.86 - 45 bp
0 bp 16,196 10.31
- 100 bp 16,441 245 2 10.36 5 bp
As with any method of measuring interest rate risk, certain shortcomings are
inherent in the methods of analysis presented above. For example, although
certain assets and liabilities may have similar maturities or periods to
repricing, they may react in different degrees to changes in market rates. Also,
the interest rates on certain types of assets and liabilities may fluctuate in
advance of changes in market interest rates, while interest rates on other types
may lag behind changes in market rates. Additionally, certain assets, such as
adjustable-rate loans, have features, which restrict changes in interest rates
on a short-term basis and over the life of the assets. Further, in the event of
a change in interest rates, expected rates of prepayments on loans and early
withdrawals from certificates could likely deviate significantly from those
assumptions used in calculating the table.
18
Fidelity Federal Bancorp and Subsidiaries
Management's Discussion and Analysis
of Results of Operations and Financial Condition
Results of Operations
General
Fidelity recorded a net loss of $4.4 million for the year ended December 31,
2002, an increase in net loss of $4.6 million over the previous year. Net
interest income increased slightly and provision for loan losses decreased while
being offset by lower noninterest income and an increase in noninterest expense
and taxes from primarily non recurring items. Nonrecurring losses were incurred
from the sale of two subsidiaries due to differences in the book and tax basis
of the stock of the subsidiaries that were sold, impairment charges and changes
in useful lives of Fidelity's intangible assets, in addition to valuation
allowances established in connection with the securitization retained interest
due to a change in prepayment speeds, a valuation allowance was established
against the deferred tax asset and a valuation allowance was established for
other real estate owned property.
Net Interest Income
Net interest income, Fidelity's largest component of income, represents the
difference between interest and fees earned on loans, investments and other
interest-earning assets, and interest paid on interest-bearing liabilities. It
also measures how effectively management has balanced and allocated Fidelity's
interest rate-sensitive assets and liabilities. In addition, certain external
factors such as the overall condition of the economy, credit demand strength,
Federal Reserve Board monetary policy, changes in tax laws, and the Supervisory
Agreement that United currently operates under (see the footnote entitled "Other
Restrictions" in the audited financial statements for further details), can also
have significant effects on changes in net interest income from one period to
another.
The net interest margin is determined by dividing net interest income by average
interest earning assets. The net interest spread is the difference between the
average yield earned on interest earning assets and the average rate paid on
interest-bearing liabilities.
The following table details average balances, interest income/expense and
average rates/yield for Fidelity's earning assets and interest bearing
liabilities for the years ended December 31, 2002, 2001 and 2000.
19
Fidelity Federal Bancorp and Subsidiaries
Average Balance Sheet and Net Interest Analysis
(Dollars In Thousands on Fully Taxable Equivalent Basis)
December 2002 December 2001 December 2000
- ----------------------------------------------------------------------------------------------------------------------------
Average Average Average Average Average Average
Year Ended: Balances Interest Rates Balances Interest Rates Balances Interest Rates
- ----------------------------------------------------------------------------------------------------------------------------
Assets
Federal funds sold and
other short-term
investments $6,371 $ 114 1.79% $12,173 $ 481 3.95% $13,909 $ 873 6.28%
Investment securities
available for
sale-taxable 32,191 1,427 4.43 18,977 1,220 6.43 22,658 1,518 6.70
Loans held for sale 2,016 137 6.80
Federal Home Loan Bank
Stock 2,634 160 6.07 2,620 195 7.44 3,326 273 8.21
Loans (1) (2)
Commercial loans 2,223 133 5.98 2,076 166 8.00 3,273 341 10.42
Multi-family loans 8,733 799 9.15 11,097 972 8.76 13,435 1,399 10.41
Home equity loans 4,563 245 5.37 4,879 381 7.81 4,635 465 10.03
Real estate mortgages 40,700 2,852 7.01 47,619 3,716 7.80 50,196 3,926 7.82
Consumer loans 38,602 3,167 8.20 45,901 4,324 9.42 35,060 3,305 9.43
---------------------- ---------------------- -----------------------
Total loans 94,821 7,196 7.59 111,572 9,559 8.57 106,599 9,436 8.85
---------------------- ---------------------- -----------------------
Total earning assets 138,033 9,034 6.54 145,342 11,455 7.88 146,492 12,100 8.26
------- ------- -------
Allowance for loan losses (1,135) (1,702) (1,989)
Cash and due from banks 2,435 3,794 2,893
Premises and equipment 5,810 5,903 5,145
Other assets 14,482 12,255 11,384
---------- ---------- ----------
Total assets $159,625 $165,592 $163,925
========== ========== ==========
Liabilities
Interest-bearing
deposits
Interest-bearing
checking $12,720 $ 115 0.90 $ 11,009 $ 196 1.78% $ 14,915 $ 458 3.07%
Money market accounts 9,664 137 1.42 13,808 496 3.59 2,919 135 4.62
Savings accounts 4,958 37 .75 4,497 72 1.60 4,689 98 2.09
Certificates of deposit 86,779 4,096 4.72 93,885 5,730 6.10 96,268 5,751 5.97
---------------------- ---------------------- -----------------------
Total interest-bearing
deposits 114,121 4,385 3.84 123,199 6,494 5.27 118,791 6,442 5.42
Federal funds purchased 156 3 1.92 32
Other borrowings 11,842 1,096 9.26 13,493 1,335 9.89 14,396 1,376 9.55
Federal Home Loan Bank
advances 13,561 538 3.97 10,926 672 6.15 9,488 639 6.73
---------------------- ---------------------- -----------------------
Total
interest-bearing
liabilities 139,680 6,022 4.31 147,650 8,501 5.76 142,675 8,457 5.93
------- ------- -------
Non-interest bearing
demand deposits 4,964 2,654 6,179
Advances by borrowers
for taxes and insurance 309 369 421
Other liabilities 2,736 4,631 7,486
---------- ---------- ----------
Total liabilities 147,689 155,304 156,761
Stockholders' Equity 11,936 10,288 7,164
---------- ---------- ----------
Total liabilities and
stockholders' equity $159,625 $165,592 $163,925
========== ========== ==========
Recap: (3)
Interest income 9,034 6.54% 11,455 7.88% 12,100 8.26%
Interest expense 6,022 4.36 8,501 5.85 8,457 5.77
-------------------- ------------------- --------------------
Net interest
Income/margin $3,012 2.18% $2,954 2.03% $3,643 2.49%
==================== =================== ====================
Interest rate spread 2.23% 2.12% 2.33%
Average interest-bearing
assets to average
interest-bearing
liabilities 98.82% 98.44% 102.68%
(1) Nonaccrual loans have been included in the average balances.
(2) Loan income includes interest and fees on loans.
(3) Interest rate spread is calculated by subtracting combined weighted
average interest rate cost from combined weighted average interest rate
earned for the period indicated.
20
FIDELITY FEDERAL BANCORP AND SUBSIDIARIES
Management's Discussion and Analysis
of Results of Operations and Financial Condition
Net interest income increased $58,000 for the year ended December 31, 2002
compared to the same period last year. The net interest margin increased to
2.18% at December 31, 2002 from 2.03% at December 31, 2001. United reduced its
liquid assets during 2002 and invested the excess funds in investments, consumer
loans and the resumption of its commercial lending activity in early 2002.
Average mortgage loans decreased $6.9 million from the prior year, primarily due
to refinancing activity in the portfolio, resulting in a $864,000 decrease in
mortgage loan interest income. Average commercial and multifamily loans
decreased $2.2 million, resulting in a $206,000 decrease in interest income.
Total average loans decreased $16.8 million resulting in a decrease of $1.4
million in interest income. The overall decline in interest rates for total
loans accounted for an additional $928,000 decrease in interest income.
The increase in Fidelity's average investment portfolio of $13.2 million
contributed an additional $850,000 in interest income, but was offset partially
by a $643,000 decrease due to lower rates and increased prepayment speeds on the
investment portfolio over the prior year. Due to the historical low interest
rate environment and increased prepayment speeds, United reduced the premium
associated with the mortgage-backed securities by approximately $303,000 to
reflect the projected remaining life of the instruments based on current
prepayment speeds.
Interest expense decreased $2.5 million at December 31, 2002 when compared to
December 31, 2001. Average interest-bearing liabilities decreased $8.0 million
from December 31, 2001 to $139.7 million at December 31, 2002. This decrease
accounted for $547,000 of the $2.5 million decrease in interest expense. The
remaining $1.9 million was rate-associated, with $1.2 million of the decrease
due to declines in certificates of deposits rates. The average rate on
interest-bearing deposits decreased to 3.84% from 5.27% in 2001, primarily due
to the continued reduction in market interest rates in 2002 and repricing
opportunities with higher fixed rate certificates maturing in 2002. Fidelity is
anticipating continued repricing opportunities through the first half of 2003.
Net interest income decreased $689,000 for the year ended December 31, 2001
compared to December 31, 2000. The net interest margin decreased to 2.03% at
December 31, 2001 from to 2.49% at December 31, 2000. The net interest margin
was negatively impacted by the 11 reductions in the federal funds rate during
2001 by the Federal Reserve Board, which resulted in assets adjusting to lower
rates more quickly than the liabilities used to fund those assets. Additionally,
a $3.1 million non-residential real estate loan was placed in non accrual status
during the third quarter of 2001. The impact of the rate cuts was magnified by
Fidelity's significant holdings of short-term investments which repriced
immediately, compared to the interest bearing liabilities used to fund those
assets. The approximate negative impact of holding these short-term investments
was $230,000. The primary reason for holding these short-term investments as
compared to maintaining a more normal level of liquidity, was to provide
additional liquidity in consideration of past asset quality concerns in
Fidelity's loan and letter of credit portfolios. Rates on interest-bearing
liabilities began to decline in the second half of 2001 as maturities and
repricing of higher rate deposits began to occur.
Average commercial and multifamily loans decreased by $3.5 million, resulting in
a $602,000 decrease in interest income. The decreases in commercial and
multifamily loans have been the result of continued workout activities and
payoffs. Average mortgage loans decreased $2.6 million, primarily due to the
increase in refinancing activity, resulting in a $202,000 decrease in interest
income. These decreases were offset by a $10.8 million increase in average
consumer loans, resulting in an increase of consumer loan interest income of
$1.0 million.
Average interest-bearing liabilities increased $5.0 million from December 31,
2000 to $147.7 million at December 31, 2001. Of this increase, average
interest-bearing deposits increased $4.4 million due to United's increase in
money market deposits. The increase in interest-bearing deposits resulted in a
slight increase in deposit interest expense of $52,000. The average rate on
interest bearing deposits decreased to 5.27% for 2001 from 5.42% for 2000
primarily due to the maturity of higher costing liabilities during the last half
of the year.
Rate/Volume Analysis
The following table sets forth an analysis of volume and rate changes in
interest income and interest expense of Fidelity's average earning assets and
average interest-bearing liabilities. The table distinguishes between the
changes related to average outstanding balances of assets and liabilities
(changes in volume holding the initial interest rate constant) and the changes
related to average interest rates (changes in average rate holding the initial
outstanding balance constant). The change in interest due to both volume and
rate has been allocated to volume and rate changes in proportion to the
relationship of the absolute dollar amounts of the change in each.
21
FIDELITY FEDERAL BANCORP AND SUBSIDIARIES
Management's Discussion and Analysis
of Results of Operations and Financial Condition
December 31, 2002 December 31, 2001
Compared to December 31, 2001 Compared to December 31, 2000
Increase (Decrease) Due To Increase (Decrease) Due To
----------------------------------------------------------------------------
Volume Rate Total Volume Rate Total
- -----------------------------------------------------------------------------------------------------------------------
(Dollars In Thousands)
Interest income on average earning assets:
Loans $(1,435) $(928) $(2,363) $440 $(317) $123
Investment securities 850 (643) 207 (247) (51) (298)
Loans held for sale 137 137
Federal Home Loan Bank stock 1 (36) (35) (58) (20) (78)
Federal funds sold and other short-term
investments (229) (138) (367) (109) (283) (392)
---------------------------------------------------------------------------
Total interest income (813) (1,608) (2,421) 26 (671) (645)
---------------------------------------------------------------------------
Interest expense on average interest- bearing liabilities:
Interest bearing accounts 30 (111) (81) (120) (142) (262)
Money market deposit accounts (149) (210) (359) 504 (143) 361
Savings accounts 7 (42) (35) (4) (22) (26)
Certificates of deposit (434) (1,200) (1,634) (142) 120 (22)
Other borrowings (163) (73) (236) (86) 46 (40)
Federal Home Loan Bank advances 162 (296) (134) 97 (64) 33
---------------------------------------------------------------------------
Total interest expense (547) (1,932) (2,479) 249 (205) 44
---------------------------------------------------------------------------
Changes in net interest income $(266) $324 $ 58 $(223) $(466) $(689)
===========================================================================
Provision for Loan Losses and Letter of Credit Reserves
Fidelity makes provisions for loan losses in amounts estimated to be sufficient
to maintain the allowance for loan losses at a level considered necessary by
management to absorb losses in the loan portfolios. 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.
The provision for loan losses for the year ended December 31, 2002 was a credit
of $360,000 compared to $1.3 million for the year ended December 2001, a
decrease of $1.7 million. During 2001, Fidelity increased its allowance for loan
losses by $1.3 million and reduced its letters of credit valuation reserve by
$1.5 million due to refinancing activities related to letters of credit
outstanding completed during 2001. During the first two quarters of 2001, seven
entities in which Fidelity or United had outstanding classified, or impaired
letters of credit, obtained non-recourse financing outside of Fidelity or
United. Fidelity provided $3.0 million in previously reserved funds in order to
complete the refinancing transactions. During 2002, three such partnerships
obtained alternate financing in which Fidelity provided $239,000 in previously
reserved funds in order to complete the refinancing transaction. As a result,
total classified assets and letters of credit were reduced from $20.5 million at
December 31, 2000 to $6.0 million at December 31, 2002.
22
FIDELITY FEDERAL BANCORP AND SUBSIDIARIES
Management's Discussion and Analysis
of Results of Operations and Financial Condition
The ratio of allowance for loan losses to non-performing loans was 91.5% at
December 31, 2002 compared to 55.9% at December 31, 2001. The primary reason for
the increase in the ratio of allowance for loan losses to non-performing loans
was the reclassification of one $3.1 million commercial real estate credit that
was written down to $1.9 million and transferred to other real estate owned in
the first quarter of 2002. An additional $100,000 valuation allowance was
established on the remaining $1.9 million property during 2002.
During 2002, Fidelity completed a securitization of automobile loans in addition
to a loan sale which created $411,000 in excess unallocated consumer loan
reserves. These excess reserves were removed from the allowance for loan losses.
Non-Interest Income
Non-interest income for the year ended December 31, 2002 decreased by $426,000
or 10.8% compared to December 31, 2001. Non-interest income for the year ended
December 31, 2001 increased by $2.1 million or 116.6% compared to December 31,
2000.
Service charges on deposit accounts increased $75,000 for the year ended
December 31, 2002 compared to the prior year due to higher activity fees and new
fee sources combined with improved monitoring of fee waivers. Net gains on the
sale of loans decreased $768,000 from the prior year due primarily to a decrease
in volume of automobile loans sold.
Servicing fees on mortgage and consumer loans sold increased $36,000 over 2001
due to the continued growth in mortgage loans sold to the secondary market with
servicing retained by United, in addition to servicing fees on consumer loans
sold. Included in the net gains on loan sales are the results of a sale of two
notes and a position in an interest rate swap to a related party totaling
$285,000. See "Related Party" footnote for additional details. During 2002,
Fidelity liquidated a $500,000 senior note for $360,000 and recorded a gain of
$140,000. During 2002, Fidelity liquidated a $1.0 million senior note for
$675,000 and recorded a gain of $325,000. A $574,000 gain on the sale of assets
was recognized in the fourth quarter of 2002 in connection with the sale of two
subsidiaries and certain other affordable housing assets to a related party, see
"Related Party" footnote. Other income decreased $226,000 from the prior year
primarily due to the increased loan servicing rights amortization as a result of
mortgage loan payoffs due to the increase in the refinancing of fixed-rate
mortgage loans.
Non-Interest Expense
Non-interest expense increased $4.2 million or 74.2% for the year ended December
31, 2002, compared to December 31, 2001.
Salaries and employee benefits increased $358,000 over the year ended December
31, 2001, due to growth in United's consumer lending activity, the opening of a
new branch late in the first quarter of 2001 and the addition of commercial
lending staff due to the resumption of commercial lending. Additionally,
Fidelity funded its defined benefit pension plan by $100,000.
During 2001, the valuation allowance for letters of credit was reduced by $1.45
million to reflect a reduction in loss exposure achieved as a result of the
previously discussed refinancing activities completed during 2001, resulting in
a reduction of other expense compared to no reductions in 2002.
Fidelity records its percentage share of losses for its investments in various
affordable housing partnerships under the equity method of accounting. These
losses were $160,000, $304,000 and $352,000 for 2002, 2001 and 2000,
respectively. During the fourth quarter of 2002, Fidelity completed the sale of
a subsidiary that held a general partnership interest in seventeen affordable
housing projects. See "Related Party" footnote for additional details.
Legal and professional fees increased $55,000 over last year due to expenses
related to workout activities with respect to various classified assets and
expenses associated with the sale of certain real estate assets. (See Related
Party Footnote) Promotional expenses increased $35,000 over 2001 due to an
increase in the indirect automobile activity compared to prior year. Federal
deposit insurance expense decreased $191,000 in 2002, compared to 2001. Expenses
of $247,000 have been incurred in connection with the foreclosure of a $3.1
million non accrual, commercial real estate loan which is included in other real
estate owned at a basis of $1.8 million. Other expense increased $239,000 over
2001 due primarily to increased consumer loan volume.
23
Fidelity Federal Bancorp and Subsidiaries
Management's Discussion and Analysis
of Results of Operations and Financial Condition
Non-recurring expenses were incurred during 2002 for various reasons, the
following non-recurring items are included in non-interest expense: Changes in
the estimated useful lives of intangible assets created additional expense of
$864,000 and are discussed in the "Related Party" footnote. Prepayment fees on
FHLB advances of $504,000 were recognized in 2002 compared to none in 2001.
United repaid long-term FHLB advances that had substantially higher interest
rates than the current market. The completion of the securitization transaction
created liquidity which was 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 in the future.
During 2002, United completed a securitization transaction and recognized a
$976,000 loss. The loss was a result of lower than expected interest rates which
resulted in United securitizing loans at lower interest rates than originally
estimated, plus experiencing faster than expected prepayment speeds on the
seasoned portion of the securitized loans. These losses were partially offset by
a reversal of $360,000 in consumer loan loss provision.
Income Tax Expense (Benefit)
Fidelity reported a pretax loss of $3.0 million compared to the prior year
pretax loss of $160,000. An income tax benefit of approximately $1.2 million was
recorded on this pretax loss but reduced by additional tax expense, which
reduced the benefit to $641,000. The additional tax expense was primarily the
result of the capital gain for tax purposes on the sale of Fidelity's
subsidiaries and the additional $500,000 tax valuation allowance established in
connection with Fidelity's deferred tax asset. Included in the tax benefit are
tax credits of $185,000 compared to $319,000 in the prior year. The decrease in
tax credits is the result of a $222,000 valuation established for potential tax
credit recapture on two limited partnerships. These credits were 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 December 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 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 50% of the initiatives included within its current business plan
and then achieve 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. Due to
capital gains 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 $500,000 until such
time that Fidelity meets its future period profitability forecasts. Fidelity has
set forth reasonable plans indicating that future period profitability will
increase and be more in line with its original strategic plan, 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.
24
Fidelity Federal Bancorp and Subsidiaries
Management's Discussion and Analysis
of Results of Operations and Financial Condition
Loss on Discontinued Operations
During the fourth quarter of 2002, Fidelity completed the sale to Pedcor Funding
Corporation ("Pedcor") of the assets connected to their affordable housing
activities began in the mid-1990's. The assets consisted of the stock of Village
Housing Corporation (a wholly-owned subsidiary of United Fidelity Bank), the
stock of Village Affordable Housing Corporation (a wholly-owned subsidiary of
Fidelity Federal), an interest rate swap, and notes from affordable housing
limited partnerships in which Village Housing Corporation is the general
partner.
The Company determined to pursue the sale of these assets in order to further
focus on its community banking activities. It also determined that the
elimination of the contingent liabilities associated with the ownership of the
affordable housing general partnerships interests would improve its overall risk
profile.
The purchaser, Pedcor Funding Corporation ("Pedcor"), is a company controlled by
Bruce A. Cordingley, Gerald K. Pedigo, and Phillip J. Stoffregen, directors of
Fidelity Federal and members of a group which beneficially owns, including stock
options and warrants, approximately 69.9% of Fidelity Federal's issued and
outstanding stock. Because of the relationship between Pedcor and Fidelity
Federal, Messrs. Cordingley, Pedigo, and Stoffregen did not participate in
either the discussion or the vote by the boards of directors of Fidelity Federal
and United Fidelity Bank regarding the sale. The sale was unanimously approved
by all other members of the respective Boards of Directors of Fidelity Federal
and United Fidelity Bank and was completed following receipt of all necessary
regulatory approvals and a fairness opinion. The fairness opinion was rendered
by Crowe Chizek & Co., an independent, non-affiliated entity which has never
performed services for Messrs. Cordingley, Pedigo, or Stoffregen or any entity
they control (other than Fidelity Federal or United Fidelity Bank), and has not
performed services within the last five years for Fidelity Federal or United
Fidelity Bank.
The sale price for the all-cash transaction was approximately $1.7 million, thus
the sale provided the Company with additional liquidity. Because a portion of
the assets sold had been previously written off for regulatory capital purposes,
the sale resulted in an increase in the regulatory capital of United Fidelity
Bank. Additional regulatory capital provides the Bank future capacity to
increase earning assets, which could then increase net interest income.
Net loss on operations from these subsidiaries totaled $2.0 million of which
$1.5 million was associated with the completion of the sale and $451,000
associated with the income tax expense impact. Net income or loss from prior
years were immaterial and not included as a separate component. See the
"Discontinued Operations" footnote for additional details.
25
Fidelity Federal Bancorp and Subsidiaries
Management's Discussion and Analysis
of Results of Operations and Financial Condition
Quarterly Results of Operations
March 31 June 30 September 30 December 31 Total
- ----------------------------------------------------------------------------------------------------------------------------
(In Thousands)
December 31, 2002
Interest income $2,573 $2,510 $2,426 $1,525 $9,034
Interest expense 1,602 1,630 1,509 1,281 6,022
----------------------------------------------------------------------------------
Net interest income 971 880 917 244 3,012
Provision for loan losses (400) 40 (360)
Non-interest income 930 820 580 1,177 3,507
Non-interest expense 1,886 1,754 3,351 2,936 9,927
----------------------------------------------------------------------------------
Income (loss) before income tax 15 (54) (1,454) (1,555) (3,048)
Income tax expense (benefit) (71) (98) 562 (1,034) (641)
----------------------------------------------------------------------------------
Income (loss) from continuing
operations 86 44 (2,016) (521) (2,407)
----------------------------------------------------------------------------------
Loss on discontinued operations before tax (762) (775) (1,537)
Income tax expense (229) 680 451
----------------------------------------------------------------------------------
Loss on discontinued operations (533) (1,455) (1,988)
----------------------------------------------------------------------------------
Net income (loss) $ 86 $ 44 $(2,549) $(1,976) $(4,395)
==================================================================================
Net income (loss) per share
Diluted net income (loss) from
continuing operations $ 0.01 $ 0.01 $ (.33) $ (.08) $ (.39)
Diluted net income (loss) from
discontinued operations (.09) (.22) (.32)
Diluted net income (loss) .01 .01 (.41) (.30) (.71)
Basic net income (loss) from
continuing operations .01 .01 (.33) (.08) (.39)
Basic net income (loss) from
discontinued operations (.09) (.22) (.32)
Basic net income (loss) .01 .01 (.41) (.30) (.71)
Cash dividends*
December 31, 2001
Interest income $3,033 $2,995 $2,779 $2,648 $11,455
Interest expense 2,282 2,297 2,106 1,816 8,501
----------------------------------------------------------------------------------
Net interest income 751 698 673 832 2,954
Provision for loan losses 284 63 800 202 1,349
Non-interest income 677 934 1,239 1,083 3,933
Non-interest expense 1,246 1,634 1,106 1,712 5,698
----------------------------------------------------------------------------------
Loss before income tax (102) (65) 6 1 (160)
Income tax benefit (126) (108) (74) (76) (384)
----------------------------------------------------------------------------------
Net income $ 24 $ 43 $ 80 $ 77 $ 224
==================================================================================
Net income per share
Diluted net income $ .01 $ .01 $ .01 $ .01 $ .04
Basic net income .01 .01 .01 .01 .04
Cash dividends*
*No cash dividends were paid for the years ended December 31, 2002 and 2001.
26
[LETTERHEAD OF BKD, LLP]
Independent Auditor's Report
Stockholders and Board of Directors
Fidelity Federal Bancorp
Evansville, Indiana
We have audited the accompanying consolidated balance sheets
of Fidelity Federal Bancorp and subsidiaries as of December
31, 2002 and 2001 and the related consolidated statements of
income, changes in stockholders' equity and cash flows for
each of the three years in the period ended December 31, 2002.
These consolidated financial statements are the responsibility
of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements based on
our audits.
We conducted our audits in accordance with auditing standards
generally accepted in the United States of America. Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements. An audit also
includes assessing the accounting principles used and
significant estimates made by management, as well as
evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements
described above present fairly, in all material respects, the
consolidated financial position of Fidelity Federal Bancorp
and subsidiaries as of December 31, 2002 and 2001, and the
results of their operations and their cash flows for each of
the three years in the period ended December 31, 2002 in
conformity with accounting principles generally accepted in
the United States of America.
BKD, LLP
Evansville, Indiana
February 7, 2003
27
FIDELITY FEDERAL BANCORP AND SUBSIDIARIES
Consolidated Balance Sheets
(In Thousands, Except Share Data)
December 31 2002 2001
- ------------------------------------------------------------------------------------------------------------------
Assets
Cash and due from banks $ 1,454 $ 1,711
Interest-bearing demand deposits 2,369 14,605
---------------------------------
Cash and cash equivalents 3,823 16,316
Investment securities available for sale 34,912 18,074
Loans, net of allowance for loan losses of $837 and $2,138 73,087 104,432
Premises and equipment 4,935 6,009
Federal Home Loan Bank of Indianapolis stock 2,674 2,620
Deferred income tax receivable 5,615 7,214
Foreclosed assets held for sale, net of allowance of $100 and $0 2,145 50
Interest receivable and other assets 5,099 4,944
---------------------------------
Total assets $132,290 $159,659
=================================
Liabilities
Deposits
Non-interest bearing $ 3,209 $ 5,008
Interest bearing 103,582 115,147
---------------------------------
Total deposits 106,791 120,155
Long-term debt 13,586 24,650
Valuation allowance for letters of credit 445 665
Other liabilities 1,880 2,294
---------------------------------
Total liabilities 122,702 147,764
---------------------------------
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-- 6,740,883 and 5,987,009 shares 6,741 5,987
Additional paid-in capital 15,359 14,692
Stock warrants 261 11
Accumulated deficit (13,152) (8,757)
Accumulated other comprehensive income (loss) 379 (38)
---------------------------------
Total stockholders' equity 9,588 11,895
---------------------------------
Total liabilities and stockholders' equity $132,290 $159,659
=================================
See notes to consolidated financial statements.
28
FIDELITY FEDERAL BANCORP AND SUBSIDIARIES
Consolidated Statements of Income
(In Thousands, Except Share Data)
Year Ended December 31 2002 2001 2000
- -------------------------------------------------------------------------------------------------------------
Interest Income
Loans receivable $7,196 $9,559 $9,436
Loans held for sale 137
Investment securities--taxable 1,427 1,220 1,518
Deposits with financial institutions 114 481 873
Other dividend income 160 195 273
---------------------------------------------------
Total interest income 9,034 11,455 12,100
---------------------------------------------------
Interest Expense
Deposits 4,385 6,494 6,442
Short-term borrowings 64
Long-term debt 1,573 2,007 2,015
---------------------------------------------------
Total interest expense 6,022 8,501 8,457
---------------------------------------------------
Net Interest Income 3,012 2,954 3,643
Provision for loan losses (360) 1,349 670
---------------------------------------------------
Net Interest Income After Provision for
Loan Losses 3,372 1,605 2,973
---------------------------------------------------
Other Income
Service charges on deposit accounts 439 364 311
Net gains on loan sales 1,283 2,051 294
Net gains on sales of securities available for sale 73
Letter of credit fees 501 506 530
Servicing fees on loans sold 161 125 109
Gain on sale of assets 574
Gain on early extinguishment of debt 140 325
Other income 336 562 572
---------------------------------------------------
Total non-interest income 3,507 3,933 1,816
---------------------------------------------------
29
FIDELITY FEDERAL BANCORP AND SUBSIDIARIES
Consolidated Statements of Income
(In Thousands, Except Share Data)
(Continued)
Year Ended December 31 2002 2001 2000
- ----------------------------------------------------------------------------------------------------------------
Other Expenses
Salaries and employee benefits $3,616 $3,258 $3,370
Net occupancy expenses 371 368 364
Equipment expenses 350 282 250
Data processing fees 337 348 339
Deposit insurance expense 57 248 243
Legal and professional fees 298 243 544
Advertising 142 144 131
Promotional expense 218 183 67
Printing, postage, and office supplies expenses 229 237 176
Professional liability insurance expense 176 211 85
Fee on prepayment of FHLB advances 504
Letter of credit valuation provision (1,450) (85)
Loss on investment in partnerships 160 304 352
Amortization of intangible assets 917 209 139
Correspondent bank charges 132 155 156
Loss on securitization 976
Other real estate owned expenses 247
Other expense 1,197 958 1,183
----------------------------------------------------
Total non-interest expense 9,927 5,698 7,314
----------------------------------------------------
Loss From Continuing Operations Before Income Tax (3,048) (160) (2,525)
Income tax benefit (641) (384) (1,369)
----------------------------------------------------
Income (Loss) From Continuing Operations (2,407) 224 (1,156)
----------------------------------------------------
Discontinued Operations
Loss from operations of VHC and VAHC (including loss
on sale of $1,517) (1,537)
Income tax expense 451
----------------------------------------------------
Loss on discontinued operations (1,988)
----------------------------------------------------
Net Income (Loss) $(4,395) $ 224 $(1,156)
====================================================
30
FIDELITY FEDERAL BANCORP AND SUBSIDIARIES
Consolidated Statements of Income
(In Thousands, Except Share Data)
(Continued)
Year Ended December 31 2002 2001 2000
- --------------------------------------------------------------------------------------------------------
Basic Earnings (Loss) Per Share From Continuing Operations $(0.39) $0.04 $(0.29)
Basic Loss Per Share from Discontinued Operations $(0.32)
Basic Earnings (Loss) Per Share $(0.71) $0.04 $(0.29)
Diluted Earnings (Loss) Per Share From Continuing Operations $(0.39) $0.04 $(0.29)
Diluted Loss Per Share from Discontinued Operations $(0.32)
Diluted Earnings (Loss) Per Share $(0.71) $0.04 $(0.29)
See notes to consolidated financial statements.
31
FIDELITY FEDERAL BANCORP AND SUBSIDIARIES
Consolidated Statements of Changes in Stockholders' Equity
(In Thousands, Except Share Data)
Accumulated
Common Stock Comprehensive Other
------------------- Paid-in Stock Income Accumulated Comprehensive
Shares Amount Capital Warrants (Loss) Deficit Income (Loss) Total
----------------------------------------------------------------------------------------
Balances, January 1, 2000 3,147,662 $3,147 $10,869 $ 11 $(7,825) $(775) $ 5,427
Comprehensive loss
Net loss $(1,156) (1,156) (1,156)
Other comprehensive income, net of tax
Unrealized gain on securities 239 239 239
--------------
Comprehensive loss $ (917)
==============
Sale of stock 1,460,000 1,460 2,805 4,265
Purchase of stock (4)
-------------------------------------- ------------------------------------
Balances, December 31, 2000 4,607,658 4,607 13,674 11 (8,981) (536) 8,775
Comprehensive income
Net income $224 224 224
Other comprehensive income, net of tax
Unrealized gain on securities 498 498 498
--------------
Comprehensive income $722
==============
Sale of stock 1,379,353 1,380 1,018 2,398
Purchase of stock (2)
-------------------------------------- ------------------------------------
Balances, December 31, 2001 5,987,009 5,987 14,692 11 (8,757) (38) 11,895
Comprehensive loss
Net loss $(4,395) (4,395) (4,395)
Other comprehensive income, net of tax
Unrealized gain on securities 417 417 417
--------------
Comprehensive loss $(3,978)
==============
Sale of stock 753,874 754 667 1,421
Issuance of stock warrants 250 250
-------------------------------------- ------------------------------------
Balances, December 31, 2002 6,740,883 $6,741 $15,359 $261 $(13,152) $ 379 $ 9,588
====================================== ====================================
See notes to consolidated financial statements.
32
FIDELITY FEDERAL BANCORP AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(In Thousands)
Year Ended December 31 2002 2001 2000
- ----------------------------------------------------------------------------------------------------------------
Operating Activities
Net income (loss) $ (4,395) $ 224 $ (1,156)
Adjustments to reconcile income (loss) from continuing operations
to net cash provided (used) by operating activities
Provision for loan losses (360) 1,349 670
Letter of credit valuation provision (1,450) (85)
Gain on early extinguishment of debt (140) (325)
Net gain on sales securities available for sale (73)
Loss on impairment of assets held for sale and changes in
estimated useful lives of intangible assets 1,769
Depreciation and amortization 1,334 573 491
Valuation allowance--affordable housing investments 40 58 69
Loans originated for sale (22,954) (32,397) (5,395)
Proceeds from sale of loans 23,129 32,516 5,384
Deferred income tax benefit (384) (2,031)
Changes in
Interest payable and other liabilities (564) 542 (114)
Interest receivable and other assets (1,258) 70 247
Other (78) (136) 214
-------------------------------------------
Net cash provided (used) by operating activities (3,550) 640 (1,706)
-------------------------------------------
Investing Activities
Purchases of securities available for sale (33,633) (2,000)
Proceeds from maturities of securities available for sale 12,541 5,724 3,639
Proceeds from sales of securities available for sale 5,053
Purchases of FHLB stock (54)
Proceeds from redemption of FHLB stock 1,300
Net change in loans 29,441 1,971 (11,484)
Purchase of premises and equipment (218) (627) (794)
Proceeds from sales of premises and equipment 783 235 110
Funding on outstanding letters of credit (239) (3,038) (600)
-------------------------------------------
Net cash provided (used) by investing activities 13,674 2,265 (7,829)
-------------------------------------------
Financing Activities
Net change in
Noninterest-bearing, interest-bearing
demand and savings deposits (3,753) 5,015 (2,030)
Certificates of deposit (9,611) (11,804) (6,042)
Proceeds from long-term debt 15,858 7,470 2,000
Repayment of long-term debt (26,782) (6,312) (1,663)
Sale of stock 1,421 2,398 3,000
Sale of stock warrants 250
-------------------------------------------
Net cash used by financing activities (22,617) (3,233) (4,735)
-------------------------------------------
33
FIDELITY FEDERAL BANCORP AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(In Thousands)
(Continued)
Year Ended December 31 2002 2001 2000
- -----------------------------------------------------------------------------------------------------------
Net Change in Cash and Cash Equivalents $(12,493) $ (328) $(14,270)
Cash and Cash Equivalents, Beginning of Period 16,316 16,644 30,914
-------------------------------------------
Cash and Cash Equivalents, End of Period $ 3,823 $ 16,316 $16,644
===========================================
Additional Cash Flows Information
Interest paid $ 6,256 $ 7,941 $ 8,448
Income tax paid (refunded) (80) 727
Stock issued in exchange for partnership operating
cash flow deficit guarantees and management services 1,265
Real estate acquired in settlement of loans 2,123
See notes to consolidated financial statements.
34
FIDELITY FEDERAL BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar Amounts in Thousands, Except Share Data)
>> Nature of Operations and Summary of Significant Accounting Policies
The accounting and reporting policies of Fidelity Federal Bancorp (Fidelity) and
its wholly-owned subsidiaries conform to accounting principles generally
accepted in the United States of America and reporting practices followed by the
thrift industry. The more significant of the policies are described below.
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Fidelity is a registered thrift holding company whose principal activity is the
ownership and management of United Fidelity Bank, fsb (United). United operates
under a national thrift charter and provides full banking services. As a
federally chartered thrift, United is subject to regulation by the Office of
Thrift Supervision (OTS) and the Federal Deposit Insurance Corporation.
Fidelity's other subsidiary was Village Affordable Housing Corporation, which
was formed during 1999 for the purpose of owning interests in real estate
housing. This subsidiary was sold during the fourth quarter of 2002 to a related
party.
United generates mortgage, consumer and commercial loans and receives deposits
from customers located primarily in Vanderburgh County, Indiana and surrounding
counties. Fidelity's loans are generally secured by specific items of collateral
including real property, consumer assets and business assets. United's
subsidiaries, Village Housing Corporation and Village Management Corporation
(Affordable Housing Group) and Village Capital Corporation, had previously been
involved in various aspects of financing, owning, developing and managing
affordable housing projects. Village Management is currently inactive. During
the fourth quarter of 2002, Village Housing Corporation was sold to a related
party. Village Capital Corporation earns fees by providing real estate mortgage
banking services to unaffiliated borrowers. Village Capital has not provided any
new banking services for the past three years, but records fee income on
transactions previously completed. Another United subsidiary, Village Insurance
Corporation, is engaged in the business of selling credit life and accident
health insurance in conjunction with United's lending activities. United formed
a new subsidiary, United Fidelity Finance, LLC, during the fourth quarter of
2001, which was utilized to complete an auto loan securitization transaction
during 2002.
Consolidation--The consolidated financial statements include the accounts of
Fidelity and its subsidiaries after elimination of all material intercompany
transactions.
Use of estimates-- The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
Material estimates that are particularly susceptible to significant change
relate to the determination of the allowance for loan losses and the valuation
of real estate acquired in connection with foreclosures or in satisfaction of
loans. In connection with the determination of the allowance for loan losses and
the valuation of foreclosed assets held for sale, management obtains independent
appraisals for significant properties.
Cash equivalents-- Fidelity considers all liquid investments with original
maturities of three months or less to be cash equivalents.
Securities available for sale are carried at fair value, with unrealized gains
and losses reported separately in accumulated other comprehensive income, net of
tax.
35
FIDELITY FEDERAL BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar Amounts in Thousands, Except Share Data)
Amortization of premiums and accretion of discounts are recorded as interest
income from securities. Realized gains and losses are recorded as net security
gains (losses). Gains and losses of securities are recorded on the
specific-identification method.
Loans held for sale are carried at the lower of aggregate cost or market value.
Market is determined using the aggregate method. Net unrealized losses, if any,
are recognized through a valuation allowance by charges to income, based on the
difference between estimated sales proceeds and aggregate cost.
Loans are carried at the principal amount outstanding. Interest income is
accrued on the principal balances of loans. The accrual of interest on impaired
loans is discontinued when, in management's opinion, the borrower may be unable
to meet payments as they become due. When interest accrual is discontinued, all
unpaid accrued interest is reversed when considered uncollectible. Interest
income is subsequently recognized only to the extent cash payments are received.
Certain loan fees and related direct costs are being deferred and amortized over
the lives of the loans as an adjustment of yield on the loans.
Allowance for loan losses and letter of credit valuation allowance are
maintained for credit losses to absorb losses inherent in the loan portfolio.
The allowances are based on ongoing quarterly assessments of the probable
estimated losses inherent in the loan portfolios. The allowance for loan losses
is increased by the provision for credit losses, which is charged against
current period operating results and decreased by the amount of chargeoffs, net
of recoveries. Fidelity's methodology for assessing the appropriateness of the
allowance for loan losses consists of several key elements, which include the
formula allowance, specific allowances for identified problem loans, and the
unallocated allowance.
The formula allowance is calculated by applying loss factors to outstanding
loans and certain unused commitments, in each case based on the internal risk
grade of such loans, pools of loans or commitments. Changes in risk grades of
both performing and nonperforming loans affect the amount of the formula
allowance. Loss factors are based on historical loss experience and may be
adjusted for significant factors that, in management's judgment, affect the
collectibility of the portfolio as of the evaluation date.
Specific loan and letter of credit valuation reserves are established in cases
where management has identified significant conditions or circumstances related
to a loan or letter of credit that management believes indicate the probability
that a loss has been incurred in excess of the amount determined by the
application of, in the case of the allowance for loan losses, the formula
allowance.
The unallocated allowance for loan losses is based upon management's evaluation
of various conditions, the effects of which are not directly measured in the
determination of the formula and specific allowances. The evaluation of the
inherent loss with respect to these conditions is subject to a higher degree of
uncertainty because they are not identified with specific credits. The
conditions evaluated in connection with the unallocated allowance for loan
losses and the letter of credit valuation reserve may include existing general
economic and business conditions affecting Fidelity's key lending areas, credit
quality trends, collateral values, loan volumes and concentrations, seasoning of
the loan and letter of credit portfolios, specific industry conditions within
portfolio segments, recent loss experience in particular segments of the
portfolios, duration of the current business cycle, regulatory examination
results and findings of an independent third party conducting quarterly reviews
of the loan and letter of credit portfolios.
The allowance for loan losses also incorporates the results of measuring
impaired loans as provided in SFAS No. 114 and SFAS No. 118. A loan is
considered impaired when management determines that it is probable that the bank
will be unable to collect all amounts due according to the original contractual
terms of the loan agreement. Impairment is measured by the difference between
the recorded investment in the loan and the estimated present value of total
expected future cash flows, discounted at the loan's effective rate, or the fair
value of the collateral of the loan, if collateral dependent. Impairment is
recognized by adjusting an allocation of the existing allowance for loan losses.
36
FIDELITY FEDERAL BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar Amounts in Thousands, Except Share Data)
The determination of the adequacy of the allowance for loan losses and the
letter of credit valuation allowance is based on estimates that are particularly
susceptible to significant changes in the economic environment and market
conditions. Management believes that, as of December 31, 2002, the allowance for
loan losses and the letter of credit valuation allowance is adequate based on
information currently available. A worsening or protracted economic decline in
the area within which Fidelity operates could affect the possibility of
additional losses due to credit and market risks and could create the need for
additional loss reserves.
Automobile Loan Securitizations-- In 2002, United used the securitization of
automobile loans as a source of funding and as a mechanism to reduce its volume
of automobile loans. Automobile loans were transferred into a qualifying special
purpose entity (SPE) then to a trust in a transaction which is effective under
applicable banking rules and regulations to legally isolate the assets from
United. Where the transferor is a depository institution such as United, legal
isolation is accomplished through compliance with specific rules and regulations
of the relevant regulatory authorities. SFAS 140 requires, for certain
transactions completed after the initial adoption date, a "true sale" analysis
of the treatment of the transfer under state law as if United were a debtor
under the bankruptcy code. A "true sale" legal analysis includes several legally
relevant factors, such as the nature and level of recourse to United and the
nature of retained servicing rights. The analytical conclusion as to a true sale
is never absolute and unconditional, but contains qualifications based on the
inherent equitable powers of a bankruptcy court, as well as the unsettled state
of the common law. Once the legal isolation test has been met under SFAS 140,
other factors concerning the nature and extent of United's control over the
transferred assets are taken into account in order to determine whether
derecognition of assets is warranted, including whether the SPE has complied
with rules concerning qualifying special purpose entities.
A legal opinion was obtained for the automobile loan securitization transaction
in 2002, which was structured as a two-step securitization. While noting the
transaction fell within the meaning of a "securitization" under the FDIC
regulation, "Treatment by the Federal Deposit Insurance Corporation as
Conservator or Receiver of Financial Assets Transferred by an Insured Depository
Institution in Connection with a Securitization or Participation" (the
"Securitization Rule"), in accordance with accounting guidance, an analysis was
also rendered under state law as if United was a debtor under the bankruptcy
code. The "true sale" opinion provides reasonable assurance the purchased assets
would not be characterized as the property of United's receivership or
conservatorship estate in the event of insolvency and also states United would
not be required to substantively consolidate the assets and liabilities of the
purchaser SPE with those of United upon such event.
In a securitization, the trust issues beneficial interests in the form of senior
and subordinated asset-backed securities backed or collateralized by the assets
sold to the trust. The senior classes of the asset-backed securities typically
receive investment grade credit ratings at the time of issuance. These ratings
are generally achieved through the acquisition of a financial guarantee policy,
the creation of lower-rated subordinated classes of asset-backed securities, as
well as subordinated interests retained by an affiliate of United. In all cases,
United or its affiliate retains interests in the securitized assets, which may
take the form of seller certificates, subordinated tranches, cash reserve
balances, servicing assets and interest-only strips representing the cash flows
generated by the assets in excess of the contractual cash flows required to be
paid to the investors and for other obligations such as servicing fees.
In a securitization, the trust issues beneficial interests in the form of senior
and subordinated asset-backed securities backed or collateralized by the assets
sold to the trust. The senior classes of the asset-backed securities typically
receive investment grade credit ratings at the time of issuance. These ratings
are generally achieved through the acquisition of a financial guarantee policy,
the creation of lower-rated subordinated classes of asset-backed securities, as
well as subordinated interests retained by an affiliate of United. In all cases,
United or its affiliate retains interests in the securitized assets, which may
take the form of seller certificates, subordinated tranches, cash reserve
balances, servicing assets and interest-only strips representing the cash flows
generated by the assets in excess of the contractual cash flows required to be
paid to the investors and for other obligations such as servicing fees.
37
FIDELITY FEDERAL BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar Amounts in Thousands, Except Share Data)
In accordance with SFAS 140, securitized automobile loans are removed from the
balance sheet and a net gain or loss is recognized in income at the time of
initial sale and each subsequent sale when the combined net sales proceeds and,
if applicable, retained interests differ from the loans' allocated carrying
amount. Net gains or losses resulting from securitizations are recorded in
noninterest income or expense.
Retained interests in the subordinated tranches and interest-only strips are
recorded at their fair value and accounted for as available-for-sale securities
with subsequent adjustments to fair value recorded through other comprehensive
income within stockholders' equity or in other noninterest expense in the income
statement if the fair value has declined below the carrying amount and such
decline has been determined to be other than temporary. United uses assumptions
and estimates in determining the fair value allocated to the retained interests
at the time of sale and each subsequent sale in accordance with SFAS 140. These
assumptions and estimates include projections concerning rates charged to
customers, the expected life of the receivables, credit loss experience, loan
repayment rates, the cost of funds and discount rates commensurate with the
risks involved.
On a quarterly basis, management reviews the historical performance of the
retained interest and the assumptions used to project future cash flows. If past
performance and future expectations dictate, assumptions are revised and the
present value of future cash flows is recalculated. Refer to the automobile loan
securitization footnote for further analysis of the assumptions used in the
determination of fair value.
The retained interest represents United's maximum loss exposure with respect to
securitization vehicles. The investors in the debt securities issued by the SPEs
have no further recourse against United if cash flows generated by the
securitized automobile loans are inadequate to service the obligations of the
SPEs.
Transaction costs associated with the automobile loan securitization were
recognized as a component of the gain or loss at the time of sale.
Premises and equipment are carried at cost, net of accumulated depreciation.
Depreciation is computed using the straight-line method based principally on the
estimated useful lives of the assets. Maintenance and repairs are expensed as
incurred while major additions and improvements are capitalized. Gains and
losses on dispositions are included in current operations.
Federal Home Loan Bank (FHLB) stock is a required investment for institutions
that are members of the FHLB system. The required investment in the common stock
is based on a predetermined formula.
Foreclosed assets held for sale-- Assets acquired through, or in lieu of, loan
foreclosure are held for sale and are initially recorded at fair value at the
date of foreclosure, establishing a new cost basis. Subsequent to foreclosure,
valuations are periodically performed by management and the assets are carried
at the lower of carrying amount or fair value less cost to sell. Revenue and
expenses from operations and changes in the valuation allowance are included in
net income or expense from foreclosed assets.
Income tax in the consolidated statements of income includes deferred income tax
provisions or benefits for all significant temporary differences in recognizing
income and expenses for financial reporting and income tax purposes. Fidelity
files consolidated income tax returns with its subsidiaries.
Servicing rights on originated loans that have been sold, including those
transferred as part of securitizations, are capitalized by allocating the total
cost of the mortgage or consumer loans between the servicing rights and the
loans based on their relative fair values. Capitalized servicing rights are
amortized in proportion to and over the period of estimated servicing revenues.
Impairment of mortgage and consumer loan-servicing rights is assessed based on
the fair value of those rights. Fair values are estimated using discounted cash
flows based on a current market interest rate. For purposes of measuring
impairment, the rights are stratified based on the predominant risk
characteristics of the underlying loans. The predominant characteristic
currently used for stratification is type of loan. The amount of impairment
recognized is the amount by which the capitalized servicing rights for a stratum
exceed their fair value.
38
Fidelity Federal Bancorp and Subsidiaries
Notes to Consolidated Financial Statements
(Dollar Amounts in Thousands, Except Share Data)
Stock options and Fidelity's stock-based incentive compensation plans are
discussed more fully in the Stock Option Plans footnote. The Company accounts
for these plans under the recognition and measurement principles of APB Opinion
No. 25, Accounting for Stock Issued to Employees, and related Interpretations.
No stock-based employee compensation cost is reflected in net income, as all
options granted under those plans had an exercise price that was equal to or
greater than the market value of the underlying common stock on the grant date.
The following table illustrates the effect on net income and earnings per share
if Fidelity had applied the fair value provisions of FASB statement No. 123,
Accounting for Stock-Based Compensation, to stock-based employee compensation.
Year Ended December 31 2002 2001 2000
- ---------------------------------------------------------------------------------------------------------
Net income (loss), as reported $(4,395) $224 $(1,156)
Less: Total stock-based compensation cost determined
under the fair value based method, net of income taxes 73 26 71
------------------------------------------
Pro forma net income (loss) $(4,468) $198 $(1,227)
==========================================
Basic earnings (loss) per share - as reported $(0.71) $0.04 $(0.29)
Basic earnings (loss) per share - pro forma $(0.72) $0.04 $(0.31)
Diluted earnings (loss) per share - as reported $(0.71) $0.04 $(0.29)
Diluted earnings (loss) per share - pro forma $(0.72) $0.04 $(0.31)
Earnings per share have been computed based upon the weighted-average common
shares outstanding during the year. The effect of outstanding options and
warrants are included in diluted earnings per share if they are not
anti-dilutive. At December 31, 2001 and 2000, all outstanding potentially
dilutive instruments were anti-dilutive.
Reclassification of certain amounts in the 2001 consolidated financial
statements has been made to conform to the 2002 presentation.
>> Restriction on Cash and Due From Banks
United is required to maintain reserve funds in cash and/or on deposit with the
Federal Reserve Bank. The reserve required at December 31, 2002 was $109.
>> Investment Securities Available for Sale
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------------------------------------------------
December 31, 2002
Mortgage-backed securities $34,293 $621 $(2) $34,912
================================================
December 31, 2001
Mortgage-backed securities $18,137 $49 $(112) $18,074
================================================
Securities with a carrying value of $34,909 and $18,074 were pledged at December
31, 2002 and 2001 to secure certain deposits, outstanding Federal Home Loan Bank
advances and for other purposes as permitted or required by law.
39
FIDELITY FEDERAL BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar Amounts in Thousands, Except Share Data)
Gross gains of $73 resulting from sales of available-for-sale securities were
realized for 2002. Taxes of $ 28 were recorded on the gains. There were no sales
of securities in 2001 or 2000.
>> Loans and Allowance
December 31 2002 2001
- ----------------------------------------------------------------------------------------------------------
Real estate mortgage loans
First mortgage loans
Conventional $36,157 $ 43,929
Construction 1,909 513
Commercial 5,645 6,114
Multi-family 3,083 3,856
Home equity loans 4,586 4,577
Purchased loans 627 745
Commercial loans--other than secured by real estate 2,210 1,848
Consumer loans 19,707 44,988
------------------------------------
Total loans 73,924 106,570
Allowance for loan losses (837) (2,138)
------------------------------------
Total loans, net of the allowance for loan losses $73,087 $104,432
====================================
Multi-family first mortgage loans are loans made to affordable housing
developments. An additional $973 in multi-family loans is included in
construction loans at December 31, 2000.
Year Ended December 31 2002 2001 2000
- -------------------------------------------------------------------------------
Allowance for Loan Losses
Balances, beginning of period $2,138 $1,921 $2,021
Provision for losses (360) 1,349 670
Recoveries on loans 1,013 269 396
Loans charged off (1,954) (1,401) (1,166)
-----------------------------------------
Balances, end of period $ 837 $2,138 $1,921
=========================================
Information on impaired loans is summarized below:
December 31 2002 2001
- --------------------------------------------------------------------------------------------------
Impaired loans with an allowance $3,440 $4,000
Impaired loans without an allowance 13 2,762
------------------------
Total impaired loans $3,453 $6,762
========================
Allowance for impaired loans (included in allowance for loan losses) $ 332 $1,273
========================
Year Ended December 31 2002 2001 2000
- ----------------------------------------------------------------------------------
Average balance of impaired loans $3,656 $5,856 $7,298
Interest income recognized on impaired loans 312 496 1,008
Cash-basis interest included above 333 492 1,045
At December 31, 2002 and 2001, accruing loans delinquent 90 days or more totaled
$1 and $45, respectively. Non-accruing loans at December 31, 2002 and 2001 were
$875 and $3,537, respectively.
40
FIDELITY FEDERAL BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar Amounts in Thousands, Except Share Data)
>> Letter of Credit Valuation Allowance
Reserves related to letters of credit issued by Fidelity and United relate to
the permanent financing for certain affordable housing projects. Multi-family
housing letters of credit, an off-balance sheet item, carry the same risk
characteristics as conventional loans and totaled $29,674 and $30,479 at
December 31, 2002 and 2001, respectively.
Year Ended December 31 2002 2001 2000
- ------------------------------------------------------------------------------
Letter of credit valuation allowance
Balances, beginning of year $665 $5,153 $5,787
Provision (1,450) (85)
Recoveries 19 38 51
Funding of outstanding letters of credit (239) (3,076) (600)
--------------------------------
Balances, end of year $445 $ 665 $5,153
================================
>> Automobile Loan Securitization
United completed an automobile loan securitization transaction in 2002. 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
non-rated class B notes. The transaction was effected through a wholly-owned
subsidiary, United Fidelity Finance, LLC.
A summary of the components of managed loans, which represents both owned and
securitized loans, follow. The automobile loans presented represent the managed
portfolio of indirect prime automobile loans.
Loans Past
Principal Due Over
As of December 31, 2002 Balance 30 Days
- -------------------------------------------------------------------------------
Total managed automobile loans $ 59,426 $216
Less: Automobile loans securitized (41,702) (45)
-----------------------------
Total automobile loans held in portfolio $ 17,724 $171
=============================
Certain cash flows received from (paid to) the securitization trust follow:
Year Ended December 31 2002
- -------------------------------------------------------------------------------
Proceeds from securitization $48,939
Servicing fees received 138
Purchases of delinquent or foreclosed assets (85)
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.
41
FIDELITY FEDERAL BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar Amounts in Thousands, Except Share Data)
A summary of the fair values of the interest-only strips and servicing assets
retained, key economic assumptions used to arrive at the fair values, and the
sensitivity of the December 31, 2002 fair values to immediate 10% and 20%
adverse changes in those assumptions follows. Actual credit losses experienced
through year-end 2002 on the pool of automobile loans securitized have been
consistent with initial projections. As such, the expected static pool loss
assumption would perform consistently with that disclosed in the sensitivity
analysis. The sensitivities are hypothetical. Changes in fair value may not be
linear. Also, the effect of a variation in a particular assumption on the fair
value of the retained interests is calculated without changing any other
assumption; in reality, changes in one factor may result in changes in another
(for example, increases in market interest rates may result in lower prepayments
and increased credit losses), which might either magnify or counteract the
sensitivities.
Weighted- Monthly Expected
Average Prepayment Cumulative Annual Weighted-
Fair Life Speed Credit Discount Average
Value (in months) (% ABS) Losses Rate Coupon
-------------------------------------------------------------------------
Interest-only strip
As of the date of securitization $ 2,707 39 1.50% 1.50% 15.0% 9.09%
As of December 31, 2002 2,106 31 1.87 1.50 15.0 8.68
Decline in fair value of 10%
adverse change $ 53 $ 14 $ 25
Decline in fair value of 20%
adverse change 125 44 64
Servicing asset
As of the date of securitization 362 39 1.50% 1.50% 15.0%
As of December 31, 2002 * 265 31 1.87 1.50 15.0
Decline in fair value of 10%
adverse change $ 20 $ 0 $ 5
Decline in fair value of 20%
adverse change 36 0 10
* Carrying value of the servicing asset approximated fair value at December 31,
2002.
>> Foreclosed Assets Held for Sale
Activity in the allowance for losses on foreclosed assets was as follows:
Year Ended December 31 2002
- ---------------------------------------------------------------------
Balance, beginning of year $ 0
Provision charged to expense 100
Charge-offs, net of recoveries 0
-----------
Balance, end of year $100
===========
There was no activity in the allowance for losses on foreclosed assets in 2001
or 2000.
42
FIDELITY FEDERAL BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar Amounts in Thousands, Except Share Data)
>> Premises and Equipment
December 31 2002 2001
- --------------------------------------------------------------------------
Land $ 935 $1,810
Building and land improvements 5,563 5,601
Furniture, fixtures and equipment 2,119 2,311
---------------------------
Total cost 8,617 9,722
Accumulated depreciation (3,682) (3,713)
---------------------------
Net $4,935 $6,009
===========================
>> Other Assets and Investments in Limited Partnerships
Included in other assets at December 31, 2002 and 2001 are investments of $397
and $487 in limited partnerships which are organized to build, own and operate
apartment complexes. The carrying amounts of these investments approximate
Fidelity's equity in the net assets of the partnerships. The investments at
December 31, 2002 and 2001 are as follows:
Amount of Number of
Investment Partnerships
Percentage and Type of -------------------------------------------
Partnership Interest 2002 2001 2002 2001
---------------------------------------------------------------------
1%--General $ 0 $ (58) 0 17
31%--Limited 13 62 1 1
26%--Limited 54 87 1 1
10%--Limited 235 271 1 1
10%--Limited 95 104 1 1
99%--Limited 0 21 2 2
The general partner interests in the 17 partnerships noted above were sold in
2002 to a related party.
Fidelity records income on the equity method in the income and losses of the
limited partnerships, which resulted in losses of $38, $100 and $103 during the
years ended December 31, 2002, 2001 and 2000. In addition to recording its
equity in the losses of these projects, Fidelity has recorded the benefit of
low-income housing tax credits of $185, $319 and $375 for the years ended
December 31, 2002, 2001 and 2000. In certain cases, Fidelity could reduce the
carrying value of its investments in and related loans to these partnerships,
should its share of net losses materially exceed the net investments in and
loans to these partnerships. Combined condensed financial statements as of
December 31, 2002 have not been presented because the investments in limited
partnerships were not considered material at that date. Combined condensed
financial statements (unaudited) for the limited partnerships as of December 31,
2001 and 2000 are as follows:
43
FIDELITY FEDERAL BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar Amounts in Thousands, Except Share Data)
December 31 2001
- ------------------------------------------------------------------------------
Combined condensed balance sheets (unaudited)
Assets
Cash $ 510
Land and property 51,754
Other assets 2,799
-----------------
Total assets $55,063
=================
Liabilities
Notes payable $41,850
Other liabilities 3,530
-----------------
Total liabilities 45,380
Partners' equity 9,683
-----------------
Total liabilities and partners' equity $55,063
=================
Year Ended December 31 2001 2000
- -------------------------------------------------------------------------------
Combined condensed statements of operations (unaudited)
Total revenue $ 5,357 $ 5,681
Total expenses 7,646 8,094
---------------------
Net loss $ (2,289) $ (2,413)
=====================
Approximately $2,665 and $3,100 of the notes payable listed above are first
mortgage loans which are due to Fidelity from these partnerships at December 31,
2002 and 2001. Specific reserves on these first mortgage loans of $98 and $245
are included in Fidelity's allowance for loan losses at December 31, 2002 and
2001.
Fidelity reduced the recorded value of its investment in limited partnerships,
in addition to the losses recorded, by $122, $204 and $249 during the years
ended December 31, 2002, 2001 and 2000, based on the performance of the
underlying real estate operations.
Included in other assets is interest receivable as follows:
December 31 2002 2001
- -------------------------------------------------------------------------------
Interest receivable on loans $248 $493
Interest receivable on investment securities and other 163 149
----------------------
Total interest receivable $411 $642
======================
>> Deposits
December 31 2002 2001
- --------------------------------------------------------------------------------
Non-interest bearing transaction accounts $ 3,209 $ 5,008
Interest-bearing transaction accounts 14,252 10,922
Money market deposit accounts 7,622 13,441
Savings accounts 5,138 4,604
Certificates of $100 or more 15,171 14,378
Other certificates and time deposits 61,399 71,802
--------------------------
Total deposits $106,791 $120,155
==========================
44
FIDELITY FEDERAL BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar Amounts in Thousands, Except Share Data)
Certificates maturing in years ending December 31:
2003 $44,669
2004 19,964
2005 9,197
2006 2,047
2007 643
Thereafter 50
-------------------
$76,570
===================
>> Long-Term Debt
December 31 2002 2001
- ----------------------------------------------------------------------------------------------------------
Note payable, 7.42% adjusted annually, payable $7 per month, including interest,
due September 2010, secured by specific
multi-family mortgages $ 972 $ 978
Note payable, 7.42% adjusted annually, payable $10 per month,
including interest, due September 2010, secured by specific
multi-family mortgages 1,486 1,495
Note payable, 10.50%, interest paid quarterly, due June 2003,
secured by United stock 1,500 1,500
Junior subordinated notes, 9.00%, interest paid semi-annually,
due February 2009, unsecured 1,002
Junior subordinated notes, 9.25%, interest paid semi-annually,
due January 2002, unsecured 1,494
Senior subordinated notes, 10.00%, interest paid semi-annually,
due June 2005, unsecured 5,500 6,000
Federal Home Loan Bank advances, due at various dates through
2004 (weighted-average rates of 2.20% and 5.48% at December 31,
2002 and 2001) 3,000 12,333
Junior subordinated notes, 12.00%, interest paid semi-annually,
due April 2004, unsecured 126 125
Note payable, 5.25%, interest paid monthly, due September 2003,
secured by United guarantee 725
-------------------------
Total long-term debt $13,586 $24,650
=========================
45
FIDELITY FEDERAL BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar Amounts in Thousands, Except Share Data)
The terms of a security agreement with the FHLB require United to pledge as
collateral qualifying first mortgage loans in an amount equal to at least 125%
of these advances and all stock in the FHLB or eligible securities with a market
value in an amount equal to at least 110% of these advances. In addition to
first mortgage loans pledged of $26,673, Fidelity had $34,909 of investment
securities pledged at December 31, 2002. Certain advances are subject to
restrictions or penalties in the event of prepayment.
All long-term debt, except for Federal Home Loan Bank advances, is debt of the
parent company and totals $10,586 at December 31, 2002 as compared to $12,317 at
December 31, 2001.
The scheduled principal reduction of borrowings at December 31, 2002, is as
follows: 2003, $2,523; 2004, $2,151; 2005, $5,527; 2006, $29; 2007, $32; and
thereafter, $3,324.
>> Loan Servicing
Mortgage loans serviced for others are not included in the accompanying
consolidated balance sheets. The unpaid principal balances of mortgage loans
serviced for others totaled $57,368, $54,944 and $40,858 at December 31, 2002,
2001 and 2000.
The aggregate fair value of capitalized mortgage servicing rights at December
31, 2002 and 2001 approximated $514 and $687. Comparable market values and a
valuation model that calculates the present value of future cash flows were used
to estimate fair value. For purposes of measuring impairment, risk
characteristics including product type, investor type and interest rates, were
used to stratify the originated mortgage servicing rights.
Year Ended December 31 2002 2001 2000
- -----------------------------------------------------------------------------
Mortgage servicing rights
Balances, beginning of period $632 $431 $430
Servicing rights capitalized 232 274 54
Amortization of servicing rights (198) (73) (53)
-----------------------------------
666 632 431
Valuation allowance (152)
-----------------------------------
Balances, end of period $514 $632 $431
===================================
The only activity in the valuation allowance was the addition of the $152
allowance which was added in the fourth quarter of 2002.
Consumer loans are also serviced for others and are not included in the
accompanying consolidated balance sheets. The unpaid principal balances of
consumer loans serviced for others totaled $49,610 and $5,001 at December 31,
2002 and 2001.
The aggregate fair value of capitalized consumer loan servicing rights at
December 31, 2002 and 2001 approximated $409 and $269. As with mortgage
servicing rights, comparable market values and a valuation model that calculates
the present value of future cash flows were used to estimate fair value.
Year Ended December 31 2002 2001
- -----------------------------------------------------------------------
Consumer loan servicing rights
Balances, beginning of period $269 $ 0
Servicing rights capitalized 397 269
Amortization of servicing rights (257)
-------------------------
Balances, end of period $409 $269
=========================
46
FIDELITY FEDERAL BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar Amounts in Thousands, Except Share Data)
>> Income Tax
Year Ended December 31 2002 2001 2000
- --------------------------------------------------------------------------------------------------------
Income tax benefit
Currently payable
Federal $ (89) $ 662
State
Deferred
Federal $ (513) (261) (1,822)
State (128) (34) (209)
-------------------------------------------
Total income tax benefit $ (641) $(384) $(1,369)
===========================================
Reconciliation of federal statutory to actual tax benefit
Federal statutory income tax at 34% $(1,036) $(121) $ (859)
Effect of state income taxes (53) 4 (138)
Nondeductible expenses 8 (22) 3
Changes in the deferred tax asset valuation allowance 600
Affordable housing tax credits and other (222) (319) (375)
Other 62 74
-------------------------------------------
Actual tax benefit $ (641) $(384) $(1,369)
===========================================
The components of the deferred tax asset are as follows:
December 31 2002 2001
- ----------------------------------------------------------------------------------------------
Assets
Allowance for loan losses $ 822 $3,344
Valuation for letters of credit 146 145
Unrealized loss on available-for-sale securities 25
Alternative minimum tax credit 81 81
Low income housing credit carryforward 1,352 1,610
State net operating loss carryforward 1,028 1,020
Federal net operating loss carryforward 3,726 2,520
State income tax 7 131
Other real estate owned 38
Other 8 149
--------------------------
Total assets 7,208 9,025
--------------------------
Liabilities
Depreciation and amortization (48) (19)
Differences in accounting for certain accrued liabilities (14) (14)
Differences in basis of FHLB stock (64) (66)
Basis differential on certain partnership interests (118) (1,435)
Differences in accounting for loan servicing rights (351) (277)
Unrealized gain on available-for-sale securities (125)
Other (70)
--------------------------
Total liabilities (790) (1,811)
--------------------------
Net deferred tax asset before valuation allowance 6,418 7,214
--------------------------
Valuation Allowance
Beginning balance 0 0
Increase during the period (600)
--------------------------
Ending balance (600) 0
--------------------------
Net deferred tax asset $5,818 $7,214
==========================
47
FIDELITY FEDERAL BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar Amounts in Thousands, Except Share Data)
At December 31, 2002, Fidelity has federal net operating loss carryforwards for
tax purposes totaling $10,959. These loss carryforwards expire in varying
amounts through the year 2022. Fidelity has state net operating loss
carryforwards for tax purposes of $12,100. These loss carryforwards expire in
varying amounts through the year 2016. Fidelity has affordable housing credit
carryforwards of $1,352. These carryforwards expire in varying amounts through
the year 2022. In addition, Fidelity has an alternative minimum tax credit
carryforward of $81.
Retained earnings include approximately $1,870 for which no deferred income tax
liability has been recognized. This amount represents an allocation of income to
bad debt deductions as of December 31, 1987 for tax purposes only. Reduction of
amounts so allocated for purposes other than tax bad debt losses, including
redemption of bank stock or excess dividends, or loss of "bank" status, would
create income for tax purposes only, which income would be subject to the
then-current corporate income tax rate. The unrecorded deferred income tax
liability on the above amount was approximately $635.
Fidelity has recorded a deferred tax asset of $4,754 for the expected benefit to
be realized from the federal and state net operating loss carryovers discussed
above. In addition, a deferred tax asset of $1,352 for low income housing tax
credits is recorded. Realization depends upon the ability of Fidelity to
generate sufficient taxable income before the expiration of the carryover
periods. The amount that management considers to be realizable is reevaluated at
each financial statement date. That estimate could be reduced in the near term
if management lowers its estimate of future taxable income during the carryover
period.
>> Other Comprehensive Income
Other comprehensive income components and related taxes were as follows:
Year Ended December 31 2002 2001 2000
-----------------------
Unrealized gains on securities available for sale $755 $824 $397
Reclassification for realized amount included in income (73)
-----------------------
Other comprehensive income, before tax effect 682 824 397
Tax expense 265 326 158
-----------------------
Other comprehensive income $417 $498 $239
=======================
>> Commitments and Contingent Liabilities
In the normal course of business, there are outstanding commitments and
contingent liabilities, such as commitments to extend credit and standby letters
of credit, which are not included in the accompanying consolidated financial
statements. Fidelity's exposure to credit loss in the event of nonperformance by
the other party to the financial instruments for commitments to extend credit
and standby letters of credit is represented by the contractual or notional
amount of those instruments. Fidelity uses the same credit policies in making
such commitments as it does for instruments that are included on the
consolidated balance sheets.
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since many of the commitments are expected to expire
without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. Fidelity evaluates each customer's credit
worthiness on a case-by-case basis. The amount of collateral obtained, if deemed
necessary by Fidelity upon extension of credit, is based on management's credit
evaluation. Collateral held varies, but may include residential real estate,
income-producing commercial properties or other assets of the borrower. At
December 31, 2002 and 2001, commitments to extend credit, which represent
financial instruments whose contract amount represents credit risk, were $9,038
and $9,133.
48
FIDELITY FEDERAL BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar Amounts in Thousands, Except Share Data)
In the past, Fidelity has issued standby letters of credit to affordable housing
developments in which one of Fidelity's subsidiaries previously had partnership
interests until December 2002. The letters of credit secure tax-exempt bond
issues and other permanent financing of limited partnerships in which the
subsidiary owned a one percent general partner interest. The amount outstanding
on these letters of credit at December 31, 2002 and 2001 was $2,206 and $2,566.
Fidelity has also issued standby letters of credit on affordable housing
developments in which the borrowers are not affiliated with Fidelity. The
letters of credit secure tax-exempt bond issues and other permanent financing of
limited partnerships. The amount outstanding on the letters of credit at
December 31, 2002 and 2001 was $27,468 and $27,923.
>> Commitments and Contingent Liabilities
Fidelity, in its previous role as general partner on various affordable housing
developments through its subsidiaries, was committed to advance certain amounts
to limited partnerships. These previous commitments potentially include
short-term loans to the limited partners or an increase in the general partner's
equity investment. Upon the sale of Village Housing Corporation in the fourth
quarter of 2002, these commitments were extinguished.
Fidelity has entered into change in control agreements with one of its employees
which provide for the continuation of a multiple of the employee's existing
salary and certain benefits for a two-year period of time under certain
conditions following a change in control. The agreement becomes effective if
there is a change in control that is accompanied by a significant change in job
responsibilities and/or compensation.
Fidelity entered into an agreement with another institution in conjunction with
a consumer loan sale that guaranteed to the purchaser that Fidelity would
repurchase any consumer loans that exceeded a 60-day delinquency status. The
original amount of the loans sold was $5.0 million and remaining amount
outstanding totaled $2.8 million at December 31, 2002. Over the past year,
Fidelity has repurchased a total of $154 that exceeded the 60-day delinquency
status.
Fidelity and its subsidiaries are also subject to claims and lawsuits that arise
primarily in the ordinary course of business. It is the opinion of management
that the disposition or ultimate resolution of such claims and lawsuits will not
have a material adverse effect on the consolidated financial position of
Fidelity.
Fidelity's dividend policy is to pay cash or distribute stock dividends when its
Board of Directors deems it to be appropriate, taking into account Fidelity's
financial condition and results of operations, economic and market conditions,
industry standards, and other factors, including regulatory capital requirements
of its savings bank subsidiary. Fidelity is not subject to any regulatory
restrictions on payments to its stockholders. Fidelity's primary source of
income is dividends from United.
United has entered into a Supervisory Agreement (Agreement) with the OTS. The
Agreement restricts the payments of dividends from United to Fidelity without
prior written OTS approval. The OTS, in 1999, permitted the payment of dividends
to assist Fidelity in meeting interest payments on its outstanding debt, and in
2001, permitted United to transfer, in the form of a dividend, two real estate
properties to Fidelity. There can be no assurance that this approval will be
granted going forward. Fidelity is uncertain when it will pay dividends in the
future and the amount of such dividends, if any.
49
FIDELITY FEDERAL BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar Amounts in Thousands, Except Share Data)
>> Regulatory Capital
United is subject to various regulatory capital requirements administered by the
federal banking agencies. Failure to meet minimum capital requirements can
initiate certain mandatory and possibly additional discretionary actions by
regulators that, if undertaken, could have a direct material effect on the
United's financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, United must meet specific
capital guidelines that involve quantitative measures of the United's assets,
liabilities and certain off-balance-sheet items as calculated under regulatory
accounting practices. United's capital amounts and classification are also
subject to qualitative judgments by the regulators about components, risk
weightings and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require United to maintain minimum amounts and ratios (set forth in the table
below). Management believes, as of December 31, 2002 and 2001, that United meets
all capital adequacy requirements to which it is subject.
>> Regulatory Capital
As of December 31, 2002, the most recent notification from United's federal
regulators categorized United as well capitalized under the regulatory framework
for prompt corrective action. To be categorized as well capitalized, United must
maintain minimum total risk-based, Tier I risk-based and Tier I leverage ratios
as set forth in the table. There are no conditions or events since that
notification that management believes have changed United's category.
There are no specific targets for capital levels included or agreed to within
the Supervisory Agreement (Agreement) between United and the OTS, only a
requirement that United include capital targets within a strategic plan. At
December 31, 2002, United was in compliance with the targets included within
that plan. The Agreement did set a target level to reduce its classified assets
to 50% or less of core capital plus the allowance for loan losses and the letter
of credit valuation reserves. United's ratio of classified assets to core
capital plus the allowance for loan losses and letter of credit valuation
reserves was 27.5% at December 31, 2002.
United's actual and required capital amounts and ratios are as follows:
Required for To Be Well
Actual Adequate Capital* Capitalized*
-------------------------------------------------------------------------------
Amount Ratio Amount Ratio Amount Ratio
-------------------------------------------------------------------------------
As of December 31, 2002
Total risk-based capital* (to risk-
weighted assets) $11,107 12.5% $7,093 8.0% $8,866 10.0%
Tier 1 capital* (to risk-weighted assets) 8,823 10.0 3,546 4.0 5,319 6.0
Core capital* (to adjusted total assets) 10,929 8.8 4,958 4.0 6,197 5.0
Core capital (to adjusted tangible assets) 10,929 8.8 2,479 2.0 N/A N/A
Tangible capital (to adjusted total
assets) 10,520 8.5 1,853 1.5 N/A 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 N/A
Tangible capital (to adjusted total
assets) 12,716 8.5 2,249 1.5 N/A N/A
*As defined by regulatory agencies
50
FIDELITY FEDERAL BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar Amounts in Thousands, Except Share Data)
>> 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 timeframes. 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. The sale of United's subsidiary, Village Housing Corporation,
during the fourth quarter of 2002 eliminated any portion of the Supervisory
Agreement in reference to Village Housing Corporation.
At December 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; developing any real
estate 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.
Previously, United was to refrain from commercial lending. However, United
received OTS approval in the first quarter of 2002 to resume commercial lending
on a limited basis in accordance with its business plan.
Management of United has taken, or has refrained from taking, as applicable, the
actions requested by the OTS. United is in compliance with the provisions of the
supervisory agreement at December 31, 2002.
51
FIDELITY FEDERAL BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar Amounts in Thousands, Except Share Data)
>> Stockholders' Equity and Capital Infusion
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
net of costs associated with the offering. The shares purchased by shareholders
with these funds were issued in September 2002.
During the third quarter of 2002, Pedcor Investments, LLC (Investments)
exercised a portion of their option that was granted under the stock purchase
agreement in May 2000 and purchased $259 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.
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, 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. The shares purchased by shareholders with these funds were issued in
July 2001.
In 2000, Fidelity and its stockholders agreed to sell 1,460,000 shares of its
common stock to Pedcor Holdings, LLC, a limited liability company (Pedcor).
The consideration paid by Pedcor included $3,000 in cash $(3.00 per share), a
five-year guarantee to United in an aggregate amount up to $1,500 against any
negative cash flow from operations of certain specified affordable housing
properties in United's portfolio and an agreement to provide certain management
services for the specified properties for ten years at no fee to United or
Fidelity. Pedcor, as a result of this transaction, has the ability to exercise
an option to purchase up to $5 million of additional stock for a period of three
years from the closing date at fair market value through May 2003. In addition,
three Pedcor principals were named to Fidelity's Board of Directors. Intangible
assets of $1,265 were recognized as a result of this transaction. These assets
were being amortized over periods ranging from five to ten years. The net
unamortized balance of these intangibles at December 31, 2001 was $917 and is
included in other assets. During the fourth quarter of 2002, the general partner
interests to which the management services and intangible assets related were
sold. The remaining balances of the intangible assets were fully amortized at
that time and, therefore, the unamortized balance of the intangibles at December
31, 2002 was $0.
52
FIDELITY FEDERAL BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar Amounts in Thousands, Except Share Data)
In connection with Fidelity's first debt and equity rights offering completed
April 30, 1994, Fidelity reserved 415,500 shares of its common stock for
issuance upon exercise of 1,500 outstanding warrants. Each warrant represents
the right to purchase 277 shares of common stock. The warrants were valued at
$100 per warrant, carrying an exercise price of $6.22 per share, and expire on
April 30, 2004. At December 31, 2002, a total of 397,218 of the shares
originally reserved had been issued and 18,282 remained reserved and unissued.
In connection with Fidelity's second debt and equity offering completed on
January 31, 1995, Fidelity reserved 346,500 shares of its common stock for
issuance upon exercise of 1,500 outstanding warrants. Each warrant represents
the right to purchase 231 shares of common stock. The warrants were valued at
$100 per warrant, carrying an exercise price of $8.93 per share, and expire on
January 31, 2005. At December 31, 2002, a total of 337,029 of the shares
originally reserved had been issued and 9,471 remained reserved and unissued.
>> Discontinued Operations, Including Fourth Quarter Charges
On September 30, 2002, Fidelity signed a definitive agreement to sell the stock
of its wholly owned affordable housing subsidiary, Village Affordable Housing
Corporation and the stock of 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 was approximately $1.7 million in cash and was consummated during
the fourth quarter of 2002. The sale resulted in a consolidated pre-tax loss
under accounting principles generally accepted in the United States of America
of approximately $201, which consists of a gain from the sale of the affordable
housing assets held by Fidelity and United of $574 offset by a loss from the
sale of the subsidiaries of $775. The gain is recorded as gain on sale of assets
in the other income section of the consolidated statements of income.
The subsidiaries were sold as part of Fidelity's plan to end its active
involvement in the affordable housing business. Accordingly, the results of
operations for the two subsidiaries, which include impairment charges recorded
upon signing the definitive agreement of $742, has been classified as
discontinued operations in Fidelity's consolidated statement of income for
December 31, 2002. The $742 combined with the $775 loss noted in the paragraph
above total the $1,517 listed in the income statement as the loss on sale of
discontinued operations. The results of operations of the two subsidiaries for
the years ended December 31, 2001 and 2000 were not material and have,
therefore, not been segregated.
The sale was consummated in the fourth quarter of 2002. Certain charges were
recorded in the third quarter because it was determined that some of the assets
held for sale were impaired or their estimated useful lives had changed. Third
quarter charges totaled approximately $1,000, net of tax, including
approximately $860 in write-downs of intangible assets whose useful lives were
reduced. In the fourth quarter, in addition to recording the amounts discussed
in the second paragraph of this note, tax provisions of approximately $800 were
recorded to account for the basis difference on the stock that was sold.
53
FIDELITY FEDERAL BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar Amounts in Thousands, Except Share Data)
>> Benefit Plans
Fidelity is a participant in the Financial Institutions Retirement Fund (FIRF).
This defined-benefit plan is a multi-employer plan; separate actuarial
valuations are not made with respect to each participating employer. According
to FIRF administrators, the market value of the fund's assets did not exceed the
value of vested benefits in the aggregate as of June 30, 2002, the date of the
latest actuarial valuation. Plan expense of $110 was recognized during 2002
compared to $54 in 2001 and none in 2000. The plan provides pension benefits for
substantially all of Fidelity's employees.
Fidelity has a retirement savings 401(k) plan in which substantially all
employees may participate. Fidelity matches employees' contributions at the rate
of 25% up to 6% of the participant's salary. Fidelity's expense for the plan was
$21, $16, and $15 for the years ended December 31, 2002, 2001 and 2000.
>> Related Party Transactions
Fidelity has entered into transactions with certain directors, executive
officers, significant stockholders and limited partnerships in which Fidelity is
an investor and their affiliates and associates. Such transactions were made in
the ordinary course of business on substantially the same terms and conditions,
including interest rates and collateral, as those prevailing at the same time
for comparable transactions with other customers, and did not, in the opinion of
management, involve more than normal credit risk or present other unfavorable
features.
The aggregate amount of loans, as defined, to such related parties was as
follows:
December 31 2002 2001
- -------------------------------------------------------------------------------
Balances, beginning of year $2,948 $2,958
Composition change (7)
Loans charged off (376) (752)
Recoveries 1,084 219
New loans, including renewals 1,075 629
Payments, etc., including renewals (1,949) (99)
------------------------------
Balances, end of year $2,782 $2,948
------------------------------
Total internally classified related party loans included in the total related
party loans at December 31, 2002 and 2001 were $2,567 and $2,913. Reserves for
these classified related party loans totaled $128 and $48 at December 31, 2002
and 2001, respectively, and are included in the allowance for loan losses.
Deposits from related parties held by Fidelity at December 31, 2002 and 2001
totaled $619 and $589.
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. Fidelity also sold a position in an interest rate
swap for a $72 gain. These gains are included in gains on sales of loans in the
consolidated statements of income. The instruments were acquired by Pedcor
Funding Corporation and the purchase price consisted of a 20% down payment with
the remainder financed by a 10 year note totaling $235 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.
54
FIDELITY FEDERAL BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar Amounts in Thousands, Except Share Data)
As noted in the discontinued operations footnote, Village Housing Corporation
and Village Affordable Housing Corporation, along with certain affordable
housing assets, were sold to Pedcor Funding Corporation in the fourth quarter of
2002.
Pedcor had also been providing management services to the partnerships in which
Fidelity was a general partner at no cost since May 2000, in accordance with the
provisions of the sale of stock to Pedcor in May 2000. Upon completion of the
Village Housing Corporation sale noted in the discontinued operations footnote,
these services were no longer necessary.
>> Stock Option Plans
Under Fidelity's stock option plans, Fidelity grants stock option awards which
vest and become exercisable at various dates. During the years ended December
31, 2002, 2001 and 2000, Fidelity authorized the grant of options for up to
99,500, 10,000 and 148,500 shares of its common stock. The exercise price of
each option, which has a 10-year life, was greater than the market price of
Fidelity's stock on the date of grant; therefore, no compensation expense was
recognized.
Although Fidelity has elected to follow APB No. 25, SFAS No. 123 requires pro
forma disclosures of net income and earnings per share as if Fidelity had
accounted for its employee stock options under that Statement. The fair value of
each option grant was estimated on the grant date using an option-pricing model
with the following assumptions:
Year Ended December 31 2002 2001 2000
- ---------------------------------------------------------------------------------------------------------
Risk-free interest rates 5.1% 5.3% 6.5%
Dividend yields 0.0% 0.0% 0.0%
Volatility factors of expected market price of common stock 40.3% 28.1% 29.6%
Weighted-average expected life of the options 10 years 10 years 10 years
The following is a summary of the status of the Fidelity's stock option plans
and changes in the plans as of and for the years ended December 31, 2002, 2001
and 2000.
Directors' Plan
Fidelity has a non-qualified stock option plan (Directors' Plan) which provides
for the grant of non-qualified stock options to individuals who are directors of
Fidelity, or any of its subsidiaries. The Directors' Plan provides for the grant
of non-qualified stock options to acquire shares of common stock of Fidelity for
the price of not less than $2 above the average of the high and low bid
quotations, as reported by NASDAQ, for the common stock of Fidelity for the five
trading days immediately preceding the date the option is granted. A total of
233,779 shares have been reserved for issuance under the Directors' Plan.
55
FIDELITY FEDERAL BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar Amounts in Thousands, Except Share Data)
At December 31, 2002, there were 35,206 options available for grant. A summary
of the stock options activity for the Directors' Plan is as follows:
December 31 2002 2001 2000
- ------------------------------------------------------------------------------------------------------
Shares under option
Outstanding at beginning of year 143,573 152,313 118,293
Granted 55,000 36,000
Forfeited/expired (8,740) (1,980)
----------------------------------------
Outstanding at end of year 198,573 143,573 152,313
========================================
Exercisable at end of year 198,573 143,573 152,313
========================================
Weighted option price per share
Exercisable $6.29 $7.00 $7.05
Granted 4.42 4.46
Weighted-average fair value of options granted
during the year $1.05 $1.03
The following table summarizes information about stock options under the
Directors' Plan outstanding at December 31, 2002:
Options Outstanding Options Exercisable
------------------------------------------------------------------------------------------------
Weighted-Average
Range of Exercise Number Remaining Weighted-Average Number Weighted-Average
Prices Outstanding Contractual Life Exercise Price Exercisable Exercise Price
- ---------------------------------------------------------------------------------------------------------------------------
$4.31 to $ 6.22 166,032 5.0 years $ 5.29 166,032 $ 5.29
$9.74 to $11.81 32,541 4.3 years $11.37 32,541 $11.37
1995 Key Employees' Stock Option Plan
The 1995 Key Employees' Stock Option Plan (1995 Plan) provides for the granting
of either incentive stock options (ISOs) pursuant to Section 422A of the
Internal Revenue Code of 1986, as amended (Code), or stock options which do not
qualify as incentive stock options (ISOs), or any combination thereof. Options
may be granted to key employees and officers of Fidelity and its subsidiaries.
The option price per share for ISOs will not be less than the fair market value
of a share on the date the option is granted. The option price per share for
ISOs granted to an employee owning 10 percent or more of the common stock of
Fidelity will be not less than 110 percent of the fair market value of a share
on the date the option is granted. The option price per share for ISOs will be
determined by the compensation committee, but may not be less than 100 percent
of the fair market value on the date of grant. A total of 236,500 shares have
been reserved for issuance under the 1995 Plan.
56
FIDELITY FEDERAL BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar Amounts in Thousands, Except Share Data)
At December 31, 2002, there were 52,670 options available for grant. A summary
of the stock options activity for the 1995 Plan is as follows:
December 31 2002 2001 2000
- --------------------------------------------------------------------------------------------
Shares under option
Outstanding at beginning of year 186,643 139,143 80,278
Granted 44,500 47,500 75,000
Forfeited/expired (45,720) (16,135)
Exercised (2,000)
---------------------------------------
Outstanding at end of year 183,423 186,643 139,143
=======================================
Exercisable at end of year 128,423 153,343 130,243
=======================================
Weighted option price per share
Exercisable $3.85 $5.91 $6.33
Granted 3.17 1.57 4.00
Weighted-average fair value of options granted
during the year $1.37 $0.82 $0.82
The following table summarizes information about stock options under 1995 Plan
outstanding at December 31, 2002:
Options Outstanding Options Exercisable
--------------------------------------------------------------------------------------------------
Weighted-Average
Range of Exercise Number Remaining Weighted-Average Number Weighted-Average
Prices Outstanding Contractual Life Exercise Price Exercisable Exercise Price
- ------------------------------------------------------------------------------------------------------------------------------
$1.53 to $ 4.00 174,923 8.02 years $ 3.14 119,923 $ 3.36
$10.81 to $ 10.81 8,500 4.89 years $10.81 8,500 $10.81
>> Earnings Per Share
Earnings per share (EPS) were computed as follows:
Year Ended December 31, 2002
----------------------------------------------------
Loss Weighted-Average Per Share Amount
Shares
----------------------------------------------------
Loss from continuing operations
$(2,407)
================
Basic earnings per share
Loss available to common stockholders $(2,407) 6,175,896 $(0.39)
==================
Effect of dilutive securities
Stock options
-----------------------------------
Diluted earnings per share
Loss available to common stockholders and
assumed conversions $(2,407) 6,175,896 $(0.39)
====================================================
57
FIDELITY FEDERAL BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar Amounts in Thousands, Except Share Data)
>> Earnings Per Share
Earnings per share (EPS) were computed as follows:
Year Ended December 31, 2002
----------------------------------------------------
Loss Weighted-Average Per Share Amount
Shares
----------------------------------------------------
Loss from continuing operations
$(2,407)
================
Basic earnings per share
Loss available to common stockholders $(2,407) 6,175,896 $(0.39)
==================
Effect of dilutive securities
Stock options
-----------------------------------
Diluted earnings per share
Loss available to common stockholders and
assumed conversions $(2,407) 6,175,896 $(0.39)
====================================================
Options to purchase 381,996 shares of common stock at prices ranging from $1.53
to $11.81 per share as well as stock warrants representing the right to purchase
527,753 share of common stock at prices ranging from $3.00 to $8.93 per share
were outstanding at December 31, 2002, but were not included in the computation
of diluted EPS because the options' exercise price was greater than the average
market price of the common shares.
>> Fair Value of Financial Instruments
The following methods and assumptions were used to estimate the fair value of
each class of financial instrument:
Cash and Cash Equivalents--The fair value of cash and cash equivalents
approximates carrying value.
Interest-Bearing Time Deposits--The fair value of interest-bearing time deposits
approximates carrying value.
Investment Securities--Fair values are based on quoted market prices.
Loans--For both short-term loans and variable-rate loans that reprice frequently
and with no significant change in credit risk, fair values are based on carrying
values. The fair values for certain mortgage loans, including one-to-four family
residential, are based on quoted market prices of similar loans sold in
conjunction with securitization transactions, adjusted for differences in loan
characteristics. The fair value for other loans is estimated using discounted
cash flow analyses using interest rates currently being offered for loans with
similar terms to borrowers of similar credit quality.
Interest Receivable/Payable--The fair values of interest receivable/payable
approximate carrying values.
58
FIDELITY FEDERAL BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar Amounts in Thousands, Except Share Data)
Long-Term Debt--The fair value of these borrowings is estimated using a
discounted cash flow calculation based on current rates for similar debt.
Long-term debt consists of adjustable instruments tied to a variable market
interest rate.
Off-Balance-Sheet Commitments--Commitments include commitments to purchase and
originate mortgage loans, commitments to sell mortgage loans and standby letters
of credit and are generally of a short-term nature. The fair value of the loan
commitments is based on fees currently charged to enter into similar agreements,
taking into account the remaining terms of the agreements and the
counterparties' credit standing. The carrying amounts of the commitments to
purchase and originate mortgage loans and to sell mortgage loans, which are
immaterial, are reasonable estimates of the fair value of these financial
instruments. The carrying amount of the standby letters of credit, which consist
of a letter of credit valuation allowance of $445, is a reasonable estimate of
the fair value of those off-balance sheet items.
The estimated fair values of Fidelity's financial instruments are as follows:
2002 2001
-----------------------------------------------------------------------
Carrying Fair Carrying Fair
December 31 Amount Value Amount Value
- ----------------------------------------------------------------------------------------------------------------------------
Assets
Cash and cash equivalents $ 3,823 $ 3,823 $ 16,316 $ 16,316
Investment securities available for sale 34,912 34,912 18,074 18,074
Loans, net 73,087 74,532 104,432 105,705
Interest receivable 411 411 642 642
FHLB stock 2,674 2,674 2,620 2,620
Liabilities
Deposits 106,791 109,097 120,155 122,877
Long-term debt 13,586 14,199 24,650 25,839
Interest payable 266 266 898 898
Standby letters of credit 445 445 665 665
59
FIDELITY FEDERAL BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar Amounts in Thousands, Except Share Data)
>> Condensed Financial Information (Parent Company Only)
Presented below is condensed financial information as to financial position,
results of operations and cash flows of Fidelity:
Condensed Balance Sheets
December 31 2002 2001
- ----------------------------------------------------------------------------------------------------------------------------
Assets
Cash and cash equivalents $ 123 $ 2
Investment in common stock of subsidiaries 13,958 16,440
Loans, net 2,814 2,317
Subordinated debentures and other loan receivables
from subsidiaries 1,500 2,875
Income tax receivable 1,876 2,852
Other assets 199 1,238
------------------------------------
Total assets $20,470 $25,724
====================================
Liabilities
Long-term debt $10,586 $12,796
Letter of credit valuation allowance 61 300
Other liabilities 235 733
------------------------------------
Total liabilities 10,882 13,829
Stockholders' Equity 9,588 11,895
------------------------------------
Total liabilities and stockholders' equity $20,470 $25,724
====================================
60
FIDELITY FEDERAL BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar Amounts in Thousands, Except Share Data)
Condensed Statements of Income
Year Ended December 31 2002 2001 2000
- ----------------------------------------------------------------------------------------------------------
Income
Dividends from subsidiaries
Interest income $ 560 $ 652 $ 711
Other income 614 364 21
----------------------------------------
Total income 1,174 1,016 732
----------------------------------------
Expense
Interest expense 1,113 1,375 1,412
Provision for loan losses (400) 595 100
Letter of credit valuation provision (715)
Other expenses 1,526 622 1,186
----------------------------------------
Total expense 2,239 1,877 2,698
----------------------------------------
Loss Before Income Tax and Equity in
Undistributed (Distributions in Excess of)
Income of Subsidiaries (1,065) (861) (1,966)
Income Taxes (Benefit) 976 (344) (779)
----------------------------------------
Loss Before Equity in Undistributed (Distributions in Excess of)
Income of Subsidiaries (2,041) (517) (1,187)
Equity in Undistributed (Distributions in Excess of) Income of
Subsidiaries (2,354) 741 31
----------------------------------------
Net Income (Loss) $(4,395) $ 224 $(1,156)
========================================
61
FIDELITY FEDERAL BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar Amounts in Thousands, Except Share Data)
Condensed Statements of Cash Flows
Year Ended December 31 2002 2001 2000
- ---------------------------------------------------------------------------------------------------------
Operating Activities
Net income (loss) $(4,395) $ 224 $(1,156)
Adjustments to reconcile net income (loss) to net
cash used by operating activities
Depreciation and amortization 6 11 13
Provision for loan losses (400) 595 100
Letter of credit valuation provision (715)
Funding on outstanding letters of credit (239) (355) (300)
Gain on early extinguishment of debt (140) (325)
Loss on impairment of assets held for sale and changes in
estimated useful lives of intangible assets 1,096
Loss on sale of subsidiary 64
Undistributed net income (loss) of subsidiaries 2,374 (741) (31)
(Increase) decrease in other assets 921 10 (1,801)
(Increase) decrease in other liabilities (498) (149) 557
------------------------------------------
Net cash used by operating activities (1,211) (1,445) (2,618)
------------------------------------------
Investing Activities
Capital contributions to subsidiaries (8) (193) (2,197)
Proceeds from sale of subsidiary 461
Principal payments received on notes from subsidiaries 1,375 2,000
Net change in loans (97) (460) (391)
------------------------------------------
Net cash provided (used) by investing activities 1,731 (653) (588)
------------------------------------------
Financing Activities
Repayment of long-term debt (3,928) (2,740) (532)
Proceeds from issuance of long-term debt 1,858 1,471
Sale of common stock 1,421 2,398 4,265
Sale of stock warrants 250
------------------------------------------
Net cash provided (used) by financing activities (399) 1,129 3,733
------------------------------------------
Change in Cash and Cash Equivalents 121 (969) 527
Cash and Cash Equivalents, Beginning of Period 2 971 444
------------------------------------------
Cash and Cash Equivalents, End of Period $ 123 $ 2 $ 971
==========================================
62
Corporation Information
Toll-Free Shareholder
Inquiries: 1.800.280.8280
If you have inquiries or questions regarding your Fidelity Federal Bancorp
Shareholder account, call shareholder relations at 800.280.8280 or 812.424.0921
ext. 2226.
Stock Transfers, Dividend Payments
Dividend Reinvestment
Fidelity Federal Bancorp
Attn: Debbie L. Merritt, Shareholder Relations
18 NW Fourth St.
PO Box 1347
Evansville, IN 47706-1347
Fidelity Federal Bancorp offers its Common shareholders a no-cost way in which
to reinvest cash dividends. For additional information about this plan, contact
us at the above address or phone number.
Financial Information
If you are seeking financial information, contact:
Mark A. Isaac, Chief Financial Officer
Fidelity Federal Bancorp
18 NW Fourth St.
PO Box 1347
Evansville, IN 47706-1347
812.424.0921 ext. 3319
All other requests, including requests for the Annual Report, Form 10-K,
Form 10-Q, etc. should be directed to:
Debbie Merritt,
Shareholder Relations.
Fidelity Federal Bancorp
18 NW Fourth St.
PO Box 1347
Evansville, IN 47706-1347
812.424.0921 ext. 2226
Internet
Information on Fidelity Federal Bancorp is available on the Internet at:
http://www.unitedfidelity.com
Common Stock Information
NASDAQ National Market System
Ticker Symbol: FFED
Market Makers
Knight Securities L.P.
Goldman, Sachs & Co.
Hill, Thompson, Magid & Co.
Hoefer & Arnett, Inc.
Products and Services
For specific information on products and services offered by the Company's
banking subsidiary, United Fidelity Bank, fsb, call 800.280.8280 or 812.424.0921
Corporate Headquarters
Fidelity Federal Bancorp
18 NW Fourth St.
PO Box 1347
Evansville, IN 47706-1347
800.280.8280
812.424.0921
Annual Meeting
Thursday, April 24, 2003
9:00 am (Central Daylight Time)
Sheraton Inn
8787 Keystone Crossing
Indianapolis, Indiana 46240
Fidelity Federal Bancorp
Board of Directors
William R. Baugh
Chairman Emeritus, Fidelity Federal Bancorp
Retired President, United Fidelity Bank, fsb
Paul E. Becker
President, Gaither Technologies STC
Director, United Fidelity Bank, fsb
Bruce A. Cordingley
President and Chief Executive Officer, Pedcor Investments
President and Chief Executive Officer, Pedcor Bancorp
Director, International City Bank, N.A. (Long Beach, CA)
Director, United Fidelity Bank, fsb
President, Chief Executive Officer, Village Housing Corporation
Jack Cunningham
Chairman of the Board, United Fidelity Bank, fsb
Chairman of the Board, Fidelity Federal Bancorp
Port of Evansville Wharfmaster
Donald R. Neel
President and Chief Executive Officer, Fidelity Federal Bancorp
President and Chief Executive Officer, Director, United Fidelity Bank, fsb
Gerald K. Pedigo
Chairman, Pedcor Bancorp
Chairman, Pedcor Investments
Director, International City Bank, N.A. (Long Beach, CA)
Barry A. Schnakenburg
President, U.S. Industries Group, Inc.
President, Barry Inc.
Director, United Fidelity Bank, fsb
Phillip J. Stoffregen
Executive Vice President and Chief Operating Officer, Pedcor Investments
Corporate Information
Officers
Jack Cunningham Mark A. Isaac
Chairman Vice President, Chief Financial
Officer
Bruce A. Cordingley Nancy K. Sweazey
Chairman, Executive Committee Vice President, Secretary
Donald R. Neel Debbie L. Merritt
President, Chief Executive Officer Assistant Vice President,
Shareholder Relations
United Fidelity Bank, fsb
Officers
Donald R. Neel Marilyn A. Doyle
President and Chief Executive Officer Assistant Vice President,
Marketing and Sales
B. Eugene Dawson Dannel R. Garness
Senior Vice President, Commercial Lending Assistant Vice President,
Loan Administration
Mark A. Isaac James W. Goodwin
Senior Vice President, Chief Financial Officer Assistant Vice President,
Consumer Lending
Thomas D. Wuerth Carrie L. Howard
Senior Vice President, Retail Banking Assistant Vice President,
Consumer Lending
Richard J. Goebel Barbara B. Hubbard
Vice President, Operations Assistant Vice President,
Collections
Stephen C. Piper J. Michael Huston
Vice President, Mortgage Lending Assistant Vice President,
Northside Branch Manager
Nancy K. Sweazey G. Andrew Jenkins
Vice President, Human Resources, Secretary Assistant Vice President,
Mortgage Lending
William P. Wisuri Kristi R. Krack
Vice President, Consumer Lending Assistant Vice President,
Eastside Branch Manager
Gregory W. Brown Debbie L. Merritt
Assistant Vice President, Assistant Controller Assistant Vice President,
Facilities Management
W. Ray Buckman Diane T. Tabor
Assistant Vice President, Consumer Lending Assistant Vice President,
Assistant Controller
Lawrence H. Coffman D. Brent Taylor
Assistant Vice President, Consumer Lending Assistant Vice President,
Branch Administration
Shanon L. Delong David W. Trout
Assistant Vice President, Internal Auditing Assistant Vice President,
Consumer Underwriter