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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 of the
Securities Exchange Act of 1934
For the fiscal year ended September 30, 2001
Commission file number 1-12753
FIDELITY BANCORP, INC.
(Exact name of registrant as specified in its charter)
Delaware 36-3915246
(State of incorporation) (I.R.S. Employer Identification No.)
5455 West Belmont Avenue, Chicago, Illinois 60641
(Address of principal executive offices)
Telephone (773) 736 - 4414
Securities registered pursuant to Section 12 (b) of the Act: None
Securities registered pursuant to Section 12 (g) of the Act:
Common Stock, par value $.01
(Title of class)
The registrant (1) has filed all reports required to be filed by Section 13
or 15 (D) of the Securities Exchange Act of 1934 during the preceding twelve
months (or for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements for the
past 90 days. Yes X No .
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this form 10-K. [ X ]
The aggregate market value of the voting stock held by non-affiliates of the
registrant, i.e., persons other than directors and executive officers of the
registrant is $49,894,732 and is based upon the last sales price as quoted on
Nasdaq Stock Market for December 1, 2001.
The number of shares of Common Stock outstanding as of December 1, 2001:
2,022,867
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the Annual Meeting of Stockholders to be
held on January 23, 2002 are incorporated by reference into Part III hereof.
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1
ITEM 1. BUSINESS
GENERAL
On December 3, 1993, Fidelity Bancorp, Inc., a Delaware corporation (the
"Company"), completed its public offering of 3,782,350 shares of common stock
at $10.00 per share and became the holding company for Fidelity Federal Savings
Bank (the "Bank") as part of the Bank's conversion from a federally-chartered
mutual savings bank to a federally-chartered stock savings bank. Primarily as
a result of stock repurchase programs, outstanding shares of common stock at
September 30, 2001 totalled 2,020,367. The Company's common stock is listed on
the national market tier of the Nasdaq Stock Market and trades under the symbol
"FBCI".
Originally organized in 1906, the Bank conducts its business through its main
office and four full-service branch offices, located in Chicago, Franklin Park,
and Schaumburg, Illinois. The Bank's results of operations are dependent on
net interest income which is the difference between interest earned on its loan
and investment portfolios, and its cost of funds, consisting of interest paid
on deposits and Federal Home Loan Bank ("FHLB") advances. In addition to
traditional mortgage, commercial, and construction loans, consumer loans, and
retail banking products, the Bank generates non-interest income such as
transactional fees, and fees and commissions from its full-service securities
brokerage services offered through INVEST Financial Corporation ("INVEST") as
well as insurance and annuity products. The brokerage services, as well as the
insurance and annuity products, are offered through Fidelity Corporation, a
wholly owned subsidiary. The Bank's operating expenses primarily consist of
employee compensation, occupancy expenses, federal deposit insurance premiums
and other general and administrative expenses. The Bank's results of
operations are also significantly affected by general economic and competitive
conditions, particularly changes in market interest rates, government policies
and actions of regulatory authorities.
As a federally chartered savings bank, the Bank's deposits are insured up to
the applicable limits by the Federal Deposit Insurance Corporation ("FDIC").
The Bank is a member of the FHLB of Chicago, which is one of the twelve
regional banks for federally insured financial institutions comprising the FHLB
system. The Bank is regulated by the Office of Thrift Supervision ("OTS") and
the FDIC. The Bank is further regulated by the Board of Governors of the
Federal Reserve System as to reserves required to be maintained against
deposits and certain other matters.
The Company's executive offices are located at 5455 West Belmont Avenue,
Chicago, Illinois 60641 and its telephone number is (773) 736-3000.
MARKET AREA
The Bank's market area for deposits is concentrated in the neighborhoods
surrounding its offices in the northwest Chicago and suburban areas. The
Bank's primary market area for lending includes northwest Chicago, western Cook
County and adjacent areas in DuPage, Kane and Lake Counties, Illinois, and to a
lesser extent McHenry County and the remainder of Cook County, Illinois.
Management believes that its offices are located in communities that can
generally be characterized as consisting of stable, residential neighborhoods
of predominately one- to four-family residences.
2
COMPETITION
The bank is faced with increasing competition in attracting retail customer
business, including deposit accounts and loan originations. The Chicago
metropolitan area is a highly competitive market. Competition for deposits
comes primarily from savings institutions, commercial banks, money market
mutual funds, and insurance companies (primarily in the form of annuity
products) and is primarily based on interest rates offered, convenience of
branch locations, ease of business transactions, and office hours. Competition
for loan products comes primarily from other mortgage brokers, savings
institutions, commercial banks and mortgage banking companies and is primarily
based on interest rates, terms, fees, and level of customer service.
REGULATORY ENVIRONMENT
The Bank is subject to extensive regulation, supervision and examination by the
OTS, as its chartering authority and primary federal regulator, and by the
FDIC, which insures its deposits up to applicable limits. The regulation and
supervision of the Bank establishes a comprehensive framework of approved
activities in which the Bank can engage and is designed primarily for the
protection of the insurance fund and depositors. The regulatory structure also
gives the regulatory authorities extensive discretion in connection with their
supervisory and enforcement activities. Any change in regulation, whether by
the OTS, the FDIC or Congress, could have a material impact on the Bank and its
operations. See "Supervision and Regulation" for more information.
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995
This report contains certain forward looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. The Company intends such forward-
looking statements to be covered by the safe harbor provisions for forward-
looking statements contained in the Private Securities Reform Act of 1995, and
is including this statement for purposes of these safe harbor provisions.
Forward-looking statements, which are based on certain assumptions and describe
future plans, strategies and expectations of the Company, are generally
identifiable by use of the words "believe," "expect," "intend," "anticipate,"
"estimate," "project" or similar expressions. The Company's ability to predict
results or the actual effect of future plans or strategies is inherently
uncertain. Factors which could have a material adverse affect on the
operations and future prospects of the Company and the subsidiaries include,
but are not limited to, changes in: interest rates, general economic
conditions, legislative/regulatory changes, monetary and fiscal policies of the
U.S. Government, including policies of the U.S. Treasury and the Federal
Reserve Board, the quality or composition of the loan or investment portfolios,
demand for loan products, deposit flows, competition, demand for financial
services in the Company's market area, implementation of new technologies, the
Company's ability to develop and maintain secure and reliable electronic
systems and accounting principles, policies and guidelines. These risks and
uncertainties should be considered in evaluating forward-looking statements and
undue reliance should not be placed on such statements.
3
Item 2. Properties
The Bank conducts its business through five full-service offices. All offices
have ATM facilities. All offices, except for the Franklin Park branch, have
drive-through facilities. During fiscal 2000, the Company's wholly owned
subsidiary, Fidelity Corporation, opened a satellite office to sell insurance
and non-FDIC insured investments through INVEST Financial Corporation. This
office was closed on September 30, 2001. Management believes that the current
facilities are adequate to meet the present and immediately foreseeable needs
of the Bank and the Company. Certain information concerning the offices of the
Company and the Bank is set forth below.
Net Book Value
Original Date of Property or Leased
Leased or Leasehold Improvements or
Location Acquired at September 30, 2000 Owned
(In thousands)
EXECUTIVE AND HOME OFFICE: Various dates
5455 W. Belmont Ave. commencing in
Chicago, IL 60641 1955 $ 1,009 Owned
BRANCHES:
Higgins Branch
6360 W. Higgins Road
Chicago, IL 60630 1984 463 Owned
Franklin Park Branch
10227 W. Grand Ave.
Franklin Park, IL 60131 1980 38 Leased
Schaumburg Branch
2425 W. Schaumburg Road
Schaumburg, IL 60194 1995 868 Leased
Harlem Avenue Branch
3940 N. Harlem Ave.
Chicago, IL 60634 1995 380 Owned
-------
$ 2,758
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Item 3. LEGAL PROCEEDINGS
As of September 30, 2001, neither the Company nor its subsidiaries are involved
in any pending legal proceedings, other than routine legal proceedings
occurring in the ordinary course of business. Such proceedings in the
aggregate are believed by management to be immaterial to the Company's
financial condition or results of operations.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
None.
4
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock is traded on the Nasdaq Stock Market under the
symbol "FBCI". As of December 1, 2001 the Company had approximately 450
stockholders of record. The table below shows the reported high and low sales
prices of the common stock during the periods indicated as reported on the
Nasdaq Stock Market and does not necessarily reflect retail markups, markdowns,
or commissions:
2001 2000
High Low High Low
First Quarter $18.81 $17.63 $18.00 $16.00
Second Quarter 21.38 18.75 18.25 16.38
Third Quarter 22.59 20.85 18.00 17.25
Fourth Quarter 25.15 22.25 17.75 17.00
The Company announced its most recent stock purchase plan, the 10th, on October
19, 1999 for 110,000 shares and expanded it to 220,000 shares on January 26,
2000. This repurchase program was completed on April 24, 2001 at an average
price of $17.91 per share. The Company views stock repurchases as part of an
ongoing strategy to build value for stockholders.
The Board of Directors declared per share dividends aggregating $0.48 and $0.47
during fiscal 2001 and 2000, respectively. In addition, the Board of Directors
declared a regular quarterly dividend of $0.12 per share, payable on November
15, 2001 to stockholders of record as of October 31, 2001.
5
Item 6. SELECTED FINANCIAL DATA
The following table sets forth certain financial data at or for the periods
indicated. This information should be read in conjunction with the
Consolidated Financial Statements and the notes thereto.
At and For the Years Ended September 30,
2001 2000 1999 1998 1997
(Dollars in thousands, except per share data)
SELECTED OPERATING DATA:
Interest income $ 46,454 43,851 39,294 36,127 35,915
Interest expense 31,461 29,112 23,762 21,836 21,470
------ ------ ------ ------ ------
Net interest income before
provision for loan losses 14,993 14,739 15,532 14,291 14,445
Provision for loan losses 295 180 165 181 64
------ ------ ------ ------ ------
Net interest income after
provision for loan losses 14,698 14,559 15,367 14,110 14,381
Non-interest income:
Fees and commissions 457 452 374 332 341
Insurance and annuity commissions 820 1,063 721 717 700
Gain on sale of securities 231 - - - -
Gain on sale of loans 640 - - - -
Other 159 53 51 58 62
------ ------ ------ ------ ------
Total non-interest income 2,307 1,568 1,146 1,107 1,103
Non-interest expense 9,700 9,320 9,840 9,218 12,266
------ ------ ------ ------ ------
Income before income taxes 7,305 6,807 6,673 5,999 3,218
Income tax expense 2,433 2,565 2,543 2,219 2,293
------ ------ ------ ------ ------
Net income $ 4,872 4,242 4,130 3,780 925
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SELECTED FINANCIAL CONDITION DATA:
Total assets $ 668,706 637,031 599,281 513,563 495,634
Loans receivable, net 422,980 534,277 507,557 425,608 388,262
Loans held for sale 41,219 - - - -
Mortgage-backed securities
held to maturity - 2,901 3,585 11,177 16,875
Mortgage-backed securities
available for sale 127,685 - - - -
Securities available for sale 42,006 74,366 66,070 58,979 70,297
Deposits 399,619 381,433 357,016 330,670 323,443
Borrowed funds 187,345 205,150 186,250 121,400 113,400
Stockholders' equity 49,384 42,803 42,021 48,597 49,617
6
At and For the Years Ended September 30,
2001 2000 1999 1998 1997
SELECTED FINANCIAL RATIOS AND OTHER DATA:
Return on average assets 0.77% 0.70% 0.74% 0.76% 0.19%
Return on average stockholders' equity 11.11 10.17 9.42 7.30 1.82
Average stockholders' equity to
average assets 6.90 6.90 7.89 10.46 10.40
Stockholders' equity to total assets 7.39 6.72 7.01 9.46 10.01
Non interest expense to average assets 1.53 1.54 1.77 1.87 1.91
Interest rate spread during period 1.95 2.06 2.43 2.38 2.45
Net interest margin 2.41 2.49 2.87 2.98 3.03
ASSET QUALITY RATIOS:
Non-performing loans to loans
receivable, net 0.16 0.07 0.07 0.20 0.47
Non-performing assets to total assets 0.10 0.06 0.06 0.19 0.41
Net charge-offs to average loans - - (0.05) 0.01 0.11
Allowance for loan losses to total loans 0.29 0.18 0.15 0.14 0.12
Allowance for loan losses to
non-performing loans 182.57 250.66 227.41 71.12 25.44
REGULATORY CAPITAL RATIOS (Bank only):
Tangible 7.51 6.95 6.89 8.91 8.59
Core 7.51 6.95 6.89 8.91 8.59
Risk-based 17.65 14.55 14.71 18.99 18.37
OTHER DATA:
Loan originations (dollars in thousands) $140,139 110,184 196,859 142,788 97,774
Number of deposit accounts $ 24,493 25,356 24,524 21,193 24,984
Book value per share outstanding $ 24.44 21.14 19.03 18.76 17.75
Earnings per share - diluted $ 2.31 1.96 1.76 1.33 0.32
Cash dividends declared per share 0.48 0.47 0.43 0.38 0.30
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED SEPTEMBER 30, 2001 AND
SEPTEMBER 30, 2000
GENERAL. Net income for the year ended September 30, 2001 was $4.9 million, or
$2.31 per diluted share ($2.42 per basic share), an increase of 14.9% over the
prior year. Diluted earnings per share increased by 17.9% over the $1.96
recorded in fiscal 2000 as a result of higher net income. Net income increased
as a result of a increases in both net interest and non-interest income.
7
NET INTEREST INCOME. The Bank's core earnings, net interest income, is the
primary source of earnings for the Company. Net interest income consists of
interest income on loans, mortgage-backed and investment securities, offset by
interest expense on deposits and borrowed funds. Net interest income for the
year was $15.0 million, compared to $14.7 million in fiscal 2000. The
Company's average interest-earning assets increased to $622.5 million for the
year ended September 30, 2001 from $592.8 million for the year ended September
30, 2000, an increase of $29.7 million, or 5.0%, while the Company's net
interest margin declined to 2.41% for the year ended September 30, 2001,
compared to 2.49% one year ago.
Interest income for the year ended September 30, 2001 totaled $46.5 million, an
increase of $2.6 million from the year ended September 30, 2000. The average
balance of the investment portfolio increased to $98.5 million. Interest
generated from mortgage-backed and investment securities for the year ended
September 30, 2001 was $7.0 million, an increase of $1.6 million from the year
ended September 30, 2000. Changes in the mix of the investment portfolio to
include government and agency, mortgage-backed, corporate and municipal
securities increased the weighted average yield 19 basis points to 7.15%.
Interest income on loans, the largest component of interest-earning assets,
increased $1.0 million from the prior year to $39.3 million. The average loan
portfolio increased $9.7 million in fiscal 2001. The average yield on loans
increased to 7.52% for the year ended September 30, 2001 from 7.47% for the
year ended September 30, 2000.
Interest expense for the year totaled $31.5 million, an increase of $2.3
million from the prior year. The increase in interest expense was impacted by
the increase in the average cost of interest-bearing liabilities to 5.51% from
5.34%. Interest expense on deposit accounts increased $1.1 million to $19.1
million for the year. Average interest-bearing deposits increased $11.7
million to $376.5 million for the year ended September 30, 2001. Increased
competition for deposits required payment of higher deposit rates to retain and
attract deposits.
For the year ended September 30, 2001, the Company recorded interest expense on
borrowed funds of $12.3 million on an average balance of $194.5 million for an
average cost of 6.34%. This compares to interest expense of $11.1 million on an
average balance of $180.7 million, or an average cost of 6.16% for 2000. The
increase in the average balance from 2000 was due to increased funding needs
for loan originations and purchases of securities. The increase in the cost of
funds was due to heavier borrowing in the first half of the year, when short-
term borrowing rates were higher.
PROVISION FOR LOAN LOSSES. Based on management's evaluation of the loan
portfolio, a provision for loan losses of $295,000 was recorded during the year
ended September 30, 2001. The provision for loan losses was $180,000 for
fiscal 2000. At September 30, 2001, the ratio of non-performing loans to total
loans was 0.16%. The allowance for loan losses represented 0.29% of total
loans receivable at September 30, 2001 compared to 0.18% one year ago.
Management reviews the provision for loan losses quarterly to provide coverage
for probable losses in the loan portfolio. The Company evaluates its loan
portfolio quarterly in conjunction with a number of factors, including the
current level of non-performing loans, loan portfolio mix changes, and general
economic conditions. Based on management's evaluation of the loan portfolio,
past loan loss experience, and known risks in the portfolio, management
believes that the allowance is adequate, although there can be no assurances
that losses will not exceed estimated amounts.
8
NON-INTEREST INCOME. Total non-interest income for the year ended September
30, 2001 was $2.3 million, a $739,000 increase, or 47.1%, over 2000. The
Company capitalized on the opportunities in the current interest rate
environment by selling loans that were likely to repay, therefore recognizing a
gain of $618,000 (see discussion of reclassification of loans in "REVIEW OF
FINANCIAL CONDITION"). Additional gains of $231,000 from the sale of
investment securities, and $106,000 from the sale of the Bank's subsidiary's
interest in a real estate investment were reported. Annuity and insurance
product sales remain another source of non-interest income. Through its
relationship with INVEST, the Bank offers non-traditional investment products
to its customers such as mutual funds, annuities and other brokerage services.
Commission revenue from insurance and annuity sales decreased $243,000 to
$820,000 from $1.1 million for the year ended September 30, 2000.
Uncertainties regarding the stock market and lower interest rates contributed
to lower sales volumes for the year ended September 30, 2001.
NON-INTEREST EXPENSE. Total non-interest expense for the year ended September
30, 2001 was $ 9.7 million, an increase of $380,000, or 4.1%, from the prior
year. The operating expense to average assets ratio remained stable at 1.53%
for 2001 compared to 1.54% in 2000.
Salaries and benefits, the largest portion of non-interest expenses, increased
$247,000 to $5.6 million for fiscal 2001 from $5.3 million for fiscal year
2000. While ESOP expense decreased, compensation increased due to normal salary
increases. In addition, employee benefit costs, primarily medical insurance
costs, contributed to the 4.6% increase.
Advertising and promotion expense decreased $111,000 to $443,000 for the year
ended September 30, 2001. The decrease reflects decreased spending on media
campaigns. Additionally, the prior year's results include start-up costs for
the Bank's website.
Other non-interest expenses increased $94,000 to $1.5 million for the year
ended September 30, 2001 compared to the prior year. Telephone expenses
increased with the implementation of a new Company-wide system. Additionally,
professional service costs increased, these costs include legal, internal audit
outsourcing, supervisory exams and assessments, and consultant fees.
INCOME TAX EXPENSE. The Company recorded a provision for income taxes of $2.4
million for the year ended September 30, 2001. The Company's effective income
tax rate declined to 33.3% compared to 37.7% for the year ended September 30,
2000. The reduction in the effective income tax rate was the result of the
utilization of a capital loss carry forward in connection with the gain on the
sale of the Bank's subsidiary's interest in a real estate investment.
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED SEPTEMBER 30, 2000 AND
SEPTEMBER 30, 1999
GENERAL. Net income for the Company was $4.2 million, or $1.96 per diluted
share ($2.04 per basic share) for the year ended September 30, 2000, an
increase of 2.7% over the prior year. Diluted earnings per share increased by
11.4% over the $1.76 recorded in fiscal 1999 as a result of our continuing
stock repurchase program. Net income increased as a result of increased non-
interest income and lower non-interest expense.
9
NET INTEREST INCOME. Net interest income for the year was $14.7 million,
compared to $15.5 million in fiscal 1999. The Company's average interest-
earning assets increased to $592.8 million for the year ended September 30,
2000 from $542.0 million for the year ended September 30, 1999, an increase of
$50.9 million, or 9.4%, while the Company's net interest margin declined to
2.49% for the year ended September 30, 2000, compared to 2.87% one year ago.
The decrease in the net interest margin was primarily due to the impact of the
flat to inverted yield curve witnessed over the past twelve months, increased
competition for savings deposits, and wider than normal borrowing spreads.
This interest rate environment was reflected in the 52 basis point increase in
interest-bearing liabilities offset only partially by the 15 basis point
increase in the yield on average interest-earning assets.
Interest income for the year ended September 30, 2000 totaled $43.9 million, an
increase of $4.6 million from the year ended September 30, 1999. The increase
in interest income was due to a combination of both a 9.4% increase in
interest-earning assets combined with an increase in the yield. Interest
income on loans, the largest component of interest-earning assets, increased
$4.5 million from the prior year to $38.3 million. The average loan portfolio
when comparing year to year increased $53.6 million. The increase that can be
attributed to rate has been affected by the trend in loan originations away
from fixed-rate products toward adjustable rate mortgages in the rising rate
environment over the past year. Interest income on investment securities
increased $285,000, or 5.8% to $5.2 million for the year ended September 30,
2000 compared to $5.0 million for the year prior.
Interest expense for the year totaled $29.1 million, an increase of $5.4
million from the prior year. The increase in interest expense was impacted by
the increase in the average cost of interest-bearing liabilities to 5.34% from
4.82%. Interest expense on deposit accounts increased $2.9 million to $18.0
million for the year. Average interest-bearing deposits increased $30.3
million to $364.8 million for the year ended September 30, 2000. Increases in
short term U.S. Treasury rates and increased competition for deposits required
payment of higher deposit rates to attract and retain deposits. The average
cost of deposits for the year was 4.93%, an increase from the average cost of
4.51% for fiscal 1999.
For the year ended September 30, 2000, the Company recorded interest expense on
borrowed funds of $11.1 million on an average balance of $180.7 million at an
average cost of 6.16%. This compares to interest expense of $8.7 million on an
average balance of $158.5 million at an average cost of 5.48% for the year
ended 1999. The increase in the average balance was primarily due to funding
loan originations, while the increase in the average rate was due to the
replacement of called advances at higher interest rates. Additional net
proceeds from the Federal Home Loan Bank of Chicago ("FHLB") borrowing for the
year ended September 30, 2000 totaled $15.0 million.
PROVISION FOR LOAN LOSSES. During the year ended September 30, 2000, the
Company's provision for loan losses was $180,000 compared to $165,000 for
fiscal 1999. At both September 30, 2000 and 1999, the ratio of non-performing
loans to total loans was 0.07%. The allowance for loan losses represented
0.18% of total loans receivable at September 30, 2000 compared to 0.15% one
year ago. Management reviews the provision for loan losses quarterly to
provide coverage for probable losses. The Company evaluates its loan portfolio
quarterly in conjunction with a number of factors, including the current level
of non-performing loans and general economic conditions.
10
NON-INTEREST INCOME. Total non-interest income for the year ended September
30, 2000 was $1.6 million, a $422,000 increase, or 36.8%, over 1999 results.
Annuity and insurance product sales remain the primary source of non-interest
income. Through its relationship with INVEST, the Bank offers non-traditional
investment products to its customers such as mutual funds, annuities and other
brokerage services. Commission revenue from insurance and annuity sales
increased $342,000 to $1.1 million, from $721,000 for the year ended September
30, 1999. The increase was due to a rise in sales of mutual funds and other
non-traditional products, a dedicated sales force, and an expanded product
line.
NON-INTEREST EXPENSE. Total non-interest expense for the year ended September
30, 2000 was $ 9.3 million, a decrease of $520,000 from the prior year.
Management continues to control expenses and this was evidenced in the improved
operating expense to average assets ratio of 1.54% for fiscal 2000, compared to
1.77% for fiscal 1999.
Salaries and benefits decreased $453,000 to $5.3 million for fiscal 2000 from
$5.8 million for fiscal year 1999. The decline was primarily due to decreased
ESOP expense. ESOP expense of $415,300 was $485,000 lower than the 1999
expense of $900,200, primarily due to a lower market adjustment of $182,000 in
fiscal 2000 compared to $502,000 in fiscal 1999.
Advertising and promotion expense increased $155,000 to $554,000 for the year
ended September 30, 2000. The increase was due to increased deposit and equity
line of credit advertising campaigns in addition to expenses related to the
launch of the Bank's website during the 2000 fiscal year.
Other non-interest expenses decreased $174,000 to $1.4 million for the year
ended September 30, 2000 compared to the prior year. Included in this decrease
was a reduction in federal deposit insurance premium expense resulting from a
scheduled decrease in insurance rates effective January 1, 2000.
INCOME TAX EXPENSE. The Company recorded a provision for income taxes of $2.6
million for the year ended September 30, 2000, or an effective tax rate of
37.7%, compared to $2.5 million for the year ended September 30, 1999, or an
effective tax rate of 38.0%.
11
RATE/VOLUME ANALYSIS
The table below presents the extent to which changes in interest rates and
changes in the volume of interest-earning assets and interest-bearing
liabilities have affected the Company's interest income and interest expense
during the period indicated. Information is provided in each category with
respect to (i) changes attributable to changes in volume (changes in volume
multiplied by prior rate), (ii) changes attributable to changes in rate
(changes in rate multiplied by prior volume), and (iii) the net changes. The
changes attributable to the combined impact of volume and rate have been
allocated proportionately to the changes due to volume and the changes due to
rate.
Years ended September 30 2001 Compared to 2000 2000 Compared to 1999
Increase (Decrease)Due to Increase (Decrease) Due to
Volume Rate Total Volume Rate Total
(in thousands)
INTEREST-EARNING ASSETS:
Loans receivable, net $ 729 279 1,008 3,990 552 4,542
Mortgage-backed securities 982 2 984 (286) 19 (267)
Interest-earning deposits 12 5 17 (6) 1 (5)
Securities and federal funds sold 446 148 594 96 191 287
------ ---- ----- ------ ----- -----
TOTAL $2,169 434 2,603 3,794 763 4,557
====== ==== ====== ====== ===== ======
INTEREST-BEARING LIABILITIES:
Passbook and NOW accounts $ 20 (289) (269) (313) 19 (294)
Money Market accounts (90) (32) (122) (116) (14) (130)
Certificate accounts 819 701 1,520 2,374 972 3,346
Borrowed funds 874 346 1,220 1,292 1,136 2,428
------ ---- ----- ----- ----- -----
Total $ 1,623 726 2,349 3,237 2,113 5,350
====== ==== ====== ===== ===== ======
Net change in net interest income $ 254 (793)
====== ======
12
AVERAGE BALANCE SHEETS
The following table sets forth certain information relating to the Company's
average balance sheets and reflects the average yield on assets and average
cost of liabilities for the periods indicated. Such yields and costs are
derived by dividing income or expense by the average balance of assets or
labilities, respectively, for the years shown. Average balances are derived
from average daily balances. The yields and costs include fees, which are
considered adjustments to yields.
For years ended September 30, 2001 2000 1999
Average Average Average
Average Yield/ Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost Balance Interest Cost
(dollars in thousands)
INTEREST-EARNING ASSETS:
Loans receivable, net $ 523,153 39,337 7.52% $ 513,437 38,329 7.47% $ 459,886 33,787 7.35%
Mortgage-backed securities 16,804 1,223 7.28% 3,307 239 7.23% 7,280 506 6.95%
Interest-earning deposits 941 58 6.16% 734 41 5.59% 837 46 5.50%
Securities available for sale
and federal funds sold (3) 81,650 5,836 7.15% 75,367 5,242 6.96% 73,950 4,955 6.70%
------- ------ ---- ------- ------ ---- -------- ------- ----
Total interest-earning assets 622,548 46,454 7.46% $ 592,845 43,851 7.40% $ 541,953 39,294 7.25%
Non-interest earning assets 12,937 11,153 13,993
------ ------- -------
Total assets $ 635,485 $ 603,998 $ 555,946
======= ======= =======
INTEREST-BEARING LIABILITIES:
Deposits:
Passbook and NOW accounts 139,869 4,868 3.48% 139,330 5,137 3.69% 147,820 5,431 3.67%
Money market accounts 11,820 423 3.58% 14,284 545 3.82% 17,324 675 3.90%
Certificate accounts 224,822 13,830 6.15% 211,174 12,310 5.83% 169,337 8,964 5.29%
------- ----- ---- ------- ------ ---- -------- ------ ----
Total deposits 376,511 19,121 5.08% 364,788 17,992 4.93% 334,481 15,070 4.51%
Borrowed funds 194,545 12,340 6.34% 180,651 11,120 6.16% 158,523 8,692 5.48%
------- ----- ---- ------- ------ ---- -------- ------ ----
Total interest-bearing liabilities 571,056 31,461 5.51% 545,439 29,112 5.34% 493,004 23,762 4.82%
Non-interest bearing deposits 8,213 6,452 7,768
Other liabilities 12,374 10,402 11,327
------ ------- -------
Total liabilities 591,643 562,293 512,099
Stockholders' equity 43,842 41,705 43,847
------ ------- -------
Total liabilities and stockholders'
equity $ 635,485 $ 603,998 $ 555,946
======= ======= =======
Net interest income/interest rate
spread (1) 14,993 1.95% 14,739 2.06% 15,532 2.43%
====== ==== ====== ==== ====== ====
Net earning assets/net interest
margin (2) $ 51,492 2.41% 47,406 2.49% 48,949 2.87%
======= ==== ======= ==== ======= ====
Ratio of interest-earning assets to
interest-bearing liabilities 1.09x 1.09x 1.10x
======= ======= =======
(1) Interest rate spread represents the difference between the average rate on
interest-earning assets and the average cost of interest-bearing
liabilities.
(2) Net interest margin represents net interest income divided by average
interest-earning assets.
(3) Municipal bond yields included in Securities Available for Sale category
above are not tax effected.
13
REVIEW OF FINANCIAL CONDITION
Total assets increased $31.7 million to $668.7 million at September 30, 2001,
compared to $637.0 million at September 30, 2000. The increase was primarily
due to increased loan originations and purchases of securities, funded by the
proceeds of $56.7 million in single-family mortgage sales, loan prepayments,
and growth in the deposit base. An additional $41.2 million in fixed-rate
mortgage loans were classified as available for sale. Loan originations for
the current fiscal year were $140.1 million, compared to $110.2 million for the
year ended September 30, 2000. Loan repayments were $152.6 million, compared to
$84.0 million for the year ended September 30, 2000.
Cash and cash equivalents amounted to $8.6 million at September 30, 2001 as
compared to $6.2 million a year earlier.
Securities classified as available for sale totalled $42.0 million at September
30, 2001, compared to $74.4 million at September 30, 2000. The Company
purchased $50.4 million, which consisted of U.S. Agency securities, corporate
debt securities, and municipal bonds, offset by maturities and sales totalling
$85.7 million.
At September 30, 2000, the Company owned one mortgage-backed security as held
to maturity. This security was sold in the third quarter of the year after
management determined that the investment portfolio would supplement the
Company's liquidity base. All mortgage-backed securities purchased in the
current year were recorded as available for sale. Mortgage-backed securities
classified as available for sale were $127.7 million at September 30, 2001.
The current year purchases were funded by the proceeds from heavy refinance
activity in the Bank's loan portfolio as well as the redeployment of the
proceeds from the sale of mortgage loans in the final quarter of this fiscal
year.
Securities classified as available for sale represent a secondary source of
liquidity to the Bank and the Company. The market value of these securities
fluctuates with interest rate movements. Net interest income in future periods
may be adversely impacted to the extent interest rates increase and these
securities are not sold with the proceeds reinvested at higher market rates.
The decision whether to sell the available for sale securities or not, is based
on a number of factors, including projected funding needs, reinvestment
opportunities and the relative cost of alternative liquidity sources.
Loans receivable decreased 20.8%, or $111.3 million to $423.0 million from
$534.3 million at September 30, 2000. The changing interest rate environment,
with rapid decreases in prime beginning in January 2001 and continuing through
September, prompted management to evaluate the loan and investment portfolios.
Falling interest rates triggered significant prepayment and refinance activity.
Repayments on loans receivable increased 85.1% from $84.0 million in fiscal
2000 to $155.5 million for the year ended September 30, 2001. Management took
a proactive approach and identified $94.3 million of loans that had similar
characteristics to those prepaying at high speeds and thus generating less
yield to the bank than originally projected. These loans were then
specifically identified and transferred from held to maturity to held for sale
as a one-time event. This transfer gave management the opportunity to monitor
prepayment volumes and act quickly to protect our earning assets. Of the
transferred loans, $53.4 million were sold in September 2001 and generated a
pre-tax gain of $618,000. The balance of the transferred loans remains in the
held for sale portfolio. Beginning the first quarter of fiscal 2002 the Bank
13
started offering loans, through the TPOs, that carry a prepayment penalty for
the first 3 to 5 years.
Deposits increased 4.8%, or $18.2 million to $399.6 million at September 30,
2001, compared to $381.4 million at September 30, 2000. Savings and
transaction accounts at September 30, 2001 amounted to $177.2 million, compared
to $162.9 million. Certificates of deposit increased throughout the year and
were $222.4 million at September 30, 2001, compared to $218.6 million at
September 30, 2000. The deposit base and the interest rates offered continues
to be priced competitively in order to attract deposits when alternative
investment products and savings competition is significant within the Company's
market areas.
Borrowed funds decreased $17.8 million, or 8.7%, to $187.3 million at September
30, 2001. The Bank utilized loan prepayment and growth in deposits to repay
FHLB advances. Of the FHLB of Chicago advances at September 30, 2001, $65.0
million of advances, with a weighted average term to maturity of 2.96 years,
contain various call provisions, with a weighted average term to call of .23
years. The calls are most likely exercised by the issuer in a period of rising
interest rates.
Advance payments by borrowers for real estate taxes of $7.2 million at
September 30, 2001, was $5.0 million higher than the balance of $2.2 million at
September 30, 2000. The prior year's lower balance reflected Cook County real
estate taxes being paid prior to September 30, 2000. The Company remitted real
estate tax payments in excess of $6 million in October of 2001.
Stockholders' equity of the Company grew to $49.4 million at September 30,
2001, compared to $42.8 million at September 30, 2000, an increase of $6.6
million. The net increase in stockholders' equity was due to net income of
$4.9 million, offset by $968,000 payment of cash dividends, and the increase in
accumulated other comprehensive income, the mark to market component of
available for sale securities of $2.8 million.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of funds are deposits and borrowing, proceeds
from principal and interest on loans and securities. While maturities and
scheduled amortization of loan and securities are predictable source of funds,
deposit flows and mortgage prepayments are greatly influenced by interest rate
cycles and economic conditions. The Bank generally manages the pricing of its
deposits to be competitive and increase core deposit relationships. The Bank
utilizes particular sources of funds based on comparative costs and
availability.
The Company's most liquid assets are cash and cash equivalents, which include
federal funds and interest-bearing deposits. The level of these assets are
dependent on the Company's operating, financing and lending, and investing
activities during any given period. At September 30, 2001 and 2000, cash and
cash equivalents totaled $8.6 million and $6.2 million, respectively.
Liquidity management for the Company is both a daily and long-term function.
In the event that the Company should require funds beyond its ability to
generate them internally, additional sources of funds are available through the
use of FHLB advances. The Company's cash flows are comprised of three
classifications: cash flows from operating activities, cash flows from
investing activities, and cash flows from financing activities.
14
Net cash related to operating activities, consisting primarily of interest and
dividends received less interest paid on deposits, and gains realized from the
sale of loans and securities were $8.8 million for the year ended September 30,
2001. During the year, $10.4 million was used in investing activities,
consisting primarily of loan originations and purchases of securities, largely
offset by principal collections on loans, proceeds from maturities of
securities and proceeds from sales of securities and loans. Net cash provided
by financing activities amounted to $4.1 million for the year ended September
30, 2001.
At September 30, 2001, the Company believed it had sufficient cash to fund its
outstanding commitments, or would be able to obtain the necessary funds from
outside sources to meet its cash needs.
LENDING ACTIVITIES
LOANS AND MORTGAGE-BACKED SECURITIES PORTFOLIO COMPOSITIONS. The loan
portfolio consists primarily of conventional first mortgage loans secured by
one- to four-family residences. At September 30, 2001, the gross loans
receivable portfolio was $422.0 million, of which $269.5 million were one- to
four-family residential mortgage loans. Of the one- to four-family residential
mortgage loans outstanding at that date, 53.7% were fixed-rate and 46.3% were
adjustable-rate mortgage (ARM) loans. During the year, the Bank sold $55.5
million of single-family mortgage loans to Federal Home Loan Mortgage
Corporation ("FHLMC") and to Federal National Mortgage Association ("FNMA").
Included in the year-end loan portfolio balance are $41.2 million in fixed-rate
mortgage loans classified as held for sale. The remainder of the loan
portfolio at September 30, 2001 consisted of $120.4 million of multi-family
loans, $1.7 million in commercial real estate, $15.3 in construction loans, and
$15.1 million of consumer loans. Consumer loans consisted primarily of home
equity and second mortgage loans.
During 1994, the Bank expanded its delivery system for mortgage loans to
include third party originators ("TPOs"), which are mortgage brokers that have
agreed to originate loans for the Bank's portfolio. The loan department
continues to seek and sign agreements with new TPOs. At September 30, 2001,
the Bank had a network of 86 TPOs. The TPO program produced $110.5 million or
96.7% of the one- to four-family and multi-family mortgage loan originations in
2001. The Bank originated $23.2 million in commercial loans and $6.7 million
in consumer loans for a total of $140.1 million in new loans; a 26.9% increase
from the year ended September 30, 2000.
In 1996, the Bank began offering certain residential loans without income
verification. Verification that the applicant is employed is noted in the file
and the amount listed on the application is used to determine the debt to
income ratio. The maximum loan to value ratio is 95% for this program. The
Bank also offers a similar program for people who typically are self-employed.
The income used to qualify the loan is the amount stated on the loan
application. The maximum loan amount allowed under this program is 95% of the
property value. The Bank also grants loans to applicants with less than
perfect credit and higher debt to income ratios than secondary market
conforming standards. In all other respects the loans are originated in the
same manner as a conventional loan. All loans have risk premium factored into
the rate and additional valuation allowances are established when the loan is
funded. It is the Bank's general policy to require private mortgage insurance
(PMI) on any conventional loan with a loan to value ratio greater than 80% for
one- to four-family homes, townhouses, and condominium units. The Bank
originated $96.0 million of these loans during fiscal 2001. At September 30,
15
2001, the portfolio included $147.8 million of these loans.
Loan origination standards of the Bank generally conform to the requirements
for sale to the FHLMC and FNMA. During the year ended September 30, 2001, the
Bank sold mortgage loans totalling $2.1 million and $54.6 million to the FHLMC
and FNMA, respectively. At September 30, 2001, the unpaid balance of total
mortgage loans sold to the FHLMC and FNMA and serviced by the Bank was $5.5
million and $51.0 million respectively.
The Bank's investment policy permits the investment in mortgage-backed
securities. The Bank purchases FHLMC Gold, GNMA II, and FNMA mortgage-backed
securities to coincide with its ongoing asset/liability management objectives
and to supplement its own loan origination program. The mortgage-backed
securities owned by the Bank are issued by FNMA, FHLMC or GNMA and are
collateralized with generic pools of single family mortgages. With respect to
prepayment risk, these securities are likely to exhibit substantially the same
characteristics as the whole loans owned by the Bank. Prepayments are not
expected to have a material effect on the yield or the recoverability of the
carrying amounts of these securities. During the year ended September 30,
2001, the Bank purchased $129.1 million of mortgage-backed securities. The
FHLMC mortgage-backed security held for investment at September 30, 2000 was
sold during the year for a realized gain of $77,000. At September 30, 2001,
the total cost of mortgage-backed securities was $126.0 million with a fair
value of $127.7 million, resulting in an unrealized gain of $1.7 million.
The following table sets forth the composition of the loan portfolio and
mortgage-backed securities, in dollar amounts and in percentages of the
respective portfolios at the dates indicated.
At September 30,
2001 2000 1999
Percent Percent Percent
Amount of Total Amount of Total Amount of Total
(Dollars in thousands)
Mortgage loans:
One- to four-family $ 269,472 63.86% $ 390,805 73.46 388,586 76.86%
Multi-family 120,432 28.54 118,309 22.25 100,412 19.86
Commercial 1,665 0.39 3,448 0.65 2,577 0.51
Construction 15,325 3.63 2,304 0.43 - -
------- ----- ------- ---- ------ -----
Total mortgage loans 406,894 96.42 514,866 96.79 491,575 97.23
Consumer loans 15,096 3.58 17,101 3.21 14,016 2.77
------- ------ ------- ------ ------ -------
Gross loans receivable 421,990 100.00% 531,967 100.00% 505,591 100.00%
====== ====== =======
Less:
Loans in process 107 26 16
Unearned discounts and
deferred loan costs (2,333) (3,286) (2,762)
Allowance for loan losses 1,236 950 780
------- ------- -------
Loans receivable, net $ 422,980 $ 534,277 $ 507,557
======= ======= =======
Mortgage-backed securities:
FHLMC held to maturity $ ----- ---- % 2,901 100.00% 3,585 100.00%
FHLMC available for sale 9,139 7.16 - - - -
FNMA available for sale 66,524 52.10 - - - -
GNMA Available for sale 52,022 40.74 - - - -
------- ------ ------ ------ ------ ------
Mortgage-backed securities, net $ 127,685 100.00% $ 2,901 100.00% $ 3,585 100.00%
======= ====== ======= ====== ====== ======
16
At September 30,
1998 1997
Percent Percent
Amount of Total Amount of Total
(Dollars in thousands)
Mortgage loans:
One- to four-family $ 324,265 76.47% $ 304,950 78.83%
Multi-family 83,084 19.59 64,450 16.66
Commercial 3,295 0.78 2,894 0.75
Commercial leases 30 0.01 408 0.10
------- ----- ------- ----
Total mortgage loans 410,674 96.85 372,702 96.34
Consumer loans 13,358 3.15 14,152 3.66
------- ----- ------- ----
Gross loans receivable 424,032 100.00% 386,854 100.00%
======
Less:
Loans in process 1 -
Unearned discounts and
deferred loan costs (2,168) (1,868)
Allowance for loan losses 591 460
------- -------
Loans receivable, net $ 425,608 388,262
======= =======
Mortgage-backed securities
FHLMC held to maturity $ 11,177 100.00% $ 16,875 100.00%
------- ------ ------- ------
Mortgage-backed
securities, net $ 11,177 100.00% $ 16,875 100.00%
======= ====== ======= ======
17
The following table sets forth the Bank's loan originations, commercial leases,
purchases of loans, and mortgage-backed securities, sales and principal
repayments for the periods indicated:
Years Ended September 30,
2001 2000 1999
(in thousands)
Mortgage Loans (gross):
At beginning of period $ 514,866 491,575 410,674
Mortgage loans originated:
One- to four- family 88,425 67,373 157,429
Multi-family 21,874 26,158 29,224
Commercial/Construction 23,157 8,350 2,216
------- ------- -------
Total mortgage loans originated 133,456 101,881 188,869
Transfer to foreclosed real estate and net charge-offs (268) (73) (262)
Transfer to loans held for sale (94,302) - -
Principal repayments of loans receivable (146,858) (78,517) (107,676)
Principal repayments of commercial leases - - (30)
------- ------- -------
At end of period 406,894 514,866 491,575
------- ------- -------
Consumer loans (gross):
At beginning of period $ 17,101 14,016 13,358
Consumer loans originated 6,683 8,581 7,990
Principal repayments (8,688) (5,496) (7,332)
------- ------ ------
At end of period 15,096 17,101 14,016
------- ------ ------
Total loans (gross) $ 421,990 531,967 505,591
======= ======= =======
Mortgage-backed securities:
At beginning of period $ 2,901 3,585 11,177
Mortgage-backed securities purchased 129,142 - -
Mortgage-backed securities sold (2,366) - -
Amortization and principal repayments (3,729) (684) (7,592)
--------- ------ ------
$ 125,948 2,901 3,585
======= ====== ======
18
LOANS MATURITY AND REPRICING. The following table shows the maturity or period
to repricing of the loans at September 30, 2001. The table does not include
prepayments or scheduled principal amortization. Principal repayments and
prepayments on loans totalled $155.5 million, $84.0 million, and $115.0 million
for the years ended September 30, 2001, 2000, and 1999, respectively.
At September 30, 2001
Fixed Rate Adjustable Rate Other Loans
Con- Total
One-to- One-to- struction Loans
Four Multi- four Multi- and Receiv-
Family Family Family Family Commercial Consumer able
(in thousands)
AMOUNTS DUE:
Within one year $ 24,649 3,230 36,527 37,411 4,635 3,264 109,716
After one year:
One to three years 38,330 3,068 65,993 59,555 12,314 3,310 182,570
Three to five years 27,920 1,470 22,178 13,874 41 2,415 67,898
Five to 10 years 39,596 1,531 - - - 3,333 44,460
10 to 20 years 13,196 293 - - - 2,774 16,263
Over 20 years 1,083 - - - - - 1,083
------- ----- ------- ------ ----- ----- -------
Total due after
one year 120,125 6,362 88,171 73,429 12,355 11,832 312,274
------- ----- ------- ------ ----- ----- -------
Total amounts due $ 144,774 9,592 124,698 110,840 16,990 15,096 421,990
======= ===== ======= ======= ====== ======
Less:
Loans in process 107
Unearned discounts,
premiums and deferred
loan costs, net (2,333)
Allowance for loan losses 1,236
------
Loan receivable, net $ 422,980
========
19
ONE- TO FOUR-FAMILY MORTGAGE LENDING. The Bank primarily originates first
mortgage loans secured by one- to four-family residences located in its primary
market area, including townhouse and condominium units. Typically, such
residences are single or two-family homes that serve as the primary residence
of the owner. To a lesser extent, the Bank also originates loans secured by
non-owner occupied one- to four-family residential real estate. Loan
originations are generally obtained from existing or past customers, members of
the local communities, third party mortgage originators located in the Bank's
market area, local real estate agent referrals, and builder/developer referrals
within the Bank's market area.
The Bank offers fixed-rate and ARM loans, which are generally amortized over 30
years, with terms of up to 30 years. Loan rates are based on market
conditions. The Bank originates zero-point loans, and loans with discount
points and fees for related origination expenses, such as appraisals and other
closing costs, on one- to four-family residential mortgage loans. Generally,
all residential mortgage loans originated by the Bank are underwritten in
conformity with FHLMC guidelines. The ARM loans generally reprice on a one,
three, or five year basis. As a general matter, the Bank does not offer
"teaser rates" on its ARM loans, nor does it offer loans with a negative
amortization feature. At time of origination, the Bank determines whether to
sell or retain fixed-rate, one- to four-family residential first mortgages
loans, while generally retaining the servicing right for loans sold. ARM loans
originated are normally held for investment.
The Bank generally makes first mortgage loans secured by one- to four-family,
owner-occupied residential real estate in amounts up to 97% of the lower of the
purchase price or the appraised value. The Bank also originates first mortgage
loans secured by one- to four-family residential investment (i.e., other than
owner occupied) properties in amounts up to 95% of the appraised value of the
property. It is the Bank's general policy to require private mortgage
insurance (PMI) on any conventional loan with a loan to value ratio greater
than 80% for one- to four-family homes, townhouses, and condominium units. In
addition, the Bank usually requires certain housing expense to income ratios
and monthly debt payment to income ratios for all borrowers which vary
depending on the loan to value ratio and other compensating factors. Mortgage
loans originated by the Bank generally include due-on-transfer clauses which
provide the Bank with the contractual rights to deem the loan immediately due
and payable, in most instances, in the event that the borrower transfers
ownership of the property without the Bank's consent. It is the Bank's policy
to enforce due-on-transfer provisions.
Residential loans without income verification are offered in amounts up to a
maximum value ratio of 95%. The Bank also offers a similar program for people
who typically are self-employed. The income and assets used to qualify the
loan is the amount stated on the loan application. The maximum loan amount
allowed under this program is 95% of the property value. The Bank, to a lesser
extent, grants loans to applicants with less than perfect credit and higher
debt to income ratios than secondary market conforming standards. In all other
respects the loans are originated in the same manner as a conventional loan. It
is the Bank's general policy to require private mortgage insurance (PMI) on any
conventional loan with a loan to value ratio greater than 80% for one- to four-
family homes, townhouses, and condominium units. All loans have risk premium
factored into the rate and additional valuation allowances are established when
the loan is funded.
The Bank offers a mortgage loan modification program that allows the borrower
to receive a reduced interest rate, change in term, or a change in loan
20
program, in lieu of refinancing the original loan. The borrower is charged a
fee that varies based upon the modifications made, including an appraisal fee
when the Bank requires a reappraisal of the collateral. The program has been
advantageous to the Bank during periods of heavy refinance activity such as
1998 and 2001, by limiting the disruption to its loan operations, as well as
reducing the costs associated with refinance activity of existing borrowers.
MULTI-FAMILY AND COMMERCIAL REAL ESTATE LENDING. The Bank originates fixed and
adjustable rate multi-family loans secured by properties (five units or more)
typically located in its primary market area. These loans generally have rate
and payment adjustment periods of 3 to 5 years, with amortizations of up to 30
years. The Bank customarily charges origination fees of up to 3% of the loan
amount for newly originated loans and lesser fees for renewals or modifications
of existing loans. The Bank's policies generally require personal guarantees
from the borrowers, with joint and several liability. The Bank's underwriting
decisions relating to these loans are primarily based upon the net operating
income generated by the property in relation to the debt service ("debt
coverage ratio"), the borrower's cash-at-risk position, financial resources and
income level of the borrower, the borrower's experience in owning or managing
similar property, the marketability of the property and the Bank's lending
relationship with the borrower. The Bank originates multi-family loans in
amounts up to 85% of the lower of the appraised value of the property or the
purchase price. The Bank generally requires a minimum debt coverage ratio of
1.15x on multi-family properties, utilizing forecasted net operating income.
As of September 30, 2001, $120.4 million, or 28.5%, of the Bank's loan
portfolio consisted of multi-family loans. Multi-family mortgage loans
typically involve substantially larger loan balances than single-family
mortgage loans, and are dependent on successful property operation as well as
on general and local economic conditions.
In connection with the Bank's policy of maintaining an interest-rate sensitive
loan portfolio, the Bank has originated loans secured by commercial real
estate, which generally carry a higher yield and are made for a shorter term
than fixed-rate one- to four-family residential loans. Commercial real estate
loans are generally granted in amounts up to 75% of the appraised value of the
property, as determined by an independent appraiser previously approved by the
Bank. The Bank's commercial real estate loans are secured by improved
properties located in the Chicago metropolitan area. As of September 30, 2001,
$1.7 million, or 0.4%, of the Bank's loan portfolio consisted of commercial
real estate loans.
Loans secured by commercial real estate properties are generally larger and
involve a greater degree of risk than residential mortgage loans. Because
payments on loans secured by commercial real estate properties are often
dependent on the successful operation or management of the properties,
repayment of such loans may be subject to adverse conditions in the real estate
market or the economy. The Bank seeks to minimize these risks by lending
primarily on existing income-producing properties and generally restricting
such loans to properties in the Chicago area. The Bank analyzes the financial
condition of the borrower and the reliability and predictability of the net
income generated by the security property in determining whether to extend
credit. In addition, the Bank usually requires a net operating income to debt
service ratio of at least 1.15 times.
CONSTRUCTION LENDING. The Bank originates loans to finance the construction of
residential property primarily in its market area. The Bank will consider
commercial construction loans in the future on a case-by-case basis. During
the year ended September 30, 2001, the Bank originated eight loans to finance
construction projects for $18.0 million. At September 30, 2001, the Bank had
21
nine construction loans which totaled $21.1 million, and reported an unpaid
balance of $15.3 million, or 3.6% of total loans receivable.
The Bank uses underwriting and construction loan guidelines for financing
primarily individual, owner-occupied houses where qualified contractors are
involved. Construction loans are structured either to be converted to
permanent loans at the end of the construction phase or to be paid off upon
receiving financing from another financial institution. Construction loans are
based on the appraised value of the property, as determined by an independent
appraiser, and an analysis of the potential marketability and profitability of
the project. Construction loans generally have terms of up to 18 months, with
extensions as needed. Loan proceeds are disbursed in increments as
construction progresses and as inspections warrant.
Construction loans afford the Bank the opportunity to increase the interest
rate sensitivity of its loan portfolio and to receive yields higher than those
obtainable on ARM loans secured by existing residential properties. These
higher yields correspond to the higher risks associated with construction
lending. Construction development loans involve additional risks attributable
to the fact that loan funds are advanced upon the security of the project under
construction, which is of uncertain value prior to its completion. Because of
the uncertainties inherent in estimating construction costs as well as the
market value of the completed project and the effects of governmental
regulation of real property, it is relatively difficult to evaluate accurately
the total funds required to complete a project and the related loan- to-value
ratio. As a result of the foregoing, construction lending often involves the
disbursement of substantial funds with repayment dependent, in part, on the
success of the ultimate project rather than the ability of the borrower or
guarantor to repay principal and interest. If the Bank is forced to foreclose
on a project prior to or at completion due to a default, there can be no
assurance that the Bank will be able to recover all of the unpaid balance of,
and accrued interest on, the loan as well as related foreclosure and holding
costs. In addition, the Bank may be required to fund additional amounts to
complete the project and may have to hold the property for an unspecified
period of time. The Bank has attempted to address these risks through its
underwriting procedures and its limited amount of construction lending on
multi-family and commercial real estate properties.
OTHER LENDING. The Bank's other lending activities consist of consumer
lending, primarily home equity loans, fixed-rate second mortgage loans, and to
a lesser extent automobiles, boats and recreational vehicles, and other secured
and unsecured loans. On September 30, 2001, outstanding balances on home
equity lines represented $13.8 million or 3.3% of the Bank's total loan
portfolio. The Bank uses the same underwriting standards for home equity lines
of credit as it uses for residential mortgage loans. As of September 30, 2001,
$1.3 million or 0.3% of the Bank's loan portfolio consisted of consumer loans.
LOAN APPROVAL PROCEDURES AND AUTHORITY. Certain officers have authority to
approve loans up to specified dollar amounts. One- to four-family mortgage
loans conforming to agency standards and all consumer loans may be approved by
the Senior Vice President - Personal Banking, Senior Vice President - Loan
Investments and designated underwriters up to the agency maximum loan
limitations. Non-conforming loans up to $250,000 and otherwise conforming to
the loan policy may be approved by the Senior Vice President - Loan
Investments. Loans of up to $500,000 may be approved by the Senior Vice
President - Loan Investments with the concurrence of a member of the Bank loan
committee or a senior underwriter. Secured mortgage and unsecured consumer
loans may be approved by designated personal banking managers. The Bank's
22
policies generally provide that all other loans are to be approved by the Board
or certain committees which include Board members. All multi-family loans over
$1.5 million and one- to four-family construction loans over $1.5 million
require the approval of a majority of the Board.
For all loans originated by the Bank, upon receipt of a completed loan
application from a prospective borrower, a credit report is ordered, income and
certain other information generally is verified and, if necessary, additional
financial information is required. All borrowers of one- to four-family
residential mortgage loans are qualified pursuant to applicable agency
guidelines. The Bank's policies require appraisals on all real estate intended
to secure a proposed loan, which currently are performed by independent
appraisers designated and approved by the Bank. Further, under current OTS
regulations, all loan transactions of $1.0 million or more, non-residential
transactions of $250,000 or more, and complex residential transactions of
$250,000 or more, the Bank requires appraisals conducted by state certified or
licensed appraisers. The Board, at least annually, approves the independent
appraisers used by the Bank and reviews the Bank's appraisal policy. It is the
Bank's policy to obtain title insurance on all real estate first mortgage
loans. Borrowers must also obtain hazard insurance prior to closing.
Borrowers generally are required to advance funds on a monthly basis together
with each payment of principal and interest to a mortgage escrow account from
which the Bank makes disbursements for items such as real estate taxes and
hazard insurance premiums.
DELINQUENCIES AND CLASSIFIED ASSETS.
DELINQUENT LOANS. The Board of Directors performs a monthly review of all
delinquent loans. The procedures taken by the Bank with respect to
delinquencies vary depending on the nature of the loan and period of
delinquency.
The Bank's policies generally provide that delinquent mortgage loans be
reviewed and that a written late charge notice be mailed no later than the
twentieth day of delinquency. The policies also require telephone contacts for
loans more than 20 days late to ascertain the reasons for the delinquency and
the prospects of repayment. Face-to-face interviews and collection notices are
generally required for loans more than 30 days delinquent and on a case-by-case
basis for mortgage loans. After 60 days, the Bank will either set a date by
which the loan must be brought current, enter into a written forbearance
agreement, foreclose on any collateral or take other appropriate action. The
Bank's policies regarding delinquent consumer loans are similar except that
telephone contacts and correspondence will generally occur after a consumer
loan is more than 15 days delinquent.
It is the Bank's general policy to discontinue the accrual of interest on all
first mortgage loans 90 days past due. Consumer loans continue to accrue
interest until a determination is made by the Bank that the loan may result in
a loss. Property acquired by the Bank as a result of a foreclosure on a
mortgage loan is classified as real estate owned and is recorded at the lower
of the unpaid principal balance or fair value at the date of acquisition and
subsequently carried at the lower of cost or net realizable value.
23
Set forth below is certain information regarding delinquent real estate loans
at September 30, 2001, 2000 and 1999:
At September 30, 2001 At September 30, 2000
60-89 Days 90 Days or More 60-89 Days 90 Days or More
----------------- ------------------ ----------------- -----------------
Number Principal Number Principal Number Principal Number Principal
of Balance of Balance of Balance of Balance
Loans of Loans Loans of Loans Loans of Loans Loans of Loans
(Dollars in thousands)
One- to four- family 4 $ 583 5 $ 628 7 $ 896 3 $ 151
Multi-family 4 953 - - 1 215 - -
Commercial - - - - - - 1 224
-- ----- -- ----- -- ---- -- ----
Total mortgage loans 8 1,536 5 628 8 1,111 4 375
Consumer - - 4 49 2 32 1 4
-- ----- -- ----- -- ---- -- ----
Total loans 8 $ 1,536 9 $ 677 10 $1,143 5 $ 379
== ===== == ===== == ==== == =====
Delinquent loans to
total loans 0.33% 0.16% 0.21% 0.07%
==== ===== ==== ====
At September 30, 1999
60-89 Days 90 Days or More
----------------- ------------------
Number Principal Number Principal
of Balance of Balance
Loans of Loans Loans of Loans
(Dollars in thousands)
One- to four- family 2 $ 252 5 $ 216
Multi-family 1 159 1 84
-- --- -- ----
Total mortgage loans 3 411 6 300
Consumer - -- 4 43
-- --- -- ----
Total loans 3 $ 411 10 $ 343
== === == ====
Delinquent loans to
total loans 0.08% 0.07%
=== ======
24
NON-PERFORMING ASSETS. The following table sets forth information regarding
non-accrual loans, loans which are 90 days or more past due, and real estate in
foreclosure. The Bank continues accruing interest on all consumer loans until
a loss determination is made. Upon determination that the loan will result in
a loss, the Bank discontinues the accrual of interest and/or establishes a
reserve in the amount of the anticipated loss. For the year ended September
30, 2001, interest income on non-accrual loans included in net income amounted
to less than $1,000. If all non-accrual mortgage loans, as of September 30,
2001, had been currently performing in accordance with their original terms,
the Bank would have recognized interest income from such loans of $36,000.
At September 30,
2001 2000 1999 1998 1997
(Dollars in thousands)
Non-accrual mortgage loans $ 628 $ 375 $ 300 $ 799 $ 1,397
Non-accrual commercial leases - - - 30 408
Non-accrual consumer loans 49 4 43 2 3
----- --- ---- ---- -----
Total non-accrual loans 677 379 343 831 1,808
Consumer loans 90 days or more
past due and still accruing - - - - -
----- --- ---- ---- ----
Total non-performing loans 677 379 343 831 1,808
Real estate in foreclosure -- 3 - 131 215
----- --- ---- ----- -----
Total non-performing assets $ 677 $ 382 $ 343 $ 962 $ 2,023
===== ==== ==== ===== =====
Total non-performing loans to
total loans 0.16% 0.07% 0.07% 0.20% 0.47%
===== ==== ===== ===== =====
Total non-performing assets to
total assets 0.10% 0.06% 0.06% 0.19% 0.41%
===== ==== ===== ===== =====
CLASSIFIED ASSETS. Federal regulations require the Bank to classify loans and
other assets such as debt and equity securities, considered by the OTS to be of
lesser quality, as "substandard", "doubtful" or "loss" assets. The Bank's
classification policies provide that assets will be classified according to OTS
regulations. An asset is considered "substandard" if it is inadequately
protected by the current net worth and paying capacity of the obligor or of the
collateral pledged, if any. "Substandard" assets include those characterized
by the "distinct possibility" that the insured institution will sustain "some
loss" if the deficiencies are not corrected. Assets classified as "doubtful"
have all of the weaknesses inherent in those classified "substandard," with the
added characteristic that the weaknesses present make "collection or
liquidation in full," on the basis of currently existing facts, conditions, and
values, "highly questionable and improbable." Assets classified as "loss" are
those considered "uncollectible" and of such little value that their
continuance as assets without the establishment of a specific loss reserve is
not warranted. Assets which do not currently expose the insured institution to
sufficient risk to warrant classification in one of the aforementioned
categories but possess weaknesses are required to be designated "special
mention" by management.
25
When the Bank determines that an asset should be classified, it generally does
not establish a specific allowance for such asset unless it determines that
such asset may result in a loss. The Bank however, establishes valuation
allowances in amounts deemed prudent for the pools of classified assets.
Valuation allowances represent loss allowances which have been established to
recognize probable losses associated with lending activities, but which, unlike
specific allowances, have not been allocated to particular problem assets. The
Bank's policies provide for the establishment of a specific allowance equal to
100% of each asset classified as "loss" or to charge-off such amount. A
savings institution's determination as to the classification of its assets and
the amount of its valuation allowances is subject to review by the OTS which
can order the establishment of additional general or specific loss allowances.
The Bank reviews the problem loans in its portfolio on a monthly basis to
determine whether any loans require classification in accordance with
applicable regulations; and believes its classification policies are consistent
with OTS policies.
As of September 30, 2001, the Bank had classified assets of $677,000.
Classified loans of $677,000 were categorized as substandard, consisting of 5
residential mortgage loans and 3 auto loans. There were no assets classified
as doubtful.
ALLOWANCE FOR LOAN LOSSES. The allowance for loan losses is established
through a provision for loan and lease losses based on management's evaluation
of probable incurred credit losses in its loan portfolio. Such evaluation,
which includes a review of all loans on which full collection may not be
reasonably assured, considers among other matters the estimated net realizable
value of the underlying collateral, economic conditions, historical loan loss
experience, peer group information and other factors that warrant recognition
in providing for an adequate loan loss allowance. Although the Bank maintains
its allowance at a level which it considers adequate to provide for probable
losses, there can be no assurances that such losses will not exceed the
estimated amounts.
26
The following table sets forth the Bank's allowance for loan losses at the
dates indicated.
At or for the Years Ended September 30,
2001 2000 1999 1998 1997
(Dollars in thousands)
Balance at beginning of year $ 950 $ 780 $ 591 $ 460 $ 810
Provision for loan losses 295 180 165 181 64
Charge offs:
One-to four-family - - - - -
Multi-family - - - - -
Commercial leases - - - - (406)
Consumer loans (12) (13) (8) (51) (19)
---- ---- ---- ---- ----
Total Charge-offs (12) (13) (8) (51) (425)
Recoveries:
Commercial leases - - 27 - -
Consumer loans 3 3 5 1 11
---- ---- ---- ---- ----
Total Recoveries 3 3 32 1 11
---- ---- ---- ---- ----
Balance at end of year $ 1,236 $ 950 $ 780 $ 591 $ 460
==== ==== ==== ==== ====
Charge-offs during the
year to average loans
outstanding during the year - % - % - % 0.01% 0.11%
==== ==== ==== ==== ====
Allowance for loan losses
to net loans receivable
at end of year 0.29% 0.18% 0.15% 0.14% 0.12%
==== ==== ==== ==== ====
Allowance for loan losses
to total non-performing
loans at end of year 182.57% 250.66% 227.41% 71.12% 25.44%
====== ====== ====== ===== =====
Allowance for loan losses
to non-performing assets
at end of year 182.57% 248.69% 227.41% 61.43% 22.74%
====== ====== ====== ===== =====
27
At September 30, 2001, the Bank maintained no specific reserves on its loan
portfolio, and is unaware of any specific identifiable charge-offs in its loan
portfolio. The following table sets forth the Company's allocation of its
allowance for loan losses. This allocation is based on management's subjective
estimates. The amount allocated to a particular category should not be
interpreted as the only amount available for future charge-offs that may occur
within that category; it may not be indicative of future charge-off trends and
it may change from year to year based on management's assessment of the risk
characteristics of the loan portfolio.
At September 30,
2001 2000 1999
% of Loans % of Loans % of Loans
in Category in Category in Category
of Total of Total of Total
Outstanding Outstanding Outstanding
Amount Loans Amount Loans Amount Loans
(Dollars in thousands)
Mortgage loans:
One- to four- family $ 407 63.86% $ 421 73.45% $ 340 76.86%
Multi-family 238 28.54 232 22.25 179 19.86
Commercial real estate 22 0.39 39 0.65 38 0.51
Construction 307 3.63 23 0.43 - -
Consumer loans 213 3.58 190 3.22 171 2.77
Unallocated Portion 49 - 45 -- 52 -
----- ------ ---- ------ ---- ------
Total $ 1,236 100.00% $ 950 100.00% $ 780 100.00%
===== ====== ==== ====== ==== ======
INVESTMENT ACTIVITIES
The investment policies of the Company and the Bank, established by the Board
of Directors and implemented by the Asset/Liability Committee, attempt to
provide and maintain liquidity, generate a favorable return on investments
without incurring undue interest rate and credit risk, and complement the
Bank's lending activities. Federally chartered savings institutions have the
authority to invest in various types of liquid assets, including United States
Treasury obligations, securities of various federal agencies, certain
certificates of deposit of insured banks and savings institutions, certain
bankers' acceptances, repurchase agreements and federal funds. Subject to
various restrictions, federally chartered savings institutions may also invest
their assets in commercial paper, investment grade corporate debt securities,
asset-backed securities, and mutual funds whose assets conform to the
investments that a federally chartered savings institution is otherwise
authorized to make directly.
The Company is the holder of certain subordinated notes (the "Notes") issued by
Cole Taylor Financial Group, Inc. The Notes have a par value and cost basis of
$3.0 million. The Notes were acquired by the Company in 1994, when Cole Taylor
Financial Group, Inc. was the parent company for both a consumer finance
company and a Chicago area bank. In fiscal 1997, Cole Taylor's bank subsidiary
was "spun-off" to certain Cole Taylor shareholders in exchange for stock and
certain assets. The Notes remained as obligations of the surviving company,
which became known as Reliance Acceptance Group, Inc. ("RAG") and remained the
parent company for the consumer finance company.
28
On November 14, 1997, RAG filed a Form 10-Q with the SEC in which RAG
reported, among other things, substantial additions to its loan loss reserves,
increasing delinquencies and repossession losses, a severe decline in its net
interest margin, continuing defaults under senior credit agreements, a lack of
future funding sources, and the imposition of substantial restrictions by
senior lenders.
The Company evaluated the information that was then available about RAG's
circumstances and future prospects in an effort to assess impairment and to
place a value on the Notes in the context of a possible RAG liquidation, sale
and/or bankruptcy. The Company concluded that the impairment was other than
temporary, and that a complete write-down of the Notes was appropriate.
Accordingly, the Company wrote the Notes down $3.0 million during the fourth
quarter and fiscal year ended September 30, 1997.
RAG subsequently filed a bankruptcy petition in the United States Bankruptcy
Court in Delaware. The Company is continuing its efforts to attempt to realize
some recovery of its subordinated notes. Among other things, the Company
actively participated on the Official Committee of the Unsecured Creditors of
RAG and in the formulation of a plan for RAG's bankruptcy liquidation.
Further, the Estate Representative for RAG, with the support of the Company and
other holders of RAG subordinated notes, has filed two lawsuits against a
number of RAG insiders, certain legal and accounting firms and others in the
United States District Court for the District of Delaware.
The lawsuits allege a variety of causes of action against these individuals and
entities relating to the spin-off, the accuracy of RAG's financial statements
and similar matters. A litigation fund of approximately $5.0 million was
established pursuant to RAG's plan of reorganization to pursue these lawsuits
and similar litigation. In addition on February 14, 2000, the Company filed a
class action in the Circuit court of Cook County, Illinois against LaSalle
National Bank and affiliates. The action is brought on behalf of the Company
individually and as class representative of all RAG subordinated noteholders.
The compliant alleges a cause of action arising out of LaSalle's involvements
as a trustee of the RAG subordinated notes.
In late 2001, the Estate Representative for RAG arrived at a preliminary
settlement with certain parties that would allow RAG to settle or satisfy the
claims of certain of its creditors including the Company. Under the proposed
settlement, certain members of the Taylor family would be required to deliver
to RAG $15 million in cash, $30 million of trust preferred securities and 15%
of the outstanding common stock of Taylor Capital Group, Inc. the parent bank
holding company of Cole Taylor Bank. The proposed settlement is subject to
certain significant conditions and no assurances can be provided that the
settlement will be completed or that the Company will receive any settlement
proceeds.
29
The following table sets forth certain information regarding the amortized cost
and fair value of the Company's interest-earning deposits, federal funds sold,
FHLB - Chicago stock, and securities portfolio at the dates indicated:
At September 30,
2001 2000 1999
Amortized Fair Amortized Fair Amortized Fair
Cost Value Cost Value Cost Value
(in thousands)
Interest-earning deposits:
FHLB daily investment $ 1,394 1,394 1,400 1,400 404 404
Money market fund 3 3 5 5 172 172
----- ----- --- --- ----- -----
Total interest-bearing deposits $ 1,397 1,397 1,405 1,405 576 576
===== ===== ===== ===== ===== =====
Federal funds sold $ 100 100 100 100 100 100
==== ==== ==== ==== ==== ====
FHLB-Chicago Stock $ 18,055 18,055 10,065 10,065 9,615 9,615
====== ====== ====== ====== ===== =====
Securities available for sale:
U.S. Government and
agencies $ 23,109 23,199 68,436 65,603 68,428 66,070
Municipal debt securities 3,491 3,492 - - - -
Corporate debt securities 14,719 15,315 7,972 8,763 - -
------- ------ ------ ------ ------ ------
Total securities
available for sale $ 41,319 42,006 76,408 74,366 68,428 66,070
======= ====== ====== ====== ====== ======
The table below sets forth certain information regarding the carrying value,
weighted average yields and maturities of the Company's investment securities
available for sale at September 30, 2001.
At September 30, 2001
One Year One to Five to More than
or Less Five Years 10 Years 10 Years Total
Avg
Wtd Wtd Wtd Wtd remaining Wtd
Amtzd Avg Amtzd Avg Amtzd Avg Amtzd Avg Years to Amtzd Fair Avg
Cost Yield Cost Yield Cost Yield Cost Yield Maturity Cost Value Yield
(dollars in thousands)
U.S. Government
and agencies (1) $ 23,109 6.64% - -% - - % -- --% - 23,109 23,199 6.64%
Municipal debt
securities (2) - - - - - - 3,491 4.91 17.3 3.491 3.492 4.91
Corporate debt
securities (3) - - - - 3,553 6.60 11,166 9.21 23.8 14,719 15,315 8.58
------ ---- ---- ---- ------ ----- ------ ----- ---- ------ ------ ----
$ 23,109 6.64% - - % 3,553 6.60% 14,657 8.19% 19.2 41,319 42,006 7.59%
====== ==== ==== ==== ====== ===== ====== ===== ==== ====== ====== ====
(1) U.S. government and agencies investments include $20.0 million in callable
notes. These securities are one year or less as both securities were called in
October, 2001.
(2) Municipal bond yields included in securities available for sale above are
not tax effected.
30
SOURCES OF FUNDS
GENERAL. Deposits, loan repayments, and cash flows generated from operations
are the primary sources of the Bank's funds for use in lending, investing and
for other general purposes. The Bank also utilizes FHLB advances from time to
time.
DEPOSITS. The Bank offers a variety of deposit accounts having a range of
interest rates and terms. The Bank's deposits consist of passbook savings,
NOW, Super NOW, money market and certificate accounts. The flow of deposits is
influenced significantly by general economic conditions, changes in money
market rates, prevailing interest rates and competition. The Bank's deposits
are obtained primarily from the areas in which its home office is located. The
Bank relies primarily on customer service and long-standing relationships with
customers to attract and retain these deposits. Certificate accounts in excess
of $100,000 are not solicited by the Bank nor does the Bank use brokers to
obtain deposits. Management constantly monitors the Bank's deposit accounts
and, based on historical experience, management believes it will retain a large
portion of such accounts upon maturity.
The following table presents the deposit activity of the Bank for the years
indicated.
Years Ended September 30,
2001 2000 1999
(in thousands)
Deposits $ 849,874 702,632 716,232
Withdrawals (850,825) (696,519) (704,706)
------- ------- -------
Net deposits in excess of withdrawals (951) 6,113 11,526
Interest credited on deposits 19,137 18,304 14,820
------- ------- -------
Total increase in deposits $ 18,186 24,417 26,346
======= ======= =======
The following table sets forth maturities time deposits over $100,000 at
September 30, 2001:
Maturity Period
(in thousands)
Three months or less $ 11,051
Over three through six months 8,712
Over six through 12 months 16,125
Over 12 months 2,455
-------
$ 38,343
=======
31
The following table sets forth the distribution of the Bank's deposit accounts
at the dates indicated and the weighted average nominal interest rates on each
category of deposits presented. Management does not believe that the use of
fiscal year-end balances instead of average balances resulted in any material
difference in the information presented.
At September 30,
2001 2000
Weighted
Weighted
Percent of Average Percent of Average
Total Nominal Total Nominal
Amount Deposits Rate Amount Deposits Rate
(dollars in thousands)
Passbook Savings $ 132,217 33.09% 3.04% $ 121,787 31.93% 4.09%
Transaction Accounts:
NOW/non-interest bearing 13,746 3.44 - 9,287 2.44 -
NOW 18,869 4.72 1.82 19,074 5.00 2.03
Money market and management 12,345 3.09 3.36 12,711 3.33 3.59
------ ----- ---- ------ ---- ----
Total transaction accounts 44,960 11.25 2.93 41,072 10.77 3.81
Certificate Accounts:
3 month 1,049 0.26 3.71 1,029 0.27 4.30
6 month 17,246 4.33 4.14 7,660 2.01 5.24
7 month 13,772 3.45 4.89 2,509 0.66 4.70
8 month 61,359 15.35 5.30 1,609 0.42 4.70
10 month 60,548 15.15 4.58 16,834 4.41 6.11
12 month 19,228 4.81 5.49 31,017 8.13 6.39
13 month 10,280 2.57 4.79 105,917 27.77 6.63
15 month 7,388 1.85 4.55 15,307 4.01 6.12
24 month 20,978 5.25 6.68 22,694 5.95 6.57
36 month 3,889 0.97 5.06 5,291 1.39 5.46
36 month rising rate 1,775 0.44 4.33 2,826 0.74 5.64
60 month 4,930 1.23 5.77 5,881 1.54 5.82
Other - - - - - -
------ ----- ---- ------ ---- ----
Total certificate accounts 222,442 55.66 5.08 218,574 57.30 6.36
------ ----- ---- ------ ---- ----
Total Deposits $ 399,619 100.00% 4.17% 381,433 100.00% 5.30%
======= ====== ==== ======= ====== ====
32
At September 30,
1999
Weighted
Percent of Average
Total Nominal
Amount Deposits Rate
(dollars in thousands)
Passbook Savings $ 127,415 35.69% 3.70%
Transaction Accounts:
NOW/non-interest bearing 6,385 1.79 -
NOW 16,577 4.64 2.22
Money market and management 16,100 4.51 3.82
------ ----- ----
Total transaction accounts 39,062 10.94 3.56
Certificate Accounts:
3 month 2,160 0.61 4.40
6 month 10,503 2.94 4.67
7 month 31,955 8.95 5.03
8 month 5,125 1.44 4.63
10 month 45,000 12.60 5.40
12 month 18,600 5.21 4.87
13 month 35,610 9.97 5.75
15 month 12,475 3.49 4.90
24 month 10,170 2.85 5.25
36 month 6,843 1.92 5.65
36 month rising rate 3,959 1.11 5.17
60 month 8,139 2.28 6.01
Other -- -- --
------ ----- ----
Total certificate accounts 190,539 53.37 5.27
------ ----- ----
Total Deposits $ 357,016 100.00% 4.49%
======= ====== ====
The following table presents, by various rate categories, the amount of
certificate accounts outstanding at September 30, 2001, 2000 and 1999 and the
periods to maturity of the certificate accounts outstanding at September 30,
2001.
Period to maturity from September 30, 2001
At September 30,
Two to
Within One to Three There-
2001 2000 1999 One Year Two Years Years after Total
(in thousands)
<s>
Certificate accounts:
2.99% or less $ - 59 81 - - - - -
3.00% to 3.99% 9,508 - - 8,476 411 621 - 9,508
4.00% to 4.99% 127,880 22,497 53,218 120,312 5,185 2,135 248 127,880
5.00% to 5.99% 41,550 30,333 133,805 36,037 4,327 669 517 41,550
6.00% to 6.99% 30,704 129,611 3,435 29 956 748 - - 30,704
7.00% to 7.99% 12,800 36,074 - 12,800 - - - 12,800
------- ------- ------- ------- ------ ----- --- -------
Total $ 222,442 218,574 190,539 207,581 10,671 3,425 765 222,442
======= ======= ======= ======= ====== ===== === =======
33
BORROWING
Although deposits are the Bank's primary source of funds, the Bank's policy has
been to utilize borrowing, such as advances from the FHLB of Chicago, when they
are a less costly source of funds or can be invested at an acceptable rate of
return.
The following table sets forth certain information regarding borrowing at and
for the date indicated:
At and for the Years Ended September 30,
2001 2000 1999
(in thousands)
Average balance outstanding $ 194,545 180,651 158,523
Maximum amount outstanding at any
month-end during the year 214,360 205,150 192,300
Balance outstanding at year end 187,345 205,150 186,250
Weighted average interest rate
during the year 6.34% 6.16% 5.48%
Weighted average interest rate
at end of year 5.50% 6.72% 5.56%
The Bank obtains advances from the FHLB of Chicago secured by its capital stock
in the FHLB of Chicago and a blanket pledge of certain of its mortgage loans
and specifically pledged mortgage-backed securities. Such advances are made
pursuant to several different credit programs, each of which has its own
interest rate and range of maturities. The maximum amount that the FHLB of
Chicago will advance to member institutions, including the Bank, for purposes
other than meeting withdrawals, fluctuates from time to time in accordance
with the policies of the OTS and the FHLB of Chicago. The maximum amount of
FHLB of Chicago advances to a member institution generally is reduced by
borrowing from any other source. During the year ended September 30, 2001, two
advances totalling $55 million matured. At September 30, 2001, the Bank's FHLB
of Chicago advances totalled $183.1 million.
Included in FHLB of Chicago advances at September 30, 2001 are $65.0 million of
fixed-rate advances which are callable at the discretion of the FHLB of Chicago
at periods from 6 months to 2 years from the origination date. The average
term to maturity on these advances is 2.96 years, while the average term to
call is 0.23 years. No advance was called during the year ended September 30,
2001. The Bank receives a lower cost of borrowing on callable advances than on
similar non-callable long-term advances in return for granting the FHLB of
Chicago the right to call the advance prior to their final maturity. If
called, the FHLB of Chicago will provide replacement funding at the then
prevailing market rate of interest for the remaining term of the advances,
subject to standard terms and conditions.
UNSECURED TERM BANK LINE OF CREDIT During fiscal 2000, the Company obtained a
$5.0 million unsecured line of credit from an unrelated financial institution.
The loan provides for an interest rate of the prime rate or 2% over the one,
34
two, or three-month LIBOR at management's discretion, adjustable and payable at
the end of the repricing period. At September 30, 2001, the loan carries an
interest rate of 2% over the three-month LIBOR. The loan requires quarterly
payments of all accrued unpaid interest due and one payment of all outstanding
principal plus all accrued unpaid interest on December 15, 2001. The financing
agreements contain covenants that, among other things, require the Company to
maintain a minimum stockholders' equity balance and to obtain certain minimum
operating results, as well as requiring the Bank to maintain "well capitalized"
regulatory capital levels and certain non-performing asset ratios. At
September 30, 2001, the Company was in compliance with these covenants.
SUBSIDIARY ACTIVITY
Fidelity Corporation, incorporated in 1970, is a wholly-owned subsidiary of the
Bank. Fidelity Corporation's business is safe deposit box rentals, and annuity
and insurance sales primarily to customers of the Bank. In addition, in
cooperation with INVEST, full service securities brokerage services are offered
to customers and non-customers of the Bank.
Fidelity Corporation had a 7.64% ownership interest as a limited partner and
had a 0.08% ownership interest as a general partner in an Illinois limited
partnership formed in 1987 for the purpose of (i) developing, in the City of
Evanston, Illinois, a public parking garage containing 602 parking spaces,
which was sold in 1989 to the City of Evanston, and (ii) developing, managing
and operating a 190 unit luxury rental apartment building adjacent thereto.
Fidelity Corporation's investment in this limited partnership, represented by
its capital contributions, totalled $732,100 at September 30, 2000. On
November 3, 2000, Fidelity Corporation sold its partnership interest to the
other General Partner for $835,000. The Company recorded a pre-tax gain of
$106,000 on the sale of this investment. Income generated from safe deposit
box rentals, annuity sales and insurance sales was $132,000 for the year ended
September 30, 2001. Operating expenses for the fiscal year were $52,000,
resulting in a total pre-tax profit of $183,000.
Fidelity Loan Services, Inc., (FLSI), incorporated in 1989, is a wholly-owned
subsidiary of the Bank that ceased operations in October 1994.
PERSONNEL
As of September 30, 2001, the Company had 126 full-time employees and 21 part-
time employees. The employees are not represented by a collective bargaining
unit and the Company considers its relationship with its employees to be
excellent.
SUPERVISION AND REGULATION
GENERAL Financial institutions and their holding companies are extensively
regulated under federal and state law. As a result, the growth and earnings
performance of the Company can be affected not only by management decisions and
general economic conditions, but also by the requirements of applicable state
and federal statutes and regulations and the policies of various governmental
regulatory authorities, including the Office of Thrift Supervision (the "OTS")
the Board of Governors of the Federal Reserve System (the "Federal Reserve"),
the Federal Deposit Insurance Corporation (the "FDIC"), the Internal Revenue
Service and state taxing authorities and the Securities and Exchange Commission
35
(the "SEC"). The effect of applicable statutes, regulations and regulatory
policies can be significant, and cannot be predicted with a high degree of
certainty.
Federal and state laws and regulations generally applicable to financial
institutions, such as the Company and the Bank, regulate, among other things,
the scope of business, investments, reserves against deposits, capital levels
relative to operations, the nature and amount of collateral for loans, the
establishment of branches, mergers, consolidations and dividends. The system of
supervision and regulation applicable to the Company and the Bank establishes a
comprehensive framework for their respective operations and is intended
primarily for the protection of the FDIC's deposit insurance funds and the
depositors, rather than the shareholders, of financial institutions.
The following is a summary of the material elements of the regulatory framework
that applies to the Company and the Bank. It does not describe all of the
statutes, regulations and regulatory policies that apply to the Company and the
Bank, nor does it restate all of the requirements of the statutes, regulations
and regulatory policies that are described. As such, the following is qualified
in its entirety by reference to the applicable statutes, regulations and
regulatory policies. Any change in applicable law, regulations or regulatory
policies may have a material effect on the business of the Company and the
Bank.
RECENT REGULATORY DEVELOPMENTS The terrorist attacks in September, 2001, have
impacted the financial services industry and have already led to federal
legislation that attempts to address certain related issues involving financial
institutions. On October 26, 2001, President Bush signed into law the Uniting
and Strengthening America by Providing Appropriate Tools Required to Intercept
and Obstruct Terrorism Act of 2001 (the "USA PATRIOT Act"). Among its other
provisions, the USA PATRIOT Act requires each financial institution: (i) to
establish an anti-money laundering program; (ii) to establish due diligence
policies, procedures and controls with respect to its private banking accounts
and correspondent banking accounts involving foreign individuals and certain
foreign banks; and (iii) to avoid establishing, maintaining, administering, or
managing correspondent accounts in the United States for, or on behalf of, a
foreign bank that does not have a physical presence in any country. In
addition, the USA PATRIOT Act contains a provision encouraging cooperation
among financial institutions, regulatory authorities and law enforcement
authorities with respect to individuals, entities and organizations engaged in,
or reasonably suspected of engaging in, terrorist acts or money laundering
activities. It is anticipated that regulations interpreting the USA PATRIOT
Act will be issued during the first quarter of 2002.
THE COMPANY The Company, as the sole shareholder of the Bank, is a savings and
loan holding company. As a savings and loan holding company, the Company is
registered with, and is subject to regulation by, the OTS under the Home
Owners' Loan Act, as amended (the "HOLA"). Under the HOLA, the Company is
subject to periodic examination by the OTS. The Company is also required to
file with the OTS periodic reports of the Company's operations and such
additional information regarding the Company and the Bank as the OTS may
require.
INVESTMENTS AND ACTIVITIES The HOLA prohibits a savings and loan holding
company, directly or indirectly, or through one or more subsidiaries from: (i)
acquiring control of, or acquiring by merger or purchase of assets, another
savings association or savings and loan holding company without the prior
written approval of the OTS; (ii) subject to certain exceptions, acquiring more
than 5% of the issued and outstanding shares of voting stock of a savings
36
association or savings and loan holding company except as part of an
acquisition of control approved by the OTS; or (iii) acquiring or retaining
control of a financial institution that is not FDIC-insured.
Prior to 1999, qualifying unitary savings and loan holding companies were
permitted to engage in non-financial activities. However, under Title IV of
the Gramm-Leach-Bliley Act of 1999, only those unitary savings and loan holding
companies that either were savings and loan holding companies on or before
May 4, 2000, like the Company, or became a savings and loan holding company
pursuant to an application pending before the OTS on or before May 4, 2000, may
continue to engage in such non-financial activities, so long as the holding
company's savings association subsidiary qualifies as a qualified thrift lender
(see "-- The Bank--Qualified Thrift Lender Test"). A savings and loan holding
company that controls only one savings association subsidiary but is not a
grandfathered company is subject to the same activity restrictions as a
multiple savings and loan holding company. In all cases, however, if, the OTS
determines that there is reasonable cause to believe that the continuation by a
savings and loan holding company of a particular activity constitutes a serious
risk to the financial safety, soundness or stability of its savings association
subsidiary, the OTS may require the holding company to cease engaging in the
activity (or divest any subsidiary which engages in the activity) or may impose
such restrictions on the holding company and the subsidiary savings association
as the OTS deems necessary to address the risk. The restrictions the OTS may
impose include limitations on (i) the payment of dividends by the savings
association to the holding company; (ii) transactions between the savings
association and its affiliates; and (iii) any activities of the savings
association that might create a serious risk that liabilities of the holding
company and its affiliates may be imposed on the savings association.
Federal law also prohibits any person or company from acquiring "control" of a
savings association or a savings and loan holding company without prior notice
to the appropriate federal bank regulator. "Control" is defined in certain
cases as the acquisition of 10% or more of the outstanding shares of a savings
association or savings and loan holding company.
DIVIDENDS The Delaware General Corporation Law (the "DGCL") allows the Company
to pay dividends only out of its surplus (as defined and computed in accordance
with the provisions of the DGCL) or if the Company has no such surplus, out of
its net profits for the fiscal year in which the dividend is declared and/or
the preceding fiscal year. Additionally, OTS policies provide that a savings
and loan holding company should not pay dividends that are not supportable by
the company's core earnings or that may be funded only by borrowing or by sales
of assets. The OTS also possesses enforcement powers over savings and loan
holding companies to prevent or remedy actions that represent unsafe or unsound
practices or violations of applicable statutes and regulations. Among these
powers is the ability to prohibit or limit the payment of dividends by savings
and loan holding companies.
FEDERAL SECURITIES REGULATION The Company's common stock is registered with
the SEC under the Securities Act of 1933, as amended, and the Securities
Exchange Act of 1934, as amended (the "Exchange Act"). Consequently, the
Company is subject to the information, proxy solicitation, insider trading and
other restrictions and requirements of the SEC under the Exchange Act.
THE BANK The Bank is a federally chartered savings association, the deposits
of which are insured by the FDIC's Savings Association Insurance Fund ("SAIF").
As a SAIF-insured, federally chartered savings association, the Bank is subject
to the examination, supervision, reporting and enforcement requirements of the
OTS, as the chartering authority for federal savings associations, and the FDIC
37
as administrator of the SAIF. The Bank is also a member of the Federal Home
Loan Bank System, which provides a central credit facility primarily for member
institutions.
DEPOSIT INSURANCE As an FDIC-insured institution, the Bank is required to pay
deposit insurance premium assessments to the FDIC. The FDIC has adopted a
risk-based assessment system under which all insured depository institutions
are placed into one of nine categories and assessed insurance premiums based
upon their respective levels of capital and results of supervisory evaluations.
Institutions classified as well-capitalized (as defined by the FDIC) and
considered healthy pay the lowest premium while institutions that are less than
adequately capitalized (as defined by the FDIC) and considered of substantial
supervisory concern pay the highest premium. Risk classification of all
insured institutions is made by the FDIC for each semi-annual assessment
period.
During the year ended December 31, 2000, SAIF assessments ranged from 0% of
deposits to 0.27% of deposits. For the year ending December 31, 2001, SAIF
assessment rates will continue to range from 0% of deposits to 0.27% of
deposits.
The FDIC may terminate the deposit insurance of any insured depository
institution if the FDIC determines, after a hearing, that the institution: (i)
has engaged or is engaging in unsafe or unsound practices; (ii) is in an unsafe
or unsound condition to continue operations; or (iii) has violated any
applicable law, regulation, order or any condition imposed in writing by, or
written agreement with, the FDIC. The FDIC may also suspend deposit insurance
temporarily during the hearing process for a permanent termination of insurance
if the institution has no tangible capital. Management of the Bank is not
aware of any activity or condition that could result in termination of the
deposit insurance of the Bank.
FICO ASSESSMENTS Since 1987, a portion of the deposit insurance assessments
paid by SAIF members has been used to cover interest payments due on the
outstanding obligations of the Financing Corporation ("FICO"). FICO was
created in 1987 to finance the recapitalization of the Federal Savings and Loan
Insurance Corporation, the SAIF's predecessor insurance fund. As a result of
federal legislation enacted in 1996, beginning as of January 1, 1997, both SAIF
members and members of the FDIC's Bank Insurance Fund ("BIF") became subject to
assessments to cover the interest payments on outstanding FICO obligations.
These FICO assessments are in addition to amounts assessed by the FDIC for
deposit insurance. Between January 1, 2000, and the final maturity of the
outstanding FICO obligations in 2019, BIF members and SAIF members will share
the cost of the interest on the FICO bonds on a pro rata basis. During the year
ended September 30, 2001, the FICO assessment rate for BIF and SAIF members was
approximately 0.02% of deposits.
SUPERVISORY ASSESSMENTS All Federal savings associations are required to pay
supervisory assessments to the OTS to fund the operations of the OTS. The
amount of the assessment is calculated using a formula which takes into account
the institution's size, its supervisory condition (as determined by the
composite rating assigned to the institution as a result of its most recent OTS
examination) and the complexity of its operations. During the year ended
September 30, 2001, the Bank paid supervisory assessments to the OTS totaling
$127,500.
38
CAPITAL REQUIREMENTS Pursuant to the HOLA and OTS regulations, savings
associations, such as the Bank, are subject to the following minimum capital
requirements: a core capital requirement, consisting of a minimum ratio of
core capital to total assets of 3% for savings associations assigned a
composite rating of 1 as of the association s most recent OTS examination, with
a minimum core capital requirement of 4% of total assets for all other savings
associations; a tangible capital requirement, consisting of a minimum ratio of
tangible capital to total assets of 1.5%; and a risk-based capital requirement,
consisting of a minimum ratio of total capital to total risk-weighted assets of
8%, at least one-half of which must consist of core capital. Core capital
consists primarily of permanent stockholders' equity less (i) intangible assets
other than certain supervisory goodwill, certain mortgage servicing rights and
certain purchased credit card relationships and (ii) investments in
subsidiaries engaged in activities not permitted for national banks. Tangible
capital is substantially the same as core capital except that all intangible
assets other than certain mortgage servicing rights must be deducted. Total
capital consists primarily of core capital plus certain debt and equity
instruments that do not qualify as core capital and a portion of the Bank's
allowances for loan and lease losses.
The capital requirements described above are minimum requirements. Higher
capital levels will be required if warranted by the particular circumstances or
risk profiles of individual institutions. For example, the regulations of the
OTS provide that additional capital may be required to take adequate account
of, among other things, interest rate risk, the risks posed by concentrations
of credit or nontraditional activities.
During the year ended September 30, 2001, the Bank was not required by the OTS
to increase its capital to an amount in excess of the minimum regulatory
requirement. As of September 30, 2001, the Bank exceeded its minimum
regulatory capital requirements with a core capital ratio of 7.51%, a tangible
capital ratio of 7.51% and a risk-based capital ratio of 17.65%.
Federal law provides the federal banking regulators with broad power to take
prompt corrective action to resolve the problems of undercapitalized
institutions. The extent of the regulators' powers depends on whether the
institution in question is "well capitalized," "adequately capitalized,"
"undercapitalized," "significantly undercapitalized" or "critically
undercapitalized," in each case as defined by regulation. Depending upon the
capital category to which an institution is assigned, the regulators'
corrective powers include: (i) requiring the institution to submit a capital
restoration plan; (ii) limiting the institution's asset growth and restricting
its activities; (iii) requiring the institution to issue additional capital
stock (including additional voting stock) or to be acquired; (iv) restricting
transactions between the institution and its affiliates; (v) restricting the
interest rate the institution may pay on deposits; (vi) ordering a new election
of directors of the institution; (vii) requiring that senior executive officers
or directors be dismissed; (viii) prohibiting the institution from accepting
deposits from correspondent banks; (ix) requiring the institution to divest
certain subsidiaries; (x) prohibiting the payment of principal or interest on
subordinated debt; and (xi) ultimately, appointing a receiver for the
institution. As of September 30, 2001, the Bank was well capitalized, as
defined by OTS regulations.
DIVIDENDS OTS regulations require prior OTS approval for any capital
distribution by a savings association that is not eligible for expedited
processing under the OTS's application processing regulations. In order to
39
qualify for expedited processing, a savings association must: (i) have a
composite examination rating of 1 or 2; (ii) have a Community Reinvestment Act
rating of satisfactory or better; (iii) have a compliance rating of 1 or 2;
(iv) meet all applicable regulatory capital requirements; and (v) not have been
notified by the OTS that it is a problem association or an association in
troubled condition. Savings associations that qualify for expedited processing
are not required to obtain OTS approval prior to making a capital distribution
unless: (a) the amount of the proposed capital distribution, when aggregated
with all other capital distributions during the same calendar year, will exceed
an amount equal to the association's year-to-date net income plus its retained
net income for the preceding two years; (b) after giving effect to the
distribution, the association will not be at least "adequately capitalized" (as
defined by OTS regulation); or (c) the distribution would violate a prohibition
contained in an applicable statute, regulation or agreement with the OTS or the
FDIC or violate a condition imposed in connection with an OTS-approved
application or notice. The OTS must be given prior notice of certain types of
capital distributions, including any capital distribution by a savings
association that, like the Bank, is a subsidiary of a savings and loan holding
company or by a savings association that, after giving effect to the
distribution, would not be "well-capitalized" (as defined by OTS regulation).
The payment of dividends by any financial institution or its holding company is
affected by the requirement to maintain adequate capital pursuant to applicable
capital adequacy guidelines and regulations, and a financial institution
generally is prohibited from paying any dividends if, following payment
thereof, the institution would be undercapitalized. As described above, the
Bank exceeded its minimum capital requirements under applicable guidelines as
of September 30, 2001. Further, under applicable regulations of the OTS, the
Bank may not pay dividends in an amount which would reduce its capital below
the amount required for the liquidation account established in connection with
the Bank's conversion from the mutual to the stock form of ownership in 1993.
Notwithstanding the availability of funds for dividends, however, the OTS may
prohibit the payment of any dividends by the Bank if the OTS determines such
payment would constitute an unsafe or unsound practice.
INSIDER TRANSACTIONS The Bank is subject to certain restrictions imposed by
federal law on extensions of credit to the Company, on investments in the stock
or other securities of the Company and the acceptance of the stock or other
securities of the Company as collateral for loans. Certain limitations and
reporting requirements are also placed on extensions of credit by the Bank to
its directors and officers, to directors and officers of the Company, to
principal stockholders of the Company, and to "related interests" of such
directors, officers and principal stockholders. In addition, federal law and
regulations may affect the terms upon which any person becoming a director or
officer of the Company or one of its subsidiaries or a principal stockholder of
the Company may obtain credit from banks with which the Bank maintains a
correspondent relationship.
SAFETY AND SOUNDNESS STANDARDS The federal banking agencies have adopted
guidelines which establish operational and managerial standards to promote the
safety and soundness of federally insured depository institutions. The
guidelines set forth standards for internal controls, information systems,
internal audit systems, loan documentation, credit underwriting, interest rate
exposure, asset growth, compensation, fees and benefits, asset quality and
earnings.
40
In general, the safety and soundness guidelines prescribe the goals to be
achieved in each area, and each institution is responsible for establishing its
own procedures to achieve those goals. If an institution fails to comply with
any of the standards set forth in the guidelines, the institution's primary
federal regulator may require the institution to submit a plan for achieving
and maintaining compliance. If an institution fails to submit an acceptable
compliance plan, or fails in any material respect to implement a compliance
plan that has been accepted by its primary federal regulator, the regulator is
required to issue an order directing the institution to cure the deficiency.
Until the deficiency cited in the regulator's order is cured, the regulator may
restrict the institution's rate of growth, require the institution to increase
its capital, restrict the rates the institution pays on deposits or require the
institution to take any action the regulator deems appropriate under the
circumstances. Noncompliance with the standards established by the safety and
soundness guidelines may also constitute grounds for other enforcement action
by the federal banking regulators, including cease and desist orders and civil
money penalty assessments.
BRANCHING AUTHORITY Federally chartered savings associations which qualify as
"domestic building and loan associations," as defined in the Internal Revenue
Code, or meet the qualified thrift lender test (see "-- Qualified Thrift Lender
Test") have the authority, subject to receipt of OTS approval, to establish or
acquire branch offices anywhere in the United States. If a federal savings
association fails to qualify as a "domestic building and loan association," as
defined in the Internal Revenue Code, and fails to meet the qualified thrift
lender test the association may branch only to the extent permitted for
national banks located in the savings association's home state. As of
September 30, 2001, the Bank qualified as a "domestic building and loan
association," as defined in the Internal Revenue Code and met the qualified
thrift lender test.
QUALIFIED THRIFT LENDER TEST The HOLA requires every savings association to
satisfy a "qualified thrift lender" ("QTL") test. Under the HOLA, a savings
association will be deemed to meet the QTL test if it either (i) maintains at
least 65% of its "portfolio assets" in "qualified thrift investments" on a
monthly basis in nine out of every 12 months or (ii) qualifies as a "domestic
building and loan association," as defined in the Internal Revenue Code. For
purposes of the QTL test, "qualified thrift investments" consist of mortgage
loans, mortgage-backed securities, education loans, small business loans,
credit card loans and certain other housing and consumer-related loans and
investments. "Portfolio assets" consist of a savings association's total
assets less goodwill and other intangible assets, the association's business
properties and a limited amount of the liquid assets maintained by the
association pursuant to OTS requirements. A savings association that fails to
meet the QTL test must either convert to a bank charter or operate under
certain restrictions on its operations and activities. Additionally, within
one year following the loss of QTL status, the holding company for the savings
association will be required to register as, and will be deemed to be, a bank
holding company. A savings association that fails the QTL test may requalify
as a QTL but it may do so only once. As of September 30, 2001, the Bank
satisfied the QTL test, with a ratio of qualified thrift investments to
portfolio assets of 97.26%, and qualified as a "domestic building and loan
association," as defined in the Internal Revenue Code.
41
LIQUIDITY REQUIREMENTS The OTS issued a final rule, effective July 18, 2001,
eliminating the requirement that each savings association maintain an average
daily balance of liquid assets of at least 4% of its liquidity base. The change
was made to implement a recent change to the HOLA. The rule, nevertheless,
requires each savings association and service corporation to maintain
sufficient liquidity to ensure its safe and sound operation.
FEDERAL RESERVE SYSTEM Federal Reserve regulations, as presently in effect,
require depository institutions to maintain non-interest earning reserves
against their transaction accounts (primarily NOW and regular checking
accounts), as follows: for transaction accounts aggregating $42.8 million or
less, the reserve requirement is 3% of total transaction accounts; and for
transaction accounts aggregating in excess of $42.8 million, the reserve
requirement is $1.284 million plus 10% of the aggregate amount of total
transaction accounts in excess of $42.8 million. The first $5.5 million of
otherwise reservable balances are exempted from the reserve requirements.
These reserve requirements are subject to annual adjustment by the Federal
Reserve. The Bank is in compliance with the foregoing requirements. The
balances maintained to meet the reserve requirements imposed by the Federal
Reserve Board may be used to satisfy liquidity requirements imposed by the OTS.
IMPACT OF INFLATION AND CHANGING PRICES
The Company's financial statements and notes thereto presented herein have been
prepared in accordance with GAAP, which generally require the measurement of
financial position and operating results in terms of historical dollars without
considering the changes in the relative purchasing power of money over time due
to inflation. The impact of inflation is reflected in the increased cost of
the Company's operations. Unlike industrial companies, nearly all of the
assets and liabilities of the Company are monetary in nature. As a result,
interest rates have a greater impact on the Company's performance than do the
effects of general levels of inflation. Interest rates do not necessarily move
in the same direction or to the same extent as the price of goods and services.
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The OTS requires all regulated thrift institutions to calculate the estimated
change in the Bank's net portfolio value (NPV) assuming instantaneous, parallel
shifts in the Treasury yield curve of 100 to 300 basis points either up or down
in 100 basis point increments. The NPV is defined as the present value of
expected cash flows from existing assets less the present value of expected
cash flows from existing liabilities plus the present value of net expected
cash inflows from existing off-balance sheet contracts.
The OTS provides all institutions that file a CONSOLIDATED MATURITY/RATE
schedule (CMR) as a part of their quarterly Thrift Financial Report with an
interest rate sensitivity report of NPV. The OTS simulation model uses a
discounted cash flow analysis and an option-based pricing approach to measuring
the interest rate sensitivity of NPV. The OTS model estimates the economics
value of each type of asset, liability, and off-balance sheet contact under the
assumption that the Treasury yield curve shifts instantaneously and parallel up
and down 100 to 300 basis points in 100 basis point increments. The OTS
provides thrifts the results of their interest rate sensitivity model, which is
based on information provided by the Bank, to estimate the sensitivity of NPV.
42
The OTS model utilizes an option-based pricing approach to estimate the
sensitivity of mortgage loans. The most significant embedded option in these
types of assets is the prepayment option of the borrowers. The OTS model uses
various price indications and prepayment assumptions to estimate sensitivity of
mortgage loans.
In the OTS model, the value of deposit accounts appears on the asset and
liability side of the NPV analysis. In estimating the value of certificate of
deposit accounts, the liability portion of the CD is represented by the implied
value when comparing the difference between the CD face rate and available
wholesale CD rates. On the asset side of the NPV calculation, the value of the
"customer relationship" due to the rollover of retail CD deposits represents an
intangible asset in the NPV calculation.
Other deposit accounts such as transaction accounts, money market deposit
accounts, passbook accounts, and non-interest bearing accounts also are
included on the asset and liability side of the NPV calculation in the OTS
model. The accounts are valued at 100% of the respective account balances on
the liability side. On the assets side of the analysis, the value of the
"customer relationship" of the various types of deposit accounts is reflected
as a deposit intangible.
The NPV sensitivity of borrowed funds is estimated by the OTS model based on a
discounted cash flow approach. The cash flows are assumed to consist of
monthly interest payments with principal paid at maturity.
The OTS model is based only on the Bank's balance sheet. The assets and
liabilities at the parent company level are short-term in nature, primarily
cash and equivalents, and were not considered in the analysis because they
would not have a material effect on the analysis of NPV sensitivity. The
following table sets forth the Company's September 30, 2001 interest rate
sensitivity of NPV, the most recent available from the OTS.
Net Portfolio Value as a %
Net Portfolio Value of Present Value of Assets
------------------------------ --------------------------
Changes in
Rates $ Amount $ Change % Change NPV Ratio Change
- ---------- --------- -------- -------- --------- ---------
+ 300 bp 41,324 (39,870) (49)% 6.31% - 522 bp
+ 200 bp 54,777 (26,416) (33)% 8.16% - 337 bp
+ 100 bp 68,370 (12,824) (16)% 9.94% - 159 bp
0 bp 81,194 11.53%
- 100 bp 89,382 8,188 10 % 12.49% + 95 bp
- 200 bp 94,104 13,910 17 % 13.11% + 158 bp
- 300 bp - - - % - % - bp
43
Item 8. Financial Statements and Supplementary Data
Consolidated Statements of Financial Condition
(Dollars in thousands, except per share data)
September 30, 2001 and 2000
ASSETS 2001 2000
Cash and due from banks $ 7,107 4,690
Interest-earning deposits 1,397 1,405
Federal funds sold 100 100
-------- -------
Cash and cash equivalents 8,604 6,195
FHLB of Chicago stock, at cost 18,055 10,065
Mortgage-backed securities held to maturity, at amortized cost
(approximate fair value of $2,924 at September 30, 2000) - 2,901
Mortgage-backed securities available for sale 127,685 -
Securities available for sale 42,006 74,366
Loans held for sale 41,219 -
Loans receivable, net of allowance for loan losses of $1,236 and $950
at September 30, 2001 and 2000 422,980 534,277
Accrued interest receivable 3,650 4,161
Premises and equipment 3,850 3,925
Other assets 657 1,141
-------- -------
$ 668,706 637,031
======== =======
LIABILITIES and STOCKHOLDERS' EQUITY
LIABILITIES
Deposits 399,619 381,433
Borrowed funds 187,345 205,150
Advance payments by borrowers for taxes and insurance 7,193 2,198
Due to broker 14,918 --
Other liabilities 10,247 5,447
-------- -------
Total liabilities 619,322 594,228
STOCKHOLDERS' EQUITY
Preferred stock, $.01 par value; authorized 2,500,000 shares;
none outstanding - -
Common stock, $.01 par value; authorized 8,000,000 shares;
issued 3,782,350 shares; 2,020,367 and 2,025,085 shares outstanding
at September 30, 2001 and 2000, respectively 38 38
Additional paid-in capital 38,636 38,780
Retained earnings, substantially restricted 40,926 37,022
Treasury stock, at cost (1,761,983 and 1,757,265 shares at
September 30, 2001 and 2000, respectively) (31,540) (31,391)
Common stock acquired by Employee Stock Ownership Plan -- (189)
Common stock acquired by Bank Recognition and Retention Plans (178) (191)
Accumluated other comprehensive income (loss) 1,502 (1,266)
-------- -------
Total stockholders' equity 49,384 42,803
-------- -------
$668,706 637,031
======== =======
See accompanying notes to consolidated financial statements.
44
Consolidated Statements of Earnings
(Dollars in thousands, except per share data)
Years ended September 30, 2001, 2000, and 1999
2001 2000 1999
INTEREST INCOME:
Loans receivable $ 39,337 38,329 33,787
Investment securities 5,822 5,236 4,951
Mortgage-backed securities 1,223 239 506
Other interest income 72 47 50
------- ------ ------
46,454 43,851 39,294
INTEREST EXPENSE:
Deposits 19,121 17,992 15,070
Borrowed funds 12,340 11,120 8,692
------- ------ ------
31,461 29,112 23,762
Net interest income before provision for loan losses 14,993 14,739 15,532
Provision for loan losses 295 180 165
------- ------ ------
Net interest income after provision for loan losses 14,698 14,559 15,367
NON-INTEREST INCOME:
Fees and commissions 457 452 374
Insurance and annuity commissions 820 1,063 721
Gain on sale of securities 231 - -
Gain on sale of loans 640 - -
Other 159 53 51
------- ------ ------
2,307 1,568 1,146
NON-INTEREST EXPENSE:
General and administrative expenses:
Salaries and employee benefits 5,578 5,331 5,784
Office occupancy and equipment 1,666 1,452 1,512
Data processing 467 521 498
Advertising and promotions 443 554 399
Other 1,535 1,441 1,615
Amortization of deposit base intangible 11 21 32
------- ------ ------
9,700 9,320 9,840
Income before income taxes 7,305 6,807 6,673
Income tax expense 2,433 2,565 2,543
------- ------ ------
NET INCOME $ 4,872 4,242 4,130
======= ====== ======
Earnings per share - basic $2.42 2.04 1.85
Earnings per share - diluted $2.31 1.96 1.76
See accompanying notes to consolidated financial statements.
45
CONSOLIDATED STATEMENTS of CHANGES IN STOCKHOLDERS' EQUITY
(Dollars in thousands)
Years ended September 30, 2001, 2000, and 1999
Accumu-
Common lated Other
Common Stock Compre-
Additional Stock Acquired hensive
Common Paid-in Retained Treasury Acquired By Income
Stock Capital Earnings Stock By ESOP By BRRP's (loss) Total
Balance at September 30, 1998 $ 38 38,117 30,646 (19,210) (1,092) (242) 340 48,597
Net income - - 4,130 - - - - 4,130
Change in accumulated other
comprehensive income - - - - - - (1,820) (1,820)
--- ------ ------- ------ ------ ------ ----- ------
Total comprehensive income 2,310
Purchase of treasury stock
(402,426 shares) - - - (9,312) - - - (9,312)
Cash dividends ($.43 per share) - - (1,005) - - - - (1,005)
Amortization of award of BRRP
stock - - - - - 44 - 44
Cost of ESOP shares released - - - - 460 - - 460
Exercise of stock options and
reissuance of treasury shares
(20,488 shares) - (145) - 354 - - - 209
Tax benefit related to vested
BRRP stock - 154 - - - - - 154
Tax benefit related to stock
options exercised - 62 - - - - - 62
Market adjustment for committed
ESOP shares - 502 - - - - - 502
--- ------ ------- ------ ------ ------ ----- ------
Balance at September 30, 1999 38 38,690 33,771 (28,168) (632) (198) (1,480) 42,021
Net income - - 4,242 - - - - 4,242
Change in accumulated other
comprehensive loss - - - - - - 214 214
--- ------ ------- ------ ------ ------ ----- ------
Total comprehensive income 4,456
Purchase of treasury stock
(191,200 shares) - - - (3,377) - - - (3,377)
Cash dividends ($.47 per share) - - (991) - - - - (991)
Amortization of award of BRRP
stock - - - - - 7 - 7
Cost of ESOP shares released - - - - 443 - - 443
Exercise of stock options and
reissuance of treasury shares
(8,439 shares) - (150) - 154 - - - 4
Tax benefit related to vested
BRRP stock - 4 - - - - - 4
Tax benefit related to stock
options exercised - 54 - - - - - 54
Market adjustment for committed
ESOP shares - 182 - - - - - 182
--- ------ ------- ------ ------ ------ ----- ------
Balance at September 30, 2000 38 38,780 37,022 (31,391) (189) (191) (1,266) 42,803
- continued -
46
Accumu-
Common lated Other
Common Stock Compre-
Additional Stock Acquired hensive
Common Paid-in Retained Treasury Acquired By Income
Stock Capital Earnings Stock By ESOP By BRRP's (loss) Total
Balance at September 30, 2000 38 38,780 37,022 (31,391) (189) (191) (1,266) 42,803
Net income - - 4,872 - - - - 4,872
Change in accumulated other
comprehensive loss 2,768 2,768
--- ------ ------- ------ ------ ------ ----- ------
Total comprehensive income 7,640
Purchase of treasury stock
(28,800 shares) - - - (562) - - - (562)
Cash dividends ($.48 per share) - - (968) - - - - (968)
Amortization of award of BRRP
stock - - - - - 13 - 13
Cost of ESOP shares released - - - - 189 - - 189
Exercise of stock options and
reissuance of treasury shares
(27,500 shares) - (208) - 413 - - - 205
Tax benefit related to vested
BRRP stock - 1 - - - - - 1
Tax benefit related to stock
options exercised - 25 - - - - - 25
Market adjustment for committed
ESOP shares - 38 - - - - - 38
--- ------ ------- ------ ------ ------ ----- ------
Balance at September 30, 2001 38 38,636 40,926 (31,540) -- (178) (1,502) 49,384
=== ====== ======= ====== ====== ====== ===== ======
See accompanying notes to consolidated financial statements.
47
CONSOLIDATED STATEMENTS of CASH FLOWS
(Dollars in thousands)
Years ended September 30, 2000 1999 1998
Cash flows from operating activities:
Net income $ 4,872 4,242 4,130
Adjustment to reconcile net income to net cash provided by
operating activities:
Depreciation 400 446 447
Deferred income taxes 4 190 9
Provision for loan losses 295 180 165
Net amortization and accretion of premiums and discounts (37) (8) 3
Amortization of cost of stock benefit plans 13 7 44
ESOP 277 625 962
Deferred loan costs, net of amortization 229 (483) (634)
Stock dividend from FHLB of Chicago (761) (344) -
Loans originated fro sale (2,186) - -
Proceeds from loans originated for sale 2,208 - -
Amortization of deposit base intangible 11 21 32
Loss (gain) on sale of real estate owned 5 (13) (45)
Gain on sale of securities and loans (871) - -
Decrease (increase) in accrued interest receivable 511 (496) (118)
Decrease in other assets, net 732 38 46
(Increase) decrease in other liabilities, net 3,120 (839) 1,316
------ ------ -----
NET CASH PROVIDED by OPERATING ACTIVITIES 8,772 3,566 6,357
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of mortgage-backed securities available for sale (114,224) - -
Proceeds from maturities of securities available for sale 40,051 - 30,000
Proceeds from sale of securities available for sale 45,736 - -
Proceeds from sale of securities held to maturity 2,443 - -
Proceeds from sale of real estate owned 280 86 438
Proceeds from redemption of Federal Home Loan Bank of Chicago stock - - 740
Purchase of Federal Home Loan Bank of Chicago stock (7,229) (106) (3,845)
Purchase of securities available for sale (50,442) (7,972) (39,951)
Loans originated for investment (140,139) 110,184) (196,859)
Proceeds from sale of loans 54,235 - -
Purchase of premises and equipment (325) (169) (248)
Principal repayments collected on loans receivable 155,546 84,013 115,038
Principal repayments collected on mortgage-backed securities 3,654 684 7,590
------ ----- ------
NET CASH USED IN INVESTING ACTIVITIES (10,414) (33,926) (87,097)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits 18,186 24,417 26,346
Net increase in (repayment of) borrowed funds (17,805) 18,900 64,850
Net increase (decrease) in advance payments by borrowers for
taxes and insurance 4,955 (5,788) 1,067
Purchase of treasury stock (562) (3,377) (9,312)
Payment of common stock dividends (968) (991) (1,005)
Proceeds from exercise of stock options 205 4 209
------ ----- ------
NET CASH PROVIDED BY FINANCING ACTIVITIES 4,501 33,165 82,155
------ ----- ------
Net change in cash and cash equivalents 2,409 2,805 1,415
Cash and cash equivalents at beginning of year 6,195 3,390 1,975
------ ----- ------
Cash and cash equivalents at end of year $ 8,604 6,195 3,390
====== ===== ======
CASH PAID DURING THE YEAR FOR:
Interest $ 31,667 29,180 23,256
Income taxes 1,557 2,292 1,955
NON-CASH INVESTING ACTIVITIES:
Loans transferred to real estate in foreclosure 277 231 262
Due to broker for securities transactions 14,918 - -
Loans transferred to held for sale 94,302 - -
====== ===== ======
See accompanying notes to consolidated financial statements.
48
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Fidelity Bancorp, Inc. (the Company) is a Delaware corporation incorporated on
September 7, 1993 for the purpose of becoming the savings and loan holding
company for Fidelity Federal Savings Bank (the Bank). On December 3, 1993, the
Bank converted from a mutual to a stock form of ownership, and the Company
completed its initial public offering and with a portion of the net proceeds
acquired all of the issued and outstanding capital stock of the Bank.
The Company through the branch network of the Bank provides financial and other
banking services to customers located primarily in Chicago and surrounding
suburbs of Chicago. Customers in these areas are primarily users of the Bank's
loan and deposit services. A major portion of loans is secured primarily by
real estate collateral, although borrower cash flow is expected to be the
primary source of repayment.
While the Company's principal decision makers monitor the revenue streams of
the various products and services, operations are managed and financial
performance is evaluated on a Company-wide basis. Accordingly, all of the
Company's banking operations are considered by management to be aggregated in
one reportable operating segment.
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of the
Company and its wholly owned subsidiary, Fidelity Federal Savings Bank, and the
Bank's wholly owned operating subsidiary, Fidelity Corporation. All
intercompany accounts have been eliminated in consolidation.
BASIS OF ACCOUNTING
The accompanying consolidated financial statements are prepared in accordance
with accounting principles generally accepted in the United States of America
and conform to general practices within the banking industry. A summary of
significant policies follows:
USE OF ESTIMATES
The preparation of the consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities,
including the allowance for loan losses, fair values of financial instruments,
and disclosure of contingent assets and liabilities at the date of the
consolidated financial statements, and the reported amounts of income and
expenses during the reporting period. Actual results could differ from those
estimates.
INVESTMENT AND MORTGAGE-BACKED SECURITIES
Securities which the entity has the positive intent and ability to hold to
maturity are classified as "held to maturity" and measured at amortized cost.
Securities purchased for the purpose of being sold are classified as trading
securities and measured at fair value with any changes in fair value included
in earnings. All other investments that are not classified as "held to
maturity" or "trading" are classified as "available for sale." Investments
available for sale are measured at fair value with any changes in fair value
reflected as a separate component of stockholders' equity, net of related tax
effects. The Company does not have any securities designated as trading.
49
For securities classified as either available for sale or held-to-maturity, the
Company determines whether a decline in fair value below the amortized cost
basis is other than temporary in nature. If the decline in fair value is
judged by management to be other than temporary, the cost basis of the
individual security is written down to fair value as the new cost basis and the
amount of the write-down is included in earnings.
LOANS HELD FOR SALE
The Bank sells, generally without recourse, whole loans and participation
interests in mortgage loans that it originates. Loans originated are
identified as either held for investment or sale upon origination. Loans which
the Bank intends to sell before maturity are classified as held for sale, and
are carried at the lower of cost, adjusted for applicable deferred loan fees or
expenses, or estimated market value in the aggregate.
LOANS RECEIVABLE
Loans receivable are stated at unpaid principal balances plus net deferred loan
costs, less loans in process, unearned discounts, and allowances for loan
losses.
Loan fees are deferred, net of certain direct costs associated with loan
originations. Net deferred fees or costs are amortized as yield adjustments
over the contractual life of the loan using the interest method.
Impaired loans are measured at the present value of expected future cash flows
discounted at the loan's effective interest rate, or, as a practical expedient,
at the loan's observable market price or at the fair value of the collateral if
the loan is collateral dependent. Factors in determining impairment include
payment status, collateral value, and the probability of collecting scheduled
payments. Large groups of smaller balance homogeneous loans, such as
residential mortgages and consumer loans, are collectively evaluated for
impairment.
The allowance for loan losses is increased by charges to operations and
decreased by charge-offs, net of recoveries. The allowance for loan losses
reflects management's estimate of the reserves needed to cover probable
incurred credit losses within the Bank's loan portfolio. In determining an
appropriate level of loss reserves, management periodically evaluates the
adequacy of the allowance based on known and inherent risks in the portfolio,
adverse situations that may affect the borrower's ability to repay, estimated
value of any underlying collateral, and current economic conditions. In
addition, various regulatory agencies, as an integral part of their examination
process, periodically review the Bank's allowance for losses on loans
receivable. Such agencies may require the Bank to recognize additions to the
allowance for loan losses based on their judgements of information available to
them at the time of their examination.
REAL ESTATE IN FORECLOSURE
Real estate acquired through foreclosure or deed in lieu of foreclosure is
carried at the lower of fair value or the related loan balance at the date of
foreclosure, less estimated costs to dispose. Valuations are periodically
performed by management and an allowance for losses is established by a charge
to operations if the carrying value of a property subsequently exceeds its
estimated net realizable value.
50
PREMISES AND EQUIPMENT
Premises and equipment are stated at cost less accumulated depreciation and
amortization. Depreciation and amortization of premises and equipment are
computed using the straight-line method over the estimated useful life of the
respective asset. Useful lives are 25 to 40 years for office buildings, and 5
to 10 years for furniture, fixtures, and equipment. Amortization of leasehold
improvements is computed on the straight-line method over the lesser of the
term of the lease or the useful life of the property.
EMPLOYEE STOCK OWNERSHIP PLAN (ESOP)
Compensation expense under the ESOP is equal to the fair value of common shares
released or committed to be released annually to participants in the ESOP.
Common stock purchased by the ESOP and not committed to be released to
participants is included in the consolidated statements of financial condition
at cost as a reduction of stockholders' equity.
STOCK COMPENSATION
Employee compensation expense under stock option plans is reported if options
are granted below market price at grant date. Pro forma disclosures of net
income and earnings per share are shown using the fair value of SFAS No. 123 to
measure expense for options granted using an option pricing model to estimate
fair value.
INCOME TAXES
Deferred income taxes arise from the recognition of certain items of income and
expense for tax purposes in years different from those in which they are
recognized in the consolidated financial statements. Income tax benefits
attributable to vested Bank Recognition and Retention Plans (BRRP) stock and
exercised non qualified stock options are credited to additional paid-in-
capital.
Deferred income taxes are accounted for under the asset and liability method,
whereby deferred income taxes are recognized for the tax consequences of
"temporary differences" by applying the applicable tax rate to differences
between the financial statement carrying amounts and the tax basis of existing
assets and liabilities. The effect on deferred taxes of a change in tax rates
is recognized in income in the period that includes the enactment date of any
such tax law change. A valuation allowance is established on deferred tax
assets when, in the opinion of management, the realization of the deferred tax
asset does not meet the "more likely than not" criteria.
INSURANCE AND ANNUITY COMMISSIONS
Insurance and annuity commissions are recognized as income as of the date of
inception of the related policy and contracts.
CASH AND CASH EQUIVALENTS
For purposes of reporting cash flows, cash and cash equivalents include cash
and due from banks, interest-bearing deposits, and federal funds sold.
EARNINGS PER SHARE
Basic earnings per share is determined by dividing net income by the weighted
average number of common shares outstanding during the period. ESOP shares are
considered outstanding for this calculation unless unearned. Diluted earnings
per share include the dilutive effect of additional potential shares issuable
under stock options.
51
Weighted average shares used in calculating earnings per share are summarized
below:
2001 2000 1999
------ ----- -----
Basic
Net Income $ 4,872 4,242 4,130
--------- --------- ---------
Weighted average common shares outstanding 2,016,716 2,092,093 2,300,562
Less: Average unallocated ESOP shares (1,180) (15,336) (63,930)
--------- --------- ---------
Average shares 2,015,536 2,076,757 2,236,632
Basic earnings per common share $ 2.42 $ 2.04 $ 1.85
--------- --------- ---------
Diluted
Net income $ 4,872 4,242 4,130
--------- --------- ---------
Weighted average common shares outstanding
for basic earnings per common share 2,015,536 2,076,757 2,236,632
Add: Dilutive effect of assumed exercises
of stock options 88,473 83,862 115,496
--------- --------- ---------
Average shares 2,104,009 2,160,619 2,352,128
--------- --------- ---------
Diluted earnings per common share $ 2.31 $ 1.96 $ 1.76
========= ========= =========
COMPREHENSIVE INCOME
Comprehensive income consists of net income and other comprehensive income
(loss). Other comprehensive income (loss) includes unrealized gains and losses
on securities available for sale, net of tax effects, which are also recognized
as separate components of equity.
Reclassifications
Certain reclassifications have been made in prior years financial statements to
conform to the current year s presentation.
NEW ACCOUNTING PRONOUNCEMENTS
New accounting guidance was issued that will, beginning in 2002, revise the
accounting for goodwill and intangible assets. Intangible assets with
indefinite lives and goodwill will no longer be amortized, but will
periodically be reviewed for impairment and written down if impaired.
Additional disclosures about intangible assets and goodwill may be required.
The Company does not expect this new guidance to have any effect on the
financial statements.
52
Beginning October 1, 2002, a new accounting pronouncement addressing the
financial accounting and reporting for obligations associated with the
retirement of tangible long-lived assets and the associated asset retirement
costs will become effective. The Company does not expect this new accounting
pronouncement to have any effect on the financial statements.
Another new accounting pronouncement becomes effective October 1, 2002 which
addresses financial accounting and reporting for the impairment of long-lived
assets and long-lived assets to be disposed of. The Company does not expect
this new accounting pronouncement to have any effect on the financial
statements.
(2) Mortgage-backed Securities
Mortgage-backed securities at September 30, are summarized as follows:
2001 2000
Gross Gross Gross Gross
Amortized unrealized unrealized Fair Amortized unrealized unrealizef Fair
cost gains losses value cost gains losses value
(in thousands)
Available for Sale:
FHLMC pass-through
certificates $ 8,977 162 - $ 9,139 - - - -
FNMA pass-through
certificates 65,426 1,098 - 66,524 - - - -
GNMA pass-though
certificates 54,545 477 - 52,022 - - - -
-------- ------ ----- ------- ---- ---- ---- ---
$ 125,948 1,737 - $ 127,685 - - - -
======= ====== ===== ======= ==== ==== ===== ====
Held to Maturity:
FHLMC pass-through $ - - - $ - 2,901 23 - 2,924
certificates
======= ====== ===== ======= ====== ==== ===== =====
As of September 30, 2001, the Company recorded unrealized gains on mortgage-
backed securities available for sale as increases to stockholders' equity of
$1.1 million net of deferred income tax expense of $660,000. Proceeds from the
sale of mortgage-backed securities held to maturity in 2001 were $2.4 million,
resulting in gross gains of $77,000. The amortized cost of the securities sold
was $2.4 million. There were no sales of mortgage-backed securities during
the years ended September 30, 2000 and 1999.
The mortgage-backed securities held at September 30, 2001 all have a
contractual maturity term of 30 years. Expected maturities may differ from
contractual maturities because of prepayments on underlying mortgage loans.
53
(3) Securities Available for Sale
Securities available for sale at September 30, are summarized as follows:
2001 2000
Gross Gross Gross Gross
Amortized unrealized unrealized Fair Amortized unrealized unrealized Fair
cost gains losses value cost gains losses value
(in thousands)
U.S. Government and
agency obligations
due:
One year or less $ 23,109 90 - $ 23,199 - - - -
After five years
to ten years - - - - 68,436 - 2,833 65,603
Municipal securities -
After 10 years
or more 3,491 11 10 3,492 - - - -
Corporate Securities:
After 5 years
to 10 years 3,553 81 - 3,634 - - - -
After 10 years
or more years 11,166 519 4 11,681 7,972 791 - 8,763
-------- ---- ----- ------- ------- ---- ----- ------
$ 41,319 701 14 $ 42,006 76,408 791 2,833 74,366
======== ==== ===== ======= ======= ==== ===== ======
As of September 30, 2001 and 2000, the Company recorded unrealized gains
(losses) on securities available for sale as increases (decreases) to
stockholders' equity of $426,000 and $(1.3 million), respectively, net of
deferred income tax expense (benefit) of $261,000 and $(776,000), respectively.
Proceeds from the sale of securities available for sale in 2001 were $45.7
million resulting in gross gains of $231,000 and no losses. There were no
sales of securities during the years ended September 30, 2000 and 1999.
The fair value of securities available for sale is based upon quoted market
prices where available. Actual maturities may differ from contractual
maturities shown in the table above because the borrowers may have the right to
call or prepay obligations with or without call or prepayment penalties.
(4) Loans Held for Sale
At September 30, 2001, the Bank had $41.2 million of fixed-rate loans
classified as held for sale with weighted average rate of 7.61%. As discussed
in Note 5, these loans were transferred from the loans receivable portfolio in
September of 2001. There were no loans held for sale at September 30, 2000.
54
(5) LOANS RECEIVABLE
Loans receivable are summarized as follows at September 30:
2001 2000
(in thousands)
One-to-four family mortgages $ 269,472 390,805
Multi-family mortgages 120,432 118,309
Commercial 1,665 3,448
Construction 15,325 2,304
Consumer loans 15,096 17,101
--------- --------
Gross loans receivable 421,990 531,967
Less:
Loans in process (107) (26)
Deferred loan costs 2,336 3,299
Allowance for losses on loans (1,236) (950)
Unearned discount on consumer loans (3) (13)
--------- --------
$ 422,980 534,277
========= ========
Mortgage loans serviced for others are not included in the accompanying
consolidated statements of financial condition. The unpaid principal balances
of these loans at September 30, 2001, 2000, and 1999 were approximately
$61,690,000, $6,062,000, and $7,314,000, respectively. Custodial balances
maintained in connection with the mortgage loans serviced for others were
included in deposits at September 30, 2001, 2000, and 1999, and were
approximately $3.47 million, $207,000, and $298,000, respectively. Service fee
income for the years ended September 30, 2001, 2000, and 1999 was $14,000,
$22,000, and $29,000, respectively.
During September 2001, management transferred $94.3 million to loans held for
sale to improve flexibility in monitoring interest rate risk. Adjustable
mortgages totalling $53.4 million were sold in September 2001, resulting in a
gain of $618,000. Mortgage servicing rights of $200,000 were recorded in the
sale of these loans.
55
Activity in the allowance for loan losses is summarized as follows for the
years ended September 30:
2001 2000 1999
(in thousands)
Balance at beginning of year $ 950 780 591
Provision for loan losses 295 180 165
Charge-offs-loans receivable (12) (13) (8)
Recoveries 3 3 32
----- ---- ---
Balance at end of year $ 1,236 950 780
===== ==== ===
Non-accrual loans receivable were as follows:
Principal Percent of
Balance total loans
Number in thousands) receivable
September 30, 2001:
Loans receivable 9 $ 677 0.16%
September 30, 2000:
Loans receivable 5 $ 379 0.07%
September 30, 1999:
Loans receivable 10 $ 343 0.07%
=== ===== =====
At September 30, 2001, 2000 and 1999, there were no loans considered to be
impaired.
(6) ACCRUED INTEREST RECEIVABLE
Accrued interest receivable is summarized as follows at September 30:
2001 2000
(in thousands)
Loans receivable $ 2,338 2,520
Mortgage-backed securities 603 18
Investment securities 571 1,534
FHLB Stock 174 110
Reserve for uncollected interest (36) (21)
------ -----
$ 3,650 4,161
====== =====
56
(7) PREMISES AND EQUIPMENT
Premises and equipment are summarized as follows at September 30:
2001 2000
(in thousands)
Land $ 858 855
Buildings 3,858 3,851
Leasehold improvements 1,429 1,434
Furniture, fixtures, and equipment 4,220 3,937
------ -----
10,365 10,077
Less accumulated depreciation and amortization 6,515 6,152
------ -----
$ 3,850 3,925
====== =====
Depreciation and amortization of premises and equipment for the years ended
September 30, 2001, 2000 and 1999 was $400,000, $446,000, and $447,000,
respectively.
The Bank is obligated under non-cancelable leases on two of its branches. The
leases contain renewal options and rent escalation clauses. Rent expense under
these leases for the years ended September 30, 2001, 2000, and 1999
approximated $179,000, $153,000, and $136,000, respectively. The projected
minimum rentals under existing leases as of September 30, 2001 are as follows:
Year ended September 30, Amount
2002 135,000
2003 99,000
2004 105,000
2005 106,000
2006 107,000
Thereafter 232,000
---------
Total $ 784,000
=========
57
(8) DEPOSITS
Deposits are summarized as follows at September 30:
2001 2000
Stated or Stated or
Weighted Percent Weighted Percent
Average of total Average of total
Rate Amount deposits Rate Amount deposits
(Dollars in thousands)
Passbook accounts 3.04% $132,217 33.1% 4.09% $121,787 31.9%
NOW accounts 1.82 32,615 8.2 2.03 28,361 7.5
Money market and
management accounts 3.36 12,345 3.1 3.59 12,711 3.3
---- ------- ---- ----- ------ -----
177,177 44.4 162,859 42.7
Certificate accounts:
91-day certificates 3.71 1,049 0.3 4.30 1,029 0.3
6-month certificates 4.14 17,246 4.3 5.24 7,660 2.0
7-month certificates 4.89 13,772 3.4 4.70 2,509 0.7
8-month certificates 5.30 61,359 15.4 4.70 1,609 0.4
10-month certificates 4.58 60,548 15.2 6.11 16,834 4.4
12-month certificates 5.49 19,228 4.8 6.39 31,017 8.1
13-month certificates 4.79 10,280 2.6 6.63 105,917 27.8
15-month certificates 4.55 7,388 1.8 6.12 15,307 4.0
24-month certificates 6.68 20,978 5.2 6.57 22,694 6.0
36-month certificates 5.06 3,889 1.0 5.46 5,291 1.4
36-month rising rate
certificates 4.33 1,775 0.4 5.64 2,826 0.7
60-month certificates 5.77 4,930 1.2 5.82 5,881 1.5
---- ------- ---- ----- ------- -----
222,442 55.6 218,574 57.3
------- ---- ------- -----
4.17% $399,619 100.0% 5.30% $381,433 100.0%
==== ======= ===== ===== ======= =====
The contractual maturities of certificate accounts are as follows at September
30:
2001 2000
Amount Percent Amount Percent
(in thousands) (in thousands)
Under 12 months $ 207,581 93.3% 191,016 87.4
12 to 36 months 14,096 6.3 26,504 12.1
Over 36 months 765 0.4 1,054 0.5
--------- ----- ------- -----
$ 222,442 100.0% 218,574 100.0%
========= ===== ======= =====
The aggregate amount of certificate accounts with a balance of $100,000 or
greater at September 30, 2001 and 2000 was approximately $38,343,000 and
$35,261,000, respectively.
58
(8) BORROWED FUNDS
Borrowed funds are summarized as follows at September 30:
Interest rate Amount
2001 2000 2001 2000
(in thousands)
Secured advances from the
FHLB of Chicago:
Fixed rate advances due:
May 8, 2001 - % 7.16 $ - 25,000
August 17, 2001 - 5.63 - 30,000
December 5, 2001 7.12 7.12 25,000 25,000
May 8, 2002 7.40 7.40 25,000 25,000
June 5, 2003 (callable) 6.44 6.44 25,000 25,000
October 18, 2003 (callable) 5.95 - 30,000 -
September 27, 2004 (callable) 4.00 - 20,000 -
August 22, 2010 (callable) 6.22 6.22 5,000 5,000
September 7, 2010 (callable) 6.07 6.07 5,000 5,000
----- ----- ------ ------
Open line advance, due on demand 3.50% 6.81 48,100 61,300
---- ----- ------- -------
Total borrowings from FHLB of Chicago 183,100 201,300
Unsecured line of credit 6.07%. 8.73 - 4,245 3,850
---- ----- ------- -------
$ 187,345 $ 205,150
======= =======
FEDERAL HOME LOAN BANK OF CHICAGO ADVANCES The Bank has entered into a
collateral pledge agreement whereby the Bank has agreed to keep on hand at all
times, free of all other pledges, liens, and encumbrances, first mortgages with
unpaid principal balances aggregating no less than 167% of the outstanding
secured advances from the FHLB of Chicago. All stock in the FHLB of Chicago is
pledged as additional collateral for these advances.
Included in FHLB of Chicago advances at September 30, 2001 are $65.0 million of
fixed-rate advances with original scheduled maturities of 2 to 9 years, which
are callable at the discretion of the FHLB of Chicago at periods from 6 months
to 2 years from the origination date. The average term to maturity on these
advances is 2.96 years, while the average term to call is 0.23 years. The Bank
receives a lower cost of borrowing on such advances than on similar non-
callable long-term advances in return for granting the FHLB of Chicago the
right to call the advance prior to its final maturity.
UNSECURED TERM BANK LINE OF CREDIT The Company obtained a $5.0 million
unsecured line of credit from an unrelated financial institution. The loan
provides for an interest rate of the prime rate or 2% over the one, two, or
three-month LIBOR at management's discretion, adjustable and payable at the end
of the repricing period. At September 30, 2001, the loan carries an interest
rate of 2% over the three-month LIBOR of 1.77%. The loan requires quarterly
payments of all accrued unpaid interest due and one payment of all outstanding
principal plus all accrued unpaid interest on December 15, 2001. The financing
agreements contain covenants that, among other things, require the Company to
59
maintain a minimum stockholders' equity balance and to obtain certain minimum
operating results, as well as requiring the Bank to maintain "well capitalized"
regulatory capital levels and certain non-performing asset ratios. At
September 30, 2001, the Company was in compliance with these covenants.
(10) Regulatory Matters
The Bank is subject to regulatory capital requirements under the OTS. Failure
to meet minimum capital requirements can initiate certain mandatory, and
possibly additional discretionary actions by regulators that, if undertaken,
could have a material impact on the Bank's financial statements. Under capital
adequacy guidelines and the regulatory framework for prompt corrective action,
the Bank must meet specific capital guidelines that involve quantitative
measures of the Bank's assets, liabilities, and certain off-balance sheet items
as calculated under regulatory accounting practices.
Quantitative measures established by the OTS to ensure capital adequacy require
the Bank to maintain minimum amounts and ratios (as set forth in the table
below) of three capital requirements: a tangible capital (as defined in the
regulations) to adjusted total assets ratios, a core capital (as defined) to
adjusted total assets ratio, and a risk based capital (as defined) to total
risk-weighted assets ratio. Management believes, as of September 30, 2001,
that the Bank meets all capital adequacy requirements to which it is subject.
The most recent notification from the federal banking agencies categorized the
Bank as well capitalized under the regulatory framework for prompt corrective
action. To be categorized as well capitalized, the Bank must maintain minimum
total risk-based, Tier 1 risk-based, and Tier 1 leverage ratios as set forth in
the table. There are no conditions or events since that notification that have
changed the Bank's category.
60
The Bank's actual capital amounts and ratios, as well as minimum amounts and
ratios required for capital adequacy and prompt corrective action provisions
are presented below:
To be well capitalized
For capital under prompt
Actual adequacy purposes corrective action
Amount Ratio Amount Ratio Amount Ratio
(dollars in thousands)
As of September 30, 2001
Total capital
(to risk weighted assets) $ 51,367 17.65% 23,281 8.00 29,101 10.00
Tier 1 capital
(to risk weighted assets) 50,131 17.23 n/a n/a 17,461 6.00
Tier 1 capital
(to adjusted assets) 50,131 7.51 20,013 3.00 33,355 5.00
Tangible capital
(to total assets) 50,131 7.51 10,028 1.50 n/a n/a
As of September 30, 2000:
Total capital
(to risk weighted assets) $ 45,201 14.55 24,859 8.00 31,074 10.00
Tier 1 capital
(to risk weighted assets) 44,251 14.24 n/a n/a 18,644 6.00
Tier 1 capital
(to adjusted assets) 44,251 6.59 19,113 3.00 31,854 5.00
Tangible capital
(to total assets) 44,251 6.95 9,541 1.50 n/a n/a
(10) INCOME TAXES
Income tax expense is summarized as follows for the years ended September 30:
2001 2000 1999
(in thousands)
Current:
Federal $ 2,125 2,015 2,388
State 304 360 146
------ ----- -----
Total current 2,429 2,375 2,534
Deferred:
Federal 316 181 7
State 82 9 2
Change in valuation allowance (394) - -
------ ----- -----
Total deferred 4 190 9
------ ----- -----
$ 2,433 2,565 2,543
====== ===== =====
61
The reasons for the difference between the effective tax rate and the corporate
federal income tax rate of 34% are detailed as shown below for the years ended
September 30:
2001 2000 1999
Federal income tax rate 34.0% 34.0 34.0
State income taxes, net of federal benefit 3.9 3.7 1.9
Change in valuation allowance (5.4) -- --
Other 0.8 -- 2.1
------ ----- -----
Effective income tax rate 33.3% 37.7 38.0
====== ===== =====
Retained earnings at September 30, 2001 included $4 million of "base-year" tax
bad debt reserves for which no provision for federal or state income taxes has
been made. If in the future this amount, or a portion thereof, is used for
certain purposes, then a federal and state tax liability will be imposed on the
amount so used at the then current corporate income tax rates.
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and deferred tax liabilities are presented below at
September 30:
2001 2000
(in thousands)
Deferred tax assets:
Deferred compensation $ 23 22
Allowance for loan losses 475 358
Decline in value of investment security 712 1,106
Retirement and pension plans 463 326
Unrealized gain on investment securities available for sale -- 776
Other 22 59
----- -----
1,695 2,647
Less valuation allowance (712) (1,106)
----- -----
Deferred tax assets 983 1,541
Deferred tax liabilities:
Deferred loan fees and costs (2,081) (2,056)
FHLB stock, due to stock dividends (540) (87)
Property and equipment, due to depreciation (283) (304)
Tax bad debt reserves (426) (568)
Tax basis in partnership less than book -- (187)
Mortgage servicing rights (74) --
Unrealized gain on securities available for sale (921) --
Other (20) --
------ -----
Deferred tax liabilities (4,345) (3,202)
------ -----
Net deferred tax liability $(3,362) (1,661)
====== ======
62
The valuation allowance for deferred tax assets was $712,000 and $1,106,000 as
of September 30, 2001 and 2000. The valuation allowance relates to the capital
loss of an investment security. The change in the valuation allowance in 2001
resulted from the use of a portion of the capital loss carryforward to offset
capital gains generated in 2001 as a result of a sale of a partnership
interest. As capital losses can only be utilized to offset capital gains,
there is uncertainty as to the realization of this remaining deferred tax
asset.
(12) Pension Plan
The Bank has a noncontributory defined benefit pension plan which covers
substantially all full-time employees who are 21 years of age and older and
have been employed for a minimum of one year. Pension costs are accrued and
funded as computed by the consulting actuary, using the entry age normal
actuarial cost method.
Accumulated benefit obligation, projected benefit obligation, accrued pension
liability, and net periodic pension cost, as estimated by the consulting
actuary, and plan net assets as of August 31, the date of the latest actuarial
valuation, are as follows:
2001 2000
(in thousands)
Change in benefit obligation:
Beginning benefit obligation $ 1,718 1,754
Service cost 139 153
Interest cost 129 127
Actuarial gain 132 (160)
Benefits paid (210) (156)
----- -----
Ending benefit obligation 1,908 1,718
Change in plan assets, at fair value:
Beginning plan assets 1,978 1,409
Actual return (14) 255
Employer contribution -- 470
Benefits paid (210) (156)
----- -----
Ending plan assets 1,754 1,978
Funded status (154) 260
Unrecognized net actuarial gain (69) (379)
Unrecognized prior service cost (32) (35)
Unrecognized transition obligation (34) (41)
----- -----
Accrued benefit cost $ (289) (195)
===== =====
63
The component of pension expense and related Actuarial assumptions were as
follows for the years ended September 30:
2001 2000 19989
(in thousands)
Service cost $ 139 153 139
Interest cost 129 127 110
Actuarial return on plan assets (152) (255) (158)
Net amortization and deferral (21) (10) (10)
Net gain (loss) on assets -- 117 48
---- --- ---
Net periodic pension cost $ 95 132 129
==== === ===
Discount rate on benefit obligation 7.25% 7.25% 7.25%
Long-term expected rate of return on plan assets 8.00 8.00 8.00
Rate of compensation increase 6.00 6.00 6.00
==== ==== ====
The Bank sponsors the Fidelity Federal Savings Bank Supplemental Retirement
Plan. The Supplemental Retirement Plan is intended to provide retirement
benefits and preretirement death and disability benefits for certain officers
of the Bank. Benefits accrued were $991,000 and $855,000 at September 30, 2001
and 2000, respectively. The expense for the years ended September 30, 2001,
2000, and 1999 was approximately $124,000, $77,000, and $129,000, respectively.
(13) Officer, Director, and Employee Benefit Plans
EMPLOYEE STOCK OWNERSHIP PLAN (ESOP) In conjunction with the Bank's
conversion, the Bank formed an ESOP. The ESOP covers substantially all full-
time employees over the age of 21 and with more than one year of employment.
The ESOP borrowed $2.9 million from the Company and purchased 290,950 common
shares of the Company issued in the conversion. The Bank committed to make
discretionary contributions to the ESOP sufficient to service the requirements
of the loan over a period not to exceed seven years. During fiscal 2001 the
loan was fully repaid. Compensation expense related to the ESOP was $196,000,
$415,000, and $900,000 for the years ended September 30, 2001, 2000, and 1999,
respectively.
Shares held by the ESOP were as follows for the years ended September 30,
2001 2000
---- ----
Allocated to participants 239,902 257,591
Unearned - 18,876
-------- --------
Total ESOP shares 239,902 276,467
======== ========
Fair value of unearned shares $ - $ 333,879
======== =========
64
STOCK OPTION PLANS In conjunction with the conversion, the Company and its
stockholders adopted an incentive stock option plan for the benefit of
employees of the Company and a directors' stock option plan for the benefit of
outside directors of the Company.
The number of shares of common stock authorized under the employees' plan is
287,313. The exercise price must be at least 100% of the fair market value of
the common stock on the date of grant, and the option term cannot exceed 10
years. Under the employees' plan, options granted become exercisable at a rate
of 20% per year commencing one year from the date of the grant. A summary of
the stock option activity and related information in the employee plan follows:
2001 2000 1999
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
-------- --------- -------- --------- -------- --------
Outstanding at beginning of year 169,456 $ 10.15 171,876 $ 10.15 188,864 $ 10.16
Granted 12,000 22.46 - - - -
Exercised (27,550) 10.33 (2642) 10.00 (16,988) 10.35
Cancelled - - - - - -
------- ------ ------- ------ ------- -----
End of period 153,906 $ 10.10 169,456 $ 10.15 171,876 $ 10.14
======= ====== ======= ====== ======= ======
Options exercisable 141,606 168,256 169,179
======= ======= =======
Fair value of options granted
during the year $ 2.71 N/A N/A
====== ====== ======
At September 30, 2001, options for 24,121 shares were available under the
employee plan, which includes additions to the available shares of 14,520,
representing cancelled shares.
65
The number of shares of common stock authorized under the directors' plan is
76,374. The exercise price must be at least 100% of the fair market value of
the common stock on the date of grant, and the option term cannot exceed 10
years. Options issued to outside directors of the Company are immediately
exercisable. A summary of the stock option activity and related information
in the director plan follows:
2001 2000 1999
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
-------- --------- -------- --------- -------- --------
Outstanding at beginning of year 27,828 $ 10.00 34,466 $ 10.00 37,966 $ 10.00
Granted -- -- 9 964 17.56 -- --
Exercised -- -- (16,602) 10.00 (3,500) 10.00
Cancelled -- -- -- -- -- --
------- ------ ------- ------ ------- -----
End of period 27,828 $ 12.71 27,828 $ 12.71 34,466 $ 10.00
======= ====== ======= ====== ======= ======
Options exercisable 27,828 27,828 34,466
======= ======= =======
Fair value of options granted
during period $ N/A $ 2.17 $ N/A
====== ====== ======
At September 30, 2001, there were no options available under the directors
plan.
The following table summarizes information about the stock options outstanding
at September 30, 2001:
Outstanding Exercisable
----------------- -----------------
Weighted Weighted
Average Average
Remaining Remaining
Contractual Contractual
Number Life Number Life
-------- --------- -------- ---------
Range of Exercise Prices
$10.00 to $13.00 157,420 2.21 157,420 2.21
$13.01 to $17.56 12,314 7.81 12,014 7.81
$18.19 to $25.03 12,000 9.64 -- --
-------- ----- -------- -----
181,734 3.58 169,434 2.57
======== ===== ======== =====
66
Had compensation cost for stock options been measured using FASB Statement No.
123, net income and earnings per share would have been the pro forma amounts
indicated below. The pro forma effect may increase in the future in more
options granted.
2001 2000 1999
Net Income:
As reported $ 4,872 4,242 4,130
Pro forma 4,865 4,222 4,110
Earnings per share:
Basic:
As reported 2.42 2.04 1.85
Pro forma 2.41 2.03 1.84
Diluted:
As reported 2.31 1.96 1.76
Pro forma 2.30 1.95 1.75
The pro forma effects are computed using the option pricing models, using the
following weighted-average assumptions as of the grant date.
2001 2000 1999
Dividend yield 2.31% 2.71% 1.96%
Risk-free interest rate 5.28% 5.90% 5.75%
Weighted average expected life 4.8 yrs 4.8 yrs 4.8 yrs
Expected volatility 28.16% 11.28% 23.38%
(14) OTHER COMPREHENSIVE INCOME
Other comprehensive income components and related taxes were as follows:
Year ended September 30,
2001 2000 1999
Unrealized holding gains and losses on
available for sale investment securities $ 4,696 316 (2,898)
Less reclassification adjustment for gains
later recognized in income (231) - -
Net unrealized gains and losses 4,465 316 (2,898)
Tax effect (1,697) (102) (1,078)
----- ---- -------
Other comprehensive income (loss) $ 2,768 214 (1,820)
===== ==== =======
67
(15) COMMITMENTS AND CONTINGENCIES
The Bank is a party to financial instruments with off-balance sheet risk in the
normal course of its business. These instruments include commitments to
originate loans and letters of credit. The instruments involve credit and
interest rate risk in excess of the amount recognized in the consolidated
statements of financial condition. The Bank evaluates each customer's
creditworthiness on a case-by-case basis.
Commitments to originate mortgage loans at September 30, 2001 of $8.8 million
represent amounts which the Bank plans to fund within the normal commitment
period of 60 to 90 days of which $1.2 million were fixed rate, with rates
ranging from 7.125% to 8.125%, and $7.6 million were adjustable rate.
The estimated fair value of these commitments approximates the commitment
amount. Because the creditworthiness of each customer is reviewed prior to the
extension of the commitment, the Bank adequately controls the credit risk on
these commitments, as it does for loans recorded on the consolidated statements
of financial condition. The Bank conducts substantially all of its lending
activities in the Chicagoland area in which it serves. Management believes the
Bank has a diversified loan portfolio and the concentration of lending
activities in these local communities does not result in an acute dependence
upon the economic conditions of the lending region.
The Company is involved in various litigation arising in the normal course of
business. In the opinion of management, based on the advice of legal counsel,
liabilities arising from such claims, if any, would not have a material effect
on the Company's financial statements.
The Company is involved in various litigation arising in the normal course of
business. In the opinion of management, based on the advice of legal counsel,
liabilities arising from such claims, if any, would not have a material effect
on the Company's financial statements.
(16) FAIR VALUE DISCLOSURES
Fair value disclosures are required under Statement of Financial Accounting
Standards No. 107, "Disclosures about Fair Value of Financial Instruments."
Such fair value disclosures are made at a specific point in time, based upon
relevant market information and information about the financial instrument.
These estimates do not reflect any premium or discount that could result from
offering for sale at one time the Company's entire holdings of a particular
financial instrument. Because no market exists for a portion of the Company's
financial instruments, fair value estimates are based on judgments regarding
future expected loss experience, current economic conditions, risk
characteristics of various financial instruments, and other factors. These
estimates are subjective in nature and involve uncertainties and matters of
significant judgment and therefore cannot be determined with precision.
Changes in assumptions could significantly affect these estimates.
Fair value estimates are based on existing on- and off-balance sheet financial
instruments without attempting to estimate the value of anticipated future
business and the value of assets and liabilities that are not considered
financial instruments. The tax ramifications related to the realization of the
unrealized gains and losses have a significant effect on the fair value
estimates and have not been considered in any estimates.
68
Reasonable comparability of fair values among financial institutions is not
practical due to the variety of assumptions and valuation methods used in
calculating the estimates.
CASH AND CASH EQUIVALENTS The carrying value of cash and cash equivalents
approximates fair value due to the relatively short period between the
origination of the instruments and their expected realization.
INVESTMENT AND MORTGAGE-BACKED SECURITIES The fair value of these financial
securities, which includes investment securities, mortgage-backed securities,
and FHLB of Chicago stock, is the quoted market price, if available, or the
quoted market price for similar securities. The fair value of FHLB of Chicago
stock is recorded at redemption value, which is equal to cost.
LOANS RECEIVABLE The fair value of loans receivable held for investment is
estimated for portfolios of loans with similar financial characteristics.
Loans are segregated by type, such as one-to four-family, multi-family,
commercial, and consumer. For variable rate loans that reprice frequently and
for which there has been no significant change in credit risk, fair values
equal carrying values. The fair values for fixed-rate loans were based on
estimates using discounted cash flow analyses and current interest rates being
offered for loans with similar terms to borrowers of similar credit quality.
LOANS HELD FOR SALE These loans are carried at the lower of cost, adjusted for
applicable deferred loan fees or expenses, or estimated market value in the
aggregate. The fair value for loans held for sale is the quoted market price,
if available, or the quoted market price for similar loan products.
ACCRUED INTEREST RECEIVABLE AND PAYABLE The carrying value of accrued interest
receivable and payable approximates fair value due to the relatively short
period of time between accrual and expected realization.
DEPOSITS The fair values for demand deposits with no stated maturity are equal
to the amount payable on demand as of September 30, 2001 and 2000,
respectively. The fair value for fixed-rate certificate accounts is based on
the discounted value of contractual cash flows using the interest rates
currently being offered for certificates of similar maturities as of September
30, 2001 and 2000, respectively.
BORROWED FUNDS Rates currently available to the Company for debt with similar
terms and remaining maturities are used to estimate fair value of existing
debt.
69
The estimated fair value of the Company's financial instruments at September
30, 2001 and 2000 are as follows:
2001 2000
Carrying Estimated Carrying Estimated
amount fair value amount fair value
(in thousands)
FINANCIAL ASSETS:
Cash and due from banks $ 7,107 7,107 4,690 4,690
Interest-earning deposits 1,397 1,397 1,405 1,405
Federal funds sold 100 100 100 100
Mortgage-backed securities 127,685 127,685 2,901 2,924
Securities 60,061 60,061 84,431 84,431
Loans receivable 422,980 447,456 534,227 532,680
Loans held for sale 41,219 41,910 -- --
Accrued interest receivable 3,650 3,650 4,161 4,161
------- ------- ------- -------
Total financial assets $ 664,199 689,366 631,965 630,391
======= ======= ======= =======
FINANCIAL LIABILITIES:
Noninterest-bearing deposits 13,746 13,746 9,287 9,287
NOW, money market and management,
and passbook accounts 163,431 163,431 153,572 153,572
Certificate accounts 222,442 223,763 218,574 218,111
Borrowed funds 187,345 191,784 205,150 204,561
Accrued interest payable 1,081 1,081 1,277 1,277
------- ------- ------- -------
Total financial liabilities $ 588,045 593,805 587,860 586,808
======= ======= ======= =======
(17) Shareholders' Rights Plan
On February 18, 1997, the Company's Board of Directors adopted a shareholders'
rights plan (the Rights Plan). Under the terms of the Rights Plan, the Board
of Directors declared a dividend of one preferred share purchase right for each
outstanding share of common stock. Upon becoming exercisable, each right
entitles the registered holder thereof, under certain limited circumstances, to
purchase one-thousandth of a share of Series A Junior Participating Preferred
Stock at an exercise price of $60.00. Rights do not become exercisable until
eleven business days after any person or group has acquired, commenced, or
announced its intention to commence a tender or exchange offer to acquire 15%
or more of the Company's common stock, or in the event a person or group owning
10% or more of the Company's common stock is deemed to be "adverse" to the
Company. If the rights become exercisable, holders of each right, other than
the acquiror, upon payment of the exercise price, will have the right to
purchase the Company's common stock (in lieu of preferred shares) having a
value equal to two times the exercise price. If the Company is acquired in a
merger, share exchange or other business combination or 50% or more of its
consolidated assets or earning power are sold, rights holders, other than the
acquiring or adverse person or group, will be entitled to purchase the
acquiror's shares at a similar discount. If the rights become exercisable, the
Company may also exchange rights, other than those held by the acquiring or
adverse person or group, in whole or in part, at an exchange ratio of one share
of the Company's common stock per right held. Rights are redeemable by the
Company at any time until they are exercisable at the exchange rate of $.01 per
right. Issuance of the rights has no immediate Dilutive effect, does not
70
currently affect reported earnings per share, is not taxable to the Company or
its shareholders, and will not change the way in which the Company's shares are
traded. The rights expire in February 2007.
(18) CONDENSED PARENT COMPANY ONLY FINANCIAL INFORMATION
The following condensed statements of financial condition as of September 30,
2001 and 2000 and condensed statements of earnings and cash flows for each of
the three years in the period ended September 30, 2001 for Fidelity Bancorp,
Inc. should be read in conjunction with the consolidated financial statements
and the notes thereto.
STATEMENT OF FINANCIAL CONDITION
September 30,
2001 2000
(in thousands)
ASSETS
Cash and cash equivalents $ 983 1,642
Securities available for sale, 4,080 8,763
Equity investment in the Bank 51,980 43,989
Accrued interest 81 162
Other assets 1,908 586
------- ------
$ 59,032 55,142
======= ======
LIABILITIES AND STOCKHOLDERS' EQUITY:
Borrowed funds from Bank 4,000 8,000
Other borrowed funds 4,245 3,850
Accrued taxes and other liabilities 1,403 489
------- ------
Total liabilities 9,648 12,339
Stockholders' equity 49,384 42,803
------- ------
$ 59,032 55,142
======= ======
71
STATEMENTS OF EARNINGS
Year ended September 30,
2001 2000 1999
(in thousands)
Equity in earnings of the Bank $ 4,842 4,463 4,358
Interest income 493 103 58
Interest expense (647) (165) --
Gain on sale of security 125 -- --
Non-interest expense (377) (307) (359)
------ ----- -----
Income before income taxes 4,436 4,094 4,057
Income tax benefit (436) (148) (73)
------ ----- -----
Net income $ 4,872 4,242 4,130
====== ===== =====
72
STATEMENTS OF CASH FLOWS
Year ended September 30,
2001 2000 1999
(in thousands)
OPERATING ACTIVITIES:
Net income $ 4,872 4,242 4,130
Equity in earnings of the Bank (4,842) (4,463) (4,358)
Dividends received from the Bank 300 1,695 9,864
Net amortization and accretion of
premiums and discounts (27) -- -
Gain on sale of security (125) -- -
Decrease (increase) in accrued
interest receivable 81 (162) -
Decrease (increase) in other assets (269) 145 (118)
Increase (decrease) in accrued taxes and
other liabilities (304) (240) 62
------ ----- -----
Net cash provided by (used in)
operating activities (314) 1,217 9,580
INVESTING ACTIVITIES:
Purchase of securities available
for sale (4,000) (7,972) -
Proceeds from sale of securities 8,125 -- -
Principal repayments received
on ESOP loan 460 443 460
------ ----- -----
Net cash provided by (used in)
investing activities 4,585 (7,529) 460
FINANCING ACTIVITIES:
Proceeds from intercompany loans -- 8,000 -
Proceeds from (repayment of)
borrowed funds (3,605) 3,850 -
Purchase of treasury stock (562) (3,377) (9,312)
Payment of common stock dividends (968) (991) (1,005)
Proceeds from exercise of stock options 205 4 209
------ ----- -----
Net cash provided by (used in)
financing activities (4,930) (7,486) (10,108)
------- ----- -----
Net increase (decrease) in cash
and cash equivalents (659) (1,174) (68)
Cash and cash equivalents at beginning
of year 1,642 468 536
------- ----- -----
Cash and cash equivalents at end of year $ 983 1,642 468
======= ===== =====
73
(19) QUARTERLY RESULTS OF OPERATIONS (unaudited)
The following table sets forth certain unaudited income and expense and per
share data on a quarterly basis for the three-month period indicated:
Year ended September 30, 2001 Year ended September 30, 2000
1st Qtr 2nd Qtr 3rd Qtr 4th Qtr 1st Qtr 2nd Qtr 3rd Qtr 4th Qtr
(in thousands, except per share data)
Interest income $ 11,933 11,656 11,185 11,680 10,689 10,815 11,020 11,327
Interest expense 8,553 8,083 7,568 7,257 6,678 6,921 7,432 8,081
----- ----- ----- ----- ----- ----- ----- -----
Net interest income
before provision
for loan losses 3,380 3,573 3,617 4,423 4,011 3,894 3,588 3,246
Provision for loan
losses 70 40 70 115 40 15 55 70
----- ----- ----- ----- ----- ----- ----- -----
Net interest income
after provision for
loan losses 3,310 3,533 3,547 4,308 3,971 3,879 3,533 3,176
Non-interest income 385 512 444 966 338 399 415 416
Non-interest expense 2,439 2,354 2,257 2,650 2,477 2,467 2,356 2,020
----- ----- ----- ----- ----- ----- ----- -----
Income before income tax
expense 1,256 1,691 1,734 2,624 1,832 1,811 1,592 1,572
Income tax expense 393 642 647 751 699 683 586 597
----- ----- ----- ----- ----- ----- ----- -----
Net income $ 863 1,049 1,087 1,873 1,133 1,128 1,006 975
===== ===== ===== ===== ===== ===== ===== =====
Earnings per share $ 0.41 0.50 0.52 0.89 0.51 0.52 0.48 0.47
==== ==== ==== ==== ===== ===== ===== =====
Cash dividends declared
per share $ 0.12 0.12 0.12 0.12 0.11 0.12 0.12 0.12
==== ==== ==== ==== ===== ===== ===== =====
Net income for the three months ended September 30, 2001 is higher than the
previous calendar quarters due primarily to the $618,000 gain on sale of loans
recorded during that quarter.
(20) CONTINGENCY
The Company has been active in its efforts to realize some recovery of the $3.0
million of Reliance Acceptance Group, Inc. (RAG) subordinated notes, which were
written-off during the fourth quarter of fiscal 1997, through participation on
the Official Committee of the Unsecured Creditors of RAG and formulation of a
plan for RAG's bankruptcy litigation. The Estate Representatives for RAG
arrived at a preliminary settlement with certain parties that would allow RAG
to settle or satisfy the claims of certain of its creditors including the
Company. The proposed settlement is subject to certain significant conditions
and no assurances can be provided that the settlement will be completed or that
the Company will receive any of the settlement proceeds. Since the amount of
the settlement, if any, cannot be quantified until various legal processes are
complete, no estimated recovery has been recorded in the Company's financial
statements as of September 30, 2001.
74
Independent Auditors' Report
The Board of Directors
Fidelity Bancorp, Inc.
Chicago, Illinois
We have audited the accompanying consolidated statement of financial condition
of Fidelity Bancorp, Inc. (the Company) as of September 30, 2001 and 2000, and
the related consolidated statements of earnings, changes in stockholders'
equity, and cash flows for the years then ended. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these 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 referred to above present
fairly, in all material respects, the financial position of Fidelity Bancorp,
Inc. as of September 30, 2001 and 2000, and the results of its operations and
its cash flows for the years then ended, in conformity with accounting
principles generally accepted in the United States of America.
Crowe, Chizek and Company LLP
Oak Brook, Illinois
October 31, 2001
75
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
PART III
Item 10. Directors and Executive Officers of the Registrant
The information relating to directors and executive officers appears
in the Company's proxy statement for the annual meeting of
stockholders to be held on January 23, 2002 and is incorporated
herein by reference.
Section 16(a) of the Exchange Act requires that our executive
officers, directors and persons who own more than 10% of our common
stock file reports of ownership and changes in ownership and changes
in ownership with the Securities and Exchange Commission. They are
also required to furnish us with copies of all Section 16(a) forms
they file. Based solely on our review of the copies of such forms,
and, if appropriate, representations made to us by any reporting
person concerning whether a Form 5 was required to be filed for 2001,
we are not aware that any of our directors, executive officers or 10%
stockholders failed to comply with the filing requirements of Section
16(a) during the fiscal year ended September 30, 2001.
Item 11. EXECUTIVE COMPENSATION
The information relating to executive compensation (excluding the
sections marked "Compensation Committee Report of Executive
Compensation" and "Stock Performance Graph") appears in the Company's
proxy statement for the annual meeting of stockholders to be held on
January 23, 2002 and is incorporated herein by reference.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information relating to security ownership of certain beneficial
owners and management appears in the Company's proxy statement for
the annual meeting of stockholders to be held on January 23, 2002 and
is incorporated herein by reference.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information relating to certain relationships and related
transactions appears on pages 16 and 17 of the Company's proxy
statement for the annual meeting of stockholders to be held on
January 23, 2002 and is incorporated herein by reference.
76
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENTS SCHEDULES, AND REPORTS ON FORM 8-K
The following documents are filed as part of this report:
(a) Exhibits
Exhibit No.
3.1 Restated Certificate of Incorporation of Fidelity Bancorp,
Inc.*
3.2 Bylaws of Fidelity Bancorp, Inc.*
4.0 Stock Certificate of Fidelity Bancorp, Inc.*
4.1 Rights Agreement between the Company and Harris Trust and
Savings Bank, as trustee (including the related certificate
of designations) ****
10.1 Employment Agreements between the Bank and Executive and
Employee Agreement between the Company and Executive *
10.2 Special Termination Agreement between the Bank and Executive
and Special Termination Agreement between the Company and
Executive *
10.6 Employee Stock Ownership Plan and Trust ***
10.8 Recognition and Retention Plan and Trust *
10.9 Incentive Stock Option Plan **
10.10 Stock Option Plan for Outside Directors **
10.11 Rights Agreement ****
21.0 Subsidiary information is incorporated herein by reference to
"Part II - Subsidiaries"
23.1 Consent from KPMG LLP
99.1 Proxy Statement and form of proxy for the 2002 Annual Meeting
of Stockholders (except such portions incorporated by
reference into this Form 10-K, the proxy materials shall not
be deemed to be "filed" with the Commission).
(b) Reports on Form 8-K
None
- -----------------
* Incorporated herein by reference into this document from the exhibits to
Form S-1, Registration Statement as amended, originally filed on October 28,
1993, Registration No. 33-68670.
** Incorporated herein by reference into this document from the exhibits to
Form S-8, Registration Statement, filed on April 20, 1994, Registration No. 33-
78000.
*** Incorporated herein by reference into this document from the exhibits to
Form 10-K, filed on December 9, 1994.
**** Incorporated herein by reference into this document from the exhibits to
Form 8-A, filed on February 19, 1997.
77
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this Report to be signed on its
behalf by the undersigned, thereunto duly authorized.
FIDELITY BANCORP, INC.
By:/s/ Raymond S. Stolarczyk
--------------------------
Raymond S. Stolarczyk
Date: December 24, 2001 Chairman of the Board and Chief
Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons in the capacities and on the
dates indicated:
Name Title Date
/s/ Raymond S. Stolarczyk Chairman and Chief Executive December 24, 2001
- ------------------------- Officer
Raymond S. Stolarczyk
/s/ Thomas E. Bentel President and Chief December 24, 2001
- ------------------------- Operating Officer
Thomas E. Bentel
/s/ Elizabeth A. Doolan Vice President and December 24, 2001
- ------------------------- Chief Financial Officer
Elizabeth A. Doolan
/s/ Judith K. Leaf Corporate Secretary December 24, 2001
- -------------------------
Judith K. Leaf
/s/ Paul J. Bielat Director December 24, 2001
- -------------------------
Paul J. Bielat
/s/ Edward J. Burda Director December 24, 2001
- -------------------------
Edward J. Burda
/s/ Patrick J. Flynn Director December 24, 2001
- -------------------------
Patrick J. Flynn
/s/ Richard J. Kasten Director December 24, 2001
- -------------------------
Richard J. Kasten