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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, 2002
Commission file number 1-12753
FIDELITY BANCORP, INC.
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 ]
Indicate by check mark whether the registration is an accelerated filer (as
defined in Exchange Act Rule 12b-2)
Yes No 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 $54,247,887 and is based upon the last sales price as quoted on
Nasdaq Stock Market for March 31, 2002.
The number of shares of Common Stock outstanding as of December 23, 2002:
3,091,515
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the Annual Meeting of Stockholders to be
held on February 12, 2003 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 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. 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.
RECENT DEVELOPMENTS
On December 17, 2002, the Company announced that it has agreed to be acquired
by MAF Bancorp, Inc. ("MAF") in an all-stock transaction with a fixed exchange
ratio. Based on the closing price of MAF's common stock on December 16, 2002,
the transaction is valued at $101.4 million. Pursuant to an Agreement and Plan
of Reorganization ("Merger Agreement") between the two companies, the Company
will merge into MAF, with MAF to be the surviving corporation. As a result of
the merger, each issued and outstanding share of the Company's common stock
will be converted into the right to receive 0.89 shares of MAF common stock.
The transaction, which is subject to regulatory approvals and approval by a
majority of the holders of the Company's common stock as well as other
conditions, is structured to be tax-free to stockholders of the Company.
Subject to the terms and conditions of the Merger Agreement, if, during a
period prior to closing, (1) the average trading price of MAF common stock
drops more than 17.5% compared to the closing price of MAF common stock next
determined after the announcement of the transaction, and (2) such drop in MAF
common stock trading price exceeds by more than 17.5 percentage points the
change in value of a weighted-average index of financial institution holding
company stocks over comparable periods, the Company may terminate the
agreement. In the event the merger is not consummated under certain
circumstances, the Company has agreed to pay MAF a termination fee of $4.5
million. MAF has agreed to pay the Company a termination fee of $1 million if
Fidelity exercises rights to terminate under certain circumstances.
3
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," "plan," "estimate," "may," "would,
"could," "should" 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:
- - The strength of the United States economy in general and the strength of
the local economies in which the Company conducts its operations which may be
less favorable than expected and may result in, among other things, a
deterioration in the credit quality and value of the Company's assets.
- - The economic impact of past and any future terrorist attacks, acts of war
or threats thereof and the response of the United States to any such threats
and attacks.
- - The effects of, and changes in, federal, state and local laws, regulations
and policies affecting banking, securities, insurance and monetary and
financial matters.
- - The effects of changes in interest rates (including the effects of changes
in the rate of prepayments of the Company's assets) and the policies of the
Board of Governors of the Federal Reserve System.
- - The ability of the Company to compete with other financial institutions as
effectively as the Company currently intends due to increases in competitive
pressures in the financial services sector.
- - The inability of the Company to obtain new customers and to retain existing
customers.
- - The timely development and acceptance of products and services, including
products and services offered through alternative delivery channels such as the
Internet.
- - Technological changes implemented by the Company and by other parties,
including third party vendors, which may be more difficult or more expensive
than anticipated or which may have unforeseen consequences to the Company and
its customers.
- - The ability of the Company to develop and maintain secure and reliable
electronic systems.
- - The ability of the Company to retain key executives and employees and the
difficulty that the Company may experience in replacing key executives and
employees in an effective manner.
4
- - Consumer spending and saving habits which may change in a manner that
affects the Company's business adversely.
- - Business combinations and the integration of acquired businesses which may
be more difficult or expensive than expected.
- - The costs, effects and outcomes of existing or future litigation.
- - Changes in accounting policies and practices, as may be adopted by state
and federal regulatory agencies and the Financial Accounting Standards Board.
- - The ability of the Company to manage the risks associated with the
foregoing as well as anticipated.
- - Additional information concerning the Company and its business, including
other factors that could materially affect the Company's financial results, is
included in the Company's filings with the Securities and Exchange Commission.
These risks and uncertainties should be considered in evaluating
forward-looking statements and undue reliance should not be placed on such
statements. Additional information concerning the Company and its business,
including other factors that could materially affect the Company's financial
results, is included in this Annual Report on Form 10-K and the Company's other
filings with the Securities Exchange Commission.
5
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. 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, 2002 Owned
(In thousands)
EXECUTIVE AND HOME OFFICE: Various dates
5455 W. Belmont Ave. commencing in
Chicago, IL 60641 1955 $ 1,063 Owned
BRANCHES:
Higgins Branch
6360 W. Higgins Road
Chicago, IL 60630 1984 431 Owned
Franklin Park Branch
10227 W. Grand Ave.
Franklin Park, IL 60131 1980 35 Leased
Schaumburg Branch
2425 W. Schaumburg Road
Schaumburg, IL 60194 1995 879 Leased
Harlem Avenue Branch
3940 N. Harlem Ave.
Chicago, IL 60634 1995 368 Owned
-------
$ 2,776
=======
Item 3. LEGAL PROCEEDINGS
As of September 30, 2002, 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.
6
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, 2002 the Company had approximately 445
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:
2002 2001
High Low High Low
First Quarter $20.17 $15.33 $12.54 $11.75
Second Quarter 20.25 18.20 14.25 12.50
Third Quarter 22.50 18.90 15.06 13.90
Fourth Quarter 22.50 20.80 16.77 14.83
All share prices have been adjusted to reflect a 3-for-2 stock split to be
effected in the form of a stock dividend to common stockholders declared on
January 22, 2002.
The Board of Directors declared per share dividends aggregating $0.35 and $0.32
during fiscal 2002 and 2001, respectively. In addition, the Board of Directors
declared a regular quarterly dividend of $0.10 per share, payable on November
15, 2002 to stockholders of record as of October 31, 2002.
The Company currently has an Incentive Stock Option Plan and Stock Option Plan
for Outside Directors under which equity securities of the Company are
authorized for issuance. The following table provides certain information
regarding such plans:
Equity Compensation Plan Information
Number of securities
remaining available for
future issuance under
Number of securities to Weighted - average equity compensation plans
be issued upon exercise exercise price of (excluding securities
of outstanding options outstanding options reflected in column (a))
Plan category (a) (b) (c)
- -------------------- --------------------- ------------------ ---------------------
Equity compensation plans
approved by securities
holders 276,113 3.73 -
Equity compensation plans
not approved by
securities holders - - -
- -------------------- --------------------- ------------------ ---------------------
276,113 3.73 -
==================== ===================== ================== =====================
7
The Company also has an Employee Stock Ownership Plan for which no information
is included in the foregoing table. Further information regarding all three
plans can be found in Footnote (13) to the Consolidated Financial Statements of
the Company included in Item 8 of this Annual Report on Form 10-K.
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,
2002 2001 2000 1999 1998
(Dollars in thousands, except per share data)
SELECTED OPERATING DATA:
Interest income $ 43,840 46,454 43,851 39,294 36,127
Interest expense 22,242 31,461 29,112 23,762 21,836
------ ------ ------ ------ ------
Net interest income before
provision for loan losses 21,598 14,993 14,739 15,532 14,291
Provision for loan losses 600 295 180 165 181
------ ------ ------ ------ ------
Net interest income after
provision for loan losses 20,998 14,698 14,559 15,367 14,110
Non-interest income:
Fees and commissions 670 457 452 374 332
Insurance and annuity commissions 863 820 1,063 721 717
Gain on sale of securities 1,122 231 - - -
Gain on sale of loans 690 640 - - -
Other 41 159 53 51 58
------ ------ ----- ----- -----
Total non-interest income 3,386 2,307 1,568 1,146 1,107
Non-interest expense 11,697 9,700 9,320 9,840 9,218
------ ------ ------ ------ ------
Income before income taxes 12,687 7,305 6,807 6,673 5,999
Income tax expense 4,684 2,433 2,565 2,543 2,219
------ ------ ------ ------ ------
Net income $ 8,003 4,872 4,242 4,130 3,780
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8
SELECTED FINANCIAL CONDITION DATA:
At and For the Years Ended September 30,
2002 2001 2000 1999 1998
(Dollars in thousands, except per share data)
Total assets $ 698,915 668,706 637,031 599,281 513,563
Loans receivable, net 414,685 422,980 534,277 507,557 425,608
Loans held for sale 83 41,219 - - -
Mortgage-backed securities
held to maturity - - 2,901 3,585 11,177
Mortgage-backed securities
available for sale 216,505 127,685 - - -
Securities available for sale 22,396 42,006 74,366 66,070 58,979
Deposits 434,134 399,619 381,433 357,016 330,670
Borrowed funds 180,650 187,345 205,150 186,250 121,400
Stockholders' equity 55,991 49,384 42,803 42,021 48,597
At and For the Years Ended September 30,
2002 2001 2000 1999 1998
SELECTED FINANCIAL RATIOS AND OTHER DATA
Return on average assets 1.20% 0.77% 0.70% 0.74% 0.76%
Return on average stockholders' equity 15.39 11.11 10.17 9.42 7.30
Average stockholders' equity to
average assets 7.82 6.90 6.90 7.89 10.46
Stockholders' equity to total assets 8.01 7.39 6.72 7.01 9.46
Efficiency ratio 46.82 56.07 57.15 59.00 59.86
Interest rate spread during period 2.93 1.95 2.06 2.43 2.38
Net interest margin 3.32 2.41 2.49 2.87 2.98
ASSET QUALITY RATIOS:
Non-performing loans to loans
receivable, net 0.56 0.16 0.07 0.07 0.20
Non-performing assets to total assets 0.39 0.10 0.06 0.06 0.19
Net charge-offs (recoveries) to
average loans - - - (0.05) 0.01
Allowance for loan losses to total loans 0.44 0.29 0.18 0.15 0.14
Allowance for loan losses to
non-performing loans 140.81 182.57 250.66 227.41 71.12
9
REGULATORY CAPITAL RATIOS (Bank only):
Tangible 8.07 7.51 6.95 6.89 8.91
Core 8.07 7.51 6.95 6.89 8.91
Risk-based 17.29 17.65 14.55 14.71 18.99
OTHER DATA:
Loan originations $159,024 140,139 110,184 196,859 142,788
Number of deposit accounts 23,676 24,493 25,356 24,524 21,193
Book value per share outstanding (1) $ 18.17 16.29 14.09 12.69 12.51
Earnings per share - diluted (1) $ 2.49 1.54 1.31 1.17 0.89
Cash dividends declared per share (1) 0.35 0.32 0.31 0.29 0.25
Dividend payout ratio 13.41% 19.88% 22.79% 23.51% 37.50%
(1) All share prices have been adjusted to reflect a 3-for-2 stock split to be
effected in the form of a stock dividend to common stockholders declared on
January 22, 2002.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED SEPTEMBER 30, 2002 AND
SEPTEMBER 30, 2001
GENERAL. Net income for the year ended September 30, 2002 was $8.0 million, or
$2.49 per diluted share ($2.61 per basic share), an increase of 64.3% over the
prior year. Diluted earnings per share increased by 61.7% over the $1.54
recorded in fiscal 2001 as a result of higher net income. Earnings per share
and net income for the year were up from the previous year's results primarily
due to an improved net interest margin and an increase in non-interest income,
partially offset by an increase in non-interest expense.
NET INTEREST INCOME. The Bank's core earnings, net interest income, are 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 $21.6 million, compared to $15.0 million in fiscal 2001. The
Company's average interest-earning assets increased 4.6%, or $28.6 million, to
$651.1 million for the year ended September 30, 2002 from $622.5 million for
the prior year. The Company's net interest margin improved to 3.32% for the
year ended September 30, 2002, compared to 2.41% in 2001.
Despite some of the lowest interest rates seen in 40 years and record
refinancings of higher yielding loans, interest income was preserved. For the
year ended September 30, 2002 interest income totaled $43.8 million, a decrease
of $2.6 million from 2001. Interest income on loans, the largest component of
interest-earning assets, decreased $8.1 million from the prior year to $31.3
million. The average loan portfolio decreased $99.1 million in fiscal 2002,
primarily due to both the sale of $90.7 million loans in September 2001,
October, December, and January, as well as record refinancings as consumers
looked to take advantage of the lower interest rates. The average yield on
loans decreased just 15 basis points from 7.52% in fiscal 2001 to 7.37% for the
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year ended September 30, 2002.
The average balance of the investment portfolio more than doubled to $225.6
million to maintain the planned level of interest earning assets. Interest
generated from mortgage-backed and investment securities for the year ended
September 30, 2002 was $12.5 million, an increase of $5.5 million over the year
ended September 30, 2001. The yield on the securities portfolio was
significantly immediately impacted by the Fed's reduction in interest rates,
however volume was adjusted accordingly to maintain the income levels and
benefit from the lower cost of funds. As securities matured and or repriced
they were replaced with current yielding investments.
Interest expense for the year totaled $22.2 million, a decrease of $9.3 million
from the prior year of $31.5 million. The decrease in interest expense was the
result of a 171 basis point reduction in the average cost of interest-bearing
liabilities, from 5.51% in 2001 to 3.80%. This rate benefit was offset
slightly by the increase in interest-bearing liabilities volume of $14.8
million, or 2.6%. Interest expense on deposit accounts decreased $5.5 million
to $13.7 million for the year. Average interest-bearing deposits increased
$34.4 million to $410.9 million for the year ended September 30, 2002. This
growth was primarily the result of the implementation of a wholesale CD program
network as well as the introduction of a new checking product.
The Company recorded interest expense on borrowed funds of $8.6 million for the
year ended September 30, 2002, on an average balance of $175.0 million at an
average cost of 4.91%. This compares to interest expense of $12.3 million on
an average balance of $194.5 million, at an average cost of 6.34% for 2001.
The decrease in the average balance from 2001 was due to increased funds
generated from deposit growth.
PROVISION FOR LOAN LOSSES. Based on management's evaluation of the loan
portfolio, a provision for loan losses of $600,000 was recorded during the year
ended September 30, 2002. The provision for loan losses was $295,000 for
fiscal 2001. Pursuant to Company policy, management 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. At September 30, 2002 the ratio of non-performing loans
to total loans was 0.56%. Given the modest economic decline in the
Chicagoland/Midwest market, combined with the current unemployment rate, and
the planned shift in the loan portfolio mix, management believes that the
increase was necessary and the allowance is adequate, although there can be no
assurances that losses will not exceed estimated amounts. The Company's
residential loans without income verification have increased 19.2%, or $28.6
million over the prior year to $177.5 million at September 30, 2002. In
addition, the Company began a program to originate commercial loans secured by
leases. At September 30, 2002, these loans amounted to $16.3 million.
NON-INTEREST INCOME. Total non-interest income consisting of fees earned on
products and services and gains and losses from sale of loans and investments
was $3.4 million, for the fiscal year ended September 30, 2002, a $1.1 million
increase, or 46.8%, over 2001. At September 30, 2001, the Bank had classified
$41.2 million of higher coupon single family loans as held for sale. These
were sold throughout fiscal 2002 to FNMA, generating gains of $643,800. In
addition to these, the Bank originated $4.3 million in longer term fixed rate
loans throughout fiscal 2002 that were sold on a loan-by-loan basis to FHLMC.
The sale of these loans generated gains of $46,600. The Company had net gains
on the sales of securities of $1.1 million in 2002, compared to $231,000 in
2001. Net gains were generated by the sale of mortgage-backed securities,
11
corporate and municipal bonds.
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
increased $43,000 to $863,000 from $820,000 for the year ended September 30,
2001. Sales of annuities and insurance products remained strong despite the
reductions in the rate of commission earned.
Other non-interest income in 2001 included $106,000 from the sale of the Bank's
subsidiary's interest in a real estate investment. Absent this gain, other
income has remained stable from year to year.
NON-INTEREST EXPENSE. Total non-interest expense for the year ended September
30, 2002 was $11.7 million, an increase of $2.0 million or 20.6%, from the
prior year.
Salaries and benefits, the largest portion of non-interest expense, increased
$966,000 to $6.5 million for fiscal 2002 from $5.6 million for fiscal year
2001. The 17.3% increase can be attributed to a combination of increased
compensation due to normal salary increases, higher employee benefit costs,
primarily due to medical insurance increases, and additional amounts accrued to
the Supplemental Executive Retirement Plan based on updated actuarial
calculations.
Office occupancy and equipment expenses were $2.0 million for the year ended
September 30, 2002 compared to $1.7 million for 2001. The increase is entirely
made up of the accelerated deprecation on certain computer hardware and
software that has become obsolete due to continual vendor upgrades, thereby no
longer supporting prior editions.
Advertising and promotion expense increased $107,000 to $550,000 for the year
ended September 30, 2002. The increase reflects increased spending on media
campaigns. Additionally, the 2002 expenses include start-up costs associated
with preparing for the launching of on-line banking and introducing a debit
card.
Other non-interest expense increased $566,000 to $2.1 million for the year
ended September 30, 2002 compared to $1.5 million the prior year. Increased
general and administrative costs account for 44%, or $249,000 of the increase,
and the remainder was primarily legal and consulting fees associated with
strategic planning for new initiatives.
INCOME TAX EXPENSE. The Company recorded a provision for income taxes of $4.7
million for the year ended September 30, 2002, a $2.3 million increase above
the prior year's $2.4 million. The Company's effective income tax rate
increased to 36.9% compared to 33.3% for the year ended September 30, 2001.
The lower effective income tax rate in the prior year was due to the
utilization of capital loss carry forwards in connection with the gain on sale
of an interest in a real estate investment.
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED SEPTEMBER 30, 2001 AND
SEPTEMBER 30, 2000
GENERAL. Diluted earnings per share increased by 17.9% over the $1.31 recorded
in fiscal 2000 as a result of higher net income. Net income increased as a
12
result of an increase in both net interest and non-interest income.
NET INTEREST INCOME. 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 over 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 over 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 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 over 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 borrowings 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.
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. Additional gains of $231,000 from the sale of investment
13
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. 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%, over 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 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.
14
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, 2002 Compared to 2001 2001 Compared to 2000
Increase (Decrease)Due to Increase (Decrease) Due to
Volume Rate Total Volume Rate Total
(in thousands)
INTEREST-EARNING ASSETS:
Loans receivable, net $(7,325) (743) (8,068) 729 279 1,008
Mortgage-backed securities 7,887 (323) 7,564 982 2 984
Interest-earning deposits 23 (57) (34) 12 5 17
Securities available for
sale and federal funds sold (681) (1,395) (2,076) 446 148 594
------ ------ ------ ----- ----- -----
TOTAL $ (96) (2,518) (2,614) 2,169 434 2,603
====== ====== ====== ===== ===== =====
INTEREST-BEARING LIABILITIES:
Passbook and NOW accounts $ 732 (1,739) (1,007) 20 (289) (269)
Money Market accounts 132 (127) 5 (90) (32) (122)
Certificate accounts 381 (4,844) (4,463) 819 701 1,520
Borrowed funds (1,154) (2,600) (3,754) 874 346 1,220
------ ------ ------ ----- ----- -----
Total $ 91 (9,310) (9,219) 1,623 726 2,349
====== ====== ====== ===== ===== =====
Net change in net interest income $ 6,605 254
====== =====
15
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/costs include fees, which are
considered adjustments to yields. Any unamortized costs on loans are also
adjustments to the yield.
For years ended September 30, 2002 2001 2000
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 $ 424,011 31,269 7.37% $ 523,153 39,337 7.52% $ 513,437 38,329 7.47%
Mortgage-backed securities 154,420 8,787 5.69% 16,804 1,223 7.28% 3,307 239 7.23%
Interest-earning deposits 1,483 24 1.62% 941 58 6.16% 734 41 5.59%
Securities available for sale
and federal funds sold (3) 71,230 3,760 5.28% 81,650 5,836 7.15% 75,367 5,242 6.96%
------- ------ ---- ------- ------ ---- -------- ------- ----
Total interest-earning assets 651,144 43,840 6.73% $ 622,548 46,454 7.46% $ 592,845 43,851 7.40%
Non-interest earning assets 14,203 12,937 11,153
------ ------- -------
Total assets $ 665,347 $ 635,485 $ 603,998
======= ======= =======
INTEREST-BEARING LIABILITIES:
Deposits:
Passbook and NOW accounts 163,532 3,861 2.36% 139,869 4,868 3.48% 139,330 5,137 3.69%
Money market accounts 16,177 428 2.65% 11,820 423 3.58% 14,284 545 3.82%
Certificate accounts 231,176 9,367 4.05% 224,822 13,830 6.15% 211,174 12,310 5.83%
------- ----- ---- ------- ------ ---- -------- ------ ----
Total deposits 410,885 13,656 3.32% 376,511 19,121 5.08% 364,788 17,992 4.93%
Borrowed funds 174,983 8,586 4.91% 194,545 12,340 6.34% 180,651 11,120 6.16%
------- ----- ---- ------- ------ ---- -------- ------ ----
Total interest-bearing liabilities 585,868 22,242 3.80% 571,056 31,461 5.51% 545,439 29,112 5.34%
Non-interest bearing deposits 13,689 8,213 6,452
Other liabilities 13,792 12,374 10,402
------ ------- -------
Total liabilities 613,349 591,643 562,293
Stockholders' equity 51,998 43,842 41,705
------- ------- -------
Total liabilities and stockholders'
equity $ 665,347 $ 635,485 $ 603,998
======= ======= =======
Net interest income/interest rate
spread (1) 21,598 2.93% 14,993 1.95% 14,739 2.06%
====== ==== ====== ==== ====== ====
Net earning assets/net interest
margin (2) $ 65,276 3.32% 51,492 2.41% 47,406 2.49%
======= ==== ======= ==== ======= ====
Ratio of interest-earning assets to
interest-bearing liabilities 1.11x 1.09x 1.09x
======= ======= =======
(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.
16
REVIEW OF FINANCIAL CONDITION
Total assets increased $30.2 million to $698.9 million at September 30, 2002,
compared to $668.7 million at September 30, 2001. The increase was primarily
due to purchases of securities, funded by the proceeds of $42.8 million in
single-family mortgage sales, loan prepayments, and growth in the deposit base.
Management expects growth in total assets to increase slowly in 2003, as
prepayments in loans receivable are expected to slow. The Bank's loan
portfolio is projected to expand through loan originations funded from either
mortgaged-backed securities sales proceeds, increased deposits, or borrowings.
Cash and cash equivalents amounted to $5.0 million at September 30, 2002,
compared to $8.6 million a year earlier.
At September 30, 2002, the Bank held $32.0 million in stock in the FHLB of
Chicago, compared to $18.1 million at September 30, 2001. Of the increase,
$1.2 million represents dividends received in the form of stock and the
remaining $12.7 million represents discretionary purchases made to enhance its
overall yield of interest-earning assets, as dividend rates on the FHLB of
Chicago stock over the past quarters have been well above the short-term US.
Treasury rates. Discretionary investments in the stock of the FHLB of Chicago
can be redeemed upon request at par value.
Securities and mortgage-backed securities classified as available for sale
totaled $238.9 million at September 30, 2002, compared to $169.7 million at
September 30, 2001. These investments 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. Investment 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. 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 2.0%, or $8.3 million to $414.7 million from $423.0
million at September 30, 2001. The changing interest rate environment, with
rapid decreases in prime beginning in January 2001 and continuing through the
current fiscal year, prompted management to evaluate the loan and investment
portfolios. Falling interest rates triggered significant prepayment and
refinance activity. Repayments on loans receivable increased 14.0% from $155.5
million in fiscal 2001 to $177.4 million for the year ended September 30, 2002.
The Bank originated $159.0 million of loans to be held in portfolio, along with
the purchase of $11.1 million. The average yield on net loans receivable
declined just 15 basis points from 7.52% in fiscal year 2001, to 7.37% in 2002
due in part to the active management of the loan portfolio.
Deposits increased 8.6%, or $34.5 million to $434.1 million at September 30,
2002, compared to $399.6 million at September 30, 2001. Through deposit
retention efforts and the addition of a wholesale jumbo certificate of deposit
program, net certificates of deposit increased 6.0% throughout the year and
were $235.8 million at September 30, 2002, compared to $222.4 million at
September 30, 2001. The wholesale CD program generated $32.1 million in
deposits with terms of between 12 and 24 months, which represent terms that are
generally longer and rates that are lower than certificates generated from the
Bank's retail customers. The Bank also added a new checking product,
17
power-checking, which attracted $13.0 million in its introductory offering
period. Other savings products including Passbook 24, a tiered rate premium
priced passbook product linked to an ATM card to provide 24 hour-banking
convenience which attracted $16.7 million during the 2002 fiscal year. Savings
and transaction accounts at September 30, 2002 amounted to $198.3 million,
compared to $177.2 million at September 30, 2001. The interest rates offered
on deposit products continue to be priced competitively in order to attract
deposits when alternative investment products and savings competition is
significant within the Bank's market areas.
Borrowed funds decreased $6.7 million, or 3.6%, to $180.7 million at September
30, 2002. The Bank utilized the proceeds of loan prepayments and growth in
deposits to repay FHLB advances. Of the FHLB of Chicago advances at September
30, 2002, $75.0 million, with a weighted average term to maturity of 2.9 years,
contain various call provisions, with a weighted average term to call of 1.1
years. The calls are most likely exercised by the issuer in a period of rising
interest rates.
Stockholders' equity of the Company grew to $56.0 million at September 30,
2002, compared to $49.4 million at September 30, 2001, an increase of $6.6
million. The net increase in stockholders' equity was primarily due to net
income of $8.0 million, offset by $1.1 million payment of cash dividends. On
January 22, 2002, the Company declared a 3-for-2 stock split effected in the
form of a stock dividend to common stockholders and issued 1,891,114 shares.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of funds are deposits, borrowings, and proceeds
from principal and interest on loans and securities. While maturities and
scheduled amortization of loan and securities are a 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 is
dependent on the Company's operating, investing and lending, and financing
activities during any given period. At September 30, 2002 and 2001, cash and
cash equivalents totaled $5.0 million and $8.6 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.
Net cash provided by operating activities, consisting primarily of interest and
dividends received less interest paid on deposits, and gains realized from the
sale of loans and securities, was $6.7 million for the year ended September 30,
2002. During the year, $36.3 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
18
by financing activities amounted to $26.1 million for the year ended September
30, 2002, primarily from the growth in deposits.
At September 30, 2002, 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. The following table discloses
contractual obligations and commercial commitments of the Company as of
September 30, 2002:
Payments Due by Period
Less than 1
Total Year 1 to 3 Years 4 to 5 Years After 5 Years
(in thousands)
FHLB of Chicago Advances $ 178,700 73,700 85,000 -- 20,000
Unsecured bank term
line of credit 7,000 7,000 -- -- --
Operating Leases 839 136 432 271 --
-------- ------ ------ ------ -------
Total contractual cash
obligations $ 186,539 80,836 85,432 271 20,000
======== ====== ====== ====== =======
The following table lists the off-balance sheet commitments of the Company and
the Bank as of September 30, 2002:
Amount of Commitment Expiring per Period
Less than 1
Total Year 1 to 3 Years 4 to 5 Years After 5 Years
(in thousands)
Mortgage loan commitments $ 10,678 10,678 -- -- --
Unused equity lines of
credit balances 3,704 3,704 -- -- --
Consumer overdraft
protection 254 254 -- -- --
Commercial loans secured by
leases commitments 2,538 2,538 -- -- --
Commercial loans in process 6,899 6,744 155 -- --
Letters of credit 395 395 -- -- --
Commercial business lines 1,072 1,072 -- -- --
-------- ------ ------ ------ ------
Total other commitments $ 25,540 25,385 155 -- --
======== ====== ====== ====== ======
LENDING ACTIVITIES
LOANS AND MORTGAGE-BACKED SECURITIES PORTFOLIO COMPOSITIONS. The loan
portfolio consists primarily of first mortgage loans secured by one- to
four-family residences. At September 30, 2002, the gross loans receivable
portfolio was $414.3 million, of which $249.0 million were one- to four-family
residential mortgage loans. Of the one- to four-family residential mortgage
loans outstanding at that date, 48.5% were fixed-rate and 51.5% were
adjustable-rate mortgage ("ARM") loans. During the year, the Bank sold $42.1
million of single-family mortgage loans to Federal Home Loan Mortgage
19
Corporation ("FHLMC") and to Federal National Mortgage Association ("FNMA").
The remainder of the loan portfolio at September 30, 2002 consisted of $117.8
million of multi-family mortgage loans, $3.4 million in commercial real estate,
$13.8 million in construction loans, $16.3 million in commercial loans secured
by leases, and $13.9 million of consumer loans. Consumer loans consisted
primarily of home equity and second mortgage loans.
Beginning 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, 2002,
the Bank had a network of 95 TPOs. The TPO program produced $107.7 million or
91.0% of the one- to four-family and multi-family mortgage loan originations in
2002. The Bank originated $10.6 million in one- to four-family and
multi-family mortgage loans, $7.3 million in commercial and construction loans,
$23.7 million in commercial loans secured by leases, and $9.7 million in
consumer loans for a total of $159.0 million in new loans; a 13.5% increase
from the year ended September 30, 2001.
In 1996, the Bank began offering certain residential loans without income
verification. The Bank also offers a similar program for people who typically
are self-employed. 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. The Bank originated $94.7 million of these
loans during fiscal 2002. At September 30, 2002, the loan portfolio included
$177.5 million of these loans.
Beginning in fiscal 2002, the Bank began offering commercial loans secured by
leases. These commercial loans secured by leases generally involve terms of 20
to 60 months to finance equipment. The leases include primarily Fortune 1000
and other major companies in good financial condition. The rates for
commercial leases are at a premium over rates on U.S. Treasury securities with
comparable maturities. At September 30, 2002, commercial loans secured by
leases were $16.3 million, or 3.3% of total loans receivable.
Loan origination standards of the Bank generally conform to the requirements
for sale to the FHLMC and FNMA. During the year ended September 30, 2002, the
Bank sold mortgage loans totaling $4.9 million and $37.1 million to the FHLMC
and FNMA, respectively. At September 30, 2002, the unpaid balance of total
mortgage loans sold to the FHLMC and FNMA and serviced by the Bank was $8.7
million and $46.6 million respectively.
The Bank's investment policy permits 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. At September 30, 2002, the total cost of mortgage-backed
securities was $215.5 million with a fair value of $216.5 million, resulting in
an unrealized gain of $1.0 million.
20
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,
2002 2001 2000
Percent Percent Percent
Amount of Total Amount of Total Amount of Total
(Dollars in thousands)
Real Estate Loans:
One- to four-family $ 248,984 60.10% $ 269,472 63.86 $ 390,805 73.46%
Multi-family 117,801 28.44 120,432 28.54 118,309 22.25
Commercial 3,429 0.83 1,665 0.39 3,448 0.65
Construction 13,761 3.32 15,325 3.63 2,304 0.43
------- ----- ------- ---- ------ -----
Total real estate loans 383,975 92.69 406,894 96.42 514,866 96.79
Commercial loans secured
by leases 16,343 3.95 - - - -
Consumer loans 13,940 3.36 15,096 3.58 17,101 3.21
------- ----- ------- ---- ------ ----
Gross loans receivable 414,258 100.00% 421,990 100.00% 531,967 100.00%
====== ====== ======
Less:
Loans in process 56 107 26
Unearned discounts and
deferred loan costs (2,309) (2,333) (3,286)
Allowance for loan losses 1,826 1,236 950
------- ------- -------
Loans receivable, net $ 414,685 $ 422,980 $ 534,277
======= ======= =======
Mortgage-backed securities:
FHLMC held to maturity $ - - % $ - - % 2,901 100.00%
FHLMC available for sale 63,992 29.55 9,139 7.16 - -
FNMA available for sale 50,697 23.42 66,524 52.10 - -
GNMA Available for sale 84,432 39.00 52,022 40.74 - -
Collaterized mortgage obligations 17,384 8.03 - - - -
------- ------ ------ ------ ------ ------
Mortgage-backed securities, net $ 216,505 100.00% $ 127,685 100.00% $ 2,901 100.00%
======= ====== ======= ====== ====== ======
21
At September 30,
1999 1998
Percent Percent
Amount of Total Amount of Total
(Dollars in thousands)
Real estate loans:
One- to four-family $ 388,586 76.86% $ 324,265 76.47%
Multi-family 100,412 19.86 83,084 19.59
Commercial 2,577 0.51 3,295 0.78
------- ----- ------- ----
Total real estate loans 491,575 97.23 410,644 96.84
Commercial loans secured
by leases - - 30 0.01
Consumer loans 14,016 2.77 13,358 3.15
------- ----- ------- ----
Gross loans receivable 505,591 100.00% 424,032 100.00%
======
Less:
Loans in process 16 1
Unearned discounts and
deferred loan costs (2,762) (2,168)
Allowance for loan losses 780 591
------- -------
Loans receivable, net $ 507,557 425,608
======= =======
Mortgage-backed securities
FHLMC held to maturity $ 3,585 100.00% $ 11,177 100.00%
------- ------ ------- ------
Mortgage-backed
securities, net $ 3,585 100.00% $ 11,177 100.00%
======= ====== ======= ======
22
The following table sets forth the loan originations, purchases of loans, and
mortgage-backed securities, sales and principal
repayments for the periods indicated:
Years Ended September 30,
2002 2001 2000
(in thousands)
Loans (gross):
At beginning of period $ 421,990 531,967 505,591
Loan originations
Real estate loans:
One- to four- family 87,272 88,425 67,373
Multi-family 31,007 21,874 26,158
Commercial/Construction 7,304 23,157 8,350
Commercial loans secured by leases 23,744 - -
Consumer loans 9,697 6,683 8,581
------- ------- -------
Total loans originated 159,024 140,139 110,462
Loans purchased:
One-to four- family 978 - -
Construction 10,100 - -
------- ------- -------
Total loans purchased 11,078 - -
------- ------- -------
Total loans originated and purchased 170,102 140,139 110,462
Commercial loans secured by leases participations sold (3,150) - -
Transfer to foreclosed real estate and net charge-offs (546) (268) (73)
Transfer to loans held for sale - (94,302) -
Principal repayments of loans receivable (163,285) (146,858) (78,517)
Principal repayments of consumer loans (10,853) (8,688) (5,496)
------- ------- -------
Total loans sold, transferred, amortization
and prepayments (177,834) (250,116) (84,086)
------- ------- -------
Total loans (gross) $ 414,258 421,990 531,967
======= ======= =======
Mortgage-backed securities (amortized cost):
At beginning of period $ 125,948 2,901 3,585
Mortgage-backed securities purchased 461,593 129,142 -
Mortgage-backed securities sold (339,826) (2,366) -
Amortization and principal repayments (32,204) (3,729) (684)
--------- ------ ------
$ 215,511 125,948 2,901
======= ====== ======
23
LOANS MATURITY AND REPRICING. The following table shows the maturity or period
to repricing of the loans at September 30, 2002. The table does not include
prepayments or scheduled principal amortization. Principal repayments and
prepayments on loans totaled $174.1 million, $155.5 million, and $84.0 million
for the years ended September 30, 2002, 2001, and 2000, respectively.
At September 30, 2002
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 $ 26,955 2,687 37,452 43,844 19,565 4,751 135,254
After one year:
One to three years 37,810 2,531 62,337 49,322 11,504 2,591 166,095
Three to five years 23,453 1,180 28,405 17,053 2,464 2,024 74,579
Five to 10 years 26,036 1,070 - - - 2,443 29,549
10 to 20 years 6,288 114 - - - 2,131 8,533
Over 20 years 248 - - - - - 248
------- ----- ------- ------ ----- ----- -------
Total due after
one year 93,835 4,895 90,742 66,375 13,968 9,189 279,004
------- ----- ------- ------ ----- ----- -------
Total amounts due $ 120,790 7,582 128,194 110,219 33,533 13,940 414,258
======= ===== ======= ======= ====== ======
Less:
Loans in process 56
Unearned discounts,
premiums and deferred
loan costs, net (2,309)
Allowance for loan losses 1,826
------
Loans receivable, net $ 414,685
========
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's loan products generally offer a monthly repayment
option and some loans carry a prepayment penalty for the first three to five
years of the loan. 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, 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
24
amortization feature. At time of origination, the Bank determines whether to
sell or retain fixed-rate, one- to four-family residential first mortgage
loans, while generally retaining the servicing rights for loans sold. ARM
loans originated are normally held for investment.
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
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 the current year, by enabling the Bank to meet
customer demand for loan refinancing, limiting the disruption to its loan
operations for loan customers who are borrowing for home purchases, as well as
reducing the costs associated with refinance activity of existing borrowers.
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 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.
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 liabilities. 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
25
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, 2002, $117.8 million, or 28.4%, 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, 2002,
$3.4 million, or 0.8%, 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, 2002, the Bank originated and purchased seven loans to
finance construction projects for $17.4 million. At September 30, 2002, the
Bank had twelve construction loans that totaled $20.7 million, and reported an
unpaid balance of $13.8 million, or 3.3% 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
26
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.
COMMERCIAL LOANS SECURED BY LEASES. The commercial leases in the Bank's loan
portfolio are purchased from leasing companies. Commercial leases generally
involve terms of 20 to 60 months to finance data processing equipment and other
commercial equipment such as telecommunications systems, hospital equipment,
and manufacturing equipment. The Bank has no commercial leases for rolling
stock or airplanes. The leases are located throughout the United States and
include primarily Fortune 1000 and other major companies in good financial
condition. The rates for commercial leases are at a premium over rates on U.S.
Treasury securities with comparable maturities. The commercial lease
financings are secured by the assignment of the underlying lease and ultimately
the leased asset. Commercial leases involve certain risks primarily
attributable to general economic conditions affecting the lease and the
obsolescence of the equipment being leased. Generally the lessee is required
to maintain the equipment and carry subject insurance covering the value of the
equipment. At September 30, 2002, commercial loans secured by leases were
$16.3 million, or 3.3% of total loans receivable.
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, 2002, outstanding balances on home
equity lines represented $10.6 million or 2.5% 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. At September 30, 2002,
$3.3 million or 0.8% of the Bank's loan portfolio consisted of consumer loans
other than home equity lines.
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
27
loans may be approved by designated personal banking managers. The Bank's
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 typically 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.
28
Set forth below is certain information regarding delinquent loans
at September 30, 2002, 2001 and 2000:
At September 30, 2002 At September 30, 2001
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 8 $ 1,416 6 $ 594 4 $ 583 5 $ 628
Multi-family 2 239 4 623 4 953 - -
Commercial - - - - - - - -
-- ----- -- ----- -- ---- -- ----
Total mortgage loans 10 1,655 10 1,217 8 1,536 5 628
Commercial loans secured
by leases - - - - - - - -
Consumer - - 2 80 - - 4 49
-- ----- -- ----- -- ---- -- ----
Total loans 10 $ 1,655 12 $ 1,297 8 $1,536 9 $ 677
== ===== == ===== == ===== == ====
Delinquent loans to
total loans 0.40% 0.31% 0.33% 0.16%
==== ==== ==== ====
At September 30, 2000
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 7 $ 896 3 $ 151
Multi-family 1 215 - -
Commercial - - 1 224
-- ----- -- -----
Total mortgage loans 8 1,111 4 375
Commercial loans secured
by leases - - - -
Consumer 2 32 1 4
-- --- -- ----
Total loans 10 $1,143 5 $ 379
== ===== = ====
Delinquent loans to
total loans 0.21% 0.07%
==== =====
29
NON-PERFORMING ASSETS. The following table sets forth information regarding
non-accrual loans, loans that 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, 2002, 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,
2002, had been currently performing in accordance with their original terms,
the Bank would have recognized interest income from such loans of $158,000.
At September 30,
2002 2001 2000 1999 1998
(Dollars in thousands)
Non-accrual mortgage loans $1,217 $ 628 $ 375 $ 300 $ 799
Non-accrual commercial loans
secured by leases 1,036 - - - 30
Non-accrual consumer loans 80 49 4 43 2
----- --- ---- ---- -----
Total non-accrual loans 2,333 677 379 343 831
Consumer loans 90 days or more
past due and still accruing - - - - -
---- --- ---- ---- ----
Total non-performing loans 2,333 677 379 343 831
Real estate in foreclosure 405 - 3 - 131
---- ---- ---- ---- ------
Total non-performing assets $2,738 $ 677 $ 382 $ 343 $ 962
===== ==== ===== ===== ======
Total non-performing loans to
total loans 0.56% 0.16% 0.07% 0.07% 0.20%
===== ===== ===== ===== =====
Total non-performing assets to
total assets 0.39% 0.10% 0.06% 0.06% 0.19%
===== ===== ===== ===== =====
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
30
categories but possess weaknesses are required to be designated "special
mention" by management.
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 incurred 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, 2002, the Bank had classified assets of $2.7 million.
Classified loans of $2.3 million were categorized as substandard, consisting of
6 residential mortgage loans, 4 multi-family loans, 1 commercial loan secured
by a lease and 2 equity loans. There were no assets classified as doubtful.
At September 30, 2002, management considered a $1.0 million commercial loan
secured by lease to be impaired, under which K-Mart Corporation was the lessee.
This loan is a direct financing lease included in the Company's commercial
loans secured by leases portion of the loan portfolio. K-Mart filed for
bankruptcy protection on January 22, 2002. The K-Mart lease loan is secured by
revenue producing equipment with an original cost of $1.5 million that was
purchased and installed during the second half of 2001. Subsequent to filing
for bankruptcy protection, K-Mart closed a number of its retail stores,
including some in which this equipment was located. K-Mart informed the Bank
that the equipment located in closed stores has been moved to stores that will
remain open.
While the K-Mart commercial loan secured by lease is currently performing in
accordance with their terms, no assurance can be given that this will continue
to be the case and such performance may depend on the terms of the
reorganization plan for K-Mart. No assurances can be made that a loss related
to these loans will not be incurred.
ALLOWANCE FOR LOAN LOSSES. The allowance for loan losses is established
through a provision for loan 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.
31
The following table sets forth the Bank's allowance for loan losses at the
dates indicated.
At or for the Years Ended September 30,
2002 2001 2000 1999 1998
(Dollars in thousands)
Balance at beginning of year $ 1,236 950 780 591 460
Provision for loan losses 600 295 180 165 181
Charge offs:
One-to four-family - - - - -
Multi-family - - - - -
Commercial loans secured
by leases - - - - -
Consumer loans (36) (12) (13) (8) (51)
---- ---- ---- ---- ----
Total Charge-offs (36) (12) (13) (8) (51)
Recoveries:
Commercial loans secured
by leases - - - 27 -
Consumer loans 26 3 3 5 1
---- ---- ---- ---- ----
Total Recoveries 26 3 3 32 1
----- ----- ---- ---- ----
Balance at end of year $ 1,826 1,236 950 780 591
===== ===== ==== ==== ====
Charge-offs during the
year to average loans
outstanding during the year - % - % - % - % 0.01%
==== ==== ==== ==== ====
Allowance for loan losses
to net loans receivable
at end of year 0.44% 0.29% 0.18% 0.15% 0.14%
==== ==== ==== ==== ====
Allowance for loan losses
to total non-performing
loans at end of year 78.27% 182.57% 250.66% 227.41% 71.12%
====== ====== ====== ====== =====
Allowance for loan losses
to non-performing assets
at end of year 66.69% 182.57% 248.69% 227.41% 61.43%
====== ====== ====== ====== =====
32
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,
2002 2001 2000
Loan Category Loan Category Loan Category
as a % as a % as a %
of Total of Total of Total
Allowance Loans Allowance Loans Allowance Loans
(Dollars in thousands)
One- to four- family residential $ 628 60.10% $ 407 63.86% $ 421 73.45%
Multi-family 338 28.44 238 28.54 232 22.25
Commercial real estate 23 0.83 22 0.39 39 0.65
Construction 135 3.32 307 3.63 23 0.43
Commercial loans secured
by leases 412 3.95 - - - -
Consumer 207 3.36 213 3.58 190 3.22
Unallocated Portion 83 - 49 - 45 -
----- ------ ---- ------ ---- ------
Total $ 1,826 100.00% $ 1,236 100.00% $ 950 100.00%
===== ====== ==== ====== ==== ======
INVESTMENT ACTIVITIES
The investment policies of the Company and the Bank, established by the Board
of Directors and implemented by the Board's 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.
33
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.
On May 24, 2002, Taylor Capital Group, Inc. ("Taylor Capital") announced that
it filed a registration statement with the Securities and Exchange Commission
for an initial public offering of its common stock. The registration statement
also covers the proposed offering of trust securities by TAYC Capital Trust 1.
On October 21, 2002. Taylor Capital announced that it completed its offerings
of common stock and trust preferred securities for $82.1 million of gross
proceeds. Taylor Capital has announced its intent to fund the settlement if
the outstanding litigation with the proceeds from these offerings.
34
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,
2002 2001 2000
Amortized Fair Amortized Fair Amortized Fair
Cost Value Cost Value Cost Value
(in thousands)
Interest-earning deposits:
FHLB daily investment $ 1,040 1,040 1,394 1,394 1,400 1,400
Money market fund 5 5 3 3 5 5
----- ----- ----- ----- ----- -----
Total interest-bearing deposits $ 1,045 1,045 1,397 1,397 1,405 1,405
===== ===== ===== ===== ===== =====
Federal funds sold $ 100 100 100 100 100 100
==== ==== ==== ==== ==== ====
FHLB-Chicago Stock $ 31,972 31,972 18,055 18,055 10,065 10,065
====== ====== ====== ====== ====== ======
Securities available for sale:
U.S. Government and
agencies $ 7,831 7,810 23,109 23,199 68,436 65,603
Municipal debt securities 803 859 3,491 3,492 - -
Corporate debt securities 13,561 13,727 14,719 15,315 7,972 8,763
------- ------ ------ ------ ------ ------
Total securities
available for sale $ 22,195 22,396 41,319 42,006 76,408 74,366
======= ====== ====== ====== ====== ======
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, 2002.
At September 30, 2002
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) $ 4,378 5.04% - - % 3,453 4.90% - -% 3.99 7,831 7,810 4.99%
Municipal debt
securities (2) - - - - - - 803 4.33 28.02 803 859 4.33
Corporate debt
securities (3) - - - - - - 13,561 5.52 18.67 13,561 13,727 5.52
------ ---- ---- ---- ------ ----- ------ ----- ---- ------ ------ ----
$ 4,378 5.04% - - % 3,453 4.90% 14,364 5.46% 19.20 22,195 22,396 5.29%
====== ==== ==== ==== ====== ===== ====== ===== ===== ====== ====== ====
(1) U.S. government and agencies investments include $10.5 million in callable
notes. These securities are shown as repricing at their respective maturity
dates although these can be no assurances that the securities will not be
called before maturity.
(2) Municipal bond yields included in securities available for sale above are
not tax effected.
35
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 area 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. Although the Bank did not
solicit certificate accounts in excess of $100,000 in the past, it initiated a
wholesale CD program in the year ended September 30, 2002. The Bank does not
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,
2002 2001 2000
(in thousands)
Deposits $ 962,391 849,874 702,632
Withdrawals (941,569) (850,825) (696,519)
------- ------- -------
Net deposits in excess of withdrawals 20,822 (951) 6,113
Interest credited on deposits 13,693 19,137 18,304
------- ------- -------
Total increase in deposits $ 34,515 18,186 24,417
======= ======= =======
The following table sets forth maturities time deposits over $100,000 at
September 30, 2002:
Maturity Period
(in thousands)
Three months or less $ 8,260
Over three through six months 15,987
Over six through 12 months 19,492
Over 12 months 10,274
-------
$ 54,013
=======
36
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,
2002 2001
Weighted Weighted
Percent Average Percent Average
of Total Nominal of Total Nominal
Amount Deposits Rate Amount Deposits Rate
(dollars in thousands)
Passbook Savings $ 133,979 30.86% 1.92% $ 132,217 33.09% 3.04%
Transaction Accounts:
NOW/non-interest bearing 14,174 3.27 - 13,746 3.44 -
NOW 30,385 7.00 1.80 18,869 4.72 1.82
Money market and management 19,801 4.56 2.21 12,345 3.09 3.36
------ ----- ---- ------ ---- ----
Total transaction accounts 64,360 14.83 1.55 44,960 11.25 1.69
Certificate Accounts:
3 month 2,397 0.55 2.23 1,049 0.26 3.71
6 month 10,956 2.53 2.54 17,246 4.33 4.14
7 month 5,047 1.16 2.52 13,772 3.45 4.89
8 month 4,091 0.94 2.70 61,359 15.35 5.30
10 month 8,607 1.98 2.81 60,548 15.15 4.58
12 month 46,072 10.61 3.29 19,228 4.81 5.49
13 month 60,000 13.82 3.61 10,280 2.57 4.79
15 month 40,942 9.43 3.48 7,388 1.85 4.55
18 month 2,249 0.51 3.49 - - -
24 month 12,569 2.90 4.06 20,978 5.25 6.68
36 month 5,104 1.18 4.50 3,889 0.97 5.06
36 month rising rate 1,314 0.31 4.39 1,775 0.44 4.33
60 month 4,309 0.99 4.50 4,930 1.23 5.77
Other 32,138 7.40 3.33 - - -
------ ----- ---- ------ ---- ----
Total certificate accounts 235,795 54.31 3.42 222,442 55.66 5.08
------- ----- ---- ------- ----- ----
Total Deposits $ 434,134 100.00% 2.67% 399,619 100.00% 4.17%
======= ====== ==== ======= ====== ====
37
At September 30,
2000
Weighted
Percent of Average
Total Nominal
Amount Deposits Rate
(dollars in thousands)
Passbook Savings $ 121,787 31.93% 4.09%
Transaction Accounts:
NOW/non-interest bearing 9,287 2.44 -
NOW 19,074 5.00 2.03
Money market and management 12,711 3.33 3.59
------ ----- ----
Total transaction accounts 41,072 10.77 2.05
Certificate Accounts:
3 month 1,029 0.27 4.30
6 month 7,660 2.01 5.24
7 month 2,509 0.66 4.70
8 month 1,609 0.42 4.70
10 month 16,834 4.41 6.11
12 month 31,017 8.13 6.39
13 month 105,917 27.77 6.63
15 month 15,307 4.01 6.12
24 month 22,694 5.95 6.57
36 month 5,291 1.39 5.46
36 month rising rate 2,826 0.74 5.64
60 month 5,881 1.54 5.82
Other - - -
------ ----- ----
Total certificate accounts 218,574 57.30 6.36
------- ----- ----
Total Deposits $ 381,433 100.00% 5.30%
======= ====== ====
The following table presents, by various rate categories, the amount of
certificate accounts outstanding at September 30, 2002, 2001 and 2000 and the
periods to maturity of the certificate accounts outstanding at September 30,
2002.
Period to maturity from September 30, 2002
At September 30,
Two to
Within One to Three There-
2002 2001 2000 One Year Two Years Years after Total
(in thousands)
<s>
Certificate accounts:
2.99% or less $ 34,509 - 59 34,295 214 - - 34,509
3.00% to 3.99% 180,508 9,508 - 146,160 32,070 2,046 232 180,508
4.00% to 4.99% 14,428 127,880 22,497 5,615 7,928 564 321 14,428
5.00% to 5.99% 5,518 41,550 30,333 4,373 677 260 208 5,518
6.00% to 6.99% 832 30,704 129,611 832 - - - 832
7.00% to 7.99% - 12,800 36,074 - - - - -
------- ------- ------- ------- ------ ----- --- -------
Total $ 235,795 222,442 218,574 191,275 40,889 2,870 761 235,795
======= ======= ======= ======= ====== ===== === =======
38
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,
2002 2001 2000
(in thousands)
Average balance outstanding $ 174,983 194,545 180,651
Maximum amount outstanding at any
month-end during the year 215,955 214,360 205,150
Balance outstanding at year end 180,650 187,345 205,150
Weighted average interest rate
during the year 4.91% 6.34% 6.16%
Weighted average interest rate
at end of year 4.33% 5.50% 6.72%
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 borrowings
from any other source. At September 30, 2002, the Bank's FHLB of Chicago
advances totaled $178.7 million.
Included in FHLB of Chicago advances at September 30, 2002 are $75.0 million of
fixed-rate advances, which are callable at the discretion of the FHLB of
Chicago at periods from 6 months to 5 years from the origination date. The
average term to maturity on these advances is 2.9 years, while the average term
to call is 1.1 years. 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 2002, the Company obtained a
$7.0 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, not less than 4.00%. At September 30, 2002,
the loan balance outstanding was $2.0 million and carries an interest rate of
4.00%. The loan requires quarterly payments of all accrued unpaid interest due
39
and one payment of all outstanding principal plus all accrued unpaid interest
on December 14, 2002. 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, 2002, 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.
Income generated from safe deposit box rentals, annuity sales and insurance
sales was $226,000 for the year ended September 30, 2002. Operating expenses
for fiscal year 2002 were $18,000.
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, 2002, the Company had 101 full-time employees and 26 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 financial
performance of the Company may be affected not only by management decisions and
general economic conditions, but also by the requirements of state and federal
statutes and by the regulations and policies of various bank regulatory
authorities, including the Office of Thrift Supervision (the "OTS"), the Board
of Governors of the Federal Reserve System (the "Federal Reserve") and the
Federal Deposit Insurance Corporation (the "FDIC"). Furthermore, taxation laws
administered by the Internal Revenue Service and state taxing authorities and
securities laws administered by the Securities and Exchange Commission (the
"SEC") have an impact on the Company. The effect of applicable statutes,
regulations and regulatory policies may be significant, and cannot be predicted
with a high degree of certainty.
Federal and state laws and regulations generally applicable to financial
institutions regulate, among other things, the scope of business, the kinds and
amounts of investments, reserve requirements, capital levels relative to
operations, the nature and amount of collateral for loans, the establishment of
branches, mergers and consolidations and the payment of dividends. This system
of supervision and regulation establishes a comprehensive framework for the
respective operations of the Company and the Bank and is intended primarily for
the protection of the FDIC's deposit insurance funds and the depositors, rather
than the shareholders, of financial institutions.
40
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, 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.
THE COMPANY
GENERAL. 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
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.
A savings and loan holding company may acquire savings associations located in
more than one state in both supervisory transactions involving failing savings
associations and nonsupervisory acquisitions of healthy institutions.
Interstate acquisitions of healthy savings associations, however, are permitted
only if the law of the state in which the savings association to be acquired is
located specifically authorizes the proposed acquisition, by language to that
effect and not merely by implication. State laws vary in the extent to which
interstate acquisitions of savings associations and savings and loan holding
companies are permitted. Illinois law presently permits savings and loan
holding companies located in any state of the United States to acquire savings
associations or savings and loan holding companies located in Illinois, subject
to certain conditions, including the requirement that the laws of the state in
which the acquiror is located permit savings and loan holding companies located
in Illinois to acquire savings associations or savings and loan holding
companies in the acquiror's state.
Because the Company controls only one savings association subsidiary and
because the Company acquired control of the Bank, and thus became a savings and
loan holding company, before May 4, 1999, the Company is generally not subject
to any restrictions on the types of non-financial activities that the Company
may conduct either directly or through a non-banking subsidiary, so long as the
Bank constitutes a qualified thrift lender (see "--The Bank--Qualified Thrift
Lender Test"). If the Bank were to fail to meet the qualified thrift lender
test, or if the Company acquired another savings association and maintained it
as a separate subsidiary of the Company, the Company would become subject to
certain restrictions on the non-financial activities in which it may engage.
In any case, however, if the OTS determines that there is reasonable cause to
believe that the continuation by a savings and loan holding company of a
41
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 Company's ability to pay dividends to its shareholders may be
affected by both general corporate law considerations and policies of the OTS
applicable to savings and loan holding companies. 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 borrowings 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. On July
30, 2002, President Bush signed into law the Sarbanes-Oxley Act of 2002. The
Act provides for sweeping changes to the reporting, accounting, corporate
governance and business practices of companies as well as financial and other
professionals who have involvement with the U.S. public markets. The
implementation of the requirements of the Act are likely to require that the
Company devote significant resources to its securities laws compliance efforts
which, among other things, is likely to result in increased compliance
expenses.
THE BANK
GENERAL. 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 federally chartered savings association, the Bank is subject to the
examination, supervision, reporting and enforcement requirements of the OTS,
the chartering authority for federal savings associations. The FDIC, as
administrator of the SAIF, also has regulatory authority over the Bank. The
Bank is also a member of the Federal Home Loan Bank System, which provides a
42
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 fiscal year ended September 30, 2002, SAIF assessments ranged from
zero to 0.27% of deposits. The FDIC has stated that the SAIF assessment rates
will not change during the remainder of calendar year 2002.
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. During the fiscal year ended September 30, 2002, 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 fiscal year
ended September 30, 2002, the Bank paid supervisory assessments to the OTS
totaling $139,000.
CAPITAL REQUIREMENTS. Pursuant to the HOLA and OTS regulations, savings
associations, such as the Bank, are subject to the following minimum capital
requirements: (i) 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; (ii) a tangible capital requirement, consisting of a minimum
ratio of tangible capital to total assets of 1.5%; and (iii) a risk-based
43
capital requirement, consisting of a minimum ratio of total capital to total
risk-weighted assets of 8%, and a minimum ratio of core capital to total
risk-weighted assets of 4%. Core capital consists primarily of permanent
stockholders' equity less (i) intangible assets other than certain supervisory
goodwill, certain loan 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.
Further, federal law and regulations provide various incentives to financial
institutions to maintain regulatory capital at levels in excess of minimum
regulatory requirements. For example, a financial institution that is
"well-capitalized" may qualify for exemptions from prior notice or application
requirements otherwise applicable to certain types of activities and may
qualify for expedited processing of other required notices or applications.
Under the regulations of the OTS, in order to be "well-capitalized" a savings
association must maintain a ratio of total capital to total risk-weighted
assets of 10% or greater, a ratio of Tier 1 capital to total risk-weighted
assets of 6% or greater and a ratio of Tier 1 capital to total assets of 5% or
greater. For purposes of these provisions of OTS regulations, "Tier 1 capital"
is defined to mean core capital.
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 "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, 2002: (i) the Bank was not subject to a directive from the
OTS to increase its capital to an amount in excess of the minimum regulatory
capital requirements; (ii) the Bank exceeded its minimum regulatory capital
requirements under OTS capital adequacy guidelines; and (iii) the Bank was
"well-capitalized", as defined by OTS regulations.
44
DIVIDENDS. The primary source of funds for the Company is dividends from the
Bank. 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 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, 2002. 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
45
exposure, asset growth, compensation, fees and benefits, asset quality and
earnings.
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, 2002, 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, 2002, the Bank
satisfied the QTL test, with a ratio of qualified thrift investments to
portfolio assets of 99.99%, and qualified as a "domestic building and loan
association," as defined in the Internal Revenue Code.
46
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 $41.3 million or
less, the reserve requirement is 3% of total transaction accounts; and for
transaction accounts aggregating in excess of $41.3 million, the reserve
requirement is $1.24 million plus 10% of the aggregate amount of total
transaction accounts in excess of $41.3 million. The first $5.7 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.
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 economic
value of each type of asset, liability, and off-balance sheet contract 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.
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
47
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, 2002 interest rate
sensitivity of NPV, the most recent available from the OTS. Due to the
abnormally low prevailing interest rate environment, the OTS report did not
provide NPV estimated for the -200 and -300 basis points.
Net Portfolio Value as a %
Net Portfolio Value of Present Value of Assets
------------------------------ --------------------------
Changes in
Rates $ Amount $ Change % Change NPV Ratio Change
- ---------- --------- -------- -------- --------- ---------
+ 300 bp 41,563 (43,933) (51)% 6.10% - 552 bp
+ 200 bp 56,524 (28,972) (34)% 8.08% - 354 bp
+ 100 bp 70,491 (15,005) (18)% 9.83% - 179 bp
0 bp 85,496 11.62%
- 100 bp 83,603 (1,893) (2)% 11.33% - 29 bp
- 200 bp - - - % - % - bp
- 300 bp - - - % - % - bp
48
Item 8. Financial Statements and Supplementary Data
Consolidated Statements of Financial Condition
(Dollars in thousands, except per share data)
September 30, 2002 and 2001
ASSETS 2002 2001
Cash and due from banks $ 3,828 7,107
Interest-earning deposits 1,045 1,397
Federal funds sold 100 100
-------- -------
Cash and cash equivalents 4,973 8,604
FHLB of Chicago stock, at cost 31,972 18,055
Mortgage-backed securities available for sale 216,505 127,685
Securities available for sale 22,396 42,006
Loans held for sale 83 41,219
Loans receivable, net of allowance for loan losses of $1,826 and $1,236
at September 30, 2002 and 2001 414,685 422,980
Accrued interest receivable 3,637 3,650
Premises and equipment 3,410 3,850
Other assets 1,254 657
-------- -------
$ 698,915 668,706
======== =======
LIABILITIES and STOCKHOLDERS' EQUITY
LIABILITIES
Deposits 434,134 399,619
Borrowed funds 180,650 187,345
Advance payments by borrowers for taxes and insurance 6,158 7,193
Due to broker 13,169 14,918
Other liabilities 8,813 10,247
-------- -------
Total liabilities 642,924 619,322
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 5,673,464 shares; 3,081,490 and 3,030,490 shares outstanding
at September 30, 2002 and 2001, respectively 57 38
Additional paid-in capital 38,410 38,636
Retained earnings, substantially restricted 47,864 40,926
Treasury stock, at cost (2,591,974 and 2,642,974 shares at
September 30, 2002 and 2001, respectively) (30,932) (31,540)
Common stock acquired by Bank Recognition and Retention Plans (149) (178)
Accumluated other comprehensive income 741 1,502
-------- -------
Total stockholders' equity 55,991 49,384
-------- -------
$698,915 668,706
======== =======
See accompanying notes to consolidated financial statements.
49
Consolidated Statements of Earnings
(Dollars in thousands, except per share data)
Years ended September 30, 2002, 2001, and 2000
2002 2001 2000
INTEREST INCOME:
Loans receivable $ 31,269 39,337 38,329
Securities 3,745 5,822 5,236
Mortgage-backed securities 8,787 1,223 239
Other interest income 39 72 47
------- ------ ------
43,840 46,454 43,851
INTEREST EXPENSE:
Deposits 13,656 19,121 17,992
Borrowed funds 8,586 12,340 11,120
------- ------ ------
22,242 31,461 29,112
Net interest income before provision for loan losses 21,598 14,993 14,739
Provision for loan losses 600 295 180
------- ------ ------
Net interest income after provision for loan losses 20,998 14,698 14,559
NON-INTEREST INCOME:
Fees and commissions 670 457 452
Insurance and annuity commissions 863 820 1 063
Gain on sale of securities 1,122 231 -
Gain on sale of loans 690 640 -
Other 41 159 53
------- ------ ------
3,386 2,307 1,568
NON-INTEREST EXPENSE:
General and administrative expenses:
Salaries and employee benefits 6,544 5,578 5,331
Office occupancy and equipment 1,993 1,666 1,452
Data processing 498 467 521
Advertising and promotions 550 443 554
Other 2,112 1,546 1,462
------- ------ ------
11,697 9,700 9,320
Income before income taxes 12,687 7,305 6,807
Income tax expense 4,684 2,433 2,565
------- ------ ------
NET INCOME $ 8,003 4,872 4,242
======= ====== ======
Earnings per share - basic $2.61 1.61 1.36
Earnings per share - diluted $2.49 1.54 1.31
See accompanying notes to consolidated financial statements.
50
CONSOLIDATED STATEMENTS of CHANGES IN STOCKHOLDERS' EQUITY
(Dollars in thousands)
Years ended September 30, 2002, 2001, and 2000
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, 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 income - - - - - - 214 214
--- ------ ------- ------ ------ ------ ----- ------
Total comprehensive income 4,456
Purchase of treasury stock
(191,200 shares) - - - (3,377) - - - (3,377)
Cash dividends ($.47 per share) - - (991) - - - - (991)
Amortization of award of BRRP
stock - - - - - 7 - 7
Cost of ESOP shares released - - - - 443 - - 443
Exercise of stock options and
reissuance of treasury shares
(20,488 shares) - (150) - 154 - - - 4
Tax benefit related to vested
BRRP stock - 4 - - - - - 4
Tax benefit related to stock
options exercised - 54 - - - - - 54
Market adjustment for committed
ESOP shares - 182 - - - - - 182
--- ------ ------- ------ ------ ------ ----- ------
Balance at September 30, 2000 38 38,780 37,022 (31,391) (189) (191) (1,266) 42,803
Net income - - 4,872 - - - - 4,872
Change in accumulated other
comprehensive loss - - - - - - 2,768 2,768
--- ------ ------- ------ ------ ------ ----- ------
Total comprehensive income 7,640
Purchase of treasury stock
(28,800 shares) - - - (562) - - - (562)
Cash dividends ($.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
- continued -
51
Accumu-
lated
Common Other
Additional Stock Compre-
Par Paid-in Retained Treasury Acquired hensive
Shares Value Capital Earnings Stock By BRRP's Income Total
Balance at
September 30, 2001 3,782,350 $ 38 38,636 40,926 (31,540) (178) 1,502 49,384
Net income - - - 8,003 - - - 8,003
Change in accumulated other
comprehensive income - - - - - - (761) (761)
--------- ------ ------- ------ ------ ----- ------ ------
Total comprehensive income 7,242
Cash dividends
($0.35 per share) - - - (1,065) - - - (1 065)
Amortization of award of
BRRP stock - - - - - 29 - 29
Exercise of stock options
and reissuance of treasury
shares(51,000 shares) - - (266) - 608 - - 342
Tax benefit related to
vested BRRP stock - - 58 - - - - 58
Tax benefit related to
stock options exercised - - 3 - - - - 3
3-for-2 stock split effected
in the form of a 50%
stock dividend and payment
of cash for fractional
shares 1,891,114 19 (21) - - - (2)
--------- ---- ------- ------ ------ ----- ------- ------
Balance at
September 30, 2002 5,673,464 $ 57 38,410 47,864 (30,932) (149) 741 55,991
========= ==== ====== ====== ====== === === ======
See accompanying notes to consolidated financial statements.
52
CONSOLIDATED STATEMENTS of CASH FLOWS
(Dollars in thousands)
Years ended September 30, 2002 2001 2000
Cash flows from operating activities:
Net income $ 8,003 4,872 4,242
Adjustment to reconcile net income to net cash provided by
operating activities:
Depreciation 741 400 446
Provision for loan losses 600 295 180
Net amortization and accretion of premiums and discounts 583 (37) (8)
Amortization of cost of stock benefit plans 29 13 7
ESOP - 227 625
Deferred loan costs, net of amortization 48 229 (483)
Stock dividend from FHLB of Chicago (1,217) (761) (344)
Loans originated for sale (4,304) (2,186) -
Proceeds from loans originated for sale 4,982 2,208 -
Amortization of deposit base intangible 2 11 21
Loss (gain) on sale of real estate owned (12) 5 (13)
Gain on sale of securities and loans (1,812) (871) -
Decrease (increase) in accrued interest receivable 13 511 (496)
Decrease (increase) in other assets, net (129) 732 38
Increase (decrease) in other liabilities, net (869) 3,124 (649)
------ ------ -----
NET CASH PROVIDED by OPERATING ACTIVITIES 6,658 8,772 3,566
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of mortgage-backed securities available for sale (464,325) (114,224) -
Proceeds from maturities of securities available for sale 20,000 40,051 -
Proceeds from sale of securities available for sale 402,258 45,736 -
Proceeds from sale of securities held to maturity - 2,443 -
Proceeds from sale of real estate owned 111 280 86
Proceeds from redemption of Federal Home Loan Bank of Chicago stock 55,500 - -
Purchase of Federal Home Loan Bank of Chicago stock (68,200) (7,229) (106)
Purchase of securities available for sale (61,101) (50,442) (7,972)
Loans originated for investment (159,024) (140,139) (110,462)
Loans purchases (978) - -
Participations purchased (10,100) - -
Participations sold 3,150 - -
Proceeds from sale of loans 37,829 54,235 -
Purchase of premises and equipment (301) (325) (169)
Principal repayments collected on loans receivable 174,138 155,546 84,013
Principal repayments collected on foreclosed real estate 44 - -
Principal repayments collected on loans available for sale 3,170 - -
Principal repayments collected on mortgage-backed securities 31,480 3,654 684
------ ----- ------
NET CASH USED IN INVESTING ACTIVITIES (36,349) (10,414) (33,926)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits 34,515 18,186 24,417
Net increase in (repayment of) borrowed funds (6,695) (17,805) 18,900
Net increase (decrease) in advance payments by borrowers for
taxes and insurance (1,035) 4,995 (5,788)
Purchase of treasury stock - (562) (3,377)
3-for-2 stock split effected in the form of a 50% stock
dividend and payment of cash for fractional shares (2) - -
Payment of common stock dividends (1,065) (968) (991)
Proceeds from exercise of stock options 342 205 4
------ ----- ------
NET CASH PROVIDED BY FINANCING ACTIVITIES 26,060 4,051 33,165
------ ----- ------
Net change in cash and cash equivalents (3,631) 2,409 2,805
Cash and cash equivalents at beginning of year 8,604 6,195 3,390
------ ----- ------
Cash and cash equivalents at end of year $ 4,973 8,604 6,195
====== ===== ======
CASH PAID DURING THE YEAR FOR:
Interest $ 22,593 31,667 29,180
Income taxes 5,769 1,557 2,292
NON-CASH INVESTING ACTIVITIES:
Loans transferred to real estate in foreclosure 546 277 231
Due to broker for securities transactions 13,169 14,918 -
Loans transferred to held for sale - 94,302 -
====== ====== ======
See accompanying notes to consolidated financial statements.
53
(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 are 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.
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 securities that are not classified as "held to
maturity" or "trading" are classified as "available for sale." Securities
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.
54
Interest income includes amortization of purchase premium or discount. 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 loans 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 judgments 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.
55
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-earning deposits, and federal funds sold.
EARNINGS PER SHARE
Basic earnings per share are 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.
56
Weighted average shares used in calculating earnings per share are summarized
below:
2002 2001 2000
------ ----- -----
Basic
Net Income $ 8,003 4,872 4,242
---------- --------- ---------
Weighted average common shares outstanding 3,069,172 3,025,074 3,138,139
Less: Average unallocated ESOP shares - (1,770) (23,004)
---------- --------- ---------
Average shares 3,069,172 3,023,304 3,115,135
Basic earnings per common share $ 2.61 $ 1.61 $ 1.36
---------- --------- ---------
Diluted
Net income $ 8,003 4,872 4,242
---------- --------- ---------
Weighted average common shares outstanding
for basic earnings per common share 3,069,172 3,023,304 3,115,135
Add: Dilutive effect of assumed exercises
of stock options 142,642 132,709 125,793
--------- --------- ---------
Average shares 3,211,814 3,156,013 3,240,928
--------- --------- ---------
Diluted earnings per common share $ 2.49 $ 1.54 $ 1.31
========= ========= =========
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.
COMMON STOCK
On January 22, 2002, the Company's Board of Directors approved a 3-for-2 stock
split to be effected in the form of a stock dividend to common stockholders of
record as of February 6, 2002 with a payment date of February 28, 2002.
Earnings and dividends per share for all periods have been restated to reflect
the 3-for-2 stock split.
RECLASSIFICATIONS
Certain reclassifications have been made in prior years financial statements to
conform to the current year s presentation.
57
NEW ACCOUNTING PRONOUNCEMENTS
Statement No. 141 was issued to improve the transparency of the accounting and
reporting for business combinations by requiring that all business combinations
initiated after June 30, 2001 be accounted for under the purchase method of
accounting. Since this accounting standard applies to business combinations
initiated after June 30, 2001, it will have no effect on the Company's
financial statements unless the Company enters into a business combination
transaction.
Statement No. 142 requires that goodwill no longer be amortized to earnings,
but instead be reviewed for impairment. This change provides investors with
greater transparency regarding the economic value of goodwill and its impact on
earnings. The adoption of this new accounting standard will have no effect on
the Company's financial statements.
In June 2001, the Financial Accounting Standards Board (FASB) issued SFAS No.
143, "Accounting For Asset Retirement Obligations" (SFAS No. 143). SFAS No.
143 addresses financial accounting and reporting for obligations associated
with the retirement of tangible long-lived assets and the associated asset
retirement costs. SFAS No. 143 is effective for financial statements issued
for fiscal years beginning after June 15, 2002. Management does not expect the
adoption of this pronouncement to have a material effect on the Company.
In August 2001, the FASB issued Statement of Financial Accounting Standards
(SFAS) No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets," which replaced SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." SFAS No. 144
established a single accounting model, based on the framework established in
SFAS No. 121, for long-lived assets to be disposed of by sale. SFAS No. 144
also resolved significant implementation issues related to SFAS No. 121. The
provisions of SFAS No. 144 are effective for financial statements issued for
fiscal years beginning after December 15, 2001. Management does not expect the
adoption of this pronouncement to have a material effect on the Company.
The FASB recently issued SFAS No. 145 and No. 146. SFAS No. 145 applies for
years beginning after May 14, 2002 and may be adopted sooner. SFAS No. 145
covers extinguishments of debt and leases and includes some minor technical
corrections. Under previous accounting guidance, gains or losses from
extinguishments of debt were always treated as extraordinary items. Under SFAS
No. 145, they will no longer be considered extraordinary, except under very
limited conditions. Upon adoption of SFAS No. 145, any prior gains and losses
from extinguishments of debt must be reclassified as ordinary gains and losses.
Under SFAS No. 145, if a capital lease is modified to become an operating
lease, it will be accounted for as a sale-leaseback, by following the
accounting guidance of SFAS No. 98, instead of being accounted for as a new
lease. SFAS No. 146 covers accounting for costs associated with exit or
long-lived asset disposal activities, such as restructurings, consolidation or
closing of facilities, lease termination costs, or employee relocation or
severance costs. SFAS No. 146 replaces Emerging Issues Task Force (EITF) 94-3,
and is to be applied prospectively to exit or disposal activities initiated
after December 31, 2002 and may be adopted sooner. A company may not restate
its previously issued financial statements. SFAS No. 146 requires exit or
long-lived asset disposal costs to be recognized as an expense when the
liability is incurred and can be measured at fair value, rather than at the
date of making a commitment to an exit or disposal plan. Management does not
expect the effects of the future adoptions of SFAS No. 145 and SFAS No. 146 to
be material to the Company's financial statements.
58
(2) Mortgage-backed Securities
Mortgage-backed securities at September 30, are summarized as follows:
2002 2001
Gross Gross Gross Gross
Amortized unrealized unrealized Fair Amortized unrealized unrealizef Fair
cost gains losses value cost gains losses value
(in thousands)
FHLMC pass-through
certificates $ 63,728 291 (27) 63,992 8,977 162 - 9,139
FNMA pass-through
certificates 50,454 265 (22) 50,697 65,426 1,098 - 66,524
GNMA pass-though
certificates 84,068 367 (3) 84,432 51,545 477 - 52,022
Collateralized Mortgage
Obligations 17,261 165 (42) 17,384 - - - -
-------- ------ ----- ------- ------ ---- ---- ------
$ 215,511 1,088 (94) 216,505 125,948 1,737 - 127,685
======= ====== ===== ======= ======= ===== ===== =======
Sales of mortgage-backed securities available for sale securities were as
follows:
2002 2001 2000
------ ----- -----
Proceeds $ 340,484 -- --
Gross gains 786 -- --
Gross losses 128 -- --
========= ========= =========
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
these securities was $2.4 million. There were no sales of mortgage-backed
securities during the year ended September 30, 2001.
The mortgage-backed securities held at September 30, 2002 all have a
contractual maturity term of either 30, 20 or 15 years. Expected maturities
may differ from the contractual maturities because of prepayments on the
underlying mortgage loans.
59
(3) Securities Available for Sale
Securities available for sale at September 30, are summarized as follows:
2002 2001
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:
After 5 years $ 7,831 52 (73) 7,810 23,109 90 - 23,199
to 10 years
Municipal securities -
After 10 years
or more 803 56 - 859 3,491 11 10 3,492
Corporate Securities:
After 5 5 years
to 10 years - - - - 3,553 81 - 3,643
After 10 years 13,561 255 (89) 13,727 11,166 519 4 11,681
-------- ---- ----- ------- ------- ---- ----- --------
$ 22,195 363 (162) 22,396 41,319 701 14 42,006
======== ==== ===== ======= ======= ==== ===== ======
Sales of available for sale securities were as follows:
2002 2001 2000
------ ----- -----
Proceeds $ 61,774 45,736 --
Gross gains 611 231 --
Gross losses 147 -- --
========= ========= =========
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, 2002 and 2001, the Bank had $83,000 and $41.2 million of
fixed-rate loans classified as held for sale with weighted average rates of
7.86% and 7.61%, respectively. As discussed in Note 5, the loans at September
30, 2001 were transferred from the loans receivable portfolio.
60
(5) LOANS RECEIVABLE
Loans receivable are summarized as follows at September 30:
2002 2001
(in thousands)
One-to-four family mortgages $ 248,984 269,472
Multi-family mortgages 126,615 120,432
Commercial 1,647 1,665
Commercial loans secured by leases 16,343 -
Construction 6,729 15,325
Consumer loans 13,940 15,096
--------- --------
Gross loans receivable 414,258 421,990
Add (deduct):
Loans in process (56) (107)
Deferred loan costs 2,310 2,336
Allowance for losses on loans (1,826) (1,236)
Unearned discount on consumer loans (1) (3)
--------- --------
$ 414,685 422,980
========= ========
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, 2002, 2001, and 2000 were approximately
$58,965,000, $58,713,000, and $6,062,000, respectively. Custodial balances
maintained in connection with the mortgage loans serviced for others were
included in deposits at September 30, 2002, 2001, and 2000, and were
approximately $3.65 million, $3.47 million, and $207,000, respectively.
Service fee income for the years ended September 30, 2002, 2001, and 2000 was
$147,000, $19,000, and $22,000, respectively.
During September 2001 management transferred $94.3 million to loans held for
sale to improve flexibility in monitoring interest rate risk. Adjustable
mortgages totaling $53.4 million were sold in September 2001, resulting in a
gain of $618,000. The balance of these loans was sold during fiscal 2002,
resulting in a gain of $643,800. Mortgage servicing rights of $127,000 and
$200,000 were recorded in the sale of these loans in 2002 and 2001,
respectively.
61
Activity in the allowance for loan losses is summarized as follows for the
years ended September 30:
2002 2001 2000
(in thousands)
Balance at beginning of year $ 1,236 950 780
Provision for loan losses 600 295 180
Charge-offs-loans receivable (36) (12) (13)
Recoveries 26 3 3
----- ---- ---
Balance at end of year $ 1,826 $ 1,236 950
===== ===== ===
Non-accrual loans receivable were as follows:
Principal Percent of
Balance total loans
Number in thousands) receivable
September 30, 2002:
Loans receivable 12 $ 1,297 0.31%
Commercial loans secured by leases 1 1,036 0.25
--- ----- ----
13 2,333 0.56
September 30, 2001:
Loans receivable 9 $ 677 0.16
September 30, 2000:
Loans receivable 5 $ 379 0.07
=== ===== =====
The Company's non-performing loan policies, which address nonaccrual loans and
any other loans where the Company may be unable to collect all amounts due
according to the contractual terms of the loans, meets the definition set forth
for impaired loans. At September 30, 2002 the recorded investment in a
commercial loan secured by a lease considered to be impaired was $1.0 million,
under which K-Mart Corporation was the lessee. This loan is a direct financing
lease included in the Company's commercial loans secured by the leases portion
of the loan portfolio. K-Mart filed for bankruptcy protection on January 22,
2002. The K-Mart lease loan is secured by revenue producing equipment with an
original cost of $1.5 million that was purchased and installed during the
second half of 2001. Subsequent to filing for bankruptcy protection, K-Mart
closed a number of its retail stores, including some in which this equipment
was located. K-Mart informed the Bank that the equipment located in closed
stores has been moved to stores that will remain open.
62
While the K-Mart commercial loan secured by the lease is currently performing
in accordance with its terms, no assurance can be given that this will continue
to be the case and such performance may depend on the terms of the
reorganization plan for K-Mart. No assurances can be made that a loss related
to these loans will not be incurred.
The average recorded investment in impaired loans for the year ended September
30, 2002 was $1.14 million. The related allowance for impaired loans at
September 30, 2002 was $259,000. For the year ended September 30, 2002, there
was no interest income recorded.
At and during the year ended September 30, 2001 and 2000, there were no loans
considered to be impaired.
(6) ACCRUED INTEREST RECEIVABLE
Accrued interest receivable is summarized as follows at September 30:
2002 2001
(in thousands)
Loans receivable $ 2,105 2,338
Mortgage-backed securities 1,025 603
Investment securities 178 571
FHLB Stock 403 174
Reserve for uncollected interest (74) (36)
------ -----
$ 3,637 3,650
====== =====
(7) PREMISES AND EQUIPMENT
Premises and equipment are summarized as follows at September 30:
2002 2001
(in thousands)
Land $ 863 858
Buildings 4,006 3,858
Leasehold improvements 1,489 1,429
Furniture, fixtures, and equipment 4,308 4,220
------ -----
10,666 10,365
Less accumulated depreciation and amortization 7,256 6,515
------ -----
$ 3,410 3,850
====== =====
Depreciation and amortization of premises and equipment for the years ended
September 30, 2002, 2001 and 2000 was $741,000, $400,000, and $446,000,
respectively.
63
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, 2002, 2001, and 2000
approximated $196,000, $151,000, and $147,000, respectively. The projected
minimum rentals under existing leases as of September 30, 2002 are as follows:
Year ended September 30, Amount
2003 136,000
2004 142,000
2005 145,000
2006 145,000
2007 145,000
Thereafter 126,000
---------
Total $ 839,000
=========
(8) DEPOSITS
Deposits are summarized as follows at September 30:
2002 2001
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 1.92% $133,979 30.9% 3.04% $132,217 33.1%
NOW accounts 1.80 44,559 10.3 1.82 32,615 8.2
Money market and
management accounts 2.21 19,801 4.5 3.36 12,345 3.1
---- ------- ---- ----- ------ -----
198,339 45.7 177,177 44.4
Certificate accounts:
3-month certificates 2.23 2,397 0.6 3.71 1,049 0.3
6-month certificates 2.54 10,956 2.5 4.14 17,246 4.3
7-month certificates 2.52 5,047 1.2 4.89 13,772 3.4
8-month certificates 2.70 4,091 0.9 5.30 61,359 15.4
10-month certificates 2.81 8,607 2.0 4.58 60,548 15.2
12-month certificates 3.29 46,072 10.6 5.49 19,228 4.8
13-month certificates 3.61 60,000 13.8 4.79 10,280 2.6
15-month certificates 3.48 40,942 9.4 4.55 7,388 1.8
18-month certificates 3.49 2,249 0.5 - - -
24-month certificates 4.06 12,569 2.9 6.68 20,978 5.2
36-month certificates 4.50 5,104 1.2 5.06 3,889 1.0
36-month rising
rate certificates 4.39 1,314 0.3 4.33 1,775 0.4
60-month certificates 4.50 4,309 1.0 5.77 4,930 1.2
Jumbo certificates 3.33 32,138 7.4 - - -
---- ------- ---- ----- ------- -----
235,795 54.3 222,442 55.6
------- ---- ------- -----
2.67% $434,134 100.0% 4.17% $399,619 100.0%
==== ======= ===== ===== ======= =====
64
The contractual maturities of certificate accounts are as follows at September
30:
2002 2001
Amount Percent Amount Percent
(in thousands) (in thousands)
Under 12 months $ 191,267 81.1% 207,581 93.3
12 to 36 months 43,760 18.6 14,096 6.3
Over 36 months 760 0.3 765 0.4
--------- ----- ------- -----
$ 235,787 100.0% 222,442 100.0%
========= ===== ======= =====
The aggregate amount of certificate accounts with a balance of $100,000 or
greater at September 30, 2002 and 2001 was approximately $54,013,000 and
$38,343,000, respectively.
(9) BORROWED FUNDS
Borrowed funds are summarized as follows at September 30:
Interest rate Amount
2002 2001 2002 2001
(in thousands)
Secured advances from the
FHLB of Chicago:
Fixed rate advances due:
December 5, 2001 - % 7.12 $ - 25,000
May 8, 2002 - 7.40 - 25,000
November 25, 2002 2.50 - 10,000 -
June 5, 2003 (callable) 6.44 6.44 25,000 25,000
October 20, 2003 (callable) 5.95 5.95 30,000 30,000
March 20, 2004 4.02 - 25,000 -
September 27, 2004 4.00 4.00 20,000 20,000
November 23, 2004 3.94 - 10,000 -
August 22, 2010 (callable) 6.22 6.22 5,000 5,000
September 7, 2010 (callable) 6.07 6.07 5,000 5,000
November 23, 2011 (callable) 4.33 - 10,000 -
Open line advance, due on demand 2.22 3.50 38,700 48,100
---- ----- ------- -------
Total borrowings from FHLB of Chicago 178,700 183,100
Unsecured line of credit 4.00% 6.07 1,950 4,245
---- ----- ------- -------
$ 180,650 $ 187,345
======= =======
65
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. In addition the Bank has
$41.0 million in mortgage-backed securities pledged as collateral.
Included in FHLB of Chicago advances at September 30, 2002 are $75.0 million of
fixed-rate advances with original scheduled maturities of 2 to 10 years, which
are callable at the discretion of the FHLB of Chicago at periods from 6 months
to 5 years from the origination date. The average term to maturity on these
advances is 2.9 years, while the average term to call is 1.1 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 During fiscal 2002, the Company obtained a
$7.0 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, 2002, the loan carries an
interest rate of 2% over the three-month LIBOR of 1.78%, but not less than
4.00%. 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 14, 2002. 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, 2002, 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, 2002,
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.
66
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, 2002
Total capital
(to risk weighted assets) $ 56,182 17.29% 26,887 8.00 33,609 10.00
Tier 1 capital
(to risk weighted assets) 56,271 16.74 n/a n/a 20,165 6.00
Tier 1 capital
(to adjusted assets) 56,271 8.07 20,928 3.00 34,880 5.00
Tangible capital
(to total assets) 56,271 8.07 10,464 1.50 n/a n/a
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
(11) INCOME TAXES
Income tax expense is summarized as follows for the years ended September 30:
2002 2001 2000
(in thousands)
Current:
Federal $ 4,903 2,125 2,015
State 830 304 360
------ ----- -----
Total current 5,733 2,429 2,375
Deferred:
Federal (722) 316 181
State (122) 82 9
Change in valuation allowance (205) (394) -
------ ----- -----
Total deferred (1,049) 4 190
------ ----- -----
$ 4,684 2,433 2,565
====== ===== =====
67
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:
2002 2001 2000
Federal income tax rate 34.0% 34.0 34.0
State income taxes, net of federal benefit 3.5 3.9 3.7
Change in valuation allowance (1.6) (5.4) --
Other 1.0 0.8 --
------ ----- -----
Effective income tax rate 36.9% 33.3 37.7
====== ===== =====
Retained earnings at September 30, 2002 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:
2002 2001
(in thousands)
Deferred tax assets:
Deferred compensation $ 124 23
Allowance for loan losses 710 475
Decline in value of investment security 507 712
Retirement and pension plans 501 463
Other 4 22
----- -----
1,846 1,695
Less valuation allowance (507) (712)
----- -----
Deferred tax assets 1,339 983
Deferred tax liabilities:
Deferred loan fees and costs (1,286) (2,081)
FHLB stock, due to stock dividends (828) (540)
Property and equipment, due to depreciation (261) (283)
Tax bad debt reserves (284) (426)
Mortgage servicing rights (60) (74)
Unrealized gain on securities available for sale (454) (921)
Other (12) (20)
------ -----
Deferred tax liabilities (3,185) (4,345)
------ -----
Net deferred tax liability $(1,846) (3,362)
====== ======
68
The valuation allowance for deferred tax assets was $507,000 and $712,000 as of
September 30, 2002 and 2001. The valuation allowance relates to the capital
loss of an investment security. The change in the valuation allowance in 2002
resulted from the use of a portion of the capital loss carryforward to offset
capital gains generated in 2002. 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:
2002 2001
(in thousands)
Change in benefit obligation:
Beginning benefit obligation $ 1,908 1,718
Service cost 139 139
Interest cost 128 129
Actuarial gain 83 132
Benefits paid (32) (210)
----- -----
Ending benefit obligation 2,226 1,908
Change in plan assets, at fair value:
Beginning plan assets 1,754 1,978
Actual return (105) (14)
Employer contribution 160 --
Benefits paid (32) (210)
----- -----
Ending plan assets 1,777 1,754
Funded status (449) (154)
Unrecognized net actuarial gain 187 (69)
Unrecognized prior service cost 20 (32)
Unrecognized transition obligation (27) (34)
----- -----
Accrued benefit cost $ (269) (289)
===== =====
69
The component of pension expense and related Actuarial assumptions were as
follows for the years ended September 30:
2002 2001 2000
(in thousands)
Service cost $ 139 139 153
Interest cost 128 129 127
Actuarial return on plan assets (117) (152) (255)
Net amortization and deferral (10) (21) (10)
Net gain (loss) on assets - - 117
---- --- ---
Net periodic pension cost $ 140 95 132
==== === ===
Discount rate on benefit obligation 6.50% 7.25% 7.25%
Long-term expected rate of return on plan assets 7.00 8.00 8.00
Rate of compensation increase 4.50 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 $1.57 million $991,000 at September 30,
2002 and 2001, respectively. The expense for the years ended September 30,
2002, 2001, and 2000 was approximately $550,000, $124,000, and $77,000,
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
436,425 common shares (adjusted for stock split) 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 $77,000, $196,000, and $415,000 for the years
ended September 30, 2002, 2001, and 2000, respectively. The ESOP was frozen
January 1, 2002 and pursuant to that action all participants became fully
vested in their accounts.
The ESOP held 341,425 and 359,853 shares at September 30, 2002 and 2001,
respectively.
401(K) PLAN On January 1, 2002, the Bank began sponsoring a contributory
401(k) profit sharing plan. All employees over age 18 that have completed 3
months of service are eligible to participate in the plan. The Company makes a
3% of compensation contribution to the 401(k) Plan. The Plan allows the
employees to make pre-tax contributions. The Company does not make any
matching contributions to the plan. The Bank, at its discretion, may make
additional contributions. Due to the safe harbor nature of the Company's
contributions, employees are immediately vested. The Bank made contributions
of $87,000 for the year ended September 30, 2002.
70
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
430,969. 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:
2002 2001 2000
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
-------- --------- -------- --------- -------- --------
Outstanding at beginning of year 230,859 $ 6.73 254,184 $ 6.77 257,814 $ 6.76
Granted 37,081 19.47 18,000 14.97 - -
Exercised (39,150) 6.73 (41,325) 6.89 (3,630) 6.67
Cancelled - - - - - -
-------- ------ ------- ------- ------- -------
End of period 228,790 $ 9.45 230,859 $ 6.73 254,184 $ 6.77
======= ====== ======= ======= ======= =======
Options exercisable 175,059 212,409 252,384
======= ======= =======
Fair value of options granted
during the year $ 3.90 $ 1.81 N/A
====== ====== ======
At September 30, 2002, no options were available for additional grants under
the employee plan.
71
The number of shares of common stock authorized under the directors' plan is
114,561. 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:
2002 2001 2000
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
-------- --------- -------- --------- -------- --------
Outstanding at beginning of year 41,742 $ 8.47 41,742 $ 8.47 51,699 $ 6.67
Granted 17,431 19.47 - - 14,946 11.71
Exercised (11,850) 6.67 - - (24,903) 6.67
Cancelled - - - - - -
------- ------ ------- ------ ------- -----
End of period 47,323 $ 12.97 41,742 $ 8.47 41,742 $ 8.47
======= ====== ======= ====== ======= ======
Options exercisable 47,323 41,742 41,742
======= ======= =======
Fair value of options granted
during period $ 3.90 $ N/A $ 1.44
====== ====== ======
At September 30, 2002, no options were available for additional grants under
the directors' plan.
The following table summarizes information about the stock options outstanding
at September 30, 2002:
Outstanding Exercisable
----------------- -----------------
Weighted Weighted
Average Average
Remaining Remaining
Contractual Contractual
Number Life Number Life
-------- --------- -------- ---------
Range of Exercise Prices
$ 6.67 to $13.00 210,351 1.95 204,951 1.79
$13.01 to $17.56 11,250 8.89 -- --
$18.19 to $19.47 54,512 9.51 17,437 9.51
-------- ----- -------- -----
276,113 3.73 222,388 2.39
======== ===== ======== =====
72
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.
2002 2001 2000
Net Income:
As reported $ 8,003 4,872 4,242
Pro forma 7,871 4,865 4,222
Earnings per share:
Basic:
As reported 2.61 1.61 1.36
Pro forma 2.57 1.61 1.35
Diluted:
As reported 2.49 1.54 1.31
Pro forma 2.45 1.53 1.30
The pro forma effects are computed using the option pricing models, using the
following weighted-average assumptions as of the grant date.
2002 2001 2000
Dividend yield 1.76% 2.31% 2.71%
Risk-free interest rate 3.63% 5.28% 5.90%
Weighted average expected life 4.8 yrs 4.8 yrs 4.8 yrs
Expected volatility 34.72% 28.16% 11.28%
(14) OTHER COMPREHENSIVE INCOME
Other comprehensive income components and related taxes were as follows:
Year ended September 30,
2002 2001 2000
Unrealized holding gains and losses on
available for sale investment securities $(2,352) 4,696 316
Less reclassification adjustment for gains
later recognized in income (1,122) (231) -
----- ---- -------
Net unrealized gains and losses (1,230) 4,465 316
Tax effect 469 (1,697) (102)
----- ---- -------
Other comprehensive income (loss) $ (761) 2,768 214
===== ==== =======
73
(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, 2002 of $10.7 million
represent amounts that the Bank plans to fund within the normal commitment
period of 60 to 90 days of which $3.5 million were fixed rate, with rates
ranging from 5.75% to 7.50%, and $7.2 million were adjustable rate.
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.
(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.
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.
74
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.
SECURITIES The fair value of securities 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, 2002 and 2001,
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, 2002 and 2001, 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.
75
The estimated fair value of the Company's financial instruments at September
30, 2002 and 2001 are as follows:
2002 2001
Carrying Estimated Carrying Estimated
amount fair value amount fair value
(in thousands)
FINANCIAL ASSETS:
Cash and due from banks $ 3,828 3,828 7,107 7,107
Interest-earning deposits 1,045 1,045 1,397 1,397
Federal funds sold 100 100 100 100
Mortgage-backed securities 216,505 216,505 127,685 127,685
Securities 54,368 54,368 60,061 60,061
Loans receivable 414,685 439,984 422,980 447,456
Loans held for sale 83 83 41,219 41,910
Accrued interest receivable 3,637 3,637 3,650 3,650
------- ------- ------- -------
Total financial assets $ 694,251 719,550 664,199 689,366
======= ======= ======= =======
FINANCIAL LIABILITIES:
Noninterest-bearing deposits 14,174 14,174 13,746 13,746
NOW, money market and management,
and passbook accounts 184,165 184,165 163,431 163,431
Certificate accounts 235,795 239,145 222,442 223,763
Borrowed funds 180,650 187,670 187,345 191,784
Accrued interest payable 781 781 1,081 1,081
------- ------- ------- -------
Total financial liabilities $ 615,565 625,935 588,045 593,805
======= ======= ======= =======
(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
76
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 at September 30, 2002
and 2001 and condensed statements of earnings and cash flows for each of the
three years in the period ended September 30, 2002 for Fidelity Bancorp, Inc.
should be read in conjunction with the consolidated financial statements and
the notes thereto.
STATEMENT OF FINANCIAL CONDITION
September 30,
2002 2001
(in thousands)
ASSETS
Cash and cash equivalents $ 808 983
Securities available for sale, 4,120 4,080
Equity investment in the Bank 56,181 51,980
Accrued interest 45 81
Other assets 1,147 1,908
------- ------
$ 62,301 59,032
======= ======
LIABILITIES AND STOCKHOLDERS' EQUITY:
Borrowed funds from Bank 4,000 4,000
Other borrowed funds 1,950 4,245
Accrued taxes and other liabilities 360 1,403
------- ------
Total liabilities 6,310 9,648
Stockholders' equity 55,991 49,384
------- ------
$ 62,301 59,032
======= ======
77
STATEMENTS OF EARNINGS
Year ended September 30,
2002 2001 2000
(in thousands)
Equity in earnings of the Bank $ 8,568 4,842 4,463
Interest income 338 493 103
Interest expense (484) (647) (165)
Gain on sale of security 50 125 --
Non-interest expense (780) (377) (307)
------ ----- -----
Income before income taxes 7,692 4,436 4,094
Income tax benefit (311) (436) (148)
------ ----- -----
Net income $ 8,003 4,872 4,242
====== ===== =====
78
STATEMENTS OF CASH FLOWS
Year ended September 30,
2002 2001 2000
(in thousands)
OPERATING ACTIVITIES:
Net income $ 8,003 4,872 4,242
Equity in earnings of the Bank (8,568) (4,842) (4,463)
Dividends received from the Bank 3,610 300 1,695
Net amortization and accretion of
premiums and discounts - (27) -
Gain on sale of security (50) (125) -
Decrease (increase) in accrued
interest receivable 36 81 (162)
Decrease (increase) in other assets 761 (269) 145
Increase (decrease) in accrued taxes and
other liabilities (997) (304) (240)
------ ----- -----
Net cash provided by (used in)
operating activities 2,795 (314) 1,217
INVESTING ACTIVITIES:
Purchase of securities available
for sale (2,000) (4,000) (7,972)
Proceeds from sale of securities 2,050 8,125 -
Principal repayments received
on ESOP loan - 460 443
------ ----- -----
Net cash provided by (used in)
investing activities 50 4,585 (7,529)
FINANCING ACTIVITIES:
Proceeds from intercompany loans - - 8,000
Proceeds from (repayment of)
borrowed funds (2,295) (3,605) 3,850
Purchase of treasury stock - (562) (3,377)
Payment of common stock dividends (1,065) (968) (991)
3-for-2 stock split effected in the
form of a 50% stock dividend and
payment of cash for fractional shares (2) - -
Proceeds from exercise of stock options 342 205 4
------ ----- -----
Net cash provided by (used in)
financing activities (3,020) (4,930) 7,486
------ ----- -----
Net increase (decrease) in cash
and cash equivalents (175) (659) (1,174)
Cash and cash equivalents at beginning
of year 983 1,642 468
------ ----- -----
Cash and cash equivalents at end of year $ 808 983 1,642
====== ===== =====
79
(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, 2002 Year ended September 30, 2001
1st Qtr 2nd Qtr 3rd Qtr 4th Qtr 1st Qtr 2nd Qtr 3rd Qtr 4th Qtr
(in thousands, except per share data)
Interest income $ 11,391 10,795 11,192 10,462 11,933 11,656 11,185 11,680
Interest expense 6,357 5,647 5,374 4,864 8,553 8,083 7,568 7,257
----- ----- ----- ----- ----- ----- ----- -----
Net interest income
before provision
for loan losses 5,034 5,148 5,818 5,598 3,380 3,573 3,617 4,423
Provision for loan
losses 140 110 200 150 70 40 70 115
----- ----- ----- ----- ----- ----- ----- -----
Net interest income
after provision for
loan losses 4,894 5,038 5,618 5,448 3,310 3,533 3,547 4,308
Non-interest income 985 771 663 967 385 512 444 966
Non-interest expense 2,771 2,812 2,796 3,318 2,439 2,354 2,257 2,650
----- ----- ----- ----- ----- ----- ----- -----
Income before income tax
expense 3,108 2,997 3,485 3,097 1,256 1,691 1,734 2,624
Income tax expense 1,163 1,119 1,262 1,140 393 642 647 751
----- ----- ----- ----- ----- ----- ----- -----
Net income $ 1,945 1,878 2,223 1,957 863 1,049 1,087 1,873
===== ===== ===== ===== ===== ===== ===== =====
Earnings per share - diluted $ 0.61 0.59 0.69 0.61 0.27 0.33 0.34 0.59
==== ==== ==== ==== ===== ===== ===== =====
Cash dividends declared
per share $ 0.08 0.08 0.09 0.10 0.08 0.08 0.08 0.08
==== ==== ==== ==== ===== ===== ===== =====
(20) CONTINGENCY
The Company has attempted 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, 2002.
80
Independent Auditors' Report
The Board of Directors
Fidelity Bancorp, Inc.
Chicago, Illinois
We have audited the accompanying consolidated statements of financial condition
of Fidelity Bancorp, Inc. as of September 30, 2002 and 2001, and the related
consolidated statements of earnings, changes in stockholders' equity, and cash
flows for each of the three years in the period ended September 30, 2002.
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, 2002 and 2001, and the results of its operations and
its cash flows for each of the three years in the period ended September 30,
2002, in conformity with accounting principles generally accepted in the United
States of America.
Crowe, Chizek and Company LLP
Oak Brook, Illinois
October 24, 2002
81
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 February 12, 2003 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 2002,
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, 2002.
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
February 12, 2003 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 February 12, 2003
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
February 12, 2003 and is incorporated herein by reference.
Item 14. CONTROLS AND PROCEDURES
Based upon an evaluation within 90 days prior to the filing date of
this Annual Report on Form 10-K, the Company's Chairman and Chief
Executive Officer and Senior Vice President and Chief Financial
Officer concluded that the Company's disclosure controls and
procedures are effective. There have been no significant changes in
82
the Company's internal controls or in other factors that could
significantly affect the Company's internal controls subsequent to
the date of evaluation, including any corrective actions with regard
to significant deficiencies and material weaknesses.
Item 15. EXHIBITS, FINANCIAL STATEMENTS SCHEDULES, AND REPORTS ON FORM 8-K
(a) Exhibits
The following exhibits are either filed as part of this report or are
incorporated herein by reference:
Exhibit No.
2.1 Agreement and Plan of Reorganization dated December 16, 2002
between Fidelity Bancorp, Inc. and MAF Bancorp, Inc.
(Incorporated by reference to Exhibit 4.1 of the Current Report
on Form 8-K dated December 17, 2002.)
3.1 Restated Certificate of Incorporations of Fidelity Bancorp,
Inc. (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.)
3.2 Bylaws of Fidelity Bancorp, Inc.. as amended (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.)
4.0 Stock Certificate of Fidelity Bancorp, Inc. (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.)
4.1 Rights Agreement between the Company and Harris Trust and
Savings Bank, as trustee (including the related certificate of
designations) (Incorporated herein by reference into this
document from the exhibits to Form 8-A, filed on February 19,
1997.)
4.2 Amendment No. 1 to Rights Agreement dated as of December
16, 2002 between Fidelity Bancorp, Inc. and Computershare
Investor Services LLC (Incorporated by reference to Exhibit
4.1 of the Current Report on Form 8-K dated December 17, 2002).
10.1 Form of Employment Agreement, as amended, between the Fidelity
Bancorp, Inc. and Raymond S. Stolarczyk and Thomas E. Bentel.
(Incorporated by reference to Exhibit 10.1 of the Current Report
on Form 10-Q dated August 14, 2002)
10.2 Form of Employment Agreement, as amended, between the Fidelity
Federal Savings Bank and Raymond S. Stolarczyk and Thomas E.
Bentel. (Incorporated by reference to Exhibit 10.1 of the
Current Report on Form 10-Q dated August 14, 2002)
83
10.3 Form of Special Termination Agreement between the Bank and the
Fidelity Bancorp, Inc. and Elizabeth Doolan and various
officers (Incorporated by reference to Exhibit 10.1 of the
Current Report on Form 10-Q dated August 14, 2002)
10.4 Form of Special Termination Agreement between the Bank and the
Fidelity Federal Savings Bank. and Elizabeth Doolan and various
officers (Incorporated by reference to Exhibit 10.1 of the
Current Report on Form 10-Q dated August 14, 2002)
10.5 Form of Special Termination Agreement between the Bank and the
Fidelity Bancorp, Inc. and Richard Burns (Incorporated by
reference to Exhibit 10.1 of the Current Report on Form 10-Q
dated August 14, 2002)
10.6 Form of Special Termination Agreement between the Bank and the
Fidelity Federal Savings Bank and Richard Burns (Incorporated
by reference to Exhibit 10.1 of the Current Report on Form 10-Q
dated August 14, 2002)
10.7 Employee Stock Ownership Plan and Trust (Incorporated herein
by reference into this document from the exhibits to Form 10-K
filed on December 9, 1994.)
10.8 Fidelity Federal Savings Bank Recognition and Retention Plan
and Trust (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.)
10.9 Amendment dated March 18, 2002 to the Fidelity Federal Savings
Bank Recognition and Retention Plan. (Incorporated by
reference to Exhibit 10.1 of the Current Report on Form 10-Q
dated August 14, 2002)
10.10 Incentive Stock Option Plan . (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.)
10.11 Amendment dated March 18, 2002 to the Fidelity Bancorp, Inc.,
1993 Incentive Stock Option Plan (Incorporated by reference to
Exhibit 10.1 of the Current Report on Form 10-Q dated August
14, 2002)
10.12 Fidelity Bancorp, Inc. 1993 Stock Option Plan for Outside
Directors (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.)
10.13 Amendment dated March 18, 2002 to the Fidelity Bancorp, Inc.
1993 Stock Option Plan for Outside Directors (Incorporated by
reference to Exhibit 10.1 of the Current Report on Form 10-Q
dated August 14, 2002)
10.14 Fidelity Federal Savings Bank Employee Severance Compensation
Plan (Incorporated by reference to Exhibit 10.1 of the Current
Report on Form 10-Q dated August 14, 2002)
84
21.0 Subsidiary information is incorporated herein by reference to
"Part II - Subsidiaries"
99.1 Chief Executive Officer Certification Pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
99.2 Chief Financial Officer Certification Pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
(b) Reports on Form 8-K
On January 22, 2002, Fidelity Bancorp, Inc. announced a three-for-two
stock split.
On January 23, 2002, Fidelity Bancorp, Inc. released the annual
meeting script for use at the Annual Meeting.
On October 15, 2002, Fidelity Bancorp, Inc. announced the date of its
annual meeting of stockholders to be January 22, 2003.
On November 27, 200, Fidelity Bancorp, Inc. announced the new date
for its annual meeting of stockholders to be February 12, 2003.
On December 17, 2002, Fidelity Bancorp, Inc. announced that it has
agreed to be acquired to MAF Bancorp, Inc.
85
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 30, 2002 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 30, 2002
- ------------------------- Officer
Raymond S. Stolarczyk
/s/ Thomas E. Bentel President and Chief December 30, 2002
- ------------------------- Operating Officer
Thomas E. Bentel
/s/ Elizabeth A. Doolan Vice President and December 30, 2002
- ------------------------- Chief Financial Officer
Elizabeth A. Doolan
/s/ Judith K. Leaf Corporate Secretary December 30, 2002
- -------------------------
Judith K. Leaf
/s/ Paul J. Bielat Director December 30, 2002
- -------------------------
Paul J. Bielat
/s/ Edward J. Burda Director December 30, 2002
- -------------------------
Edward J. Burda
/s/ Patrick J. Flynn Director December 30, 2002
- -------------------------
Patrick J. Flynn
/s/ Richard J. Kasten Director December 30, 2002
- -------------------------
Richard J. Kasten
86
CERTIFICATIONS
I, Raymond S. Stolarczyk, certify that:
1. I have reviewed this annual report on Form 10-K of Fidelity Bancorp, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
(a) Designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this annual report is being
prepared;
(b) Evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
(c) Presented in this annual report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of
the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
(a) All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified
for the registrant's auditors any material weaknesses in internal
controls; and
(b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Date: December 30, 2002
By: /s/ Raymond S. Stolarczyk
Name: Raymond S. Stolarczyk
Title: Chairman and Chief Executive Officer
87
I, Elizabeth A. Doolan, certify that:
1. I have reviewed this annual report on Form 10-K of Fidelity Bancorp, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
(a) Designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this annual report is being
prepared;
(b) Evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
(c) Presented in this annual report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of
the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
(a) All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified
for the registrant's auditors any material weaknesses in internal
controls; and
(b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Date: December 30, 2002
By: /s/ Elizabeth A. Doolan
Name: Elizabeth A. Doolan
Title: Senior Vice President and Chief Financial Officer