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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, 1996
Commission file number 0-22826
FIDELITY BANCORP, INC.
(Exact name of registrant as specified in its charter)
Delaware 36-3915246
(State of incorporation) (I.R.S. Employer Identification No.)
5455 West Belmont Avenue, Chicago, Illinois 60641
(Address of principal executive offices)
Telephone (773) 736 - 4414
Securities registered pursuant to Section 12 (b) of the Act: None
Securities registered pursuant to Section 12 (g) of the Act:
Common Stock, par value $.01
(Title of class)
The registrant (1) has filed all reports required to be filed by Section 13 or
15 (D) of the Securities Exchange Act of 1934 during the preceding twelve
months (or for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements for the
past 90 days. Yes X No .
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this form 10-K. [ X ]
The aggregate market value of the voting stock held by non-affiliates of the
registrant, i.e., persons other than directors and executive officers of the
registrant is $41,990,830 and is based upon the last sales price as quoted on
Nasdaq Stock Market for November 27, 1996.
The Registrant has 2,784,075 shares of common stock outstanding as of November
27, 1996
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the 1997 Annual Meeting of Stockholders are
incorporated by reference into Part III of this Form 10-K.
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ITEM 1. BUSINESS
GENERAL
On December 3, 1993, Fidelity Bancorp, Inc., a Delaware corporation (the
"Company") completed its public offering of its common stock and acquired
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 issued and sold 3,782,350 shares of common stock at
$10.00 per share, thereby completing the conversion. As a result of stock
repurchase programs, outstanding shares of common stock at September 30, 1996
totalled 2,866,108. The Company's common stock is listed on the Nasdaq
National Market and trades under the symbol "FBCI". Currently, the Company
does not transact any material business other than through its sole subsidiary,
the Bank.
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 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 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 by the
Federal Deposit Insurance Corporation ("FDIC"), up to applicable limits. The
Bank is a member of the FHLB of Chicago, which is one of the twelve regional
banks for federally insured savings 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.
MARKET AREA AND COMPETITION
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.
The Chicago metropolitan area is a highly competitive market. The Bank's market
share of deposits and loan originations in the Chicago metropolitan area
amounts to less than one percent. Competition comes from savings institutions
and commercial banks, many of which have greater financial resources than the
Bank. Additional competitors for loans are mortgage brokerage, mortgage
banking and insurance companies and to a lesser extent credit unions.
Competition for deposits includes traditional savings institutions, commercial
banks and credit unions, and also includes mutual funds, brokerage firms,
insurance companies and corporate deferred compensation and savings plans.
Changes in federal and state banking laws have allowed industry consolidation
into larger financial entities, some based in other states and foreign
countries. Increased competition for loans and deposits may also come from the
reduction of barriers to interstate banking.
The Bank serves its community with a wide selection of mortgage and consumer
loans and retail deposit and investment services. Management believes the
Bank's major appeal to consumers in its market area is its financial and
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. Such regulation and
supervision establish a comprehensive framework of approved activities in which
the Bank can engage. The regulations are designed primarily for the protection
of the insurance fund and depositors. The regulatory structure also gives the
regulatory authorities wide 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
Item 7. "Management's Discussion and Analysis - Regulation and Supervision."
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, 1996 Owned
(In thousands)
EXECUTIVE AND HOME OFFICE: Various dates
5455 W. Belmont Ave. commencing in
Chicago, IL 60641 1955 $ 515 Owned
BRANCHES:
Higgins Branch
6360 W. Higgins Road
Chicago, IL 60630 1984 344 Owned
Franklin Park Branch
10227 W. Grand Ave.
Franklin Park, IL 60131 1980 87 Leased
Schaumburg Branch
2425 West Schaumburg Rd
Schaumburg, IL 60194 1995 1,072 Leased
Harlem Avenue Branch
3940 North Harlem Ave.
Chicago, IL 60634 1995 288 Owned
-------
$ 2,306
=======
ITEM 3. LEGAL PROCEEDINGS
The Bank is involved in legal proceedings regarding the Bennett Funding Group
("BFG") bankruptcy proceedings, in which the Bank has an investment in
commercial leases guaranteed by BFG. See discussion in "CLASSIFIED ASSETS".
The Bankruptcy Trustee has filed an adversary complaint against the Bank for
claimed violations of the automatic stay provisions of the bankruptcy code with
respect to post-petition collection efforts of the Bank. The monies collected
by the Bank, aggregating approximately $60,000, have since been remitted to the
Trustee's escrow account after obtaining assurances from the court that the
funds would be protected pending the outcome of the litigation. The Trustee's
claim for $10 million for sanctions and actual damages based on the Bank's
post-petition collection activity is also being vigorously contested. The
Trustee has also filed an adversary proceeding against 60 banks, including the
Bank, asserting various causes of action. The results of these adversary
proceeding are not expected to have a material adverse impact on the Bank.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
None.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock is traded over-the-counter and quoted on the NASDAQ
Stock Market under the symbol "FBCI". As of November 27, 1996, there were
2,784,078 shares of common stock outstanding and 643 stockholders of record,
not including the number of persons or entities whose stock is held in nominee
or "street" name through various brokerage firms or banks.
The table below sets forth the high and low sales prices during each period as
reported on Nasdaq Stock Market and does not necessarily reflect retail
markups, markdowns, or commissions:
1996 1995
High Low High Low
First Quarter 16 14 12 1/4 9 1/4
Second Quarter 16 1/4 14 1/2 11 3/4 10
Third Quarter 17 15 13 3/4 11
Fourth Quarter 17 1/8 15 1/2 15 3/4 13 1/4
Such over-the-counter market quotations reflect inter-dealer prices, without
retail mark-up, mark-down or commission and may not necessarily represent
actual transactions.
As of September 30, 1996, the Company had repurchased 920,442 shares of its
common stock since its initial public offering. During fiscal 1994 and 1995,
the Company completed its first two 5% stock repurchase programs and began its
third. It acquired 505,456 common shares at a cost of $6.0 million or $11.87
per share. During fiscal 1996, the Company completed its third stock
repurchase program. It also began and completed its fourth and fifth programs
and began its sixth on August 8, 1996. The Company believes such repurchases
increase the long-term potential return to stockholders. The price, timing of
purchases and actual number of shares repurchased in the future will be based
on the impact to stockholder value.
The Board of Directors declared per share dividends aggregating $0.24 and $0.12
during fiscal 1996 and 1995, respectively. In addition, the Board of Directors
declared a regular quarterly dividend of $0.06 per share, payable on November
15, 1996 to shareholders of record as of October 31, 1996.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL AND OTHER 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,
1996 1995 1994 1993 1992
(Dollars in thousands, except per share data)
SELECTED OPERATING DATA:
Interest income $ 31,554 26,169 21,113 20,967 22,467
Interest expense 18,129 13,752 9,759 10,253 13,384
------ ------ ------ ------ ------
Net interest income before
provision for loan losses 13,425 12,417 11,354 10,714 9,083
Provision for loan losses 410 192 48 57 106
------ ------ ------ ------ ------
Net interest income after
provision for loan losses 13,015 12,225 11,306 10,657 8,977
Non-interest income:
Gain on sale of investment
securities available for sale - 274 - 695 767
Gain (loss) on sale of
loans receivable - - (17) 61 -
Fees and commissions 379 398 680 1,479 1,296
Insurance and annuity commissions 519 519 536 388 433
Other 59 38 42 93 125
------ ------ ------ ------ ------
Total non-interest income 957 1,229 1,241 2,716 2,621
Non-interest expense 10,595 8,337 8,164 7,129 6,532
------ ------ ------ ------ ------
Income before income taxes and
cumulative effect of change
in accounting principle 3,377 5,117 4,383 6,244 5,066
Income tax expense 1,235 2,033 1,703 2,628 1,892
------ ------ ------ ------ ------
Income before cumulative effect
of change in accounting principle 2,142 3,084 2,680 3,616 3,174
Cumulative effect of change in
accounting principle - - - - 420
------ ------ ------ ------ ------
Net income $ 2,142 3,084 2,680 3,616 2,754
====== ====== ====== ====== ======
SELECTED FINANCIAL CONDITION DATA:
Total assets $ 475,862 393,664 338,082 273,557 275,031
Loans receivable, net 354,255 266,735 216,657 203,990 205,164
Mortgage-backed securities
held to maturity, net 21,673 26,484 29,565 - -
Investment securities
available for sale 78,104 84,579 70,963 12,287 20,423
Deposits 302,934 275,993 238,062 247,863 253,199
Borrowed funds 115,300 54,032 42,000 - -
Stockholders' equity 48,828 53,792 53,477 21,100 17,484
September 30, 1996 1995 1994 1993 1992
SELECTED FINANCIAL RATIOS AND OTHER DATA:
Return on average assets 0.50% 0.85% 0.84% 1.31% 1.02%
Return on average stockholders' equity 4.08 5.62 5.62 18.50 16.87
Average stockholders' equity to
average assets 12.27 15.12 14.89 7.07 6.06
Stockholders' equity to total assets 10.26 13.66 15.82 7.71 6.36
Non interest expense to average assets 2.48 2.30 2.53 2.56 2.42
Interest rate spread during period 2.57 2.80 3.01 3.66 3.09
Net interest margin 3.23 3.52 3.63 3.98 3.45
ASSET QUALITY RATIOS:
Non-performing loans to loans
receivable, net 0.87 0.23 0.13 0.10 0.21
Non-performing assets to total assets 0.67 0.16 0.11 0.08 0.18
Allowance for loan losses to total loans 0.23 0.15 0.11 0.11 0.09
Allowance for loan losses to
non-performing loans 26.25 65.32 80.85 112.02 43.55
REGULATORY CAPITAL RATIOS:
Tangible 8.04 10.51 11.09 7.28 5.88
Core 8.04 10.51 11.09 7.28 5.88
Risk-based 16.89 20.71 19.61 15.95 12.15
OTHER DATA:
Loan originations (dollars in thousands) $139,589 77,880 64,543 80,504 75,796
Number of deposit accounts 24,553 20,488 20,095 20,779 23,096
Book value per share outstanding $ 17.04 16.41 14.88 N/A N/A
Earnings per share - fully diluted $ 0.72 0.93 0.71 N/A N/A
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION
MANAGEMENT STRATEGY
The Company is pursuing a strategy that is designed to improve its performance
by positioning the Bank as a locally managed full-service community bank in an
increasingly competitive environment. Although mortgage lending is expected to
continue as an important part of the Company's business, a key component of the
Company's strategy is the provision of nonbanking financial services and
products, such as annuity and insurance products and brokerage services through
INVEST to retain and attract customers. In addition, the third party loan
originator network enables the Company to be a competitive, low cost provider
of single- and multi-family mortgage loans. The nonbanking financial services
and products are also intended to generate additional fee income and thereby
improve profitability. The Company also intends to diversify its asset base
and at the same time develop further customer relationships through increased
consumer lending activities, such as home equity lending. Finally, the Company
will continue to pursue opportunities for growth and expansion in the Bank's
existing marketplace, whether through acquisitions, such as the Bank's
acquisition of deposits from the RTC in 1992, or through additional facilities,
such as the Schaumburg and Harlem Avenue offices, opened in fiscal 1995. The
Company may seek additional asset growth to further leverage its net worth. In
the event that its traditional retail sources of funding and investment
opportunities (i.e., deposits and direct lending) are insufficient for this
purpose, or appear to be inappropriately priced, the Bank may further utilize
the wholesale markets, such as FHLB advances, for funding or mortgage-backed
securities for investment opportunities.
ASSET/LIABILITY MANAGEMENT
The Company's overall asset/liability strategy is directed toward managing the
Bank's exposure to interest rate risk in changing interest rate environments.
Asset/liability management is a daily function of the Bank's management due to
continual fluctuations in interest rates and financial markets.
The matching of assets and liabilities may be analyzed by examining the extent
to which such assets and liabilities are "interest rate sensitive" and by
monitoring an institution's interest rate sensitivity "gap." An asset or
liability is said to be interest rate sensitive within a special time period if
it will mature or reprice within that time period. The interest rate
sensitivity gap is defined as the difference between the amount of interest-
earning assets maturing or repricing within that time period. A gap is
considered positive when the amount of interest rate sensitive assets exceeds
the amount of interest rate sensitive liabilities. A gap is considered
negative when the amount of interest rate sensitive liabilities exceeds the
amount of interest rate sensitive assets. During a period of rising interest
rates, a negative gap would tend to adversely affect net interest income while
a positive gap would tend to result in an increase in net interest income.
During a period of falling interest rates, a negative gap would tend to result
in an increase in net interest income while a positive gap would tend to
adversely affect net interest income.
At September 30, 1996, total interest-earning assets maturing, repricing, or
estimated to mature, reprice or decay, within one year exceeded total interest-
bearing liabilities maturing, repricing, or estimated to prepay, in the same
period by $161.8 million, representing a cumulative one year negative gap of
34.0% of assets. Thus, during future periods of rising interest rates, the
costs on interest-bearing liabilities may increase more quickly than the yields
on interest-earning assets, which could adversely affect net interest income.
Conversely, in a period of falling interest rates, the yields on its interest-
earning assets may decrease at a slower pace than the cost of its interest-
bearing liabilities. The Company closely monitors its interest rate risk as
such risk relates to its operational strategies. Management's interest rate
sensitivity strategy is designed to provide a relatively stable stream of net
interest income in moderately varying interest rate environments.
The following table sets forth the scheduled repricing or maturity of the
Company's assets and liabilities at September 30, 1996, based on certain
assumptions used by the OTS with respect to NOW, checking and passbook account
withdrawals. The Company's loan prepayment assumptions are based on national
experience data. These assumptions may not be indicative of the actual
prepayments and withdrawals experienced by the Company.
The effect of these assumptions is to quantify the dollar amount of items that
are interest-sensitive and may be repriced within each of the periods
specified. The table does not necessarily indicate the impact of general
interest rate movements on the Company's net interest yield because the
repricing of certain categories of assets and liabilities is subject to
competitive and other pressures beyond the Company's control. As a result,
certain assets and liabilities indicated as maturing or otherwise repricing
within a stated period may, in fact, mature or reprice at different times and
at different volumes.
At September 30, 1996
More More
than than More More More More
3 3 6 than than than than More
mths or mths to mths 1 yr 3 yrs to 5 yrs 10 yrs to than
less 6 mths to 1 yr to 3 yrs 5 yrs to 10 yrs 20 yrs 20 yrs Total
(Dollars in thousands)
INTEREST-EARNING ASSETS
Mortgage loans (1) $ 14,251 17,292 36,265 146,552 68,875 27,658 27,115 2,107 340,115
Consumer loans (1) 2,148 1,302 2,193 5,879 2,063 - - - 13,585
Mortgage-backed securities 731 708 1,348 4,623 11,211 2,125 927 - 21,673
Interest-earning deposits 225 - - - - - - - 225
Mutual funds, investment
securities available
for sale, federal funds
sold and FHLB stock (2) 11,221 794 1,601 3,259 13,333 57,037 - - 87,245
------ ----- ------ ------- ------ ------ ------ ----- -------
Total interest-earning
assets $ 28,576 20,096 41,407 160,313 95,482 86,820 28,042 2,107 462,843
====== ====== ====== ======= ====== ====== ====== ===== =======
INTEREST-BEARING LIABILITIES
Passbook accounts $ 3,828 3,828 6,978 22,226 14,490 18,390 12,722 3,615 86,077
NOW accounts 1,390 1,390 2,206 4,562 1,221 1,638 899 165 13,471
Money market accounts 2,454 2,454 3,382 5,851 1,631 2,104 1,114 202 19,192
Certificate accounts 32,754 67,884 46,032 32,928 - - - - 179,598
Borrowed funds 77,300 - - 38,000 - - - - 115,300
------ ----- ------ ------- ------ ------ ------ ----- -------
Total interest-bearing
liabilities 117,726 75,556 58,598 103,567 17,342 22,132 14,735 3,982 413,638
====== ====== ====== ======= ====== ====== ====== ===== =======
Interest sensitivity gap $ (89,150) (55,460) (17,191) 56,746 78,140 64,688 13,307 (1,875) 49,205
====== ====== ====== ======= ====== ====== ====== ===== =======
Cumulative interest
sensitivity gap $ (89,150)(144,610)(161,801) (105,055) (26,915) 37,773 51,080 49,205
====== ====== ====== ======= ====== ====== ====== =====
Cumulative interest
sensibility gap as a
percentage of total
assets (18.7)% (30.4)% (34.0)% (22.1)% (5.7)% 7.9% 10.7% 10.3%
Cumulative net interest-
earning assets as a
percentage of interest-
sensitive liabilities 24.3% 25.2% 35.8% 70.4% 92.8% 109.6% 112.5% 111.9%
(1) For purposes of the gap analysis, mortgage and consumer loans are not
reduced by non-performing loans or by the allowance for loan losses.
(2) Category includes $65 million in callable federal agency securities.
Because of interest rate increases since the purchase of these
securities. They are shown as repricing at their respective maturity
dates although there can be no assurance that the securities will not be
called before maturity. The issues include $10 million 7.125% FNMA due
11/7/2005 callable 11/7/97, $20 million 8% FNMA due 5/15/2006 callable
5/15/97, $5 million 6.85% FHLB due 11/8/2002 callable 11/8/96, $10
million 7% FHLB 1/19/2006 callable 1/19/97, $10 million 6.37% FHLB due
3/13/2001 callable 12/13/96, and $10 million 7.65% due 3/27/2006
callable 12/27/96.
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 1996 Compared to 1995 1995 Compared to 1994
Increase (Decrease) Due to Increase (Decrease) Due to
Volume Rate Total Volume Rate Total
(in thousands)
INTEREST-EARNING ASSETS:
Loans receivable, net $ 4,915 (337) 4,578 $ 3,751 (435) 3,316
Mortgage-backed securities (544) (55) (599) 1,530 (5) 1,525
Interest-earning deposits (5) 11 6 (93) 44 (49)
Investment securities, mutual
funds, and federal funds sold 538 862 1,400 (1,236) 1,500 264
------ ---- ----- ------ ----- -----
Total $ 4,904 481 5,385 3,952 1,104 5,056
====== ==== ====== ====== ===== ======
INTEREST-BEARING LIABILITIES:
Passbook accounts (278) 115 (163) 31 (36) (5)
NOW accounts 21 (37) (16) (394) 33 (361)
Money market accounts 416 37 453 50 114 164
Certificate accounts 2,017 684 2,701 1,118 1,201 2,319
Borrowed funds 1,584 (182) 1,402 1,450 426 1,876
------ ---- ----- ------ ----- -----
Total $ 3,760 617 4,377 2,255 1,738 3,993
------ ==== ====== ------ ===== ======
Net change in net interest income $ 1,008 $ 1,063
====== ======
AVERAGE BALANCE SHEETS
The following table sets forth certain information relating to the Company's
average balance sheets and reflects the average yield on assets and average
cost of liabilities for the periods indicated. Such yields and costs are
derived by dividing income or expense by the average balance of assets or
labilities, respectively, for the years shown. Average balances are derived
from average daily balances. The yields and costs include fees, which are
considered adjustments to yields.
For years ended September 30, 1996 1995 1994
Average Average Average
Average Yield/ Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost Balance Interest Cost
(dollars in thousands)
INTEREST-EARNING ASSETS:
Mortgage loans, net $ 290,054 22,715 7.83% 228,331 18,137 7.94% 183,936 15,079 8.20%
Consumer loans, net 15,061 1,192 7.91% 14,107 1,192 8.45% 11,581 934 8.06%
Mortgage-backed securities 24,331 1,703 7.00% 32,081 2,302 7.18% 10,753 777 7.23%
Interest-earning deposits 1,049 60 5.72% 1,156 54 4.67% 3,627 103 2.84%
Mutual funds, investment
securities available for sale,
commercial paper and federal
funds sold 85,282 5,884 6.90% 76,672 4,484 5.85% 102,633 4,220 4.11%
------ ----- ---- ------- ------ ---- -------- ------ ----
Total interest-earning assets 415,777 31,554 7.59% 352,347 26,169 7.43% 312,530 21,113 6.76%
Non-interest earning assets 12,188 10,805 7,767
------ ------- -------
Total assets $ 427,965 363,152 320,297
======= ======= =======
INTEREST-BEARING LIABILITIES:
Deposits:
Passbook accounts 79,727 2,455 3.08% 88,863 2,618 2.95% 102,231 2,979 2.91%
NOW accounts 14,775 329 2.23% 13,895 345 2.48% 12,710 350 2.75%
Money market accounts 19,796 841 4.25% 9,934 388 3.91% 8,305 224 2.70%
Certificate accounts 172,863 10,316 5.97% 138,390 7,615 5.50% 116,099 5,296 4.56%
------ ----- ---- ------- ------ ---- -------- ------ ----
Total deposits 287,161 13,941 4.85% 251,082 10,966 4.37% 239,345 8,849 3.70%
Borrowed funds 74,078 4,188 5.65% 46,224 2,786 6.03% 20,614 910 4.41%
------ ----- ---- ------- ------ ---- -------- ------ ----
Total interest-bearing liabilities 361,239 18,129 5.02% 297,306 13,752 4.63% 259,959 9,759 3.75%
Non-interest bearing deposits 5,162 3,442 7,039
Other liabilities 9,066 7,489 5,610
------ ------- --------
Total liabilities 375,467 308,237 272,608
Stockholders' equity 52,498 54,915 47,689
------ ------- --------
Total liabilities and stockholders'
equity $ 427,965 363,152 320,297
======= ======= =======
Net interest income/interest rate
spread (1) 13,425 2.57% 12,417 2.80% 11,354 3.01%
====== ==== ====== ==== ====== ====
Net earning assets/net interest
margin (2) $ 54,538 3.23% 55,041 3.52% 52,571 3.63%
======= ==== ======= ==== ======= ====
Ratio of interest-earning assets to
interest-bearing liabilities 1.15x 1.19x 1.20x
======= ======= =======
(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.
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED SEPTEMBER 30, 1996 AND
SEPTEMBER 30, 1995
GENERAL. The Company's net income decreased to $2.1 million, or $0.72 per
fully-diluted share, from $3.1 million, or $0.93 per fully-diluted share, a
30.5% decrease in fully-diluted earnings per share over the previous year. The
current year decrease was a result of a one-time special assessment charge
related to the Bank's deposit insurance premium. This one-time charge is the
result of legislation passed on September 30, 1996, regarding the Savings
Association Insurance Fund ("SAIF"). To cover the special assessment called
for by the legislation, the Bank recorded a pre-tax charge of $1.6 million.
Excluding the one-time charge related to the Bank's deposit insurance premium,
net income was $3.2 million, or $1.06 per fully diluted share. This compares
with $3.1 million, or $0.93 per fully diluted share for the prior year, a 14.0
percent increase in earnings per share.
INTEREST INCOME. Interest income increased 20.6% to $31.6 million from $26.2
million in 1995. The increase was due primarily to an increase in loans
receivable, including a larger number of multi-family residential loans. The
average yield on interest-earning assets improved slightly during 1996 to 7.59%
compared to 7.43% in 1995. An increase of 18.0% in average earning assets
combined with the slightly higher yield contributed to the significant increase
in interest income. Average loans receivable increased by $62.7 million to
$305.1 million in 1996 and the average investment portfolio increased $8.6
million.
INTEREST EXPENSE. Interest expense for the year was $18.1 million, compared
with $13.8 million in 1995, the result of deposit growth and an increase in
borrowed funds. The average interest cost of savings deposits increased 48
basis points to 4.85% in 1996, primarily due to increased rates on certificates
of deposit. Average borrowings increased $27.9 million in 1996. The cost of
borrowed funds in 1996 averaged 38 basis points lower than the previous year
due in part to the Bank's ability to borrow utilizing FHLB Community Investment
Program advances.
NET INTEREST INCOME BEFORE PROVISION FOR LOAN LOSSES. Net interest income is
the principal source of earnings for the Company, and consists of interest
income on loans, mortgage-backed and investment securities, offset by interest
expense on deposits and borrowed funds. Net interest income before provision
for loan losses increased $1.0 million or 8.1%, to $13.4 million for the year
ended September 30, 1996, from $12.4 million in 1995. The net interest margin
declined to 3.23% for the year ended September 30, 1996, compared with 3.52%
for 1995. The decrease in the net interest margin in 1996 was primarily due to
a 16 basis point increase in average interest earning assets, offset by an
increase in the average cost of funds of 38 basis points.
PROVISION FOR LOAN LOSSES. The provision for loan losses is recorded quarterly
to provide coverage for possible future losses. The Company provided $410,000
in 1996 compared to $192,000 in 1995. The increased provision accommodated the
increase in loans receivable, changes in the components of the loan portfolio
and the Bennett commercial leases. See "CLASSIFIED ASSETS". The Company
evaluates its loan portfolio quarterly in conjunction with the current level of
non-performing loans and general economic conditions. At September 30, 1996,
non-performing mortgages and consumer loans amounted to $1.1 million or 0.22%
of total assets, compared to $617,000 or 0.16% of total assets at September 30,
1995. Total non-performing assets, including commercial leases, were $3.2
million or 0.67% of total assets at September 30, 1996.
NON-INTEREST INCOME. Non-interest income decreased to $957,000 from $1.2
million for 1996 compared to 1995. Excluding a non-recurring $274,000 gain on
sale of investment securities available for sale in 1995, non-interest income
remained stable at approximately $950,000.
NON-INTEREST EXPENSE. Non-interest expense for 1996 included a one-time SAIF
special assessment of $1.6 million, thus increasing total non-interest expense
to $10.6 million from $8.3 million one year ago. Exclusive of this charge,
non-interest expense increased $633,000. This increase was primarily the
result of expanding the branch network in 1995 to include two new offices.
Operating expenses, excluding the
SAIF special assessment, as a percentage of average assets for the year ended
September 30, 1996 were 2.1%, down from 2.3% in 1995. Slight increases were
noted in all general and administrative expenses. Included in non-interest
expense was a $10,000 recapture of an allowance for credit enhancement losses.
The balance of the allowance was recaptured due to the pay-off of the related
loan. See "CLASSIFIED ASSETS".
INCOME TAX EXPENSE. For the year ended September 30, 1996, federal and state
income tax expense totaled $1.2 million, or an effective rate of 36.6%,
compared to $2.0 million or an effective rate of 39.7% for 1995. Income taxes
decreased in 1996 as a direct result of decreased earnings before income taxes.
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED SEPTEMBER 30, 1995 AND
SEPTEMBER 30, 1994
GENERAL. The Company's net income increased to $3.1 million, or $0.93 per
fully-diluted share, from $2.7 million, or $0.71 per fully-diluted share, a
31.0% increase in fully-diluted earnings per share over the previous year. The
increase in net income for the year was primarily due to a 9.4% increase in net
interest income before provision for loan losses.
INTEREST INCOME. Interest income increased 23.9% to $26.2 million from $21.1
million in 1994. The average yield on interest-earning assets improved during
1995 to 7.43% compared to 6.76% in 1994 due to an increase in short-term
interest rates yielding higher rates for liquid investments, as well as
increasing indices which improved the yields on adjustable-rate loans and
mortgage-backed securities. Due to the rise in interest rates during 1995, the
significant refinance activity noted in 1994 slowed and many customers chose
adjustable-rate loans. Average loans receivable increased by $46.9 million to
$242.4 million in 1995. The origination and purchase of loans receivable
utilized funds decreasing the average balance of interest-earning deposits,
assets held for sale, and federal funds sold to $77.8 million, from $106.3
million in 1994.
INTEREST EXPENSE. Interest expense on deposits increased from $8.8 million to
$11.0 million during the year. Consistent with the interest rate increases in
fiscal 1995, the average cost of savings deposits increased 67 basis points to
4.37%. In addition to the interest rate increase, the Bank noted significant
growth in the deposit portfolio. In addition to the higher-rate promotional
certificates of deposit offered in conjunction with the opening of the Bank's
two newest offices, the Bank also created a money management account that
attracted $14.2 million in its first 10 months. The Bank continued to utilize
FHLB of Chicago advances to supply funds for loan origination and investment
portfolio opportunities. Average outstanding advances more than doubled to
$46.2 million in 1995. Consistent with interest rate increases, the average
cost of advances increased 162 basis points to 6.03% in 1995.
NET INTEREST INCOME BEFORE PROVISION FOR LOAN LOSSES. Net interest income
before provision for loan losses increased from $11.4 million, or 9.4%, to
$12.4 million for the year ended September 30, 1995. Net interest margin was
3.52% for the year ended September 30, 1995, compared with 3.63% for 1994.
During the 1995 fiscal year, asset yields did not rise as quickly as liability
costs, resulting in the interest margin compression.
PROVISION FOR LOAN LOSSES. The provision for loan losses is recorded to
provide coverage for losses on loans unknown to the Bank at the current time.
Although the loan portfolio grew by 22.9% during 1995, the ratio of the
allowance for loan losses to non-performing loans only increased 11.3% to 53.0%
at September 30, 1995. The Company provided $192,000 in 1995 compared to
$48,000 in 1994. The increased provision accommodated the increase in loans
receivable and changes in the components of the loan portfolio, such as a $2.5
million commercial loan and $2.4 million in commercial equipment leases, which
generally have a higher degree of risk. At September 30, 1995, the allowance
for loan losses was $403,000. The Company evaluates its loan portfolio
quarterly in conjunction with the current level of non-performing loans and
general economic conditions. At September 30, 1995 non-performing loans
were only 0.28% of total loans receivable.
NON-INTEREST INCOME. Non-interest income remained stable at $1.2 million for
1995 and 1994. The decrease in fees and commissions can be attributed to the
cessation of operations at Fidelity Loan Services, Inc. ("FLSI"), the Bank's
loan origination subsidiary. This $282,000 decrease was entirely offset by the
non-recurring gain on sale of assets available for sale during 1995. During
1995, management redeemed the balance of an investment in an adjustable-rate
mortgage mutual fund ("ARM fund") and sold an available-for-sale mortgage-
backed security to build liquidity for anticipated loan demand. A net gain of
$274,000 was recorded on these sales.
NON-INTEREST EXPENSE. Non-interest expense for 1995 rose 2.1% to $8.3 million
as a result of franchise expansion. Despite the costs associated with adding
two new offices, operating expenses as a percentage of average assets for the
year ended September 30, 1995 were 2.3%, down from 2.5% in 1994. Slight
increases were noted in all general and administrative expenses. Included in
non-interest expense was a $90,000 recapture of an allowance for credit
enhancement losses. The allowance was reduced due to improving debt coverage
ratios associated with the property and no longer considered necessary by
management.
INCOME TAX EXPENSE. For the year ended September 30, 1995, federal and state
taxes totaled $2.0 million, equal to an effective rate of 39.7%, compared to
$1.7 million, or an effective rate of 38.8% for 1994.
REVIEW OF FINANCIAL CONDITION
Total assets at September 30, 1996 increased to $475.9 million from $393.7
million at September 30, 1995. The growth in assets was primarily the result
of increased loan originations, which totaled $139.6 million, up 79.2% from the
prior year. The increase in loan originations was due to the expansion of the
Bank's third party originator ("TPO") network. The TPO network gives the
Company the ability to keep overhead expenses in check without constraining the
Bank's ability to grow loan volumes. Deposits also grew, exceeding the $300
million mark for the first time. Deposits totaled $302.9 million at September
30, 1996, up 9.8% from the previous year. Growth in deposits for the year was
achieved as the result of new household acquisitions at all offices. A
successful third quarter campaign aimed at retaining maturing certificates of
deposit was also an important factor in deposit growth.
Cash and due from banks, interest-earning deposits, federal funds sold and
mutual funds increased to $7.4 million at September 30, 1996. The higher
investment in dollar-denominated mutual funds was established to maintain the
higher liquidity required by deposit growth. The Bank used available cash and
FHLB advances to fund increased loan volume.
Stock in the FHLB Chicago increased $2.8 million due to the increase in
borrowings from the FHLB of Chicago.
Investment securities available for sale decreased $6.5 million to $78.1
million at September 30, 1996 compared to $84.6 million at September 30, 1995.
The decrease resulted primarily from the principal repayments on the Company's
portfolio of asset-backed securities.
Loans receivable increased $87.5 million to $354.3 million at September 30,
1996. The increase was due to record mortgage loan production of $139.6
million. The continued utilization of the Bank's TPO network brought loan
originations up 79.2% from the previous year. These originations were offset
by repayments of $50.8 million.
Real estate in foreclosure consisted of two properties at September 30, 1996.
Both are one- to four- family properties where the current appraised value is
greater than the outstanding loan amount. Management has considered these
factors in its loan allowance valuation and does not anticipate any losses on
these loans.
Deposits increased $26.9 million to $302.9 million at September 30, 1996. The
increase was a result of an expanded customer base and retail network. A
promotional 7-month certificate of deposit contributed $39.4 million to the
gross $234.4 million deposit inflow.
FHLB advances remain a cost effective source of funding for increased loan
activity. During 1996, borrowed funds more than doubled to $115.3 million at
September 30, 1996. The Bank continued to utilize advances to supply funds for
loan origination and investment portfolio opportunities. The borrowings
included $38 million in FHLB Community Investment Program advances at favorable
fixed rates.
Advance payments by borrowers for real estate taxes were lower during fiscal
1996 because Cook County real estate taxes were paid in the fourth quarter of
1996. The balance at September 30, 1995 was unusually high because Cook County
real estate taxes were not due until November 3, 1995.
Stockholders' equity decreased 9.2% to $48.8 million at September 30, 1996.
The decrease was a result of earnings of $2.1 million offset by dividends of
$740,000 paid to stockholders and the $6.7 million purchase of treasury shares
through the Company's stock buy back programs. During 1996, the Company
repurchased 414,986 shares for $6.7 million.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity management for the Bank is both a daily and long-term function of
management's strategy. The Company's primary sources of funds are deposits and
borrowings, amortization and prepayment of loan principal and mortgage-backed
securities, maturities of investment securities and operations. While maturing
investments and scheduled loan repayments are relatively predictable, deposit
flows and loan prepayments are greatly influenced by interest rates, floors and
caps on loan rates, general economic conditions and competition. The Bank
generally manages the pricing of its deposits to be competitive and increase
core deposit relationships, but has from time to time decided not to pay
deposit rates that are as high as those of its competitors and, when necessary,
to supplement deposits with FHLB advances.
Federal regulations require the Bank to maintain minimum levels of liquid
assets. This requirement, which may be varied at the direction of the OTS
depending upon economic conditions and deposit flows, is based upon a
percentage of deposits and short-term borrowings. The current required ratio
is 5.0%. The Bank has historically maintained its liquidity ratio for
regulatory purposes at levels in excess of those required. At September 30,
1996 the Bank's liquidity ratio was 8.22%.
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. Cash flows provided by operating activities,
consisting primarily of interest and dividends received less interest paid on
deposits, were $5.0 million for the year ended September 30, 1996. During the
year, the Bank used $82.7 million in investing activities, consisting primarily
of loan originations, offset partially by principal collections on loans,
mortgage-backed securities, and investment securities available for sale. Net
cash provided by financing activities amounted to $77.9 million for the year
ended September 30, 1996. Financing sources included $26.9 and $61.3 million
in deposits and FHLB advances, respectively.
At September 30, 1996, the Bank had outstanding loan commitments of $7.4
million. Management anticipates that it will have sufficient funds available
to meet its current loan commitments. Certificates of deposit scheduled to
mature in one year or less from September 30, 1996 totalled $134.7 million.
Management believes that a significant portion of such deposits will remain
with the Bank.
The Bank's Tangible and Core (leverage) Capital of $37.6 million at September
30, 1996 was 8.0% of Adjusted Tangible Assets. This exceeded the Tangible
Capital and Core Capital requirements of 1.5% and 3% by $30.6 and $23.6 million
respectively. The Bank's Risk-based Capital of $38.0 million was 16.9% of
Total Risk-Weight Assets at September 30, 1996 which exceeds the Risk-based
Capital requirement of 8% by $20.0 million.
LENDING ACTIVITIES
LOAN AND MORTGAGE-BACKED SECURITIES PORTFOLIO COMPOSITIONS. The Bank's loan
portfolio consists primarily of conventional first mortgage loans secured by
one- to four-family residences. At September 30, 1996, the Bank's gross loans
receivable portfolio was $353.7 million, of which $277.0 million were one- to
four-family residential mortgage loans. Of the one- to four-family residential
mortgage loans outstanding at that date, 33.3% were fixed-rate and 66.7% were
adjustable-rate mortgage ("ARM") loans. In November 1995, the Bank closed a
$3.7 million fixed-rate commercial loan for a golf course in a western Chicago
suburb. The Bank services the entire loan and another institution has a
participation for $1.89 million, resulting in a net loan of $1.85 million for
the Bank. Through regular monthly payments, the Bank's outstanding portion at
September 30, 1996 was $1.83 million. The remainder of the Bank's loan
portfolio at September 30, 1996 consisted of $55.3 million of multi-family
loans, $5.7 million in commercial property loans, and $13.6 million of consumer
loans. Consumer loans consisted primarily of home equity and second mortgage
loans.
During 1995 the Bank purchased four pools of full pay-out commercial equipment
leases totalling $3.0 million. At September 30, 1996, the outstanding balance
of these leases amounted to $2.0 million. See further discussion of these
leases included in "CLASSIFIED ASSETS".
During 1994 the Bank expanded its delivery system for mortgage loans to include
TPO's whereby these mortgage brokers have agreed to originate loans for the
Bank's portfolio. Throughout 1996 and 1995, the loan department continued to
seek and sign agreements with new TPO's. At September 30, 1996 the Bank had a
network of 35 TPO's. The TPO program produced $115.2 million or 89.2% of the
Bank's one- to four-family and multi-family mortgage loan originations in 1996.
Loan origination standards of the Bank generally conform to the requirements
for sale to the Federal Home Loan Mortgage Corporation ("FHLMC"). On occasion
the Bank sells fixed-rate mortgage loans to the FHLMC. There were no sales
during the year ended September 30, 1996 and 1995. At September 30, 1996, the
unpaid balance of total mortgage loans sold to the FHLMC and serviced by the
Bank was $12.0 million.
The Bank's investment policy permits the investment in mortgage-backed
securities. The Bank purchases FHLMC Gold mortgage-backed securities to
coincide with its ongoing asset/liability management objectives and to
supplement its own loan origination program. The FHLMC mortgage-backed
securities owned by the Bank are guaranteed by the FHLMC and are collateralized
with generic pools of single family mortgages with security coupons ranging
from 7.00% to 7.50%. 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, 1996, total mortgage-backed securities aggregated $21.7
million, or 4.6% of total assets. The fair value of these securities was
approximately $21.8 million at September 30, 1996.
Currently all loans originated or purchased by the Bank and mortgage-backed
securities are held for investment.
The following table sets forth the composition of the Bank's loan portfolio and
mortgage-backed securities held to maturity, in dollar amounts and in
percentages of the respective portfolios at the dates indicated.
At September 30,
1996 1995 1994
Percent Percent Percent
Amount of Total Amount of Total Amount of Total
(Dollars in thousands)
Mortgage loans:
One- to four-family $ 277,086 78.34% $ 203,974 76.40% $ 163,845 75.41%
Multi-family 55,341 15.65 45,698 17.12 41,224 18.98
Commercial 5,656 1.60 2,478 0.93 - -
Commercial leases 2,032 0.57 2,373 0.89 - -
------- ----- ------- ---- ------ -----
Total mortgage loans 340,115 96.16 254,523 95.34 205,069 94.39
Consumer loans 13,585 3.84 12,442 4.66 12,196 5.61
------- ----- ------- ---- ------ -----
Gross loans receivable 353,700 100.00% 266,965 100.00% 217,265 100.00%
====== ====== ======
Less:
Loans in process 3 77 -
Unearned discounts and
deferred loan fees (costs) (1,368) (250) 380
Allowance for loan losses 810 403 228
------- ------- ------
Loans receivable, net $ 354,255 $ 266,735 $ 216,657
======= ======= =======
Mortgage-backed
securities - FHLMC $ 21,647 100.00% $ 26,435 100.00% $ 29,485 100.00%
====== ====== ======
Net premiums 26 49 80
------- ------- ------
Mortgage-backed
securities, net $ 21,673 $ 26,484 $ 29,565
======= ======= =======
<CAPTIONS>
At September 30,
1993 1994
Percent Percent
Amount of Total Amount of Total
(Dollars in thousands)
Mortgage loans:
One- to four-family $ 152,504 74.31% $ 168,521 81.62%
Multi-family 40,846 19.90 24,952 12.08
Construction 738 0.36 1,497 0.72
------- ----- ------- ----
Total mortgage loans 194,088 94.57 194,970 94.42
Consumer loans 11,144 5.43 11,524 5.58
------- ----- ------- ----
Gross loans receivable 205,232 100.00% 206,494 100.00%
====== ======
Less:
Loans in process 140 35
Unearned discounts and
deferred loan fees (costs) 869 1,106
Allowance for loan losses 233 189
------- -------
Loans receivable, net $ 203,990 $ 205,164
======= =======
The following table sets forth the Bank's loan originations, purchases of
loans, commercial leases, and mortgage-backed securities held to maturity,
sales and principal repayments for the periods indicated:
Years Ended September 30,
1996 1995 1994
(in thousands)
Mortgage Loans (gross):
At beginning of period $ 254,523 205,069 194,088
Mortgage loans originated:
One- to four- family 108,698 62,309 48,037
Multi-family 20,220 7,994 9,003
Commercial 4,129 2,500 -
------- ------- -------
Total mortgage loans originated 133,047 72,803 57,040
One- to four- family mortgage loans purchased - - 3,369
Commercial leases purchased - 3,000 -
Transfer of mortgage loans to foreclosed real estate (113) (193) (88)
Transfer of mortgage loans from foreclosed real estate - 113 -
Sale of commercial loan participation (1,890) - -
Principal repayments (45,405) (26,269) (43,875)
One- to four- family mortgage participations securitized (47) - -
Sale of loans to FHLMC - - (5,465)
------- ------- -------
At end of period $ 340,115 254,523 205,069
------- ------- -------
Consumer loans (gross):
At beginning of period $ 12,442 12,196 11,144
Consumer loans originated 6,615 5,077 7,503
Principal repayments (5,472) (4,831) (6,451)
------- ------ ------
At end of period 13,585 12,442 12,196
------- ------ ------
Total loans (gross) $ 353,700 266,965 217,265
======= ======= =======
Mortgage-backed securities held to maturity:
At beginning of period $ 26,435 29,485 -
Mortgage-backed securities purchased - - 30,301
One- to four- family mortgage participations securitized 47 - -
Amortization and principal repayments (4,835) (3,050) (816)
------- ------ ------
At end of period $ 21,647 26,435 29,485
======= ======= =======
LOAN AND MORTGAGE-BACKED SECURITIES MATURITY AND REPRICING. The following
table shows the maturity or period to repricing of the Bank's loans and
mortgage-backed securities held to maturity portfolios at September 30, 1996.
The table does not include prepayments or scheduled principal amortization.
Principal repayments and prepayments on loans and mortgage-backed securities
held to maturity totalled $55.7 million, $34.1 million, and $51.6 million for
the years ended September 30, 1996, 1995 and 1994, respectively.
At September 30, 1996
Fixed Rate Adjustable Rate Other Loans Totals
Mortgage-
Commercial Total Backed
One-to- One-to- Equip- Loans Securities
Four Multi- Four Multi- Commer- ment Receiv- Held to
Family Family Family Family cial Leases Consumer able Maturity Total
(in thousands)
AMOUNTS DUE:
Within one year $ 8,384 782 45,011 12,317 640 674 5,643 73,451 2,787 76,238
After one year:
One to three years 15,287 830 96,343 32,179 555 1,358 5,879 152,431 4,623 157,054
Three to five years 13,029 540 43,454 7,391 4,461 - 2,063 70,938 11,185 82,123
Five to 10 years 26,792 866 - - - - - 27,658 2,125 29,783
10 to 20 years 26,679 436 - - - - - 27,115 927 28,042
Over 20 years 2,107 - - - - - - 2,107 - 2,107
------- ---- ------- ------ ----- ----- ----- ------- ------ -------
Total due after
one year 83,894 2,672 139,797 39,570 5,016 1,358 7,942 280,249 18,860 299,109
Total amounts due $ 92,278 3,454 184,808 51,887 5,656 2,032 13,585 353,700 21,647 375,347
Less:
Loans in process 3 - 3
Unearned discounts,
premiums and deferred
loan fees (costs), net (1,368) (26) (1,394)
Allowance for possible loan losses 810 - 810
------ ------ ------
Loan receivable and mortgage-
backed securities held to
maturity, net $354,255 21,673 375,928
======== ======= =======
ONE- TO FOUR-FAMILY MORTGAGE LENDING. The Bank primarily originates first
mortgage loans secured by one- to four-family residences located in its primary
market area, including townhouse and condominium units. Typically, such
residences are single or two-family homes that serve as the primary residence
of the owner. To a lesser extent, the Bank also originates loans secured by
non-owner occupied one- to four-family residential real estate. Loan
originations are generally obtained from existing or past customers, members of
the local communities, third party mortgage originators located in the Bank's
market area, local real estate agent referrals, and builder/developer referrals
within the Bank's market area.
The Bank offers fixed-rate and ARM loans, which are generally amortized over 30
years, with terms of up to 30 years. Loan rates are based on market
conditions. The Bank originates zero-point loans, and loans with discount
points and fees for related origination expenses, such as appraisals and other
closing costs, on one- to four-family residential mortgage loans. Generally,
all residential mortgage loans originated by the Bank are underwritten in
conformity with FHLMC guidelines. The ARM loans generally reprice on a one,
three, or five year basis. As a general matter, the Bank does not offer
"teaser rates" on its ARM loans, nor does it offer loans with a negative
amortization feature. At time of origination, the Bank determines whether to
sell or retain fixed-rate, one- to four-family residential first mortgages
loans, while generally retaining the servicing right for loans sold. ARM loans
originated are normally held for investment.
The Bank generally makes first mortgage loans secured by one- to four-family,
owner-occupied residential real estate in amounts up to 95% 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 75% 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.
MULTI-FAMILY AND COMMERCIAL REAL ESTATE LENDING. The Bank originates fixed and
adjustable rate multi-family loans secured by properties (five units or more)
typically located in its primary market area. These loans generally have rate
and payment adjustment periods of 3 to 5 years, with amortizations of up to 30
years. The Bank customarily charges origination fees of up to 3% of the loan
amount for newly originated loans and lesser fees for renewals or modifications
of existing loans. The Bank's policies generally require personal guarantees
from the borrowers, with joint and several liability. The Bank's underwriting
decisions relating to these loans are primarily based upon the net operating
income generated by the property in relation to the debt service ("debt
coverage ratio"), the borrower's cash-at-risk position, financial resources and
income level of the borrower, the borrower's experience in owning or managing
similar property, the marketability of the property and the Bank's lending
relationship with the borrower. The Bank originates multi-family loans in
amounts up to 85% of the lower of the appraised value of the property or the
purchase price. The Bank generally requires a minimum debt coverage ratio of
1.15x on multi-family properties, utilizing forecasted net operating income.
As of September 30, 1996, $55.3 million, or 15.6%, 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, 1996,
$5.7 million, or 1.6%, of the Bank's loan portfolio consisted of commercial
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 does not actively solicit construction loans,
although it will consider such loans on a case-by-case basis as presented.
Construction lending generally is considered to involve a higher degree of risk
than lending on improved, owner-occupied real estate. Construction loans are
dependent largely upon the accuracy of the initial estimate of the property's
value at completion of construction or development and the estimated cost
(including interest) of construction. During the construction phase, a number
of factors could result in delays and cost overruns.
COMMERCIAL LEASES. The Bank purchased 454 full-payout commercial equipment
leases located in various parts of the country with original aggregate
outstanding principal balances of $3.0 million during fiscal 1995. These
leases were all originated by, serviced by, and financially guaranteed by
Bennett Funding Group of Syracuse, New York. See further discussion in
"CLASSIFIED ASSETS".
CONSUMER, HOME EQUITY AND OTHER LENDING. The Bank offers a variety of consumer
loans, although its current portfolio consists primarily of home equity and
second mortgage loans. Also included in consumer loans are installment loans
secured by automobiles, boats and recreational vehicles, and other secured and
unsecured loans. As of September 30, 1996, $13.6 million or 3.8% of the Bank's
loan portfolio consisted of consumer loans.
The Bank's home equity loans consist of fixed and adjustable rate mortgage
loans generally secured by second mortgages on one- to four-family owner-
occupied residential properties located in its primary market area. The second
mortgage loan products are currently offered in both fixed and adjustable rate,
fixed-term loans for up to 30 years.
CREDIT ENHANCEMENT ACTIVITY. In 1985, the Bank, in participation with six
other financial institutions, entered into a credit enhancement agreement with
a local municipality to guarantee the repayment of municipal revenue bonds (the
"Bonds"), in an original aggregate amount of $11.0 million, the proceeds of
which were used by an unrelated corporation to finance the development of an
apartment building complex. The Bonds were secured by first mortgages on the
apartment building, which is located in Glendale Heights, Illinois. The Bank's
share of the guarantee amounted to $2.0 million. The related bonds were paid
in full on May 1, 1996. At that time the Bank was released from all
obligations pertaining to the enhancement.
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 Vice President - Personal Banking, Vice President - Loan Servicing/Closing
and designated underwriters up to the agency maximum loan limitations. Non-
conforming one- to four-family first mortgage loans may be approved by the
Senior Vice President - Loan Investments in amounts up to $500,000. Secured
mortgage and unsecured consumer 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 $500,000 and one- to four-family
construction loans over $500,000 require the approval of a majority of the
Board.
For all loans originated by the Bank, upon receipt of a completed loan
application from a prospective borrower, a credit report is ordered, income and
certain other information generally is verified and, if necessary, additional
financial information is required. All borrowers of one- to four-family
residential mortgage loans are qualified pursuant to applicable agency
guidelines. The Bank's policies require appraisals on all real estate intended
to secure a proposed loan, which currently are performed by independent
appraisers designated and approved by the Bank. Further, under current OTS
regulations, all loan transactions of $1.0 million or more, non-residential
transactions of $250,000 or more, and complex residential transactions of
$250,000 or more, the Bank requires appraisals conducted by state certified or
licensed appraisers. The Board, at least annually, approves the independent
appraisers used by the Bank and reviews the Bank's appraisal policy. It is the
Bank's policy to obtain title insurance on all real estate first mortgage
loans. Borrowers must also obtain hazard insurance prior to closing.
Borrowers generally are required to advance funds on a monthly basis together
with each payment of principal and interest to a mortgage escrow account from
which the Bank makes disbursements for items such as real estate taxes and
hazard insurance premiums.
DELINQUENCIES AND CLASSIFIED ASSETS.
DELINQUENT LOANS. The Board of Directors performs a monthly review of all
delinquent loans. The procedures taken by the Bank with respect to
delinquencies vary depending on the nature of the loan and period of
delinquency.
The Bank's policies generally provide that delinquent mortgage loans be
reviewed and that a written late charge notice be mailed no later than the
twentieth day of delinquency. The policies also require telephone contacts for
loans more than 20 days late to ascertain the reasons for the delinquency and
the prospects of repayment. Face-to-face interviews and collection notices are
generally required for loans more than 30 days delinquent and on a case-by-case
basis for mortgage loans. After 60 days, the Bank will either set a date by
which the loan must be brought current, enter into a written forbearance
agreement, foreclose on any collateral or take other appropriate action. The
Bank 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 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.
Set forth below is certain information regarding delinquent loans at September
30, 1996, 1995 and 1994:
At September 30, 1996 At September 30, 1995
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 6 $ 141 7 $ 671 4 $ 121 10 $ 604
Commercial - - 2 378 - - - -
Commercial leases (1) - - 1 2,032 - - - -
-- --- -- ------ -- ---- -- ----
Total mortgage loans 6 141 10 3,081 4 121 10 604
Consumer 1 5 2 5 4 22 3 13
-- --- -- ------ -- ---- -- ----
Total loans 7 $ 146 12 $ 3,086 8 $ 143 13 $ 617
== === == ====== == ==== == ====
Delinquent loans to
total loans 0.04% 0.87% 0.09% 0.23%
=== ====== ==== ====
At September 30, 1994
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 5 $ 196 5 $ 116
Multi-family - - 1 163
-- --- -- -----
Total mortgage loans 5 196 6 279
Consumer 1 1 2 3
-- --- -- -----
Total loans 6 $ 197 8 $ 282
== === == ======
Delinquent loans to
total loans 0.09% 0.13%
=== ======
(1) Relates to leases purchased from Bennett Funding Group - see further
discussion in "CLASSIFIED ASSETS". For purposes of this table, the portfolio
of leases has been considered to be one loan due to the collectibility issues
related to the leases.
NON-PERFORMING ASSETS. The following table sets forth information regarding
non-accrual loans, which are 90 days or more past due, and real estate in
foreclosure. Prior to September 30, 1995, the Bank ceased accruing interest on
mortgage loans 60 days past due, effective October 1, 1995, the Bank conformed
with industry standards and ceased accruing interest on mortgage loans 90 days
past due. 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, 1996, 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,
1996, had been currently performing in accordance with their original terms,
the Bank would have recognized interest income from such loans of $44,000.
At September 30,
1996 1995 1994 1993 1992
(Dollars in thousands)
Non-accrual mortgage loans $ 1,049 $ 604 $ 279 $ 208 $ 429
Non-accrual commercial leases 2,032 - - - -
Non-accrual consumer loans 5 13 3 - 5
----- --- --- --- ---
Total non-accrual loans 3,086 617 282 208 434
Consumer loans 90 days or more
past due and still accruing - - - - -
----- --- --- --- ---
Total non-performing loans 3,086 617 282 208 434
Real estate in foreclosure 97 - 88 - 64
----- --- --- --- ---
Total non-performing assets $ 3,183 $ 617 $ 370 $ 208 $ 498
===== === === === ===
Total non-performing loans to
total loans 0.87% 0.23% 0.13% 0.10% 0.21%
===== === === === ===
Total non-performing assets to
total assets 0.67% 0.16% 0.11% 0.08% 0.18%
===== === === === ===
CLASSIFIED ASSETS. Federal regulations require the Bank to classify loans and
other assets such as debt and equity securities, considered by the OTS to be of
lesser quality, as "substandard", "doubtful" or "loss" assets. The Bank's
classification policies provide that assets will be classified according to OTS
regulations. An asset is considered "substandard" if it is inadequately
protected by the current net worth and paying capacity of the obligor or of the
collateral pledged, if any. "Substandard" assets include those characterized
by the "distinct possibility" that the insured institution will sustain "some
loss" if the deficiencies are not corrected. Assets classified as "doubtful"
have all of the weaknesses inherent in those classified "substandard," with the
added characteristic that the weaknesses present make "collection or
liquidation in full," on the basis of currently existing facts, conditions, and
values, "highly questionable and improbable." Assets classified as "loss" are
those considered "uncollectible" and of such little value that their
continuance as assets without the establishment of a specific loss reserve is
not warranted. Assets which do not currently expose the insured institution to
sufficient risk to warrant classification in one of the aforementioned
categories but possess weaknesses are required to be designated "special
mention" by management.
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 may, however, increase its general
valuation allowance in an amount deemed prudent. General valuation allowances
represent loss allowances which have been established to recognize the inherent
risk 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, 1996, the Bank had classified assets of $3.2 million.
Classified loans of $1.1 million were categorized as substandard, consisting of
7 residential mortgage loans, 2 commercial loans, and 2 unsecured lines of
credit. In addition to the mortgage and consumer portfolio, the Bank
classified its investment in commercial leases as substandard. There were no
assets classified as doubtful.
From October 1994 through January 1995, the Bank purchased 454 full-payout
commercial equipment leases located in various parts of the country with
original aggregate outstanding principal balances of $3.0 million. Since that
time normal lease payments had reduced the aggregate outstanding balance to
$2.0 million at February 29, 1996. These leases were all originated by,
serviced by, and financially guaranteed by Bennett Funding Group of Syracuse,
New York ("BFG"). On March 29, 1996 it was reported that BFG was the target of
a civil complaint filed by the Securities and Exchange Commission. On that
same date BFG filed a Chapter 11 bankruptcy petition in the Northern District
of New York and halted payments on the lease agreements. The Bankruptcy
Trustee is currently collecting the lease payments from the lessees and holding
them in escrow pending the outcome of the litigation concerning BFG, its
creditors, and related issues. This disruption of payment flows from the
servicer, BFG, has caused the Company to classify all the leases as
substandard, place them on non-accrual status and to categorize them as non-
performing and impaired.
The Bank is vigorously pursuing available legal remedies in an attempt to
protect and collect amounts due under the terms of the underlying leases. The
substance of the Bank's claims center on the assertion that the Bank has a
perfected security interest in the leases and the proceeds thereof. The
Trustee disagrees. The opinion of the Bank's bankruptcy counsel at this time
is that the Bank's position should ultimately prevail. There can be no
assurance, however, of the actual results of this legal process or the extent
of the Bank's recovery, if any.
The Bank has estimated what is believed to be the realizable value of the
leases and established a valuation allowance of $406,000. In the event that
the outcome of the litigation is not favorable, i.e. the Bank's status is that
of an unsecured creditor, the recovery may be substantially smaller. Any
recovery by the Bank of less than the net book value of the leases will cause
additional losses to the Bank.
ALLOWANCE FOR LOAN LOSSES. The allowance for loan losses is established
through a provision for loan and lease losses based on management's evaluation
of the risk inherent in its loan portfolio and the general economy. 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 and other factors that warrant recognition in providing
for an adequate loan loss allowance. In recent years, in light of the general
economic conditions, management has, from time to time, increased its provision
to account for its evaluation of the potential effects of such conditions. The
Bank will continue to monitor and modify its allowances for loan losses as
conditions dictate. Although the Bank maintains its allowance at a level which
it considers adequate to provide for potential losses, there can be no
assurances that such losses will not exceed the estimated amounts.
The following table sets forth the Bank's allowance for loan losses at the
dates indicated.
At or for the Years Ended September 30,
1996 1995 1994 1993 1992
(Dollars in thousands)
Balance at beginning of period $ 403 $ 228 $ 233 $ 189 $ 88
Provision for loan losses 410 192 48 57 106
Charge offs:
One-to four-family (8) (2) - - -
Multi-family - (5) (21) - -
Consumer loans (26) (19) (32) (13) (5)
---- ---- ---- ---- ----
Total Charge-offs (34) (26) (53) (13) (5)
Recoveries - Consumer loans 31 9 - - -
---- ---- ---- ---- ----
Balance at end of period $ 810 $ 403 $ 228 $ 233 $ 189
==== ==== ==== ==== ====
Ratio of charge-offs during the
period to average loans
outstanding during the period 0.01% 0.01% 0.03% 0.01% - %
==== ==== ==== ==== ====
Ratio of allowance for loan losses
to net loans receivable at end
of period 0.23% 0.15% 0.11% 0.11% 0.09%
==== ==== ==== ==== ====
Ratio of allowance for loan losses
to total non-performing loans at
end of period 26.25% 65.32% 80.85% 112.02% 43.55%
===== ===== ===== ====== =====
Ratio of allowance for loan losses
to non-performing assets at end
of period 25.48% 65.32% 61.62% 112.02% 37.95%
===== ===== ===== ====== =====
The Bank's allowance for loan losses has been established as an allowance for
future losses on its entire portfolio. For internal purposes, the Bank does
not allocate the allowance among loan classifications. In the following table,
the allowance for loan losses has been allocated by category for purposes of
complying with public disclosure requirements. The amount allocated on the
following table to any category should not be interpreted as an indication of
future charge-offs and the amounts allocated are not intended to reflect the
amount that may be available for future losses on any category since the Bank's
allowance is a general allowance.
The following table also sets forth the percent of loans in each category to
total loans.
At September 30,
1996 1995 1994
% of Loans % of Loans % of Loans
in Category in Category in Category
of Total of Total of Total
Outstanding Outstanding Outstanding
Amount Loans Amount Loans Amount Loans
(Dollars in thousands)
Mortgage loans:
One- to four- family $ 90 78.34% $ 70 76.40% $ 48 75.41%
Multi-family 57 15.65 46 17.12 42 18.98
Commercial 104 1.60 89 0.93 - -
Commercial leases 406 0.57 24 0.89 - -
Consumer loans 150 3.84 132 4.66 130 5.61
Unallocated 3 - 42 - 8 -
---- ------ ---- ------ ---- ------
Total allowance for loan losses $ 810 100.00% $ 403 100.00% $ 228 100.00%
==== ====== ==== ====== ==== ======
At September 30,
1993 1992
% of Loans % of Loans
in Category in Category
of Total of Total
Outstanding Outstanding
Amount Loans Amount Loans
(Dollars in thousands)
Mortgage loans:
One- to four- family $ 37 74.31% $ 20 81.62%
Multi-family 41 19.90 28 12.08
Construction 37 0.36 75 0.72
Consumer loans 112 5.43 34 5.58
Unallocated 6 - 32 -
---- ---- ---- -----
Total allowance for loan losses $ 233 100.00% $ 189 100.00%
==== ====== ==== ======
INVESTMENT ACTIVITIES
The investment policy of the Bank, established by the Board of Directors and
implemented by the Asset/Liability Committee, attempts 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 following table sets forth certain information regarding the amortized cost
and fair value of the Company's investment securities portfolio at the dates
indicated:
At September 30,
1996 1995 1994
Amortized Fair Amortized Fair Amortized Fair
Cost Value Cost Value Cost Value
(in thousands)
Interest-earning deposits:
FHLB daily investment $ - - 897 897 1,348 1,348
Money market fund 225 225 369 369 58 58
---- --- --- --- ----- -----
Total interest-bearing deposits $ 225 225 1,266 1,266 1,406 1,406
==== === ===== ===== ===== =====
Federal funds sold $ 200 200 200 200 450 450
==== === ===== ===== ===== =====
Mutual funds:
AMF ARM Fund $ - - - - 7,673 7,514
Federated Liquid Cash Trust 3,146 3,146 227 227 1,215 1,215
----- ----- --- --- ----- -----
Total mutual funds $ 3,146 3,146 227 227 8,888 8,729
===== ===== ===== ===== ===== =====
FHLB-Chicago Stock $ 5,795 5,795 3,000 3,000 2,269 2,269
===== ===== ===== ===== ===== =====
Investment securities
available for sale:
U.S. Government and
agencies $ 66,000 64,972 47,000 47,206 5,085 5,029
Corporate asset-backed
securities 7,331 7,267 14,532 14,275 23,493 22,958
Corporate debt securities 5,973 5,865 23,138 23,098 43,450 42,976
------- ------ ------ ------ ------ ------
Total investment securities
available for sale $ 79,304 78,104 84,670 84,579 72,028 70,963
======= ====== ====== ====== ====== ======
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, 1996.
At September 30, 1996
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 $ - - % 11,000 6.31% 55,000 7.49% - - 4.2 66,000 64,972 7.46%
Corporate asset-backed
securities 3,524 4.87 3,807 4.76 - - - - 1.7 7,331 7,267 4.87
Corporate debt securities - - 3,000 9.00 2,973 6.56 - - 5.4 5,973 5,865 7.79
------ ==== ------ ==== ----- ==== ---- ==== ==== ------ ------ ====
$3,524 17,807 57,973 - 79,304 78,104
====== ====== ====== ==== ====== ======
SOURCES OF FUNDS
GENERAL. Deposits, loan repayments, and cash flows generated from operations
are the primary sources of the Bank's funds for use in lending, investing and
for other general purposes. The Bank also utilizes FHLB advances from time to
time.
DEPOSITS. The Bank offers a variety of deposit accounts having a range of
interest rates and terms. The Bank's deposits consist of passbook savings,
NOW, Super NOW, money market and certificate accounts. The flow of deposits is
influenced significantly by general economic conditions, changes in money
market rates, prevailing interest rates and competition. The Bank's deposits
are obtained primarily from the areas in which its home office is located. The
Bank relies primarily on customer service and long-standing relationships with
customers to attract and retain these deposits. Certificate accounts in excess
of $100,000 are not solicited by the Bank nor does the Bank use brokers to
obtain deposits. Management constantly monitors the Bank's deposit accounts
and, based on historical experience, management believes it will retain a large
portion of such accounts upon maturity.
The following table presents the deposit activity of the Bank for the periods
indicated.
Years Ended September 30,
1996 1995 1994
(in thousands)
Deposits $ 234,407 180,925 144,236
Withdrawals (214,502) (149,135) (161,322)
------- ------- -------
Net withdrawals in excess of deposits 19,905 31,790 (17,086)
Interest credited on deposits 7,036 6,141 7,285
------- ------- -------
Total increase (decrease) in deposits $ 26,941 37,931 (9,801)
======= ======= =======
The following table sets forth time deposits over $100,000 at September 30,
1996:
Maturity Period
(in thousands)
Three months or less $ 1,819
Over three through six months 5,716
Over six through 12 months 4,655
Over 12 months 8,098
-------
$ 20,288
=======
/TABLE
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,
1996 1995
Weighted Weighted
Percent of Average Percent of Average
Total Nominal Total Nominal
Amount Deposits Rate Amount Deposits Rate
(dollars in thousands)
Passbook Savings $ 86,077 28.41% 3.35% $ 81,979 9.70% 3.06%
Transaction Accounts:
NOW/non-interest bearing 4,596 1.52 - 4,822 1.75 -
NOW 13,471 4.45 2.17 15,078 5.46 2.79
Money management 16,364 5.40 4.39 14,230 5.16 5.20
Money market 2,828 0.93 2.85 4,204 1.52 2.86
------ ----- ---- ------ ---- ----
Total transaction accounts 37,259 12.30 2.93 38,334 13.89 3.34
Certificate Accounts:
3 month 572 0.19 4.80 205 1.07 4.10
6 month 12,287 4.06 5.00 12,891 4.67 5.45
7 month 39,411 13.01 5.83 - - -
8 month 5,191 1.71 5.15 16,667 6.04 6.34
10 month 5,277 1.74 5.34 15,775 5.72 6.08
12 month 11,789 3.89 5.35 13,241 4.80 5.78
13 month 19,760 6.52 5.93 22,455 8.14 7.66
15 month 31,806 10.50 5.91 17,707 6.42 5.76
24 month 22,515 7.43 6.38 22,069 8.00 6.17
36 month 7,924 2.62 5.64 9,961 3.61 5.25
36 month rising rate 12,467 4.12 5.94 11,236 4.07 5.36
60 month 10,399 3.43 5.78 13,073 4.74 6.27
Other 200 0.07 5.65 400 0.14 5.76
------ ----- ---- ------ ---- ----
Total certificate accounts 179,598 59.29 5.79 155,680 56.41 6.14
------ ----- ---- ------ ---- ----
Total Deposits $ 302,934 100.00% 4.75% $ 275,993 100.00% 4.83%
======= ====== ==== ======= ====== ====
At September 30, 1994
Weighted
Percent of Average
Total Nominal
Amount Deposits Rate
(dollars in thousands)
Passbook Savings $ 95,511 40.12% 2.85%
Transaction Accounts:
NOW/non-interest bearing 4,133 1.74 -
NOW 12,533 5.26 2.27
Money market 6,825 2.87 2.60
------ ----- ----
Total transaction accounts 23,491 9.87 1.91
Certificate Accounts:
3 month 305 0.13 3.27
6 month 15,584 6.55 3.73
8 month 12,394 5.21 4.13
10 month 4,242 1.78 3.67
12 month 11,134 4.68 3.75
15 month 14,608 6.14 4.42
24 month 11,584 4.87 4.43
36 month 15,012 6.31 5.27
36 month rising rate 20,923 8.79 5.31
60 month 13,070 5.49 6.43
Other 204 0.09 3.76
------ ----- ----
Total certificate accounts 119,060 50.01 4.69
Total Deposits $ 238,062 100.00% 3.68%
======= ====== ====
/TABLE
The following table presents, by various rate categories, the amount of
certificate accounts outstanding at September 30, 1996, 1995 and 1994 and the
periods to maturity of the certificate accounts outstanding at September 30,
1996.
Period to maturity from September 30, 1996
At September 30,
Two to
Within One to Three There-
1996 1995 1994 One Year Two Years Years after Total
(in thousands)
Certificate accounts:
2.99% or less $ 587 1,358 1,302 383 66 124 14 587
3.00% to 3.99% - 214 32,444 - - - - -
4.00% to 4.99% 4,080 12,677 40,799 3,361 3 716 - 4,080
5.00% to 5.99% 107,182 58,669 36,546 86,326 13,363 5,591 1,902 107,182
6.00% to 6.99% 60,437 50,977 3,638 37,279 20,987 112 2,059 60,437
7.00% to 7.99% 7,312 31,096 4,051 7,312 - - - 7,312
8.00% to 8.99% - 689 253 - - - - -
9.00% to 9.99% - - 27 - - - - -
10.00% to 10.99% - - - - - - - -
------- ------- ------- ------- ------ ----- ----- -------
Total $ 179,598 155,680 119,060 134,661 34,419 6,543 3,975 179,598
======= ======= ======= ======= ====== ===== ===== =======
BORROWINGS
Although deposits are the Bank's primary source of funds, the Bank's policy has
been to utilize borrowings, such as advances from the FHLB-Chicago when they
are a less costly source of funds or can be invested at a positive rate of
return.
The Bank obtains advances from the FHLB-Chicago secured by its capital stock in
the FHLB-Chicago and certain of its mortgage loans. 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-
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-Chicago. The maximum amount of FHLB-
Chicago advances to a member institution generally is reduced by borrowings
from any other source. At September 30, 1996, the Bank's FHLB-Chicago advances
totalled $115.3 million.
The following table sets forth certain information regarding borrowings at and
for the date indicated:
At and for the Years Ended September 30,
1996 1995 1994
(in thousands)
FHLB-CHICAGO ADVANCES
Average balance outstanding $ 74,078 46,224 20,614
Maximum amount outstanding at any
month-end during the year 115,300 56,733 42,000
Balance outstanding at year end 115,300 54,032 42,000
Weighted average interest rate
during the year 5.65% 6.03% 4.41%
Weighted average interest rate
at end of year 6.00% 5.88% 4.88%
SUBSIDIARY ACTIVITY
Fidelity Corporation, incorporated in 1970, is a wholly-owned subsidiary of the
Bank. Fidelity Corporation's business is safe deposit box rentals, and annuity
and insurance sales primarily to customers of the Bank. In addition, in
cooperation with INVEST, full service securities brokerage services are offered
to customers and non-customers of the Bank.
Fidelity Corporation owns a 7.64% ownership interest as a limited partner and a
.08% ownership interest as a general partner in an Illinois limited partnership
formed in 1987 for the purpose of (i) developing, in the City of Evanston,
Illinois, a public parking garage containing 602 parking spaces, which was sold
in 1989 to the City of Evanston, and (ii) developing, managing and operating a
190 unit luxury rental apartment building adjacent thereto. Fidelity
Corporation's investment in this limited partnership, represented by its
capital contributions, totalled $680,000 at September 30, 1996. Losses to
Fidelity Corporation other than any liability as a general partner are limited
to its capital contributions. Profits to Fidelity Corporation, if any, are
initially expected to be derived from partnership operations and, after pro-
rata payment of "Preferred Distributions" to the partners (including Fidelity
Corporation), are to be equal to Fidelity Corporation's pro-rata ownership
interests in the partnership. The apartment complex, which was completed in
August 1990, was 99% occupied as of September 30, 1996. The Bank is not aware
of any present plans for the disposition of this project by the partnership,
nor is it aware of any further funding needs of the partnership. Fidelity
Corporation's portion of the operating losses for the year ended September 30,
1996 was $35,000. Losses from the operations of the property are primarily due
to the expensing of certain organizational and marketing costs and non-cash
expenses such as amortization and depreciation. The losses from the
partnership have reduced the Bank's income.
Real estate development and investment activities involve varying degrees of
risk. In the case of rental property, decreases in occupancy rates, increases
in operating expenses, declines in the underlying value of the project or in
its general market area, adverse changes in local, regional and/or national
economic conditions, or a combination of these or other factors can have a
negative effect on the profitability and value of the project. The Bank
currently does not intend to engage in further real estate development
activities. At September 30, 1996, Fidelity Corporation had assets of
$930,000.
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, 1996, the Company had 91 full-time employees and 28 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
The growth and earnings performance of the Company can be affected not only by
management decisions and general economic conditions, but also by the policies
of various governmental regulatory authorities including, but not limited to,
the OTS, the FDIC, the Board of Governors of the Federal Reserve System (the
"Federal Reserve Board"), the Internal Revenue Service and state taxing
authorities and the SEC. Financial institutions and their holding companies
are extensively regulated under federal and state law. The effect of such
statutes, regulations and policies can be significant, and cannot be predicted
with a high degree of certainty.
Federal and state laws and regulations generally applicable to financial
institutions, such as the Company and the Bank, regulate, among other things,
the scope of business, investments, reserves against deposits, capital levels
relative to operations, the nature and amount of collateral for loans, the
establishment of branches, mergers, consolidations and dividends. The system of
supervision and regulation applicable to the Company and the Bank establishes a
comprehensive framework for their respective operations and is intended
primarily for the protection of the FDIC's deposit insurance funds and the
depositors, rather than the shareholders, of financial institutions.
The following references to material statutes and regulations affecting the
Company and the Bank are brief summaries thereof and do not purport to be
complete, and are qualified in their entirety by reference to such statutes and
regulations. Any change in applicable law or regulations may have a material
effect on the business of the Company and the Bank.
RECENT REGULATORY DEVELOPMENTS
On September 30, 1996, President Clinton signed into law the Economic Growth
and Regulatory Paperwork Reduction Act of 1996" (the Regulatory Reduction
Act ). Subtitle G of the Regulatory Reduction Act consists of the Deposit
Insurance Funds Act of 1996" (the DIFA ). The DIFA provides for a one-time
special assessment on each depository institution holding deposits subject to
assessment by the FDIC for the Savings Association Insurance Fund (the SAIF )
in an amount which, in the aggregate, will increase the designated reserve
ratio of the SAIF (i.e., the ratio of the insurance reserves of the SAIF to
total SAIF-insured deposits) to 1.25% on October 1, 1996. Subject to certain
exceptions, the special assessment is payable in full on November 27, 1996. As
a SAIF-member, the Bank is subject to the special assessment.
Under the DIFA, the amount of the special assessment payable by an institution
is to be determined on the basis of the amount of SAIF-assessable deposits held
by the institution on March 31, 1995, or acquired by the institution after
March 31, 1995 from another institution which held the deposits as of that date
but is no longer in existence on November 27, 1996. The DIFA provides for a
20% discount in calculating the SAIF-assessable deposits of certain Oakar
banks (i.e., Bank Insurance Fund ( BIF ) member banks that hold deposits
acquired from a SAIF member that are deemed to remain SAIF insured) and certain
Sasser banks (i.e., banks that converted from thrift to bank charters but
remain SAIF members). The DIFA also exempts certain institutions from payment
of the special assessment (including institutions that are undercapitalized or
that would become undercapitalized as a result of payment of the special
assessment), and allows an institution to pay the special assessment in two
installments if there is a significant risk that by paying the special
assessment in a lump sum, the institution or its holding company would be in
default under or in violation of terms or conditions of debt obligations or
preferred stock issued by the institution or its holding company and
outstanding on September 13, 1995.
On October 8, 1996, the FDIC adopted a final regulation implementing the SAIF
special assessment. In that regulation, the FDIC set the special assessment
rate at 0.657% of SAIF-assessable deposits held on March 31, 1995. The FDIC
has notified the Bank that the dollar amount of the special assessment payable
by the Bank is estimated to be $1.6 million, which the Bank included in other
liabilities at September 30, 1996.
In light of the recapitalization of the SAIF pursuant to the special assessment
authorized by the DIFA, the FDIC, on October 8, 1996, issued a proposed rule
that would reduce regular semi-annual SAIF assessments from the current range
of 0.23% - 0.31% of deposits to a range of 0% - 0.27% of deposits. Under the
proposal, the new rates would be effective October 1, 1996 for Oakar and Sasser
banks, but would not take affect for other SAIF-assessable institutions until
January 1, 1997. From October 1, 1996 through December 31, 1996, SAIF-
assessable institutions other than Oakar and Sasser banks would, under the
proposal, be assessed at rates ranging from 0.18% to 0.27% of deposits, which
represents the amount the FDIC calculates as necessary to cover the interest
due for that period on outstanding obligations of the Financing Corporation
(the FICO ), discussed below. Because SAIF-assessable institutions have
already been assessed at current rates (i.e., 0.23% - 0.31% of deposits) for
the semi-annual period ending December 31, 1996, the proposal contemplates that
the FDIC will refund the amount collected from such institutions for the period
from October 1, 1996 through December 31, 1996 which exceeds the amount due for
that period under the reduced assessment schedule. Assuming the proposal is
adopted as proposed, and assuming the Bank retains its current risk
classification under the FDIC s risk-based assessment system, the deposit
insurance assessments payable by the Bank will be reduced significantly, to the
same level currently paid by the Bank s BIF-member competitors.
Prior to the enactment of the DIFA, a substantial amount of the SAIF assessment
revenue was used to pay the interest due on bonds issued by the FICO, the
entity created in 1987 to finance the recapitalization of the Federal Savings
and Loan Insurance Corporation (the "FSLIC"), the SAIF s predecessor insurance
fund. Pursuant to the DIFA, the interest due on outstanding FICO bonds will
be covered by assessments against both SAIF and BIF member institutions
beginning January 1, 1997. Between January 1, 1997 and December 31, 1999, FICO
assessments against BIF-member institutions cannot exceed 20% of the FICO
assessments charged SAIF-member institutions. From January 1, 2000 until the
FICO bonds mature in 2019, FICO assessments will be shared by all FDIC-insured
institutions on a pro rata basis. The FDIC estimates that the FICO assessments
for the period January 1, 1997 through December 31, 1999 will be approximately
0.013% of deposits for BIF members versus approximately 0.064% of deposits for
SAIF members, and will be less than 0.025% of deposits thereafter.
The DIFA also provides for a merger of the BIF and the SAIF on January 1, 1999,
provided there are no state or federally chartered, FDIC-insured savings
associations existing on that date. To facilitate the merger of the BIF and
the SAIF, the DIFA directs the Treasury Department to conduct a study on the
development of a common charter and to submit a report, along with appropriate
legislative recommendations, to the Congress by March 31, 1997.
In addition to the DIFA, the Regulatory Reduction Act includes a number of
statutory changes designed to eliminate duplicative, redundant or unnecessary
regulatory requirements. Further, the Regulatory Reduction Act removes the
percentage of assets limitations on the aggregate amount of credit card and
education loans that may be made by a savings association, such as the Bank;
increases from 10% to 20% of total assets the aggregate amount of commercial
loans that a savings association may make, provided that any amount in excess
of 10% of total assets represents small business loans; allows education,
small business, and credit card to be counted in full in determining a savings
association s compliance with the qualified thrift lender ( QTL ) test; and
provides that a savings association may be deemed to meet the QTL test if it
qualifies as a domestic building and loan association under the Internal
Revenue Code. The Regulatory Reduction Act also clarifies the liability of a
financial institution, when acting as a lender or in a fiduciary capacity,
under the federal environmental clean-up laws. Although the full impact of the
Regulatory Reduction Act on the operations of the Company and the Bank cannot
be determined at this time, management believes that the legislation will
reduce compliance costs to some extent and allow the Company and the Bank
somewhat greater operating flexibility.
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 and is required to file periodic
reports of its operations and such additional information 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 does not have SAIF or BIF insurance of
accounts.
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, subject
to the requirement that in any nonsupervisory transaction, the law of the state
in which the savings association to be acquired is located must specifically
authorize the proposed acquisition, by language to that effect and not merely
by implication. State laws vary in the extent to which they allow interstate
acquisitions of savings associations. Illinois law presently permits financial
institution holding companies located in any state of the United States to
acquire financial institutions or financial institution holding companies
located in Illinois, subject to certain conditions.
A savings and loan holding company that controls only one savings association
subsidiary is generally not subject to any restrictions on the non-banking
activities that the holding company may conduct either directly or through a
non-banking subsidiary, so long as the holding company's savings association
subsidiary constitutes a qualified thrift lender. If, however, the OTS
determines that there is reasonable cause to believe that the continuation by a
savings and loan holding company of a particular activity constitutes a serious
risk to the financial safety, soundness or stability of its savings association
subsidiary, the OTS may require the holding company to cease engaging in the
activity (or divest any subsidiary which engages in the activity) or may impose
such restrictions on the holding company and the subsidiary savings association
as deemed necessary to address the risk, including imposing 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 legislation also prohibits acquisition of control of a savings
association or savings and loan holding company, such as the Company, without
prior notice to certain federal bank regulators. Control is defined in
certain cases as acquisition of 10% of the outstanding shares of a savings
association or savings and loan holding company.
DIVIDENDS. The General Corporation Law of the State of Delaware allows the
Company to pay dividends only out of its surplus, 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. The Company's ability to pay
dividends is also dependent upon the ability of the Bank to pay dividends to
the Company. OTS regulations impose certain restrictions on the ability of the
Bank to pay dividends to the Company. See "--THE BANK--DIVIDENDS."
FEDERAL SECURITIES REGULATION. The Company's common stock is registered with
the SEC under the Securities Act of 1933, as amended, and the Securities
Exchange Act of 1934, as amended (the "Exchange Act"). Consequently, the
Company is subject to the information, proxy solicitation, insider trading and
other restrictions and requirements of the SEC under the Exchange Act.
THE BANK
GENERAL. The Bank is a federally chartered savings association, the deposits
of which are insured by the SAIF of the FDIC. As a SAIF-insured, federally
chartered savings association, the Association is subject to the examination,
supervision, reporting and enforcement requirements of the OTS, as the
chartering authority for federal savings associations, and the FDIC as
administrator of the SAIF. The Bank is also a member of the Federal Home Loan
Bank System (the "FHLB System"), which provides a central credit facility
primarily for member institutions.
DEPOSIT INSURANCE. As an FDIC-insured institution, the Bank is required to pay
deposit insurance premium assessments to the FDIC. The amount each institution
pays for FDIC deposit insurance is determined in accordance with 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
level of capital and supervisory evaluation. 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. As of September 30, 1996,
SAIF-member institutions were assessed at rates ranging from 0.23% of deposits
to 0.31% of deposits. The FDIC has proposed to reduce SAIF assessment rates to
a range of 0.18% - 0.27% of deposits for the period October 1, 1996 through
December 31, 1996, and to a range of 0% - 0.27% of deposits commencing January
1, 1997. See "--RECENT REGULATORY DEVELOPMENTS."
The FDIC may terminate the deposit insurance of any insured depository
institution if the FDIC determines, after a hearing, that the institution has
engaged or is engaging in unsafe or unsound practices, is in an unsafe or
unsound condition to continue operations or 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 Company 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, such as the Bank, have been used to cover interest
payments due on the outstanding obligations of the FICO, the entity created to
finance the recapitalization of the FSLIC, the SAIF's predecessor insurance
fund. Pursuant to federal legislation enacted September 30, 1996, commencing
January 1, 1997, SAIF members and BIF members will be subject to assessments to
cover the interest payment on outstanding FICO obligations. Such FICO
assessments will be in addition to amounts assessed by the FDIC for deposit
insurance. Until January 1, 2000, the FICO assessments made against BIF
members may not exceed 20% of the amount of the FICO assessments made against
SAIF members. It is estimated that SAIF members will pay FICO assessments
equal to 0.064% of deposits while BIF members will pay FICO assessments equal
to 0.013% of deposits. Between January 1, 2000 and the maturity of the
outstanding FICO obligations in 2019, BIF members and SAIF members will share
the cost of the interest on the FICO bonds on a pro rata basis. It is
estimated that FICO assessments during this period will be less than 0.025% of
deposits.
OTS ASSESSMENTS. Savings associations are required to pay assessments to the
OTS to fund the operations of the OTS. The amount of the OTS assessment is
based upon each institution's total assets, including consolidated
subsidiaries, as reported to the OTS on the quarterly Thrift Financial Reports.
During the year ended September 30, 1996, the Bank paid total OTS assessments
of $97,000.
CAPITAL REQUIREMENTS. The OTS has established the following minimum capital
standards for savings associations, such as the Bank: a core capital
requirement, consisting of a minimum ratio of core capital (consisting
primarily of stockholders' equity) to total assets of 3%; a tangible capital
requirement consisting of a minimum ratio of tangible capital (defined as core
capital minus all intangible assets other than a specified amount of purchased
mortgage servicing rights) to total assets of 1.5%; and a risk-based capital
requirement, consisting of a minimum ratio of total capital to total risk-
weighted assets of 8%, at least one-half of which must consist of core capital.
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
an institution's exposure to interest rate risk and the risks posed by
concentrations of credit and nontraditional activities.
At September 30, 1996, the Bank exceeded its minimum regulatory capital
requirements, as follows:
4.0%
Actual Required Excess Actual Required
Capital Capital Capital Percentage Percentage(1)
(dollars in thousands)
Risk-based $ 38,042 18,020 20,022 16.9% 8.0%
Tangible 37,639 7,023 30,616 8.0 1.5
Core (leverage) 37,639 14,046 23,593 8.0 3.0
(1) Although the OTS capital regulations require savings institutions to meet
a 1.5% tangible capital ratio and a 3% core (leverage) capital ratio, the
prompt corrective action standards discussed below also establish, in effect, a
minimum 2% tangible capital standard, a 4% core (leverage) capital ratio (3%
for institutions receiving the highest rating on the CAMEL financial
institution rating system), and, together with the risk-based standard itself,
a 4% Tier 1 risk-based capital standard.
Federal law provides the OTS with broad power to take prompt corrective action
to resolve the problems of undercapitalized savings associations. The extent
of the OTS's powers depends on whether the institution in question is "well
capitalized," "adequately capitalized," "undercapitalized," "significantly
undercapitalized" or "critically undercapitalized." Depending upon the capital
category to which an institution is assigned, the OTS's corrective powers
include: requiring the submission of a capital restoration plan; placing
limits on asset growth and restrictions on activities; requiring the
institution to issue additional capital stock (including additional voting
stock) or to be acquired; restricting transactions with affiliates; restricting
the interest rate the institution may pay on deposits; ordering a new election
of directors of the institution; requiring that senior executive officers or
directors be dismissed; prohibiting the institution from accepting deposits
from correspondent banks; requiring the institution to divest certain
subsidiaries; prohibiting the payment of principal or interest on subordinated
debt; and ultimately, appointing a receiver for the institution.
DIVIDENDS. OTS regulations impose limitations upon all capital distributions
by thrifts, including cash dividends. The rule establishes three tiers of
institutions. An institution that exceeds all fully phased-in capital
requirements before and after the proposed capital distribution ( Tier 1
Institution ) could, after prior notice to, but without the approval of, the
OTS, make capital distributions during a calendar year of up to the higher of
(i) 100% of its net income to date during the calendar year plus the amount
that would reduce by one-half its surplus capital ratio (the excess capital
over its fully phased-in capital requirements) at the beginning of the calendar
year, or (ii) 75% of its net income over the most recent preceding four quarter
period. Any additional capital distributions would require prior regulatory
approval. As of September 30, 1996, the Bank was a Tier 1 Institution.
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. As described above, the Bank
exceeded its minimum capital requirements under applicable guidelines as of
September 30, 1996. 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. For
the year ended September 30, 1996, approximately $4.3 million was paid as
dividends to the Company by the Bank.
INSIDER TRANSACTIONS. The Bank is subject to certain restrictions imposed by
the Federal Reserve Act on any extensions of credit to the Company and its
subsidiaries, on investments in the stock or other securities of the Company
and its subsidiaries and the acceptance of the stock or other securities of the
Company or its subsidiaries 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 and its
subsidiaries, to principal stockholders of the Company, and to "related
interests" of such directors, officers and principal stockholders. In
addition, such legislation 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 OTS has adopted guidelines which establish
operational and managerial standards to promote the safety and soundness of
savings associations. The guidelines set forth standards for internal
controls, information systems, internal audit systems, loan documentation,
credit underwriting, interest rate exposure, asset growth, compensation, fees
and benefits, asset quality and earnings. In general, the 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 OTS
may require the institution to submit a plan for achieving and maintaining
compliance. The preamble to the guidelines states that the OTS expects to
require a compliance plan from an institution whose failure to meet one or more
of the guidelines is of such severity that it could threaten the safety and
soundness of the institution. Failure to submit an acceptable plan, or failure
to comply with a plan that has been accepted by the OTS, would constitute
grounds for further enforcement action.
QUALIFIED THRIFT LENDER TEST. Under the qualified thrift lender ("QTL") test
in effect during the year ended September 30, 1996, the Bank generally was
required to invest at least 65% of its portfolio assets in "qualified thrift
investments," as measured on a monthly average basis in nine out of every 12
months. Qualified thrift investments for purposes of the QTL test consist
principally of residential mortgage loans, mortgage-backed securities and other
housing and consumer-related investments. The term "portfolio assets" is
statutorily defined to mean a savings association's total assets less goodwill
and other intangible assets, the association's business property and a limited
amount of its liquid assets. As of September 30, 1996, the Bank satisfied the
QTL test, with a ratio of qualified thrift investments to portfolio assets of
85.3%. Under amendments to the HOLA enacted September 30, 1996, the Bank will
be deemed to satisfy the QTL test if it either holds qualified thrift
investments equaling 65% or more of its portfolio assets, as described above,
or qualifies as a domestic building and loan association under the Internal
Revenue Code. See "--RECENT REGULATORY DEVELOPMENTS."
LIQUIDITY REQUIREMENTS. OTS regulations currently require each savings
association to maintain, for each calendar month, an average daily balance of
liquid assets (including cash, certain time deposits, bankers' acceptances, and
specified United States Government, state or federal agency obligations) equal
to at least 5% of the average daily balance of its net withdrawable accounts
plus short-term borrowings (i.e., those repayable in 12 months or less) during
the preceding calendar month. This liquidity requirement may be changed from
time to time by the OTS to an amount within a range of 4% to 10% of such
accounts and borrowings, depending upon economic conditions and the deposit
flows of savings associations. OTS regulations also require each savings
association to maintain, for each calendar month, an average daily balance of
short-term liquid assets (generally liquid assets having maturities of 12
months or less) equal to at least 1% of the average daily balance of its net
withdrawable accounts plus short-term borrowings during the preceding calendar
month. Penalties may be imposed for failure to meet liquidity ratio
requirements. At September 30, 1996, the Bank was in compliance with OTS
liquidity requirements, with an overall liquidity ratio of 8.2% and a short-
term liquidity ratio of 1.5%.
FEDERAL HOME LOAN BANK SYSTEM. The Bank is a member of the FHLB System, which
consists of twelve regional FHLBs. The FHLB System provides a central credit
facility primarily for member institutions. The Bank is a member of the FHLB
of Chicago, and as such is required to own shares of capital stock in that FHLB
in an amount at least equal to 1% of the aggregate principal amount of its
unpaid residential mortgage loans and similar obligations at the beginning of
each year, or 1/20th of its advances (borrowings) from the FHLB of Chicago,
whichever is greater. The Bank is in compliance with this requirement with an
investment in FHLB of Chicago stock of $5.8 million at September 30, 1996.
The FHLBs are required to provide funds to cover certain FICO obligations and
to contribute funds for affordable housing programs. These requirements could
reduce the dividends paid by the FHLBs on their outstanding stock and could
also result in the FHLBs imposing higher rates of interest on advances to their
members, which could reduce the Bank's net interest income. During the fiscal
year ended September 30, 1996, the Bank received dividends on its stock in the
FHLB of Chicago totalling $271,000.
FEDERAL RESERVE SYSTEM. Federal Reserve Board regulations require savings
institutions to maintain non-interest earning reserves against their
transaction accounts (primarily NOW and regular checking accounts), as follows:
for accounts aggregating $52.0 million or less, the reserve requirement is 3%;
and for accounts greater than $52.0 million, the reserve requirement is $1.6
million plus 10% of the amount of total transaction accounts in excess of $52.0
million. The first $4.3 million of otherwise reservable balances are exempted
from the reserve requirements. These reserve requirements are subject to
annual adjustment by the Federal Reserve Board. The Bank is in compliance with
the foregoing requirements. The balances used to meet the reserve requirements
imposed by the Federal Reserve Board may be used to satisfy liquidity
requirements imposed by the OTS.
IMPACT OF NEW ACCOUNTING STANDARDS
In March 1995, the FASB issued Statement of Financial Accounting Standards
("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of". SFAS No. 121 is effective for fiscal
years beginning after December 15, 1995. SFAS No. 121 provides guidance for
the recognition and measurement of impairment of long-lived assets, certain
identifiable intangibles, and goodwill related both to assets to be held and
used and assets to be disposed of. SFAS No. 121 requires entities to perform
separate calculations for assets to be held and used to determine whether
recognition of an impairment loss is required and, if so, to measure that
impairment. SFAS No. 121 requires long-lived assets and certain identifiable
intangibles to be disposed of to be reported at the lower of carrying amount
or fair value less costs to sell. The Company will implement SFAS No. 121 on
October 1, 1996. The adoption of SFAS No. 121 will not have a material impact
of the Company's financial position or results of operations.
In May 1995, the FASB issued SFAS No. 122, "Accounting for Mortgage Servicing
Rights." SFAS No. 122 is effective for fiscal years beginning after December
15, 1995, with earlier application encouraged. SFAS No. 122 requires the
recognition of a separate assets related to rights to service loans for others,
however those servicing rights are acquired. SFAS No. 122 also requires an
assessment of the capitalized mortgage rights for impairment based on the fair
value of those rights. The Company will implement the provisions of SFAS No.
122 on October 1, 1996. The adoption of SFAS No. 122 will not have a material
impact of the Company's financial position or results of operations.
In October 1995, the FASB issued SFAS No. 123 "Accounting for Stock-Based
Compensation". SFAS No. 123 is effective for fiscal years beginning after
December 15, 1995, the fiscal year beginning October 1, 1996 for the Company.
SFAS No. 123 allows for alternative accounting treatment for stock-based
compensation which the Company currently reports under Accounting Principles
Board (APB) No. 25, "Accounting for Stock Issued to Employees." The Company
does not intend to elect the fair value-based method of expense recognition for
stock-based compensation as contemplated by SFAS No. 123, but rather will adopt
the pro forma disclosure alternative provided in SFAS No. 123, and continue to
account for stock-based compensation under APB No. 25.
In June 1996, the FASB issued SFAS No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities." SFAS No.
125, among other things, applies a "financial-components approach" that focuses
on control, whereby an entity recognizes the financial and servicing assets it
controls and the liabilities it has incurred, derecognizes assets when control
has been surrendered, and derecognizes liabilities when extinguished. SFAS No.
125 provides consistent standards for distinguishing transfers of financial
assets that are sales from transfers that are secured borrowings. SFAS No. 125
is effective for transfers and servicing of financial assets and
extinguishments of liabilities occurring after December 31, 1996. The Company
does not expect this pronouncement to have a significant impact on its
consolidated financial condition or results of operations.
No other new accounting policies were adopted and the application of existing
policies was not changed during fiscal 1996.
ITEM 8. FINANCIAL STATEMENTS and SUPPLEMENTARY DATA
CONSOLIDATED STATEMENTS of FINANCIAL CONDITION
(Dollars in thousands)
September 30, 1996 and 1995
ASSETS 1996 1995
Cash and due from banks $ 3,848 2,649
Interest-earning deposits 225 1,266
Federal funds sold 200 200
Investment in dollar-denominated mutual funds, at fair value 3,146 227
FHLB of Chicago stock, at cost 5,795 3,000
Mortgage-backed securities held to maturity, at amortized cost
(approximate fair value of $21,766 and $26,769 at
September 30, 1996 and 1995) 21,673 26,484
Investment securities available for sale, at fair value 78,104 84,579
Loans receivable, net of allowance for loan losses of $810 and $403
at September 30, 1996 and 1995 354,255 266,735
Accrued interest receivable 3,199 2,910
Real estate in foreclosure 97 -
Premises and equipment 3,780 3,988
Deposit base intangible 158 219
Other assets 1,382 1,407
-------- -------
$ 475,862 393,664
======== =======
LIABILITIES and STOCKHOLDERS' EQUITY
LIABILITIES
Deposits 302,934 275,993
Borrowed funds 115,300 54,032
Advance payments by borrowers for taxes and insurance 1,953 4,908
Other liabilities 6,847 4,939
-------- -------
Total liabilities 427,034 339,872
STOCKHOLDERS' EQUITY
Preferred stock, $.01 par value; authorized 2,500,000 shares;
none outstanding - -
Common stock, $.01 par value; authorized 8,000,000 shares;
issued 3,782,350 shares; 2,866,108 and 3,278,894 shares outstanding
at September 30, 1996 and 1995, respectively 38 38
Additional paid-in capital 37,079 36,795
Retained earnings, substantially restricted 27,851 26,449
Treasury stock, at cost (916,242 and 503,456 shares at
September 30, 1996 and 1995, respectively) (12,619) (5,978)
Common stock acquired by Employee Stock Ownership Plan (2,078) (2,494)
Common stock acquired by Bank Recognition and Retention Plans (708) (963)
Unrealized loss on investment securities available for sale,
less applicable taxes (735) (55)
-------- -------
Total stockholders' equity 48,828 53,792
-------- -------
Commitments and contingencies
$475,862 393,664
======== =======
See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENTS of EARNINGS
(Dollars in thousands, except per share data)
Years ended September 30, 1996, 1995, and 1994
1996 1995 1994
INTEREST INCOME:
Loans receivable $ 23,907 19,329 16,013
Investment securities 5,772 4,240 2,325
Mortgage-backed securities 1,703 2,302 777
Interest earning deposits 60 54 103
Federal funds sold 38 24 1,035
Commercial paper - - 209
Investment in dollar-denominated mutual funds 74 220 651
------- ------ ------
31,554 26,169 21,113
INTEREST EXPENSE:
Deposits 13,941 10,966 8,849
Borrowed funds 4,188 2,786 910
------- ------ ------
18,129 13,752 9,759
Net interest income before provision for loan losses 13,425 12,417 11,354
Provision for loan losses 410 192 48
------- ------ ------
Net interest income after provision for loan losses 13,015 12,225 11,306
NON-INTEREST INCOME:
Gain (loss) on sale of investment securities
available for sale - 274 (17)
Fees and commissions 379 398 680
Insurance and annuity commissions 519 519 536
Other 59 38 42
------- ------ ------
957 1,229 1,241
NON-INTEREST EXPENSE:
General and administrative expenses:
Salaries and employee benefits 4,878 4,570 4,451
Office occupancy and equipment 1,208 1,220 1,119
Data processing 449 407 315
Advertising and promotions 421 476 466
Federal deposit insurance premiums 2,294 564 560
Other 1,294 1,118 1,172
------- ------ ------
Total general and administrative expenses 10,544 8,355 8,083
Amortization of intangible 61 72 81
Recapture of credit enhancement losses (10) (90) -
------- ------ ------
10,595 8,337 8,164
Income before income taxes 3,377 5,117 4,383
Income tax expense 1,235 2,033 1,703
------- ------ ------
NET INCOME $ 2,142 3,084 2,680
======= ====== ======
Earnings per share - primary $0.72 0.94 0.71
Earnings per share - fully diluted $0.72 0.93 0.71
See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENTS of CHANGES IN STOCKHOLDERS' EQUITY
(Dollars in thousands)
Years ended September 30, 1996, 1995, and 1994
Unrealized
Common Loss On
Common Stock Investment
Additional Stock Acquired Securities
Common Paid-in Retained Treasury Acquired By Available
Stock Capital Earnings Stock By ESOP By BRRP's For Sale Total
Balance at September 30, 1993 $ - - 21,100 - - - - 21,100
Net income - - 2,680 - - - - 2,680
Net proceeds of common stock
issued 37 35,188 - - (2,909) - - 32,316
Adjustment to paid-in capital
resulting from BRRP stock
purchase 1 1,454 - - - (1,455) - -
Purchase of treasury stock
189,117 shares) - - - (2,045) - - - (2,045)
Amortization of award of BRRP
stock - - - - - 236 - 236
Unrealized loss on investment
securities available for sale - - - - - - (810) (810)
--- ------ ------- ------ ------ ------ ----- ------
Balance at September 30, 1994 38 36,642 23,780 (2,045) (2,909) (1,219) (810) 53,477
Net income - - 3,084 - - - - 3,084
Purchase of treasury stock
(316,339 shares) - - - (3,957) - - - (3,957)
Cash dividends ($.12 per share) - - (415) - - - - (415)
Amortization of award of BRRP
stock - - - - - 256 - 256
Cost of ESOP shares released - - - - 415 - - 415
Exercise of stock options and
reissuance of treasury shares
(2,000 shares) - (4) - 24 - - - 20
Tax benefit related to vested
BRRP stock - 26 - - - - - 26
Tax benefit related to stock
options exercised - 1 - - - - - 1
Market adjustment for committed
ESOP shares - 130 - - - - - 130
Change in unrealized loss on
investment securities available
for sale - - - - - - 755 755
--- ------ ------- ------ ------ ------ ----- ------
Balance at September 30, 1995 38 36,795 26,449 (5,978) (2,494) (963) (55) 53,792
Net income - - 2,142 - - - - 2,142
Purchase of treasury stock
(414,986 shares) - - - (6,669) - - - (6,669)
Cash dividends ($.24 per share) - - (740) - - - - (740)
Amortization of award of BRRP
stock - - - - - 255 - 255
Cost of ESOP shares released - - - - 416 - - 416
Exercise of stock options and
reissuance of treasury shares
(2,200 shares) - (6) - 28 - - - 22
Tax benefit related to vested
BRRP stock - 51 - - - - - 51
Tax benefit related to stock
options exercised - 3 - - - - - 3
Market adjustment for committed
ESOP shares - 236 - - - - - 236
Change in unrealized loss on
investment securities available
for sale - - - - - - (680) (680)
--- ------ ------- ------ ------ ------ ----- ------
Balance at September 30, 1996 $38 37,079 27,851 (12,619) (2,078) (708) (735) 48,828
=== ====== ======= ====== ====== ====== ===== ======
See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENTS of CASH FLOWS
(Dollars in thousands)
Years ended September 30, 1996 1995 1994
Cash flows from operating activities:
Net income $2,142 3,084 2,680
Adjustment to reconcile net income to net cash provided by
operating activities:
Depreciation 385 342 353
Deferred income taxes (229) 217 (183)
Provision for loan losses 410 192 48
Recapture of credit enhancement provision for loss (10) (90) -
Net amortization and accretion of premiums and discounts 210 698 400
Amortization of cost of stock benefit plans 255 256 236
Principal payment on ESOP loan 416 415 -
Market adjustment for committed ESOP shares 236 130 -
Deferred loan fees, net of amortization (1,144) (631) (606)
Amortization of deposit base intangible 61 72 81
Federal Home Loan Bank of Chicago stock dividends - (40) -
Loss (gain) on sale of investment securities available for sale - (274) 17
Origination of loans held for sale - - (5,004)
Proceeds from sale of loans - - 5,448
Increase in accrued interest receivable (289) (549) (1,109)
Decrease (increase) in other assets, net (41) (34) 483
Increase in other liabilities, net 2,621 804 811
------ ----- ------
NET CASH PROVIDED by OPERATING ACTIVITIES 5,023 4,592 3,655
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities of investment securities
available for sale 63,000 22,686 11,215
Proceeds from sale of investment securities available for sale - 14,627 -
Proceeds from redemption of mutual funds 40 8,552 16,562
Proceeds from redemption of Federal Home Loan Bank of Chicago stock 179 - -
Proceeds from loan participation sold 1,890 - -
Proceeds from sale of real estate owned - 161 -
Purchase of dollar-denominated mutual funds (2,959) (12) (4,415)
Purchase of Federal Home Loan Bank of Chicago stock (2,974) (691) -
Purchase of investment securities available for sale (65,000) (59,450) (78,485)
Purchase of mortgage-backed securities held to maturity - - (30,399)
Loans originated for investment (139,589) (77,880) (59,539)
Purchase of loans receivable - (3,000) (3,369)
Purchase of premises and equipment (177) (1,946) (228)
Principal repayments collected on loans receivable 50,820 31,100 50,748
Principal repayments collected on investment securities
available for sale 7,203 9,229 6,649
Principal repayments collected on mortgage-backed
securities held to maturity 4,835 3,050 816
------ ----- ------
NET CASH USED IN INVESTING ACTIVITIES (82,732) (53,574) (90,445)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in deposits 26,941 37,931 (9,801)
Net increase in borrowed funds 61,268 12,032 42,000
Net increase (decrease) in advance payments by borrowers for
taxes and insurance (2,955) 3,931 (265)
Net proceeds from sale of stock - - 32,316
Purchase of treasury stock (6,669) (3,957) (2,045)
Payment of common stock dividends (740) (415) -
Proceeds from exercise of stock options 22 20 -
------ ----- ------
NET CASH PROVIDED BY FINANCING ACTIVITIES 77,867 49,542 62,205
Net change in cash and cash equivalents 158 560 (24,585)
Cash and cash equivalents at beginning of year 4,115 3,555 28,140
------ ----- ------
Cash and cash equivalents at end of year $ 4,273 4,115 3,555
====== ===== ======
CASH PAID DURING THE YEAR FOR:
Interest $ 17,825 13,674 9,451
Income taxes 1,371 1,543 1,559
NON-CASH INVESTING ACTIVITIES - Loans transferred to real
estate in foreclosure 113 193 88
See accompanying notes to consolidated financial statements.
(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 15, 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 accounting and reporting policies of the Company and its subsidiary conform
to generally accepted accounting principles (GAAP) and to general practices
within the thrift industry. In order to prepare the Bank's financial
statements in conformity with GAAP, management is required to make certain
estimates that affect the amounts reported in the financial statements and
accompanying notes. These estimates may differ from actual results. The
following describes the more significant accounting policies.
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
significant intercompany accounts and transactions have been eliminated in
consolidation.
INVESTMENTS IN MUTUAL FUNDS
Investments in mutual funds are designated as available for sale and are
carried at fair value.
MORTGAGE-BACKED SECURITIES HELD TO MATURITY
Management determines the appropriate classification of securities at the time
of purchase. The current mortgage-backed securities portfolio is designated as
held to maturity, as management has the ability and positive intent to hold
these securities to maturity. These securities are carried at cost, adjusted
for premiums and discounts. Amortization of premiums and accretion of
discounts is recognized into interest income by the interest method over the
remaining contractual lives of the securities.
INVESTMENT SECURITIES
Investment 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. Investments purchased for the purpose of being sold are classified as
trading securities and measured at fair value with any changes in fair value
included in earnings. All other investments that are not classified as "held
to maturity" or "trading" are classified as "available for sale". Investments
available for sale are measured at fair value with any changes in fair value
reflected as a separate component of stockholders' equity, net of related tax
effects. All government and corporate securities are classified as available
for sale, and there are no trading securities.
LOANS RECEIVABLE
Loans receivable are stated at unpaid principal balances less loans in process,
deferred loan fees or costs, unearned discounts, and allowances for loan
losses.
Loan fees or costs 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.
On October 1, 1995, the Company adopted Financial Accounting Standards Board
Statement No. 114, "Accounting by Creditors for Impairment of a Loan," as
amended by Statement No. 118, "Accounting by Creditors for Impairment of a Loan
- - Income Recognition and Disclosures". Statement No. 114 requires that
impaired loans be measured at the present value of expected future cash flows
discounted at the loan's effective interest rate, or, as a practical expedient,
at the loan's observable market price or at the fair value of the collateral if
the loan is collateral dependent. Statement No. 118 eliminates the provisions
for Statement No. 114 that describe how a creditor should report interest
income on an impaired loan and allows a creditor to use existing methods to
recognize, measure, and display interest income on an impaired loan.
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 the risks
inherent in the Bank's loan portfolio. In determining a proper level of loss
reserves, management periodically evaluates the adequacy of the allowance based
on general trends in the real estate market, 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 and prospective
economic conditions. The Bank's recent historical trends have resulted in no
significant losses on loans that are 90 days or greater delinquent and on loans
which management believes are uncollectible. In addition, various regulatory
agencies, as an integral part of their examination process, periodically review
the Bank's allowance for losses on loans receivable. Such agencies may require
the Bank to recognize additions to the allowance for loan losses based on their
judgements of information available to them at the time of their examination.
REAL ESTATE IN FORECLOSURE
Real estate acquired through foreclosure or deed in lieu of foreclosure is
carried at the lower of fair value or the related loan balance at the date of
foreclosure, less estimated costs to dispose. Valuations are periodically
performed by management and an allowance for losses is established by a charge
to operations if the carrying value of a property subsequently exceeds its
estimated net realizable value.
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 3
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.
DEPOSIT BASE INTANGIBLE
The deposit base intangible arising from the Bank's branch purchase and
assumption of the deposit liabilities is being amortized over 10 years, using
the interest method. Accumulated amortization as of September 30, 1996 and
1995 was $354,000 and $293,000, respectively.
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.
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. Income is reduced for
commissions applicable to return premiums when the credit is issued to the
policyholder.
CASH AND CASH EQUIVALENTS
For purposes of reporting cash flows, cash and cash equivalents include cash
and due from banks, interest-bearing deposits, and federal funds sold.
EARNINGS PER SHARE
Earnings per share of common stock for the year ended September 30, 1996 has
been determined by dividing net income by 2,984,863 and 2,993,069, the weighted
average number of primary and fully diluted shares of common stock and common
stock equivalents outstanding, respectively. Earnings per share of common
stock for the year ended September 30, 1995 has been determined by dividing net
income by 3,281,872 and 3,331,536, the weighted average number of primary and
fully diluted shares of common stock and common stock equivalents outstanding,
respectively. Pro forma earnings per share of common stock for the year ended
September 30, 1994 has been determined by dividing net income by 3,753,567 and
3,773,119, the weighted average number of primary and fully diluted shares of
common stock and common stock equivalents, respectively, outstanding as if the
Company's initial public offering took place on October 1, 1993. Stock options
are regarded as common stock equivalents and are therefore considered in both
the primary and fully diluted earnings per share calculations. Common stock
equivalents are computed using the treasury stock method. ESOP shares are only
considered outstanding for earnings per share calculations when they are
committed to be released, effective October 1, 1994.
(2) MORTGAGE-BACKED SECURITIES HELD TO MATURITY
Mortgage-backed securities held to maturity are summarized as follows:
1996 1995
Gross Gross Gross Gross
Amortized unrealized unrealized Fair Amortized unrealized unrealizef Fair
cost gains losses value cost gains losses value
(in thousands)
Federal Home Loan
Mortgage
Corporation $ 21,673 93 - 21,766 26,484 285 - 26,769
There were no sales of mortgage-backed securities held to maturity during the
years ended September 30, 1996, 1995, and 1994.
(3) INVESTMENT SECURITIES AVAILABLE FOR SALE
Investment securities available for sale are summarized as follows:
1996 1995
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:
Within one year $ - - - - 1,000 2 - 1,002
After one year
to five years 11,000 - 479 10,521 26,000 19 9 26,010
After 5 years
to 10 years 55,000 - 549 54,451 20,000 194 - 20,194
-------- --- ----- ------- ------- ---- --- -------
66,000 - 1,028 64,972 47,000 215 9 47,206
======== === ===== ======= ======= ==== === =======
Corporate debt
securities due:
Within one year - - - - 20,138 - 40 20,098
After one year
to five years 3,000 - 30 2,970 3,000 - - 3,000
After 5 years
to 10 years 2,973 - 78 2,895 - - - -
-------- --- ---- ------- ------- ---- --- -------
5,973 - 108 5,865 23,138 - 40 23,098
======== === ===== ======= ======= ==== === =======
Corporate asset-backed
securities 7,331 4 68 7,267 14,532 - 257 14,275
-------- --- ---- ------- ------- ---- --- -------
$ 79,304 4 1,204 78,104 84,670 215 306 84,579
======== === ===== ======= ======= ==== === =======
Proceeds from the sale of investment securities available for sale during 1995
were $14.6 million. There were no sales of investment securities available for
sale in 1996 and 1994. Gross realized gains of $409,000 and gross realized
losses of $121,000 were recorded in 1995. The fair value of all investment
securities available for sale is based upon quoted market prices. 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 prepayment penalties.
(4) LOANS RECEIVABLE
Loans receivable are summarized as follows at September 30:
1996 1995
(in thousands)
One-to-four family mortgages $ 277,086 203,974
Multifamily mortgages 55,341 45,698
Commercial 5,656 2,478
Commercial leases 2,032 2,373
Consumer loans 13,585 12,442
--------- --------
Gross loans receivable 353,700 266,965
Less:
Loans in process (3) (77)
Deferred loan costs 1,414 270
Allowance for losses on loans (810) (403)
Unearned discount on consumer loans (46) (20)
--------- --------
$ 354,255 266,735
========= ========
Weighted average interest rate 7.74% 8.00%
====== ======
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, 1996, 1995, and 1994 were approximately
$14,857,000, $16,528,000, and $18,753,000, respectively. Custodial balances
maintained in connection with the mortgage loans serviced for others are
included in deposits at September 30, 1996, 1995, and 1994 and were
approximately $246,000, $601,000, and $255,000, respectively. Service fee
income for the years ended September 30, 1996, 1995, and 1994 was $59,000,
$60,000, and $79,000, respectively.
Activity in the allowance for loan losses is summarized as follows for the
years ended September 30:
1996 1995 1994
(in thousands)
Balance at beginning of year $ 403 228 233
Provision for loan losses 410 192 48
Charge-offs (34) (26) (53)
Recoveries 31 9 -
----- ---- ----
Balance at end of year $ 810 403 228
===== ==== ====
Non-accrual loans receivable were as follows:
Principal Percent of
Balance total loans
Number in thousands) receivable
September 30, 1996:
Loans receivable 11 $ 1,054 0.30%
Commercial leases, Bennett Funding Group 1 2,032 0.57%
September 30, 1995 13 617 0.23%
September 30, 1994 8 282 0.13%
On October 1, 1995, the Company adopted Statements No. 114 and 118. 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 loan, meet the definition set forth
for impaired loans in Statement No. 114. On October 1, 1995, the Company had
no impaired loans under the guidelines of Statement No. 114. At September 30,
1996, the recorded investment in loans considered to be impaired under
Statement No. 114 was $2.0 million, which solely consisted of certain
commercial equipment leases as more fully discussed below. For statistical and
discussion purposes, the leases are considered to be one loan.
From October 1994 through January 1995, the Bank purchased 454 full-payout
commercial equipment leases located in various parts of the country with
original aggregate outstanding principal balances of $3.0 million. Since that
time, normal lease payments have reduced the aggregate outstanding balance to
$2.0 million. These leases were all originated by, serviced by, and
financially guaranteed by Bennett Funding Group ("BFG") of Syracuse, New York.
On March 29, 1996, it was reported that BFG was the target of a civil complaint
filed by the Securities and Exchange Commission. On that same date, BFG filed
a Chapter 11 bankruptcy petition in the Northern District of New York and
halted payments on lease agreements.
The Bankruptcy Trustee is currently collecting the lease payments from the
lessees and holding them in escrow pending the outcome of the litigation
concerning BFG, its creditors, and related issues. The Company is vigorously
pursuing legal remedies in an attempt to collect and protect amounts due under
the terms of the underlying leases. There can be no assurance that additional
losses will not be incurred in connection with the BFG leases.
The Bank's $2.0 million of commercial equipment leases originated by BFG meet
the criteria for impaired loans. The average recorded investment in impaired
loans for the year ended September 30, 1996 was $ 1.2 million. The related
allowance for impaired loans was $406,000 at September 30, 1996. For the year
ended September 30, 1996, the Company's income recognition for these loans was
limited to actual cash received, prior to the BFG bankruptcy filing, which
amounted to $88,000.
(5) ACCRUED INTEREST RECEIVABLE
Accrued interest receivable is summarized as follows at September 30:
1996 1995
(in thousands)
Loans receivable $ 1,831 1,366
Mortgage-backed securities 129 158
Investment securities available for sale 1,269 1,416
Investment in dollar-denominated mutual funds 13 -
Reserve for uncollected interest (43) (30)
------ -----
$ 3,199 2,910
====== =====
(6) PREMISES AND EQUIPMENT
Premises and equipment are summarized as follows at September 30:
1996 1995
(in thousands)
Land $ 803 796
Buildings 3,513 3,419
Leasehold improvements 1,374 1,374
Furniture, fixtures, and equipment 2,993 2,917
------ -----
8,683 8,506
Less accumulated depreciation and amortization 4,903 4,518
------ -----
$ 3,780 3,988
====== =====
Depreciation and amortization of premises and equipment for the years ended
September 30, 1996, 1995, and 1994 was $385,000, $342,000, and $353,000,
respectively.
The Bank is obligated under non-cancelable leases on two of its branches. Both
leases contain renewal options and rent escalation clauses. Rent expense under
these leases for the years ended September 30, 1996, 1995, and 1994
approximated $148,000, $130,000, and $42,000, respectively. The projected
minimum rentals under existing leases as of September 30, 1996, are as follows:
Year ended September 30, Amount
1997 $ 136,000
1998 92,000
1999 97,000
2000 98,000
2001 99,000
Thereafter 748,000
---------
Total $ 1,270,000
(7) DEPOSITS
Deposits are summarized as follows at September 30:
1996 1995
Stated or Stated or
Weighted Percent Weighted Percent
Average of total Average of total
Rate Amount deposits Rate Amount deposits
(Dollars in thousands)
Passbook accounts 3.35% $ 86,077 28.4% 3.06 81,979 29.7%
NOW accounts 2.17 18,067 6.0 2.02 19,900 7.2
Money market and
management accounts 4.16 19,192 6.3 4.67 18,434 6.7
---- ------- ---- ----- ------ -----
123,336 40.7 120,313 43.6
Certificate accounts:
91-day certificates 4.80 572 0.2 4.10 205 0.1
6-month certificates 5.00 12,287 4.1 5.45 12,891 4.7
7-month certificates 5.83 39,411 13.0 - - -
8-month certificates 5.15 5,191 1.7 6.34 16,667 6.0
10-month certificates 5.34 5,277 1.7 6.08 15,775 5.7
12-month certificates 5.35 11,789 3.9 5.78 13,241 4.8
13-month certificates 5.93 19,760 6.5 7.66 22,455 8.2
15-month certificates 5.91 31,806 10.6 5.76 17,707 6.4
24-month certificates 6.38 22,515 7.4 6.17 22,069 8.0
36-month certificates 5.64 7,924 2.6 5.25 9,961 3.6
36-month rising rate
certificates 5.94 12,467 4.1 5.36 11,236 4.1
60-month certificates 5.78 10,399 3.4 6.27 13,073 4.7
Other certificates 5.65 200 0.1 5.76 400 0.1
---- ------- ---- ----- ------- -----
179,598 59.3 155,680 56.4
------- ---- ------- -----
4.75% $302,934 100.0% 4.83 275,993 100.0%
==== ======= ===== ===== ======= =====
The contractual maturities of certificate accounts are as follows at September
30:
1996 1995
Amount Percent Amount Percent
(in thousands) (in thousands)
Under 12 months $ 134,661 75.0% 110,199 70.8
12 to 36 months 40,962 22.8 40,201 25.8
Over 36 months 3,975 2.2 5,280 3.4
--------- ----- ------- -----
$ 179,598 100.0% 155,680 100.0
========= ===== ======= =====
The aggregate amount of certificate accounts with a balance of $100,000 or
greater at September 30, 1996 and 1995 was approximately $20,288,000 and
$23,854,000, respectively.
Interest expense on deposit accounts is summarized as follows for the years
ended September 30:
1996 1995 1994
(in thousands)
NOW accounts $ 329 345 350
Money market and management accounts 841 388 224
Passbook accounts 2,455 2,618 2,979
Certificate accounts 10,316 7,615 5,296
------ ------ -----
$ 13,941 10,966 8,849
====== ====== =====
(8) BORROWED FUNDS
Borrowed funds are summarized as follows at September 30:
Interest rate Amount
1996 1995 1996 1995
(in thousands)
Secured advances from the
FHLB of Chicago:
Fixed rate advances due:
January 3,1996 - % 5.82 $ - 50,000
January 5,1998 5.29 - 24,000 -
August 16,1998 6.04 - 14,000 -
Open line advance, due on demand 6.22 6.66 77,300 4,032
---- ----- ------- ------
$ 115,300 54,032
========= ======
Weighted average rate 6.00% 5.88
====== =====
The Bank has adopted a collateral pledge agreement whereby the Bank has agreed
to at all times keep on hand, 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 Federal Home Loan
Bank of Chicago (the "FHLB-Chicago"). All stock in the FHLB-Chicago is pledged
as additional collateral for these advances.
(9) REGULATORY CAPITAL
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 which 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 as calculated under regulatory accounting
purposes.
OTS regulations require all savings institutions to meet three capital
requirements: a tangible capital to adjusted total assets ratio of 1.5%, a core
capital to adjusted total assets ratio of 3.0%, and a risk-based capital to
total risk-weighted assets ratio of 8.0%. Management believes, as of September
30, 1996, that the Bank meets all capital adequacy requirements to which it is
subject. The following table reflects the Bank's regulatory capital as of
September 30, 1996 as it relates to its three capital adequacy requirements.
Required For Capital
Actual Adequacy Purposes Excess
Amount Ratio Amount Ratio Amount
(dollars in thousands)
As of September 30, 1996:
Risk-based $ 38,042 16.9% $ 18,020 8.0% $ 20,022
Tangible 37,639 8.0 7,023 1.5 30,616
Core (leverage) 37,639 8.0 14,046 3.0 23,593
As of September 30, 1995:
Risk-based $ 40,717 20.7% $ 15,733 8.0% $ 24,984
Tangible 40,314 10.5 5,755 1.5 34,559
Core (leverage) 40,314 10.5 11,509 3.0 28,805
Core capital is defined as common stockholder's equity plus non-cumulative
perpetual preferred stock and related surplus, and minority interests in equity
accounts of consolidated subsidiaries, plus 90% of the fair value of readily
marketable purchased mortgage servicing rights, less non-qualifying intangible
assets, such as goodwill and core deposit intangibles. Tangible capital is
defined as core capital less all intangible assets other than a limited amount
of readily marketable purchased mortgage servicing rights. The risk-based
requirement requires the Bank to maintain risk-based capital of 8% of total
risk-weighted assets. Assets of the Bank, including certain off-balance sheet
items, are adjusted to reflect degrees of credit risk to compute total risk-
weighted assets. Capital for this computation includes core capital plus
supplementary capital, which included general loan loss reserves.
OTS regulations require that in meeting the tangible, core, and risk-based
capital standards, institutions must generally deduct investments in and loans
to subsidiaries engaged in activities not permissible for a national bank.
(10) INCOME TAXES
Income tax expense is summarized as follows for the years ended September 30:
<TABLE.
CAPTION>
1996 1995 1994
(in thousands)
Current:
Federal $ 1,425 1,515 1,189
State 27 237 237
------ ----- -----
Total current 1,452 1,752 1,426
Deferred:
Federal (177) 229 220
State (40) 52 57
------ ----- -----
Total deferred (217) 281 277
------ ----- -----
$ 1,235 2,033 1,703
====== ===== =====
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:
1996 1995 1994
Federal income tax rate 34.0% 34.0 34.0
State income taxes, net of federal benefit - 3.7 4.4
Other 2.6 2.0 0.4
------ ----- -----
Effective income tax rate 36.6% 39.7 38.8
====== ===== =====
Retained earnings at September 30, 1996 includes $4.6 million of "base-year"
tax bad debt reserves for which no provision for Federal income tax has been
made. If in the future this amount, or a portion thereof, is used for certain
purposes other than to absorb losses on bad debts, a federal and state tax
liability will be imposed on the amount so used at the then current corporate
income tax rate.
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:
1996 1995
(in thousands)
Deferred tax assets:
Deferred compensation $ 8 4
Allowance for loan loss 315 160
Unrealized loss on investment securities
available for sale 465 36
Accrual for SAIF special assessment 629 -
Other 109 47
---- ---
Deferred tax assets 1,526 247
Deferred tax liabilities:
Deferred loan fees and costs (1,151) (599)
FHLB stock, due to stock dividends (149) (149)
Property and equipment, due to depreciation (89) (27)
Tax bad debt reserves (808) (748)
Tax basis in partnership less than book (170) (164)
Pension plan (29) (61)
Other (81) (98)
------ -----
Deferred tax liabilities (2,477) (1,846)
------ -----
Net deferred tax liability $ (951) (1,599)
====== ======
Management believes that it is more likely than not that the deferred tax
assets will be realized, therefore, no valuation allowance has been recorded at
September 30, 1996 and 1995.
(11) 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. Total pension expense for the years ended September 30,
1996, 1995, and 1994 was approximately $111,000, $93,000, and $98,000,
respectively.
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:
1996 1995
(in thousands)
Actuarial present value of accumulated benefit
obligation, including vested benefits of $744
and $636 in 1996 and 1995, respectively $ 782 668
===== ====
Actuarial present value of projected benefit obligation $(1,378) (1,195)
Plan assets at fair value 1,086 901
----- -----
Plan assets less than projected benefit obligation (292) (294)
Unrecognized net gain from past experience different from
that assumed, and effects of changes in assumptions 69 107
Unrecognized transition obligation, being recognized over
17 years (68) (74)
----- -----
Net accrued pension cost $ (291) (261)
===== ====
Net pension costs include the following components for the years ended
September 30:
1996 1995 1994
(in thousands)
Service cost - benefits earned during the period $ 110 89 91
Interest cost on projected benefit obligation 87 77 68
Actuarial return on plan assets (116) (107) (10)
Net amortization and deferral 30 34 (51)
---- --- ---
Net periodic pension cost $ 111 93 98
==== === ===
The discount rate used in determining the actuarial present value of the
projected benefit obligation at the beginning of the year to determine the net
periodic pension cost and at the end of the year for the present value of the
benefit obligations during 1996 and 1995 was 7.25% and 8.00% in 1994. The
expected long-term rate of return on assets was 8.00% during 1996, 1995, and
1994. The rate of increase in future compensation was 6.00% in 1996, 1995, and
1994.
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. The expense for the years ended September 30, 1996, 1995, and
1994 was approximately $121,000, $96,000 and $ 91,000, respectively.
(12) Officer, Director, and Employee Benefit Plans
EMPLOYEE STOCK OWNERSHIP PLAN ("ESOP"). In conjunction with the Bank's
conversion, the Bank formed an ESOP. The ESOP covers substantially all full-
time employees over the age of 21 and with more than one year of employment.
The ESOP borrowed $2.9 million from the Company and purchased 290,950 common
shares of the Company issued in the conversion. The Bank has committed to make
discretionary contributions to the ESOP sufficient to service the requirements
of the loan over a period not to exceed seven years. Expense related to the
ESOP was $416,000, $415,000 and $312,000 for the years ended September 30,
1996, 1995 and 1994, respectively.
On October 1, 1994, the Company adopted the provisions of Statement of Position
93-6, (SOP 93-6), "Employers' Accounting for Employee Stock Ownership Plans",
issued by the American Institute of Certified Public Accountants. SOP 93-6
requires the Company to consider outstanding only those shares of the ESOP that
are committed to be released when calculating both primary and fully diluted
earnings per share. SOP 93-6 also requires the Company to record the
difference between the fair value of the shares committed to be released and
the cost of those shares to the ESOP as a charge to additional paid-in-capital
with the corresponding increase or decrease to compensation expense. The
adoption of SOP 93-6 had the effect of increasing additional paid-in-capital
and compensation expense by $236,000 and 130,000 in 1996 and 1995,
respectively.
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' and
directors' plans is 363,687, equal to 10% of the total number of shares issued
in the Company's initial stock offering. 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. There were 102,386
option grants exercisable at September 30, 1996 for the employees' plan.
Options issued to outside directors of the Company are immediately exercisable.
Employees' Plan Directors' Plan
Amount Exercise Amount Exercise
Price Price
Granted at conversion -
December 15, 1993 256,712 $ 10.00 66,410 $ 10.00
Options granted 1,500 11.75 - -
------- ----- ------ -----
Options outstanding at
September 30, 1994 258,212 10.01 66,410 10.00
Options granted 1,500 10.25 - -
Options forfeited (3,000) 10.00 (11,621) 10.00
Options exercised - - (2,000) 10.00
------- ----- ------ -----
Options outstanding at
September 30, 1995 256,712 10.01 52,789 10.00
Options granted 3,000 15.31 - -
Options exercised - - (2,200) 10.00
------- ----- ------ -----
Options outstanding at
September 30, 1996 259,712 $ 10.07 50,589 $ 10.00
======= ===== ====== =====
BANK RECOGNITION AND RETENTION PLANS ("BRRPs") In conjunction with the Bank's
conversion, the Bank formed two BRRPs, which were authorized to acquire 4.0%,
or 145,475 shares, of the common stock issued in the conversion. The shares
were purchased by the Bank from the authorized but unissued shares of common
stock at a price of $10 per share. The $1.5 million contribution to the BRRPs
is being amortized to compensation expense as the Bank's employees and
directors become vested in those shares. At September 30, 1996, 14,251 plan
shares had not yet been awarded. The aggregate purchase price of all shares
owned by the BRRPs is reflected as a reduction of stockholders' equity and to
the extent shares have been awarded, is shown as amortized expense as the
Bank's employees and directors become vested in their stock awards. For the
years ended September 30, 1996, 1995, and 1994, 25,304, 25,104, and 4,986
shares, respectively, were vested and distributed to employees. For the years
ended September 30, 1996, 1995, and 1994, $255,000, $256,000, and $236,000,
respectively, was reflected as compensation expense.
(13) 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, 1996 and 1995 of $7.4
million and $4.6 million, respectively, represented amounts which the Bank
plans to fund within the normal commitment period of 60 to 90 days. Of the
commitments to originate loans at September 30, 1996, $238,000 represented
commitments for fixed rate loans with interest rates ranging from 8.00% to
8.750%.
The estimated fair value of these commitments approximates the commitment
amount. Because the creditworthiness of each customer is reviewed prior to the
extension of the commitment, the Bank adequately controls the credit risk on
these commitments, as it does for loans recorded on the consolidated statements
of financial condition. The Bank conducts substantially all of its lending
activities in the Chicagoland area in which it serves. Management believes the
Bank has a diversified loan portfolio and the concentration of lending
activities in these local communities does not result in an acute dependence
upon the economic conditions of the lending region.
The Bank had guaranteed indebtedness in the amount of $2.0 million of an
unrelated corporation which financed the development of an apartment complex
located in Glendale Heights, Illinois. The related bonds were paid in full on
May 1, 1996. At that time the Bank was released from all obligations
pertaining to the enhancement. An allowance for credit enhancement loss was
established in prior years. In 1995, $90,000 of the allowance was reversed due
to improving debt coverage ratios of the property. In 1996 the Company
recaptured its remaining $10,000 credit enhancement loss provision on the
credit enhancement.
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.
(14) 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.
CASH AND DUE FROM BANKS, INTEREST-EARNING DEPOSITS, FEDERAL FUNDS SOLD,
INVESTMENT IN DOLLAR-DENOMINATED MUTUAL FUNDS For these short-term
instruments, the carrying value is a reasonable estimate of fair value.
INVESTMENT SECURITIES The fair value of investment securities, which includes
investment securities, mortgage-backed securities, and FHLB of Chicago stock,
is the quoted market price, if available, or the quoted market price for
similar securities. FHLB of Chicago stock is recorded at redemption value,
which is equal to cost.
LOANS RECEIVABLE Fair values are 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 that 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.
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, 1996 and 1995,
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, 1996 and 1995, 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.
The estimated fair value of the Company's financial instruments at September
30, 1996 and 1995 are as follows:
1996 1995
Net carrying Estimated Net carrying Estimated
amount fair value amount fair value
(in thousands)
FINANCIAL ASSETS:
Cash and due from banks $ 3,848 3,848 2,649 2,649
Interest-earning deposits 225 225 1,266 1,266
Federal funds sold 200 200 200 200
Investment in dollar-
denominated mutual funds 3,146 3,146 227 227
Investment securities 106,772 105,665 114,154 114,348
Loans receivable 355,082 355,122 266,945 269,402
Accrued interest receivable 3,199 3,199 2,910 2,910
------- ------- ------- -------
Total financial assets $ 472,472 471,405 388,351 391,002
======= ======= ======= =======
FINANCIAL LIABILITIES:
Noninterest-bearing deposits 4,596 4,596 5,610 5,610
NOW, money market and management,
and passbook accounts 118,740 118,740 114,703 114,703
Certificate accounts 179,598 179,598 155,680 156,246
Borrowed funds 115,300 115,104 54,032 53,996
Accrued interest payable 752 752 447 447
------- ------- ------- -------
Total financial liabilities $ 418,986 418,790 330,472 331,002
======= ======= ======= =======
/TABLE
(15) Condensed Parent Company Only Financial Information
The following condensed statements of financial condition, as of September 30,
1996 and 1995 and condensed statements of earnings and cash flows for the years
ended September 30, 1996 and 1995 and the period from December 15, 1993 (date
of commencement of operations) to September 30, 1994 for Fidelity Bancorp, Inc.
should be read in conjunction with the consolidated financial statements and
the notes thereto.
STATEMENT OF FINANCIAL CONDITION
September 30,
1996 1995
(in thousands)
ASSETS
Cash and cash equivalents $ 1,708 1,406
Investment in dollar-denominated mutual funds 146 177
Investment securities available for sale 5,642 8,317
Equity investment in the Bank 42,474 44,764
Other assets 2,242 2,704
------- ------
$ 52,212 57,368
======= ======
LIABILITIES AND STOCKHOLDERS' EQUITY:
Accrued taxes and other liabilities 346 277
STOCKHOLDERS' EQUITY:
Common stock 38 38
Additional paid-in capital 36,636 36,639
Retained earnings 27,851 26,449
Treasury stock (12,619) (5,978)
Unrealized loss on investment securities
available for sale (40) (57)
------- ------
Total Stockholders' equity 51,866 57,091
------- ------
$ 52,212 57,368
======= ======
STATEMENTS OF EARNINGS
Year ended Period from
September 30, December 15, 1993 to
1996 1995 September 30, 1994
(in thousands)
Equity in earnings of the Bank $ 1,992 2,807 2,517
Interest income 651 843 607
Interest expense - - (74)
Non-interest expense (387) (420) (304)
Income before income taxes 2,256 3,230 2,746
Provision for federal and
state income taxes (114) (146) (66)
------ ----- -----
Net income $ 2,142 3,084 2,680
====== ===== =====
STATEMENTS OF CASH FLOWS
Year ended Period from
September 30, December 15, 1993 to
1996 1995 September 30, 1994
(in thousands)
OPERATING ACTIVITIES:
Net income $ 2,142 3,084 2,680
Equity in undistributed
earnings of the Bank (1,992) (2,807) (2,517)
Dividends received from the Bank 4,282 - -
Net amortization and accretion of
premiums and discounts 1 1 -
Decrease (increase) in other assets 46 (1) (209)
Increase in accrued taxes and
other liabilities 60 30 286
------ ----- -----
Net cash provided by operating activities 4,539 307 240
INVESTING ACTIVITIES:
Purchase of capital stock of the Bank - - (18,340)
Purchase of assets available for sale - - (15,486)
Principal repayments collected
on investment securities 2,703 3,899 3,174
Purchase of mutual funds (9) (12) (4,415)
Redemption of mutual funds 40 1,000 3,250
Disbursement of loan to ESOP trust - - (2,909)
Principal payment received on ESOP loan 416 415 -
------ ----- -----
Net provided by (used in)investing
activities 3,150 5,302 (34,726)
FINANCING ACTIVITIES:
Net proceeds from sale of common stock - - 36,680
Purchase of treasury stock (6,669) (3,957) (2,045)
Payment of common stock dividends (740) (415) -
Proceeds from exercise of stock options 22 20 -
------ ----- -----
Net cash provided by (used in)
financing activities (7,387) (4,352) 34,635
------- ----- -----
Net increase in cash and cash equivalents 302 1,257 149
Cash and cash equivalents at beginning
of period 1,406 149 -
------- ----- -----
Cash and cash equivalents at end of period $ 1,708 1,406 149
====== ===== =====
/TABLE
(16) Quarterly Results of Operations
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, 1996 Year ended September 30, 1995
1st Qtr 2nd Qtr 3rd Qtr 4th Qtr 1st Qtr 2nd Qtr 3rd Qtr 4th Qtr
(in thousands, except per share data)
Interest income $ 7,407 7,493 8,053 8,601 6,095 6,417 6,556 7,101
Interest expense 4,228 4,197 4,649 5,055 2,878 3,199 3,613 4,062
----- ----- ----- ----- ----- ----- ----- -----
Net interest income
before provision
for loan losses 3,179 3,296 3,404 3,546 3,217 3,218 2,943 3,039
Provision for loan
losses - 80 10 320 82 20 90 -
----- ----- ----- ----- ----- ----- ----- -----
Net interest income
after provision for
loan losses 3,179 3,216 3,394 3,226 3,135 3,198 2,853 3,039
Gain on sale of investment
securities available
for sale - - - - - 3 271 -
Other income 237 276 210 234 263 215 261 216
Non-interest expense 2,219 2,211 2,239 3,926 (1) 2,107 2,058 2,032 2,140
----- ----- ----- ----- ----- ----- ----- -----
Income before income tax
expense (benefit) 1,197 1,281 1,365 (466) 1,291 1,358 1,353 1,115
Income tax expense
(benefit) 465 497 530 (257) 517 541 542 433
----- ----- ----- ----- ----- ----- ----- -----
Net income (loss) $ 732 784 835 (209) 774 817 811 682
===== ===== ===== ===== ===== ===== ===== =====
Earnings (loss) per
share $ 0.23 0.26 0.28 (0.07) 0.23 0.25 0.25 0.21
===== ===== ===== ===== ===== ===== ===== =====
Cash dividends declared
per share $ 0.06 0.06 0.06 0.06 - 0.04 0.04 0.04
===== ===== ===== ===== ===== ===== ===== =====
(1) Fourth quarter non-interest expense includes a one-time special assessment
charge resulting from legislation passed on September 30, 1996, regarding the
Savings Association Insurance Fund (SAIF). To cover the special assessment
called for by the legislation, the bank recorded a pre-tax charge of $1.6
million.
Independent Auditor's Report
The Board of Directors
Fidelity Bancorp, Inc.
Chicago, Illinois:
We have audited the accompanying consolidated statements of financial condition
of Fidelity Bancorp, Inc. (the Company) and subsidiary as of September 30, 1996
and 1995, and the related consolidated statements of earnings, changes in
stockholders' equity, and cash flows for each of the years in the three-year
period ended September 30, 1996. These consolidated financial statements are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. 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. and subsidiary as of September 30, 1996 and 1995, and the results of their
operations and their cash flows for each of the years in the three-year period
ended September 30, 1996, in conformity with generally accepted accounting
principles.
KPMG PEAT MARWICK LLP
Chicago, Illinois
November 1, 1996
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 will appear in the
Registrant's Proxy Statement for the Annual Meeting of Stockholders to be held
on January 29, 1997 and is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information relating to executive compensation will appear in the
Registrant's Proxy Statement for the Annual Meeting of Stockholders to be held
on January 29, 1997 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 is will appear in the Registrant's Proxy Statement for the Annual
Meeting of Stockholders to be held of on January 29, 1997 and is incorporated
herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information relating to certain relationships and related transactions will
appear in the COMPENSATION sections of the Registrant's Proxy Statement for the
Annual Meeting of Stockholders to be held of on January 29, 1997 and is
incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES, AND REPORTS ON FORM 8-K
The following documents are filed as part of this report:
(a) EXHIBITS (required by the SEC Regulation SK-8)
Exhibit No.
3.1 Restated Certificate of Incorporation of Fidelity Bancorp, Inc.*
3.2 Bylaws of Fidelity Bancorp, Inc.*
4.0 Stock Certificate of Fidelity Bancorp, Inc.*
10.1 Employment Agreements between the Bank and Executive and Employee
Agreement between the Company and Executive *
10.2 Special Termination Agreement between the Bank and Executive and
Special Termination Agreement between the Company and Executive *
10.6 Employee Stock Ownership Plan and Trust ***
10.8 Recognition and Retention Plan and Trust *
10.9 Incentive Stock Option Plan **
10.10 Stock Option Plan for Outside Directors **
21.0 Subsidiary information is incorporated herein by reference to "Part
II - Subsidiaries"
(b) REPORTS on FORM 8-K
On October 21, 1996, the Company announced that its 1997 annual meeting
of shareholders will be held on January 29, 1997.
- -----------------
* Incorporated herein by reference into this document from the exhibits
to Form S-1, Registration Statement as amended, originally filed on
October 28, 1993, Registration No. 33-68670.
** Incorporated herein by reference into this document from the exhibits
to Form S-8, Registration Statement, filed on April 20, 1994,
Registration No. 33-78000.
*** Incorporated herein by reference into this document from the exhibits
to Form 10-K, filed on December 9, 1994.
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 11, 1996 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 11, 1996
- ------------------------- Officer
Raymond S. Stolarczyk
/s/ Thomas E. Bentel President and Chief December 11, 1996
- ------------------------- Operating Officer
Thomas E. Bentel
/s/ Grant M. Berntson Senior Vice President and December 11, 1996
- ------------------------- Corporate Secretary
Grant M. Berntson
/s/ James R. Kinney Senior Vice President and December 11, 1996
- ------------------------- Chief Financial Officer
James R. Kinney
/s/ Paul J. Bielat Director December 11, 1996
- -------------------------
Paul J. Bielat
/s/ Myron H. Dudek Director December 11, 1996
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Myron H. Dudek
/s/ Patrick J. Flynn Director December 11, 1996
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Patrick J. Flynn
/s/ Raymond J. Horvat Director December 11, 1996
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Raymond J. Horvat
/s/ Bonnie J. Stolarczyk Director December 11, 1996
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Bonnie J. Stolarczyk