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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, 1998
Commission file number 1-12753
FIDELITY BANCORP, INC.
(Exact name of registrant as specified in its charter)
Delaware 36-3915246
(State of incorporation) (I.R.S. Employer Identification No.)
5455 West Belmont Avenue, Chicago, Illinois 60641
(Address of principal executive offices)
Telephone (773) 736 - 4414
Securities registered pursuant to Section 12 (b) of the Act: None
Securities registered pursuant to Section 12 (g) of the Act:
Common Stock, par value $.01
(Title of class)
The registrant (1) has filed all reports required to be filed by Section 13 or
15 (D) of the Securities Exchange Act of 1934 during the preceding twelve
months (or for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements for the
past 90 days. Yes X No .
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this form 10-K. [ X ]
The aggregate market value of the voting stock held by non-affiliates of the
registrant, i.e., persons other than directors and executive officers of the
registrant is $49,794,982 and is based upon the last sales price as quoted on
Nasdaq Stock Market for December 1, 1998.
The Registrant has 2,406,784 shares of common stock outstanding as of
December 1, 1998.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the 1999 Annual Meeting of Stockholders are
incorporated by reference into Part III of this Form 10-K.
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1
ITEM 1. BUSINESS
GENERAL
On December 3, 1993, Fidelity Bancorp, Inc., a Delaware corporation (the
"Company") completed its public offering of 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. Primarily as a result of
stock repurchase programs, outstanding shares of common stock at September 30,
1998 totalled 2,589,784. The Company's common stock is listed on the Nasdaq
National Market and trades under the symbol "FBCI".
Originally organized in 1906, the Bank conducts its business through its main
office and four full-service branch offices, located in Chicago, Franklin Park,
and Schaumburg, Illinois. The Bank's results of operations are dependent on
net interest income which is the difference between interest earned on its loan
and investment portfolios, and its cost of funds, consisting of interest paid
on deposits and Federal Home Loan Bank ("FHLB") advances. In addition to
traditional mortgage 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.
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995
This report contains certain forward looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. The Company intends such forward-
looking statements to be covered by the safe harbor provisions for forward-
looking statements contained in the Private Securities Reform Act of 1995, and
is including this statement for purposes of these safe harbor provisions.
Forward-looking statements, which are based on certain assumptions and describe
future plans, strategies and expectations of the Company, are generally
identifiable by use of the words "believe," "expect," "intend," "anticipate,"
"estimate," "project" or similar expressions. The Company's ability to predict
results or the actual effect of future plans or strategies is inherently
uncertain. Factors which could have a material adverse affect on the
operations and future prospects of the Company and the subsidiaries include,
but are not limited to, changes in: interest rates, general economic
conditions, legislative/regulatory changes, monetary and fiscal policies of the
2
U.S. Government, including policies of the U.S. Treasury and the Federal
Reserve Board, the quality or composition of the loan or investment portfolios,
demand for loan products, deposit flows, competition, demand for financial
services in the Company's market area and accounting principles, policies and
guidelines. These risks and uncertainties should be considered in evaluating
forward-looking statements and undue reliance should not be placed on such
statements. Further information concerning the Company and its business,
including additional factors that could materially affect the Company's
financial results, is included in the Company's filings with the Securities and
Exchange Commission.
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."
3
ITEM 2. PROPERTIES
The Bank conducts its business through five full-service offices. All offices
have ATM facilities. All offices, except for the Franklin Park branch, have
drive through facilities. 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, 1998 Owned
(In thousands)
EXECUTIVE AND HOME OFFICE: Various dates
5455 W. Belmont Ave. commencing in
Chicago, IL 60641 1955 $ 1,150 Owned
BRANCHES:
Higgins Branch
6360 W. Higgins Road
Chicago, IL 60630 1984 408 Owned
Franklin Park Branch
10227 W. Grand Ave.
Franklin Park, IL 60131 1980 18 Leased
Schaumburg Branch
2425 West Schaumburg Rd
Schaumburg, IL 60194 1995 980 Leased
Harlem Avenue Branch
3940 North Harlem Ave.
Chicago, IL 60634 1995 264 Owned
-------
$ 2,820
=======
ITEM 3. LEGAL PROCEEDINGS
Neither the Company nor its subsidiaries are involved in any pending legal
proceedings, other than routine legal proceedings occurring in the ordinary
course of business. Such proceedings in the aggregate are believed by
management to be immaterial to the Company's financial condition or results of
operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
None.
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 December 1, 1998, there were
2,406,784 shares of common stock outstanding and 553 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.
4
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:
1998 1997
High Low High Low
First Quarter 25 3/4 23 17 5/8 16 1/4
Second Quarter 26 24 21 16 7/8
Third Quarter 26 22 1/8 19 3/4 18 1/2
Fourth Quarter 25 1/4 19 1/4 25 3/8 18 1/2
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, 1998, the Company had repurchased 1,256,472 shares of its
common stock since its initial public offering at a cost of $19.96 million or
$15.88 per share. On November 16, 1998, the Company completed its eighth stock
repurchase plan. This plan was announced on August 28, 1998 for 10% of the
Company's stock. 270,000 shares of common stock were purchased at an average
cost of $21.87. On November 18, 1998 the Company announced a ninth stock
repurchase plan for up to 240,000 shares, or 10% of its outstanding common
stock. Through December 1, 1998, the Company had purchased 27,500 shares at a
cost of $633,437, or $23.03 per share. 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 $0.38 and $0.30
during fiscal 1998 and 1997, respectively. In addition, the Board of Directors
declared a regular quarterly dividend of $0.10 per share, payable on November
13, 1998 to stockholders of record as of October 30, 1998.
5
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,
1998 1997 1996 1995 1994
(Dollars in thousands, except per share data)
SELECTED OPERATING DATA:
Interest income $ 36,127 35,915 31,554 26,169 21,113
Interest expense 21,836 21,470 18,129 13,752 9,759
------ ------ ------ ------ ------
Net interest income before
provision for loan losses 14,291 14,445 13,425 12,417 11,354
Provision for loan losses 181 64 410 192 48
------ ------ ------ ------ ------
Net interest income after
provision for loan losses 14,110 14,381 13,015 12,225 11,306
Non-interest income:
Gain on sale of investment
securities available for sale - - - 274 -
Gain (loss) on sale of
loans receivable - - - - (17)
Fees and commissions 332 341 379 398 680
Insurance and annuity commissions 717 700 519 519 536
Other 58 62 59 38 42
------ ------ ------ ------ ------
Total non-interest income 1,107 1,103 957 1,229 1,241
Non-interest expense 9,218 12,266 10,595 8,337 8,164
------ ------ ------ ------ ------
Income before income taxes 5,999 3,218 3,377 5,117 4,383
Income tax expense 2,219 2,293 1,235 2,033 1,703
------ ------ ------ ------ ------
Net income $ 3,780 925 2,142 3,084 2,680
====== ====== ====== ====== ======
SELECTED FINANCIAL CONDITION DATA:
Total assets $ 513,563 495,634 475,862 393,664 338,082
Loans receivable, net 425,608 388,262 354,255 266,735 216,657
Mortgage-backed securities
held to maturity, net 11,177 16,875 21,673 26,484 29,565
Investment securities
available for sale 58,979 70,297 78,104 84,579 70,963
Deposits 330,670 323,443 302,934 275,993 238,062
Borrowed funds 121,400 113,400 115,300 54,032 42,000
Stockholders' equity 48,597 49,617 48,828 53,792 53,477
6
September 30, 1998 1997 1996 1995 1994
SELECTED FINANCIAL RATIOS AND OTHER DATA:
Return on average assets 0.76% 0.19% 0.50% 0.85% 0.84%
Return on average stockholders' equity 7.30 1.82 4.08 5.62 5.62
Average stockholders' equity to
average assets 10.46 10.40 12.27 15.12 14.89
Stockholders' equity to total assets 9.46 10.01 10.26 13.66 15.82
Non interest expense to average assets 1.87 1.91 2.48 2.30 2.53
Interest rate spread during period 2.38 2.45 2.57 2.80 3.01
Net interest margin 2.98 3.03 3.23 3.52 3.63
ASSET QUALITY RATIOS:
Non-performing loans to loans
receivable, net 0.20 0.47 0.87 0.23 0.13
Non-performing assets to total assets 0.19 0.41 0.67 0.16 0.11
Net charge-offs to average loans 0.01 0.11 0.01 0.01 0.03
Allowance for loan losses to total loans 0.14 0.12 0.23 0.15 0.11
Allowance for loan losses to
non-performing loans 71.12 25.44 26.25 65.32 80.85
REGULATORY CAPITAL RATIOS:
Tangible 8.91 8.59 8.04 10.51 11.09
Core 8.91 8.59 8.04 10.51 11.09
Risk-based 18.99 18.37 16.89 20.71 19.61
OTHER DATA:
Loan originations (dollars in thousands) $142,788 97,774 139,589 77,880 64,543
Number of deposit accounts 21,193 24,984 24,553 20,488 20,095
Book value per share outstanding $ 18.76 17.75 17.04 16.41 14.88
Earnings per share - diluted $ 1.33 0.32 0.72 0.94 0.71
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. Mortgage lending is expected to continue
as an important part of the Company's business including specialized mortgage
programs for self-employed individuals and for small multi-family building
owners. Another 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.
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 or through additional facilities. 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, and governmental and agency
7
securities for investments.
YEAR 2000 READINESS DISCLOSURE
THE COMPANY'S STATE OF READINESS On Sunday, October 11, 1998 the Company
conducted a full-scale test of its transaction processing systems utilizing the
date of January 3, 2000. An extensive set of transactions was tested using
production teller terminals and related computer hardware, software, and data
communications systems. There were no significant failures or problems during
the testing. A few minor issues arose and will be addressed with FiServ, the
Company's data processing service provider, prior to the next test which is
scheduled for February, 1999.
Concerning non-information technology systems (embedded microcontrollers, etc.)
the Company has tested such things as vault doors, alarm systems, etc. and is
not aware of any significant problems with such systems.
There are three third parties with whom the Company has a material
relationship, and thus potential exposure to Year 2000 issues. The FiServ
systems, as mentioned above, are already being tested. The Company's main
commercial banking relationship is with Harris Bank in Chicago. Harris
newsletters indicate substantial progress with Year 2000 readiness. The
Company also has a material relationship with the Federal Home Loan Bank of
Chicago, whose newsletters also indicate substantial progress with Year 2000
readiness.
The three third utilities on which the Company is dependent are Ameritech
(phone service), Commonwealth Edison (electricity) and People's Gas (natural
gas for heating). The Company has not identified any practical, long-term
alternatives to relying on these companies for basic utility services.
THE COSTS TO ADDRESS THE COMPANY'S YEAR 2000 ISSUES The incremental direct
costs to address the Company's Year 2000 issues are not expected to exceed
$50,000, exclusive of any costs incurred because of the failure of one or more
of the utility companies mentioned above. At the present time, no situations
that will require material cost expenditures to become fully compliant have
been identified. However, the Year 2000 problem is pervasive and complex and
can potentially affect any computer process. Accordingly, no assurance can be
given that Year 2000 compliance can be achieved without additional
unanticipated expenditures and uncertainties that might affect future financial
results.
It is not possible at this time to quantify the estimated future costs due to
possible business disruption caused by vendors, suppliers, customers, or even
the possible loss of electric power or phone service; however, such costs could
be substantial.
THE RISKS OF THE COMPANY'S YEAR 2000 ISSUES The most reasonably likely worst
case Year 2000 scenario involves a complete failure of the utility companies
mentioned above for all five of our operating locations simultaneously. This
scenario would severely curtail the Company's ability to conduct its business,
including its ability to generate new loans and to develop new deposit account
relationships. The effect on existing loans and deposits is not predictable or
quantifiable.
THE COMPANY'S CONTINGENCY PLANS In the event of a complete utility failure,
the Company plans to operate at least two locations on a restricted schedule
during daylight hours. A manual bookkeeping system will be employed, and
battery powered satellite phones or other alternative communications systems
8
will be used for communication between operating locations.
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 1998 Compared to 1997 1997 Compared to 1996
Increase (Decrease) Due to Increase (Decrease) Due to
Volume Rate Total Volume Rate Total
(in thousands)
INTEREST-EARNING ASSETS:
Loans receivable, net $ 1,957 (194) 1,763 5,061 (500) 4,561
Mortgage-backed securities (368) (1) (369) (322) 6 (316)
Interest-earning deposits 9 11 20 10 (10) -
Investment securities, mutual
funds, and federal funds sold (1,123) (57) (1,180) (68) 184 116
------ ---- ----- ------ ----- -----
Total $ 475 (241) 234 4,681 (320) 4,361
====== ==== ====== ====== ===== ======
INTEREST-BEARING LIABILITIES:
Savings accounts 665 509 1,174 438 484 922
Money market accounts (27) (2) (29) (55) (13) (68)
Certificate accounts (1,086) (52) (1,138) 1,395 (261) 1,134
Borrowed funds 291 68 359 1,347 6 1,353
------ ---- ----- ------ ----- -----
Total $ (157) 523 366 3,125 216 3,341
------ ==== ====== ------ ===== ======
Net change in net interest income $ (132) 1,020
====== ======
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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, 1998 1997 1996
Average Average Average
Average Yield/ Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost Balance Interest Cost
(dollars in thousands)
INTEREST-EARNING ASSETS:
Loans receivable, net $ 396,611 30,231 7.62% 370,946 28,468 7.67% 305,115 23,907 7.84%
Mortgage-backed securities 14,503 1,018 7.02% 19,748 1,387 7.02% 24,331 1,703 7.00%
Interest-earning deposits 1,401 80 5.71% 1,233 60 4.87% 1,049 60 5.72%
Mutual funds, investment
securities available for sale,
commercial paper and federal
funds sold 68,374 4,798 7.02% 84,299 6,000 7.12% 85,282 5,884 6.90%
------ ----- ---- ------- ------ ---- -------- ------ ----
Total interest-earning assets 480,889 36,127 7.51% 476,226 35,915 7.54% 415,777 31,554 7.59%
Non-interest earning assets 14,088 11,195 12,188
------ ------- -------
Total assets $ 494,977 487,421 427,965
======= ======= =======
INTEREST-BEARING LIABILITIES:
Deposits:
Passbook and NOW accounts 126,431 4,880 3.86% 108,314 3,706 3.42% 94,502 2,784 2.95%
Money market accounts 17,848 744 4.17% 18,496 773 4.18% 19,796 841 4.25%
Certificate accounts 177,998 10,312 5.79% 196,737 11,450 5.82% 172,863 10,316 5.97%
------- ----- ---- ------- ------ ---- -------- ------ ----
Total deposits 322,277 15,936 4.94% 323,547 15,929 4.92% 287,161 13,941 4.85%
Borrowed funds 102,968 5,900 5.73% 97,879 5,541 5.66% 74,078 4,188 5.65%
------- ----- ---- ------- ------ ---- -------- ------ ----
Total interest-bearing liabilities 425,245 21,836 5.13% 421,426 21,470 5.09% 361,239 18,129 5.02%
Non-interest bearing deposits 6,002 4,705 5,162
Other liabilities 11,506 10,605 9,066
------ ------- -------
Total liabilities 442,753 436,736 375,467
Stockholders' equity 52,224 50,685 52,498
------ ------- -------
Total liabilities and stockholders'
equity $ 494,977 487,421 427,965
======= ======= =======
Net interest income/interest rate
spread (1) 14,291 2.38% 14,445 2.45% 13,425 2.57%
====== ==== ====== ==== ====== ====
Net earning assets/net interest
margin (2) $ 55,644 2.97% 54,800 3.03% 54,538 3.23%
======= ==== ======= ==== ======= ====
Ratio of interest-earning assets to
interest-bearing liabilities 1.13x 1.13x 1.15x
======= ======= =======
(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.
10
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED SEPTEMBER 30, 1998 AND
SEPTEMBER 30, 1997
GENERAL. The Company's net income increased to $3.8 million, or $1.33 per
diluted share, from $925,000, or $0.33 per diluted share. The Company's 1997
results were affected by a loss on impairment of investment securities. The
charge in fiscal 1997 amounted to $3.0 million, or $1.08 per diluted share.
See "Investment Activities." Compared with earnings before the loss, 1998 net
income was down $165,000. The decline in earnings was primarily due to lower
yields on earnings assets caused in part by record mortgage refinance activity
in the first half of the fiscal year.
INTEREST INCOME. Interest income amounted to $36.1 million, an increase of
$212,000 over the prior year. Interest income from loans receivable grew $1.8
million to $30.2 million. Although the average interest rate decreased 5 basis
points, the average portfolio grew $25.7 million. Maturing investments and
amortization payments received on mortgage- and asset-backed securities
contributed to the $21.2 million decline in the average balance of these
portfolios. Interest income earned from the investment portfolio declined $1.6
million during 1998. An overall increase of 1.0% in total average earning
assets and a steady yield of 7.5% contributed to the small increase in interest
income.
INTEREST EXPENSE. Interest expense grew only $366,000 during the fiscal year.
A steady deposit base along with an average rate of 4.9% in both 1998 and 1997
explain the flat $15.9 million in deposit expense for both 1998 and 1997. A
major portion of the overall increase can be attributed to continued growth in
borrowed funds. Average borrowed funds increased 5.2% to $103.0 million from
$97.9 million one year ago. The Bank has continued to utilize the FHLB
Community Investment Program to secure advances at reasonable rates. The
average cost of borrowings increased 7 basis points from 1997 to 1998.
NET INTEREST INCOME BEFORE PROVISION FOR LOAN LOSSES. The Bank's core
earnings, net interest income, are the primary source of earnings for the
Company. Net interest income consists of interest income on loans, mortgage-
backed and investment securities, offset by interest expense on deposits and
borrowed funds. Net interest income before provision for loan losses decreased
$154,000 or 1.1%, to $14.3 million for the year ended September 30, 1998. The
net interest margin declined to 2.98% for the year ended September 30, 1998,
compared with 3.03% for 1997. The Company's net interest spread decreased 7
basis points to 2.38% during the year.
PROVISION FOR LOAN LOSSES. Management reviews the provision for loan losses
quarterly to provide coverage for possible future losses. During the year
ended September 30, 1998, the Company provided $181,000, compared to $64,000 in
1997. The continuing growth of the loan portfolio requires the continuing
increase in the provision.
The Company evaluates its loan portfolio quarterly in conjunction with the
current level of non-performing loans and general economic conditions. At
September 30, 1998, non-performing assets, including $30,000 of commercial
equipment leases purchased from Bennett Funding Group (see "Classified
Assets"), totalled $962,000 or 0.19% of total assets, compared to $2.0 million
or 0.41% of total assets at September 30, 1997.
NON-INTEREST INCOME. The primary source of non-interest income is commissions
generated from annuity and insurance products sales. Fiscal 1998 income of
$717,000 was slightly above that of $700,000 for the year ended September 30,
1997. There was a small decline in non-interest income received from other
fees and commissions.
11
NON-INTEREST EXPENSE. Non-interest expense, exclusive of the loss and recovery
on impairment of investment securities was flat at $9.3 million. See
"Investment Activities" for further discussion. The increase in compensation
and related benefits was primarily due to the market adjustment for Employee
Stock Ownership Plan (ESOP) common shares committed to be released. The charge
in fiscal 1998 was $571,000 compared to $343,000 for the year ended September
30, 1997.
INCOME TAX EXPENSE. Income tax expense for the year ended September 30, 1998
was $2.2 million, or $74,000 less than that recorded in the prior year. For
the year ended September 30, 1997, federal and state income tax expense totaled
$2.3 million, or an effective rate of 71.2% The effective rate is a result of
no tax benefit being recognized for financial reporting purposes relative to
the loss on impairment of investment securities available for sale.
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED SEPTEMBER 30, 1997 AND
SEPTEMBER 30, 1996
GENERAL. The Company's net income decreased to $925,000, or $0.33 per diluted
share, from $2.1 million, or $0.72 per diluted share, a 56% decrease in diluted
earnings per share over the previous year. The current year decrease was due
to an "other than temporary impairment" write down of an investment security
available for sale. The charge in fiscal 1997 amounted to $3.0 million, or
$1.08 per diluted share. See "Investment Activities."
INTEREST INCOME. Interest income increased $4.4 million, to $35.9 million, a
13.8% increase over the prior year of $31.6 million. This increase was due
primarily to increased volumes of loans receivable. The one-to four-family
portfolio grew in excess of 10%, while the amount of multi-family residential
loans increased 16.5%. The average yield on interest-earning assets decreased
5 basis points during 1997 to 7.54% compared to 7.59% in 1996. An overall
increase of 14.5% in total average earning assets and a steady yield
contributed to the increase in interest income.
INTEREST EXPENSE. The continued growth in both deposits and borrowed funds
resulted in a $3.3 million, or 18.4%, increase in interest expense for fiscal
1997. Interest expense grew to $21.5 million from $18.1 million in 1996. An
increase of 7 basis points in the average cost contributed less than 10% of the
increase in expense. The primary factor was the 16.7% increase in total
interest-bearing liabilities. The Bank was able to maintain a steady average
borrowing rate due to the utilization of FHLB Community Investment Program
advances and other term advances.
NET INTEREST INCOME BEFORE PROVISION FOR LOAN LOSSES. Net interest income
before provision for loan losses increased $1.0 million or 8.0%, to $14.4
million for the year ended September 30, 1997, from $13.4 million in 1996. The
net interest margin declined to 3.03% for the year ended September 30, 1997,
compared with 3.23% for 1996. The decrease in the net interest margin in 1997
was primarily due to a 5 basis point increase in the yield on average interest
earning assets, offset by an increase in the average cost of funds of 7 basis
points.
PROVISION FOR LOAN LOSSES. Management reviews the provision for loan losses
quarterly to provide coverage for possible future losses. During the year
ended September 30, 1997, the Company provided $64,000, compared to $410,000 in
1996. The significant 1996 provision of $410,000 accommodated the increase in
loans receivable, changes in the components of the loan portfolio and, more
specifically, the $2.0 million of Bennett commercial leases. See "Classified
12
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, 1997, non-performing assets, including $408,000 of commercial
equipment leases purchased from Bennett Funding Group (see "Classified
Assets"), totalled $2.0 million or 0.41% of total assets, compared to $3.2
million or 0.67% of total assets at September 30, 1996.
NON-INTEREST INCOME. The commissions generated from annuity and insurance
products sales contributed significantly to the $146,000 increase in non-
interest income. Non-interest income amounted to $1.1 million in 1997 from
$957,000 in 1996. The 34.9% increase in insurance and annuity commissions can
be attributed to increased, intensified sales efforts, including seminars to
inform customers of investment opportunities, and a favorable investment
environment.
NON-INTEREST EXPENSE. Non-interest expense increased in 1997 to $12.3 million
from $10.6 million in 1996. Fiscal 1997 included a non-recurring loss on
impairment of investment securities available for sale of $3.0 million. See
"Investment Activities." Prior year expense included a one-time Savings
Association Insurance Fund (SAIF) special assessment of $1.6 million. Absent
these two fourth quarter adjustments, non-interest expense increased 3.2%. The
increase was primarily a result of increased compensation and related benefits.
The 1997 market adjustment for ESOP common shares committed to be released was
$343,000. After considering the 1996 SAIF assessment, federal deposit
insurance premium expense decreased in excess of 50% during fiscal year 1997.
INCOME TAX EXPENSE. For the year ended September 30, 1997, federal and state
income tax expense totaled $2.3 million, or an effective rate of 71.2%,
compared to $1.2 million or an effective rate of 36.6% for 1996. The effective
rate is a result of no tax benefit being recognized for financial reporting
purposes relative to the loss on impairment of investment securities available
for sale. For tax purposes the loss was treated as a capital loss, and full
realization of the deferred tax asset is uncertain.
REVIEW OF FINANCIAL CONDITION
Total assets at September 30, 1998 increased $17.9 million to $513.6 million
from $495.6 million at September 30, 1997. Record loan originations of $142.8
million contributed to the 3.6% increase in assets. The third party originator
(TPO) network gives the Company the ability to control overhead expenses
without constraining the Bank's ability to grow loan volume. Lending in 1998
included $58.1 million of loans originated to applicants for which income
verification was not required, and to a lesser extent, applicants with less
than perfect credit and higher debt-to-income ratios than secondary market
conforming standards (see "Lending Activities").
Cash and due from banks, interest-earning deposits, federal funds sold and
dollar-denominated mutual funds amounted to $2.0 million at September 30, 1998
as compared to $6.0 million a year earlier. The Bank used available cash
generated by deposits and loan payments to fund increased loan origination
volume.
Due to the increase in the Bank's borrowings from the FHLB of Chicago, stock in
the FHLB Chicago increased $810,000, or 14.2%.
Investment securities available for sale totalled $59.0 million at September
30, 1998. The portfolio decreased $11.3 million or 16.1% during the year due
to redemptions and maturities, and repayments from asset-backed securities.
13
Loans receivable topped $400 million during fiscal 1998. The 9.6% increase was
a result of loan originations of $142.8 million which were partially offset by
unusually high repayments of $107.4 million received during the year ended
September 30, 1998.
Real estate in foreclosure of $131,000 consisted of one property at September
30, 1998. It is a single family dwelling 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
the future sale. Real estate in foreclosure was $215,000 at September 30,
1997.
Deposits increased 2.2%, or $7.3 million to $330.7 million at September 30,
1998, compared to $323.4 at September 30, 1997. This overall increase in
deposits stemmed from an increase in transaction accounts. During the year,
the Bank replaced higher yielding certificates of deposit with transaction
based accounts.
FHLB advances remain a cost effective source of funding for increased loan
activity. At September 30, 1998, the Bank had $121.4 million of FHLB advances
as compared to $113.4 million a year earlier. Throughout the year, the Bank
continued to utilize advances to supply funds for loan origination.
Advance payments by borrowers for real estate taxes were significantly higher
during fiscal 1998 because Cook County real estate taxes were not due and paid
until the first quarter of fiscal 1999. The balance at September 30, 1998 of
$6.9 million included $5.1 million that was paid in October 1998.
Stockholders' equity decreased by $1.0 million throughout the year, from $49.6
million at September 30, 1998 to $48.6 million at September 30, 1998. Common
stock repurchases of $5.9 million combined with the amortization of $799,000 of
the Bank's benefit plans and $1.1 million in cash dividends to stockholders
contributed to an overall decrease given that the Company earned $3.8 million
in fiscal 1998.
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. During a portion of the year, Office of Thrift Supervision (OTS)
regulations required the Bank 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
liquidity base , defined as net withdrawable accounts plus short-term
borrowings (i.e., those repayable in 12 months or less) during the preceding
14
calendar month. During the earlier portion of the fiscal year, OTS regulations
also required the Bank 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.
Pursuant to amendments adopted by the OTS effective November 24, 1997, the
minimum liquidity requirement has been reduced to 4% of the liquidity base, the
short-term liquidity requirement has been eliminated, liquidity requirements
will be determined quarterly, rather than monthly, and savings associations
have the option of calculating their liquidity requirements either on the basis
of (i) their liquidity base at the end of the preceding quarter or (ii) the
average daily balance of their liquidity base during the preceding quarter.
The amended regulations also provide, however, that savings associations must
maintain liquidity in excess of the minimum requirement if necessary to insure
safe and sound operations. At September 30, 1998, the Bank was in compliance
with OTS liquidity requirements, with a liquidity ratio of 17.33%.
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, 1998. During the
year, the Bank used $22.4 million in investing activities, consisting primarily
of loan originations, largely offset by principal collections on loans,
mortgage-backed securities, and investment securities available for sale. Net
cash provided by financing activities amounted to $13.4 million for the year
ended September 30, 1998.
At September 30, 1998, the Bank had outstanding loan commitments of $6.3
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, 1998 totalled $141.5 million.
Management believes that a significant portion of such deposits will remain
with the Bank.
The Bank's Tangible and Core (leverage) Capital of $45.7 million at September
30, 1998 was 8.9% of Adjusted Tangible Assets. This exceeded the Tangible
Capital and Core Capital minimum requirements of 1.5% and 3% by $38.0 and $30.3
million respectively. The Bank's Risk-based Capital of $47.1 million was 19.4%
of Total Risk-Weighted Assets at September 30, 1998 which exceeded the Risk-
based Capital minimum requirement of 8% by $27.6 million.
LENDING ACTIVITIES
LOANS 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, 1998, the Bank's gross loans
receivable portfolio was $424.0 million, of which $324.3 million were one- to
four-family residential mortgage loans. Of the one- to four-family residential
mortgage loans outstanding at that date, 44.8% were fixed-rate and 55.2% were
adjustable-rate mortgage (ARM) loans. The Bank services a $3.7 million fixed-
rate commercial loan for a golf course in a western Chicago suburb, having
participated $1.89 million of the loan to another institution, resulting in a
net loan of $1.85 million for the Bank. Through regular monthly payments, the
Bank's outstanding portion at September 30, 1998 was $1.62 million. The
15
remainder of the Bank's loan portfolio at September 30, 1998 consisted of $83.0
million of multi-family loans, $3.3 million in commercial property loans, and
$13.4 million of consumer loans. Consumer loans consisted primarily of home
equity and second mortgage loans.
During 1994 the Bank expanded its delivery system for mortgage loans to include
TPOs which are mortgage brokers that have agreed to originate loans for the
Bank's portfolio. Throughout 1998 and 1997, the loan department continued to
seek and sign agreements with new TPOs. At September 30, 1998 the Bank had a
network of 52 TPOs. The TPO program produced $119.6 million or 86.0% of the
Bank's one- to four-family and multi-family mortgage loan originations in 1998.
In October 1996, the Bank began offering residential loans without income
verification. Verification that the applicant is employed is noted in the file
and the amount listed on the application is used to determine the debt to
income ratio. The maximum loan to value ratio is 80% for this program. The
Bank also offers a similar program for people who typically are self-employed.
The income used to qualify the loan is the amount stated on the loan
application. The maximum loan amount allowed under this program is 75% of the
property value. The Bank, to a lessor extent, grants loans to applicants with
less than perfect credit and higher debt to income ratios than secondary market
conforming standards. In all other respects the loans are originated in the
same manner as a conventional loan. All loans have risk premium factored into
the rate and additional valuation allowances are established when the loan is
funded. The Bank originated $59.2 million of these loans during fiscal 1998.
At September 30, 1998, the Bank's portfolio included $57.7 million of these
loans.
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, 1998 or 1997. At September 30, 1998, the
unpaid balance of total mortgage loans sold to the FHLMC and serviced by the
Bank was $7.8 million.
During 1995 the Bank purchased four pools of full pay-out commercial equipment
leases totalling $3.0 million from Bennett Funding Group (BFG). Normal lease
payments received through March, 1996 reduced the aggregate outstanding balance
to $2.0 million. During fiscal 1998 and 1997, the Bank received post-
bankruptcy lease receipts totaling $378,000 and $1.2 million, respectively. At
September 30, 1998, the Bank had $30,000 of commercial leases. The BFG
settlement also ended all outstanding litigation. See further discussion of
these leases included in "Classified Assets".
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, 1998, total mortgage-backed securities aggregated $11.2
million, or 2.2% of total assets. The fair value of these securities was
approximately $11.5 million at September 30, 1998.
Currently all loans originated or purchased by the Bank and mortgage-backed
16
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,
1998 1997 1996
Percent Percent Percent
Amount of Total Amount of Total Amount of Total
(Dollars in thousands)
Mortgage loans:
One- to four-family $ 324,265 76.47% $ 304,950 78.83% $ 277,086 78.34%
Multi-family 83,084 19.59 64,450 16.66 55,341 15.65
Commercial 3,295 0.78 2,894 0.75 5,656 1.60
Commercial leases 30 0.01 408 0.10 2,032 0.57
------- ----- ------- ---- ------ -----
Total mortgage loans 410,674 96.85 372,702 96.34 340,115 96.16
Consumer loans 13,358 3.15 14,152 3.66 13,585 3.84
------- ------ ------- ------ ------ ------
Gross loans receivable 424,032 100.00% 386,854 100.00% 353,700 100.00%
====== ====== ======
Less:
Loans in process 1 - 3
Unearned discounts and
deferred loan costs (2,168) (1,868) (1,368)
Allowance for loan losses 591 460 810
------- ------- -------
Loans receivable, net $ 425,608 388,262 354,255
======= ======= =======
Mortgage-backed
securities - FHLMC $ 11,177 100.00% 16,866 100.00% 21,647 100.00%
====== ====== ======
Net premiums - 9 26
------- ------- ------
Mortgage-backed
securities, net $ 11,177 $ 16,875 $ 21,673
======= ======= =======
17
<CAPTIONS>
At September 30,
1995 1994
Percent Percent
Amount of Total Amount of Total
(Dollars in thousands)
Mortgage loans:
One- to four-family $ 203,974 76.40% $ 163,845 75.41%
Multi-family 45,698 17.12 41,224 18.98
Commercial 2,478 0.93 - -
Commercial leases 2,373 0.89 - -
------- ----- ------- ----
Total mortgage loans 254,523 95.34 205,069 94.39
Consumer loans 12,442 4.66 12,196 5.61
------- ----- ------- ----
Gross loans receivable 266,965 100.00% 217,265 100.00%
====== ======
Less:
Loans in process 77 -
Unearned discounts and
deferred loan fees (250) 380
Allowance for loan losses 403 228
------- -------
Loans receivable, net $ 266,735 $ 216,657
======= =======
Mortgage-backed
securities - FHLMC $ 26,435 100.00% $ 29,485 100.00%
====== ======
Net premiums 49 80
------- -------
Mortgage-backed
securities, net $ 26,484 $ 29,565
======= =======
18
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,
1998 1997 1996
(in thousands)
Mortgage Loans (gross):
At beginning of period $ 372,702 340,115 254,523
Mortgage loans originated:
One- to four- family 107,575 74,067 108,698
Multi-family 26,719 15,981 20,220
Commercial 2,494 913 4,129
------- ------- -------
Total mortgage loans originated 136,788 90,961 133,047
Transfer of mortgage loans to foreclosed real estate (1,163) (359) (113)
Transfer of mortgage loans from foreclosed real estate 529 - -
Sale of commercial loan participation - - (1,890)
Principal repayments of loans receivable (100,182) (56,798) (45,064)
Principal repayments of commercial leases (378) (1,217) (341)
Purchase of loans receivable 2,378 - -
One- to four- family mortgage participations securitized - - (47)
------- ------- -------
At end of period $ 410,674 372,702 340,115
------- ------- -------
Consumer loans (gross):
At beginning of period $ 14,152 13,585 12,442
Consumer loans originated 6,000 6,813 6,615
Principal repayments (6,794) (6,246) (5,472)
------- ------ ------
At end of period 13,358 14,152 13,585
------- ------ ------
Total loans (gross) $ 424,032 386,854 353,700
======= ======= =======
Mortgage-backed securities held to maturity:
At beginning of period $ 16,866 21,647 26,435
One- to four- family mortgage participations securitized - - 47
Amortization and principal repayments (5,689) (4,781) (4,835)
------- ------ ------
At end of period $ 11,177 16,866 21,647
======= ======= =======
19
LOANS 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, 1998.
The table does not include prepayments or scheduled principal amortization.
Principal repayments and prepayments on loans and mortgage-backed securities
held to maturity totalled $113.0 million, $69.0 million, and $55.7 million for
the years ended September 30, 1998, 1997 and 1996, respectively.
At September 30, 1998
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 $ 19,369 738 70,666 27,371 733 30 4,965 123,872 6,991 130,863
After one year:
One to three years 32,370 1,070 80,410 35,187 2,064 - 4,888 155,989 1,421 157,410
Three to five years 25,552 674 27,771 16,692 498 - 2,085 73,542 1,054 74,596
Five to 10 years 41,561 875 - - - - 1,285 43,721 1,543 45,264
10 to 20 years 22,112 207 - - - - 135 22,454 168 22,622
Over 20 years 4,454 - - - - - - 4,454 - 4,454
------- ---- ------- ------ ----- ----- ----- ------- ------ -------
Total due after
one year 126,049 2,826 108,181 52,149 2,562 - 13,358 300,160 4,186 304,346
Total amounts due $ 145,418 3,564 178,847 79,520 3,295 30 13,358 424,032 11,177 435,209
Less:
Loans in process 1 - 1
Unearned discounts,
premiums and deferred
loan costs, net (2,168) - (2,168)
Allowance for possible loan losses 591 - 591
------ ------ ------
Loan receivable and mortgage-
backed securities held to
maturity, net $425,608 11,177 436,785
======== ======= =======
20
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.
Residential loans without income verification are offered in amounts up to a
maximum value ratio of 80%. The Bank also offers a similar program for people
who typically are self-employed. The income used to qualify the loan is the
amount stated on the loan application. The maximum loan amount allowed under
this program is 75% of the property value. The Bank, to a lessor extent,
grants loans to applicants with less than perfect credit and higher debt to
income ratios than secondary market conforming standards. In all other
respects the loans are originated in the same manner as a conventional loan.
All loans have risk premium factored into the rate and additional valuation
allowance are established when the loan is funded.
MULTI-FAMILY AND COMMERCIAL REAL ESTATE LENDING. The Bank originates fixed and
adjustable rate multi-family loans secured by properties (five units or more)
typically located in its primary market area. These loans generally have rate
and payment adjustment periods of 3 to 5 years, with amortizations of up to 30
years. The Bank customarily charges origination fees of up to 3% of the loan
amount for newly originated loans and lesser fees for renewals or modifications
21
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, 1998, $83.1 million, or 19.6%, 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, 1998,
$3.3 million, or 0.8%, 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". As of September 30, 1998, $30,000 or 0.01% of the Bank's
loan portfolio consisted of commercial leases.
22
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, 1998, $13.4 million or 3.2% 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.
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 Investments and
designated underwriters up to the agency maximum loan limitations. Non-
conforming loans up to $250,000 and otherwise conforming to the Loan Policy may
be approved by the Vice President - Loan Investments. Loans of up to $500,000
may be approves by the Vice President - Loan Investments with the concurrence
of a member if the Bank loan committee. 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 $1.5 million and one- to four-family construction loans over $1.5
million require the approval of a majority of the Board.
For all loans originated by the Bank, upon receipt of a completed loan
application from a prospective borrower, a credit report is ordered, income and
certain other information generally is verified and, if necessary, additional
financial information is required. All borrowers of one- to four-family
residential mortgage loans are qualified pursuant to applicable agency
guidelines. The Bank's policies require appraisals on all real estate intended
to secure a proposed loan, which currently are performed by independent
appraisers designated and approved by the Bank. Further, under current OTS
regulations, all loan transactions of $1.0 million or more, non-residential
transactions of $250,000 or more, and complex residential transactions of
$250,000 or more, the Bank requires appraisals conducted by state certified or
licensed appraisers. The Board, at least annually, approves the independent
appraisers used by the Bank and reviews the Bank's appraisal policy. It is the
Bank's policy to obtain title insurance on all real estate first mortgage
loans. Borrowers must also obtain hazard insurance prior to closing.
Borrowers generally are required to advance funds on a monthly basis together
with each payment of principal and interest to a mortgage escrow account from
which the Bank makes disbursements for items such as real estate taxes and
hazard insurance premiums.
DELINQUENCIES AND CLASSIFIED ASSETS.
DELINQUENT LOANS. The Board of Directors performs a monthly review of all
delinquent loans. The procedures taken by the Bank with respect to
delinquencies vary depending on the nature of the loan and period of
delinquency.
The Bank's policies generally provide that delinquent mortgage loans be
reviewed and that a written late charge notice be mailed no later than the
twentieth day of delinquency. The policies also require telephone contacts for
loans more than 20 days late to ascertain the reasons for the delinquency and
23
the prospects of repayment. Face-to-face interviews and collection notices are
generally required for loans more than 30 days delinquent and on a case-by-case
basis for mortgage loans. After 60 days, the Bank will either set a date by
which the loan must be brought current, enter into a written forbearance
agreement, foreclose on any collateral or take other appropriate action. The
Bank's policies regarding delinquent consumer loans are similar except that
telephone contacts and correspondence will generally occur after a consumer
loan is more than 15 days delinquent.
It is the Bank's general policy to discontinue the accrual of interest on all
first mortgage loans 90 days past due. Consumer loans continue to accrue
interest until a determination 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, 1998, 1997 and 1996:
At September 30, 1998 At September 30, 1997
60-89 Days 90 Days or More 60-89 Days 90 Days or More
----------------- ------------------ ----------------- -----------------
Number Principal Number Principal Number Principal Number Principal
of Balance of Balance of Balance of Balance
Loans of Loans Loans of Loans Loans of Loans Loans of Loans
(Dollars in thousands)
One- to four- family 8 $ 501 6 $ 571 5 $ 141 8 $ 1,166
Multi-family - - 1 228 - - - -
Commercial - - - - - - 1 231
Commercial leases (1) - - 1 30 - - 1 408
-- --- -- ------ -- ---- -- ----
Total mortgage loans 8 501 8 829 5 141 10 1,805
Consumer 1 14 1 2 5 40 2 3
-- --- -- ------ -- ---- -- ----
Total loans 9 $ 515 9 $ 831 10 $ 181 12 $ 1,808
== === == ====== == ==== == =====
Delinquent loans to
total loans 0.12% 0.20% 0.05% 0.47%
=== ====== ==== ====
At September 30, 1996
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 6 $ 141 7 $ 671
Commercial - - 2 378
Commercial leases (1) - - 1 2,032
-- --- -- ------
Total mortgage loans 6 141 10 3,081
Consumer 1 5 2 5
-- --- -- ------
Total loans 7 $ 146 12 $3,086
== === == ======
Delinquent loans to
total loans 0.04% 0.87%
=== ======
24
(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, loans which are 90 days or more past due, and real estate in
foreclosure. The Bank continues accruing interest on all consumer loans until
a loss determination is made. Upon determination that the loan will result in
a loss, the Bank discontinues the accrual of interest and/or establishes a
reserve in the amount of the anticipated loss. For the year ended September
30, 1998, 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,
1998, had been currently performing in accordance with their original terms,
the Bank would have recognized interest income from such loans of $34,000.
At September 30,
1998 1997 1996 1995 1994
(Dollars in thousands)
Non-accrual mortgage loans $ 799 $ 1,397 $ 1,049 $ 604 $ 279
Non-accrual commercial leases 30 408 2,032 - -
Non-accrual consumer loans 2 3 5 13 3
----- --- --- --- ---
Total non-accrual loans 831 1,808 3,086 617 282
Consumer loans 90 days or more
past due and still accruing - - - - -
----- --- --- --- ---
Total non-performing loans 831 1,808 3,086 617 282
Real estate in foreclosure 131 215 97 - 88
----- --- --- --- ---
Total non-performing assets $ 962 $ 2,023 $ 3,183 $ 617 $ 370
===== === === === ===
Total non-performing loans to
total loans 0.20% 0.47% 0.87% 0.23% 0.13%
===== === === === ===
Total non-performing assets to
total assets 0.19% 0.41% 0.67% 0.16% 0.11%
===== === === === ===
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
25
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, 1998, the Bank had classified assets of $962,000.
Classified loans of $799,000 were categorized as substandard, consisting of 6
residential mortgage loans, 1 multi-family loan, and 1 unsecured line 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.
In August 1997, the Bank and the Bennett Bankruptcy Trustee reached a
settlement agreement. Under the terms of this agreement, the Bank received
post bankruptcy lease receipts totaling $1.1 million. Repayment of the balance
of $408,000 in lease receivables at September 30, 1997 is expected from future
lease payments. The settlement also ended all outstanding litigation. As a
result of the settlement, the Company charged off $406,000 of leases in 1997,
against the previously established allowance. During fiscal 1998, the Company
received and additional $378,000 in payments. At September 30, 1998 the
recorded book value of the Bennett lease was $30,000.
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
26
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,
1998 1997 1996 1995 1994
(Dollars in thousands)
Balance at beginning of year $ 460 $ 810 $ 403 $ 228 $ 233
Provision for loan losses 181 64 410 192 48
Charge offs:
One-to four-family - - (8) (2) -
Multi-family - - - (5) (21)
Commercial leases - (406) - - -
Consumer loans (51) (19) (26) (19) (32)
---- ---- ---- ---- ----
Total Charge-offs (51) (425) (34) (26) (53)
Recoveries - Consumer loans 1 11 31 9 -
---- ---- ---- ---- ----
Balance at end of year $ 591 $ 460 $ 810 $ 403 $ 228
==== ==== ==== ==== ====
Ratio of charge-offs during the
year to average loans
outstanding during the year 0.01% 0.11% 0.01% 0.01% 0.03%
==== ==== ==== ==== ====
Ratio of allowance for loan losses
to net loans receivable at end
of year 0.014% 0.12% 0.23% 0.15% 0.11%
==== ==== ==== ==== ====
Ratio of allowance for loan losses
to total non-performing loans at
end of year 71.12% 25.44% 26.25% 65.32% 80.85%
===== ===== ===== ====== =====
Ratio of allowance for loan losses
to non-performing assets at end
of year 61.43% 22.74% 25.48% 65.32% 61.62%
===== ===== ===== ====== =====
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.
27
The following table also sets forth the percent of loans in each category to
total loans.
At September 30,
1998 1997 1996
% 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 $ 241 76.47% $ 158 78.83% $ 90 78.34%
Multi-family 140 19.59 84 16.66 57 15.65
Commercial 52 0.78 35 0.75 104 1.60
Commercial leases 2 0.01 21 0.10 406 0.57
Consumer loans 148 3.15 157 3.66 150 3.84
Unallocated 8 - 5 - 3 -
---- ------ ---- ------ ---- ------
Total allowance for loan losses $ 591 100.00% $ 460 100.00% $ 810 100.00%
==== ====== ==== ====== ==== ======
At September 30,
1995 1994
% 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 $ 70 76.40% $ 48 75.41%
Multi-family 46 17.12 42 18.98
Construction 89 0.93 - -
Commercial leases 24 0.89 - -
Consumer loans 132 4.66 130 5.61
Unallocated 42 - 8 -
---- ---- ---- -----
Total allowance for loan losses $ 403 100.00% $ 228 100.00%
==== ====== ==== ======
28
INVESTMENT ACTIVITIES
The investment policies of the Company and the Bank, established by the Board
of Directors and implemented by the Asset/Liability Committee, attempt to
provide and maintain liquidity, generate a favorable return on investments
without incurring undue interest rate and credit risk, and complement the
Bank's lending activities. Federally chartered savings institutions have the
authority to invest in various types of liquid assets, including United States
Treasury obligations, securities of various federal agencies, certain
certificates of deposit of insured banks and savings institutions, certain
bankers' acceptances, repurchase agreements and federal funds. Subject to
various restrictions, federally chartered savings institutions may also invest
their assets in commercial paper, investment grade corporate debt securities,
asset-backed securities, and mutual funds whose assets conform to the
investments that a federally chartered savings institution is otherwise
authorized to make directly.
The Company is the holder of certain subordinated notes (the Notes) issued by
Cole Taylor Financial Group, Inc. The Notes have a par value and cost basis of
$3.0 million. The Notes were acquired by the Company in 1994, when Cole Taylor
Financial Group, Inc. was the parent company for both a consumer finance
company and a Chicago area Bank. In fiscal 1997, Cole Taylor's bank subsidiary
was "spun-off" to certain Cole Taylor shareholders in exchange for stock and
certain assets. The Notes remained as obligations of the surviving company,
which is now known as Reliance Acceptance Group, Inc. (RACC) and is the parent
company for the consumer finance company.
On November 14, 1997, RACC filed a Form 10-Q with the SEC in which RACC
reported, among other things, substantial additions to its loan loss reserves,
increasing delinquencies and repossession losses, a severe decline in its net
interest margin, continuing defaults under senior credit agreements, a lack of
future funding sources, and the imposition of substantial restrictions by
senior lenders. In April 1998 RACC filed a plan of reorganization with the
United States Bankruptcy Court in Delaware.
The Company has evaluated currently available information about RACC's present
circumstances and future prospects in an effort to assess impairment and to
place a value on the Notes in the context of a possible RACC liquidation, sale
and/or bankruptcy. The Company concluded that the impairment is other than
temporary, and that a complete write-down of the Notes was appropriate, because
of RACC's worsening condition, the fact that the Notes are subordinate to the
senior debt and are structurally subordinate to the other obligations of RACC's
finance company subsidiary, and the substantial uncertainties that exist
regarding ultimate realization of the asset.
Accordingly, the Company wrote the Notes down $3.0 million during the fourth
quarter and fiscal year ended September 30, 1997. In accordance with generally
accepted accounting principles (GAAP), the write-down was charged against
fiscal year 1997 earnings because the notes were considered to be other than
temporarily impaired.
The Company intends to closely monitor future developments concerning RACC, and
to continue to explore alternatives for realizing a recovery on this
investment.
29
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,
1998 1997 1996
Amortized Fair Amortized Fair Amortized Fair
Cost Value Cost Value Cost Value
(in thousands)
Interest-earning deposits:
FHLB daily investment $ 547 547 722 722 - -
Money market fund 8 8 1,592 1,592 225 225
----- ----- --- --- ----- -----
Total interest-bearing deposits $ 555 555 2,314 2,314 225 225
===== ===== ===== ===== ===== =====
Federal funds sold $ 100 100 100 100 200 200
==== === ===== ===== ===== =====
Mutual funds -
Federated Liquid Cash Trust $ - - 3,154 3,154 3,146 3,146
===== ===== ===== ===== ===== =====
FHLB-Chicago Stock $ 6,510 6,510 5,700 5,700 5,795 5,795
===== ===== ===== ===== ===== =====
Investment securities
available for sale:
U.S. Government and
agencies $ 58,439 58,979 64,467 64,687 66,000 64,972
Corporate asset-backed
securities - - 2,616 2,613 7,331 7,267
Corporate debt securities - - 3,000 2,997 5,973 5,865
------- ------ ------ ------ ------ ------
Total investment securities
available for sale $ 58,439 58,979 70,083 70,297 79,304 78,104
======= ====== ====== ====== ====== ======
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, 1998.
At September 30, 1998
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 $ 9,991 7.00% 9,992 6.25 38,456 6.77% - - 7.2 58,439 58,979 6.72%
====== ====== ====== ==== ====== ======
Investments include $59 million in callable notes. These securities 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 6.25% FHMLC due 3/12/2003, callable 3/12/99, $10 million
6.90% FNMA due 5/6/2008, callable 5/6/99, $20 million 6.77% FNMA due
5/21/2008, callable 5/21/99, $8.5 million 6.60% FHLMC due 6/24/2008, callable
6/24/99, and a $10 million 7.00% FHLMC, originally due 11/27/2007, called to
settle on 12/7/98.
30
SOURCES OF FUNDS
GENERAL. Deposits, loan repayments, and cash flows generated from operations
are the primary sources of the Bank's funds for use in lending, investing and
for other general purposes. The Bank also utilizes FHLB advances from time to
time.
DEPOSITS. The Bank offers a variety of deposit accounts having a range of
interest rates and terms. The Bank's deposits consist of passbook savings,
NOW, Super NOW, money market and certificate accounts. The flow of deposits is
influenced significantly by general economic conditions, changes in money
market rates, prevailing interest rates and competition. The Bank's deposits
are obtained primarily from the areas in which its home office is located. The
Bank relies primarily on customer service and long-standing relationships with
customers to attract and retain these deposits. Certificate accounts in excess
of $100,000 are not solicited by the Bank nor does the Bank use brokers to
obtain deposits. Management constantly monitors the Bank's deposit accounts
and, based on historical experience, management believes it will retain a large
portion of such accounts upon maturity.
The following table presents the deposit activity of the Bank for the years
indicated.
Years Ended September 30,
1998 1997 1996
(in thousands)
Deposits $ 372,003 156,089 234,407
Withdrawals (377,067) (144,310) (214,502)
------- ------- -------
Net deposits in excess of withdrawals (5,064) 11,779 19,905
Interest credited on deposits 12,341 8,730 7,036
------- ------- -------
Total increase in deposits $ 7,277 20,509 26,941
======= ======= =======
The following table sets forth maturities time deposits over $100,000 at
September 30, 1998:
Maturity Period
(in thousands)
Three months or less $ 5,877
Over three through six months 4,253
Over six through 12 months 10,859
Over 12 months 3,524
-------
$ 24,513
=======
/TABLE
31
The following table sets forth the distribution of the Bank's deposit accounts
at the dates indicated and the weighted average nominal interest rates on each
category of deposits presented. Management does not believe that the use of
fiscal year-end balances instead of average balances resulted in any material
difference in the information presented.
At September 30,
1998 1997
Weighted Weighted
Percent of Average Percent of Average
Total Nominal Total Nominal
Amount Deposits Rate Amount Deposits Rate
(dollars in thousands)
Passbook Savings $ 126,901 38.38% 4.16% $ 100,588 31.10% 3.83%
Transaction Accounts:
NOW/non-interest bearing 5,981 1.81 - 4,766 1.47 -
NOW 15,972 4.83 2.25 13,201 4.08 2.18
Money market and management 17,462 5.28 4.03 17,634 5.45 4.21
------ ----- ---- ------ ---- ----
Total transaction accounts 39,415 11.92 2.70 35,601 11.01 3.70
Certificate Accounts:
3 month 2,589 0.78 4.95 3,820 1.18 5.23
6 month 18,095 5.47 5.25 15,631 4.83 5.52
7 month 4,662 1.41 5.32 4,615 1.43 5.35
8 month 39,875 12.06 5.69 12,221 3.78 5.65
10 month 17,876 5.41 5.44 30,926 9.56 5.99
12 month 28,263 8.55 5.63 43,244 13.37 5.94
13 month 3,984 1.20 5.59 18,159 5.61 6.04
15 month 15,377 4.65 5.64 15,081 4.66 5.85
24 month 11,967 3.62 5.78 11,506 3.56 5.72
36 month 7,533 2.28 5.82 7,904 2.44 6.10
36 month rising rate 4,578 1.38 5.29 14,161 4.38 6.55
60 month 9,455 2.86 5.91 9,681 2.99 5.82
Other 100 0.03 5.50 305 0.09 6.04
------ ----- ---- ------ ---- ----
Total certificate accounts 164,354 49.70 5.59 187,254 57.89 5.79
------ ----- ---- ------ ---- ----
Total Deposits $ 330,670 100.00% 4.78% $ 323,443 100.00% 4.89%
======= ====== ==== ======= ====== ====
32
At September 30,
1996
Weighted
Percent of Average
Total Nominal
Amount Deposits Rate
(dollars in thousands)
Passbook Savings $ 86,077 28.41% 3.35%
Transaction Accounts:
NOW/non-interest bearing 4,596 1.52 -
NOW 13,471 4.45 2.17
Money market and management 19,192 6.34 4.16
------ ----- ----
Total transaction accounts 37,259 12.30 2.93
Certificate Accounts:
3 month 572 0.19 4.80
6 month 12,287 4.06 5.00
7 month 39,411 13.01 5.83
8 month 5,191 1.71 5.15
10 month 5,277 1.74 5.34
12 month 11,789 3.89 5.35
13 month 19,760 6.52 5.93
15 month 31,806 10.50 5.91
24 month 22,515 7.43 6.38
36 month 7,924 2.62 5.64
36 month rising rate 12,467 4.12 5.94
60 month 10,399 3.43 5.78
Other 200 0.07 5.65
------ ----- ----
Total certificate accounts 179,598 59.29 5.79
------ ----- ----
Total Deposits $ 302,934 100.00% 4.75%
======= ====== ====
33
The following table presents, by various rate categories, the amount of
certificate accounts outstanding at September 30, 1998, 1997 and 1996 and the
periods to maturity of the certificate accounts outstanding at September 30,
1998.
Period to maturity from September 30, 1998
At September 30,
Two to
Within One to Three There-
1997 1996 1995 One Year Two Years Years after Total
(in thousands)
Certificate accounts:
2.99% or less $ 139 266 587 29 - 41 69 139
3.00% to 3.99% - 76 - - - - - -
4.00% to 4.99% 5,340 660 4,080 2,733 31 2,576 - 5,340
5.00% to 5.99% 147,841 104,941 107,182 130,744 10,193 4,302 2,602 147,841
6.00% to 6.99% 11,034 81,081 60,437 7,978 1,850 156 1,050 11,034
7.00% to 7.99% - 230 7,312 - - - - -
8.00% to 8.99% - - - - - - - -
9.00% to 9.99% - - - - - - - -
10.00% to 10.99% - - - - - - - -
------- ------- ------- ------- ------ ----- ----- -------
Total $ 164,354 187,254 179,598 141,484 12,074 7,075 3,721 164,354
======= ======= ======= ======= ====== ===== ===== =======
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, 1998, the Bank's FHLB-Chicago advances
totalled $121.4 million.
The following table sets forth certain information regarding borrowings at and
for the date indicated:
At and for the Years Ended September 30,
1998 1997 1996
(in thousands)
FHLB-CHICAGO ADVANCES
Average balance outstanding $102,968 97,879 74,078
Maximum amount outstanding at any
month-end during the year 128,400 113,400 115,300
Balance outstanding at year end 121,400 113,400 115,300
Weighted average interest rate
during the year 5.73% 5.66% 5.65%
Weighted average interest rate
at end of year 5.69% 5.80% 6.00%
34
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 $640,000 at September 30, 1998. 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, 1998. 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,
1998 was $10,000. Losses from the operations of the property were 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, 1998, Fidelity Corporation had assets of $1.3
million.
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, 1998, the Company had 91 full-time employees and 35 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.
35
SUPERVISION AND REGULATION
GENERAL
Financial institutions and their holding companies are extensively regulated
under federal and state law. As a result, the growth and earnings performance
of the Company can be affected not only by management decisions and general
economic conditions, but also by the requirements of applicable state and
federal statutes and regulations and the policies of various governmental
regulatory authorities including, but not limited to, the OTS, the FDIC, the
Board of Governors of the Federal Reserve System (the "FRB"), the Internal
Revenue Service and state taxing authorities and the Securities and Exchange
Commission (the "SEC"). 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
YEAR 2000 COMPLIANCE GUIDELINES. The federal banking regulators recently
issued guidelines establishing minimum safety and soundness standards for
achieving Year 2000 compliance. The guidelines, which took effect October 15,
1998 and apply to all FDIC-insured depository institutions, establish standards
for developing and managing Year 2000 project plans, testing remediation
efforts and planning for contingencies. The guidelines are based upon guidance
previously issued by the agencies under the auspices of the Federal Financial
Institutions Examination Council (the FFIEC ), but are not intended to replace
or supplant the FFIEC guidance which will continue to apply to all federally
insured depository institutions.
The guidelines were issued under section 39 of the Federal Deposit Insurance
Act, as amended (the FDIA ), which requires the federal banking regulators to
establish standards for the safe and sound operation of federally insured
depository institutions. Under section 39 of the FDIA, if an institution fails
to meet any of the standards established in the guidelines, the institution s
primary federal regulator may require the institution to submit a plan for
achieving compliance. If an institution fails to submit an acceptable
compliance plan, or fails in any material respect to implement a compliance
plan that has been accepted by its primary federal regulator, the regulator is
required to issue an order directing the institution to cure the deficiency.
Such an order is enforceable in court in the same manner as a cease and desist
order. Until the deficiency cited in the regulator s order is cured, the
36
regulator may restrict the institution s rate of growth, require the institution
to increase its capital, restrict the rates the institution pays on deposits or
require the institution to take any action the regulator deems appropriate
under the circumstances. In addition to the enforcement procedures established
in section 39 of the FDIA, noncompliance with the standards established by the
guidelines may also be grounds for other enforcement action by the federal
banking regulators, including cease and desist orders and civil money penalty
assessments.
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 with the OTS
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 FDIC 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 interstate acquisitions
of savings associations and savings and loan holding companies are permitted.
Illinois law presently permits savings and loan holding companies located in
any state of the United States to acquire savings associations or savings and
loan holding companies located in Illinois, subject to certain conditions,
including the requirement that the laws of the state in which the acquiror is
located permit savings and loan holding companies located in Illinois to
acquire savings associations or savings and loan holding companies in the
acquiror's state.
A savings and loan holding company that, like the Company, 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 (see "--The Bank--
Qualified Thrift Lender Test"). 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
37
on the holding company and the subsidiary savings association as the OTS deems
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 law also prohibits acquisition of control of a savings association or
savings and loan holding 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 Delaware General Corporation Law (the "DGCL") allows the
Company to pay dividends only out of its surplus (as defined and computed in
accordance with the provisions of the DGCL), or if the Company has no such
surplus, out of its net profits for the fiscal year in which the dividend is
declared and/or the preceding fiscal year. Additionally, the OTS possesses
enforcement powers over savings and loan holding companies to prevent or remedy
actions that represent unsafe or unsound practices or violations of applicable
statutes and regulations. Among these powers is the ability to proscribe the
payment of dividends by savings and loan holding companies.
FEDERAL SECURITIES REGULATION. The Company's common stock is registered with
the SEC under the Securities Act of 1933, as amended, and the Securities
Exchange Act of 1934, as amended (the "Exchange Act"). Consequently, the
Company is subject to the information, proxy solicitation, insider trading and
other restrictions and requirements of the SEC under the Exchange Act.
THE BANK
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 Bank is subject to the examination,
supervision, reporting and enforcement requirements of the OTS, as the
chartering authority for federal savings associations, and the FDIC as
administrator of the SAIF. The Bank is also a member of the Federal Home Loan
Bank System, which provides a central credit facility primarily for member
institutions.
DEPOSIT INSURANCE. As an FDIC-insured institution, the Bank is required to pay
deposit insurance premium assessments to the FDIC. The FDIC has adopted a
risk-based assessment system under which all insured depository institutions
are placed into one of nine categories and assessed insurance premiums based
upon their respective levels of capital and results of supervisory evaluations.
Institutions classified as well-capitalized (as defined by the FDIC) and
considered healthy pay the lowest premium while institutions that are less than
adequately capitalized (as defined by the FDIC) and considered of substantial
supervisory concern pay the highest premium. Risk classification of all
insured institutions is made by the FDIC for each semi-annual assessment
period.
During calendar year 1998, SAIF assessments ranged from 0% of deposits to 0.27%
of deposits.
38
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 has been used to cover interest payments due on the
outstanding obligations of the FICO, the entity created to finance the
recapitalization of the Federal Savings and Loan Insurance Corporation, the
SAIF's predecessor insurance fund. Pursuant to federal legislation enacted
September 30, 1996, commencing January 1, 1997, both SAIF members and Bank
Insurance Fund ("BIF") members became subject to assessments to cover the
interest payments on outstanding FICO obligations. Such FICO assessments are
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. 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. During the period October 1, 1997 to September 30,
1998, the FICO assessment rate for SAIF members ranged from 0.0632% of deposits
to 0.0621% of deposits while the FICO assessment rate for BIF members ranged
from 0.0126% of deposits to 0.0112% of deposits. During the year ended
September 30, 1998, the Bank paid FICO assessments totaling $203,000.
OTS ASSESSMENTS. All Federal savings associations are required to pay
supervisory fees to the OTS to fund the operations of the OTS. The amount of
such supervisory fees is based upon each institution's total assets, including
consolidated subsidiaries, as reported to the OTS. During the year ended
September 30, 1998, the Bank paid supervisory fees to the OTS totaling
$112,000.
CAPITAL REQUIREMENTS. Pursuant to the HOLA and OTS regulations, savings
associations, such as the Bank, are subject to the following minimum capital
requirements: a core capital requirement, consisting of a minimum ratio of
core capital to total assets of 3%; a tangible capital requirement consisting
of a minimum ratio of tangible capital to total assets of 1.5%; and a risk-
based capital requirement, consisting of a minimum ratio of total capital to
total risk-weighted assets of 8%, at least one-half of which must consist of
core capital. For purposes of these capital standards, core capital consists
primarily of permanent stockholders' equity less intangible assets other than
certain supervisory goodwill, certain mortgage servicing rights and certain
purchased credit card relationships and less investments in subsidiaries
engaged in activities not permitted for national banks; tangible capital is
substantially the same as core capital except that all intangible assets other
than certain mortgage servicing rights must be deducted; and total capital
consists primarily of core capital plus certain debt and equity instruments
that do not qualify as core capital, and a portion of the Bank's allowances for
loan and leases losses.
The capital requirements described above are minimum requirements. Higher
capital levels will be required if warranted by the particular circumstances or
risk profiles of individual institutions. For example, the regulations of the
OTS provide that additional capital may be required to take adequate account
39
of, among other things, interest rate risk or the risks posed by concentrations
of credit or nontraditional activities.
During the year ended September 30, 1998, the Bank was not required by the OTS
to increase its capital to an amount in excess of the minimum regulatory
requirement. As of September 30, 1998 the Bank exceeded its minimum regulatory
capital requirements with a core capital ratio of 8.91%, a tangible capital
ratio of 8.91% and a risk-based capital ratio of 18.99%.
The OTS has proposed to amend its regulations to establish a minimum core
capital requirement of 3% of total assets for any savings association assigned
a composite rating of 1 under the Uniform Financial Institutions Rating System
("UFIRS") as of the association's most recent OTS examination, with a minimum
core capital requirement of 4% of total assets for all other savings
associations. It is not anticipated that the adoption of this proposal would
affect the Bank's ability to comply with the OTS capital requirements.
Federal law provides the federal banking regulators with broad power to take
prompt corrective action to resolve the problems of undercapitalized
institutions. The extent of the regulators' powers depends on whether the
institution in question is "well capitalized," "adequately capitalized,"
"undercapitalized," "significantly undercapitalized" or "critically
undercapitalized." Depending upon the capital category to which an institution
is assigned, the regulators' 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 savings associations, 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 (a Tier 1
Institution ) could, after prior notice to, but without the approval of, the
OTS, make capital distributions during a calendar year in an aggregate amount
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
(i.e., 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 OTS approval. As of September 30, 1998, 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, and a financial institution
generally is prohibited from paying any dividends if, following payment
thereof, the institution would be undercapitalized. As described above, the
Bank exceeded its minimum capital requirements under applicable guidelines as
of September 30, 1998. 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
40
the Bank's conversion from the mutual to the stock form of ownership in 1993.
Notwithstanding the availability of funds for dividends, however, the OTS may
prohibit the payment of any dividends by the Bank if the OTS determines such
payment would constitute an unsafe or unsound practice.
The OTS has proposed to amend its regulations governing capital distributions
(including cash dividends) by savings associations. The proposed amendment
would require prior OTS approval for any capital distribution by a savings
association that is not eligible for expedited processing under the OTS's
application processing regulations. In order to qualify for expedited
processing, a savings association must: (i) have a composite UFIRS rating of 1
or 2; (ii) have a Community Reinvestment Act rating of satisfactory or better;
(iii) have a compliance rating of 1 or 2; (iv) meet all applicable regulatory
capital requirements; and (v) not have been notified by the OTS that it is a
problem association or an association in troubled condition. Savings
associations that qualify for expedited processing would be required to obtain
OTS approval prior to making a capital distribution only if the amount of the
proposed capital distribution, when aggregated with all other capital
distributions during the same calendar year, would exceed an amount equal to
the association's year-to-date net income plus its retained net income for the
preceding two years. The proposed amendment will continue to require that the
OTS be given prior notice of certain types of capital distributions, including
any capital distribution by a savings association that, like the Bank, is a
subsidiary of a savings and loan holding company.
INSIDER TRANSACTIONS. The Bank is subject to certain restrictions imposed by
the Federal Reserve Act on 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, federal law and regulations may affect the terms upon which any
person becoming a director or officer of the Company or one of its subsidiaries
or a principal stockholder of the Company may obtain credit from banks with
which the Bank maintains a correspondent relationship.
SAFETY AND SOUNDNESS STANDARDS. The federal banking agencies have adopted
guidelines which establish operational and managerial standards to promote the
safety and soundness of federally insured depository institutions. The
guidelines set forth standards for internal controls, information systems,
internal audit systems, loan documentation, credit underwriting, interest rate
exposure, asset growth, compensation, fees and benefits, asset quality,
earnings and Year 2000 compliance. 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
institution's primary federal regulator may require the institution to submit a
plan for achieving and maintaining compliance. The preamble to the guidelines
states that the agencies expect 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 appropriate federal regulator, would constitute grounds
for further enforcement action.
41
BRANCHING AUTHORITY. Federally chartered savings associations which qualify as
"domestic building and loan associations," as defined in the Internal Revenue
Code, or meet the qualified thrift lender test (see "-The Bank -- Qualified
Thrift Lender Test") have the authority, subject to receipt of OTS approval, to
establish branch offices anywhere in the United States, either de novo or
through acquisitions of all or part of another financial institution. If a
federal savings association fails to qualify as a "domestic building and loan
association," as defined in the Internal Revenue Code, and fails to meet the
qualified thrift lender test, the association may branch only to the extent
permitted for national banks located in the savings association's home state.
As of September 30, 1998, the Bank qualified as a "domestic building and loan
association," as defined in the Internal Revenue Code and met the QTL test.
QUALIFIED THRIFT LENDER TEST. The HOLA requires every savings association to
satisfy a "qualified thrift lender" ("QTL") test. Under the HOLA, a savings
association will be deemed to meet the QTL test if it either (i) maintains at
least 65% of its "portfolio assets" in "qualified thrift investments" on a
monthly basis in nine out of every 12 months or (ii) qualifies as a "domestic
building and loan association," as defined in the Internal Revenue Code. For
purposes of the QTL test, "qualified thrift investments" include mortgage
loans, mortgage-backed securities, education loans, small business loans,
credit card loans and certain other housing and consumer-related loans and
investments. "Portfolio assets" consist of a savings association's total
assets less goodwill and other intangible assets, the association's business
properties and a limited amount of the liquid assets maintained by the
association pursuant to the liquidity requirements of the HOLA and OTS
regulations (see "--The Bank--Liquidity Requirements"). A savings association
that fails to meet the QTL test must either convert to a bank charter or
operate under certain restrictions on its activities and, within one year
following the loss of QTL status, the holding company for the savings
association will be required to register as, and will be deemed to be, a bank
holding company. A savings association that fails the QTL test may requalify
as a QTL but it may do so only once. As of September 30, 1998, the Bank
satisfied the QTL test, with a ratio of qualified thrift investments to
portfolio assets of 99.99%, and qualified as a "domestic building and loan
association," as defined in the Internal Revenue Code.
LIQUIDITY REQUIREMENTS. OTS regulations currently require each savings
association to maintain, for each calendar quarter, 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 4% of either (i) its liquidity base (i.e., its net withdrawable
accounts plus borrowings repayable in 12 months or less) as of the end of the
preceding calendar quarter or (ii) the average daily balance of its liquidity
base during the preceding calendar quarter. This liquidity requirement may be
changed from time to time by the OTS to an amount within a range of 4% to 10%
of the liquidity base, depending upon economic conditions and the deposit flows
of savings associations. The OTS may also require a savings association to
maintain a higher level of liquidity than the minimum 4% requirement if the OTS
deems necessary to ensure the safe and sound operation of the association.
Penalties may be imposed for failure to meet liquidity ratio requirements. At
September 30, 1998, the Bank was in compliance with OTS liquidity requirements,
with a liquidity ratio of 17.33%.
FEDERAL RESERVE SYSTEM. FRB regulations, as presently in effect, require
depository institutions to maintain non-interest earning reserves against their
transaction accounts (primarily NOW and regular checking accounts), as follows:
for transaction accounts aggregating $47.8 million or less, the reserve
requirement is 3% of total transaction accounts; and for transaction accounts
42
aggregating in excess of $47.8 million, the reserve requirement is $1.434
million plus 10% of the aggregate amount of total transaction accounts in
excess of $47.8 million. The first $4.7 million of otherwise reservable
balances are exempted from the reserve requirements. These reserve
requirements are subject to annual adjustment by the FRB. The Bank is in
compliance with the foregoing requirements. The balances used to meet the
reserve requirements imposed by the FRB may be used to satisfy liquidity
requirements imposed by the OTS.
IMPACT OF INFLATION AND CHANGING PRICES
The Company's financial statements and notes thereto presented herein have been
prepared in accordance with GAAP, which generally require the measurement of
financial position and operating results in terms of historical dollars without
considering the changes in the relative purchasing power of money over time due
to inflation. The impact of inflation is reflected in the increased cost of
the Company's operations. Unlike industrial companies, nearly all of the
assets and liabilities of the Company are monetary in nature. As a result,
interest rates have a greater impact on the Company's performance than do the
effects of general levels of inflation. Interest rates do not necessarily move
in the same direction or to the same extent as the price of goods and services.
IMPACT OF NEW ACCOUNTING STANDARDS
In December 1996, the FASB issued SFAS No. 127 "Deferral of the Effective Date
of Certain Provisions of FASB Statement No. 125." This statement delays until
1998 the effective date of certain of the provisions of Statement 125 that deal
with securities lending, repurchase dollar repurchase agreements, and for the
recording of collateral. The other provisions of Statement 125 are effective
for transfers occurring on or after July 1, 1997.
In February 1997, the FASB issued Statement 129, "Disclosure of Information
about Capital Structure." Statement 129 provides required disclosures for the
capital structure of both public and nonpublic companies and is effective for
financial statement periods ending after December 15, 1997. The required
disclosures had been included in a number of separate statements and opinions.
As such, the issuance of Statement 129 is not expected to require significant
revision of prior disclosures.
In June 1997, the FASB issued Statement 130, "Reporting Comprehensive Income."
Statement 130 establishes standards for reporting and presentation of
comprehensive income and its components in a full set of general-purpose
financial statements. Statement 130 is effective for both interim and annual
periods beginning after December 15, 1997, and is not expected to have a
material impact on the consolidated financial statements.
In June 1997, the FASB issued Statement 131. "Disclosures about Segments of an
Enterprise and Related Information." Statement 131 establishes standards for
the way public business enterprises are to report information about operating
segments in annual financial statements and requires those enterprises to
report selected information about operating segments in interim financial
reports issued to shareholders. Statement 131 is effective for financial
periods beginning after December 15, 1997, and is not expected to have a
material impact on the Company.
In February 1998, the Financial Accounting Standards issued Statement of
Financial Accounting Standards No. 132, "Employers' Disclosure about Pensions
43
and Other Postretirement Benefits (Statement 132). This statement revises
certain disclosures about pension and other postretirement benefits within the
consolidated financial statements. This Statement does not change the
measurement or recognition of the plans. Instead it standardized the
disclosure requirement to the extent practicable, requires additional
information on changes in the benefit obligations and fair values of plan
assets that will facilitate financial analysis, and eliminates periods
beginning after December 15, 1997 and is not expected to have a material impact
on the Company's results of operations.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities (Statement No. 133) which establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts and for hedging activities. The
Statement requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those
instruments at fair value. The accounting for changes in the fair value of a
derivative depends on the intended use of the derivative and the resulting
designation. Statement 133 is effective for fiscal quarters of fiscal years
beginning after June 15, 1999 and is not expected to have a material impact on
the Company's financial position, results of operations or liquidity.
No other new accounting policies were adopted and the application of existing
policies was not changed during fiscal 1998.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
The OTS requires all regulated thrift institutions to calculate the estimated
change in the Bank's net portfolio value (NPV) assuming instantaneous, parallel
shifts in the Treasury yield curve of 100 to 400 basis point either up or down
in 100 basis point increments. The NPV is defined as the present value of
expected cash flows from existing assets less the present value of expected
cash flows from existing liabilities plus the present value of net expected
cash inflows from existing off-balance sheet contracts.
The OTS provides all institutions that file a schedule entitled the
CONSOLIDATED MATURITY/RATE SCHEDULE (CMR) as a part of their quarterly Thrift
Financial Report with an interest rate sensitivity report of NPV. The OTS
simulation model uses a discounted cash flow analysis and an option-based
pricing approach to measuring the interest rate sensitivity of NPV. The OTS
model estimates the economics value of each type of asset, liability, and off-
balance sheet contact under the assumption that the Treasury yield curve shifts
instantaneous and parallel up and down 100 to 400 basis points in 100 basis
point increments. The OTS provides thrifts the results of their interest rate
sensitivity model, which is based on information provided by the Bank, to
estimate the sensitivity of NPV.
The OTS model utilizes an option-based pricing approach to estimate the
sensitivity of mortgage loans. The most significant embedded option in these
types of assets is the prepayment option of the borrowers. The OTS model uses
various price indications and prepayment assumptions to estimate sensitivity of
mortgage loans.
In the OTS model the value of deposit accounts appears on the asset and
liability side of the NPV analysis. In estimating the value of certificates of
deposit account, the liability portion of the CD is represented by the implied
value when comparing the difference between the CD face rate and available
wholesale CD rates. On the asset side of the NPV calculation, the value of the
44
"customer relationship" due to the rollover of retail CD deposits represents an
intangible asset in the NPV calculation.
Other deposit accounts such as transaction accounts, money market deposit
accounts, passbook accounts, and non-interest bearing accounts also are
included on the asset and liability side of the NPV calculation in the OTS
model. The accounts are valued at 100% of the respective account balances on
the liability side. On the assets side of the analysis, the value of the
"customer relationship" of the various types of deposit accounts is reflected
as a deposit intangible.
The NPV sensitivity of borrowed funds is estimated by the OTS model based on a
discounted cash flow approach. The cash flows are assumed to consist of
monthly interest payments with principal paid at maturity.
The OTS model is based only on the Bank's level balance sheet. The assets and
liabilities at the parent company level are short-term in nature, primarily
cash and equivalents, and were not considered in the analysis because they
would not have a material effect on the analysis of NPV sensitivity. The
following table sets forth the Company's interest rate sensitivity of NPV as of
September 30, 1998.
Net Portfolio Value as a %
Net Portfolio Value of Present Value of Assets
------------------------------ --------------------------
Changes in
Rates $ Amount $ Change % Change NPV Ratio Change
- ---------- --------- -------- -------- --------- ---------
+ 400 bp 41,973 (24,630) (37)% 8.47% - 402 bp
+ 300 bp 50,419 (16,184) (24)% 9.94% - 255 bp
+ 200 bp 57,202 (9,400) (14)% 11.06% - 143 bp
+ 100 bp 61,981 (4,622) (7)% 11.80% - 69 bp
0 bp 66,603 12.49%
- 100 bp 72,310 5,707 9 % 13.33% + 84 bp
- 200 bp 79,318 12,715 19 % 14.34% + 185 bp
- 300 bp 88,199 21,596 32 % 15.59% + 310 bp
- 400 bp 97,478 30,875 46 % 16.84% + 435 bp
45
ITEM 8. FINANCIAL STATEMENTS and SUPPLEMENTARY DATA
CONSOLIDATED STATEMENTS of FINANCIAL CONDITION
(Dollars in thousands)
September 30, 1998 and 1997
ASSETS 1998 1997
Cash and due from banks $ 1,320 436
Interest-earning deposits 555 2,314
Federal funds sold 100 100
Investment in dollar-denominated mutual funds, at fair value - 3,154
FHLB of Chicago stock, at cost 6,510 5,700
Mortgage-backed securities held to maturity, at amortized cost
(approximate fair value of $11,513 and $17,124 at
September 30, 1998 and 1997) 11,177 16,875
Investment securities available for sale, at fair value 58,979 70,297
Loans receivable, net of allowance for loan losses of $491 and $460
at September 30, 1998 and 1997 425,608 388,262
Accrued interest receivable 3,547 3,445
Real estate in foreclosure 131 215
Premises and equipment 4,401 3,593
Deposit base intangible 66 107
Other assets 1,169 1,136
-------- -------
$ 513,563 495,634
======== =======
LIABILITIES and STOCKHOLDERS' EQUITY
LIABILITIES
Deposits 330,670 323,443
Borrowed funds 121,400 113,400
Advance payments by borrowers for taxes and insurance 6,919 2,197
Other liabilities 5,977 6,977
-------- -------
Total liabilities 464,966 446,017
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; 2,589,784 and 2,794,978 shares outstanding
at September 30, 1998 and 1997, respectively 38 38
Additional paid-in capital 38,117 37,494
Retained earnings, substantially restricted 30,646 27,939
Treasury stock, at cost (1,080,566 and 987,372 shares at
September 30, 1998 and 1997, respectively) (19,210) (13,855)
Common stock acquired by Employee Stock Ownership Plan (1,092) (1,662)
Common stock acquired by Bank Recognition and Retention Plans (242) (471)
Unrealized gain on investment securities available for sale,
less applicable taxes 340 134
-------- -------
Total stockholders' equity 48,597 49,617
-------- -------
Commitments and contingencies
$513,563 495,634
======== =======
See accompanying notes to consolidated financial statements.
46
CONSOLIDATED STATEMENTS of EARNINGS
(Dollars in thousands, except per share data)
Years ended September 30, 1998, 1997, and 1996
1998 1997 1996
INTEREST INCOME:
Loans receivable $ 30,231 28,468 23,907
Investment securities 4,759 5,813 5,772
Mortgage-backed securities 1,018 1,387 1,703
Interest earning deposits 80 60 60
Federal funds sold 22 19 38
Investment in dollar-denominated mutual funds 17 168 74
------- ------ ------
36,127 35,915 31,554
INTEREST EXPENSE:
Deposits 15,936 15,929 13,941
Borrowed funds 5,900 5,541 4,188
------- ------ ------
21,836 21,470 18,129
Net interest income before provision for loan losses 14,291 14,445 13,425
Provision for loan losses 181 64 410
------- ------ ------
Net interest income after provision for loan losses 14,110 14,381 13,015
NON-INTEREST INCOME:
Fees and commissions 332 341 379
Insurance and annuity commissions 717 700 519
Other 58 62 59
------- ------ ------
1,107 1,103 957
NON-INTEREST EXPENSE:
General and administrative expenses:
Salaries and employee benefits 5,682 5,366 4,878
Office occupancy and equipment 1,293 1,203 1,208
Data processing 524 482 449
Advertising and promotions 263 515 421
Federal deposit insurance premiums 221 325 2,294
Other 1,216 1,346 1,294
Amortization of deposit base intangible 41 51 61
Loss on (recovery of) impairment of investment securities
available for sale (22) 2,978 -
Recapture of credit enhancement losses - - (10)
------- ------ ------
9,218 12,266 10,595
Income before income taxes 5,999 3,218 3,377
Income tax expense 2,219 2,293 1,235
------- ------ ------
NET INCOME $ 3,780 925 2,142
======= ====== ======
Earnings per share - basic $1.41 0.35 0.75
Earnings per share - diluted $1.33 0.33 0.72
See accompanying notes to consolidated financial statements.
47
CONSOLIDATED STATEMENTS of CHANGES IN STOCKHOLDERS' EQUITY
(Dollars in thousands)
Years ended September 30, 1998, 1997, and 1996
Unrealized
Common Gain (Loss)
Common Stock on 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, 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 ($.24 per share) - - (740) - - - - (740)
Amortization of award of BRRP
stock - - - - - 255 - 255
Cost of ESOP shares released - - - - 416 - - 416
Exercise of stock options and
reissuance of treasury shares
(2,200 shares) - (6) - 28 - - - 22
Tax benefit related to vested
BRRP stock - 51 - - - - - 51
Tax benefit related to stock
options exercised - 3 - - - - - 3
Market adjustment for committed
ESOP shares - 236 - - - - - 236
Change in unrealized loss on
investment securities
available for sale - - - - - - (680) (680)
--- ------ ------- ------ ------ ------ ----- ------
Balance at September 30, 1996 38 37,079 27,851 (12,619) (2,078) (708) (735) 48,828
Net income - - 925 - - - - 925
Purchase of treasury stock
(82,030 shares) - - - (1,389) - - - (1,389)
Cash dividends ($.30 per share) - - (837) - - - - (837)
Amortization of award of BRRP
stock - - - - - 237 - 237
Cost of ESOP shares released - - - - 416 - - 416
Exercise of stock options and
reissuance of treasury shares
(10,900 shares) - (44) - 153 - - - 109
Tax benefit related to vested
BRRP stock - 78 - - - - - 78
Tax benefit related to stock
options exercised - 38 - - - - - 38
Market adjustment for committed
ESOP shares - 343 - - - - - 343
Change in unrealized loss on
investment securities available
for sale - - - - - - 869 869
--- ------ ------- ------ ------ ------ ----- ------
Balance at September 30, 1997 38 37,494 27,939 (13,855) (1,662) (471) 134 49,617
Net income - - 3,780 - - - - 3,780
Purchase of treasury stock
(254,000 shares) - - - (5,896) - - - (5,896)
Cash dividends ($.38 per share) - - (1,073) - - - - (1,073)
Amortization of award of BRRP
stock - - - - - 229 - 229
Cost of ESOP shares released - - - - 570 - - 570
Exercise of stock options and
reissuance of treasury shares
(63,451 shares) - (170) - 541 - - - 371
Tax benefit related to vested
BRRP stock - 120 - - - - - 120
Tax benefit related to stock
options exercised - 102 - - - - - 102
Market adjustment for committed
ESOP shares - 571 - - - - - 571
Change in unrealized gain on
investment securities available
for sale - - - - - - 206 206
--- ------ ------- ------ ------ ------ ----- ------
Balance at September 30, 1998 $38 38,117 30,646 (19,210) (1,092) (242) 340 48,597
=== ====== ======= ====== ====== ====== ===== ======
48
See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENTS of CASH FLOWS
(Dollars in thousands)
Years ended September 30, 1998 1997 1996
Cash flows from operating activities:
Net income $ 3,780 925 2,142
Adjustment to reconcile net income to net cash provided by
operating activities:
Depreciation 352 351 385
Deferred income taxes 194 925 (217)
Provision for loan losses 181 64 410
Recapture of credit enhancement provision for loss - - (10)
Net amortization and accretion of premiums and discounts (37) (5) 210
Amortization of cost of stock benefit plans 229 237 255
Principal payment on ESOP loan 570 416 416
Market adjustment for committed ESOP shares 571 343 236
Deferred loan costs, net of amortization (283) (485) (1,144)
Amortization of deposit base intangible 41 51 61
Loss on (recovery of) impairment of investment securities
available for sale (22) 2,978 -
Proceeds from sale of real estate owned 702 245 -
Gain on sale of real estate owned (24) - -
Increase in accrued interest receivable (102) (246) (289)
Increase in other assets, net (77) (175) (41)
Increase (decrease) in other liabilities, net (1,093) (1,225) 2,609
------ ----- ------
NET CASH PROVIDED by OPERATING ACTIVITIES 4,982 4,399 5,023
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities of investment securities
available for sale 67,518 30,000 63,000
Proceeds from redemption of Federal Home Loan Bank of Chicago stock 1,390 935 179
Proceeds from loan participation sold - - 1,890
Purchase of Federal Home Loan Bank of Chicago stock (2,200) (840) (2,974)
Purchase of investment securities available for sale (58,436) (28,466) (65,000)
Loans originated for investment (142,788) (97,774) (139,589)
Purchase of loans receivable (2,378) - -
Purchase of premises and equipment (1,160) (164) (177)
Principal repayments collected on loans receivable 107,354 64,261 50,820
Principal repayments collected on investment securities
available for sale 2,649 4,717 7,203
Principal repayments collected on mortgage-backed
securities held to maturity 5,689 4,781 4,835
------ ----- ------
NET CASH USED IN INVESTING ACTIVITIES (22,362) (22,550) (79,813)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits 7,227 20,509 26,941
Net increase (decrease) in borrowed funds 8,000 (1,900) 61,268
Net increase (decrease) in advance payments by borrowers for
taxes and insurance 4,722 244 (2,955)
Purchase of treasury stock (5,896) (1,389) (6,669)
Payment of common stock dividends (1,073) (837) (740)
Proceeds from exercise of stock options 371 109 22
------ ----- ------
NET CASH PROVIDED BY FINANCING ACTIVITIES 13,351 16,736 77,867
------ ----- ------
Net change in cash and cash equivalents (4,029) (1,415) 3,077
Cash and cash equivalents at beginning of year 6,004 7,419 4,342
------ ----- ------
Cash and cash equivalents at end of year $ 1,975 6,004 7,419
====== ===== ======
CASH PAID DURING THE YEAR FOR:
Interest $ 21,820 21,416 17,825
Income taxes 2,459 1,081 1,371
NON-CASH INVESTING ACTIVITIES - Loans transferred to real
estate in foreclosure 1,163 359 113
See accompanying notes to consolidated financial statements.
49
(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
intercompany accounts and transactions have been eliminated in consolidation.
INVESTMENTS IN MUTUAL FUNDS
Investments in dollar-denominated 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. The Company has does not have any investment securities designated as
held to maturity or trading.
For individual securities classified as either available for sale or held-to-
maturity, the Company determines whether a decline in fair value below the
amortized cost basis is other than temporary in nature. If the decline in fair
value is judged by management to be other than temporary, the cost basis of the
individual security is written down to fair value as the new cost basis and the
amount of the write-down is included in earnings.
50
LOANS RECEIVABLE
Loans receivable are stated at unpaid principal balances plus deferred loan
costs, less loans in process, 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.
Impaired loans are measured at the present value of expected future cash flows
discounted at the loan's effective interest rate, or, as a practical expedient,
at the loan's observable market price or at the fair value of the collateral if
the loan is collateral dependent.
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 mortgage and consumer 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, 1998 and
1997 was $446,000 and $405,000, respectively.
51
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
In February 1997, the FASB issued Statement 128, "Earnings Per Share."
Statement 128 supersedes APB Opinion No. 15, "Earnings Per Share," and
specifies the computation, presentation, and disclosure requirements for
earnings per share (EPS) for entities with publicly held common stock or
potential common stock. It replaces the presentations of primary EPS with the
presentation of basic EPS, and replaces fully diluted EPS with diluted EPS. It
also requires dual presentation of basic and diluted EPS on the face of the
income statement for all entities with complex capital structures, and requires
a reconciliation of the numerator and dominator of the basic EPS computation to
the numerator and denominator of the diluted EPS computation. Statement 128 is
effective for financial statements for both interim and annual periods ending
after December 15, 1997.
Earnings per share of common stock for the year ended September 30, 1998 has
been calculated according to the guidelines of Statement 128 and earnings per
share of common stock for the years ended September 30, 1997 and 1996 has been
restated to conform with Statement 128.
52
Diluted earnings per share for the years ended September 30, 1998, 1997 and
1996 are computed by dividing net income by the weighted average number of
shares of common stock and potential common stock outstanding for the period
which were 2,839,225, 2,804,455 and 2,965,223, respectively. Stock options are
the only potential common stock and are therefore considered in the diluted
earnings per share calculations. Potential common stock are computed using the
treasury stock method.
PENDING ACCOUNTING CHANGES
Statement 129, "Disclosure of Information about Capital Structure," provides
required disclosures for the capital structure of both public and nonpublic
companies and is effective for financial statement periods ending after
December 15, 1997. The required disclosures had been included in a number of
separate statements and opinions. As such, the issuance of Statement 129 is
not expected to require significant revision of prior disclosures.
Statement 130, "Reporting Comprehensive Income," established standards for
reporting and presentation of comprehensive income and its components in a full
set of general-purpose financial statement. Statement 130 is effective for
both interim and fiscal years beginning after December 15, 1997, and is not
expected to have a material impact on the consolidated financial statements.
(2) MORTGAGE-BACKED SECURITIES HELD TO MATURITY
Mortgage-backed securities held to maturity are summarized as follows:
1998 1997
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 $ 11,177 336 - 11,513 16,875 249 - 17,124
There were no sales of mortgage-backed securities held to maturity during the
years ended September 30, 1998, 1997 and 1996.
53
(3) INVESTMENT SECURITIES AVAILABLE FOR SALE
Investment securities available for sale are summarized as follows:
1998 1997
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 $ - - - - 16,000 9 - 16,009
After one year
to five years 9,992 63 - 10,055 10,000 - 28 9,972
After 5 years
to 10 years 48,447 477 - 48,924 38,467 282 43 38,706
-------- ---- ----- ------- ------- ---- --- -------
58,439 540 - 58,979 64,467 291 71 64,687
======== ==== ===== ======= ======= ==== ===== ======
Corporate debt
securities due:
After one year
to five years - - - - 22 - - 22
After 5 years
to 10 years - - - - 2,978 - 3 2,975
-------- --- ---- ------- ------- ---- --- ------
- - - - 3,000 - 3 2,997
======== === ===== ======= ======= ==== === =======
Corporate asset-backed
securities - - - - 2,616 11 14 2,613
-------- --- ---- ------- ------- ---- --- ------
$ 58,439 540 - 58,979 70,083 302 88 70,297
======== === ===== ======= ======= ==== ===== =======
There were no sales of investment securities available for sale in 1998, 1997
and 1996. The fair value of investment securities available for sale is based
upon quoted market prices where available. Actual maturities may differ from
contractual maturities shown in the table above because the borrowers may have
the right to call or prepay obligations with or without prepayment penalties.
During the fourth quarter and year ended September 30, 1997, the Company wrote
down a corporate subordinated debt security in the amount of $2,978,000 by a
charge to earnings to record an other than temporary impairment. The new cost
basis of the security at September 30, 1997 was $22,000. The cost basis was
received in fiscal 1998 in addition to a recovery of $22,000 of the charge to
earnings in the prior year.
54
(4) LOANS RECEIVABLE
Loans receivable are summarized as follows at September 30:
1998 1997
(in thousands)
One-to-four family mortgages $ 324,265 304,950
Multifamily mortgages 83,084 64,450
Commercial 3,295 2,894
Commercial leases 30 408
Consumer loans 13,358 14,152
--------- --------
Gross loans receivable 424,032 386,854
Less:
Loans in process (1) -
Deferred loan costs 2,182 1,899
Allowance for losses on loans (591) (460)
Unearned discount on consumer loans (14) (31)
--------- --------
$ 425,608 388,262
========= ========
Weighted average interest rate 7.64% 7.79%
====== ======
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, 1998, 1997, and 1996 were approximately
$9,845,000, $12,524,000, and $14,857,000, respectively. Custodial balances
maintained in connection with the mortgage loans serviced for others were
included in deposits at September 30, 1998, 1997, and 1996, and were
approximately $381,000, $233,000, and $246,000, respectively. Service fee
income for the years ended September 30, 1998, 1997, and 1996 was $35,000,
$60,000, and $59,000, respectively.
Activity in the allowance for loan losses is summarized as follows for the
years ended September 30:
1998 1997 1996
(in thousands)
Balance at beginning of year $ 460 810 403
Provision for loan losses 181 64 410
Charge-offs:
Loans receivable (51) (19) (34)
Commercial leases - (406) -
Recoveries 1 11 31
----- ---- ----
Balance at end of year $ 591 460 810
===== ==== ====
55
Non-accrual loans receivable were as follows:
Principal Percent of
Balance total loans
Number in thousands) receivable
September 30, 1998:
Loans receivable 8 $ 801 0.19%
Commercial leases, Bennett Funding Group 1 30 -
---- ----- ------
9 831 0.19%
September 30, 1997:
Loans receivable 11 1,400 0.36%
Commercial leases, Bennett Funding Group 1 408 0.11%
--- ----- ------
12 1,808 0.47%
September 30, 1996:
Loans receivable 11 1,054 0.30%
Commercial leases, Bennett Funding Group 1 2,032 0.57%
--- ----- ------
12 $ 3,086 0.87%
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, meets the definition set forth
for impaired loans. At September 30, 1998 and 1997, the recorded investment in
loans considered to be impaired was $30,000 and $408,000, respectively, which
consisted solely 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. These
leases were all originated, serviced, 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 Bank thereafter classified all BFG leases as substandard, placed them on
non-accrual status, and categorized them as non-performing and impaired. In
addition, the Bank established a valuation allowance of $406,000 for these
leases during fiscal year 1997.
Normal lease payments had reduced the aggregate outstanding balance of the
leases to $2.0 million prior to bankruptcy, leaving the Bank with a claim in
that amount. In August 1997, the Bank and the Bennett Bankruptcy Trustee
settled this claim. Under the terms of the settlement agreement, the Bank
received post-bankruptcy lease receipts totaling $1.1 million, and is entitled
to receive repayments on the remaining lease receivables. Repayment of the
balance of $30,000 in lease receivables at September 30, 1998 is expected from
future lease payments. The settlement also ended all outstanding litigation.
56
As a result of the settlement, the Company charged off $406,000 of leases in
1997, against the previously established valuation allowance.
On September 30, 1998 and 1997, the Bank's $30,000 and $408,000, respectively,
of commercial equipment leases originated by BFG met the criteria for impaired
loans. The average recorded investment in impaired loans for the years ended
September 30, 1998 and 1997 was $198,000 and $1.8 million, respectively. There
was no related allowance for impaired loans at September 30, 1998 and 1997.
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. There was no income recorded in 1998 or
1997.
(5) ACCRUED INTEREST RECEIVABLE
Accrued interest receivable is summarized as follows at September 30:
1998 1997
(in thousands)
Loans receivable $ 2,335 2,071
Mortgage-backed securities 67 101
Investment securities available for sale 1,179 1,378
Investment in dollar-denominated mutual funds - 14
Reserve for uncollected interest (34) (119)
------ -----
$ 3,547 3,445
====== =====
(6) PREMISES AND EQUIPMENT
Premises and equipment are summarized as follows at September 30:
1998 1997
(in thousands)
Land $ 803 803
Buildings 3,790 3,630
Leasehold improvements 1,383 1,380
Furniture, fixtures, and equipment 3,983 3,034
------ -----
9,959 8,847
Less accumulated depreciation and amortization 5,558 5,254
------ -----
$ 4,401 3,593
====== =====
Depreciation and amortization of premises and equipment for the years ended
September 30, 1998, 1997, and 1996 was $352,000, $351,000, and $385,000,
respectively.
The Bank is obligated under non-cancelable leases on two of its branches. The
leases contain a renewal option and a rent escalation clause. Rent expense
under these leases for the years ended September 30, 1998, 1997, and 1996
57
approximated $136,000, $145,000, and $148,000, respectively. The projected
minimum rentals under existing leases as of September 30, 1998 are as follows:
Year ended September 30, Amount
1999 $ 130,000
2000 133,000
2001 134,000
2002 135,000
2003 99,000
Thereafter 551,000
---------
Total $ 1,182,000
=========
(7) DEPOSITS
Deposits are summarized as follows at September 30:
1998 1997
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 4.16% $126,901 38.4% 3.83% 100,588 31.0%
NOW accounts 2.25 21,953 6.6 2.18 17,967 5.6
Money market and
management accounts 4.03 17,462 5.3 4.21 17,634 5.5
---- ------- ---- ----- ------ -----
166,316 50.3 136,189 42.1
Certificate accounts:
91-day certificates 4.95 2,589 0.8 5.23 3,820 1.2
6-month certificates 5.25 18,095 5.5 5.52 15,631 4.7
7-month certificates 5.32 4,662 1.4 5.35 4,615 1.4
8-month certificates 5.69 39,875 12.1 5.65 12,221 3.8
10-month certificates 5.44 17,876 5.4 5.99 30,926 9.6
12-month certificates 5.63 28,263 8.5 5.94 43,244 13.4
13-month certificates 5.59 3,984 1.2 6.04 18,159 5.6
15-month certificates 5.64 15,377 4.7 5.85 15,081 4.7
24-month certificates 5.78 11,967 3.6 5.72 11,506 3.6
36-month certificates 5.82 7,533 2.3 6.10 7,904 2.4
36-month rising rate
certificates 5.29 4,578 1.4 6.55 14,161 4.4
60-month certificates 5.91 9,455 2.8 5.82 9,681 3.0
Other certificates 5.50 100 0.0 6.04 305 0.1
---- ------- ---- ----- ------- -----
164,354 49.7 187,254 57.9
------- ---- ------- -----
4.78 $330,670 100.0% 4.89% 323,443 100.0%
==== ======= ===== ===== ======= =====
58
The contractual maturities of certificate accounts are as follows at September
30:
1998 1997
Amount Percent Amount Percent
(in thousands) (in thousands)
Under 12 months $ 141,484 86.1% 161,308 86.1
12 to 36 months 19,149 11.7 22,949 12.3
Over 36 months 3,721 2.2 2,997 1.6
--------- ----- ------- -----
$ 164,354 100.0% 187,254 100.0
========= ===== ======= =====
The aggregate amount of certificate accounts with a balance of $100,000 or
greater at September 30, 1998 and 1997 was approximately $24,513,000 and
$25,399,000, respectively.
Interest expense on deposit accounts is summarized as follows for the years
ended September 30:
1998 1997 1996
(in thousands)
NOW accounts $ 359 304 329
Money market and management accounts 744 773 841
Passbook accounts 4,522 3,402 2,673
Certificate accounts 10,311 11,450 10,098
------ ------ ------
$ 15,936 15,929 13,941
====== ====== ======
(8) BORROWED FUNDS
Borrowed funds are summarized as follows at September 30:
Interest rate Amount
1998 1997 1998 1997
(in thousands)
Secured advances from the
FHLB of Chicago:
Fixed rate advances due:
January 5, 1998 - % 5.29 $ - 24,000
August 16, 1998 - 6.04 - 14,000
February 21, 2000 5.48 5.48 25,000 25,000
August 8, 2000 5.60 5.60 20,000 20,000
January 2, 2000 5.65 - 24,000 -
August 17, 2001 5.63 - 30,000 -
Open line advance, due on demand variable 22,400 30,400
---- ----- ------- -------
$ 121,400 113,400
======= =======
Weighted average rate 5.69% 5.80
59
The Bank has adopted a collateral pledge agreement whereby the Bank has agreed
to keep on hand at all times, free of all other pledges, liens, and
encumbrances, first mortgages with unpaid principal balances aggregating no
less than 167% of the outstanding secured advances from the 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 MATTERS
The Bank is subject to regulatory capital requirements administered by the
federal banking agencies. Failure to meet minimum capital requirements can
initiate certain mandatory, and possibly additional discretionary actions by
regulators that, if undertaken, could have a material impact on the Company's
financial statements. Under capital adequacy guidelines and the regulatory
framework for prompt corrective action, the Bank must meet specific capital
guidelines that involve quantitative measures of the entity's assets,
liabilities, and certain off-balance sheet items as calculated under regulatory
accounting purposes. The Bank's capital amounts and classification are also
subject to qualitative judgments by the regulators about components, risk
weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in the table
below) of total and Tier 1 capital to risk-weighted assets, and of Tier 1
capital to average assets and of tangible capital to average assets. As of
September 30, 1998, the Company and Bank met the capital adequacy requirements
to which they are subject.
The most recent notification, July 1998, from the federal banking agencies
categorized the Company and the Bank as well capitalized under the regulatory
framework for prompt corrective action. To be categorized as well capitalized,
the Company and the Bank must maintain minimum total risk-based, Tier 1 risk-
based, and Tier 1 leverage ratios as set forth in the table. There are no
conditions or events since that notification that have changed the Company's or
the Bank's category.
60
The Company's and the Banks actual capital amounts and ratios as of September
30, 1998 and 1997 are as follows:
To be well capitalized
For capital under prompt
Actual adequacy purposes corrective action
Amount Ratio Amount Ratio Amount Ratio
(dollars in thousands)
As of September 30, 1998:
Total capital
(to risk weighted assets):
Consolidated $48,597 19.86% n/a n/a n/a n/a
Fidelity Federal Savings Bank 47,123 19.35 19,481 8.00 24,352 10.00
Tier 1 capital
(to risk weighted assets):
Consolidated 47,129 19.26 n/a n/a n/a n/a
Fidelity Federal Savings Bank 45,655 18.75 n/a n/a 14,611 6.00
Tier 1 capital
(to adjusted assets):
Consolidated 47,129 9.20 n/a n/a n/a n/a
Fidelity Federal Savings Bank 45,655 8.91 15,374 3.00 25,624 5.00
Tangible capital
Consolidated 47,129 9.20 n/a n/a n/a n/a
Fidelity Federal Savings Bank 45,655 8.91 7,687 1.50 n/a n/a
To be well capitalized
For capital under prompt
Actual adequacy purposes corrective action
Amount Ratio Amount Ratio Amount Ratio
(dollars in thousands)
As of September 30, 1997:
Total capital
(to risk weighted assets):
Consolidated $49,617 21.04% n/a n/a n/a n/a
Fidelity Federal Savings Bank 43,772 18.81 18,614 8.00 23,268 10.00
Tier 1 capital
(to risk weighted assets):
Consolidated 48,117 20.41 n/a n/a n/a n/a
Fidelity Federal Savings Bank 42,272 18.17 n/a n/a 13,961 6.00
Tier 1 capital
(to adjusted assets):
Consolidated 48,117 9.73 n/a n/a n/a n/a
Fidelity Federal Savings Bank 42,272 8.59 14,755 3.00 24,591 5.00
Tangible capital
Consolidated 48,117 9.73 n/a n/a n/a n/a
Fidelity Federal Savings Bank 42,272 8.59 7,378 1.50 n/a n/a
61
(10) INCOME TAXES
Income tax expense is summarized as follows for the years ended September 30:
1998 1997 1996
(in thousands)
Current:
Federal $ 1,978 1,282 1,425
State 344 86 27
------ ----- -----
Total current 2,322 1,368 1,452
Deferred:
Federal (84) 754 (177)
State (19) 171 (40)
------ ----- -----
Total deferred (103) 925 (217)
------ ----- -----
$ 2,219 2,293 1,235
====== ===== =====
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:
1998 1997 1996
Federal income tax rate 34.0% 34.0 34.0
State income taxes, net of federal benefit 4.3 1.1 -
Decline in value of investment security - 35.8 -
Other (1.3) 0.3 2.6
------ ----- -----
Effective income tax rate 37.0% 71.2 36.6
====== ===== =====
Retained earnings at September 30, 1998 includes $4.6 million of "base-year"
tax bad debt reserves for which no provision for federal or state income taxes
has been made. If in the future this amount, or a portion thereof, is used for
certain purposes, then a federal and state tax liability will be imposed on the
amount so used at the then current corporate income tax rates.
62
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:
1998 1997
(in thousands)
Deferred tax assets:
Deferred compensation $ 16 12
Allowance for loan losses 229 178
Decline in value of investment security 1,106 1,153
Retirement and pension plans 383 182
----- -----
1,734 1,525
Less valuation allowance (1,106) (1,153)
----- -----
Deferred tax assets 628 372
Deferred tax liabilities:
Deferred loan fees and costs (1,509) (1,419)
FHLB stock, due to stock dividends (87) (101)
Property and equipment, due to depreciation (195) (106)
Tax bad debt reserves (852) (852)
Tax basis in partnership less than book (188) (177)
Unrealized gain on investment securities available for sale (200) (79)
Other (35) (58)
------ -----
Deferred tax liabilities (3,066) (2,792)
------ -----
Net deferred tax liability $(2,438) (2,420)
====== ======
The valuation allowance for deferred tax assets was $1,106,000 and $1,153,000
as of September 30, 1998 and 1997, respectively. The valuation allowance
relates to the capital loss of an investment security. As capital losses can
only be utilized to offset capital gains, there is uncertainty as to the
realization of this deferred tax asset. The decrease in the valuation
allowance relates to the utilization of capital losses to reduce capital gains
in the current year.
(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,
1998, 1997, and 1996 was approximately $112,000, $123,000 and $111,000,
respectively.
63
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:
1998 1997
(in thousands)
Actuarial present value of accumulated benefit
obligation, including vested benefits of $840
and $768 in 1998 and 1997, respectively $ 888 811
===== ====
Actuarial present value of projected benefit obligation $(1,537) (1,486)
Plan assets at fair value 1,281 1,193
----- -----
Plan assets less than projected benefit obligation (256) (293)
----- -----
Unrecognized net gain (loss)from past experience different
from that assumed, and effects of changes in assumptions (52) (62)
Unrecognized prior service cost (42) -
Unrecognized transition obligation, being recognized over
17 years (54) (61)
----- -----
Net accrued pension cost $ (404) (416)
===== ====
Net pension costs include the following components for the years ended
September 30:
1998 1997 1996
(in thousands)
Service cost - benefits earned during the period $ 128 128 110
Interest cost on projected benefit obligation 93 98 87
Actuarial return on plan assets (13) (258) (116)
Net gain on assets (86) 165 -
Net amortization and deferral (10) (10) 30
---- --- ---
Net periodic pension cost $ 112 123 111
==== === ===
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 1998, 1997, and 1996 was 7.25%. The expected long-
term rate of return on assets was 8.00% during 1998, 1997, and 1996. The rate
of increase in future compensation was 6.00% in 1998, 1997, and 1998.
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, 1998, 1997, and
1996 was approximately $121,000, $67,000, and $121,000, respectively.
64
(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. Compensation expense
related to the ESOP was $1.1 million, $600,000, and $651,000 for the years
ended September 30, 1998, 1997, and 1996, 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. SOP 93-6
had the effect of increasing additional paid-in-capital and compensation
expense by $571,000, $343,000, and $236,000 in 1998, 1997, and 1996,
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 139,233
option grants exercisable at September 30, 1998 for the employees' plan.
Options issued to outside directors of the Company are immediately exercisable.
65
The Company applies ABP Opinion No. 25 in accounting for the Stock Option Plan
and, accordingly, compensation cost based on the fair value at grant date has
not been recognized for its stock options in the consolidated financial
statements during the years ended September 30, 1998, 1997 and 1996. As of
September 30, 1997, the Company adopted the disclosure provisions of Financial
Accounting Standards Board Statement No. 123, "Accounting for Stock-Based
Compensation" (SFAS No. 123). Under SFAS No. 123, the Company is required to
disclose pro forma net income and earnings per share for 1998, 1997, and 1996
as if compensation expense relative to the fair value of options granted had
been included in earnings. Had the Company determined compensation cost based
on the fair value at the grant date for its stock options under SFAS No. 123,
the Company's net income would have been reduced to the pro forma amounts
indicated below:
1998 1997 1996
Net Income:
As reported $ 3,780 925 2,142
Pro forma 3,760 906 2,134
Earnings per share:
Basic:
As reported 1.41 0.35 0.75
Pro forma 1.40 0.34 0.75
Diluted:
As reported 1.33 0.33 0.72
Pro forma 1.32 0.32 0.72
Pro forma net income reflects only options granted in 1997 and 1996, there were
no options granted in fiscal 1998. Therefore, the full impact of calculating
compensation cost for stock options under SFAS No. 123 is not reflected in the
pro forma net income amounts presented above, because compensation costs is
reflected over the options' graded vesting period of five years for the
employees stock option plan and immediately for the directors' stock option
plan. Compensation for options granted prior to October 1, 1995, is not
considered. However, the annual expense allocation methodology prescribed by
SFAS No. 123 attributes a higher percentage of the reported expense to earlier
years than to later years, resulting in an accelerated expense recognition.
The fair value of each option granted is estimated on the grant date using the
Black Scholes options pricing model. The following assumptions were used in
estimating the fair value for options in 1998, 1997, and 1996:
1998 1997 1996
Dividend yield 1.61% 1.57% 1.53%
Risk-free interest rate 4.25% 6.00% 6.50%
Weighted average expected life 4.8 yrs 4.8 yrs 4.8 yrs
Expected volatility 20.07% 25.28% 15.73%
</ TABLE>
66
A summary of the status of the Company's stock option transactions under the
Plan for the years ended September 30, 1998, 1997 and 1996 is presented below:
Employees' Plan Directors' Plan
Amount Exercise Amount Exercise
Price
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 10.01 50,589 10.00
Options granted 1,500 17.00 - -
Options forfeited (10,620) 10.00 - -
Options exercised (5,400) 10.03 (5,500) 10.00
------- ----- ------ -----
Options outstanding at
September 30, 1997 245,192 10.12 45,089 10.00
Options exercised (56,328) 10.00 (7,123) 10.00
------- ----- ------- -----
Options outstanding at
September 30, 1998 188,864 $ 10.16 37,966 $ 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, 1998, 18,924 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, 1998, 1997, and 1996, 22,575, 26,206, and 25,304
shares, respectively, were vested and distributed to employees. For the years
ended September 30, 1998, 1997, and 1996, $229,000, $237,000, and $255,000,
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, 1998 and 1997 of $6.3
million and $6.3 million, respectively, represented amounts which the Bank
plans to fund within the normal commitment period of 60 to 90 days. Of the
67
commitments to originate loans at September 30, 1998, $3.7 million represented
commitments for fixed rate loans with interest rates ranging from 6.25% to
8.875%.
The estimated fair value of these commitments approximates the commitment
amount. Because the creditworthiness of each customer is reviewed prior to the
extension of the commitment, the Bank adequately controls the credit risk on
these commitments, as it does for loans recorded on the consolidated statements
of financial condition. The Bank conducts substantially all of its lending
activities in the Chicagoland area in which it serves. Management believes the
Bank has a diversified loan portfolio and the concentration of lending
activities in these local communities does not result in an acute dependence
upon the economic conditions of the lending region.
The Company is involved in various litigation arising in the normal course of
business. In the opinion of management, based on the advice of legal counsel,
liabilities arising from such claims, if any, would not have a material effect
on the Company's financial statements.
(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, AND
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.
68
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 there has been no significant
change in credit risk, fair values equal carrying values. The fair values for
fixed-rate loans were based on estimates using discounted cash flow analyses
and current interest rates being offered for loans with similar terms to
borrowers of similar credit quality.
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, 1997 and 1996,
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, 1997 and 1996, 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, 1998 and 1997 are as follows:
1998 1997
Net carrying Estimated Net carrying Estimated
amount fair value amount fair value
(in thousands)
FINANCIAL ASSETS:
Cash and due from banks $ 1,320 1,320 436 436
Interest-earning deposits 555 555 2,314 2,314
Federal funds sold 100 100 100 100
Investment in dollar-
denominated mutual funds - - 3,154 3,154
Investment securities 76,126 77,002 92,658 93,121
Loans receivable 426,199 435,230 388,722 391,217
Accrued interest receivable 3,547 3,547 3,445 3,445
------- ------- ------- -------
Total financial assets $ 507,847 517,754 490,829 493,787
======= ======= ======= =======
FINANCIAL LIABILITIES:
Noninterest-bearing deposits 5,892 5,892 4,766 4,766
NOW, money market and management,
and passbook accounts 160,424 160,424 131,423 131,423
Certificate accounts 164,354 164,968 187,254 187,371
Borrowed funds 121,400 122,797 113,400 113,400
Accrued interest payable 808 808 831 831
------- ------- ------- -------
Total financial liabilities $ 452,878 454,889 437,674 437,791
======= ======= ======= =======
/TABLE
69
(15) SHAREHOLDERS' RIGHTS PLAN
On February 18, 1997, the Company's Board of Directors adopted a shareholders'
rights plan (the Rights Plan). Under the terms of the Rights Plan, the Board
of Directors declared a dividend of one preferred share purchase right for each
outstanding share of common stock. Upon becoming exercisable, each right
entitles the registered holder thereof, under certain limited circumstances, to
purchase one one-thousandth of a share of Series A Junior Participating
Preferred Stock at an exercise price of $60.00. Rights do not become
exercisable until eleven business days after any person or group has acquired,
commenced, or announced its intention to commence a tender or exchange offer to
acquire 15% or more of the Company's common stock, or in the event a person or
group owning 10% or more of the Company's common stock is deemed to be
"adverse" to the Company. If the rights become exercisable, holders of each
right, other than the acquiror, upon payment of the exercise price, will have
the right to purchase the Company's common stock (in lieu of preferred shares)
having a value equal to two times the exercise price. If the Company is
acquired in a merger, share exchange or other business combination of 50% or
more of its consolidated assets or earning power are sold, rights holders,
other than the acquiring or adverse person or group, will be entitled to
purchase the acquiror's shares at a similar discount. If the rights become
exercisable, the Company may also exchange rights, other than those held by the
acquiring or adverse person or group, in whole or in part, at an exchange ratio
of one share of the Company's common stock per right held. Rights are
redeemable by the Company at any time until they are exercisable at the
exchange rate of $.01 per right. Issuance of the rights has no immediate
dilutive effect, does not currently affect reported earnings per share, is not
taxable to the Company or its shareholders, and will not change the way in
which the Company's shares are traded. The rights expire in February 2007.
(16) CONDENSED PARENT COMPANY ONLY FINANCIAL INFORMATION
The following condensed statements of financial condition as of September 30,
1998 and 1997 and condensed statements of earnings and cash flows for the three
years ended September 30, 1998 for Fidelity Bancorp, Inc. should be read in
conjunction with the consolidated financial statements and the notes thereto.
STATEMENT OF FINANCIAL CONDITION
September 30,
1998 1997
(in thousands)
ASSETS
Cash and cash equivalents $ 536 3,350
Investment in dollar-denominated mutual funds - 154
Investment securities available for sale - 1,104
Equity investment in the Bank 48,118 45,765
Other assets 1,135 1,654
------- ------
$ 49,789 52,027
======= ======
70
LIABILITIES AND STOCKHOLDERS' EQUITY:
Accrued taxes and other liabilities 198 417
STOCKHOLDERS' EQUITY:
Common stock 38 38
Additional paid-in capital 38,117 37,494
Retained earnings 30,646 27,939
Treasury stock (19,210) (13,855)
Unrealized loss on investment securities
available for sale - (6)
------- ------
Total Stockholders' equity 49,591 51,610
------- ------
$ 49,789 52,027
======= ======
STATEMENTS OF EARNINGS
Year ended September 30,
1998 1997 1996
(in thousands)
Equity in earnings of the Bank $ 3,890 3,818 1,992
Interest income 141 530 651
Recovery on (loss on) impairment
of investment securities 22 (2,978) -
Non-interest expense (338) (344) (387)
------ ----- -----
Income before income taxes 3,715 1,026 2,256
Income tax expense (65) 101 114
------ ----- -----
Net income $ 3,780 925 2,142
====== ===== =====
71
STATEMENTS OF CASH FLOWS
Year ended September 30,
1998 1997 1996
(in thousands)
OPERATING ACTIVITIES:
Net income $ 3,780 925 2,142
Equity in undistributed
earnings of the Bank (3,890) (3,818) (1,992)
Dividends received from the Bank 2,330 1,391 4,282
Net amortization and accretion of
premiums and discounts 1 - 1
Loss on (recovery of) impairment of
investment securities 22 2,978 -
Decrease (increase) in other assets (51) 589 46
Increase (decrease) in accrued taxes and
other liabilities (324) (330) 60
------ ----- -----
Net cash provided by operating activities 1,824 1,735 4,539
INVESTING ACTIVITIES:
Principal repayments collected
on investment securities 1,134 1,616 2,703
Principal payment received on ESOP loan 570 416 416
------ ----- -----
Net cash provided by investing activities 1,704 2,023 3,119
5,302
FINANCING ACTIVITIES:
Purchase of treasury stock (5,896) (1,389) (6,669)
Payment of common stock dividends (1,073) (837) (740)
Proceeds from exercise of stock options 473 109 22
------ ----- -----
Net cash used in financing activities (6,496) (2,117) (7,387)
------- ----- -----
Net increase in cash and cash equivalents (2,968) 1,650 271
Cash and cash equivalents at beginning
of year 3,504 1,854 1,583
------- ----- -----
Cash and cash equivalents at end of year $ 536 3,504 1,854
====== ===== =====
/TABLE
72
(17) QUARTERLY RESULTS OF OPERATIONS (unaudited)
The following table sets forth certain unaudited income and expense and per
share data on a quarterly basis for the three-month period indicated:
Year ended September 30, 1998 Year ended September 30, 1997
1st Qtr 2nd Qtr 3rd Qtr 4th Qtr 1st Qtr 2nd Qtr 3rd Qtr 4th Qtr
(in thousands, except per share data)
Interest income $ 9,079 8,923 8,978 9,147 8,902 8,944 8,984 9,085
Interest expense 5,568 5,304 5,331 5,633 5,346 5,229 5,386 5,509
----- ----- ----- ----- ----- ----- ----- -----
Net interest income
before provision
for loan losses 3,511 3,619 3,647 3,514 3,556 3,715 3,598 3,576
Provision for loan
losses 46 15 90 30 39 - 15 10
----- ----- ----- ----- ----- ----- ----- -----
Net interest income
after provision for
loan losses 3,465 3,604 3,557 3,484 3,517 3,715 3,583 3,566
Other income 284 250 271 302 225 295 294 289
Non-interest expense 2,198 2,354 2,356 2,310 2,390 2,395 2,299 5,182(1)
----- ----- ----- ----- ----- ----- ----- -----
Income before income tax
expense (benefit) 1,551 1,500 1,472 1,476 1,352 1,615 1,578 (1,327)
Income tax expense 574 540 538 567 518 618 546 611
----- ----- ----- ----- ----- ----- ----- -----
Net income (loss) $ 977 960 934 909 834 997 1,032 (1,938)
===== ===== ===== ===== ===== ===== ===== =====
Earnings (loss) per
share $ 0.34 0.34 0.32 0.33 0.30 0.36 0.37 (0.69)
===== ===== ===== ===== ===== ===== ===== =====
Cash dividends declared
per share $ 0.08 0.10 0.10 0.10 0.06 0.08 0.08 0.08
===== ===== ===== ===== ===== ===== ===== =====
(1) Fourth quarter 1997 non-interest expense includes the effect of an other
than temporary impairment loss on investment securities in the amount of
$2,978,000. No tax benefit was provided for this loss.
73
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, 1998
and 1997, 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, 1998. 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, 1998 and 1997, and the results of their
operations and their cash flows for each of the years in the three-year period
ended September 30, 1998, in conformity with generally accepted accounting
principles.
KPMG PEAT MARWICK LLP
Chicago, Illinois
October 23, 1998
74
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 28, 1998 and is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information relating to executive compensation (excluding the sections
marked "Compensation Committee Report of Executive Compensation" and "Stock
Performance Graph") will appear in the Registrant's Proxy Statement for the
Annual Meeting of Stockholders to be held on January 28, 1998 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 28, 1998 and is incorporated
herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information relating to certain relationships and related transactions will
appear on pages 10, 11, and 12 of the Registrant's Proxy Statement for the
Annual Meeting of Stockholders to be held of on January 28, 1998 and is
incorporated herein by reference.
75
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"
99.1 Proxy Statement and form of proxy for the 1999 Annual Meeting of
Stockholders (except such portions incorporated by reference into
this Form 10-K, the proxy materials shall not be deemed to be
"filed" with the Commission).
(b) REPORTS on FORM 8-K
None.
- -----------------
* Incorporated herein by reference into this document from the exhibits
to Form S-1, Registration Statement as amended, originally filed on
October 28, 1993, Registration No. 33-68670.
** Incorporated herein by reference into this document from the exhibits
to Form S-8, Registration Statement, filed on April 20, 1994,
Registration No. 33-78000.
*** Incorporated herein by reference into this document from the exhibits
to Form 10-K, filed on December 9, 1994.
76
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 22, 1998 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 22, 1998
- ------------------------- Officer
Raymond S. Stolarczyk
/s/ Thomas E. Bentel President and Chief December 22, 1998
- ------------------------- Operating Officer
Thomas E. Bentel
s/ James R. Kinney Senior Vice President and December 22, 1998
- ------------------------- Chief Financial Officer
James R. Kinney
/s/ Judith K. Leaf Corporate Secretary December 22, 1998
- -------------------------
Judith K. Leaf
/s/ Paul J. Bielat Director December 22, 1998
- -------------------------
Paul J. Bielat
/s/ Patrick J. Flynn Director December 22, 1998
- -------------------------
Patrick J. Flynn
/s/ Raymond J. Horvat Director December 22, 1998
- -------------------------
Raymond J. Horvat
/s/ Bonnie J. Stolarczyk Director December 22, 1998
- -------------------------
Bonnie J. Stolarczyk