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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, 1999
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 $34,391,683 and is based upon the last sales price as quoted on
Nasdaq Stock Market for December 1, 1999.
The Registrant has 2,187,766 shares of common stock outstanding as of
December 1, 1999.
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,
1999 totalled 2,207,846. 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, 1999 Owned
(In thousands)
EXECUTIVE AND HOME OFFICE: Various dates
5455 W. Belmont Ave. commencing in
Chicago, IL 60641 1955 $ 1,070 Owned
BRANCHES:
Higgins Branch
6360 W. Higgins Road
Chicago, IL 60630 1984 490 Owned
Franklin Park Branch
10227 W. Grand Ave.
Franklin Park, IL 60131 1980 44 Leased
Schaumburg Branch
2425 West Schaumburg Rd
Schaumburg, IL 60194 1995 960 Leased
Harlem Avenue Branch
3940 North Harlem Ave.
Chicago, IL 60634 1995 411 Owned
-------
$ 2,975
=======
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, 1999, there were
2,187,766 shares of common stock outstanding and 501 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 fiscal
period as reported on the Nasdaq Stock Market and does not necessarily reflect
retail markups, markdowns, or commissions:
1999 1998
High Low High Low
First Quarter 25 15 1/4 25 3/4 23
Second Quarter 25 1/8 22 26 24
Third Quarter 23 7/8 20 1/4 26 22 1/8
Fourth Quarter 22 15 25 1/4 19 1/4
Such over-the-counter market quotations reflect inter-dealer prices, without
retail mark-up, mark-down or commission and may not necessarily represent
actual transactions.
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. This repurchase
program was completed on June 4, 1999. The Company repurchased the shares at
an average price of $24.10 per share. As of September 30, 1999, the Company
had repurchased 1,654,472 shares of its common stock since its initial public
offering at a cost of $29.16 million or $17.62 per share. On October 19, 1999,
the Company announced its tenth plan to repurchase shares, up to 110,000
shares, or 5% of its common stock. As of December 1, 1999, the Company had
purchased 20,500 shares, at an average cost of $17.125 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 $0.43 and $0.38
during fiscal 1999 and 1998, respectively. In addition, the Board of Directors
declared a regular quarterly dividend of $0.11 per share, payable on November
15, 1999 to stockholders of record as of October 30, 1999.
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,
1999 1998 1997 1996 1995
(Dollars in thousands, except per share data)
SELECTED OPERATING DATA:
Interest income $ 39,294 36,127 35,915 31,554 26,169
Interest expense 23,762 21,836 21,470 18,129 13,752
------ ------ ------ ------ ------
Net interest income before
provision for loan losses 15,532 14,291 14,445 13,425 12,417
Provision for loan losses 165 181 64 410 192
------ ------ ------ ------ ------
Net interest income after
provision for loan losses 15,367 14,110 14,381 13,015 12,225
Non-interest income:
Gain on sale of investment
securities available for sale - - - - 274
Fees and commissions 374 332 341 379 398
Insurance and annuity commissions 721 717 700 519 519
Other 51 58 62 59 38
------ ------ ------ ------ ------
Total non-interest income 1,146 1,107 1,103 957 1,229
Non-interest expense 9,840 9,218 12,266 10,595 8,337
------ ------ ------ ------ ------
Income before income taxes 6,673 5,999 3,218 3,377 5,117
Income tax expense 2,543 2,219 2,293 1,235 2,033
------ ------ ------ ------ ------
Net income $ 4,130 3,780 925 2,142 3,084
====== ====== ====== ====== ======
SELECTED FINANCIAL CONDITION DATA:
Total assets $ 599,281 513,563 495,634 475,862 393,664
Loans receivable, net 507,557 425,608 388,262 354,255 266,735
Mortgage-backed securities
held to maturity, net 3,585 11,177 16,875 21,673 26,484
Investment securities
available for sale 66,070 58,979 70,297 78,104 84,579
Deposits 357,016 330,670 323,443 302,934 275,993
Borrowed funds 186,250 121,400 113,400 115,300 54,032
Stockholders' equity 42,021 48,597 49,617 48,828 53,792
6
September 30, 1999 1998 1997 1996 1995
SELECTED FINANCIAL RATIOS AND OTHER DATA:
Return on average assets 0.74% 0.76% 0.19% 0.50% 0.85%
Return on average stockholders' equity 9.42 7.30 1.82 4.08 5.62
Average stockholders' equity to
average assets 7.89 10.46 10.40 12.27 15.12
Stockholders' equity to total assets 7.01 9.46 10.01 10.26 13.66
Non interest expense to average assets 1.77 1.87 1.91 2.48 2.30
Interest rate spread during period 2.43 2.38 2.45 2.57 2.80
Net interest margin 2.87 2.98 3.03 3.23 3.52
ASSET QUALITY RATIOS:
Non-performing loans to loans
receivable, net 0.07 0.20 0.47 0.87 0.23
Non-performing assets to total assets 0.06 0.19 0.41 0.67 0.16
Net charge-offs to average loans (0.05) 0.01 0.11 0.01 0.01
Allowance for loan losses to total loans 0.15 0.14 0.12 0.23 0.15
Allowance for loan losses to
non-performing loans 227.41 71.12 25.44 26.25 65.32
REGULATORY CAPITAL RATIOS:
Tangible 6.89 8.91 8.59 8.04 10.51
Core 6.89 8.91 8.59 8.04 10.51
Risk-based 14.71 18.99 18.37 16.89 20.71
OTHER DATA:
Loan originations (dollars in thousands) $196,859 142,788 97,774 139,589 77,880
Number of deposit accounts 24,524 21,193 24,984 24,553 20,488
Book value per share outstanding $ 19.03 18.76 17.75 17.04 16.41
Earnings per share - diluted $ 1.76 1.33 0.32 0.72 0.94
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.
7
YEAR 2000
THE COMPANY'S STATE OF READINESS On Sunday, February 7, 1999, the Company
conducted its second full-scale test of its transaction processing systems
utilizing Year 2000 dates. 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.
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, have already been 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 party 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 likely worst case Year
2000 scenario involves a complete failure of the utility companies mentioned
above for all five of the Company s 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. The
manual system has gone through two iterations of testing.
8
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 1999 Compared to 1998 1998 Compared to 1997
Increase (Decrease) Due to Increase (Decrease) Due to
Volume Rate Total Volume Rate Total
(in thousands)
INTEREST-EARNING ASSETS:
Loans receivable, net $ 4,681 (1,125) 3,556 1,957 (194) 1,763
Mortgage-backed securities (502) (10) (512) (368) (1) (369)
Interest-earning deposits (31) (3) (34) 9 11 20
Investment securities and
federal funds sold 380 (223) 157 (1,119) (83) (1,202)
------ ---- ----- ------ ----- -----
Total $ 4,528 (1,361) 3,167 479 (267) 212
====== ==== ====== ====== ===== ======
INTEREST-BEARING LIABILITIES:
Savings accounts 795 (244) 551 665 509 1,174
Money market accounts (21) (48) (69) (27) (2) (29)
Certificate accounts (486) (862) (1,348) (1,086) (52) (1,138)
Borrowed funds 3,056 (264) 2,792 291 68 359
------ ---- ----- ------ ----- -----
Total $ 3,344 (1,418) 1,926 (157) 523 366
------ ==== ====== ------ ===== ======
Net change in net interest income $ 1,241 (154)
====== ======
9
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, 1999 1998 1997
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 $ 459,886 33,787 7.35% 396,611 30,231 7.62% 370,946 28,468 7.67%
Mortgage-backed securities 7,280 506 6.95% 14,503 1,018 7.02% 19,748 1,387 7.02%
Interest-earning deposits 837 46 5.50% 1,401 80 5.71% 1,233 60 4.87%
Investment securities available
for sale, and federal
funds sold 73,950 4,955 6.70% 68,374 4,798 7.02% 84,299 6,000 7.12%
------- ------ ---- ------- ------ ---- -------- ------- ----
Total interest-earning assets 541,953 39,294 7.25% 480,889 36,127 7.51% 476,226 35,915 7.54%
Non-interest earning assets 13,993 14,088 11,195
------ ------- -------
Total assets $ 555,946 494,977 487,421
======= ======= =======
INTEREST-BEARING LIABILITIES:
Deposits:
Passbook and NOW accounts 147,820 5,431 3.67% 126,431 4,880 3.86% 108,314 3,706 3.42%
Money market accounts 17,324 675 3.90% 17,848 744 4.17% 18,496 773 4.18%
Certificate accounts 169,337 8,964 5.29% 177,998 10,312 5.79% 196,737 11,450 5.82%
------- ----- ---- ------- ------ ---- -------- ------ ----
Total deposits 334,481 15,070 4.51% 322,277 15,936 4.94% 323,547 15,929 4.92%
Borrowed funds 158,523 8,692 5.48% 102,968 5,900 5.73% 97,879 5,541 5.66%
------- ----- ---- ------- ------ ---- -------- ------ ----
Total interest-bearing liabilities 493,004 23,762 4.82% 425,245 21,836 5.13% 421,426 21,470 5.09%
Non-interest bearing deposits 7,768 6,002 4,705
Other liabilities 11,327 11,506 10,605
------ ------- -------
Total liabilities 512,099 442,753 436,736
Stockholders' equity 43,847 52,224 50,685
------ ------- -------
Total liabilities and stockholders'
equity $ 555,946 494,977 487,421
======= ======= =======
Net interest income/interest rate
spread (1) 15,532 2.43% 14,291 2.38% 14,445 2.45%
====== ==== ====== ==== ====== ====
Net earning assets/net interest
margin (2) $ 48,949 2.87% 55,644 2.98% 54,800 3.03%
======= ==== ======= ==== ======= ====
Ratio of interest-earning assets to
interest-bearing liabilities 1.10x 1.13x 1.13x
======= ======= =======
(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, 1999 AND
SEPTEMBER 30, 1998
GENERAL. For the year ended September 30, 1999, earnings per diluted share
were up $0.43 per share, or 32.3%, from $1.33 in 1998 to $1.76 in 1999. Net
income increased 9.3%, from $3.8 million in 1998 to $4.1 million in 1999.
Earnings per share and net income increased as the result of higher income,
which resulted primarily from a greater volume of loans receivable.
INTEREST INCOME. Interest income increased 8.8% from year to year. Fiscal
1999 interest income totalled $39.3 million, an increase of $3.2 million over
1998's income of $36.1 million. Interest income generated from loan volume
showed an 11.8% increase to $33.8 million in 1999, compared to $30.2 million in
1998. The 15.9% increase in the average loans receivable, more than
compensated for the 27 basis point decrease in the weighted average loan
yields. Investment portfolio purchases have increased the average portfolio by
$5.6 million and this increase has contributed to the 4.0% increase in interest
income. Investment securities interest income increased $192,000 from $4.8
million in 1998 to $ 5.0 million in 1999.
INTEREST EXPENSE. Total interest expense increased $1.9 million, from $21.8
million in 1998 to $23.8 million in fiscal 1999. Throughout the year, some
maturing certificates of deposit with higher interest rates were replaced with
lower yielding transactions accounts, thus the overall weighted average
interest cost on deposits decreased 43 basis points and the average deposit
base increased $12.2 million, or 3.8%. Borrowed funds continued to be a
reasonable choice for funding loan growth throughout the year, thus the $55.6
million increase in average borrowed funds. The weighted average cost
decreased 25 basis points from 1998 to 1999, 5.73% to 5.48%, respectively. The
Bank has continued to utilize the Federal Home Loan Bank of Chicago (the
"FHLB") to secure advances at reasonable rates.
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 showed an 8.7% increase over the prior
year. Fiscal 1999 net interest income amounted to $15.5 million, compared to
$14.3 million the prior year. The Company had a 12.7% increase in average
interest earning assets and a 15.9% increase in average interest bearing
liabilities. Net interest margin declined 11 basis points from 2.98% to 2.87%
in 1999. The Company's net interest spread increased 5 basis points during the
year.
PROVISION FOR LOAN LOSSES. During the year ended September 30, 1999, the
Company's provision for loan losses was $165,000, compared to $181,000 in 1998.
New loans closed during the year totaled $196.9 million, up $54.1 million.
Management reviews the provision for loan losses quarterly to provide coverage
for possible future losses. The Company evaluates its loan portfolio quarterly
in conjunction with a number of factors, including the current level of non-
performing loans and general economic conditions. At September 30, 1999, non-
performing assets totalled $343,000 or 0.06% of total assets, compared to
$962,000 or 0.19% of total assets at September 30, 1998.
NON-INTEREST INCOME. Fees and commissions increased $42,000, or 12.7% from
1998 to 1999. This non-interest income amounted to $374,000, compared to
$332,000 in the previous year. Annuity and insurance product sales remain the
primary source of non-interest income. These remained flat at approximately
$720,000 in both 1999 and 1998.
11
NON-INTEREST EXPENSE. Salaries and benefits, the largest portion of non-
interest income, remained flat at approximately $5.8 million for both fiscal
1999 and 1998. Office occupancy includes the cost of depreciating the
Company's computer system, which was placed in service in the second half of
fiscal 1998. The computer upgrade included both hardware, software for the
offices, as well as ATM upgrade adjustments.
INCOME TAX EXPENSE. Income tax expense for the year ended September 30, 1999
was $2.5 million, or $324,000 more than that recorded in the prior year. The
fiscal 1998 effective tax rate was 37.0%, compared to 38.0% for fiscal 1999.
The slight increase in rate was due in part to the addition of some investment
securities that are not exempt from state tax.
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
explained the flat $15.9 million in deposit expense for both 1998 and 1997. A
major portion of the overall increase was attributed to continued growth in
borrowed funds. Average borrowed funds increased 5.2% to $103.0 million from
$97.9 million in 1997. 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. 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 required 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
12
economic conditions, among other factors. 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 product 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.
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.
REVIEW OF FINANCIAL CONDITION
Total assets at September 30, 1999 increased $85.7 million to $599.3 million
from $513.6 million at September 30, 1998. Record loan originations of $196.9
million contributed to the 16.7% increase in assets. The Company's third party
originator (TPO) network continued to give the Company the ability to control
overhead expenses without constraining the Bank's ability to grow loan volume.
The TPO program generated 88.8% of the fiscal 1999 originations. Lending in
1999 included $58.7 million, or 29.8%, 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 $3.4 million at September 30, 1999
as compared to $2.0 million a year earlier. The Company used available cash
generated by deposits and loan payments to fund increased loan origination
volume.
Due to the increase in borrowings from the FHLB of Chicago, stock in the FHLB
Chicago increased $3.1 million.
Investment securities available for sale totalled $66.1 million at September
30, 1999. The portfolio increased $7.1 million or 12.0% during the year. No
investments were sold during the fiscal year.
Loans receivable reached the $500 million mark during fiscal 1999 for the first
time in the Company's history and ended the year at $507.6 million. The 19.3%
increase in the net portfolio was a result of significant loan originations.
Repayments remained high in the first quarter of the fiscal year, then slowed
down to historical levels.
13
There was no real estate in foreclosure at fiscal year end.
Deposits increased 7.9%, or $26.4 million to $357.0 million at September 30,
1999, compared to $330.7 million at September 30, 1998. Comparing transaction
accounts from September 30, 1999 to September 30, 1998, it appears that they
remained flat at $166.4 million, although they reached as high as $178.3
million at March 31, 1999. Certificates of deposits increased throughout the
year to $190.5 million at September 30, 1999, from $164.4 million at September
30, 1998.
FHLB advances remain a cost effective source of funding for increased loan
activity. At September 30, 1999, the Bank had $186.3 million of FHLB advances
as compared to $121.4 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 at a higher level for
the past two years, due to Cook County real estate taxes being payable during
the first quarter of the following the fiscal year. The balance at September
30, 1999 of $8.0 million included $5.0 million that was paid in October 1999.
Stockholders' equity decreased by $6.6 million throughout the year, from $48.6
million at September 30, 1999 to $42.0 million at September 30, 1998. Common
stock repurchases of $9.3 million combined with the amortization of $669,000 of
the Company's benefit plans, $1.0 million in cash dividends to stockholders,
and a comprehensive loss on the investment portfolio more than offset the $4.1
million in earnings during fiscal 1999.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity management 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. The minimum liquidity requirement is 4% of the liquidity base.
Liquidity requirements are determined quarterly, 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.
Savings associations must maintain liquidity in excess of the minimum
requirement if necessary to insure safe and sound operations. At September 30,
1999, the Bank was in compliance with Office of Thrift Supervision ( OTS )
liquidity requirements, with a liquidity ratio of 14.83%.
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 $6.8 million for the year ended September 30, 1999. During the
year, the Bank used $87.5 million in investing activities, consisting primarily
14
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 $82.2 million for the year
ended September 30, 1999.
At September 30, 1999, the Bank had outstanding loan commitments of $4.0
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, 1999 totalled $165.1 million.
Management believes that a significant portion of such deposits will remain
with the Bank.
The Bank's Tangible and Core (leverage) Capital of $41.4 million at September
30, 1999 was 6.9% of Adjusted Tangible Assets. This exceeded the Tangible
Capital and Core Capital minimum requirements of 1.5% and 3% by $32.4 and $23.4
million respectively. The Bank's Risk-based Capital of $40.9 million was 14.3%
of Total Risk-Weighted Assets at September 30, 1999 which exceeded the Risk-
based Capital minimum requirement of 8% by $17.9 million.
LENDING ACTIVITIES
LOANS AND MORTGAGE-BACKED SECURITIES PORTFOLIO COMPOSITIONS. The loan
portfolio consists primarily of conventional first mortgage loans secured by
one- to four-family residences. At September 30, 1999, the gross loans
receivable portfolio was $505.6 million, of which $388.6 million were one- to
four-family residential mortgage loans. Of the one- to four-family residential
mortgage loans outstanding at that date, 58.3% were fixed-rate and 41.7% 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, 1999 was $1.53 million. The
remainder of the loan portfolio at September 30, 1999 consisted of $100.4
million of multi-family loans, $2.6 million in commercial property loans, and
$14.0 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 1999 and 1998, the loan department
continued to seek and sign agreements with new TPOs. At September 30, 1999,
the Bank had a network of 61 TPOs. The TPO program produced $170.1 million or
88.8% of the one- to four-family and multi-family mortgage loan originations in
1999.
In October 1996, the Bank began offering certain residential loans without
income verification. Verification that the applicant is employed is noted in
the file and the amount listed on the application is used to determine the debt
to income ratio. The maximum loan to value ratio is 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 also grants loans to applicants with less than
perfect credit and higher debt to income ratios than secondary market
conforming standards. In all other respects the loans are originated in the
same manner as a conventional loan. All loans have risk premium factored into
the rate and additional valuation allowances are established when the loan is
funded. The Bank originated $58.7 million of these loans during fiscal 1999.
15
At September 30, 1999, the portfolio included $125.0 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, 1999 or 1998. At September 30, 1999, the
unpaid balance of total mortgage loans sold to the FHLMC and serviced by the
Bank was $5.4 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 1999 and 1998, the Bank received post-
bankruptcy lease receipts totaling $57,000 and $378,000, respectively. At
September 30, 1999, the Bank had received all payments from BFG and had no
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 a security coupon of 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,
1999, total mortgage-backed securities aggregated $3.6 million, or 0.6% of
total assets. The fair value of these securities was approximately $3.6
million at September 30, 1999.
Currently all loans originated or purchased by the Bank and mortgage-backed
securities are held for investment.
16
The following table sets forth the composition of the 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,
1999 1998 1997
Percent Percent Percent
Amount of Total Amount of Total Amount of Total
(Dollars in thousands)
Mortgage loans:
One- to four-family $ 388,586 76.86% 324,265 76.47% $ 304,950 78.83%
Multi-family 100,412 19.86 83,084 19.59 64,450 16.66
Commercial 2,577 0.51 3,295 0.78 2,894 0.75
Commercial leases - - 30 0.01 408 0.10
------- ----- ------- ---- ------ -----
Total mortgage loans 491,575 97.23 410,674 96.85 372,702 96.34
Consumer loans 14,016 2.77 13,358 3.15 14,152 3.66
------- ------ ------- ------ ------ ------
Gross loans receivable 505,591 100.00% 424,032 100.00% 386,854 100.00%
====== ====== ======
Less:
Loans in process 16 1 -
Unearned discounts and
deferred loan costs (2,762) (2,168) (1,868)
Allowance for loan losses 780 591 460
------- ------- -------
Loans receivable, net $ 507,557 425,608 388,262
======= ======= =======
Mortgage-backed
securities - FHLMC $ 3,587 100.00% 11,177 100.00% 16,866 100.00%
====== ====== ======
Net premiums (2) - 9
------- ------- ------
Mortgage-backed
securities, net $ 3,585 $ 11,177 $ 16,875
======= ======= =======
17
<CAPTIONS>
At September 30,
1996 1995
Percent Percent
Amount of Total Amount of Total
(Dollars in thousands)
Mortgage loans:
One- to four-family $ 277,086 78.34% 203,974 76.40%
Multi-family 55,341 15.65 45,698 17.12
Commercial 5,656 1.60 2,478 0.93
Commercial leases 2,032 .057 2,373 0.89
------- ----- ------- ----
Total mortgage loans 340,115 96.16 254,523 95.34
Consumer loans 13,585 3.84 12,442 4.66
------- ----- ------- ----
Gross loans receivable 353,700 100.00% 266,965 100.00%
====== ======
Less:
Loans in process 3 77
Unearned discounts and
deferred loan fees (1,368) (250)
Allowance for loan losses 810 403
------- -------
Loans receivable, net $ 354,255 266,735
======= =======
Mortgage-backed
securities - FHLMC $ 21,647 100.00% $ 26,435 100.00%
====== ======
Net premiums 26 49
------- -------
Mortgage-backed
securities, net $ 21,673 $ 26,484
======= =======
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,
1999 1998 1997
(in thousands)
Mortgage Loans (gross):
At beginning of period $ 410,674 372,702 340,115
Mortgage loans originated:
One- to four- family 157,429 107,575 74,067
Multi-family 29,224 26,719 15,981
Commercial 2,216 2,494 913
------- ------- -------
Total mortgage loans originated 188,869 136,788 90,961
Transfer of mortgage loans to foreclosed real estate (262) (1,163) (359)
Transfer of mortgage loans from foreclosed real estate - 529 -
Principal repayments of loans receivable (107,676) (100,182) (56,798)
Principal repayments of commercial leases (30) (378) (1,217)
Purchase of loans receivable - 2,378 -
------- ------- -------
At end of period $ 491,575 410,674 372,702
------- ------- -------
Consumer loans (gross):
At beginning of period $ 13,358 14,152 13,585
Consumer loans originated 7,990 6,000 6,813
Principal repayments (7,332) (6,794) (6,246)
------- ------ ------
At end of period 14,016 13,358 14,152
------- ------ ------
Total loans (gross) $ 505,591 424,032 386,854
======= ======= =======
Mortgage-backed securities held to maturity:
At beginning of period $ 11,177 16,866 21,647
Amortization and principal repayments (7,590) (5,689) (4,781)
------- ------ ------
At end of period $ 3,587 11,177 16,866
======= ======= =======
19
LOANS AND MORTGAGE-BACKED SECURITIES MATURITY AND REPRICING. The following
table shows the maturity or period to repricing of the loans and mortgage-
backed securities held to maturity portfolios at September 30, 1999. The table
does not include prepayments or scheduled principal amortization. Principal
repayments and prepayments on loans and mortgage-backed securities held to
maturity totalled $122.6 million, $113.0 million, and $69.0 million for the
years ended September 30, 1999, 1998 and 1997, respectively.
At September 30, 1999
Fixed Rate Adjustable Rate Other Loans Totals
Mortgage-
Total Backed
One-to- One-to- Loans Securities
Four Multi- four Multi- Commer- Receiv- Held to
Family Family Family Family cial Consumer able Maturity Total
(in thousands)
AMOUNTS DUE:
Within one year $ 25,480 1,082 41,515 14,753 59 3,687 86,576 556 87,132
After one year:
One to three years 44,522 1,791 70,129 43,917 261 4,455 165,075 959 166,034
Three to five years 37,011 1,341 50,334 35,175 1,591 2,526 127,978 780 128,758
Five to 10 years 66,506 2,142 - - - 2,397 71,045 1,292 72,337
10 to 20 years 42,529 877 - - - 932 44,338 - 44,338
Over 20 years 10,560 - - - - 19 10,579 - 10,579
------- ----- ------- ------ ----- ----- ------- ------- --------
Total due after
one year 201,128 6,151 120,463 79,092 1,852 10,329 419,015 3,031 422,046
Total amounts due $ 226,608 7,233 161,978 93,845 1,911 14,016 505,591 3,587 509,178
Less:
Loans in process 16 - 16
Unearned discounts,
premiums and deferred
loan costs, net (2,762) 2 (2,760)
Allowance for possible loan losses 780 - 780
------ ------ ------
Loan receivable and mortgage-
backed securities held to
maturity, net $ 507,557 3,585 511,142
======== ======= =======
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 and assets 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, 1999, $100.4 million, or 19.9%, 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, 1999,
$2.6 million, or 0.5%, 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, 1999, the Bank's loan portfolio
included no 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, 1999, $14.0 million or 2.8% of the Bank's
loan portfolio consisted of consumer loans.
The Bank's home equity loans consist of fixed and adjustable rate mortgage
loans generally secured by second mortgages on one- to four-family owner-
occupied residential properties located in its primary market area. The second
mortgage loan products are currently offered in both fixed and adjustable rate,
fixed-term loans for up to 30 years.
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 approved by the Vice President - Loan Investments with the concurrence
of a member of 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
23
loans more than 20 days late to ascertain the reasons for the delinquency and
the prospects of repayment. Face-to-face interviews and collection notices are
generally required for loans more than 30 days delinquent and on a case-by-case
basis for mortgage loans. After 60 days, the Bank will either set a date by
which the loan must be brought current, enter into a written forbearance
agreement, foreclose on any collateral or take other appropriate action. The
Bank's policies regarding delinquent consumer loans are similar except that
telephone contacts and correspondence will generally occur after a consumer
loan is more than 15 days delinquent.
It is the Bank's general policy to discontinue the accrual of interest on all
first mortgage loans 90 days past due. Consumer loans continue to accrue
interest until a determination is made by the Bank that the loan may result in
a loss. Property acquired by the Bank as a result of a foreclosure on a
mortgage loan is classified as real estate owned and is recorded at the lower
of the unpaid principal balance or fair value at the date of acquisition and
subsequently carried at the lower of cost or net realizable value.
Set forth below is certain information regarding delinquent loans at September
30, 1999, 1998 and 1997:
At September 30, 1999 At September 30, 1998
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 2 $ 252 5 $ 216 8 $ 501 6 $ 571
Multi-family 1 159 1 84 - - 1 228
Commercial - - - - - - - -
Commercial leases (1) - - - - - - 1 30
-- --- -- ------ -- ---- -- ----
Total mortgage loans 3 411 6 300 8 501 8 829
Consumer - - 4 43 1 14 1 2
-- --- -- ------ -- ---- -- ----
Total loans 3 $ 411 10 $ 343 9 $ 515 9 $ 831
== === == ====== == ==== == =====
Delinquent loans to
total loans 0.08% 0.07% 0.12% 0.20%
=== ====== ==== ====
At September 30, 1997
60-89 Days 90 Days or More
----------------- ------------------
Number Principal Number Principal
of Balance of Balance
Loans of Loans Loans of Loans
(Dollars in thousands)
One- to four- family 5 $ 141 8 $ 1,166
Commercial - - 1 231
Commercial leases (1) - - 1 408
-- --- -- ------
Total mortgage loans 5 141 10 1,805
Consumer 5 40 2 3
-- --- -- ------
Total loans 10 $ 181 12 $ 1,808
== === == ======
Delinquent loans to
total loans 0.05% 0.47%
=== ======
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, 1999, 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,
1999, had been currently performing in accordance with their original terms,
the Bank would have recognized interest income from such loans of $14,000.
At September 30,
1999 1998 1997 1996 1995
(Dollars in thousands)
Non-accrual mortgage loans $ 300 $ 799 $ 1,397 $ 1,049 $ 604
Non-accrual commercial leases - 30 408 2,032 -
Non-accrual consumer loans 43 2 3 5 13
----- --- ----- ----- ---
Total non-accrual loans 343 831 1,808 3,086 617
Consumer loans 90 days or more
past due and still accruing - - - - -
----- --- ----- ----- ---
Total non-performing loans 343 831 1,808 3,086 617
Real estate in foreclosure - 131 215 97 -
----- --- ----- ----- ---
Total non-performing assets $ 343 $ 962 $ 2,023 $ 3,183 $ 617
===== === ===== ===== ===
Total non-performing loans to
total loans 0.07% 0.20% 0.47% 0.87% 0.23%
===== === ===== ===== ===
Total non-performing assets to
total assets 0.06% 0.19% 0.41% 0.67% 0.16%
===== === ===== ===== ===
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, 1999, the Bank had classified assets of $343,000.
Classified loans of $343,000 were categorized as substandard, consisting of 5
residential mortgage loans and 1 multi-family loan. 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 1999 and 1998, the
Company received an additional $57,000 and $378,000 in payments, respectively.
At September 30, 1999, the Company had recovered the agreed upon amount for the
Bennett leases. The leases now have a zero book value, and there will be no
further recoveries.
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,
1999 1998 1997 1996 1995
(Dollars in thousands)
Balance at beginning of year $ 591 $ 460 $ 810 $ 403 $ 228
Provision for loan losses 165 181 64 410 192
Charge offs:
One-to four-family - - - (8) (2)
Multi-family - - - - (5)
Commercial leases - - (406) - -
Consumer loans (8) (51) (19) (26) (19)
---- ---- ---- ---- ----
Total Charge-offs (8) (51) (425) (34) (26)
Recoveries:
Commercial leases 27 - - - -
Consumer loans 5 1 11 31 9
---- ---- ---- ---- ----
Total Recoveries 32 1 11 31 9
---- ---- ---- ---- ----
Balance at end of year $ 780 $ 591 $ 460 $ 810 $ 403
==== ==== ==== ==== ====
Ratio of charge-offs during the
year to average loans
outstanding during the year - % 0.01% 0.11% 0.01% 0.01%
==== ==== ==== ==== ====
Ratio of allowance for loan losses
to net loans receivable at end
of year 0.15% 0.14% 0.12% 0.23% 0.15%
==== ==== ==== ==== ====
Ratio of allowance for loan losses
to total non-performing loans at
end of year 227.41% 71.12% 25.44% 26.25% 65.32%
====== ===== ===== ====== =====
Ratio of allowance for loan losses
to non-performing assets at end
of year 227.41% 61.43% 22.74% 25.48% 65.32%
====== ===== ===== ====== =====
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
27
future charge-offs and the amounts allocated are not intended to reflect the
amount that may be available for future losses on any category since the Bank's
allowance is a general allowance.
The following table also sets forth the percent of loans in each category to
total loans.
At September 30,
1999 1998 1997
% 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 $ 340 76.86% $ 241 76.47% $ 158 78.83%
Multi-family 179 19.86 140 19.59 84 16.66
Commercial 38 0.51 52 0.78 35 0.75
Commercial leases - - 2 0.01 21 0.10
Consumer loans 171 2.77 148 3.15 157 3.66
Unallocated 52 - 8 - 5 -
---- ------ ---- ------ ---- ------
Total allowance for loan losses $ 780 100.00% $ 591 100.00% $ 460 100.00%
==== ====== ==== ====== ==== ======
At September 30,
1996 1995
% 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 $ 90 78.34% $ 70 76.40%
Multi-family 57 15.65 46 17.12
Construction 104 1.60 89 0.93
Commercial leases 406 0.57 24 0.89
Consumer loans 150 3.84 132 4.66
Unallocated 3 - 42 -
---- ---- ---- -----
Total allowance for loan losses $ 810 100.00% $ 403 100.00%
==== ====== ==== ======
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. ("RAG") and is the parent
company for the consumer finance company.
On November 14, 1997, RAG filed a Form 10-Q with the SEC in which RAG
reported, among other things, substantial additions to its loan loss reserves,
increasing delinquencies and repossession losses, a severe decline in its net
interest margin, continuing defaults under senior credit agreements, a lack of
future funding sources, and the imposition of substantial restrictions by
senior lenders.
The Company evaluated the information that was then about RAG'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 RAG liquidation, sale
and/or bankruptcy. The Company concluded that the impairment was other than
temporary, and that a complete write-down of the Notes was appropriate, because
of RAG's worsening condition, the fact that the Notes are subordinate to the
senior debt and are structurally subordinate to the other obligations of RAG's
finance company subsidiary, and the substantial uncertainties that existed
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.
RAG subsequently filed a bankruptcy petition in the United States Bankruptcy
Court in Delaware. The Company is continuing its efforts to attempt to realize
some recovery of its subordinated notes. Among other things, the Company
actively participated on the Official Committee of the Unsecured Creditors of
RAG and in the formulation of a plan for RAG's bankruptcy liquidation.
Further, the Estate Representive for RAG, with the support of the Company and
other holders of RAG subordinated notes, has filed two lawsuits against a
number of RAG insiders, certain legal and accounting firms and others in the
United States District Court for the District of Delaware.
29
The lawsuits allege a variety of causes of action against these individuals and
entities relating to the spin-off, the accuracy of RAG's financial statements
and similar matters. A litigation fund of approximately $5.0 million was
established pursuant to RAG's plan of reorganization to pursue these lawsuits
and similar litigation. The lawsuits are presently in the discovery stage. An
order was recently entered scheduling the lawsuits for a jury trial on
September 10, 2000.
The Company and other holders of RAG subordinated notes are also presently
evaluating the desirability of instituting other third party litigation
relating specifically to the subordinated notes.
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,
1999 1998 1997
Amortized Fair Amortized Fair Amortized Fair
Cost Value Cost Value Cost Value
(in thousands)
Interest-earning deposits:
FHLB daily investment $ 404 404 547 547 722 722
Money market fund 172 172 8 8 1,592 1,592
----- ----- --- --- ----- -----
Total interest-bearing deposits $ 576 576 555 555 2,314 2,314
===== ===== ===== ===== ===== =====
Federal funds sold $ 100 100 100 100 100 100
==== === ===== ===== ===== =====
Mutual funds -
Federated Liquid Cash Trust $ - - - - 3,154 3,154
===== ===== ===== ===== ===== =====
FHLB-Chicago Stock $ 9,615 9,615 6,510 6,510 5,700 5,700
===== ===== ===== ===== ===== =====
Investment securities
available for sale:
U.S. Government and
agencies $ 68,428 66,070 58,439 58,979 64,467 64,687
Corporate asset-backed
securities - - - - 2,616 2,613
Corporate debt securities - - - - 3,000 2,997
------- ------ ------ ------ ------ ------
Total investment securities
available for sale $ 68,428 66,070 58,439 58,979 70,083 70,297
======= ====== ====== ====== ====== ======
30
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, 1999.
At September 30, 1999
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 $ - - % - - 68,428 6.59% - - 9.1 68,428 66,070 6.59%
==== ==== ====== ==== ====== ====== ====
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 three FHMLCs; $8.5 million 6.60% due 6/24/2008, $10 million 6.65% due
3/23/2009, and $10 million 6.75% due 5/4/2009 that are callable with 10 days
notice. Also included is a $20 million, 6.77% FNMA due 5/21/2008 that is
callable within 10 days notice. Two FHLB notes for $10 million each with rates
of 6.275% and 6.285% are due 11/25/2008 and 12/29/2008, respectively. These
are callable on their anniversary dates in 1999.
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.
31
The following table presents the deposit activity of the Bank for the years
indicated.
Years Ended September 30,
1999 1998 1997
(in thousands)
Deposits $ 716,232 372,003 156,089
Withdrawals (704,706) (377,067) (144,310)
------- ------- -------
Net deposits in excess of withdrawals 11,526 (5,064) 11,779
Interest credited on deposits 14,820 12,341 8,730
------- ------- -------
Total increase in deposits $ 26,346 7,277 20,509
======= ======= =======
The following table sets forth maturities time deposits over $100,000 at
September 30, 1999:
Maturity Period
(in thousands)
Three months or less $ 7,264
Over three through six months 8,111
Over six through 12 months 7,207
Over 12 months 4,041
-------
$ 26,623
=======
32
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,
1999 1998
Weighted Weighted
Percent of Average Percent of Average
Total Nominal Total Nominal
Amount Deposits Rate Amount Deposits Rate
(dollars in thousands)
Passbook Savings $ 127,415 35.69% 3.70% $ 126,901 38.38% 4.16%
Transaction Accounts:
NOW/non-interest bearing 6,385 1.79 - 5,981 1.81 -
NOW 16,577 4.64 2.22 15,972 4.83 2.25
Money market and management 16,100 4.51 3.82 17,462 5.28 4.03
------ ----- ---- ------ ---- ----
Total transaction accounts 39,062 10.94 3.56 39,415 11.92 2.70
Certificate Accounts:
3 month 2,160 0.61 4.40 2,589 0.78 4.95
6 month 10,503 2.94 4.67 18,095 5.47 5.25
7 month 31,955 8.95 5.03 4,662 1.41 5.32
8 month 5,125 1.44 4.63 39,875 12.06 5.69
10 month 45,000 12.60 5.40 17,876 5.41 5.44
12 month 18,600 5.21 4.87 28,263 8.55 5.63
13 month 35,610 9.97 5.75 3,984 1.20 5.59
15 month 12,475 3.49 4.90 15,377 4.65 5.64
24 month 10,170 2.85 5.28 11,967 3.62 5.78
36 month 6,843 1.92 5.65 7,533 2.28 5.82
36 month rising rate 3,959 1.11 5.17 4,578 1.38 5.29
60 month 8,139 2.28 6.01 9,455 2.86 5.91
Other - - - 100 0.03 5.50
------ ----- ---- ------ ---- ----
Total certificate accounts 190,539 53.37 5.27 164,354 49.70 5.59
------ ----- ---- ------ ---- ----
Total Deposits $ 357,016 100.00% 4.49% 330,670 100.00% 4.78%
======= ====== ==== ======= ====== ====
33
At September 30,
1997
Weighted
Percent of Average
Total Nominal
Amount Deposits Rate
(dollars in thousands)
Passbook Savings $ 100,588 31.10% 3.83%
Transaction Accounts:
NOW/non-interest bearing 4,766 1.47 -
NOW 13,201 4.08 2.18
Money market and management 17,634 5.45 4.21
------ ----- ----
Total transaction accounts 35,601 11.01 3.70
Certificate Accounts:
3 month 3,820 1.18 5.23
6 month 15,631 4.83 5.52
7 month 4,615 1.43 5.35
8 month 12,221 3.78 5.65
10 month 30,926 9.56 5.99
12 month 43,244 13.37 5.94
13 month 18,159 5.61 6.04
15 month 15,081 4.66 5.85
24 month 11,506 3.56 5.72
36 month 7,904 2.44 6.10
36 month rising rate 14,161 4.38 6.55
60 month 9,681 2.99 5.82
Other 305 0.09 6.04
------ ----- ----
Total certificate accounts 187,254 57.89 5.79
------ ----- ----
Total Deposits $ 323,443 100.00% 4.89%
======= ====== ====
34
The following table presents, by various rate categories, the amount of
certificate accounts outstanding at September 30, 1999, 1998 and 1997 and the
periods to maturity of the certificate accounts outstanding at September 30,
1999.
Period to maturity from September 30, 1999
At September 30,
Two to
Within One to Three There-
1999 1998 1997 One Year Two Years Years after Total
(in thousands)
Certificate accounts:
2.99% or less $ 81 139 266 - 43 - 38 81
3.00% to 3.99% - - 76 - - - - -
4.00% to 4.99% 53,218 5,340 660 45,973 4,761 1,807 677 53,218
5.00% to 5.99% 133,805 147,841 104,941 116,997 13,274 1,205 2,349 133,805
6.00% to 6.99% 3,435 11,034 81,081 2,194 163 337 741 3,435
7.00% to 7.99% - - 230 - - - - -
8.00% to 8.99% - - - - - - - -
9.00% to 9.99% - - - - - - - -
10.00% to 10.99% - - - - - - - -
------- ------- ------- ------- ------ ----- ----- -------
Total $ 190,539 164,354 187,254 165,144 18,241 3,349 3,805 190,539
======= ======= ======= ======= ====== ===== ===== =======
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 of 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 of Chicago secured by its capital stock
in the FHLB of 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 of
Chicago will advance to member institutions, including the Bank, for purposes
other than meeting withdrawals, fluctuates from time to time in accordance
with the policies of the OTS and the FHLB of Chicago. The maximum amount of
FHLB of Chicago advances to a member institution generally is reduced by
borrowings from any other source. At September 30, 1999, the Bank's FHLB-
Chicago advances totalled $186.3 million.
The following table sets forth certain information regarding borrowings at and
for the date indicated:
At and for the Years Ended September 30,
1999 1998 1997
(in thousands)
FHLB-CHICAGO ADVANCES
Average balance outstanding $158,523 102,968 97,879
Maximum amount outstanding at any
month-end during the year 192,300 128,400 113,400
Balance outstanding at year end 186,250 121,400 113,400
Weighted average interest rate
during the year 5.48% 5.73% 5.66%
Weighted average interest rate
at end of year 5.56% 5.69% 5.80%
35
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 $945,000 at September 30, 1999. 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, 1999. 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,
1999 was $36,000. 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, 1999, 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, 1999, the Company had 92 full-time employees and 34 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.
36
SUPERVISION AND REGULATION
GENERAL
Financial institutions and their holding companies are extensively regulated
under federal and state law. As a result, the growth and earnings performance
of the Company can be affected not only by management decisions and general
economic conditions, but also by the requirements of applicable state and
federal statutes and regulations and the policies of various governmental
regulatory authorities, including the Office of Thrift Supervision (the "OTS"),
the Board of Governors of the Federal Reserve System (the "Federal Reserve"),
the Federal Deposit Insurance Corporation (the "FDIC"), the Internal Revenue
Service and state taxing authorities and the Securities and Exchange Commission
(the "SEC"). The effect of applicable statutes, regulations and regulatory
policies can be significant, and cannot be predicted with a high degree of
certainty.
Federal and state laws and regulations generally applicable to financial
institutions, such as the Company and the Bank, regulate, among other things,
the scope of business, investments, reserves against deposits, capital levels
relative to operations, the nature and amount of collateral for loans, the
establishment of branches, mergers, consolidations and dividends. The system of
supervision and regulation applicable to the Company and the Bank establishes a
comprehensive framework for their respective operations and is intended
primarily for the protection of the FDIC's deposit insurance funds and the
depositors, rather than the stockholders, of financial institutions.
The following is a summary of the material elements of the regulatory framework
that applies to the Company and the Bank. It does not describe all of the
statutes, regulations and regulatory policies that apply to the Company and the
Bank, nor does it restate all of the requirements of the statutes, regulations
and regulatory policies that are described. As such, the following is qualified
in its entirety by reference to the applicable statutes, regulations and
regulatory policies. Any change in applicable law, regulations or regulatory
policies may have a material effect on the business of the Company and the
Bank.
RECENT REGULATORY DEVELOPMENTS
On November 12, 1999, legislation was enacted that would allow bank holding
companies to engage in a wider range of nonbanking activities, including
greater authority to engage in securities and insurance activities. Under the
Gramm-Leach-Bliley Act (the "GLB Act"), a bank holding company that elects to
become a financial holding company may engage in any activity that the Board of
Governors of the Federal Reserve System (the "Federal Reserve"), in
consultation with the Secretary of the Treasury, determines by regulation or
order is (i) financial in nature, (ii) incidental to any such financial
activity, or (iii) complementary to any such financial activity and does not
pose a substantial risk to the safety or soundness of depository institutions
or the financial system generally. The GLB Act specifies certain activities
that are deemed to be financial in nature, including lending, exchanging,
transferring, investing for others, or safeguarding money or securities;
underwriting, dealing in or making a market in, securities; and any activity
currently permitted for bank holding companies by the Federal Reserve under
section 4(c)(8) of the Bank Holding Company Act. A bank holding company may
elect to be treated as a financial holding company only if all depository
institution subsidiaries of the holding company are well-capitalized, well-
37
managed and have at least a satisfactory rating under the Community
Reinvestment Act.
Under current law, so-called "unitary savings and loan holding companies"
(i.e., those that control only one savings association and have no other
depository institution subsidiaries) are not generally subject to any
restrictions on the non-banking activities in which they may engage (either
directly or through a subsidiary). The GLB Act limits the nonbanking
activities of unitary savings and loan holding companies by generally
prohibiting any savings and loan holding company from engaging in any activity
other than activities that (i) are currently permitted for multiple savings and
loan holding companies or (ii) are permissible for financial holding companies
(as described above) (collectively "permissible activities"). The Act also
generally prohibits any company from acquiring control of a savings association
or savings and loan holding company unless the acquiring company engages solely
in permissible activities. The GLB Act creates an exemption from the general
prohibitions for unitary savings and loan holding companies in existence, or
formed pursuant to an application pending before the Office of Thrift
Supervision, on or before May 4, 1999.
Many of the provisions of the Act have delayed effective dates and require the
issuance of regulations to implement the statutory provisions. Accordingly, at
this time, the Company is unable to predict the impact the Act may have on the
Company and the Bank.
THE COMPANY
GENERAL. The Company, as the sole stockholder of the Bank, is a savings and
loan holding company. As a savings and loan holding company, the Company is
registered with, and is subject to regulation by, the OTS under the Home
Owners' Loan Act, as amended (the "HOLA"). Under the HOLA, the Company is
subject to periodic examination by the OTS. The Company is also required to
file with the OTS periodic reports of the Company's operations and such
additional information regarding the Company and the Bank as the OTS may
require.
INVESTMENTS AND ACTIVITIES. The HOLA prohibits a savings and loan holding
company, directly or indirectly, or through one or more subsidiaries from: (i)
acquiring control of, or acquiring by merger or purchase of assets, another
savings association or savings and loan holding company without the prior
written approval of the OTS; (ii) subject to certain exceptions, acquiring more
than 5% of the issued and outstanding shares of voting stock of a savings
association or savings and loan holding company except as part of an
acquisition of control approved by the OTS; or (iii) acquiring or retaining
control of a financial institution that is not FDIC-insured.
A savings and loan holding company may acquire savings associations located in
more than one state in both supervisory transactions involving failing savings
associations and nonsupervisory acquisitions of healthy institutions.
Interstate acquisitions of healthy savings associations, however, are permitted
only if the law of the state in which the savings association to be acquired is
located specifically authorizes the proposed acquisition, by language to that
effect and not merely by implication. State laws vary in the extent to which
interstate acquisitions of savings associations and savings and loan holding
companies are permitted. Illinois law presently permits savings and loan
holding companies located in any state of the United States to acquire savings
associations or savings and loan holding companies located in Illinois, subject
to certain conditions, including the requirement that the laws of the state in
38
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 and either was a savings and loan holding
company on or before May 4, 1999 or became a savings and loan holding company
pursuant to an application pending before the OTS on or before May 4, 1999 (a
"grandfathered company"), is generally not subject to any restrictions on the
types of 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"). A savings and loan holding company
that controls only one savings association subsidiary but is not a
grandfathered company is subject to certain restrictions on the non-banking
activities in which it may engage (see "Recent Regulatory Developments"). In
all cases, however, if, the OTS determines that there is reasonable cause to
believe that the continuation by a savings and loan holding company of a
particular activity constitutes a serious risk to the financial safety,
soundness or stability of its savings association subsidiary, the OTS may
require the holding company to cease engaging in the activity (or divest any
subsidiary which engages in the activity) or may impose such restrictions on
the holding company and the subsidiary savings association as the OTS deems
necessary to address the risk. The restrictions the OTS may impose include
limitations on (i) the payment of dividends by the savings association to the
holding company, (ii) transactions between the savings association and its
affiliates and (iii) any activities of the savings association that might
create a serious risk that liabilities of the holding company and its
affiliates may be imposed on the savings association.
Federal law also prohibits any person or company from acquiring control of a
savings association or a savings and loan holding company without prior notice
to the appropriate federal bank regulator. Control is defined generally to
mean the acquisition of 25% or more of the outstanding shares of voting stock
of a savings association or savings and loan holding company. Under certain
circumstances, however, a person or company may be presumed (subject to
rebuttal) to have acquired control of a savings association or savings and loan
holding company as a result of the acquisition of 10% or more of the
outstanding shares of voting stock of the savings association or savings and
loan holding company.
DIVIDENDS. The Delaware General Corporation Law (the "DGCL") allows the
Company to pay dividends only out of its surplus (as defined and computed in
accordance with the provisions of the DGCL) or if the Company has no such
surplus, out of its net profits for the fiscal year in which the dividend is
declared and/or the preceding fiscal year. Additionally, OTS policies provide
that a savings and loan holding company should not pay dividends that are not
supportable by the company's core earnings or that may be funded only by
borrowings or by sales of assets. The OTS also possesses enforcement powers
over savings and loan holding companies to prevent or remedy actions that
represent unsafe or unsound practices or violations of applicable statutes and
regulations. Among these powers is the ability to 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 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
39
SEC under the Exchange Act.
THE BANK
GENERAL. The Bank is a federally chartered savings association, the deposits
of which are insured by the FDIC's Savings Association Insurance Fund ("SAIF").
As a 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 the semi-annual assessment period which began January 1, 1999, SAIF
assessments ranged from 0% of deposits to 0.27% of deposits. For the semi-
annual assessment period which began July 1, 1999, SAIF assessment rates
continue to range from 0% of deposits to 0.27% of deposits.
The FDIC may terminate the deposit insurance of any insured depository
institution if the FDIC determines, after a hearing, that the institution (i)
has engaged or is engaging in unsafe or unsound practices, (ii) is in an unsafe
or unsound condition to continue operations or (iii) has violated any
applicable law, regulation, order, or any condition imposed in writing by, or
written agreement with, the FDIC. The FDIC may also suspend deposit insurance
temporarily during the hearing process for a permanent termination of insurance
if the institution has no tangible capital. Management of the 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 Financing Corporation ("FICO"). FICO was
created in 1987 to finance the recapitalization of the Federal Savings and Loan
Insurance Corporation, the SAIF's predecessor insurance fund. As a result of
federal legislation enacted in 1996, beginning as of January 1, 1997, both SAIF
members and members of the FDIC's Bank Insurance Fund ("BIF") became subject to
assessments to cover the interest payments on outstanding FICO obligations.
These FICO assessments are in addition to amounts assessed by the FDIC for
deposit insurance. 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 final maturity of the
outstanding FICO obligations in 2019, BIF members and SAIF members will share
the cost of the interest on the FICO bonds on a pro rata basis. During the
year ended September 30, 1999, the FICO assessment rate for SAIF members ranged
between approximately 0.058% of deposits and approximately 0.061% of deposits,
while the FICO assessment rate for BIF members ranged between approximately
0.012% of deposits and approximately 0.013% of deposits. During the year ended
40
September 30, 1999, the Bank paid FICO assessments totaling $201,000.
SUPERVISORY ASSESSMENTS. All Federal savings associations are required to pay
supervisory assessments to the OTS to fund the operations of the OTS. The
amount of the assessment is calculated using a formula which takes into account
the institution's size, its supervisory condition (as determined by the
composite rating assigned to the institution as a result of its most recent OTS
examination) and the complexity of its operations. During the year ended
September 30, 1999, the Bank paid supervisory assessments to the OTS totaling
$107,000.
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% for the most highly rated institutions, with
a minimum required ratio of 4% for all others; a tangible capital requirement,
consisting of a minimum ratio of tangible capital to total assets of 1.5%; and
a risk-based capital requirement, consisting of a minimum ratio of total
capital to total risk-weighted assets of 8%, at least one-half of which must
consist of core capital. Core capital consists primarily of permanent
stockholders' equity less (i) intangible assets other than certain supervisory
goodwill, certain mortgage servicing rights and certain purchased credit card
relationships and (ii) investments in subsidiaries engaged in activities not
permitted for national banks. Tangible capital is substantially the same as
core capital except that all intangible assets other than certain mortgage
servicing rights must be deducted. Total capital consists primarily of core
capital plus certain debt and equity instruments that do not qualify as core
capital and a portion of the Bank's allowances for loan and 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
of, among other things, interest rate risk or the risks posed by concentrations
of credit or nontraditional activities.
During the year ended September 30, 1999, 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, 1999, the Bank exceeded its minimum
regulatory capital requirements with a core capital ratio of 6.89%, a tangible
capital ratio of 6.89% and a risk-based capital ratio of 14.71%.
Federal law provides the federal banking regulators with broad power to take
prompt corrective action to resolve the problems of undercapitalized
institutions. The extent of the regulators' powers depends on whether the
institution in question is "well capitalized," "adequately capitalized,"
"undercapitalized," "significantly undercapitalized" or "critically
undercapitalized," in each case as defined by regulation. Depending upon the
capital category to which an institution is assigned, the regulators'
corrective powers include: requiring the institution to submit a capital
restoration plan; limiting the institution's asset growth and restricting its
activities; requiring the institution to issue additional capital stock
(including additional voting stock) or to be acquired; restricting transactions
between the institution and its 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;
41
prohibiting the payment of principal or interest on subordinated debt; and
ultimately, appointing a receiver for the institution. As of September 30,
1999, the Bank was well capitalized, as defined by OTS regulations.
DIVIDENDS. OTS regulations require prior OTS approval for any capital
distribution by a savings association that is not eligible for expedited
processing under the OTS's application processing regulations. In order to
qualify for expedited processing, a savings association must: (i) have a
composite examination rating of 1 or 2; (ii) have a Community Reinvestment Act
rating of satisfactory or better; (iii) have a compliance rating of 1 or 2;
(iv) meet all applicable regulatory capital requirements; and (v) not have been
notified by the OTS that it is a problem association or an association in
troubled condition. Savings associations that qualify for expedited processing
are not required to obtain OTS approval prior to making a capital distribution
unless: (a) the amount of the proposed capital distribution, when aggregated
with all other capital distributions during the same calendar year, will exceed
an amount equal to the association's year-to-date net income plus its retained
net income for the preceding two years; (b) after giving effect to the
distribution, the association will not be at least "adequately capitalized" (as
defined by OTS regulation); or (c) the distribution would violate a prohibition
contained in an applicable statute, regulation or agreement with the OTS or the
FDIC or violate a condition imposed in connection with an OTS-approved
application or notice. The OTS be given prior notice of certain types of
capital distributions, including any capital distribution by a savings
association that, like the Bank, is a subsidiary of a savings and loan holding
company, or by a savings association that, after giving effect to the
distribution, would not be "well-capitalized" (as defined by OTS regulation).
The payment of dividends by any financial institution or its holding company is
affected by the requirement to maintain adequate capital pursuant to applicable
capital adequacy guidelines and regulations, and a financial institution
generally is prohibited from paying any dividends if, following payment
thereof, the institution would be undercapitalized. As described above, the
Bank exceeded its minimum capital requirements under applicable guidelines as
of September 30, 1999. Further, under applicable regulations of the OTS, the
Bank may not pay dividends in an amount which would reduce its capital below
the amount required for the liquidation account established in connection with
the Bank's conversion from the mutual to the stock form of ownership in 1993.
Notwithstanding the availability of funds for dividends, however, the OTS may
prohibit the payment of any dividends by the Bank if the OTS determines such
payment would constitute an unsafe or unsound practice.
INSIDER TRANSACTIONS. The Bank is subject to certain restrictions imposed by
federal law on extensions of credit to the Company and the Bank, on investments
in the stock or other securities of the Company and the Bank and the acceptance
of the stock or other securities of the Company or the Bank 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 the Bank, 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 the Bank
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,
42
internal audit systems, loan documentation, credit underwriting, interest rate
exposure, asset growth, compensation, fees and benefits, asset quality and
earnings. In addition, in October 1998, the federal banking regulators issued
safety and soundness standards for achieving Year 2000 compliance, including
standards for developing and managing Year 2000 project plans, testing
remediation efforts and planning for contingencies.
In general, the safety and soundness guidelines prescribe the goals to be
achieved in each area, and each institution is responsible for establishing its
own procedures to achieve those goals. If an institution fails to comply with
any of the standards set forth in the guidelines, the institution's primary
federal regulator may require the institution to submit a plan for achieving
and maintaining compliance. If an institution fails to submit an acceptable
compliance plan, or fails in any material respect to implement a compliance
plan that has been accepted by its primary federal regulator, the regulator is
required to issue an order directing the institution to cure the deficiency.
Until the deficiency cited in the regulator's order is cured, the regulator may
restrict the institution's rate of growth, require the institution to increase
its capital, restrict the rates the institution pays on deposits or require the
institution to take any action the regulator deems appropriate under the
circumstances. Noncompliance with the standards established by the safety and
soundness guidelines may also constitute grounds for other enforcement action
by the federal banking regulators, including cease and desist orders and civil
money penalty assessments.
BRANCHING AUTHORITY. Federally chartered savings associations which qualify as
"domestic building and loan associations," as defined in the Internal Revenue
Code, or meet the qualified thrift lender test (see "-The Bank -- Qualified
Thrift Lender Test") have the authority, subject to receipt of OTS approval, to
establish or acquire branch offices anywhere in the United States. If a
federal savings association fails to qualify as a "domestic building and loan
association," as defined in the Internal Revenue Code, and fails to meet the
qualified thrift lender test the association may branch only to the extent
permitted for national banks located in the savings association's home state.
As of September 30, 1999, the Bank qualified as a "domestic building and loan
association," as defined in the Internal Revenue Code and met the qualified
thrift lender test.
QUALIFIED THRIFT LENDER TEST. The HOLA requires every savings association to
satisfy a "qualified thrift lender" ("QTL") test. Under the HOLA, a savings
association will be deemed to meet the QTL test if it either (i) maintains at
least 65% of its "portfolio assets" in "qualified thrift investments" on a
monthly basis in nine out of every 12 months or (ii) qualifies as a "domestic
building and loan association," as defined in the Internal Revenue Code. For
purposes of the QTL test, "qualified thrift investments" consist of mortgage
loans, mortgage-backed securities, education loans, small business loans,
credit card loans and certain other housing and consumer-related loans and
investments. "Portfolio assets" consist of a savings association's total
assets less goodwill and other intangible assets, the association's business
properties and a limited amount of the liquid assets maintained by the
association pursuant to 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 operations and activities.
Additionally, within one year following the loss of QTL status, the holding
company for the savings association will be required to register as, and will
be deemed to be, a bank holding company. A savings association that fails the
QTL test may requalify as a QTL but it may do so only once. As of September
30, 1999, the Bank satisfied the QTL test, with a ratio of qualified thrift
43
investments to portfolio assets of 98.60%, 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, 1999, the Bank was in compliance with OTS liquidity requirements,
with a liquidity ratio of 14.83%.
FEDERAL RESERVE SYSTEM. Federal Reserve regulations, as presently in effect,
require depository institutions to maintain non-interest earning reserves
against their transaction accounts (primarily NOW and regular checking
accounts), as follows: for transaction accounts aggregating $44.3 million or
less, the reserve requirement is 3% of total transaction accounts; and for
transaction accounts aggregating in excess of $44.3 million, the reserve
requirement is $1.329 million plus 10% of the aggregate amount of total
transaction accounts in excess of $44.3 million. The first $5.0 million of
otherwise reservable balances are exempted from the reserve requirements.
These reserve requirements are subject to annual adjustment by the Federal
Reserve. The Bank is in compliance with the foregoing requirements. The
balances used to meet the reserve requirements imposed by the Federal Reserve
may be used to satisfy liquidity requirements imposed by the OTS.
IMPACT OF INFLATION AND CHANGING PRICES
The Company's financial statements and notes thereto presented herein have been
prepared in accordance with GAAP, which generally require the measurement of
financial position and operating results in terms of historical dollars without
considering the changes in the relative purchasing power of money over time due
to inflation. The impact of inflation is reflected in the increased cost of
the Company's operations. Unlike industrial companies, nearly all of the
assets and liabilities of the Company are monetary in nature. As a result,
interest rates have a greater impact on the Company's performance than do the
effects of general levels of inflation. Interest rates do not necessarily move
in the same direction or to the same extent as the price of goods and services.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET 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 300 basis points either up or down
in 100 basis point increments. The NPV is defined as the present value of
expected cash flows from existing assets less the present value of expected
cash flows from existing liabilities plus the present value of net expected
cash inflows from existing off-balance sheet contracts.
44
The OTS provides all institutions that file a Consolidated Maturity/Rate
schedule (CMR) as a part of their quarterly Thrift Financial Report with an
interest rate sensitivity report of NPV. The OTS simulation model uses a
discounted cash flow analysis and an option-based pricing approach to measuring
the interest rate sensitivity of NPV. The OTS model estimates the economics
value of each type of asset, liability, and off-balance sheet contact under the
assumption that the Treasury yield curve shifts instantaneously and parallel up
and down 100 to 300 basis points in 100 basis point increments. The OTS
provides thrifts the results of their interest rate sensitivity model, which is
based on information provided by the Bank, to estimate the sensitivity of NPV.
The OTS model utilizes an option-based pricing approach to estimate the
sensitivity of mortgage loans. The most significant embedded option in these
types of assets is the prepayment option of the borrowers. The OTS model uses
various price indications and prepayment assumptions to estimate sensitivity of
mortgage loans.
In the OTS model, the value of deposit accounts appears on the asset and
liability side of the NPV analysis. In estimating the value of certificate of
deposit accounts, the liability portion of the CD is represented by the implied
value when comparing the difference between the CD face rate and available
wholesale CD rates. On the asset side of the NPV calculation, the value of the
"customer relationship" due to the rollover of retail CD deposits represents an
intangible asset in the NPV calculation.
Other deposit accounts such as transaction accounts, money market deposit
accounts, passbook accounts, and non-interest bearing accounts also are
included on the asset and liability side of the NPV calculation in the OTS
model. The accounts are valued at 100% of the respective account balances on
the liability side. On the assets side of the analysis, the value of the
"customer relationship" of the various types of deposit accounts is reflected
as a deposit intangible.
The NPV sensitivity of borrowed funds is estimated by the OTS model based on a
discounted cash flow approach. The cash flows are assumed to consist of
monthly interest payments with principal paid at maturity.
45
The OTS model is based only on the Bank's balance sheet. The assets and
liabilities at the parent company level are short-term in nature, primarily
cash and equivalents, and were not considered in the analysis because they
would not have a material effect on the analysis of NPV sensitivity. The
following table sets forth the Company's interest rate sensitivity of NPV as of
September 30, 1999.
Net Portfolio Value as a %
Net Portfolio Value of Present Value of Assets
------------------------------ --------------------------
Changes in
Rates $ Amount $ Change % Change NPV Ratio Change
- ---------- --------- -------- -------- --------- ---------
+ 300 bp 20,114 (37,422) (65)% 3.54% - 582 bp
+ 200 bp 34,032 (23,503) (41)% 5.82% - 354 bp
+ 100 bp 46,911 (10,625) (18)% 7.82% - 154 bp
0 bp 57,536 9.36%
- 100 bp 65,362 7,826 14 % 10.49% + 113 bp
- 200 bp 74,587 17,051 30 % 11.75% + 238 bp
- 300 bp 85,337 27,801 48 % 13.16% + 380 bp
46
ITEM 8. FINANCIAL STATEMENTS and SUPPLEMENTARY DATA
CONSOLIDATED STATEMENTS of FINANCIAL CONDITION
(Dollars in thousands)
September 30, 1999 and 1998
ASSETS 1999 1998
Cash and due from banks $ 2,714 1,320
Interest-earning deposits 576 555
Federal funds sold 100 100
FHLB of Chicago stock, at cost 9,615 6,510
Mortgage-backed securities held to maturity, at amortized cost
(approximate fair value of $3,637 and $11,513 at
September 30, 1999 and 1998) 3,585 11,177
Investment securities available for sale, at fair value 66,070 58,979
Loans receivable, net of allowance for loan losses of $780 and $591
at September 30, 1999 and 1998 507,557 425,608
Accrued interest receivable 3,665 3,547
Real estate in foreclosure - 131
Premises and equipment 4,202 4,401
Deposit base intangible 34 66
Other assets 1,163 1,169
-------- -------
$ 599,281 513,563
======== =======
LIABILITIES and STOCKHOLDERS' EQUITY
LIABILITIES
Deposits 357,016 330,670
Borrowed funds 186,250 121,400
Advance payments by borrowers for taxes and insurance 7,986 6,919
Other liabilities 6,008 5,977
-------- -------
Total liabilities 557,260 464,966
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; 2,207,846 and 2,701,784 shares outstanding
at September 30, 1999 and 1998, respectively 38 38
Additional paid-in capital 38,690 38,117
Retained earnings, substantially restricted 33,771 30,646
Treasury stock, at cost (1,574,504 and 1,192,566 shares at
September 30, 1998 and 1997, respectively) (28,168) (19,210)
Common stock acquired by Employee Stock Ownership Plan (632) (1,092)
Common stock acquired by Bank Recognition and Retention Plans (198) (242)
Accumluated other comprehensive income (loss) (1,480) 340
-------- -------
Total stockholders' equity 42,021 48,597
-------- -------
Commitments and contingencies
$599,281 513,563
======== =======
See accompanying notes to consolidated financial statements.
47
CONSOLIDATED STATEMENTS of EARNINGS
(Dollars in thousands, except per share data)
Years ended September 30, 1999, 1998, and 1997
1999 1998 1997
INTEREST INCOME:
Loans receivable $ 33,787 30,231 28,468
Investment securities 4,951 4,759 5,813
Mortgage-backed securities 506 1,018 1,387
Interest earning deposits 46 80 60
Federal funds sold 4 22 19
Investment in dollar-denominated mutual funds - 17 168
------- ------ ------
39,294 36,127 35,915
INTEREST EXPENSE:
Deposits 15,070 15,936 15,929
Borrowed funds 8,692 5,900 5,541
------- ------ ------
23,762 21,836 21,470
Net interest income before provision for loan losses 15,532 14,291 14,445
Provision for loan losses 165 181 64
------- ------ ------
Net interest income after provision for loan losses 15,367 14,110 14,381
NON-INTEREST INCOME:
Fees and commissions 374 332 341
Insurance and annuity commissions 721 717 700
Other 51 58 62
------- ------ ------
1,146 1,107 1,103
NON-INTEREST EXPENSE:
General and administrative expenses:
Salaries and employee benefits 5,784 5,682 5,366
Office occupancy and equipment 1,512 1,293 1,203
Data processing 498 524 482
Advertising and promotions 399 263 515
Federal deposit insurance premiums 211 221 325
Other 1,404 1,216 1,346
Amortization of deposit base intangible 32 41 51
Loss on (recovery of) impairment of investment securities
available for sale - (22) 2,978
------- ------ ------
9,840 9,218 12,266
Income before income taxes 6,673 5,999 3,218
Income tax expense 2,543 2,219 2,293
------- ------ ------
NET INCOME $ 4,130 3,780 925
======= ====== ======
Earnings per share - basic $1.85 1.41 0.35
Earnings per share - diluted $1.76 1.33 0.33
See accompanying notes to consolidated financial statements.
48
CONSOLIDATED STATEMENTS of CHANGES IN STOCKHOLDERS' EQUITY
(Dollars in thousands)
Years ended September 30, 1999, 1998, and 1997
Accumu-
Common lated Other
Common Stock Compre-
Additional Stock Acquired hensive
Common Paid-in Retained Treasury Acquired By Income
Stock Capital Earnings Stock By ESOP By BRRP's (loss) Total
Balance at September 30, 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 ($.24 per share) - - (837) - - - - (837)
Amortization of award of BRRP
stock - - - - - 237 - 237
Cost of ESOP shares released - - - - 416 - - 416
Exercise of stock options and
reissuance of treasury shares
(10,900 shares) - (44) - 153 - - - 109
Tax benefit related to vested
BRRP stock - 78 - - - - - 78
Tax benefit related to stock
options exercised - 38 - - - - - 38
Market adjustment for committed
ESOP shares - 343 - - - - - 343
Change in accumualted other
comprehensive income - - - - - - 869 869
--- ------ ------- ------ ------ ------ ----- ------
Balance at September 30, 1997 38 37,494 27,939 (13,855) (1,662) (471) 134 49,617
Net income - - 3,780 - - - - 3,780
Purchase of treasury stock
(254,000 shares) - - - (5,896) - - - (5,896)
Cash dividends ($.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 accumualted other
comprehensive income - - - - - - 206 206
--- ------ ------- ------ ------ ------ ----- ------
Balance at September 30, 1998 38 38,117 30,646 (19,210) (1,092) (242) 340 48,597
Net income - - 4,130 - - - - 4,130
Purchase of treasury stock
(402,426 shares) - - - (9,312) - - - (9,312)
Cash dividends ($.43 per share) - - (1,005) - - - - (1,005)
Amortization of award of BRRP
stock - - - - - 44 - 44
Cost of ESOP shares released - - - - 460 - - 460
Exercise of stock options and
reissuance of treasury shares
(20,488 shares) - (145) - 354 - - - 209
Tax benefit related to vested
BRRP stock - 154 - - - - - 154
Tax benefit related to stock
options exercised - 62 - - - - - 62
Market adjustment for committed
ESOP shares - 502 - - - - - 502
Change in accumualted other
comprehensive loss - - - - - - (1,820) (1,820)
--- ------ ------- ------ ------ ------ ----- ------
Balance at September 30, 1999 $38 38,690 33,771 (28,168) (632) (198) (1,480) 42,021
=== ====== ======= ====== ====== ====== ===== ======
See accompanying notes to consolidated financial statements.
49
CONSOLIDATED STATEMENTS of CASH FLOWS
(Dollars in thousands)
Years ended September 30, 1999 1998 1997
Cash flows from operating activities:
Net income $ 4,130 3,780 925
Adjustment to reconcile net income to net cash provided by
operating activities:
Depreciation 447 352 351
Deferred income taxes 9 (103) 925
Provision for loan losses 165 181 64
Net amortization and accretion of premiums and discounts 3 (37) (5)
Amortization of cost of stock benefit plans 44 229 237
Principal payment on ESOP loan 460 570 416
Market adjustment for committed ESOP shares 502 571 343
Deferred loan costs, net of amortization (634) (283) (485)
Amortization of deposit base intangible 32 41 51
Loss on (recovery of) impairment of investment securities
available for sale - (22) 2,978
Proceeds from sale of real estate owned 438 702 245
Gain on sale of real estate owned (45) (24) -
Increase in accrued interest receivable (118) (102) (246)
Increase in other assets, net 46 (77) (175)
Increase (decrease) in other liabilities, net 1,316 (796) (1,225)
------ ----- ------
NET CASH PROVIDED by OPERATING ACTIVITIES 6,795 4,982 4,399
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities of investment securities
available for sale 30,000 67,518 30,000
Proceeds from redemption of Federal Home Loan Bank of Chicago stock 740 1,390 935
Purchase of Federal Home Loan Bank of Chicago stock (3,845) (2,200) (840)
Purchase of investment securities available for sale (39,951) (58,436) (28,466)
Loans originated for investment (196,859) (142,788) (97,774)
Purchase of loans receivable - (2,378) -
Purchase of premises and equipment (248) (1,160) (164)
Principal repayments collected on loans receivable 115,038 107,354 64,261
Principal repayments collected on investment securities
available for sale - 2,649 4,717
Principal repayments collected on mortgage-backed
securities held to maturity 7,590 5,689 4,781
------ ----- ------
NET CASH USED IN INVESTING ACTIVITIES (87,535) (22,362) (22,550)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits 26,346 7,227 20,509
Net increase (decrease) in borrowed funds 64,850 8,000 (1,900)
Net increase (decrease) in advance payments by borrowers for
taxes and insurance 1,067 4,722 244
Purchase of treasury stock (9,312) (5,896) (1,389)
Payment of common stock dividends (1,005) (1,073) (837)
Proceeds from exercise of stock options 209 371 109
------ ----- ------
NET CASH PROVIDED BY FINANCING ACTIVITIES 82,155 13,351 16,736
------ ----- ------
Net change in cash and cash equivalents 1,415 (4,029) (1,415)
Cash and cash equivalents at beginning of year 1,975 6,004 7,419
------ ----- ------
Cash and cash equivalents at end of year $ 3,390 1,975 6,004
====== ===== ======
CASH PAID DURING THE YEAR FOR:
Interest $ 23,256 21,820 21,416
Income taxes 1,955 2,459 1,081
NON-CASH INVESTING ACTIVITIES - Loans transferred to real
estate in foreclosure 262 1,163 359
See accompanying notes to consolidated financial statements.
50
(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.
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 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.
51
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, 1999 and
1998 was $478,000 and $446,000, respectively.
52
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 years ended September 30, 1999 and
1998 has been calculated according to the guidelines of Statement 128 and
earnings per share of common stock for the year ended September 30, 1997 has
been restated to conform with Statement 128.
53
Diluted earnings per share for the years ended September 30, 1999, 1998 and
1997 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 2,352,128, 2,839,225 and 2,804,445, respectively. Stock options are
the only potential common stock and are therefore considered in the diluted
earnings per share calculations. Potential common stock is computed using the
treasury stock method.
(2) MORTGAGE-BACKED SECURITIES HELD TO MATURITY
Mortgage-backed securities held to maturity are summarized as follows:
1999 1998
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 $ 3,585 52 - 3,637 11,177 336 - 11,513
There were no sales of mortgage-backed securities held to maturity during the
years ended September 30, 1999, 1998 and 1997.
(3) INVESTMENT SECURITIES AVAILABLE FOR SALE
Investment securities available for sale are summarized as follows:
1999 1998
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 $ - - - - - - - -
After one year
to five years - - - - 9,992 63 - 10,055
After 5 years
to 10 years 68,428 - 2,358 66,070 48,447 477 - 48,924
-------- ---- ----- ------- ------- ---- --- -------
68,428 - 2,358 66,070 58,439 540 - 58,979
======== ==== ===== ======= ======= ==== ===== ======
There were no sales of investment securities available for sale in 1999, 1998
and 1997. 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.
54
(4) LOANS RECEIVABLE
Loans receivable are summarized as follows at September 30:
1999 1998
(in thousands)
One-to-four family mortgages $ 388,586 324,265
Multifamily mortgages 100,412 83,084
Commercial 2,577 3,295
Commercial leases - 30
Consumer loans 14,016 13,358
--------- --------
Gross loans receivable 505,591 424,032
Less:
Loans in process (16) (1)
Deferred loan costs 2,816 2,182
Allowance for losses on loans (780) (591)
Unearned discount on consumer loans (54) (14)
--------- --------
$ 507,557 425,608
========= ========
Weighted average interest rate 7.47% 7.64%
====== ======
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, 1999, 1998, and 1997 were approximately
$7,314,000, $9,845,000, and $12,524,000, respectively. Custodial balances
maintained in connection with the mortgage loans serviced for others were
included in deposits at September 30, 1999, 1998, and 1997, and were
approximately $298,000, $381,000, and $233,000, respectively. Service fee
income for the years ended September 30, 1999, 1998, and 1997 was $29,000,
$35,000, and $60,000, respectively.
Activity in the allowance for loan losses is summarized as follows for the
years ended September 30:
1999 1998 1997
(in thousands)
Balance at beginning of year $ 591 460 810
Provision for loan losses 165 181 64
Charge-offs:
Loans receivable (8) (51) (19)
Commercial leases - - (406)
Recoveries 32 1 11
----- ---- ----
Balance at end of year $ 780 591 460
===== ==== ====
55
Non-accrual loans receivable were as follows:
Principal Percent of
Balance total loans
Number in thousands) receivable
September 30, 1999:
Loans receivable 10 $ 343 0.07%
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%
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, 1999, there were no loans considered to
be impaired. At September 30, 1998, the recorded investment in loans
considered to be impaired was $30,000, 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. On March 29,
1996, BFG filed a Chapter 11 bankruptcy petition in the Northern District of
New York and halted payments on lease agreements. 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. Throughout fiscal 1999, the Bank received
$58,000 in repayment of the balance of $30,000 in lease receivables at
September 30, 1998, thus recovering $28,000 of the 1997 charge-off of $406,000.
There will be no further recoveries per the terms of the settlement agreement.
On September 30, 1998, the Bank's $30,000 of commercial equipment leases
originated by BFG met the criteria for impaired loans. The average recorded
investment in impaired loans for the year ended September 30, 1998 was
$198,000. There was no related allowance for impaired loans at September 30,
1998. There was no income recorded in 1998.
56
(5) ACCRUED INTEREST RECEIVABLE
Accrued interest receivable is summarized as follows at September 30:
1999 1998
(in thousands)
Loans receivable $ 2,353 2,335
Mortgage-backed securities 22 67
Investment securities available for sale 1,304 1,179
Reserve for uncollected interest (14) (34)
------ -----
$ 3,665 3,547
====== =====
(6) PREMISES AND EQUIPMENT
Premises and equipment are summarized as follows at September 30:
1999 1998
(in thousands)
Land $ 815 803
Buildings 3,888 3,790
Leasehold improvements 1,426 1,383
Furniture, fixtures, and equipment 3,806 3,983
------ -----
9,935 9,959
Less accumulated depreciation and amortization 5,733 5,558
------ -----
$ 4,202 4,401
====== =====
Depreciation and amortization of premises and equipment for the years ended
September 30, 1999, 1998 and 1997 was $447,000, $352,000, and $351,000,
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, 1999, 1998, and 1997
approximated $136,000, $144,000, and $145,000, respectively. The projected
minimum rentals under existing leases as of September 30, 1999 are as follows:
Year ended September 30, Amount
2000 133,000
2001 134,000
2002 135,000
2003 99,000
2004 105,000
Thereafter 445,000
---------
Total $ 1,051,000
=========
57
(7) DEPOSITS
Deposits are summarized as follows at September 30:
1999 1998
Stated or Stated or
Weighted Percent Weighted Percent
Average of total Average of total
Rate Amount deposits Rate Amount deposits
(Dollars in thousands)
Passbook accounts 3.70% $127,415 35.7% 4.16% $126,901 38.4%
NOW accounts 2.22 22,962 6.4 2.25 21,953 6.6
Money market and
management accounts 3.82 16,100 4.5 4.03 17,462 5.3
---- ------- ---- ----- ------ -----
166,477 46.6 166,316 50.3
Certificate accounts:
91-day certificates 4.40 2,160 0.6 4.95 2,589 0.8
6-month certificates 4.67 10,503 3.0 5.25 18,095 5.5
7-month certificates 5.03 31,955 9.0 5.32 4,662 1.4
8-month certificates 4.63 5,125 1.4 5.69 39,875 12.1
10-month certificates 5.40 45,000 12.6 5.44 17,876 5.4
12-month certificates 4.87 18,600 5.2 5.63 28,263 8.5
13-month certificates 5.75 35,610 10.0 5.59 3,984 1.2
15-month certificates 4.90 12,475 3.5 5.64 15,377 4.7
24-month certificates 5.28 10,170 2.8 5.78 11,967 3.6
36-month certificates 5.65 6,843 1.9 5.82 7,533 2.3
36-month rising rate
certificates 5.17 3,959 1.1 5.29 4,578 1.4
60-month certificates 6.01 8,139 2.3 5.91 9,455 2.8
Other certificates - - - 5.50 100 -
---- ------- ---- ----- ------- -----
190,539 53.4 164,354 49.7
------- ---- ------- -----
4.49 $357,016 100.0% 4.78% 330,670 100.0%
==== ======= ===== ===== ======= =====
The contractual maturities of certificate accounts are as follows at September
30:
1999 1998
Amount Percent Amount Percent
(in thousands) (in thousands)
Under 12 months $ 165,143 86.7% 141,484 86.1
12 to 36 months 21,590 11.3 19,149 11.7
Over 36 months 3,806 2.0 3,721 2.2
--------- ----- ------- -----
$ 190,539 100.0% 164,354 100.0
========= ===== ======= =====
The aggregate amount of certificate accounts with a balance of $100,000 or
greater at September 30, 1999 and 1998 was approximately $26,623,000 and
$24,513,000, respectively.
58
Interest expense on deposit accounts is summarized as follows for the years
ended September 30:
1999 1998 1997
(in thousands)
NOW accounts $ 368 359 304
Money market and management accounts 675 744 773
Passbook accounts 5,063 4,522 3,402
Certificate accounts 8,964 10,311 11,450
------ ------ ------
$ 15,070 15,936 15,929
====== ====== ======
(8) BORROWED FUNDS
Borrowed funds are summarized as follows at September 30:
Interest rate Amount
1999 1998 1999 1998
(in thousands)
Secured advances from the
FHLB of Chicago:
Fixed rate advances due:
January 5, 2000 5.65% 5.65 $ 24,000 24,000
February 21, 2000 5.48 5.48 25,000 25,000
August 8, 2000 5.60 5.60 20,000 20,000
August 17, 2001 5.63 5.63 30,000 30,000
Open line advance, due on demand variable 87,250 22,400
---- ----- ------- -------
$ 186,250 121,400
======= =======
Weighted average rate 5.56% 5.69
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 FHLB of Chicago.
All stock in the FHLB of 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
59
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, 1999, the Company and Bank met the capital adequacy requirements
to which they are subject.
The most recent notification, July 1999, 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.
The Company's and the Banks actual capital amounts and ratios as of September
30, 1999 and 1998 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, 1999
Total capital
(to risk weighted assets):
Consolidated $42,021 14.66% n/a n/a n/a n/a
Fidelity Federal Savings Bank 40,855 14.26 22,922 8.00 28,653 10.00
Tier 1 capital
(to risk weighted assets):
Consolidated 42,521 14.84 n/a n/a n/a n/a
Fidelity Federal Savings Bank 41,355 14.43 n/a n/a 17,192 6.00
Tier 1 capital
(to adjusted assets):
Consolidated 42,521 7.08 n/a n/a n/a n/a
Fidelity Federal Savings Bank 41,355 6.89 17,999 3.00 29,999 5.00
Tangible capital
Consolidated 42,521 7.08 n/a n/a n/a n/a
Fidelity Federal Savings Bank 41,355 6.89 9,000 1.50 n/a n/a
60
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
(10) INCOME TAXES
Income tax expense is summarized as follows for the years ended September 30:
1999 1998 1997
(in thousands)
Current:
Federal $ 2,388 1,978 1,282
State 146 344 86
------ ----- -----
Total current 2,534 2,322 1,368
Deferred:
Federal 7 (84) 754
State 2 (19) 171
------ ----- -----
Total deferred 9 (103) 925
------ ----- -----
$ 2,543 2,219 2,293
====== ===== =====
61
The reasons for the difference between the effective tax rate and the corporate
Federal income tax rate of 34% are detailed as shown below for the years ended
September 30:
1999 1998 1997
Federal income tax rate 34.0% 34.0 34.0
State income taxes, net of federal benefit 1.9 4.3 1.1
Decline in value of investment security - - 35.8
Other 2.1 (1.3) 0.3
------ ----- -----
Effective income tax rate 38.0% 37.0 71.2
Retained earnings at September 30, 1999 included $4 million of "base-year" tax
bad debt reserves for which no provision for federal or state income taxes has
been made. If in the future this amount, or a portion thereof, is used for
certain purposes, then a federal and state tax liability will be imposed on the
amount so used at the then current corporate income tax rates.
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and deferred tax liabilities are presented below at
September 30:
1999 1998
(in thousands)
Deferred tax assets:
Deferred compensation $ 20 16
Allowance for loan losses 302 229
Decline in value of investment security 1,106 1,106
Retirement and pension plans 485 383
----- -----
1,913 1,734
Less valuation allowance (1,106) (1,106)
----- -----
Deferred tax assets 807 628
Deferred tax liabilities:
Deferred loan fees and costs (1,784) (1,509)
FHLB stock, due to stock dividends (87) (87)
Property and equipment, due to depreciation (255) (195)
Tax bad debt reserves (710) (852)
Tax basis in partnership less than book (182) (188)
Unrealized gain on investment securities available for sale 914 (200)
Other (36) (35)
------ -----
Deferred tax liabilities (2,140) (3,066)
------ -----
Net deferred tax liability $(1,333) (2,438)
====== ======
The valuation allowance for deferred tax assets was $1,106,000 as of September
30, 1999 and 1998. 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.
62
(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,
1999, 1998, and 1997 was approximately $129,000, $112,000 and $123,000,
respectively.
Accumulated benefit obligation, projected benefit obligation, accrued pension
liability, and net periodic pension cost, as estimated by the consulting
actuary, and plan net assets as of August 31, the date of the latest actuarial
valuation, are as follows:
1999 1998
(in thousands)
Actuarial present value of accumulated benefit
obligation, including vested benefits of $993
and $840 in 1999 and 1998, respectively $ 1,036 888
===== ====
Actuarial present value of projected benefit obligation $(1,754) (1,537)
Plan assets at fair value 1,409 1,281
----- -----
Plan assets less than projected benefit obligation (346) (256)
----- -----
Unrecognized net gain (loss)from past experience different
from that assumed, and effects of changes in assumptions (101) (52)
Unrecognized prior service cost (39) (42)
----- -----
Unrecognized transition obligation, being recognized over
17 years (47) (54)
----- -----
Net accrued pension cost $ (533) (404)
===== ====
Net pension costs include the following components for the years ended
September 30:
1999 1998 1997
(in thousands)
Service cost - benefits earned during the period $ 139 128 128
Interest cost on projected benefit obligation 110 93 98
Actuarial return on plan assets (158) (13) (258)
Net gain on assets 48 (86) 165
Net amortization and deferral (10) (10) (10)
---- --- ---
Net periodic pension cost $ 129 112 123
==== === ===
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
63
benefit obligations during 1999, 1998, and 1997 was 7.25%. The expected long-
term rate of return on assets was 8.00% during 1999, 1998, and 1997. The rate
of increase in future compensation was 6.00% in 1999, 1998, and 1997.
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, 1999, 1998, and
1997 was approximately $129,000, $121,000, and $67,000, respectively.
(12) OFFICER, DIRECTOR, AND EMPLOYEE BENEFIT PLANS
EMPLOYEE STOCK OWNERSHIP PLAN (ESOP) In conjunction with the Bank's
conversion, the Bank formed an ESOP. The ESOP covers substantially all full-
time employees over the age of 21 and with more than one year of employment.
The ESOP borrowed $2.9 million from the Company and purchased 290,950 common
shares of the Company issued in the conversion. The Bank has committed to make
discretionary contributions to the ESOP sufficient to service the requirements
of the loan over a period not to exceed seven years. Compensation expense
related to the ESOP was $900,000, $1.1 million, and $600,000 for the years
ended September 30, 1999, 1998, and 1997, 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 $502,000, $571,000, and $343,000 in 1999, 1998, and 1997,
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 169,176
option grants exercisable at September 30, 1999 for the employees' plan.
Options issued to outside directors of the Company are immediately exercisable.
The Company applies APB 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
64
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:
1999 1998 1997
Net Income:
As reported $ 4,130 3,780 925
Pro forma 4,110 3,760 906
Earnings per share:
Basic:
As reported 1.85 1.41 0.35
Pro forma 1.84 1.40 0.34
Diluted:
As reported 1.76 1.33 0.33
Pro forma 1.75 1.32 0.32
Pro forma net income reflects only options granted in 1997, there were no
options granted in fiscal 1999 and 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 1999, 1998, and 1997:
1999 1998 1997
Dividend yield 1.96% 1.61% 1.57%
Risk-free interest rate 5.75% 4.25% 6.00%
Weighted average expected life 4.8 yrs 4.8 yrs 4.8 yrs
Expected volatility 23.38% 20.07% 25.28%
</ TABLE>
The weighted average per share fair values of options granted during 1997 were
$11.71.
65
A summary of the status of the Company's stock option transactions under the
Plan for the years ended September 30, 1999, 1998 and 1997 is presented below:
Employees' Plan Directors' Plan
Amount Exercise Amount Exercise
Price
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
Options exercised (16,988) 10.35 (3,500) 10.00
------- ----- ------- -----
Options outstanding at
September 30, 1999 171,876 $ 10.14 34,466 $ 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, 1999, 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, 1999, 1998, and 1997, 20,576, 22,575, and 26,206
shares, respectively, were vested and distributed to employees. For the years
ended September 30, 1999, 1998, and 1997, $44,000, $229,000, and $237,000,
respectively, was reflected as compensation expense.
(13) Comprehensive Income
In fiscal 1999, the Company adopted Statement of Financial Accounting Standards
No. 130, "Reporting Comprehensive Income" ("SFAS 130") which establishes
standards for reporting and the display of comprehensive income and its
components on a full set of general purpose financial statements. SFAS 130
requires all items to be recognized under standards as components of
comprehensive income be reported in a financial statement that is displayed in
equal prominence with other financial statements. The Company is required to
classify items of "other comprehensive income" by their nature in the financial
statements and display the balance of other comprehensive income separately in
the stockholders' equity section of the statement of financial condition.
66
Year ended September 30,
1999 1998 1997
Net Income $ 4,130 3,780 925
Comprehensive income, net of tax -
Unrealelized gain (loss) on securities
availble for sale arising during the year (1,820) 206 869
------ ----- -----
$ 2,310 3,986 1,794
====== ===== =====
(14) 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, 1999 and 1998 of $4.0
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
commitments to originate loans at September 30, 1999, $1.7 million represented
commitments for fixed rate loans with interest rates ranging from 7.50% to
9.00%.
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.
(15) 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
67
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, AND FEDERAL FUNDS SOLD For
these short-term instruments, the carrying value is a reasonable estimate of
fair value.
INVESTMENT SECURITIES The fair value of investment securities, which includes
investment securities, mortgage-backed securities, and FHLB of Chicago stock,
is the quoted market price, if available, or the quoted market price for
similar securities. FHLB of Chicago stock is recorded at redemption value,
which is equal to cost.
LOANS RECEIVABLE Fair values are estimated for portfolios of loans with
similar financial characteristics. Loans are segregated by type, such as one-
to-four family, multi-family, commercial, and consumer. For variable rate
loans that reprice frequently and for which 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, 1999 and 1998,
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, 1999 and 1998, 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.
68
The estimated fair value of the Company's financial instruments at September
30, 1999 and 1998 are as follows:
1999 1998
Net carrying Estimated Net carrying Estimated
amount fair value amount fair value
(in thousands)
FINANCIAL ASSETS:
Cash and due from banks $ 2,714 2,714 1,320 1,320
Interest-earning deposits 576 576 555 555
Federal funds sold 100 100 100 100
Investment securities 79,270 79,322 76,666 77,002
Loans receivable 508,337 499,109 426,199 435,230
Accrued interest receivable 3,665 3,665 3,547 3,547
------- ------- ------- -------
Total financial assets $ 594,662 585,486 508,387 517,754
======= ======= ======= =======
FINANCIAL LIABILITIES:
Noninterest-bearing deposits 6,385 6,385 5,892 5,892
NOW, money market and management,
and passbook accounts 160,092 160,092 160,424 160,424
Certificate accounts 190,539 189,986 164,354 164,968
Borrowed funds 186,250 186,003 121,400 122,797
Accrued interest payable 1,345 1,345 808 808
------- ------- ------- -------
Total financial liabilities $ 544,611 543,811 452,878 454,889
======= ======= ======= =======
(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-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.
69
(16) CONDENSED PARENT COMPANY ONLY FINANCIAL INFORMATION
The following condensed statements of financial condition as of September 30,
1999 and 1998 and condensed statements of earnings and cash flows for the three
years ended September 30, 1999 for Fidelity Bancorp, Inc. should be read in
conjunction with the consolidated financial statements and the notes thereto.
STATEMENT OF FINANCIAL CONDITION
September 30,
1999 1998
(in thousands)
ASSETS
Cash and cash equivalents $ 468 536
Equity investment in the Bank 43,166 48,118
Other assets 793 1,135
------- ------
$ 44,427 49,789
======= ======
LIABILITIES AND STOCKHOLDERS' EQUITY:
Accrued taxes and other liabilities 96 198
------- ------
STOCKHOLDERS' EQUITY:
Common stock 38 38
Additional paid-in capital 38,690 38,117
Retained earnings 33,771 30,646
Treasury stock (28,168) (19,210)
------- ------
Total Stockholders' equity 44,331 49,591
------- ------
$ 44,427 49,789
======= ======
STATEMENTS OF EARNINGS
Year ended September 30,
1999 1998 1997
(in thousands)
Equity in earnings of the Bank $ 4,358 3,890 3,818
Interest income 1 141 530
Recovery on (loss on) impairment
of investment securities - 22 (2,978)
Non-interest expense (359) (338) (344)
------ ----- -----
Income before income taxes 4,000 3,715 1,026
Income tax expense (130) (65) 101
------ ----- -----
Net income $ 4,130 3,780 925
====== ===== =====
70
STATEMENTS OF CASH FLOWS
Year ended September 30,
1999 1998 1997
(in thousands)
OPERATING ACTIVITIES:
Net income $ 4,130 3,780 925
Equity in undistributed
earnings of the Bank (4,358) (3,890) (3,818)
Dividends received from the Bank 9,864 2,330 1,391
Net amortization and accretion of
premiums and discounts - 1 -
Loss on (recovery of) impairment of
investment securities - (22) 2,978
Decrease (increase) in other assets (118) (51) 589
Increase (decrease) in accrued taxes and
other liabilities 62 (222) (330)
------ ----- -----
Net cash provided by operating activities 9,580 1,926 1,735
INVESTING ACTIVITIES:
Principal repayments collected
on investment securities - 1,134 1,616
Principal payment received on ESOP loan 460 570 416
------ ----- -----
Net cash provided by investing activities 460 1,704 2,032
5,302
FINANCING ACTIVITIES:
Purchase of treasury stock (9,312) (5,896) (1,389)
Payment of common stock dividends (1,005) (1,073) (837)
Proceeds from exercise of stock options 209 371 109
------ ----- -----
Net cash used in financing activities (10,108) (6,598) (2,117)
------- ----- -----
Net increase in cash and cash equivalents (68) (2,968) 1,650
Cash and cash equivalents at beginning
of year 536 3,504 1,854
------- ----- -----
Cash and cash equivalents at end of year $ 468 536 3,504
====== ===== =====
71
(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, 1999 Year ended September 30, 1998
1st Qtr 2nd Qtr 3rd Qtr 4th Qtr 1st Qtr 2nd Qtr 3rd Qtr 4th Qtr
(in thousands, except per share data)
Interest income $ 9,270 9,525 9,974 10,525 9,079 8,923 8,978 9,147
Interest expense 5,640 5,680 5,986 6,456 5,568 5,304 5,331 5,633
----- ----- ----- ----- ----- ----- ----- -----
Net interest income
before provision
for loan losses 3,630 3,845 3,988 4,069 3,511 3,619 3,647 3,514
Provision for loan
losses 25 15 55 70 46 15 90 30
----- ----- ----- ----- ----- ----- ----- -----
Net interest income
after provision for
loan losses 3,605 3,830 3,933 3,999 3,465 3,604 3,557 3,484
Other income 262 217 360 307 284 250 271 302
Non-interest expense 2,418 2,451 2,517 2,454 2,198 2,354 2,356 2,310
----- ----- ----- ----- ----- ----- ----- -----
Income before income tax
expense 1,449 1,596 1,776 1,852 1,551 1,500 1,472 1,476
Income tax expense 540 602 666 735 574 540 538 567
----- ----- ----- ----- ----- ----- ----- -----
Net income $ 909 994 1,110 1,117 977 960 934 909
===== ===== ===== ===== ===== ===== ===== =====
Earnings per share $ 0.36 0.42 0.48 0.49 0.34 0.34 0.32 0.33
==== ==== ==== ==== ===== ===== ===== =====
Cash dividends declared
per share $ 0.10 0.11 0.11 0.11 0.08 0.10 0.10 0.10
==== ==== ==== ==== ===== ===== ===== =====
72
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, 1999
and 1998, 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, 1999. 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, 1999 and 1998, and the results of their
operations and their cash flows for each of the years in the three-year period
ended September 30, 1999, in conformity with generally accepted accounting
principles.
KPMG LLP
Chicago, Illinois
October 22, 1999
73
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information relating to Directors and Executive Officers appears in the
Registrant's Proxy Statement for the Annual Meeting of Stockholders to be held
on January 26, 2000 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") appears in the Registrant's Proxy Statement for the Annual
Meeting of Stockholders to be held on January 26, 2000 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 appears in the Registrant's Proxy Statement for the Annual
Meeting of Stockholders to be held of on January 26, 2000 and is incorporated
herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information relating to certain relationships and related transactions
appears on pages 10, 11, and 12 of the Registrant's Proxy Statement for the
Annual Meeting of Stockholders to be held of on January 26, 2000 and is
incorporated herein by reference.
74
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
On September 30, 1999, the Company announced under item 4 that it engaged
Crowe, Chizek and Company LLP as its independent auditors for the fiscal
year ending September 30, 2000.
- -----------------
* 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.
75
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 17, 1999 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 17, 1999
- ------------------------- Officer
Raymond S. Stolarczyk
/s/ Thomas E. Bentel President and Chief December 17, 1999
- ------------------------- Operating Officer
Thomas E. Bentel
s/ James R. Kinney Senior Vice President and December 17, 1999
- ------------------------- Chief Financial Officer
James R. Kinney
/s/ Judith K. Leaf Corporate Secretary December 17, 1999
- -------------------------
Judith K. Leaf
/s/ Paul J. Bielat Director December 17, 1999
- -------------------------
Paul J. Bielat
/s/ Patrick J. Flynn Director December 17, 1999
- -------------------------
Patrick J. Flynn
/s/ Raymond J. Horvat Director December 17, 1999
- -------------------------
Raymond J. Horvat
/s/ Bonnie J. Stolarczyk Director December 17, 1999
- -------------------------
Bonnie J. Stolarczyk