FORM 10-KSB/A
Amendment No. 1
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.
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[ X ] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 ($250 FEE)
For the fiscal year ended September 30, 1996
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 (NO FEE REQUIRED)
For the transition period from _______ to _______
Commission File Number: 0-22288
FIDELITY BANCORP, INC.
(Name of Small Business Issuer in Its Charter)
Pennsylvania 25-1705405
(State or Other Jurisdiction Of (I.R.S. Employer
Incorporation or Organization Identification Number)
1009 Perry Highway
Pittsburgh, Pennsylvania 15237
(Address of Principal Executive Office) (Zip Code)
Registrant's telephone number, including area code: (412) 367-3300
Securities registered under Section 12(b) of the Exchange Act: Not applicable
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, $.01 par value
----------------------------
Title of Class
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 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 [ ]
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will 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-KSB or any
amendment to this Form 10-KSB. (X)
State the issuer's revenues for its most recent fiscal year: $21,718,000
<PAGE>
As of December 13, 1996, the aggregate market value of the 1,212,867 shares of
Common Stock of the Registrant issued and outstanding on such date, excluding
the 168,110 shares held by all directors of the Registrant and executive
officers of the Registrant and its subsidiaries as a group (excluding the
effects of unexercised stock options), was $23.0 million. This figure is based
on the last sale price of $19.00 per share of the Registrant's Common Stock on
December 13, 1996, as reported in The Wall Street Journal on December 16, 1996.
Although directors of the Registrant and executive officers of the Registrant
and its subsidiaries were assumed to be "affiliates" of the Registrant for
purposes of this calculation, the classification is not to be interpreted as an
admission of such status.
Number of shares of Common Stock outstanding as of December 13, 1996: 1,380,977.
Transitional Small Business Disclosure Format (check one): Yes [ ] No [ X ]
DOCUMENTS INCORPORATED BY REFERENCE
The following documents are incorporated herein by reference:
(1) Portions of the Annual Report to Stockholders for the year ended September
30, 1996 are incorporated by reference into Part II, Items 5-8 and Part III,
Item 13 of this Form 10-KSB.
(2) Portions of the definitive Proxy Statement for the Annual Meeting of
Stockholders to be held on February 4, 1997 are incorporated by reference into
Part III, Item 9-12 of this Form 10-KSB.
<PAGE>
ITEM 1. DESCRIPTION OF BUSINESS
On August 19, 1993, Fidelity Savings Bank ("Fidelity Savings" or the "Bank")
consummated its reorganization into the holding company form of organization
(the "Reorganization") and thereby became a wholly owned subsidiary of Fidelity
Bancorp, Inc. (the "Company"), which had previously been a wholly owned
subsidiary of the Bank. The Reorganization was effected by means of a merger of
Fidelity Interim Savings Bank, a Pennsylvania-chartered stock savings bank which
was wholly owned by the Company ("Interim"), with and into the Bank pursuant to
an Agreement and Plan of Reorganization between the Company, the Bank and
Interim, dated November 25, 1992.
As a result of the Reorganization, (i) all of the issued and outstanding common
stock of the Company, par value $.01 per share ("Company Common Stock"), held by
the Bank was canceled; (ii) all of the issued and outstanding common stock of
Interim held by the Company was, by operation of law, converted into and became,
on a one-for-one basis, fully paid and non-assessable shares of commons stock of
the Bank, par value $1.00 per share ("Bank Common Stock"); and (iii) all of the
issued and outstanding shares of Bank Common Stock were automatically converted,
by operation of law, on a one-for-one bases, into an equal number of issued and
outstanding shares of Company Common Stock. As a result of the foregoing, former
stockholders of the Bank became stockholders of the Company and the Bank become
a wholly owned subsidiary of the Company.
The common stock of the Company has been registered with the Securities and
Exchange Commission ("SEC") under Section 12(g) of the Securities Exchange Act
1934 and has been substituted for the common stock of the Bank on the National
Association of Securities Dealers Automated Quotation National Market System
under the symbol "FSBI".
The Company's direct subsidiary, the Bank, is a Pennsylvania-chartered stock
savings bank which is headquartered in Pittsburgh, Pennsylvania. Deposits in the
Bank are insured by the Savings Association Insurance Fund ("SAIF") of the
Federal Deposit Insurance Corporation ("FDIC"). The Bank, incorporated in 1927,
conducts business from eight full-service offices located in Allegheny and
Butler counties, two of five Pennsylvania counties which comprise the
metropolitan and suburban areas of greater Pittsburgh.
At September 30, 1996, Fidelity Savings had total assets of $317.9 million,
savings deposits of $234.3 million and stockholders' equity of $21.8 million.
The Bank's principal business consists of attracting deposits from the general
public through its home office and branch offices and investing such deposits
primarily in single-family (one-to-four family) residential loans,
mortgage-backed securities and, to a lesser extent, commercial real estate loans
in the Bank's primary market area. In recent years, the Bank has also been an
active originator of home equity and consumer loans and, to a limited extent,
has originated loans to small businesses in its immediate market area.
Fidelity Savings' earnings have historically depended primarily on its level of
net interest income, which is determined by the difference between the yield
earned on its loans, investment and mortgage-backed securities and other
interest-earning assets and the rate paid on its deposits and borrowings. In
recent years, Fidelity Savings has sought to improve profitability by (i)
emphasizing the origination and purchase of interest-rate sensitive assets and
assets with short-term maturities; (ii) developing a long-range asset and
liability management strategy to reduce the imbalance between the Bank's
interest-earning assets and its interest-bearing liabilities with short-term
maturities; and (iii) strengthening its senior management team to aid in the
<PAGE>
implementation of this strategy. The Bank has in recent years emphasized the
origination of adjustable-rate mortgage loans and home equity, consumer and, to
a limited extent, commercial business loans, because such loans traditionally
have shorter terms to maturity. The Bank's Board of Directors has also adopted
written management and investment policies, formulated with the cooperation of
its senior officers, to implement portions of the Bank's assets and liability
management strategy.
As a result of the Bank's actions, the amount by which the Bank's
interest-bearing liabilities that mature or reprice within one year exceed its
interest-earning assets with similar characteristics equaled $54.0 million or
17.0% of total assets at September 30, 1996. This gap position has increased on
a percentage basis from September 30, 1995, when the Bank's interest-bearing
liabilities that matured or repriced within one year exceeded its
interest-earning assets with similar characteristics by $31.6 million or 11.2%
of total assets, and the Bank believes that its current gap position is
appropriate for the current interest rate environment. Adjustable-rate mortgage
loans amounted to 20.7%, 68.2% and 38.5% of the Bank's originations of mortgage
loans in fiscal 1996, 1995, and 1994 respectively. The origination of
adjustable-rate mortgage loans has been emphasized in recent years. The Bank
also is emphasizing the origination of home equity loans (loans secured by the
equity in the borrower's residence but not necessarily for the purpose of
property improvement). In recent years, Fidelity Savings has also been an active
originator of consumer loans and has increased its commercial business lending.
These home equity, consumer and commercial business loans generally have shorter
maturities and higher interest rates than residential mortgage loans. The Bank
continues to offer long-term, fixed-rate residential mortgage loans, but
generally only under terms, conditions, and documentation which permit the sale
of a portion of such loans in the secondary market. In fiscal 1992, the Bank
began selling a portion of these loans to the Federal National Mortgage
Association ("FNMA").
Customer savings deposits with Fidelity Savings are insured by the SAIF to the
maximum extent provided by law and the Bank is now, following its charter
conversion, subject to examination and comprehensive regulation by the FDIC and
the Pennsylvania Department of Banking ("Department"). Fidelity Savings is also
a member of the Federal Home Loan Bank of Pittsburgh ("FHLB of Pittsburgh" or
"FHLB"), which is one of the 12 regional banks comprising the FHLB System. The
Bank is further subject to regulations of the Board of Governors of the Federal
Reserve System ("Federal Reserve Board") governing reserves required to be
maintained against deposits and certain other matters.
The Company's executive office is located at 1009 Perry Highway, Pittsburgh,
Pennsylvania 15237, and its telephone number is (412) 367-3300.
<PAGE>
LENDING ACTIVITIES
LOAN PORTFOLIO COMPOSITION. At September 30, 1996, Fidelity Savings' net loan
portfolio totaled $151.3 million, representing approximately 47.6% of its $317.9
million of total assets at that date. The Bank's loan portfolio at September 30,
1996 primarily consisted of conventional residential mortgage loans, which are
loans that are neither insured by the Federal Housing Administration ("FHA") nor
partially guaranteed by the Department of Veterans Affairs ("VA"). At September
30, 1996, $89.6 million or 56.7% and $21.8 million or 13.8% of its total loan
portfolio consisted of conventional residential mortgage loans (including $5.0
million in loans for the construction of one-to-four family dwellings) and
commercial real estate loans, (including $2.6 million in loans for the
construction of commercial properties), respectively. In addition, at September
30, 1996, the Bank had $35.8 million or 22.7% of its total loan portfolio
invested in installment loans, and $10.7 million or 6.8% of its total loan
portfolio invested in commercial business loans.
The following table sets forth information concerning Fidelity Savings' loan
portfolio by type at the dates indicated.
<TABLE>
<CAPTION>
As of September 30,
---------------------------------------------------------------------
1996 1995 1994
----------------- ---------------- ----------------
Amount % Amount % Amount %
------ -- ------ -- ------ --
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Real estate loans:
Residential:
Single-family (one-to-four units) $ 80,186 50.8% $ 60,160 47.4% $ 61,570 52.7%
Multi-family (over four units) 4,435 2.8 5,156 4.1 5,664 4.9
Construction 7,645 4.8 6,911 5.4 5,595 4.8
Commercial 19,112 12.1 20,102 15.8 17,032 14.6
-------- ---- -------- ---- -------- ----
Total real estate loans 111,378 70.5 92,329 72.7 89,861 77.0
Installment loans 35,782 22.7 28,421 22.4 22,992 19.7
Commercial business loans 10,702 6.8 6,186 4.9 3,918 3.3
-------- ---- -------- ---- -------- ----
Total loans receivable 157,862 100.0% 126,936 100.0% 116,771 100.0%
====== ===== =====
Less:
Loans in process (4,109) (3,664) (1,843)
Unamortized premiums, discounts and
deferred loan fees (960) (939) (947)
Allowance for possible loan losses (1,530) (1,429) (1,334)
-------- -------- --------
Net loans receivable $151,263 $120,904 $112,647
======== ======== ========
<PAGE>
<CAPTION>
As of September 30,
----------------------------------------
1993 1992
---------------- ---------------
Amount % Amount %
------ -- ------ --
<S> <C> <C> <C> <C>
Real estate loans:
Residential:
Single-family (one-to-four units) $ 66,083 59.2% $ 66,513 60.3%
Multi-family (over four units) 5,295 4.8 5,160 4.7
Construction 4,904 4.4 1,014 .9
Commercial 15,532 13.9 17,449 15.8
------- ---- -------- ----
Total real estate loans 91,814 82.3 90,136 81.7
Installment loans 16,276 14.6 16,598 15.0
Commercial business loans 3,451 3.1 3,659 3.3
-------- ---- -------- ----
Total loans receivable 111,541 100.0% 110,393 100.0%
===== =====
Less:
Loans in process (2,772) (2,126)
Unamortized premiums, discounts and
deferred loan fees (1,062) (880)
Allowance for possible loan losses (1,122) (980)
-------- -------
Net loans receivable $106,585 $106,407
======== ========
</TABLE>
<PAGE>
CONTRACTUAL MATURITIES. The following table sets forth the contractual
maturities of the total loans receivable of Fidelity Savings as of September 30,
1996 by categories of loans.
<TABLE>
<CAPTION>
Contractual Maturities Due
in Year(s) Ended September 30,
------------------------------
Balance Outstanding at 1998- After
September 30, 1996 1997 2001 2001
---------------------- ------- ------- --------
(In Thousands)
<S> <C> <C> <C> <C>
Real estate loans:
Residential $ 84,621 $ 1,959 $ 1,997 $ 80,665
Commercial 19,112 2,637 4,573 11,902
Construction 7,645 3,304 744 3,597
Installment loans 35,782 260 15,363 20,159
Commercial business loans 10,702 451 4,257 5,994
-------- ------- ------- --------
Total (1) $157,862 $ 8,611 $26,934 $122,317
======== ======= ======= ========
</TABLE>
- -------------------
(1) Of the $149.3 million of principal repayments contractually due after
September 30, 1997, $115.7 million have fixed rates of interest and $33.6
million have adjustable or floating rates of interest.
<PAGE>
Contractual principal repayments of loans do not necessarily reflect the actual
term of the Bank's loan portfolio. The average life of mortgage loans is
substantially less than their average contractual maturities because of loan
payments and prepayments and because of enforcement of due-on-sale clauses,
which generally give the Bank the right to declare a loan immediately due and
payable in the event, among other things, that the borrower sells the real
property subject to the mortgage and the loan is not repaid. The average life of
mortgage loans tends to increase, however, when current mortgage loan rates are
substantially higher than rates on existing mortgage loans and, conversely,
decrease when current mortgage loan rates are substantially lower than rates on
existing mortgage loans.
ORIGINATION, PURCHASE AND SALE OF LOANS. As a Pennsylvania-chartered savings
institution, Fidelity Savings Bank has general authority to originate and
purchase loans secured by real estate located throughout the United States.
Notwithstanding this nationwide authority, it has been the Bank's policy to
concentrate its lending activities in its immediate market area. As a result,
over 95% of the mortgage loans originated by the Bank are secured by real estate
located in Allegheny County and adjacent Pennsylvania counties. Generally, the
Bank has departed from this policy only when overall demand is low in its
immediate market area or when it has needed to supplement its adjustable-rate
mortgage ("ARM") loan portfolio. During fiscal 1994, the Bank purchased $2.2
million of single family co-op loans within Allegheny County. The Bank reviews
all such loans to ensure each meets the same underwriting standards that
Fidelity Savings applies to loans it originates. The Bank did not purchase any
loans during fiscal 1996 or fiscal 1995.
Applications for all types of loans are taken at the Bank's home office and
branch offices by branch managers and forwarded to the administrative office for
processing. In most cases, an interview with the applicant is conducted at the
branch office by a branch manager. Residential and commercial real estate loan
originations are primarily attributable to walk-in and existing customers and,
to a lesser extent, real estate brokers. Installment loans are primarily
obtained through existing and walk-in customers. The Board of Directors has
delegated authority to the Loan Committee, consisting of the President,
Executive Vice President and Chief Financial Officer and Executive Vice
President and Chief Lending Officer, to approve first mortgage, home equity,
secured consumer, unsecured consumer and commercial loans up to $500,000,
$200,000, $75,000, $50,000, and $400,000, respectively. Any loan in excess of
those amounts must be approved by the Board of Directors. The Board of Directors
has further delegated authority to the Bank's President to approve first
mortgage, home equity, secured consumer, unsecured consumer and commercial loans
up to $175,000, $100,000, $75,000, $50,000, and $125,000, respectively. The
terms of the delegation also permit the President to delegate authority to any
other Bank officer under the same or more limited terms. Pursuant to this
authority, the President of the Bank has delegated to the Executive Vice
President and Chief Lending Officer, subject to certain conditions, the
authority to approve motor vehicle loans, secured personal loans and unsecured
personal loans up to $50,000, $50,000, and $15,000, respectively; to approve
first mortgage one-to-four family loans up to $175,000, with a loan-to-value of
65% or less; to approve home equity loans up to $100,000 if the amount of the
loan is not in excess of 80% of the equity; to approve commercial loans up to
$100,000; to approve education loans up to levels approved by the Pennsylvania
Higher Education Assistance Agency; and to approve credit cards and checking
account overdraft protection loans that conform to the parameters of the
program.
<PAGE>
Historically, Fidelity Savings originated mortgage loans for inclusion in its
loan portfolio and not for sale in the secondary market. In fiscal 1992, the
Bank began selling some fixed-rate mortgage loans to FNMA. Mortgage loans
generally are originated under terms, conditions and documentation which permit
such sale.
The following table shows total loans originated, purchased, sold and repaid
during the periods indicated.
<TABLE>
<CAPTION>
Fiscal Year Ended September 30,
----------------------------------
1996 1995 1994
-------- -------- --------
(In Thousands)
<S> <C> <C> <C>
Real estate loan originations
Residential:
Single-family .................... $ 31,411 $ 12,195 $ 11,978
Multi-family ..................... 134 454 1,441
Commercial ....................... 2,893 4,613 2,910
-------- -------- --------
Total real estate
loan originations ............ 34,438 17,262 16,329
Installment loan originations ........... 20,411 14,116 16,173
Commercial business loan
originations ......................... 9,402 5,582 1,606
-------- -------- --------
Total loan originations ........ 64,251 36,960 34,108
Purchases of loans ...................... -0- -0- 2,174
-------- -------- --------
Total loan originations
and purchases ................ 64,251 36,960 36,282
-------- -------- --------
Principal repayments on loans ........... 32,142 24,284 28,260
Sales of residential loans .............. 134 361 2,183
Sales of education loans ................ 1,042 1,649 609
-------- -------- --------
Total principal repayments
and sales of loans ............. 33,318 26,294 31,052
-------- -------- --------
Change in loans in process .............. (445) (1,821) 929
Change in deferred loan fees ............ (21) 8 115
Change in allowance for possible
loan losses .......................... (101) (95) (212)
Other changes, net ...................... (7) (501) -0-
-------- -------- --------
Net increase (decrease) in loans ........ $ 30,359 $ 8,257 $ 6,062
======== ======== ========
</TABLE>
REAL ESTATE LENDING. The Bank concentrates its lending activities on the
origination of loans and purchase of loan participations secured primarily by
first mortgage liens on existing single-family residences. At September 30,
1996, $85.2 million or 54.0% of the Bank's total loan portfolio consisted of
such loans (including $5.0 million of residential construction loans).
<PAGE>
In response to a concern for more effective asset and liability management, in
recent years the Bank has been emphasizing single-family residential loans which
provide for annual interest rate adjustments. The adjustable-rate residential
mortgage loans offered by Fidelity Savings in recent years have 10, 15 or
30-year terms and interest rates which adjust every year generally in accordance
with the index of average yield on U.S. Treasury Securities adjusted to a
constant maturity of one year. There is generally a 2% cap or limit on any
increase or decrease in the interest rate per year with a 5% or 6% limit on the
amount by which the interest can increase over the life of the loan. The Bank
has not engaged in the practice of using a cap on the payments that could allow
the loan balance to increase rather than decrease, resulting in negative
amortization.
Adjustable-rate mortgage loans comprised approximately 20.7%, 68.2% and 38.5% of
the total originations of mortgage loans by the Bank in fiscal 1996, 1995, and
1994, respectively, and amounted to approximately $34.2 million or 30.7% of the
Bank's portfolio of mortgage loans at September 30, 1996.
The Bank continues to originate fixed-rate loans with terms of 10, 15, 20 or 30
years in order to provide a full range of products to its customers, but
generally only under terms, conditions and documentation which permit the sale
of a portion of these loans in the secondary market. The Bank also offers a
10-year balloon loan with payments based on 30-year amortization. At September
30, 1996, approximately $77.1 million or 69.3% of the mortgage loans in the
Bank's loan portfolio consisted of loans which provide for fixed rates of
interest. Although these loans provide for repayments of principal over a fixed
period of up to 30 years, it is the Bank's experience that such loans have
remained outstanding for a substantially shorter period of time. The Bank's
policy is to enforce the "due-on-sale" clauses contained in most of its
fixed-rate, conventional mortgage loans, which generally permit the Bank to
require payment of the outstanding loan balance if the mortgaged property is
sold or transferred and, thus, contributes to shortening the average life of
such loans.
The Savings Bank will lend generally up to 80% of the appraised value of the
property securing the loan (referred to as the loan-to-value ratio) up to a
maximum amount of $207,000 but will lend up to 95% of the appraised value up to
the same amount if the borrower obtains private mortgage insurance on the
portion of the principal amount of the loan that exceeds 80% of the value of the
property securing the loan. While the Bank also originates residential mortgage
loans in amounts over $207,000, such loans generally have terms of 10 or 15
years or are 10-year balloon loans with payments based on 15-year to 30-year
amortization. Generally, such loans will not exceed a maximum loan amount of
$1.0 million, although the Bank may consider loans above that limit on a
case-by-case basis.
The Savings Bank also, in recent years, has developed single-family residential
mortgage loan programs targeted to the economically disadvantaged and minorities
in the Bank's primary lending area. Under the programs, the Bank will lend up to
97% of the appraised value of the property securing the loan as well as reducing
the closing costs the borrower is normally required to pay. The Bank does not
believe that these loans pose a significantly greater risk of non-performance
than similar single-family residential mortgage loans underwritten using the
Bank's normal criteria.
<PAGE>
The Bank requires the properties securing mortgage loans it originates and
purchases to be appraised by independent appraisers who are approved by or who
meet certain prescribed standards established by the Board of Directors. The
Bank also requires title, hazard and (where applicable) flood insurance in order
to protect the properties securing its residential and other mortgage loans.
Borrowers are subject to employment verification and credit evaluation reports,
and must meet established underwriting criteria with respect to their ability to
make monthly mortgage payments.
In addition to loans secured by single-family residential real estate, Fidelity
Savings also originates, to a lesser extent, loans secured by commercial real
estate and multi-family residential real estate. Over 95% of this type of
lending is done within the Bank's primary market area. At September 30, 1996,
$26.2 million or 16.6% of the Bank's total loan portfolio consisted of
commercial real estate and multi-family residential real estate loans (including
$2.6 million of commercial construction loans).
Although terms vary, commercial and multi-family residential real estate loans
are generally made for terms of up to 10 years with a longer period for
amortization and in amounts of up to 80% of the lesser of appraised value or
sales price. These loans are usually made with adjustable rates of interest, but
the Bank occasionally will make fixed-rate commercial or multi-family real
estate loans on a 10 or 7 year payment basis, with the period of amortization
negotiated on a case-by-case basis.
The Bank, to a limited extent, also engages in loans to finance the construction
of one-to-four family dwellings. This activity is generally limited to
individual units and may, to a limited degree, include speculative construction
by developers. The inspections, for approval of payment vouchers, are performed
by Bank personnel and are based on stages of completion. Applications for
construction loans primarily are received from former borrowers and builders who
have worked with Fidelity Savings in the past. At September 30, 1996, the Bank
had 29 construction projects of this type in process. In addition, the Bank also
engages in loans to finance the construction of commercial properties. At
September 30, 1996, the Bank had three construction projects of this type in
process.
Loans to finance commercial and multi-family residential real estate and for the
financing of construction generally provide a greater rate of return but are
considered to have a greater risk of loss than loans to finance the purchase of
single-family, owner-occupied dwellings. However, the Bank has adopted
underwriting guidelines to ensure that the loans involve only a minimal amount
of additional risk.
The Financial Institutions Reform, Recovery, and Enforcement Act of 1989
("FIRREA") applied the loans-to-one borrower limit applicable to national banks
to all loans made by savings associations, and a subsequently adopted FDIC
regulation applied this limit to state-chartered savings banks such as Fidelity
Savings. The regulation generally does not permit loans-to-one borrower to
exceed 15% of unimpaired capital and surplus. Loans in an amount equal to an
additional 10% of unimpaired capital and surplus also may be made to a borrower
if the loans are fully secured by readily marketable securities. At September
30, 1996, the Bank's limit on loans-to-one borrower was $3.4 million, and the
Bank's largest loan or group of loans-to-one borrower, including related
entities, aggregated $2.4 million. This represents a commercial mortgage,
secured by five mobile home parks located in Allegheny, Beaver and Butler
counties with an appraised value of $3.3 million in 1994. The loan is current
and performing at September 30, 1996.
<PAGE>
INSTALLMENT LENDING. The Bank offers a wide variety of installment loans,
including home equity loans and consumer loans.
Home equity loans amounted to $30.1 million or 84.0% of the Bank's total
installment loan portfolio at September 30, 1996. These loans are made on the
security of the unencumbered equity in the borrower's residence. Home equity
loans are made at fixed rates for terms of up to 15 years, and home equity lines
of credit are made at variable rates. Home equity loans generally may not exceed
80% of the value of the security property when aggregated with all other liens,
although a limited number of loans up to 100% value may be made at increased
rates.
Consumer loans consist of motor vehicle loans, other types of secured consumer
loans and unsecured personal loans. At September 30, 1996, these loans amounted
to $2.5 million, which represented 6.9% of the Bank's total installment loan
portfolio. At September 30, 1996, motor vehicle loans amounted to $1.5 million
and unsecured loans and loans secured by property other than real estate
amounted to $1.0 million.
The Bank also makes other types of installment loans such as savings account
loans, education loans, credit card loans and overdraft loans. At September 30,
1996, these loans amounted to $3.1 million or 8.6% of the total installment loan
portfolio. That total consisted of $1.0 million of education loans, $957,000 of
savings account loans, $797,000 of credit card loans and $310,000 of overdraft
loans.
Consumer, credit card and overdraft loans and, to a lesser extent, home equity
loans may involve a greater risk of nonpayment than traditional first mortgage
loans on single-family residential dwellings. However, such loans generally
provide a greater rate of return, and Fidelity Savings underwrites the loans in
conformity to standards adopted by its Board of Directors.
COMMERCIAL BUSINESS LOANS: Commercial business loans of both a secured and
unsecured nature are made by the Savings Bank for business purposes to
incorporated and unincorporated businesses. Typically, these are loans made for
the purchase of equipment, to finance accounts receivable and to finance
inventory, as well as other business purposes. At September 30, 1996, these
loans amounted to $10.7 million or 6.8% of the total loan portfolio.
LOAN FEE AND SERVICING INCOME. In addition to interest earned on loans, the Bank
receives income through the servicing of loans and loan fees charged in
connection with loan originations and modifications, late payments, changes of
property ownership and for miscellaneous services related to its loans. Income
from these activities varies from period to period with the volume and type of
loans made.
The Bank charges loan origination fees which are calculated as a percentage of
the amount loaned. The fees received in connection with the origination of
conventional, single-family, residential real estate loans have generally
amounted to two to three points (one point being equivalent to 1% of the
principal amount of the loan). In addition, the Bank typically receives fees of
two or three points in connection with the origination of conventional,
multi-family residential loans and commercial real estate loans. Loan fees and
certain direct costs are deferred, and the net fee or cost is amortized into
income using the interest method over the expected life of the loan. See Note 1
to the Consolidated Financial Statements contained in the 1996 Annual Report to
Stockholders, which is included as Exhibit 13 hereto ("Annual Report").
<PAGE>
The Bank also receives income from servicing loans which are owned by others.
The amount of loans serviced by the Bank for others has decreased from $8.3
million at September 30, 1994 to $6.5 million at September 30, 1996.
NON-PERFORMING LOANS AND REAL ESTATE OWNED. When a borrower fails to make a
required payment on a loan, Fidelity Savings attempts to cause the default to be
cured by contacting the borrower. In general, contacts are made after a payment
is more than 15 days past due, and a late charge is assessed at that time. In
most cases, defaults are cured promptly. If the delinquency on a mortgage loan
exceeds 90 days and is not cured through Fidelity Savings' normal collection
procedures or an acceptable arrangement is not worked out with the borrower,
Fidelity Savings will normally institute measures to remedy the default,
including commencing a foreclosure action or, in special circumstances,
accepting from the mortgagor a voluntary deed of the secured property in lieu of
foreclosure.
The remedies available to a lender in the event of a default or delinquency with
respect to residential mortgage loans, and the procedures by which such remedies
may be exercised, are subject to Pennsylvania laws and regulations. Under
Pennsylvania law, a lender is prohibited from accelerating the maturity of a
residential mortgage loan, commencing any legal action (including foreclosure
proceedings) to collect on such loan, or taking possession of any loan
collateral until the lender has first provided the delinquent borrower with at
least 30 days' prior written notice specifying the nature of the delinquency and
the borrower's right to correct such delinquency. In addition, the Homeowner's
Emergency Assistance Act of 1983 further restricts the ability of a lender to
exercise any remedies it may have with respect to loans for one- and two-family
principal residences located in Pennsylvania (including the lender's right to
foreclose on such property) until the lender has provided the delinquent
borrower with written notice detailing the borrower's rights under such Act to
seek consumer credit counseling and state financial assistance and until the
borrower has exhausted or failed to pursue such rights.
If foreclosure is effected, the property is sold at a public auction in which
Fidelity Savings may participate as a bidder. If Fidelity Savings is the
successful bidder, the acquired real estate is then included in Fidelity
Savings' "real estate owned" account until it is sold. Although Fidelity Savings
is permitted to finance sales of real estate owned by "loans to facilitate,"
which may involve more favorable interest rates and terms than generally would
be granted under the Bank's underwriting guidelines, it is the policy of
Fidelity Savings to provide such loans only in rare circumstances.
Loans are placed on non-accrual status when, in the judgment of management, the
probability of collection of interest is deemed to be insufficient to warrant
further accrual, generally when a loan is ninety days or more delinquent. When a
loan is placed on non-accrual status, previously accrued but unpaid interest is
deducted from interest income.
Real estate owned consists of properties acquired through foreclosure and are
recorded at the lower of cost (principal balance of the former mortgage loan
plus costs of obtaining title and possession) or fair value less estimated cost
to sell. Costs relating to development and improvement of the property are
capitalized, whereas costs of holding such real estate are expensed as incurred.
Additional write downs are charged to income, and the carrying value of the
property reduced, when the carrying value exceeds fair value less estimated cost
to sell. Management believes that the current reserve for losses on real estate
owned is adequate.
<PAGE>
The following tables sets forth information regarding nonaccrual loans and real
estate owned by the Bank at the dates indicated. The Bank did not have any
accruing loans which were 90 days or more overdue or any loans which were
classified as troubled debt restructurings at the dates presented.
<TABLE>
<CAPTION>
September 30,
----------------------------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Nonaccrual residential real estate
loans (one-to-four family) $ 567 $ 227 $ 574 $ 550 $ 243
Nonaccrual construction, multi-family
residential and commercial real
estate loans 134 -- 621 562 989
Nonaccrual installment and commercial
business loans 457 85 87 178 475
------ ------ ------ ------ ------
Total non-performing loans $1,158 $ 312 $1,282 $1,290 $1,707
====== ====== ====== ====== ======
Total nonperforming loans as a percent
of total loans receivable .73% .25% 1.10% 1.16% 1.55%
====== ====== ====== ====== ======
Total real estate owned, net of
related reserves $ 370 $1,062 $ 455 $ 399 219
====== ====== ====== ====== ======
Total nonperforming loans and real
estate owned as a percent of total
assets .48% .49% .63% .63% .76%
====== ====== ====== ====== ======
</TABLE>
At September 30, 1996, non-accrual loans consisted of fifteen 1-4 family
residential real estate loans totaling $567,000, one single family construction
loan totaling $134,000, twenty-three installment loans totaling $125,000, three
commercial loans totaling $189,000, three commercial lines of credit totaling
$129,000, three personal lines of credit totaling $1,000 and eleven credit card
accounts totaling $13,000.
Real estate owned at September 30, 1996 consisted of two single-family
properties in Pittsburgh, Pennsylvania totaling $370,000. One of the properties,
recorded at $350,000 at September 30, 1996, is under agreement of sale. The Bank
expects the net proceeds from the sale, including selling expenses, to
approximate the recorded value.
<PAGE>
The following table set forth an analysis of the Bank's allowance for loan
losses.
<TABLE>
<CAPTION>
Year Ended September 30,
------------------------------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Balance at beginning of period $1,429 $1,334 $1,122 $ 980 $ 621
Provision charged to operations 270 230 360 655 483
------ ------ ------ ------ ------
Charge-offs:
Residential real estate 149 230 116 157 --
Installment 44 29 40 27 43
Commercial 78 116 3 340 88
Recoveries:
Residential real estate 55 120 -- -- --
Installment 10 11 6 7 4
Commercial 37 109 5 4 3
------ ------ ------ ------ ------
Net charge-off 169 135 148 513 124
------ ------ ------ ------ ------
Balance at end of period $1,530 $1,429 $1,334 $1,122 $ 980
====== ====== ====== ====== ======
Ratio of net charge-offs during
the period to average loans
outstanding during the period .12% .11% .14% .46% .11%
====== ====== ====== ====== ======
</TABLE>
<PAGE>
The following table shows the amount of the Bank's allowance for loan losses
attributable to each category of loan indicated and the percent of loans in each
category to total loans, at each of the dates indicated.
<TABLE>
<CAPTION>
At September 30,
------------------------------------------------------------------------------
1996 1995 1994
------------------- ------------------- ------------------
Amount % Amount % Amount %
------ - ------ -- ------ --
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Residential real estate
loans $ 443 53.6% $ 385 51.5% $ 354 57.6%
Commercial real estate
loans 225 12.1 256 15.8 245 14.6
Construction loans 60 4.8 61 5.4 58 4.8
Installment loans 358 22.7 332 22.4 340 19.7
Commercial business loans 444 6.8 395 4.9 337 3.3
------ ----- ------ ----- ------ -----
Total $1,530 100.0% $1,429 100.0% $1,334 100.0%
====== ====== ====== ====== ====== ======
<CAPTION>
At September 30,
----------------------------------------------
1993 1992
------------------ -----------------
Amount % Amount %
------ -- ------ --
<S> <C> <C> <C> <C>
Residential real estate
loans $ 269 64.0% $ 262 64.9%
Commercial real estate
loans 214 13.9 238 15.8
Construction loans 50 4.4 10 .9
Installment loans 364 14.6 209 15.1
Commercial business loans 225 3.1 261 3.3
------ ----- ----- -----
Total $1,122 100.0% $ 980 100.0%
====== ====== ===== ======
</TABLE>
<PAGE>
Management establishes both allowances for estimated losses on delinquent loans
when it determines that losses are anticipated to be incurred and general loan
loss allowances for potential future delinquent loans. In determining the
appropriate level of allowances for possible losses, consideration is given to
general economic conditions, diversification of loan portfolios, historical loss
experience, identified credit problems, delinquency levels and adequacy of
collateral. For the year ended September 30, 1996, the Bank recorded provisions
for loan losses of $270,000. At September 30, 1996, the Bank had an allowance
for possible loan losses of $1.5 million or 1.01% of net loans receivable. The
allowance for possible loan losses was 132.1% of total non-performing loans at
that date.
Management also establishes specific allowances for estimated losses on real
estate owned when it determines that losses are anticipated to be incurred on
the underlying properties. At September 30, 1996, the Bank had $102,000 recorded
as allowances for estimated losses on real estate owned. Property in real estate
owned at September 30, 1996 is carried at fair value less estimated costs of
sale.
The Bank's management believes that its present allowances are adequate and that
the carrying value of its real estate owned approximates the net realizable
value of the properties. However, while management uses the best information
available to make such determinations, future adjustments to reserves may become
necessary, based on changes in economic conditions, or as a result of
examinations by various regulatory agencies, who review the allowance as a part
of their examination procedures.
The Chief Lending Officer, Chief Financial Officer and the Collection Manager
meet monthly to review non-performing assets and any other assets that may
require classification or special consideration. Adjustments to the carrying
values of such assets are made as needed and a detailed report is submitted to
the Board of Directors on a monthly basis.
MORTGAGE-BACKED SECURITIES. Mortgage-backed securities (which also are known as
mortgage participation certificates or pass-through certificates) typically
represent a participation interest in a pool of single-family or multi-family
mortgages, the principal and interest payments on which are passed from the
mortgage originators, through intermediaries (generally U.S. Government agencies
and government sponsored enterprises such as FNMA, the Federal Home Loan
Mortgage Corporation ("FHLMC") and Government National Mortgage Association
("GNMA")) that pool and repackage the participation interests in the form of
securities, to investors such as the Bank.
Mortgage-backed securities typically are issued with stated principal amounts,
and the securities are backed by pools of mortgages that have loans with
interest rates that are within a range and have varying maturities. The
underlying pool of mortgages, i.e., fixed rate or adjustable rate, as well as
the prepayment risk, are passed on to the certificate holders. Accordingly, the
life of a mortgage-backed pass-through security approximates the life of the
underlying mortgages.
<PAGE>
The actual maturity of a mortgage-backed security may be less than its stated
maturity due to prepayments of the underlying mortgages. Prepayments that are
faster than anticipated may shorten the life of the security and adversely
affect its yield to maturity. The yield is based upon the interest income and
the amortization of any premium or discount related to the mortgage-backed
security. In accordance with generally accepted accounting principals, premiums
and discounts are amortized over the estimated lives of the loans, which
decrease and increase interest income, respectively. The prepayment assumptions
used to determine the amortization period for premiums and discounts can
significantly affect the yield of the mortgage-backed security, and these
assumptions are reviewed periodically to reflect actual prepayments. Although
prepayments of underlying mortgages depend on many factors, including the type
of mortgages, the coupon rate, the age of mortgages, the geographical location
of the underlying real estate collateralizing the mortgages and general levels
of market interest rates, the difference between the interest rates on the
underlying mortgages and the prevailing mortgage interest rates generally is the
most significant determinant of the rate of prepayments. During periods of
falling mortgage interest rates, if the coupon rate of the underlying mortgages
exceeds the prevailing market interest rates offered for mortgage loans,
refinancing generally increases and accelerates the prepayment of the underlying
mortgages and the related security. Under such circumstances, the Bank may be
subject to reinvestment risk because to the extent that the Bank's
mortgage-backed securities amortize or prepay faster than anticipated, the Bank
may not be able to reinvest the proceeds of such repayments and prepayments at a
comparable rate. Mortgage-backed securities held for investment decreased $61.0
million or 66.1% to $31.3 million at September 30, 1996 from $92.3 million at
September 30, 1995. During fiscal 1996, the Bank purchased $550,000 of
mortgage-backed securities held-to-maturity all of which were adjustable-rate.
The Bank did not sell any mortgage-backed securities held-to-maturity in fiscal
1996.
Effective October 1, 1994, the Bank adopted Statement of Financial Accounting
Standards ("SFAS") No. 115 "Accounting for Certain Investments in Debt and
Equity Securities". SFAS No. 115 requires that investments be classified as
either: (1) Securities Held to Maturity - reported at amortized cost, (2)
Trading Securities reported at fair value, or (3) Securities Available-for-Sale
- - reported at fair value. Unrealized holding gains and losses for trading
securities are reported in earnings while unrealized gains and losses for
securities available-for-sale are reported as a separate component of equity. At
October 1, 1994, approximately $10.9 million of mortgage-backed securities were
reclassified as available-for-sale.
On November 15, 1995, the FASB issued "A Guide to Implementation of Statement
115 on Accounting for Certain Investments in Debt and Equity Securities"
("Guide"). The Guide permitted a one-time reclassification of securities without
calling into question the propriety of a company's stated intent in prior or
subsequent periods. The reclassification had to occur between November 15, 1995
and December 31, 1995. The Bank utilized this opportunity to reclassify
approximately $55.0 million of mortgage-backed securities as available-for-sale.
Mortgage-backed securities available-for-sale were $62.5 and $9.2 million at
September 30, 1996 and 1995, respectively. As discussed above, approximately
$10.9 and $55.0 million of mortgage-backed securities were transferred to
available-for-sale pursuant to the adoption of SFAS No. 115 and the Guide. These
securities may be held for indefinite periods of time and are generally used as
part of the Bank's asset/liability management strategy. These securities may be
sold in response to changes in interest rates, prepayment rates or to meet
liquidity needs. During fiscal 1996, the Bank purchased $13.3 million of these
securities and sold $5.5 million. Sales of these securities in fiscal 1996
resulted in a pretax gain of $17,000.
<PAGE>
The following table sets forth the composition and amortized cost of the Bank's
mortgage-backed securities at the dates indicated.
<TABLE>
<CAPTION>
September 30,
-------------------------------------------
1996 1995 1994
------- ------- --------
(In Thousands)
<S> <C> <C> <C>
Mortgage-backed securities
held-to-maturity:
GNMA $ 55 $ 3,135 $ 3,357
FHMA 10,556 40,330 48,868
FHLMC 16,734 23,440 31,046
FNMA Remic -- 335 864
FHLMC Remic 248 18,443 19,934
Other $ 3,682 $ 6,641 $ 8,167
------- ------- --------
Total $31,275 $92,324 $112,236
======= ======= ========
Mortgage-backed securities
available-for-sale:
GNMA $ 7,011 $ -- $ --
FNMA 25,072 3,557 --
FHLMC 11,608 4,993 --
FNMA Remic 15,264 637 --
FHLMC Remic 5,059 -- --
------- ------- --------
Total $64,014 $ 9,187 $ --
======= ======= ========
</TABLE>
<PAGE>
Information regarding the contractual maturities and weighted average yield of
the Bank's mortgage-backed securities portfolio at September 30, 1996 is
presented below.
<TABLE>
<CAPTION>
Amounts at September 30, 1996 Which Mature In
------------------------------------------------------------
After Five
One Year After One to to Over 10
or Less Five Years 10 Years Years Total
------- ------------ ---------- ------- -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Mortgaged-backed securites
held-to-maturity:
GNMA $ -- $ -- $ 55 $ -- $ 55
FNMA -- -- 251 10,305 10,556
FHLMC -- 191 1,705 14,838 16,734
FNMA Remic -- 248 -- -- 248
Other -- -- -- 3,682 3,682
------- ------- -------- ------- -------
Total $ -- $ 439 $ 2,011 $28,825 $31,275
======= ======= ======== ======= =======
Weighted average yield -- % 8.33% 8.00% 6.69% 6.80%
======= ======= ======== ======= =======
Mortgaged-backed securites
available-for-sale:
GNMA $ -- $ -- $ -- $ 7,011 $ 7,011
FNMA -- 4,537 14,651 5,884 25,072
FHLMC 48 3,016 -- 8,544 11,608
FNMA Remic 156 6,032 -- 9,076 15,264
FHLMC Remic -- -- -- 5,059 5,059
------- ------- -------- ------- -------
Total $ 204 $13,585 $ 14,651 $35,574 $64,014
======= ======= ======== ======= =======
Weighted average yield 5.82% 6.22% $ 5.67% 6.44% 6.22%
======= ======= ======== ======= =======
</TABLE>
For additional information relating to the Bank's mortgage-backed securities,
see Notes 1, 4, and 5 of the Notes to the Consolidated Financial Statements.
As of September 30, 1996, non-U.S. Government and U.S. Government agency
mortgage-backed securities that exceeded ten percent of stockholders equity are
as follows:
<TABLE>
<CAPTION>
Issues Book Value Market Value
------ ---------- ------------
(in thousands)
<S> <C> <C>
Resolution Trust Corporation $2,349 $2,347
</TABLE>
The above security is an adjustable rate mortgage-backed security that adjusts
off the one-year treasury index and is rated AA by Standard and Poors.
<PAGE>
Investment Activities
Interest and dividends on investments historically have provided the Bank with
its third largest source of revenue after interest on loans and mortgage-backed
securities. At September 30, 1996, the Bank's investments amounted to $59.2
million, which includes $53.8 million available-for-sale, which represented
18.6% of total assets. At October 1, 1994, approximately $10.6 million of
investment securities were reclassified as available-for-sale upon the adoption
of SFAS No. 115 and approximately $8.2 million were reclassified to
available-for-sale in fiscal 1996 under the provision of the Guide. Pursuant to
Fidelity Savings' investment policy, the Bank's investments include obligations
issued or fully guaranteed by the United States government, certain federal
agency obligations, FHLB stock and other specified investments.
It is the Bank's policy that investments are to be made with a primary
consideration for safety and liquidity. Pursuant to this policy, the Bank
invests only in government and government-guaranteed securities, federal funds,
banker acceptances, A-rated commercial paper and corporate obligations, money
market accounts, mutual funds, repurchase agreements, certain collateralized
investments and FHLMC preferred stock.
The method of calculating the carrying value of the Bank's investments differs
by type of security. Investment account securities held to maturity are carried
at cost, adjusted for amortization of premium and accretion of discounts, if
any, over the term of the security. Management has the intent and ability to
hold these securities to maturity. Gains or losses on the sale of investment
securities are recognized upon realization using the specific identification
method.
The Bank has identified those securities which may be sold prior to maturity.
These assets are classified as available-for-sale and are recorded at fair
value. Unrealized gains or losses are reported as a separate component of
equity. Gains or losses on the sale of available-for-sale securities are
recognized using the specific identification method.
<PAGE>
The following tables set forth Fidelity Savings' investment portfolio at
carrying value at the dates indicated.
<TABLE>
<CAPTION>
Available-for-sale
As of September 30,
-----------------------------------------
1996 1995 1994
------- ------- -------
(In Thousands)
<S> <C> <C> <C>
Short-term liquid cash funds:
Federated Securities Corp. $ -- $ 53 $ --
Investment securities:
U.S. government and agency 24,288 16,570 --
Obligations of state and
political subdivisions 24,676 10,700 --
Mutual funds(1) 1,520 1,430 2,680
FHLB stock 2,826 1,752 1,475
FHLMC preferred stock 381 388 125
Equity securities 64 -- --
------- ------- -------
Total $53,755 $30,893 $ 4,280
======= ======= =======
</TABLE>
(1) Consists of investment in the Federated Investors ARM Fund.
<TABLE>
<CAPTION>
Held-to-maturity
As of September 30,
-----------------------------------------
1996 1995 1994
------- ------- -------
(In Thousands)
<S> <C> <C> <C>
Invest securities:
U.S. Government and agency $ 3,997 $ 6,997 $18,089
Obligations of state and
political subdivisions -- 6,227 7,332
Corporate notes -- -- 2,203
Asset-backed securities 1,404 2,052 5,281
------- ------- -------
$ 5,401 $15,276 $32,905
======= ======= =======
</TABLE>
<PAGE>
The following tables set forth the carrying value, estimated market value,
weighted average life and weighted average tax-equivalent yield of Fidelity
Savings' investment securities and interest-earning deposits with other
institutions at September 30, 1996.
<TABLE>
<CAPTION>
Available-for-Sale
-------------------------------------------------
Weighted
Amortized Estimated Average Weighted
Cost Market Life Average
Value Value (In Years) Yield
--------- --------- ---------- --------
(Dollars In Thousands)
<S> <C> <C> <C> <C>
U.S. government and agency
obligations $24,780 $24,288 8.12 7.06%
Obligations of state and
political subdivisions 24,308 24,676 14.91 7.65
Mutual funds 1,558 1,520 -- 5.88
FHLMC preferred stock 380 381 -- 5.94
FHLB stock 2,826 2,826 -- 6.38
Equity securities 48 64 -- 2.49
------- ------- ----
Total investment securities 53,900 53,755 7.25
Interest-earning deposits
with other institutions 146 146 -- 5.18
------- ------- ----
Total investment securities
and interest-earning
deposits with other
institutions $54,046 $53,901 -- 7.24%
======= ======= ====
<PAGE>
<CAPTION>
Held-to-Maturity
-----------------------------------------------
Weighted
Estimated Average Weighted
Carrying Market Life Average
Value Value (In Years) Yield
-------- --------- ---------- --------
(Dollars In Thousands)
<S> <C> <C> <C> <C>
U.S. government and agency
obligations $3,997 $3,953 3.03 5.73%
Asset-backed securities 1,404 1,398 9.05 7.13
------ ------ ----
Total $5,401 $5,351 6.10%
====== ====== ====
</TABLE>
At September 30, 1996, the Bank holds no securities of any issuer, the aggregate
value of which exceeds ten percent of stockholders equity, other than U.S.
Government and U.S. Government agency securities.
<PAGE>
The following tables set forth the amount of each category of investment
securities of Fidelity Savings at September 30, 1996 which mature during each of
the periods indicated and the weighted average yield for each range of
maturities. The yields on the tax-exempt investments have been adjusted to their
pre-tax equivalents.
<TABLE>
<CAPTION>
Available-for-Sale
Amounts At September 30, 1996 Which Mature In
-------------------------------------------------------------------------------
After One Year After Five Years
One Year of Less Through Five Years Through Ten Years
---------------- ------------------ -----------------
Weighted Weighted Weighted
Average Average Average
Amount Yield Amount Yield Amount Yield
--------------------- ----------------------- --------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
U.S. government and U.S. government
agency obligations $ -- -- $4,990 6.39% $19,298 7.24
Obligations of state and political
subdivisions -- -- 1,945 6.28 5,036 6.82
Mutual funds 1,520 5.88 -- -- -- --
FHLB stock 2,826 6.38 -- -- -- --
FHLMC preferred stock 381 5.94 -- -- -- --
Equity securities 64 2.49 -- -- -- --
------- ---- ------- ----- ------- -----
Total $ 4,791 6.13% $ 6,935 6.36% $24,334 7.15%
======= ===== ======= ===== ======= =====
<PAGE>
<CAPTION>
Available-for-Sale
Amounts At September 30, 1996 Which Mature In
---------------------------------------------
After Ten Years
---------------
Weighted
Average
Amount Yield
----------------------
(Dollars in Thousands)
<S> <C> <C>
U.S. government and U.S. government
agency obligations -- --
Obligations of state and political
subdivisions 17,695 7.90
Mutual funds -- --
FHLB stock -- --
FHLMC preferred stock -- --
Equity securities -- --
------- ----
Total $17,695 7.90%
======= =====
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Held-to-Maturity
Amounts At September 30, 1996 Which Mature In
-------------------------------------------------------------------------------
After One Year After Five Years
One Year of Less Through Five Years Through Ten Years
---------------- ------------------ -----------------
Weighted Weighted Weighted
Average Average Average
Amount Yield Amount Yield Amount Yield
--------------------- ----------------------- --------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
U.S. government and U.S. government
agency obligations $ -- -- % $ 3,997 5.73% $ -- --%
Asset-backed securities -- -- 335 7.59 -- --
------- ---- ------- ---- ------- ----
Total $ -- -- % $ 4,332 5.87% $ -- --%
======= ==== ======= ==== ======= ====
<CAPTION>
Held-to-Maturity
Amounts At September 30, 1996 Which Mature In
---------------------------------------------
After Ten Years
---------------
Weighted
Average
Amount Yield
----------------------
<S> <C> <C>
U.S. government and U.S. government
agency obligations $ -- -- %
Asset-backed securities 1,069 6.98
------- ----
Total $ 1,069 6.99%
======= ====
</TABLE>
<PAGE>
SOURCES OF FUNDS
GENERAL. Savings deposits obtained through the home office and branch offices
have traditionally been the principal source of the Bank's funds for use in
lending and for other general business purposes. The Bank also derives funds
from scheduled amortizations and prepayments of outstanding loans and
mortgage-backed securities and sales of investments available-for-sale. The Bank
also may borrow funds from the FHLB of Pittsburgh and other sources. Borrowings
generally may be used on a short-term basis to compensate for seasonal or other
reductions in savings deposits or other inflows at less than projected levels,
as well as on a longer-term basis to support expanded lending activities.
SAVINGS DEPOSITS. The Bank's current savings deposit products include passbook
savings accounts, demand deposit accounts, NOW accounts, money market deposit
accounts and certificates of deposit ranging in terms from three months to ten
years. Included among these savings deposit products are Individual Retirement
Account ("IRA") certificates and Keogh Plan retirement certificates
(collectively "retirement accounts"). The Bank offers preferred rates for
certificates of deposit in denominations of $99,000 or more at terms ranging
from one month to five years and, at September 30, 1996, such certificates
accounted for 4.1% of total savings deposits.
The Bank's savings deposits are obtained primarily from residents of Allegheny
and Butler Counties. The principal methods used by the Bank to attract savings
deposit accounts include the offering of a wide variety of services and
accounts, competitive interest rates and convenient office locations and service
hours. The Bank does not currently pay, nor has it in the past paid, fees to
brokers to obtain its savings deposits.
The following table shows the distribution of, and certain other information
relating to the Bank's savings deposits by type as of the dates indicated.
<TABLE>
<CAPTION>
September 30,
---------------------------------------------------------------------------------
1996 1995 1994
------------------- ------------------ -------------------
Average Average Average
Balance Rate Balance Rate Balance Rate
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Passbook and club accounts $50,445 2.62% $ 53,184 3.08% $ 64,954 3.11%
Checking accounts 30,944 1.10 29,172 1.54 27,993 1.76
Money market accounts 17,437 2.72 15,835 2.71 24,158 2.71
Certificates account 135,450 5.59 145,892 5.63 111,199 4.92
-------- ---- -------- ---- -------- ----
Total $234,276 4.17% $244,083 4.24% $228,304 3.75%
======== ===== ======== ===== ======== =====
</TABLE>
<PAGE>
In recent years, the Bank has been required by market conditions to rely
increasingly on newly-authorized types of short-term certificate accounts and
other savings deposit alternatives that are more responsive to market interest
rates than passbook accounts and regulated fixed-rate, fixed-term certificates
that were historically the Bank's primary source of savings deposits. As a
result of deregulation and consumer preference for shorter term, market-rate
sensitive accounts, the Bank has, like most financial institutions, experienced
a significant shift in savings deposits towards relatively short-term,
market-rate accounts. In recent years, the Bank has been successful in
attracting retirement accounts which have provided the Bank with a relatively
stable source of funds. As of September 30, 1996, the Bank's total retirement
funds were $34.3 million or 14.6% of its total savings deposits.
The Bank attempts to control the flow of savings deposits by pricing its
accounts to remain generally competitive with other financial institutions in
its market area, but does not necessarily seek to match the highest rates paid
by competing institutions. In this regard, the senior officers of the Bank meet
weekly to determine the interest rates which the Bank will offer to the general
public.
Rates established by the Bank are also affected by the amount of funds needed by
the Bank on both a short-term and long-term basis, alternative sources of funds
and the projected level of interest rates in the future. The ability of the Bank
to attract and maintain savings deposits and the Bank's cost of funds have been,
and will continue to be, significantly affected by economic and competitive
conditions.
The following table sets forth the net savings deposit flows of the Bank during
the periods indicated.
<TABLE>
<CAPTION>
Fiscal Years Ended September 30,
------------------------------------
1996 1995 1994
-------- ------- -------
(In Thousands)
<S> <C> <C> <C>
Increase (decrease) before interest
credited $(19,963) $ 5,672 $(9,070)
Interest credited 10,156 10,107 3,283
-------- ------- -------
Net savings deposit increase (decrease) $ (9,807) $15,779 $(5,787)
======== ======= =======
</TABLE>
<PAGE>
The following table presents by various interest rate categories the amounts of
certificate accounts at the date indicated and the amounts of certificate
accounts at such date which mature during the periods indicated. See Note 11 to
the Consolidated Financial Statements in the Annual Report.
<TABLE>
<CAPTION>
Amounts at September 30, 1996
Maturing
--------------------------------------
At Within After
September 30, One Two Three Three
1996 Year Years Years Years
------------ --------- ----- ----- ------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Certificate accounts:
under 4.01% $ 66 $ 55 $ 11 $ -- $ --
4.01% to 6.00% 104,925 77,623 8,947 7,188 11,167
6.01% to 8.00% 29,800 5,454 10,051 1,627 12,668
8.01% to 10.00% 659 52 498 83 26
-------- -------- ------- ------- -------
Total certificate
accounts $135,450 $ 83,184 $19,507 $ 8,898 $23,861
======== ======== ======= ======= =======
</TABLE>
Maturities of certificates of deposit of $100,000 or more that were outstanding
as of September 30, 1996 are summarized as follows (in thousands):
3 months or less $ 3,768
Over 3 months through 6 months 2,292
Over 6 months through 12 months 1,497
Over 12 months 1,506
-------
Total $ 9,063
=======
<PAGE>
The following table presents certain information concerning Fidelity Savings'
deposits at September 30, 1996 and the scheduled quarterly maturities of its
certificates of deposit.
<TABLE>
<CAPTION>
Percentage of Weighted Average
Amount Total Savings Nominal
(in Thousands) Deposits Rate
-------------- ------------- ----------------
<S> <C> <C> <C>
Passbook accounts $ 50,445 21.53% 2.50%
NOW accounts and
noninterest-bearing
checking accounts 30,944 13.21 1.50
Money market deposit
accounts (1) 17,437 7.44 2.93
-------- ------ ----
Total 98,826 42.18 2.26
-------- ------ ----
Certificate accounts
maturing by quarter:
December 31, 1996 25,782 11.00 5.03
March 31, 1997 26,219 11.19 4.94
June 30, 1997 16,646 7.11 4.95
September 30, 1997 14,537 6.21 5.16
December 31, 1997 7,163 3.06 6.16
March 31, 1998 5,447 2.33 5.99
June 30, 1998 3,712 1.58 6.22
September 30, 1998 3,185 1.36 5.58
December 31, 1998 1,402 .60 5.36
March 31, 1999 3,097 1.32 5.39
June 30, 1999 2,516 1.07 5.53
September 30, 1999 1,883 .80 5.79
Thereafter 23,861 10.19 6.23
-------- ------ ----
Total certificate
accounts 135,450 57.82 5.40
-------- ------ ----
Total savings deposits $234,276 100.00% 4.08%
======== ====== ====
</TABLE>
(1) Includes $1,397 in IRA money market deposit accounts.
BORROWINGS. The Bank is eligible to obtain advances from the FHLB of Pittsburgh
upon the security of the common stock it owns in that bank, securities owned by
the Bank and held in safekeeping by the FHLB and certain of its residential
mortgages, provided certain standards related to creditworthiness have been met.
See "Regulation of the Bank - Federal Home Loan Bank System." Such advances are
made pursuant to several different credit programs, each of which has its own
interest rate and range of maturities. FHLB advances are generally available to
meet seasonal and other withdrawals of deposit accounts and to expand lending,
as well as to aid the effort of members to establish better asset and liability
management through the extension of maturities of liabilities. At September 30,
1996, the Bank had $56.6 million of advances outstanding.
<PAGE>
The Bank also, from time to time, enters into sales of securities under
agreements to repurchase ("reverse repurchase agreements"). Such reverse
repurchase agreements are treated as financings, and the obligations to
repurchase securities sold are reflected as liabilities in the statement of
financial condition. At September 30 1996, the Bank had no reverse repurchase
agreements outstanding.
The following table sets forth certain information regarding the short-term
borrowings (due within one year or less) of Fidelity Savings at the dates or for
the periods indicated.
<TABLE>
<CAPTION>
At or for the Year Ended September 30,
--------------------------------------
1996 1995 1994
------- ------- -------
(Dollars In Thousands)
<S> <C> <C> <C>
FHLB advances:
Average balance outstanding $ 5,627 $ 5,356 $ 2,404
Maximum amount outstanding
at any month-end during
the period 8,550 6,330 2,750
Average interest rate during
the period 5.03% 4.76% 4.23%
Balance outstanding at end of
period 5,300 3,250 2,750
Weighted average interest rate 5.11% 4.86% 4.23%
Reverse repurchase agreements:
Average balance outstanding $ 1,216 $ 9,486 $ 1,158
Maximum amount outstanding
at any month-end during
the period 4,565 15,471 4,951
Average interest rate during
the period 4.75% 5.89% 3.71%
Balance outstanding at end of
period 493 4,542 4,951
Weighted average interest rate 4.50% 5.53% 3.70%
Lines of credit:
Average balance outstanding $ -- $ 6,488 $ 4,903
Maximum amount outstanding
at any month-end during
the period -- 10,150 16,000
Average interest rate during
the period -- 5.91% 4.56%
Balance outstanding at end of
period -- -- 11,350
Weighted average interest rate -- 5.34% 4.60%
<PAGE>
<CAPTION>
At or for the Year Ended September 30,
--------------------------------------
1996 1995 1994
------- ------- -------
(Dollars In Thousands)
<S> <C> <C> <C>
FHLB Repoplus Advances:
Average balance outstanding $25,078 2,312 --
Maximum amount outstanding
at any month-end during
the period 51,350 5,000 --
Average interest rate during
the period 5.43% 5.84% --
Balance outstanding at end
of period 51,350 5,000 --
Weighted average interest rate 5.46% 5.89% --
Total average short-term borrowings $30,504 $23,735 $ 8,465
Average interest rate of total
short-term borrowings 5.42% 5.60% 4.35%
</TABLE>
Subsidiaries
Pennsylvania law permits a Pennsylvania-chartered savings institution to invest
up to 3% of its assets in the capital stock, securities or other obligations of
subsidiary corporations or service corporations. The Department is empowered to
authorize Pennsylvania-chartered savings institutions, upon specific
application, to invest a greater percentage of assets in subsidiaries. As a
result of FIRREA, the types of activities and the magnitude of the Bank's
activities in its investments in service corporations are restricted (with
certain exceptions) to the levels and magnitude of investments permitted
state-chartered savings institutions. The Bank did not have any subsidiaries at
September 30, 1996, and the Company did not have any subsidiaries other than the
Bank at September 30, 1996.
Employees
At September 30, 1996, Fidelity Savings had 83 full-time and 31 part-time
employees. None of these employees are represented by a collective bargaining
agent, and the Bank believes that it enjoys good relations with its personnel.
Competition
Federal legislation in recent years has given savings institutions the
opportunity to compete on a more equal footing in many of the areas previously
reserved for other types of financial intermediaries, mainly commercial banks.
As a result, the competitive pressures among savings institutions, commercial
banks and other financial institutions have increased significantly and are
expected to continue to do so.
<PAGE>
Fidelity Savings faces significant competition in attracting savings deposits.
Its most direct competition for savings deposits has historically come from
commercial banks, savings banks and other financial institutions located in its
market area. Particularly in times of high interest rates, Fidelity Savings
faces additional significant competition for investors' funds from short-term
money market mutual funds and issuers of corporate and government securities.
Fidelity Savings competes for savings deposits principally by offering
depositors a variety of deposit programs, convenient branch locations and hours,
and other services. Fidelity Savings does not rely upon any individual group or
entity for a material portion of its savings deposits.
Fidelity Savings' competition for real estate loans comes principally from
mortgage banking companies, commercial banks, savings banks and other financial
institutions. Fidelity Savings competes for loan originations primarily through
the interest rates and loan fees it charges, and the efficiency and quality of
services it provides borrowers and real estate brokers. Factors which affect
competition include the general and local economic conditions, current interest
rate levels and volatility in the mortgage markets.
Market Area
The Bank now conducts business from eight full-service offices located in its
primary market area, Allegheny and Butler counties, which are two of the five
Pennsylvania counties which comprise the metropolitan and suburban areas of
greater Pittsburgh. Approximately 1.5 million people live in the market area
served by Fidelity Savings Bank. Substantially all of the Bank's deposits and
loans are received from residents and businesses located in its primary market
area. In addition, the Bank participates in the MACTM and PLUSTM automatic
teller machine networks which provide locations throughout the Bank's primary
market area, as well as the rest of Pennsylvania and most other states.
The area's economy is reasonably diversified, including manufacturing,
transportation, utilities, banks, hospitals and educational services segments.
The unemployment rate in Allegheny County, the Bank's largest market area, is
approximately 5.6%. The real estate market has been relatively stable, although
residential construction is slowing. The Bank believes the diversity of the
area's industry will continue to help provide for a stable economy for the
foreseable future; however, a general national economic slowdown may curtail the
slow but steady growth the area has experienced in recent years.
Average Balances and Yields
The following table presents for the periods indicated the total dollar amount
of interest from average interest-earning assets and the resultant yields, as
well as the interest expense on average interest-bearing liabilities, expressed
both in dollars and rates, and the net interest margin. The average balance of
loans receivable includes non-accrual loans. Interest income on tax free
investments has been adjusted for federal income tax purposes using a rate of
34%.
<PAGE>
<TABLE>
<CAPTION>
Year Ended September 30,
--------------------------------------------------------------------------------
1996 1995
----------------------------------- --------------------------------------
Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate
------- -------- ---- ------- -------- ----
(Dollars in Thousands)
Interest-earning assets:
<S> <C> <C> <C> <C> <C> <C>
Loans receivable $135,945 $11,482 8.45% $119,340 $ 9,953 8.34%
Mortgage-backed securities 97,340 6,120 6.29 109,010 6,600 6.05
Investment securities and
FHLB stock 54,242 3,816 7.04 39,596 2,714 6.85
Interest-earning deposits 769 24 3.12 892 69 7.78
-------- ------- ---- -------- ------- ----
Total interest-earning assets 288,296 21,442 7.44% 268,838 19,336 7.19
------- ---- ------- ----
Non-interest-earning assets 12,290 9,434
-------- --------
Total assets $300,586 $278,272
======== ========
Interest-bearing liabilities:
Deposits $241,258 10,071 4.17 $235,472 9,982 4.24
Borrowed funds 35,544 1,761 4.95 21,360 1,077 5.04
-------- ------ ---- ------- ------- ----
Total interest-bearing
liabilities 276,802 11,832 4.27 256,832 11,059 4.31
------ ---- ------ ----
Non-interest bearing
liabilities 1,689 339
-------- --------
Total liabilities 278,491 257,171
Stockholders' equity 22,095 21,101
-------- --------
Total liabilities and stock-
holders' equity $300,586 $278,272
======== ========
Net interest income; interest
rate spread $ 9,610 3.17% $ 8,277 2.88%
======= ====== ======= ====
Net interest margin(1) 3.33% 3.08%
====== ====
Average interest-earning assets
to average interest-bearing
liabilities 104.22% 104.68%
======= =======
</TABLE>
- ---------------
(1) Net interest margin is net interest income divided by average
interest-earning assets.
<PAGE>
<TABLE>
<CAPTION>
Year Ended September 30,
--------------------------------------
1994
--------------------------------------
Average Yield/
Balance Interest Rate
------- -------- ----
Interest-earning assets:
<S> <C> <C> <C>
Loans receivable $109,583 $ 9,030 8.24%
Mortgage-backed securities 114,165 6,611 5.79
Investment securities and
FHLB stock 34,625 2,029 5.86
Interest-earning deposits 3,641 108 2.94
-------- ------- ----
Total interest-earning assets 262,014 17,778 6.78
------- ----
Non-interest-earning assets 8,986
--------
Total assets $271,000
========
Interest-bearing liabilities:
Deposits $233,132 8,746 3.75
Borrowed funds 17,659 689 3.90
-------- ------- ----
Total interest-bearing
liabilities 250,791 9,435 3.77
------- ----
Non-interest bearing
liabilities 434
--------
Total liabilities 251,225
Stockholders' equity 19,775
--------
Total liabilities and stock-
holders' equity $271,000
========
Net interest income; interest
rate spread $ 8,343 3.01%
======= ====
Net interest margin(1) 3.18%
====
Average interest-earning assets
to average interest-bearing
liabilities 104.48%
======
</TABLE>
- ---------------
(1) Net interest margin is net interest income divided by average
interest-earning assets.
<PAGE>
Rate/Volume Analysis
The following table presents certain information regarding changes in interest
income and interest expense of the Bank for the periods indicated. For each
category of interest-earning assets and interest-bearing liabilities,
information is provided with respect to changes attributable to (1) changes in
volume (change in volume multiplied by old rate), (2) changes in rate (change in
rate multiplied by old volume), and (3) changes in rate/volume (change in rate
multiplied by change in volume).
<TABLE>
<CAPTION>
Fiscal 1996 Fiscal 1995
Compared to Fiscal 1995 Compared to Fiscal 1994
--------------------------------------- ---------------------------------------
Rate/ Rate/
Volume Rate Volume Total Volume Rate Volume Total
------ ---- ------- ----- ------ ---- ------ -----
(In Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest income on interest
earning assets:
Mortgage loans $ 609 $ 112 $ 10 $ 731 $ 21 $ (5) $ -- $ 16
Mortgage-backed securities (667) 214 (27) (480) (292) 294 (13) (11)
Installment loans 485 33 6 524 637 14 4 655
Commercial business loans 370 (71) (25) 274 130 89 33 252
Investment securities and
other investments 969 56 32 1,057 275 454 (83) 646
------ ------- ------ ------ ------ ------- ------ ------
Total interest-earning assets 1,766 344 (4) 2,106 771 846 (59) 1,558
------ ------- ------- ------ ------ ------- ------ ------
Interest expense on interest-
bearing liabilities:
Deposits 255 (162) (4) 89 87 1,138 11 1,236
Borrowed Funds 728 (32) (12) 684 129 217 42 388
------ ------- ------ ------- ------ ------- ------ ------
Total interest-bearing
liabilities 983 (194) (16) 773 216 1,355 53 1,624
------ ------- ------ ------- ------ ------- ------ ------
Net change in net interest income $ 783 $ 538 $ 12 $ 1,333 $ 555 $ (509) $ (112) $ (66)
====== ====== ===== ======= ====== ======== ======= =======
</TABLE>
<PAGE>
Certain Ratios
The following table presents certain information regarding the return on average
assets and average equity, and the ratio of average equity to assets of the Bank
and the dividend payout ratio for the periods indicated.
<TABLE>
<CAPTION>
Year Ended September 30,
-----------------------------------
1996 1995 1994
----- ----- -----
<S> <C> <C> <C>
Return on average assets .44% .54% .87%
Return on average equity 5.96 7.13 12.02
Average equity to assets ratio 7.37 7.85 7.30
Dividend payout ratio 34.04 28.44 16.37
</TABLE>
Asset and Liability Management
The Bank in fiscal 1996 continued to utilize strategies designed to decrease the
Bank's vulnerability to significant and prolonged increases in interest rates.
This process involves monitoring the imbalance between the generally long-term,
fixed rate nature of the Bank's interest-earning assets and its generally short
or medium-term, interest-bearing liabilities on a regular basis and implementing
actions designed to reduce this imbalance. Although management of the Bank
believes that the steps it has taken, as discussed in Management's Discussion
and Analysis of Financial Condition and Results of Operations - Asset and
Liability Management" in the Annual Report, have reduced the Bank's overall
vulnerability to increases in interest rates, the Bank continues to remain
vulnerable to significant and prolonged increases in interest rates because its
interest rate sensitive liabilities exceed its interest rate sensitive assets
with short-term maturities.
The following table summaries the anticipated repayments of Fidelity Savings
Bank's interest-earning assets and interest-bearing liabilities as of September
30, 1996. Adjustable and floating-rate assets are included in the period in
which interest rates are next scheduled to adjust and fixed-rate loans,
mortgage-backed securities held-for-investment and investment securities are
included in the periods in which they are anticipated to be repaid based on
scheduled maturities and certain assumptions that estimate the projected
repayments of loans, mortgage-backed securities and investments with specified
characteristics. The Bank has assumed that passbook, money market and NOW
accounts, which generally are subject to immediate withdrawal, are withdrawn at
various rates applied to the cumulative declining balances based on certain
assumptions for passbook, money market and NOW accounts.
<PAGE>
<TABLE>
<CAPTION>
September 30, 1996
---------------------------------------------------------------
Over Three
Months After One
Three Through Year
Months Twelve Through Five After Five
or Less Months Years Years Total
--------- --------- --------- --------- ---------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Interest-earning assets:
Mortgage loans $ 12,258 $ 20,994 $ 27,030 $ 46,987 $ 107,269
Mortgage-backed securities 16,936 10,673 47,361 18,768 93,738
Installment loans 8,318 7,081 18,881 1,502 35,782
Commercial business loans 4,698 1,599 4,098 307 10,702
Investment securities and
other investments 6,233 4,432 18,943 29,694 59,302
--------- --------- --------- --------- ---------
Total interest-earning
assets 48,443 44,779 116,313 97,258 306,793
--------- --------- --------- --------- ---------
Interest-bearing liabilities:
Passbook and club accounts 1,500 4,551 17,829 26,565 50,445
Checking accounts 2,115 -- 23,486 5,343 30,944
Money market accounts 2,000 -- 15,437 -- 17,437
Certificate accounts 25,782 57,402 40,918 11,348 135,450
Borrowed funds 51,843 2,000 3,300 1,317 58,460
--------- --------- --------- --------- ---------
Total interest-bearing
liabilities 83,240 63,953 100,970 44,573 292,736
--------- --------- --------- --------- ---------
Interest sensitivity $ (34,797) $ (19,174) $ 15,343 $ 52,685 $ 14,057
========= ========= ========= ========= =========
Cumulative interest
sensitivity $ (34,797) $ (53,971) $ (38,628) $ 14,057
========= ========= ========= =========
Cumulative ratio as a
percent of assets (10.9)% (17.0)% (12.2)% 4.4%
========= ========= ========= =========
</TABLE>
<PAGE>
Regulation of the Company
BHCA - GENERAL. The Company, as a bank holding company, is subject to regulation
and supervision by the Federal Reserve Board. Under the BHCA, a bank holding
company is required to file annually with the Federal Reserve Board a report of
its operations and, with its subsidiaries, is subject to examination by the
Federal Reserve Board.
BHCA - ACTIVITIES AND OTHER LIMITATIONS. The BHCA prohibits a bank holding
company form acquiring direct or indirect ownership or control of more than 5%
of the voting shares of any bank, or increasing such ownership or control of any
bank, without prior approval of the Federal Reserve Board. The BHCA also
generally prohibits a bank holding company from acquiring any bank located
outside of the state in which the existing bank subsidiaries of the bank holding
company are located unless specifically authorized by applicable state law. No
approval under the BHCA is required, however, for a bank holding company already
owning or controlling 50% of the voting shares of a bank to acquire additional
shares of such bank.
The BHCA also prohibits a bank holding company, with certain exceptions, from
acquiring more than 5% of the voting shares of any company that is not a bank
and from engaging in any business other than banking or managing or controlling
banks. Under the BHCA, the Federal Reserve Board is authorized to approve the
ownership of more than 5% of the shares by a bank holding company in any
company, the activities of which the Federal Reserve Board has determined to be
so closely related to banking or to managing or controlling banks as to be a
proper incident thereto. In making such determinations, the Federal Reserve
Board is required to weigh the expected benefit to the public, such as greater
convenience, increased competition or gains in efficiency, against the possible
adverse effects, such as undue concentration of resources, decreased or unfair
competition, conflicts of interest or unsound banking practices.
The Federal Reserve Board has by regulation determined that certain activities
are closely related to banking within the meaning of the BHCA. These activities
include providing services for internal operations for itself and its
subsidiaries and operating a mortgage company, finance company, credit card
company, factoring company, trust company or savings association; performing
certain data processing operations; providing limited securities brokerage
services; acting as an investment or financial advisor; acting as an insurance
agent for certain types of credit-related insurance; leasing personal property
on a full-payout, non-operating basis; providing tax planning and preparation
services; operating a collection agency; providing certain courier services;
providing management consulting services to depository institutions; issuing and
selling money orders, travelers checks and savings bonds; performing real estate
and personal property appraisals; arranging commercial real estate equity
financing; providing certain securities brokerage services; underwriting and
dealing in government obligations and money market instruments; providing
foreign exchange advisory and transactional services; acting as a futures
commission merchant; providing consumer financial counseling; providing tax
planning and preparation services; providing check guaranty services; operating
a collection agency; and operating a credit bureau. The Federal reserve Board
also has determined that certain other activities, including real estate
brokerage and syndication, land development, property management and
underwriting of life insurance not related to credit transactions, are not
closely related to banking and a proper incident thereto.
<PAGE>
LIMITATIONS ON ACQUISITIONS OF VOTING STOCK. The Federal Change in Bank Control
Act prohibits a person or group of persons from acquiring "control" of a bank
holding company unless the Federal Reserve Board has been given 60 days' prior
written notice of such proposed acquisition and within that time period the
Federal Reserve Board has not issued a notice disapproving the proposed
acquisition or extending for up to another 30 days the period during which such
a disapproval may be issued. An acquisition may be made prior to expiration of
the disapproval period if the Federal Reserve Board issues written notice of its
intent not to disapprove the action. Under a rebuttable presumption established
by the Federal Reserve Board, the acquisition of more than 10% of a class of
voting stock of a bank holding company with a class of securities registered
under Section 12 of the Exchange Act would, under the circumstances set forth in
the presumption, constitute the acquisition of control.
In addition, any "company" would be required to obtain the approval of the
Federal Reserve Board under the BHCA before acquiring 25% (5% in the case of an
acquiror that is a bank holding company) or more of the outstanding Common Stock
of, or such lesser number of shares as constitute control over, the Company.
Regulation of the Bank
Following completion of its conversion to a Pennsylvania savings bank charter as
of November 27, 1991, the Bank is now subject to extensive regulation by the
FDIC and the Department. There are periodic examinations by the Department and
the FDIC to test the Bank's compliance with various regulatory requirements.
This regulation and supervision establishes a comprehensive framework of
activities in which an institution can engage and is intended primarily for the
protection of the insurance fund and depositors.
FDIC INSURANCE PREMIUMS. The Bank currently pays deposit insurance premiums to
the FDIC based on a risk-based assessment system established by the FDIC for all
SAIF-member institutions. Under applicable regulations, institutions are
assigned to one of three capital groups which is based solely on the level on an
institution's capital - "well capitalized," "adequately capitalized" and
"undercapitalized" - which is defined in the same manner as the regulations
establishing the prompt corrective action system under Section 38 of the Federal
Deposit Insurance Act ("FDIA"), as discussed below. These three groups are then
divided into three subgroups which reflect varying levels of supervisory
concern, from those which are considered to be healthy to those which are
considered to be of substantial supervisory concern. The matrix so created
results in nine assessment risk classifications, with rates prior to January 1,
1997 ranging from .23% for well capitalized, healthy institutions to .31% for
undercapitalized institutions which substantial supervisory concerns. The Bank
is a "well capitalized" institution as of September 30, 1996 and the Bank's
insurance premiums throughout 1996 were .23% (per annum) of insured deposits.
Both the SAIF and BIF are statutorily required to be capitalized to a ratio of
1.25% of insured reserve deposits. The BIF has reached the required reserve
ratio and, as discussed below, legislation has recently been passed which will
fully recapitalize the SAIF in the fourth quarter of 1996.
<PAGE>
On September 30, 1996, the President signed into law the Deposit Insurance Funds
Act of 1996 (the ACT). Among other things, the ACT imposed a one time special
assessment on deposits insured by the SAIF designed to fully capitalize the SAIF
to the level required by law. This special assessment was approximately $1.5
million for the Bank. The Act also included a provision confirming that the
special assessment is deductible for Federal income tax purposes in the year
paid. The Act also provides for the eventual merger of the SAIF and BIF and
reallocates payment of Financing Corporation (FICO) bond obligations to both
SAIF and BIF insured institutions. In addition, the Act contains prohibitions on
insured institutions facilitating or encouraging the migration of SAIF deposits
to the BIF until the end of 1999. While the Bank has not yet determined the
effect all the provisions of the Act will have on it, it is expected that, as a
result of the recapitalization of SAIF, deposit insurance premiums will be
significantly reduced beginning in calendar year 1997 for all SAIF insured
institutions.
Effective January 1, 1997, SAIF members will have the same risk-based assessment
schedule as BIF members of 0 to 27 basis points. FICO assessments of
approximately 6.4 and 1.3 basis points will be added to the regular assessment
for the SAIF and BIF members, respectively, until December 1999. Thereafter,
about 2.4 basis points will be added to each regular assessment for all insured
depositories, achieving full pro rata FICO sharing. As a "well-capitalized"
institution, the Bank would expect its risk-based assessment beginning January
1, 1997 to be zero basis points. Including the FICO assessment of 6.4 basis
points, the Bank anticipates that total deposit insurance premiums will be 6.4
basis points effective January 1, 1997.
CAPITAL REQUIREMENTS. The FDIC has promulgated regulations and adopted a
statement of policy regarding the capital adequacy of state-chartered banks
which, like the Bank, will not be members of the Federal Reserve System. These
requirements are substantially similar to those adopted by the Federal Reserve
Board regarding bank holding companies, as described above.
The FDIC's capital regulations establish a minimum 3.0% Tier I leverage capital
requirement for the most highly-rated state-chartered, non-member banks, with an
additional cushion of at least 100 to 200 basis points for all other
state-chartered, non-member banks, which effectively will increase the minimum
Tier I leverage ratio for such other banks to 4.0% to 5.0% or more. Under the
FDIC's regulation, highest-rated banks are those that the FDIC determines are
not anticipating or experiencing significant growth and have well diversified
risk, including no undue interest rate risk exposure, excellent asset quality,
high liquidity, good earnings and, in general, which are considered a strong
banking organization and are rated composite 1 under the Uniform Financial
Institutions Rating System. Leverage or core capital is defined as the sum of
common stockholders' equity (including retained earnings), noncumulative
perpetual preferred stock and related surplus, and minority interests in
consolidated subsidiaries, minus all intangible assets other than certain
qualifying supervisory goodwill, and certain purchased mortgage servicing rights
and purchased credit and relationships.
The FDIC also requires that savings banks meet a risk-based capital standard.
The risk-based capital standard for savings banks requires the maintenance of
total capital (which is defined as Tier I capital and supplementary (Tier 2
capital) to risk weighted assets of 8%. In determining the amount of
risk-weighted assets, all assets; plus certain off balance sheet assets, are
multiplied by a risk-weight of 0% to 100%, based on the risks the FDIC believes
are inherent in the type of asset or item.
<PAGE>
The components of Tier I capital are equivalent to those discussed above under
the 3% leverage standard. The components of supplementary (Tier 2) capital
include certain perpetual preferred stock, certain mandatory convertible
securities, certain subordinated debt and intermediate preferred stock and
general allowances for loan and lease losses. Allowance for loan and lease
losses includable in supplementary capital is limited to a maximum of 1.25% of
risk-weighted assets. Overall, the amount of capital counted toward
supplementary capital cannot exceed 100% of core capital. At September 30, 1996,
the Bank met each of its capital requirements.
The following table sets forth certain information concerning the Bank's
regulatory capital at September 30, 1996.
<TABLE>
<CAPTION>
Tier I Tier I Tier II
Core Risk-Based Risk-Based
Capital Capital Capital
------- ------- -------
(Dollars in thousands)
<S> <C> <C> <C>
Equity Capital (1) $20,768 $20,768 $20,768
Less: unrealized securities gains 1,145 1,145 1,145
intangible assets (44) (44) (44)
Plus: general valuation allowance (2) -- -- 1,530
------- ------- -------
Total regulatory capital 21,869 21,869 23,399
Minimum required capital 12,528 6,208 12,416
------- ------- -------
Excess regulatory capital $ 9,341 $15,661 $10,983
======= ======= =======
Regulatory capital as a percentage (3) 6.98% 14.09% 15.08%
Minimum regulatory capital percentage 4.00 4.00 8.00
------- ------- -------
Excess regulatory capital
percentage 2.98% 10.09% 7.08%
======= ======= =======
</TABLE>
(1) Represents equity capital of the Bank as reported to the FDIC and the
Pennsylvania Department of Banking on Form 033 for the quarter ended
September 30, 1996.
(2) Limited to 1.25% of risk adjusted assets.
(3) Tier 1 capital is calculated as a percentage of adjusted total assets of
$313.2 million. Tier I and Tier II risk-based capital are calculated as a
percentage of adjusted risk-weighed assets of $155.2 million.
<PAGE>
Section 18 of the FDIA, as amended by the FDICIA, requires the federal banking
agencies to revise their risk-based capital guidelines, with appropriate
transition rules, to ensure that they take adequate account of interest rate
risk. In August 1995, the FDIC and other federal banking agencies published a
final rule modifying their existing risk-based capital standards to provide for
consideration of interest rate risk when assessing capital adequacy of a bank.
Under the final rule, the FDIC must explicitly include a bank's exposure to
declines in the economic value of its capital due to changes in interest rates
as a factor in evaluating a bank's capital adequacy. In addition, in August
1995, the FDIC and the other federal banking agencies published a joint policy
statement for public comment that describes the process the banking agencies
will use to measure and assess the exposure of a bank's net economic value to
changes in interest rates. Under the policy statement, the FDIC will consider
results of supervisory and internal interest rate risk models as one factor in
evaluating capital adequacy.
The Bank is also subject to more stringent Department capital guidelines.
Although not adopted in regulation form, the Department utilizes capital
standards requiring a minimum of 6% leverage capital and 10% risk-based capital.
The components of leverage and risk-based capital are substantially the same as
those defined by the FDIC.
SAFETY AND SOUNDNESS. FDICIA requires each federal banking regulatory agency to
prescribe, by regulation, standards for all insured depository institutions and
depository institution holding companies relating to (i) internal controls,
information systems and audit systems; (ii) loan documentation; (iii) credit
underwriting; (iv) interest rate risk exposure; (v) asset growth; (vi)
compensation, fees and benefits; and (vii) such other operational and managerial
standards as the agency determines to be appropriate. If an insured depository
institution or its holding company fails to meet any of the standards
promulgated by regulation, then such institution or company will be required to
submit a plan within 30 days to the FDIC specifying the steps it will take to
correct the deficiency. In the event that an institution or company fails to
submit or fails in any material respect to implement a compliance plan within
the time allowed by the agency, Section 39 of the FDIA provides that the FDIC
must order the institution or company to correct the deficiency and may (1)
restrict asset growth; (2) require the institution or company to increase its
ratio of tangible equity to assets; (3) restrict the rates of interest that the
institution or company may pay; or (4) take any other action that would better
carry out the purpose of prompt corrective action. The Bank believes that it is
in compliance with each of the standards adopted.
REGULATORY ENFORCEMENT AUTHORITY. FIRREA included substantial enhancement to the
enforcement powers available to federal banking regulators. This enforcement
authority includes, among other things, the ability to assess civil money
penalties, to issue cease-and-desist or removal orders and to initiate
injunctive actions against banking organizations and institution-affiliated
parties, as defined. In general, these enforcement actions may be initiated for
violations of laws and regulations and unsafe or unsound practices. Other
actions or inactions may provide the basis for enforcement actions, including
misleading or untimely reports filed with regulatory authorities. FIRREA
significantly increased the amount of and grounds for civil money penalties and
requires, except under certain circumstances, public disclosure of final
enforcement actions by the federal banking agencies. In addition, under FIRREA
and regulations adopted by the FDIC thereunder, the FDIC must be given 30 days'
notice of any changes in directors or senior executive officers of Fidelity
Savings, and the FDIC may object to such changes.
<PAGE>
ACTIVITIES AND INVESTMENTS OF INSURED STATE-CHARTERED BANKS. Section 24 of the
FDIA, as amended by the FDICIA, generally limits the activities and equity
investments of FDIC-insured, state-chartered banks to those that are permissible
for national banks. Under regulations dealing with equity investments, an
insured state bank generally may not directly or indirectly acquire or retain
any equity investment of a type, or in an amount, that is not permissible for a
national bank. An insured state bank is not prohibited from, among other things,
(I) acquiring or retaining a majority interest in a subsidiary, (ii) investing
as a limited partner in a partnership the sole purpose of which is direct or
indirect investment in the acquisition, rehabilitation or new construction of a
qualified housing project, provided that such limited partnership investments
may not exceed 2% of the bank's total assets, (iii) acquiring up to 10% of the
voting stock of a company that solely provides or reinsures directors',
trustees' and officers' liability insurance coverage or bankers' blanket bond
group insurance coverage for insured depository institutions, and (iv) acquiring
or retaining the voting shares of a depository institution if certain
requirements are met.
The FDIC adopted final regulation governing the activities and investments of
insured state banks which further implemented Section 24 of the FDIA, as amended
by FDICIA. Under the regulations, an insured state-chartered bank may not,
directly, or indirectly through a subsidiary, engage as "principal" in any
activity that is not permissible for a national bank unless the FDIC has
determined that such activities would pose no risk to the insurance fund of
which it is a member and the bank is in compliance with applicable regulatory
capital requirements. Any insured state-chartered bank directly or indirectly
engaged in any activity that is not permitted for a national bank must cease the
impermissible activity.
FEDERAL HOME LOAN BANK SYSTEM. The Bank is a member of the FHLB System, which
consists of 12 regional FHLBs, with each subject to supervision and regulation
by the Federal Housing Finance Board. The FHLBs provide a central credit
facility primarily for member institutions. The Bank, as a member of the FHLB of
Pittsburgh, is required to acquire and hold shares of capital stock in that FHLB
in an amount equal to at least 1% of the aggregate principal amount of its
unpaid residential mortgage loans, home purchase contracts and similar
obligations at the beginning of each year, or 5% of its advances (borrowings)
from the FHLB of Pittsburgh, whichever is greater. Fidelity Savings had a $2.8
million investment in stock of the FHLB of Pittsburgh at September 30, 1996,
which complied with this requirement.
Advances from the FHLB of Pittsburgh are secured by a member's shares of stock
in the FHLB of Pittsburgh, certain types of mortgages and other assets. Interest
rates charged for advances vary depending upon maturity, the cost of funds to
the FHLB of Pittsburgh and the purpose of the borrowing. At September 30, 1996,
the Bank had $56.6 million of advances from the FHLB of Pittsburgh outstanding.
<PAGE>
CLASSIFICATION OF ASSETS. Under current federal regulations, an institution's
problem assets are subject to classification according to one of three
categories: "substandard," "doubtful" and "loss." For assets classified
"substandard" and "doubtful," the institution is required to establish prudent
general loan loss reserves in accordance with generally accepted accounting
principles. Assets classified "loss" must be either completely written off or
supported by a 100% specific reserve. A classification category designated
"special mention" also must be established and maintained for assets not
currently requiring classification but having potential weaknesses or risk
characteristics that could result in future problems. An institution is required
to develop an in-house program to classify its assets, including investments in
subsidiaries, on a regular basis and set aside appropriate loss reserves on the
basis of such classification. At September 30, 1996, the Bank had $1.5 million
of assets classified as substandard.
INTERSTATE ACQUISITIONS. The Commonwealth of Pennsylvania has enacted
legislation regarding the acquisition of commercial banks, bank holding
companies, savings banks and savings and loan associations located in
Pennsylvania by institutions located outside of Pennsylvania. The statute
dealing with savings institutions authorizes (i) a savings bank, savings and
loan association or holding company thereof located in Delaware, the District of
Columbia, Indiana, Kentucky, Maryland, New Jersey, Ohio, Virginia and West
Virginia (collectively, "regional institutions") to acquire the voting stock of,
merge or consolidate with, or purchase assets and assume liabilities of, a
Pennsylvania-chartered savings bank, (collectively, "Pennsylvania institutions")
and (ii) the establishment of branches in Pennsylvania by regional institutions,
in each case subject to certain conditions including reciprocal legislation in
the state in which the regional institution seeking entry into Pennsylvania is
located permitting comparable entry by Pennsylvania institutions and approval by
the Pennsylvania Department of Banking. The statute also provides for nationwide
branching by Pennsylvania-chartered savings banks and savings and loan
associations, subject to Pennsylvania Department of Banking approval and certain
other conditions. Of the states within the region, Delaware, Maryland, New
Jersey, Ohio and West Virginia currently have laws that permit Pennsylvania
institutions to branch into such states and/or acquire savings institutions
located is such states.
MISCELLANEOUS. The Bank is subject to certain restrictions on loans to the
Company, on investments in the stock or securities thereof, on the taking of
such stock or securities as collateral for loans to any borrower, and on the
issuance of a guarantee or letter of credit on behalf of the Company. The Bank
is also subject to certain restrictions on most types of transactions with the
Company, requiring that the terms of such transactions be substantially
equivalent to terms of similar transactions with non-affiliated firms. In
addition, there will be various limitations on the distribution of dividends to
the Company by the Bank.
In addition to requiring a new system of risk-based insurance assessments and a
system of prompt corrective action with respect to undercapitalized banks, as
discussed above, the FDICIA also contains provisions which are intended to
enhance independent auditing requirements, amend various consumer banking laws,
limit the ability of "undercapitalized banks" to borrow from the Federal Reserve
Board's discount window, and require regulators to perform annual on-site bank
examinations and set standards for real estate lending.
<PAGE>
Pennsylvania Bank Law
Following its conversion to a savings bank charter as of November 27, 1991, the
Bank is now incorporated under the Pennsylvania Banking Code of 1965, which
contains detailed provisions governing the organization, location of offices,
rights and responsibilities of directors, officers, employees and members, as
well as corporate powers, savings and investment operations and other aspects of
the Savings Bank and its affairs. The Banking Code delegates extensive
rulemaking power and administrative discretion to the Department so that the
supervision and regulation of state-chartered savings banks may be flexible and
readily responsive to changes in economic conditions and in savings and lending
practices.
One of the purposes of the Banking Code is to provide savings banks with the
opportunity to be competitive with each other and with other financial
institutions existing under other Pennsylvania laws and other state, federal and
foreign laws. A Pennsylvania savings bank may locate or change the location of
its principal place of business and establish an office anywhere in the
Commonwealth, with the prior approval of the Department.
The Department generally examines each savings bank not less frequently than
once every two years. Although the Department may accept the examinations and
reports of the FDIC in lieu of the Department's examination, the present
practice is for the Department to conduct a joint examination with the FDIC. The
Department may order any savings bank to discontinue any violation of law or
unsafe or unsound business practice and may direct any director, officer,
attorney or employee of a savings bank engaged in an objectionable activity,
after the Department has ordered the activity to be terminated, to show cause at
a hearing before the Department why such person should not be removed.
The foregoing references to laws and regulations which are applicable to
Fidelity Savings Bank are brief summaries thereof which do no purport to be
complete and which are qualified in their entirety by reference to such laws and
regulations.
Federal and State Taxation
GENERAL. The Company and Bank are subject to federal income taxation in the same
general manner as other corporations with some exceptions, including
particularly the reserve for bad debts discussed below. The following discussion
of federal taxation is intended only to summarize certain pertinent federal
income tax matters and is not a comprehensive description of the tax rules
applicable to the Bank.
METHOD OF ACCOUNTING. For federal income tax purposes, the Company and Bank
currently report income and expenses on the accrual method of accounting and use
a tax year ending September 30 for filing its consolidated federal income tax
returns.
<PAGE>
BAD DEBT RESERVES. Savings institutions such as the Bank, which meet certain
definitional tests primarily relating to their assets and the nature of their
businesses, are permitted to establish a reserve for bad debts and to make
annual additions to the reserve. These additions may, within specified formula
limits, be deducted in arriving at the Bank's taxable income. For purposes of
computing the deductible addition to its bad debt reserve, the Bank's loan are
separated into "qualifying real property loans" (i.e., generally those loans
secured by certain interests in real property) and all other loans
("non-qualifying loans"). The deduction with respect to nonqualifying loans must
be computed under the experience method, which essentially allows a deduction
for the Bank's actual charge-offs, while a deduction with respect to qualifying
loans may be computed using a percentage based on actual loss experience or a
percentage of taxable income. Reasonable additions to the reserve for losses on
nonqualifying loans must be based upon actual loss experience and would reduce
the current years addition to the reserve for losses on qualifying real property
loans, unless that addition is also determined under the experience method. The
sum of the additions to each reserve for each year is the Bank's annual bad debt
deduction.
Under the experience method, the deductible annual addition to the Bank's bad
debt reserves is the amount necessary to increase the balance of the reserve at
the close of the taxable year to the greater of (a) the amount which bears the
same ratio to loans outstanding at the close of the taxable year as the total
net bad debts sustained during the current and five preceding taxable years bear
to the sum of the loans outstanding at the close of those six years or (b) the
lower of (i) the balance in the reserve account at the close of the last taxable
year prior to the most recent adoption of the experience method (the "base
year"), except that for taxable years beginning after 1987, the base year is the
last taxable year beginning before 1988, or (ii) if the amount of loans
outstanding at the close of the taxable year is less than the amount of loans
outstanding at the close of the base year, the amount which bears the same ratio
to loans outstanding at the close of the taxable year as the balance of the
reserve at the close of the base year bears to the amount of loans outstanding
at the close of the base year.
Under the percentage of taxable income method, the bad debt deduction equals 8%
of taxable income determined without regard to that deduction and with certain
adjustments. The availability of the percentage of taxable income method has
permitted a qualifying savings institution to be taxed at a lower maximum
effective marginal federal income tax rate than that applicable to corporations
in general. This resulted generally in a maximum effective marginal federal
income tax rate payable by a qualifying savings institution fully able to use
the maximum deduction permitted under the percentage of taxable income method,
in the absence of other factors affecting taxable income, of 31.3% exclusive of
any minimum tax or environmental tax. Any savings institution at least 60% of
whose assets are qualifying assets, as described in Section 7701(a)(19)(c) of
the Internal Revenue Code of 1986 (the "Code"), will generally be eligible for
the full deduction of 8% of taxable income. As of September 30, 1996, at least
60% of the Bank's assets were "qualifying assets" described in Section
7701(a)(19)(c) of the Code, and the Bank anticipates that at least 60% of its
assets will continue to be qualifying assets in the immediate future. If this
ceases to be the case, the Bank may be required to restore some portion of its
bad debt reserve to taxable income in the future.
<PAGE>
Under the percentage of taxable income method, the bad debt deduction for an
addition to the reserve for qualifying real property loans cannot exceed the
amount necessary to increase the balance in this reserve to an amount equal to
6% of such loans outstanding at the end of the taxable year. The bad debt
deduction is also limited to the amount which, when added to the addition to the
reserve for losses on non-qualifying loans, equals the amount by which 12% of
deposits at the close of the year exceeds the sum of surplus, undivided profits
and reserves at the beginning of the year. Based on experience, it is not
expected that these restrictions will be a limited factor in the immediate
future. In addition, the deduction for qualifying real property loans is reduced
by an amount equal to the deduction for non-qualifying loans.
Recently enacted legislation (i) repeals the provision of the Code which
authorizes use of the percentage of taxable income method by qualifying savings
institutions to determine deductions for bad debts, effective for taxable years
beginning after 1995, and (ii) requires that a savings institution recapture for
tax purposes (i.e. take into income) over a six-year period it applicable excess
reserves, which for a thrift institution such as the Bank which becomes a "small
bank," as defined in the Code, generally is the excess of the balance of its bad
debt reserves as of the close of its last taxable year beginning before January
1, 1996 over the balance of such reserves as of the close of its last taxable
year beginning before January 1, 1988, which recapture would be suspended for
any tax year that begins after December 31, 1995 and before January 1, 1998
(thus a maximum of two years) in which a savings institution originates an
amount of residential loans which is not less than the average or the principal
amount of such loans made by a savings institution during its six most recent
taxable years beginning before January 1, 1996. As an institution with less than
$500.0 million in assets, the Bank can elect to either use the experience method
available to commercial banks of this size or it can adopt the specific
charge-off method applicable to "large banks" (banks with total assets in excess
of $500.0 million). The Company does not believe that these provisions will have
a material adverse effect on the Company's financial condition or results of
operations.
The above-referenced legislation also repeals certain provisions of the Code
that only apply to thrift institutions to which Section 593 applies: (i) the
denial of a portion of certain tax credits to a thrift institution; (ii) the
special rules with respect to the foreclosure of property securing loans of a
thrift institution; (iii) the reduction in the dividends received deduction of a
thrift institution; and (iv) the ability of a thrift institution to use a net
operating loss to offset its income from a residual interest in a real estate
mortgage investment conduit. It is not anticipated that the repeal of these
provisions will have a material adverse effect on the Company's financial
condition or results of operations.
DISTRIBUTIONS. If the Bank makes a distribution to stockholders, and the
distribution is treated as being from its accumulated bad debt reserves, the
distribution will cause the Bank to have additional taxable income. As
distribution to stockholders is deemed to have been made from accumulated bad
debt reserves to the extent that (a) the reserves exceed the amount that would
have been accumulated on the basis of actual loss experience, and (b) the
distribution is a "nondividend distribution." A distribution in respect of stock
is a non-dividend distribution to the extent that, for federal income tax
purposes, (i) it is in redemption of shares, (ii) it is pursuant to a
liquidation of the institution, or (iii) in the case of a current distribution,
together with all other such distributions during the taxable year, exceeds the
Bank's current and post-1951 accumulated earnings and profits. The amount of
additional taxable income created by a nondividend distribution is an amount
that when reduced by the tax attributable to it is equal to the amount of the
distribution.
<PAGE>
MINIMUM TAX. The Code imposes the corporate minimum tax from an add-on tax to an
alternative minimum tax at a rate of 20%. The alternative minimum tax generally
will apply to a base of regular taxable income plus certain tax preferences
("alternative minimum taxable income" or "AMTI") and will be payable to the
extent such AMTI is in excess of an exemption amount. The Code provides that an
item of tax preference is the excess of the bad debt deduction over the amount
allowable under the experience method. The other items of tax preference that
constitute AMTI include (a) tax-exempt interest on newly-issued (generally,
issued on or after August 8, 1986) private activity bonds other than certain
qualified bonds and (b) 75% of the excess (if any) of (i) 75% of adjusted
current earning as defined in the Code, over (ii) AMTI (determined without
regard to this preference and prior to reduction by net operating losses).
NET OPERATING LOSS CARRYOVERS. The Bank may carry back net operating losses
("NOLS") to the preceding three taxable years and forward to the succeeding 15
taxable years. Losses incurred by savings institutions in years beginning after
1981 and before 1986 may be carried back ten years and forward eight years.
Losses attributable to years before 1982 may be carried back ten years and
forward five years.
CAPITAL GAINS AND CORPORATE DIVIDENDS-RECEIVED DEDUCTIONS. Corporate net capital
gains are taxed at a maximum rate of 34%. The corporate dividends-received
deduction is 80% in the case of dividends received from corporations with which
a corporate recipient does not file a consolidated tax return, however, if a
corporation owns less than 20% of the stock of a corporation distributing a
dividend, it may deduct only 70% of dividends received or accrued on its behalf.
A corporation may deduct 100% of dividends from a member of the same affiliated
group of corporations.
PENNSYLVANIA TAXATION. The Company is subject to the Pennsylvania Corporate Net
Income Tax and Capital Stock and Franchise Tax. The Corporate Net Income Tax
rate is currently 12.25% and is imposed on the Company's unconsolidated taxable
income for federal purposes with certain adjustments. In general, the Capital
Stock Tax is a property tax imposed at a rate of 1.3% of a corporation's capital
stock value, which is determined in accordance with a fixed formula based on
average net income and net worth.
The Bank is subject to tax under the Pennsylvania Mutual Thrift Institutions Tax
Act ("MITA"), currently at the rate of 11.5% on the Bank's net earnings,
determined in accordance with GAAP, as shown on its books. For fiscal years
beginning in 1983, and thereafter, net operating losses may be carried forward
and allowed as a deduction for three succeeding years. MITA exempts the Bank
from all other corporate taxes imposed by Pennsylvania for state tax purposes,
and from all local taxes imposed by political subdivisions thereof, except taxes
on real estate and real estate transfers.
<PAGE>
Item 2. Description of Properties
At September 30, 1996, Fidelity Savings conducted its business from its main
office in Pittsburgh, Pennsylvania and seven full-service branch offices located
in Allegheny and Butler counties.
The following table sets forth certain information with respect to the offices
of the Bank as of September 30, 1996.
<TABLE>
<CAPTION>
Net Book Value
Lease Expiration of Property and
Date (Including Leasehold Improvements
Lease or Own Options) at September 30, 1996
--------------------- ---------------------
Location
- -------------------------------------------------
County Address
- ------ -------
<S> <C> <C> <C>
Allegheny 3300 Brighton Road
Pittsburgh PA 15212 Own $ 172,817
Allegheny 1009 Perry Highway
Pittsburgh PA 15237 Own 246,206
Butler 251 South Main Street
Zelienople PA 16063 Own 352,511
Allegheny 312 Beverly Road
Pittsburgh PA 15216 Lease 10/31/97 -0-
Allegheny 6000 Babcock Blvd.
Pittsburgh PA 15237 Lease 11/30/97 -0-
Allegheny 1701 Duncan Avenue
Allison Park PA 15101 Lease 01/31/00 -0-
Allegheny 4710 Liberty Avenue
Pittsburgh PA 15224 Own 660,105
Allegheny 728 Washington Road
Pittsburgh PA 15228 Own 266,899
-----------
Total $ 1,698,538
-----------
Allegheny Administrative Offices
1014 Perry Highway
Pittsburgh PA 15237 Own 389,418
Allegheny Data Processing and
Checking Department
1015 Perry Highway
Pittsburgh PA 15237 Own 308,552
------------
Total
(including Data Center) $ 2,396,508
============
</TABLE>
<PAGE>
Management of Fidelity Savings believes that the above properties are adequately
covered by insurance and are in good condition. The Bank has determined that it
does not presently require all of the administrative office space available at
1014 Perry Highway and has therefore placed that building for sale.
Fidelity Savings generally does not invest in real estate directly. The real
estate activities of Fidelity Savings generally consist of providing loans to
the purchasers of the properties. The properties which serve as collateral for
the loans may consist of any type of real estate located anywhere in the United
States. For a description of the real estate lending activities of Fidelity
Savings, see "Item 1. Description of Business - Lending Activities."
Item 3. Legal Proceedings
The Company is not involved in any legal proceedings other than legal
proceedings occurring in the ordinary course of business, of which none are
expected to have a material adverse effect on the Company. In the opinion of
management, the aggregate amount involved in such proceedings is not material to
the financial condition or results of operations of Fidelity Savings.
Items 4. Submission of Matters to a Vote of Securities Holders
Not applicable.
PART II.
Item 5. Market for Common Equity and Related Stockholder Matters
The information required herein is incorporated by reference from page 2 of the
Company's Annual Report to Stockholders for fiscal 1996 ("Annual Report"). The
Company's ability to pay cash dividends in the future is dependent upon, among
other things, the receipt of dividends from the Bank.
Item 6. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The information required herein is incorporated by reference from pages 33 to 43
of the Company's Annual Report.
Item 7. Financial Statements
The information required herein is incorporated by reference form pages 6 to 32
of the Company's Annual Report.
Item 8. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure
Not applicable.
PART III.
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act
The information required herein is incorporated by reference from pages 4 to 6
and 8 to 9 of the Proxy Statement for the 1997 Annual Meeting of Stockholders to
be filed within 120 days of September 30, 1996 ("Proxy Statement").
<PAGE>
Item 10. Executive Compensation and Transactions
The information required herein is incorporated by reference from pages 10 to 17
of the Proxy Statement.
Item 11. Security Ownership of Certain Beneficial Owners and Management
Contents
The information required herein is incorporated by reference from pages 2 to 6
of the Proxy Statement.
<PAGE>
Item 12. Certain Relationships and Related Transactions
The information required herein is incorporated by reference from pages 17 to 18
of the Proxy Statement.
Item 13. Exhibits, List and Reports on Form 8-K
(a.) Exhibits
The following exhibits are filed as part of this Form 10-KSB and this list
includes the Exhibit Index.
No. Exhibits Page
--- -------- ----
2 Agreement and Plan of Reorganization *
3.1 Articles of Incorporation *
3.2 Bylaws *
4 Common Stock Certificate **
10.1 Employee Stock Ownership Plan, as amended **
10.2 Employee Stock Compensation Program **
10.3 Employment Agreement between the Company,
the Bank and William L. Windisch E-1
13 Annual Report to Stockholders E-11
21 Subsidiaries (see Item 1. Description of
Business - Subsidiaries)
- ----------------------------------
* Incorporated by reference from the exhibits attached to the Prospectus and
Proxy Statement of the Company included in its Registration Statement on Form
S-4 (registration No. 33-55384) filed with the SEC on December 3, 1992 (the
"Registration Statement").
** Incorporated by reference from the Registration Statement.
(b.) Reports on form 8-K
The Company did not file any reports on Form 8-K during the quarter ended
September 30, 1996.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange Act of
1934, the Company has duly caused this report to be signed on its behalf by the
undersigned, thereunto only authorized.
FIDELITY BANCORP, INC.
December 23, 1996 By: /s/ William L. Windisch
-----------------------
William L. Windisch
Chief Executive Officer and
President
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Company and in
the capacities and on the dates indicated.
/s/ William L. Windisch December 23, 1996
- -------------------------------
William L. Windisch, Director,
President and Chief Executive Officer
/s/ Richard G. Spencer December 23, 1996
- -------------------------------
Richard G. Spencer
Vice President and Treasurer
(also principal accounting officer)
/s/ John R. Gales December 23, 1996
- -------------------------------
John R. Gales, Director
/s/ Robert F. Kastelic December 23, 1996
- -------------------------------
Robert F. Kastelic, Director
/s/ Oliver D. Keefer December 23, 1996
- -------------------------------
Oliver D. Keefer, Director
/s/ Charles E. Nettrour December 23, 1996
- -------------------------------
Charles E. Nettrour, Director
<PAGE>
/s/ James E. Shepard December 23, 1996
- -------------------------------
James E. Shepard, Director
/s/ Joanne Ross Wilder December 23, 1996
- -------------------------------
Joanne Ross Wilder, Director
FIDELITY
Bancorp, Inc.
1996
Fidelity Savings Bank
Annual Report
<PAGE>
CORPORATE PROFILE, MISSION AND MISSION STATEMENT
Corporate Profile
Fidelity Bancorp, Inc. (the Company) is a bank holding company organized
under the Pennsylvania Business Corporation Law. It was organized to
operate principally as a holding company for its wholly owned subsidiary,
Fidelity Savings Bank (the Bank). The Bank is a Pennsylvania-chartered,
FDIC-insured stock savings bank conducting business through eight offices
located in Allegheny and Butler counties.
Mission
Fidelity Savings Bank will offer its consumer and commercial customers a
wide range of high quality, fairly priced products and services. The Bank
will be sensitive to changing customer needs, and will adapt its products
and services quickly to satisfy the desires of its client base.
Mission Statement
The Board of Directors and Management are dedicated to excellence within
community banking, which can be best achieved through a commitment to:
-- maximizing stockholder value, thereby assuring the financial
success of the independent bank franchise;
-- ensuring customer satisfaction by offering quality products and
services that are delivered in an efficient and convenient
manner;
-- the employment and retention of a competent and dedicated staff;
and
-- the communities served by Fidelity Savings Bank.
<PAGE>
FINANCIAL HIGHLIGHTS AND CORPORATE INFORMATION
<TABLE>
<CAPTION>
Financial Highlights
At or For the
Fiscal Years Ended September 30,
(in thousands, except per share data and percentages) 1996 1995
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Total assets $317,874 $281,810
Total savings deposits 234,276 244,083
Total loans receivable, net 151,263 120,904
Total stockholders' equity 21,778 22,132
- -------------------------------------------------------------------------------------------------------------------
Net interest income $ 9,154 $ 7,988
Provision for loan losses 270 230
Net income(2) 1,317 1,515
- -------------------------------------------------------------------------------------------------------------------
Earnings per share(1,2) $ .94 $ 1.09
Book value per share(1) 15.86 16.28
Average interest rate spread 3.17% 2.88%
Return on average assets(2) .44% .54%
Return on average stockholders' equity(2) 5.96% 7.13%
- -------------------------------------------------------------------------------------------------------------------
Common shares outstanding(1) 1,373,151 1,359,307
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Fiscal 1995 per share amounts and common shares outstanding were restated to
reflect the 10% stock dividend paid on May 31, 1996.
(2) Fiscal 1996 results reflect the payment of a $1.5 million one-time special
assessment to recapitalize the Savings Association Insurance Fund. Exclusive
of the special assessment, net income would have been $2,189 or $1.56 per
share, which reflects a return on assets of .73% and a return on equity of
9.88%.
<PAGE>
CORPORATE INFORMATION
Annual Meeting
The annual meeting of the stockholders will be held at 5:00 p.m., on Tuesday,
February 4, 1997 at the Perrysville Office of the Bank at 1009 Perry Highway,
Pittsburgh, Pennsylvania. Stockholders are encouraged to attend.
Annual Report on Form 10-KSB
A copy of Fidelity Bancorp, Inc.'s Annual Report on Form 10-KSB is available
without charge to stockholders upon written request. Requests should be
addressed to Sandra L. Graham, Corporate Secretary, at the Company's
headquarters. (See inside back cover.)
Investor Relations
Analysts, investors, stockholders and others seeking financial information are
asked to contact Richard G. Spencer, Chief Financial Officer, at the Company's
headquarters. Requests for all other information should be addressed to Sandra
L. Graham, Investor Relations, at the Company's headquarters. (See inside back
cover.)
Stock Transfer/Address Changes
The Transfer Agent and Registrar of Fidelity Bancorp, Inc. is Registrar and
Transfer Company. Questions regarding transfer of stock, address changes or lost
certificates should be directed to Sandra L. Graham, Investor Relations, at the
Company's headquarters or to the transfer agent, Registrar and Transfer Company.
(See inside back cover.)
Dividend Reinvestment Plan Information
Registered holders of Fidelity Bancorp, Inc. common stock may purchase common
stock through reinvestment of common cash dividends or by making optional cash
payments. A brochure describing the plan and an application to participate may
be obtained from Sandra L. Graham, Investor Relations, at the Company's
headquarters. (See inside back cover.)
<PAGE>
CAPITAL STOCK INFORMATION
Stock Information
The following table sets forth the fiscal 1996, 1995 and 1994 high and low
prices as reported on the NASDAQ National Market System and the dividends
declared per common share. Amounts shown have been adjusted to reflect the 10%
stock dividend paid in May 1996.
<TABLE>
<CAPTION>
Stock Price Dividends
- -----------------------------------------------------------------------------------------------------------------------------
Quarter Ended: High Low Cash Stock
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
September 30, 1996 $19.75 $16.00 $0.08 --
June 30, 1996 $17.27 $14.54 $.073 10%
March 31, 1996 $17.27 $15.00 $.073 --
December 31, 1995 $16.36 $14.77 $.073 --
- -----------------------------------------------------------------------------------------------------------------------------
September 30, 1995 $16.14 $13.41 $.073 --
June 30, 1995 $14.54 $13.41 $.073 --
March 31, 1995 $15.00 $13.18 $.073 --
December 31, 1994 $15.45 $12.73 $.064 --
- -----------------------------------------------------------------------------------------------------------------------------
September 30, 1994 $16.36 $15.23 $.064 --
June 30, 1994 $16.14 $13.86 $.064 --
March 31, 1994 $18.18 $14.09 $.064 --
December 31, 1993 $18.18 $13.64 $.064 --
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
As of September 30, 1996, Fidelity Bancorp, Inc. had 1,373,151 shares of stock
outstanding and approximately 650 stockholders, including beneficial owners
whose stock is held in nominee name.
Common Stock Market Makers
The Company's stock is traded on the NASDAQ National Market System under the
symbol "FSBI" by the following market makers:
Legg Mason Wood Walker Inc. (LEGG)
2 Oliver Plaza
Pittsburgh, PA 15222 -- (800) 261-7300
Ryan, Beck &Co. (RYAN)
80 Main Street - 3rd Floor
West Orange, NJ 07052 -- (800) 395-7926
Herzog, Heine, Geduld, Inc. (HRZG)
525 Washington Boulevard
Pavonia, NJ 07310 -- (800) 221-3600
<PAGE>
SELECTED FINANCIAL DATA
Financial Condition Data
<TABLE>
<CAPTION>
September 30,
1996 1995 1994 1993 1992(3)
- -----------------------------------------------------------------------------------------------------------------------------
Total assets $317,874 $281,810 $273,564 $267,205 $252,923
Loans, net 151,263 120,904 112,647 106,585 106,407
Mortgage-backed securities(1) 93,738 101,511 112,236 120,033 96,705
Investment securities and
other earning assets(2) 59,302 46,523 37,607 30,487 39,910
Savings deposits 234,276 244,083 228,304 234,091 233,979
Advances from FHLB
and other borrowings 57,143 13,092 22,601 12,309 --
Stockholders' equity
--substantially restricted 21,778 22,132 20,646 18,544 16,589
Number of full service offices 8 8 8 9 9
- -----------------------------------------------------------------------------------------------------------------------------
<CAPTION>
Operations Data
Fiscal Years Ended September 30,
1996 1995 1994 1993 1992(3)
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Interest income $20,986 $19,047 $17,652 $18,515 $19,258
Interest expense 11,832 11,059 9,435 9,982 12,084
- -----------------------------------------------------------------------------------------------------------------------------
Net interest income 9,154 7,988 8,217 8,533 7,174
Provision for loan losses 270 230 360 655 483
- -----------------------------------------------------------------------------------------------------------------------------
Net interest income after
provision for loan losses 8,884 7,758 7,857 7,878 6,691
Gain (loss) on sale of investments and
mortgage-backed securities, net 27 (57) 79 751 312
Gain on sale of loans 17 18 24 57 47
Service fees and other income 688 643 524 569 462
Operating expenses 8,073(4) 6,119 5,617 5,650 5,180
- -----------------------------------------------------------------------------------------------------------------------------
Income before income tax provisions
and cumulative effect of change
in accounting principle 1,543 2,243 2,867 3,605 2,332
Income tax provision 226 728 1,025 1,411 1,010
- -----------------------------------------------------------------------------------------------------------------------------
Net income before cumulative
effect of change in
accounting principle 1,317(4) 1,515 1,842 2,194 1,322
- -----------------------------------------------------------------------------------------------------------------------------
Cumulative effect of change
in accounting principle -- -- 530 -- --
- -----------------------------------------------------------------------------------------------------------------------------
Net income $ 1,317(4) $11,515 $12,372 $ 2,194 $ 1,322
=============================================================================================================================
</TABLE>
<PAGE>
(1) Consists of mortgage-backed securities classified as investments
held-to-maturity and available-for-sale.
(2) Consists of interest-bearing deposits, investment securities classified as
investments held-to-maturity and available-for-sale, and Federal Home Loan
Bank stock.
(3) Fiscal 1992 data reflects the purchase of three branch offices during the
year.
(4) Fiscal 1996 operating results include the effect of a one-time pre-tax
payment to recapitalize the Savings Association Insurance Fund of $1.5
million. Exclusive of the special assessment, net income would have been
$2,189 and operating expenses would have been $6,536.
<PAGE>
LETTER TO OUR STOCKHOLDERS
To Our Stockholders:
Fiscal 1996 was a significant year in a number of ways. The Company ended the
year with assets in excess of $300 million. The volume of new loans originated
reached an all-time high. The uncertainty surrounding deposit insurance was
finally resolved, and excluding the impact of the deposit insurance resolution,
the increase in earnings over fiscal 1995 was respectable. These results were
accomplished in a year when competition for new customers, deposits, and loans
became more intense than ever from other banks as well as non-bank competitors.
Deposit Insurance - The cost of FDIC deposit insurance had been an unresolved
issue for several years. The Savings Association Insurance Fund (SAIF) was
severely undercapitalized while the Bank Insurance Fund (BIF) was fully
capitalized. As a result, the deposit insurance premium expense to Fidelity Bank
was approximately $.23 for every $100 in deposits while the insurance premium
for commercial bank competitors was "0". This made competing with commercial
banks for deposits very expensive, and therefore had a severe impact on the
Bank's profitability. The issue was finally resolved on September 30, 1996, by
the enactment of a law which mandated that a special assessment be charged to
all SAIF-insured institutions to raise the level of the fund to a fully
capitalized status. Thereafter the annual premiums paid by SAIF members will be
lowered to an amount that is closer to the BIF insurance premium rates. This
one-time payment cost the Bank $1.5 million (pre-tax) and reduced profits for
the year ending September 30, 1996 by approximately $900,000 or $.62 per share.
While significant, this charge does remove the uncertainty surrounding the
federal deposit insurance system, and also lessens the competitive advantage
enjoyed by BIF-insured banks.
Operating Results - Net income for fiscal 1996 was $1.3 million or $.94 per
share, compared to $1.5 million or $1.09 per share in fiscal 1995. Excluding the
effects of the SAIF special assessment, net income for fiscal 1996 would have
been $2.2 million or $1.56 per share.
Net interest income before provision for loan losses increased $1.2 million or
14.6% to $9.2 million in fiscal 1996, from $8.0 million in fiscal 1995. Both an
increase in the yield earned on interest-earning assets, as well as a decline in
the cost of interest-bearing liabilities contributed to this improved margin.
The increased yield resulted primarily from the growth of the loan portfolio,
which generally has a higher yield than securities.
The expense of interest-bearing liabilities declined in fiscal 1996 to 4.27%,
compared to 4.31% in fiscal 1995. Two factors were principally responsible for
this decrease. The first factor was the decision to not aggressively price
deposits during much of fiscal 1996 due to competitive conditions. As a result
of the deposit insurance premium disparity, BIF-insured institutions could offer
higher rates to attract deposits at a cost considerably less than SAIF-insured
institutions. The Bank chose not to match those higher rates while the status of
the SAIF deposit insurance fund was still unresolved, and as a result
experienced a decrease in time deposits.
The second factor affecting the cost of funds was the Bank's reliance on Federal
Home Loan Bank (FHLB) advances, both to replace the deposits discussed above and
to fund growth. Through much of fiscal 1996 short-term FHLB advances generally
cost less than time deposits and the Bank was able to take advantage of these
lower costs.
<PAGE>
Other income for fiscal 1996 was $732,000, up from $604,000 in fiscal 1995, an
increase of $128,000 or 21.2%. These figures include a net gain on the sale of
securities of $27,000 in fiscal 1996 versus a loss on the sale of securities of
$57,000 in 1995. The loss in 1995 was incurred for the purpose of repositioning
a portion of the investment portfolio.
Operating expenses, exclusive of the $1.5 million one-time special SAIF
assessment, increased $417,000 or 6.8% to $6.5 million in fiscal 1996 from $6.1
million in fiscal 1995. The increase, comprised of $170,000 in compensation
costs and $247,000 for other operating expenses, was primarily due to the
continuing investment in people and systems required to expand and upgrade the
services offered to customers.
The provision for income taxes decreased $502,000 or 68.9% to $226,000 in fiscal
1996 from $728,000 in fiscal 1995. This decrease reflects both lower taxable
income in fiscal 1996, and an increase in holdings of tax-exempt securities in
the investment portfolio.
Capital - The Bank is well capitalized, with stockholders' equity remaining well
above regulatory requirements. At September 30, 1996 the Bank's core capital
ratio was 6.98% compared to a requirement of 4.00%. At current year end, book
value per share was $15.86.
Asset Quality - Loan loss reserves increased by $101,000 or 7.1% to $1,530,000
from $1,429,000 at the prior year end. The percentage of loan loss reserves to
net loans receivable at September 30, 1996 was 1.01%. Asset quality remained
sound with nonperforming loans and real estate owned at .48% of assets, down
from .49% at the end of the previous year.
Lending - The loan portfolio increased by $30.4 million or 25.1% to $151.3
million and the increases were in all categories of loans. Mortgage loans were
increased $18.6 million, installment loans by $7.3 million and commercial
business loans by $4.5 million. The Bank is committed to increasing the loan
portfolio. Therefore, aggressive yet conservative loan development practices
will be pursued in the coming year.
Dividend - The Company has paid an uninterrupted quarterly cash dividend since
October, 1988. The amount of the dividend paid in fiscal 1996 was $.32 per
share. In addition to the cash dividend, a 10% stock dividend was paid in May
1996. As has been continually commented, it is the intention of the Board of
Directors to continue its current dividend payment practices and to enhance them
whenever it is deemed appropriate.
Outlook - The banking business, like many other industries, is changing rapidly.
Many of the changes are being dictated by technological innovations and by
competition. The new standards of technology affect not only the products and
services that the Bank offers, but also the way in which they are delivered.
Banking delivery systems now make it possible to provide new and existing
services in ways that are more convenient for consumers. Increasingly,
competition is being felt from a variety of financial firms as well as non-bank
companies. At Fidelity we believe that it is imperative that we continually
embrace and implement new technology so that our customers have choices about
how they do their banking, thus assuring that we remain competitive in our
market area.
<PAGE>
This past year several products and services designed to make banking at
Fidelity more attractive and convenient for our customers were introduced. A
telephone banking service, which permits customers to conduct a portion of their
banking from any telephone was introduced. A statement printing option was added
to the Bank's ATM's to give customers the ability to obtain checking account
statements at any time through a Fidelity MAC(R) Machine. Further, the VISA(R)
Check Card (a debit card) was introduced, enabling customers to use funds from
their checking account to purchase from any merchant that accepts VISA, rather
than putting the purchase on their credit card. Also implemented was a checking
account statement imaging system, which digitizes and stores customers' checks
in the Bank's computer. Now when customers get their check statements, they
receive images of their checks printed ten to 18 on a page. This makes account
balancing, storage and retrieval more efficient. Lastly, a home page on the
Internet (http://www.fidelitybk.com) was created. While our web site is only
informational in nature at this time, the intention is to offer Internet Banking
services in the future. Plans are in place to introduce PC Banking to consumer
and retail customers in the near future. All in all, customers have been very
receptive to these additions, and seem pleased with the results.
Each year, government regulation becomes more oppressive, and the cost of
compliance rises. While the Banking community has been told that the Government
is dedicated to reducing regulation, facts have shown that regulation is simply
changing, not being reduced. The Government's attitude seems to be that since it
provides deposit insurance, it has a right to control virtually every activity
in which banks are involved. In offering our services to the public, Fidelity
competes in every area of its business with companies from the private sector,
which is completely unregulated. Therefore, because the cost of complying with
government regulation is extremely high and the cost cannot be passed on to the
consumer, the return that we are able to provide to our stockholders is reduced.
We bear this cost because we must; we cope with it because we have no choice.
Unfortunately, there is no end in sight to the regulatory burdens we face, and
as a result we do not anticipate any cost savings in this area.
Fidelity Savings Bank had a rewarding year in fiscal 1996, and we are pleased
with what we accomplished. With the rapid pace of change in our world, we will
be fully challenged during the coming year and we are committed to meeting those
challenges. If the economy continues to prosper and if interest rates remain in
their current ranges, we feel confident about the prospects for fiscal 1997.
Absent the occurrence of any significant negative events, we know that our
stockholders will be pleased with the fiscal 1997 results, also.
The success that we have had this year was the result of the hard work and
dedication of the Bank's staff. I want to thank the employees for their
accomplishments, and acknowledge their efforts. Additionally, along with the
directors, officers, and staff, I would like to thank our stockholders and
customers for their continued support.
Sincerely,
/S/William L. Windisch
William L. Windisch
President
December 20, 1996
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors and Stockholders
Fidelity Bancorp, Inc. and Subsidiary:
We have audited the accompanying consolidated statements of financial condition
of Fidelity Bancorp, Inc. and subsidiary, as of September 30, 1996 and 1995, and
the related consolidated statements of income, stockholders' equity, and cash
flows for each of the years in the three-year period ended September 30, 1996.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Fidelity Bancorp,
Inc. and subsidiary as of September 30, 1996 and 1995, and the results of their
operations and their cash flows for each of the years in the three-year period
ended September 30, 1996, in conformity with generally accepted accounting
principles.
As discussed in Note 1 to the financial statements, the Company adopted the
provisions of the Financial Accounting Standards Board's Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes," and No. 115,
"Accounting for Certain Investments in Debt and Equity Securities," as of
October 1, 1993 and 1994, respectively.
/s/KPMG Peat Marwick LLP
Pittsburgh, Pennsylvania
November 8, 1996
<PAGE>
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
September 30,
(in thousands, except per share data) 1996 1995
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Cash and amounts due from depository institutions $ 4,616 $ 4,690
Interest-earning demand deposits with other institutions 146 354
Investment securities held-to-maturity
(market value of $5,351 and $15,205) (Notes 2, 11, 12, 13 and 19) 5,401 15,276
Investment securities available-for-sale
(cost of $51,074 and $28,850) (Notes 3, 12, 13 and 19) 50,929 29,141
Mortgage-backed securities held-to maturity
(market value of $30,818 and $90,320) (Notes 4, 12, 13 and 19) 31,275 92,324
Mortgage-backed securities available-for-sale
(cost of $64,014 and $9,202) (Notes 5, 12, 13 and 19) 62,463 9,187
Loans receivable, net of the allowance of $1,530 and $1,429
(Notes 6, 8, 12 and 19) 151,263 120,904
Real estate owned, net (Note 8) 370 1,062
Federal Home Loan Bank stock, at cost (Notes 9 and 12) 2,826 1,752
Accrued interest receivable:
Loans 850 706
Mortgage-backed securities 566 588
Investments and interest-earning deposits 727 608
Office premises and equipment, net (Note 10) 3,366 3,481
Deferred tax assets (Note 15) 1,926 816
Prepaid income taxes (Note 15) 324 67
Intangible assets 44 308
Prepaid expenses and sundry assets 782 546
- ---------------------------------------------------------------------------------------------------------------------------
$317,874 $281,810
===========================================================================================================================
Liabilities and Stockholders' Equity
Liabilities:
Savings deposits (Notes 11 and 19) $234,276 $244,083
Federal Home Loan Bank advances (Notes 12 and 19) 56,650 8,550
Reverse repurchase agreements (Notes 13 and 19) 493 4,542
Advance payments by borrowers for taxes and insurance 1,317 1,198
Accrued interest on savings and other deposits 177 258
Other accrued expenses and sundry liabilities 3,183 1,047
- ---------------------------------------------------------------------------------------------------------------------------
296,096 259,678
- ---------------------------------------------------------------------------------------------------------------------------
Stockholders' Equity (Notes 1, 15, 16, and 17):
Common stock, $0.01 par value per share;
10,000,000 shares authorized; 1,373,151 and
1,235,734 shares issued and outstanding 14 12
Additional paid-in capital 10,437 8,138
Retained earnings-- substantially restricted 12,523 13,789
Unrealized gain (loss) on securities available-for-sale, net (1,196) 193
- ---------------------------------------------------------------------------------------------------------------------------
21,778 22,132
- ---------------------------------------------------------------------------------------------------------------------------
$317,874 $281,810
===========================================================================================================================
</TABLE>
See Accompanying Notes to Consolidated Financial Statements.
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME
For the fiscal years ended September 30, 1996, 1995 and 1994
<TABLE>
<CAPTION>
(in thousands, except per share data) 1996 1995 1994
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest income:
Loans $11,482 $ 9,953 $ 9,030
Mortgage-backed securities 6,120 6,600 6,611
Investment securities 3,360 2,425 1,903
Deposits with other institutions 24 69 108
- --------------------------------------------------------------------------------------------------------------------------
Total interest income 20,986 19,047 17,652
- --------------------------------------------------------------------------------------------------------------------------
Interest expense:
Savings deposits (Note 11) 10,071 9,982 8,746
Borrowed funds 1,761 1,077 689
- --------------------------------------------------------------------------------------------------------------------------
Total interest expense 11,832 11,059 9,435
- --------------------------------------------------------------------------------------------------------------------------
Net interest income before provision for loan losses 9,154 7,988 8,217
Provision for loan losses (Note 8) 270 230 360
- --------------------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 8,884 7,758 7,857
- --------------------------------------------------------------------------------------------------------------------------
Other income:
Service fee income 75 85 95
Gain (loss) on sale of investment and
mortgage-backed securities, net 27 (57) 79
Gain on sale of loans 17 18 24
Other operating income 613 558 429
- --------------------------------------------------------------------------------------------------------------------------
Total other income 732 604 627
- --------------------------------------------------------------------------------------------------------------------------
Operating expenses:
Compensation, payroll taxes and fringe benefits (Note 17) 3,238 3,068 2,786
Office occupancy and equipment expense 564 542 521
Depreciation and amortization 456 439 407
Federal insurance premiums 553 526 534
SAIF assessment 1,537 -- --
Loss on real estate owned, net 91 9 2
Intangible amortization 264 264 264
Other operating expenses 1,370 1,271 1,103
- --------------------------------------------------------------------------------------------------------------------------
Total operating expenses 8,073 6,119 5,617
- --------------------------------------------------------------------------------------------------------------------------
(Continued)
<PAGE>
<CAPTION>
CONSOLIDATED STATEMENTS OF INCOME -- Continued
For the fiscal years ended September 30, 1996, 1995 and 1994
<CAPTION>
(in thousands, except per share data) 1996 1995 1994
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Income before income tax provision and cumulative effect
of change in accounting principle 1,543 2,243 2,867
Income tax provision (Note 15) 226 728 1,025
- --------------------------------------------------------------------------------------------------------------------------
Net income before cumulative effect of change
in accounting principle 1,317 1,515 1,842
Cumulative effect of change in accounting principle
(Notes 1 and 15) -- -- 530
- --------------------------------------------------------------------------------------------------------------------------
Net income $ 1,317 $ 1,515 $ 2,372
===========================================================================================================================
Primary earnings per share before cumulative effect
of change in accounting principle $ .94 $ 1.09 $ 1.33
Cumulative effect of accounting change -- -- .38
- --------------------------------------------------------------------------------------------------------------------------
Primary earnings per share (Note 1) $ .94 $ 1.09 $ 1.71
===========================================================================================================================
</TABLE>
See Accompanying Notes to Consolidated Financial Statements.
<PAGE>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Unrealized
Gain (Loss) Employee
Additional on Securities Stock
Common Paid-In Retained Available- Ownership
(in thousands) Stock Capital Earnings For-Sale Plan Debt Total
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at September 30, 1993 $12 $ 7,950 $10,625 $ -- $ (43) $18,544
Employee stock ownership plan
debt repayment -- -- -- -- 24 24
Stock options exercised (Note 17) -- 58 -- -- -- 58
Cash dividends paid -- -- (341) -- -- (341)
Net income -- -- 2,372 -- -- 2,372
Unrealized loss on marketable
equity securities -- -- -- (54) -- (54)
Sale of stock through Dividend
Reinvestment Plan -- 43 -- -- -- 43
- -----------------------------------------------------------------------------------------------------------------------
Balance at September 30, 1994 12 8,051 12,656 (54) (19) 20,646
Employee stock ownership plan
debt repayment -- -- -- -- 19 19
Stock options exercised (Note 17) -- 32 -- -- -- 32
Cash dividends paid -- -- (382) -- -- (382)
Net income -- -- 1,515 -- -- 1,515
Effect of change in accounting for certain
debt and equity securities at date of
adoption, net of deferred taxes (Note 1) -- -- -- (208) -- (208)
Net change in unrealized gain (loss)
on securities available-for-sale,
net of taxes -- -- -- 455 -- 455
Sale of stock through Dividend
Reinvestment Plan -- 55 -- -- -- 55
- -----------------------------------------------------------------------------------------------------------------------
Balance at September 30, 1995 12 8,138 13,789 193 -- 22,132
Stock options exercised (Note 17) -- 70 -- -- -- 70
Cash dividends paid -- -- (409) -- -- (409)
Stock dividend paid (Note 1) 2 2,172 (2,174) -- -- --
Net income -- -- 1,317 -- -- 1,317
Effect of change in accounting for certain
debt and equity securities at date of one-time
reclassification, net of deferred taxes (Note 1) -- -- -- (539) -- (539)
Net change in unrealized gain (loss)
on securities available-for-sale,
net of taxes -- -- -- (850) -- (850)
Sale of stock through Dividend
Reinvestment Plan -- 57 -- -- -- 57
- -----------------------------------------------------------------------------------------------------------------------
Balance at September 30, 1996 $14 $10,437 $12,523 ($1,196) $ -- $21,778
========================================================================================================================
</TABLE>
See Accompanying Notes to Consolidated Financial Statements.
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the fiscal years ended September 30, 1996, 1995 and 1994
<TABLE>
<CAPTION>
(in thousands) 1996 1995 1994
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating Activities:
Net income $ 1,317 $ 1,515 $ 2,372
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 270 230 360
Loss on real estate owned 91 9 2
Depreciation and amortization 456 439 407
Deferred loan fee amortization (235) (66) (228)
Amortization of investment and mortgage-backed
securities discounts/premiums, net (321) 437 860
Deferred income tax provision (579) (116) (34)
Amortization of intangibles 264 264 264
Net (gain) loss on sale of investments (10) 131 --
Net (gain) loss on sale of mortgage-backed securities (17) (74) (79)
Loans held-for-sale originated (134) (361) (2,183)
Sale of loans held-for-sale 151 361 2,939
Net gain on sale of loans (17) (18) (24)
(Increase) decrease in interest receivable (241) (132) 42
Increase in deferred tax assets (1,110) (30) (576)
Increase (decrease) in interest payable (81) (122) (22)
Increase (decrease) in accrued taxes (257) (158) (65)
SAIF assessment 1,537 -- --
Other changes-- net 1,266 470 (85)
- -----------------------------------------------------------------------------------------------------------------------------
Net cash provided (used) by operating activities 2,992 2,779 3,950
- -----------------------------------------------------------------------------------------------------------------------------
Investing Activities:
Proceeds from sales of investments available-for-sale 5,556 6,881 --
Proceeds from sales of mortgage-backed securities available-for-sale 5,505 6,312 15,249
Proceeds from maturities and principal repayments
of investment securities available-for-sale 6,000 4,200 --
Proceeds from maturities and principal repayments
of mortgage-backed securities available-for-sale 7,778 2,475 295
Purchases of investment securities available-for-sale (25,528) (26,684) (616)
Purchases of mortgage-backed securities available-for-sale (13,255) (7,079) (8,205)
Proceeds from maturities and principal repayments
of investment securities held-to-maturity 1,649 7,230 7,057
Purchases of investment securities held-to-maturity -- (473) (14,249)
Net (increase) decrease in other interest-earning
deposits with other institutions -- 297 297
Proceeds from sales of mortgage-backed securities held-to-maturity -- -- 33,212
Proceeds from mortgage-backed securities
held-to-maturity principal repayments 6,438 9,551 29,125
Purchases of mortgage-backed securities held-to-maturity (550) (891) (62,600)
Principal repayments on first mortgage loans 15,247 13,475 18,274
Principal repayments on other loans 16,895 10,809 9,986
First mortgage loans originated and disbursed (33,859) (15,080) (15,075)
Purchases of first mortgage loans -- -- (2,174)
Sale of other loans 1,042 1,649 609
Other loans originated (29,813) (19,698) (17,779)
Additions to office premises and equipment (341) (805) (1,027)
- -----------------------------------------------------------------------------------------------------------------------------
Net cash provided (used) by investing activities $(37,236) $(7,831) $(7,621)
- -----------------------------------------------------------------------------------------------------------------------------
(continued)
<PAGE>
<CAPTION>
For the fiscal years ended September 30, 1996, 1995 and 1994
(in thousands) 1996 1995 1994
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Financing Activities:
Net increase (decrease) in savings deposits $ (9,807) $15,779 $ (5,787)
Increase (decrease) in reverse repurchase agreements (4,049) (409) 2,892
FHLB advance repayments (1,299,500) (53,400) (39,500)
FHLB advances 1,347,600 44,300 46,900
Cash dividends paid (409) (382) (341)
Stock options exercised 70 32 58
Proceeds from sale of stock 57 55 43
- -----------------------------------------------------------------------------------------------------------------------------
Net cash provided (used) by financing activities 33,962 5,975 4,265
- -----------------------------------------------------------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents (282) 923 594
Cash and cash equivalents at beginning of year 5,044 4,121 3,527
- -----------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 4,762 $ 5,044 $ 4,121
=============================================================================================================================
<CAPTION>
Supplemental Disclosure of Cash Flow Information
For the fiscal years ended September 30, 1996, 1995 and 1994
(in thousands) 1996 1995 1994
- -----------------------------------------------------------------------------------------------------------------------------
Cash paid during the year for:
Interest on deposits and other borrowings $ 11,867 $11,255 $ 9,457
Income taxes 1,011 1,008 1,136
- -----------------------------------------------------------------------------------------------------------------------------
Transfer of investment and mortgage-backed securities
from investment to available-for-sale 63,240 21,481 --
- -----------------------------------------------------------------------------------------------------------------------------
Transfer of loans to real estate owned $ 536 $ 522 $ 369
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
See Accompanying Notes to Consolidated Financial Statements.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Summary of Significant Accounting Policies
Nature of Operations and Use of Estimates
Fidelity Bancorp, Inc. is a bank holding company organized under the
Pennsylvania Business Corporation Law. It operates principally as a holding
company for its wholly-owned subsidiary, Fidelity Savings Bank, a
Pennsylvania-chartered, FDIC-insured state savings bank. The Bank conducts
business through eight offices in Allegheny and Butler counties.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of certain assets and liabilities
and disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of related revenue and expense during the
reporting period. Actual results could differ from those estimates.
Consolidation
The consolidated financial statements include the accounts of Fidelity
Bancorp, Inc. (the Company) and its wholly-owned subsidiary Fidelity Savings
Bank (the Bank). Intercompany transactions have been eliminated in
consolidation.
Cash and Cash Equivalents
Cash and cash equivalents include cash and amounts due from depository
institutions and the demand deposits portion of interest-earning deposits with
other institutions.
Investment and Mortgage-backed Securities
In May 1993, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 115, "Accounting for
Certain Investments in Debt and Equity Securities." SFAS No. 115 requires that
investments be classified as either: (1) Securities Held-to-Maturity -- debt
securities that the Company has the positive intent and ability to hold to
maturity and reported at amortized cost; (2) Trading Securities -- debt and
equity securities bought and held principally for the purpose of selling them in
the near term and reported at fair value, with unrealized gains and losses
included in the current period earnings; or (3) Securities Available-for-Sale --
debt and equity securities not classified as either Securities Held-to-Maturity
or Trading Securities and reported at fair value, with unrealized gains and
losses, net of taxes, included as a separate component of stockholders' equity.
The Company adopted SFAS No. 115 effective October 1, 1994.
On November 15, 1995, the FASB issued a Special Report, "A Guide to
Implementation of Statement 115 on Accounting for Certain Investments in Debt
and Equity Securities"(Guide). The Guide provided a one-time opportunity for
companies to reassess the classification of securities under SFAS No. 115. The
one-time reclassification could be made without calling into question the
propriety of a company's stated intent in prior or subsequent periods. The
reclassification had to occur between November 15, 1995 and December 31, 1995.
The Company utilized this opportunity to reclassify securities in December,
1995.
<PAGE>
On December 31, 1995, the Company reclassified $8.2 million of investment
securities held-to-maturity to investment securities available-for-sale and
$55.0 million of mortgage-backed securities held-to-maturity to mortgage-backed
securities available-for-sale at market value, with the net unrealized gains of
$34 for the investment securities and the net unrealized loss of $573 for the
mortgage-backed securities excluded from earnings and reported as a separate
component of stockholders' equity, net of tax.
Loans
Loans receivable are stated at unpaid principal balances net of the
allowance for possible loan losses, net deferred loan fees and discounts. The
Company adopted SFAS 114, "Accounting by Creditors for Impairment of a Loan" and
SFAS 118, "Accounting by Creditors for Impairment of a Loan -- Income
Recognition and Disclosures," an amendment of SFAS 114, effective October 1,
1995. These statements address the accounting by creditors for impairment of
certain loans. They apply to all creditors and to all loans, uncollateralized as
well as collateralized, except for large groups of smaller-balance homogeneous
loans that are collectively evaluated for impairment. The Bank considers all
one-to-four family residential mortgage loans and all installment loans (as
presented in Note 6) to be smaller homogeneous loans. Loans within the scope of
these statements are considered impaired when, based on current information and
events, it is probable that all principal and interest will not be collected in
accordance with the contractual terms of the loans. Management determines the
impairment of loans based on knowledge of the borrower's ability to repay the
loan according to the contractual agreement, the borrower's repayment history
and the fair value of collateral for certain collateral dependent loans.
Pursuant to SFAS 114 paragraph 8, management does not consider an insignificant
delay or insignificant shortfall to impair a loan. Management has determined
that a delay less than 90 days will be considered an insignificant delay and
that an amount less than $5,000 will be considered an insignificant shortfall.
The Bank does not apply SFAS 114 using major risk calculations, but on a loan by
loan basis. Non-accrual loans are not necessarily considered to be impaired if
management believes that it is probable that all principal and interest will be
collected in accordance with the contractual terms of the loan. All loans are
charged off when management determines that principal and interest are not
collectible. Any excess of the Bank's recorded investment in the loans over the
measured value of the loans in accordance with SFAS 114 are provided for in the
allowance for loan losses. The Bank reviews its loans for impairment on a
quarterly basis.
The accrual of interest on all loans is discontinued when, in management's
opinion, the borrower may be unable to meet payments as they become due or when
the loan becomes 90 days past due, whichever occurs first. When interest accrual
is discontinued, all unpaid accrued interest is reserved. Such interest
ultimately collected is credited to income in the period of recovery or applied
to reduce principal if there is sufficient doubt about the collectability of
principal.
<PAGE>
The Company is a party to financial instruments with off-balance sheet
risk (commitments to extend credit) in the normal course of business to meet the
financing needs of its customers. Commitments to extend credit are agreements to
lend to a customer as long as there is no violation of any condition established
in the commitment. Commitments generally have fixed expiration dates or other
termination clauses and may require payment of a fee. Since some of the
commitments are expected to expire without being drawn upon, the total
commitment amount does not necessarily represent future cash requirements. The
Company evaluates each customer's credit worthiness on a case-by-case basis
using the same credit policies in making commitments and conditional obligations
as it does for on-balance sheet instruments. The amount of collateral obtained,
if deemed necessary by the Company upon extension of credit, is based on
management's credit evaluation of the counter-party.
Real Estate Owned
Real estate owned consists of properties acquired through foreclosure and
are recorded at the lower of cost (principal balance of the former mortgage loan
plus costs of obtaining title and possession) or fair value less estimated cost
to sell. Costs relating to development and improvement of the property are
capitalized, whereas costs of holding such real estate are expensed as incurred.
Additional write downs are charged to income, and the carrying value of the
property reduced, when the carrying value exceeds fair value less estimated cost
to sell.
Provisions for Losses
Provisions for estimated losses on loans and real estate owned are charged
to earnings in an amount that results in an allowance sufficient, in
management's judgment, to cover anticipated losses based on management's
evaluation of portfolio risk, past and expected future loss experience and
economic conditions.
Office Premises and Equipment
Office premises and equipment are stated at cost less accumulated
depreciation and amortization. Depreciation is calculated on a straight-line
basis over the estimated useful lives of the related assets, which are
thirty-one years for buildings and three to ten years for furniture, fixtures
and equipment.
Amortization of leasehold improvements is computed using the straight-line
method over the term of the related lease.
Intangible Assets
Intangible assets, which consist of goodwill and core deposit intangibles,
are amortized to expense using the straight-line method over the period
estimated to be benefited, generally five years for book purposes and fifteen
years for tax purposes.
Interest on Savings and Other Deposits
Interest on savings deposits and certain deposits by borrowers for taxes
and insurance is accrued monthly. Such interest is paid or credited in
accordance with the terms of the respective accounts.
<PAGE>
Income Taxes
The Company accounts for income taxes in accordance with SFAS No. 109,
"Accounting for Income Taxes." SFAS No. 109 requires use of the asset and
liability method of accounting for income taxes. Under the asset and liability
method of SFAS No. 109, deferred tax assets and liabilities are recognized for
the future tax consequences attributable to differences between the financial
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. Under SFAS No. 109, the effect on deferred tax assets and
liabilities of a change in the tax rates is recognized in income in the period
that includes the enacted date.
Effective October 1, 1993, the Company adopted SFAS No. 109 and has
reported the cumulative effect of that change in the method of accounting for
income taxes in the 1994 Consolidated Statement of Income.
Earnings per Share
Earnings per share for fiscal 1996, 1995 and 1994 is calculated by
dividing net income by the weighted average number of common shares outstanding.
Outstanding shares also include common stock equivalents which consist of
certain outstanding stock options. The average number of shares outstanding
(including common stock equivalents) for fiscal 1996, 1995 and 1994 were
1,407,340, 1,393,333, and 1,383,175, respectively, which gives retroactive
effect to the 10% common stock dividend declared by the Company's Board of
Directors and paid on May 31, 1996. The Company has not separately reported
fully diluted earnings per share as it is not materially different from primary
earnings per share.
<PAGE>
(dollar amounts in thousands, except per share data)
(2) Investment Securities Held-to-Maturity
Investment securities held-to-maturity at September 30, 1996 and 1995 are as
follows:
<TABLE>
<CAPTION>
Gross Gross
Carrying Unrealized Unrealized Market
At September 30, 1996 Value Gains Losses Value
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. government and agency obligations:
Due beyond one year, but within five years $3,997 $1 $(45) $3,953
Asset-backed securities:
Contractually due beyond one year,
but within five years 335 -- -- 335
Contractually due beyond ten years 1,069 -- (6) 1,063
- -----------------------------------------------------------------------------------------------------------------------------
$5,401 $1 $(51) $5,351
=============================================================================================================================
<CAPTION>
Gross Gross
Carrying Unrealized Unrealized Market
At September 30, 1995 Value Gains Losses Value
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. government and agency obligations:
Due beyond one year, but within five years $ 5,997 $ -- $(126) $ 5,871
Due beyond five years, but within ten years 1,000 -- (6) 994
Asset-backed securities:
Contractually due beyond one year,
but within five years 447 -- -- 447
Contractually due beyond ten years 1,605 31 -- 1,636
Municipal obligations:
Due beyond one year, but within five years 410 4 -- 414
Due beyond five years, but within ten years 5,817 65 (39) 5,843
- -----------------------------------------------------------------------------------------------------------------------------
$15,276 $100 $(171) $15,205
=============================================================================================================================
</TABLE>
At September 30, 1996, the Bank had no outstanding commitments to purchase
investment securities held-to-maturity. There were no sales of investment
securities held-to-maturity in 1994, 1995 or 1996.
<PAGE>
(dollar amounts in thousands, except per share data)
(3) Investment Securities Available-for-Sale
Investment securities available-for-sale at September 30, 1996 and 1995 are as
follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Market
At September 30, 1996 Cost Gains Losses Value
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. government and agency obligations:
Due beyond one year, but within five years $ 5,001 $ 15 $ (26) $ 4,990
Due beyond five years, but within ten years 19,779 14 (495) 19,298
Municipal obligations:
Due beyond one year, but within five years 1,947 6 (7) 1,946
Due beyond five years, but within ten years 5,026 43 (33) 5,036
Due beyond ten years 17,335 448 (89) 17,694
Equity securities 48 16 -- 64
Mutual funds 1,558 -- (38) 1,520
Federal Home Loan Mortgage Corp.
Preferred Stock 380 1 -- 381
- -----------------------------------------------------------------------------------------------------------------------------
$51,074 $543 $(688) $50,929
=============================================================================================================================
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Market
At September 30, 1995 Cost Gains Losses Value
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. government and agency obligations:
Due within one year $ 1,000 $ 4 $ -- $ 1,004
Due beyond one year, but within five years 10,491 55 (21) 10,525
Due beyond five years, but within ten years 3,996 31 -- 4,027
Due beyond ten years 996 18 -- 1,014
Municipal obligations:
Due beyond one year, but within five years 250 -- -- 250
Due beyond five years, but within ten years 447 -- -- 447
Due beyond ten years 9,759 252 (8) 10,003
Money markets 53 -- -- 53
Mutual funds 1,471 -- (41) 1,430
Federal Home Loan Mortgage Corp.
Preferred Stock 387 1 -- 388
- -----------------------------------------------------------------------------------------------------------------------------
$28,850 $361 $(70) $29,141
=============================================================================================================================
</TABLE>
At September 30, 1996, the Bank had no outstanding commitments to purchase
investment securities available-for-sale. Proceeds from sales of investment
securities available-for-sale were $5.6 million and $6.9 million in 1996 and
1995, respectively. There were no sales in fiscal 1994. Gross gains of $34 and
$2 and gross losses of $23 and $133 were realized on these sales in 1996 and
1995, respectively.
<PAGE>
(dollar amounts in thousands, except per share data)
(4) Mortgage-Backed Securities Held-to-Maturity
Mortgage-backed securities held-to-maturity were comprised of the following:
<TABLE>
<CAPTION>
Gross Gross
Carrying Unrealized Unrealized Market
At September 30, 1996 Value Gains Losses Value
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Government National Mortgage Association:
Contractually due beyond five years, but within ten years $ 55 $ -- $ -- $ 55
Federal Home Loan Mortgage Corporation:
Contractually due beyond one year, but within five years 191 -- (1) 190
Contractually due beyond five years, but within ten years 1,705 23 -- 1,728
Contractually due beyond ten years 14,838 39 (293) 14,584
Federal National Mortgage Association:
Contractually due beyond five years, but within ten years 3,781 8 (115) 3,674
Contractually due beyond ten years 6,775 22 (150) 6,647
AA Rated Mortgage Certificates:
Contractually due beyond ten years 3,682 -- (5) 3,677
Collateralized Mortgage Obligations:
Contractually due beyond one year, but within five years 248 15 -- 263
- -----------------------------------------------------------------------------------------------------------------------------
$31,275 $107 $(564) $30,818
=============================================================================================================================
<CAPTION>
Gross Gross
Carrying Unrealized Unrealized Market
At September 30, 1995 Value Gains Losses Value
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Government National Mortgage Association:
Contractually due beyond five years, but within ten years $ 68 $ 1 $ -- $ 69
Contractually due beyond ten years 3,067 25 (13) 3,079
Federal Home Loan Mortgage Corporation:
Contractually due beyond one year, but within five years 3,488 -- (97) 3,391
Contractually due beyond five years, but within ten years 1,778 6 (2) 1,782
Contractually due beyond ten years 18,174 69 (335) 17,908
Federal National Mortgage Association:
Contractually due beyond one year, but within five years 2,126 -- (63) 2,063
Contractually due beyond five years, but within ten years 24,253 -- (921) 23,332
Contractually due beyond ten years 13,951 17 (341) 13,627
AA Rated Mortgage Certificates:
Contractually due beyond ten years 5,214 -- -- 5,214
Collateralized Mortgage Obligations:
Contractually due beyond one year, but within five years 1,819 -- (16) 1,803
Contractually due beyond five years, but within ten years 4,934 15 -- 4,949
Contractually due beyond ten years 13,452 -- (349) 13,103
- -----------------------------------------------------------------------------------------------------------------------------
$92,324 $133 $(2,137) $90,320
=============================================================================================================================
</TABLE>
<PAGE>
At September 30, 1996, the Bank had no outstanding commitments to purchase
mortgage-backed securities held-to-maturity. Proceeds from sales of
mortgage-backed securities held-to-maturity during 1994 were $33.2 million.
There were no sales of mortgage-backed securities classified as held-to-maturity
during 1996 or 1995. Gross gains of $182 and gross losses of $152 were realized
on these sales in 1994.
<PAGE>
(dollar amounts in thousands, except per share data)
(5) Mortgage-Backed Securities Available-For-Sale
Mortgage-backed securities available-for-sale are as follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Market
At September 30, 1996 Cost Gains Losses Value
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Government National Mortgage Association:
Contractually due beyond ten years $ 7,011 $12 $ (237) $ 6,786
Federal Home Loan Mortgage Corporation:
Contractually due within one year 48 -- (1) 47
Contractually due beyond one year, but
within five years 3,017 -- (77) 2,940
Contractually due beyond ten years 8,543 34 (64) 8,513
Federal National Mortgage Association:
Contractually due beyond one year, but
within five years 4,537 3 (40) 4,500
Contractually due beyond five years, but
within ten years 14,651 -- (618) 14,033
Contractually due beyond ten years 5,884 6 (177) 5,713
Collateralized Mortgage Obligations:
Contractually due within one year 156 -- (1) 155
Contractually due beyond one year, but
within five years 6,032 28 -- 6,060
Contractually due beyond ten years 14,135 2 (421) 13,716
- -----------------------------------------------------------------------------------------------------------------------------
$64,014 $85 $(1,636) $62,463
=============================================================================================================================
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Market
At September 30, 1995 Cost Gains Losses Value
- -----------------------------------------------------------------------------------------------------------------------------
Federal Home Loan Mortgage Corporation:
Contractually due beyond one year, but
within five years $ 698 $ 2 $ (1) $ 699
Contractually due beyond ten years 4,311 6 (23) 4,294
Federal National Mortgage Association:
Contractually due beyond one year, but
within five years 3,559 2 (4) 3,557
Collateralized Mortgage Obligations:
Contractually due beyond one year, but
within five years 382 1 -- 383
Contractually due beyond ten years 252 2 -- 254
- -----------------------------------------------------------------------------------------------------------------------------
$9,202 $13 $(28) $9,187
=============================================================================================================================
</TABLE>
<PAGE>
At September 30, 1996, the Bank had no outstanding commitments to purchase
mortgage-backed securities available- for-sale. Proceeds from sales of
mortgage-backed securities available-for-sale during 1996, 1995 and 1994 were
$5.5 million, $6.3 million and $15.2 million, respectively. Gross gains of $29,
$85, and $95 were realized on these sales in 1996, 1995 and 1994, respectively.
There were $12 of gross losses in 1996, $11 of gross losses in 1995, and $46 of
gross losses realized on sales in 1994.
<PAGE>
(dollar amounts in thousands, except per share data)
(6) Loans Receivable
Loans receivable, net are summarized as follows:
<TABLE>
<CAPTION>
September 30,
1996 1995
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
First mortgage loans:
Conventional:
1-4 family dwellings $ 80,186 $ 60,160
Multi-family dwellings 4,435 5,156
Commercial 19,112 20,102
Construction 7,645 6,911
- -----------------------------------------------------------------------------------------------------------------------------
111,378 92,329
- -----------------------------------------------------------------------------------------------------------------------------
Less:
Loans in process (4,109) (3,664)
Unearned discounts and fees (960) (939)
- -----------------------------------------------------------------------------------------------------------------------------
106,309 87,726
- -----------------------------------------------------------------------------------------------------------------------------
Installment loans:
Home equity 30,070 22,475
Mobile home loans 169 254
Consumer loans 2,479 2,695
Other 3,064 2,997
- -----------------------------------------------------------------------------------------------------------------------------
35,782 28,421
- -----------------------------------------------------------------------------------------------------------------------------
Commercial business loans 10,702 6,186
- -----------------------------------------------------------------------------------------------------------------------------
Less: Allowance for possible loan losses (1,530) (1,429)
- -----------------------------------------------------------------------------------------------------------------------------
Loans receivable, net $151,263 $120,904
=============================================================================================================================
</TABLE>
<PAGE>
Commitments to originate loans at September 30, 1996 were approximately as
follows:
<TABLE>
<CAPTION>
Rate Amount
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
First mortgage loans:
Fixed-rate 6.50% to 7.875% $ 554
Other loans:
Fixed-rate 8.25% to 13.25% 747
Adjustable-rate 6.35% to 13.25% 297
- -----------------------------------------------------------------------------------------------------------------------------
$1,598
=============================================================================================================================
</TABLE>
(7) Loan Servicing Portfolio
The amount of loans serviced for others, which are not reflected in the
accompanying consolidated financial statements, was $6,471, $7,716, and $8,337
at September 30, 1996, 1995 and 1994, respectively.
<PAGE>
(dollar amounts in thousands, except per share data)
(8) Allowance for Possible Losses on Loans and Real Estate Owned
Changes in the allowance for possible loan losses are as follows:
<TABLE>
<CAPTION>
First Commercial
Mortgage Installment Business
Loans Loans Loans Total
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance at September 30, 1993 $ 533 $ 364 $ 225 $ 1,122
Provision for loan losses 240 10 110 360
Charge-offs (116) (40) (3) (159)
Recoveries -- 6 5 11
- -----------------------------------------------------------------------------------------------------------------------------
Balance at September 30, 1994 657 340 337 1,334
Provision for loan losses 155 10 65 230
Charge-offs (189) (29) (116) (334)
Recoveries 79 11 109 199
- -----------------------------------------------------------------------------------------------------------------------------
Balance at September 30, 1995 702 332 395 1,429
Provision for loan losses 120 60 90 270
Charge-offs (149) (44) (78) (271)
Recoveries 55 10 37 102
- -----------------------------------------------------------------------------------------------------------------------------
Balance at September 30, 1996 $ 728 $ 358 $ 444 $ 1,530
=============================================================================================================================
</TABLE>
Non-accrual loans were approximately $1.1 million, $312 and $1.3 million at
September 30, 1996, 1995 and 1994, respectively. The foregone interest on those
loans for the periods ended September 30, 1996, 1995 and 1994, was $61, $52 and
$103, respectively. The amount of interest income on such loans actually
included in income in the periods ending September 30, 1996, 1995 and 1994 was
$58, $27 and $8, respectively. There are no commitments to lend additional funds
to debtors in non-accrual status.
At September 30, 1996, the recorded investment in loans that are considered to
be impaired under FAS 114 was $319. Included in this amount is $157 of impaired
loans for which the related allowance for credit losses is $13 and $162 of
impaired loans that as a result of write-downs do not have an allowance for
credit losses. The average recorded investment in impaired loans during the
fiscal year ended September 30, 1996 was approximately $281. For the fiscal year
ended September 30, 1996, the Company recognized interest income on those
impaired loans of $20 which was recognized using the cash basis of income
recognition.
<PAGE>
Changes in the allowance for losses on real estate owned are as follows:
<TABLE>
<CAPTION>
Fiscal Years
Ended September 30,
1996 1995 1994
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Beginning of period balance $ 8 $-- $--
Provisions 102 8 --
Write-off (8) -- --
- -----------------------------------------------------------------------------------------------------------------------------
End of period balance $102 $ 8 $--
=============================================================================================================================
</TABLE>
Management believes that the allowances for possible losses on loans and real
estate owned are adequate. While management uses available information to
recognize losses on loans and real estate owned, future additions to the
allowances may be necessary based on changes in economic conditions. In
addition, various regulatory agencies, as an integral part of their examination
process, periodically review the Bank's allowances for possible losses on loans
and real estate owned. Such agencies may require the Bank to recognize additions
to the allowances based on their judgments using information available to them
at the time of examination.
<PAGE>
(dollar amounts in thousands, except per share data)
(9) Investments Required by Law
The Bank is a member of the Federal Home Loan Bank System and, as a member,
maintains an investment in the capital stock of the Federal Home Loan Bank of
Pittsburgh (FHLB), at cost, in an amount not less than 1% of its outstanding
home loans or 5% of its outstanding notes payable, if any, to the FHLB,
whichever is greater.
(10) Office Premises and Equipment
Office premises and equipment at September 30, 1996 and 1995 are summarized as
follows:
<TABLE>
<CAPTION>
1996 1995
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Land $ 379 $ 370
Office buildings 3,116 3,023
Furniture, fixtures and equipment 3,558 3,351
Leasehold improvements 102 95
- -----------------------------------------------------------------------------------------------------------------------------
7,155 6,839
- -----------------------------------------------------------------------------------------------------------------------------
Less accumulated depreciation and amortization (3,789) (3,358)
- -----------------------------------------------------------------------------------------------------------------------------
Office premises and equipment, net $ 3,366 $ 3,481
=============================================================================================================================
</TABLE>
The Bank has operating leases with respect to one records storage facility and
three branch offices which expire on various dates through fiscal 2001. Lease
expense amounted to $83, $81, and $77 in fiscal years 1996, 1995 and 1994,
respectively.
Minimum annual lease commitments are approximately as follows:
Years Ended September 30 Amount
- -------------------------------------------------
1997 $83
1998 $83
1999 $56
2000 $53
2001 $19
<PAGE>
(dollar amounts in thousands, except per share data)
(11) Savings Deposits
Savings deposit balances at September 30, 1996 and 1995 are summarized as
follows:
<TABLE>
<CAPTION>
September 30,
Stated Rates 1996 1995
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance by type:
Savings Deposits:
Demand deposits noninterest-bearing $ 8,460 $ 8,126
NOW accounts 1.50% in 1996 and 2.00% in 1995 22,484 21,046
Passbooks 2.50% in 1996 and 3.00% in 1995 50,445 53,184
Money market
deposit accounts 2.98% in 1996 and 2.97% in 1995 16,040 15,835
- -----------------------------------------------------------------------------------------------------------------------------
97,429 98,191
- -----------------------------------------------------------------------------------------------------------------------------
Time Deposits:
Fixed-rate 3.00% to 4.99% 47,446 12,462
5.00% to 6.99% 71,113 102,532
7.00% to 8.99% 7,211 15,416
09.00% to 10.99% 120 348
Negotiated-rate 04.35% to 8.30% 9,560 13,653
Floating-rate 02.55% to 3.05% 1,397 1,481
- -----------------------------------------------------------------------------------------------------------------------------
136,847 145,892
- -----------------------------------------------------------------------------------------------------------------------------
$234,276 $244,083
=============================================================================================================================
</TABLE>
The weighted average interest rate for all deposits was 4.03% and 4.54% at
September 30, 1996 and 1995, respectively. Deposits with balances of $100 or
more totalled $9.1 million at September 30, 1996.
At September 30, 1996, investment securities with a carrying value of $1.0
million were pledged as required to secure deposits of public funds.
<PAGE>
The maturities of time deposits at September 30, 1996 and 1995 are summarized as
follows:
<TABLE>
<CAPTION>
September 30,
1996 1995
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Within one year $ 84,581 $ 92,741
Beyond one year but within two years 19,507 15,243
Beyond two years but within three years 8,898 15,710
Beyond three years 23,861 22,198
- -----------------------------------------------------------------------------------------------------------------------------
$136,847 $145,892
=============================================================================================================================
</TABLE>
Interest expense by deposit category is as follows:
<TABLE>
<CAPTION>
Years Ended September 30,
1996 1995 1994
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NOW accounts $ 332 $ 443 $ 478
Passbooks 1,366 1,772 2,084
Money market deposit accounts 478 578 783
Time deposits 7,895 7,189 5,401
- -----------------------------------------------------------------------------------------------------------------------------
$10,071 $9,982 $8,746
=============================================================================================================================
</TABLE>
<PAGE>
(dollar amounts in thousands, except per share data)
(12) Federal Home Loan Bank Advances
Federal Home Loan Bank advances are as follows:
<TABLE>
<CAPTION>
September 30,
Interest Rate 1996 1995
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Due Date
RepoPlus Advance 5.46% $51,350 $ 5,000
June 11, 1996 4.97% -- 3,250
February 24, 1997 5.14% 2,000 --
October 29, 1997 4.60% 300 300
February 26, 1998 5.14% 3,000 --
=============================================================================================================================
</TABLE>
At September 30, 1996, the Bank had three fixed rate advances. Such advances are
subject to a prepayment fee in the event the advances are repaid prior to
maturity. The prepayment fee is equal to the present value of the difference
between cash flows generated at the advance rate from the date of prepayment
until the original maturity date and the interest rate posted by the FHLB on the
date of prepayment for an advance of comparable maturity.
Under a blanket collateral pledge agreement, the Bank has pledged, as collateral
for advances from the FHLB of Pittsburgh, all stock in the Federal Home Loan
Bank and certain other qualifying collateral, such as investment securities,
mortgage-backed securities and loans, with market values equal to at least 110%
of the unpaid amount of outstanding advances.
The Bank has a line of credit with the FHLBof Pittsburgh (Flexline), which is
approximately $16.4 million, and expires on March 25, 1997. There are no
commitment fees associated with this line of credit and the FHLBof Pittsburgh
may reduce or terminate the line at any time. When used, interest is charged at
the FHLB's posted rates, which change daily, and the loan can be repaid at any
time but in no event later than March 25, 1997. The Bank utilized this line of
credit through March 1995, ranging from $0 to $14.1 million. The daily average
balance through March 1995 was $6.5 million, and the daily average interest rate
was 5.34%, with an interest rate at year end of 7.12%. The maximum amount
outstanding at any month-end during 1995 was $16.5 million. This line of credit
was not used in fiscal 1996.
FHLB "RepoPlus" Advances are short-term borrowings maturing within one to
ninety-two days, bear a fixed interest rate and are subject to prepayment
penalty. Although no specific collateral is required to be pledged for these
borrowings, "RepoPlus" Advances are secured under the blanket collateral pledge
agreement. The Bank utilized "RepoPlus" Advances during fiscal 1996, ranging
from $150 to $51.4 million. The daily average balance during 1996 was $25.1
million, and the daily average interest rate was 5.43%, with an average interest
rate at year-end of 5.46%. The maximum amount outstanding at any month-end
during 1996 was $51.4 million.
<PAGE>
(13) Securities Sold Under Agreement to Repurchase
The Bank enters into sales of securities under agreements to repurchase. Such
repurchase agreements are treated as financings and the obligations to
repurchase securities sold are reflected as a liability in the consolidated
statement of financial condition. The dollar amount of securities underlying the
agreements remains in the asset accounts. The securities sold under agreement to
repurchase are collateralized by various securities that are either held in
safekeeping by the Federal Home Loan Bank of Pittsburgh or delivered to the
dealer who arranged the transaction. The market value of such securities exceeds
the value of the securities sold under agreements to repurchase.
At September 30, 1996, these agreements had a weighted average interest rate of
4.50% and matured within one month. Short-term borrowings under repurchase
agreements averaged $1.3 million and $9.5 million during 1996 and 1995,
respectively. The maximum amount outstanding at any month-end during 1996 was
$4.6 million. At September 30, 1996, short-term borrowings under agreements to
repurchase securities sold are summarized as follows:
<TABLE>
<CAPTION>
Collateral
-----------------------------
U.S. Government &
Weighted Federal Agency Obligations
Repurchase Average -----------------------------
Liability Interest Rate Book Value Market Value
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Within 30 days $493 4.50% $1,001 $1,002
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
(14) Financial Instruments with Off-Balance Sheet Risk
At September 30, 1996, the Bank had outstanding commitments to originate loans
of $1.6 million and no outstanding commitments to purchase securities.
The Bank's customers have available lines of credit as follows: consumer, both
secured and unsecured, and commercial, generally unsecured. The amount available
at September 30, 1996 and 1995 was $6.2 million and $4.0 million, respectively,
for consumer lines of credit and $3.5 million and $2.4 million, respectively,
for commercial lines of credit. The interest rate for the consumer lines of
credit range from 6.00% to 18.0%. The interest rates for the commercial lines of
credit are generally variable and based on prevailing market conditions at the
time of funding. The Bank's customers also have available letters of credit. The
amount available under these letters of credit at September 30, 1996 and 1995
was $150 and $145, respectively. The interest rates are generally variable and
based on prevailing market conditions at the time of funding.
Letters of credit are conditional commitments issued by the Bank to guarantee
the performance of a customer to a third party. The credit risk involved in
issuing letters of credit is essentially the same as that in extending loans to
customers. The Bank minimizes this risk by adhering to its written credit
policies and by requiring security and debt covenants similar to those contained
in loan agreements.
<PAGE>
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the commitment.
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. The Bank evaluates each customer's credit
worthiness on a case-by-case basis. The amount of collateral obtained, if deemed
necessary by the Bank upon extension of credit, is based on management's credit
evaluation of the borrower. The collateral consists primarily of residential
real estate and personal property.
The Bank conducts its business through eight offices located in the greater
Pittsburgh metropolitan area. At September 30, 1996, the majority of the Bank's
net loan portfolio was secured by properties located in this region. The Bank
does not believe it has significant concentrations of credit risk to any one
group of borrowers given its underwriting and collateral requirements. The Bank
does not have any off-balance-sheet risk at September 30, 1996, except for the
commitments referenced above.
(15) Income Taxes
As discussed in Note 1, the Bank adopted SFASNo. 109 as of October 1, 1993, and
the cumulative effect of this change is reported in the 1994 Consolidated
Statement of Income.
The provision for (benefit from) income taxes in the Consolidated Statements of
Income consists of the following:
<TABLE>
<CAPTION>
Fiscal Years Ended September 30,
1996 1995 1994
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Current
Federal $ 689 $ 732 $ 827
State 55 112 232
- -----------------------------------------------------------------------------------------------------------------------------
Total current 744 844 1,059
- -----------------------------------------------------------------------------------------------------------------------------
Deferred federal (518) (116) (34)
- -----------------------------------------------------------------------------------------------------------------------------
Total $ 226 $ 728 $1,025
=============================================================================================================================
</TABLE>
Total income tax provision for the years ended September 30, 1996, 1995 and 1994
was allocated as follows:
<TABLE>
<CAPTION>
1996 1995 1994
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Income before cumulative effect of change
in accounting principle $ 226 $728 $1,025
Cumulative effect of change in accounting principle -- -- (530)
Stockholders' equity:
Unrealized gains (losses) on investment securities $(592) $ 86 --
=============================================================================================================================
</TABLE>
<PAGE>
The difference between the expected and actual tax provision expressed as
percentages of income before tax are as follows:
<TABLE>
<CAPTION>
Fiscal Years Ended September 30,
1996 1995 1994
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Expected federal tax rate 34.0 % 34.0 % 34.0 %
Tax free interest (21.3) (6.5) (3.1)
State income tax, net of federal tax benefit 2.4 3.3 5.3
Other items, net (0.5) 1.7 (0.4)
- -----------------------------------------------------------------------------------------------------------------------------
Actual tax rate incurred 14.6 % 32.5 % 35.8 %
=============================================================================================================================
</TABLE>
The tax effect of temporary differences that gave rise to significant portions
of the deferred tax assets and deferred tax liabilities at September 30, 1996
and 1995 are presented below:
<TABLE>
<CAPTION>
1996 1995
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets (liabilities):
Deferred loan fees $ 211 $315
Fixed assets (67) (50)
Loan loss reserves 449 387
Intangible assets 287 241
Investment securities 506 (86)
Savings Association Insurance Fund assessment 520 --
Other (net) 20 9
- -----------------------------------------------------------------------------------------------------------------------------
$1,926 $816
=============================================================================================================================
</TABLE>
<PAGE>
The Bank has determined that it is not required to establish a valuation
allowance for deferred tax assets in accordance with SFASNo. 109 since it is
more likely than not that the deferred tax asset will be realized through
carryback to taxable income in prior years, future reversals of existing
temporary differences, and to a lesser extent future taxable income.
The Bank qualifies to be taxed under special income tax rules applicable to
savings and loan associations and is entitled to a special bad debt deduction
(8% in fiscal years 1994, 1995 and 1996, based on taxable income before the bad
debt deduction) with the amount deducted being subject to the minimum tax on
preference items. Should amounts previously claimed as a bad debt deduction be
used for any purpose other than to absorb bad debts (which is not anticipated),
tax liabilities will be incurred at the rate then in effect.
SFAS No. 109 treats tax basis bad debt reserves established after 1987 as
temporary differences on which deferred income taxes have been provided.
Deferred taxes are not required to be provided on tax bad debt reserves recorded
in 1987 and prior years (base year bad debt reserves). Approximately $2.7
million of balances in retained income at September 30, 1995, (the most recent
date for which a tax return has been filed) represent base year bad debt
deductions for tax purposes only. No provision for federal income tax has been
made for such amount.
On August 20, 1996, President Clinton signed legislation which will eliminate
the percentage of taxable income bad debt deduction for thrift institutions for
tax years beginning after December 31, 1995. This new legislation also requires
a thrift to generally recapture the excess of its current tax reserves in excess
of its 1987 base year reserves. As the Bank has previously provided deferred
taxes on this amount, no financial statement tax expense should result from this
new legislation.
<PAGE>
(dollar amounts in thousands, exceptper share data)
(16) Stockholders'Equity
The Bank is subject to various 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 direct material effect on the
Bank's financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Bank must meet specific
capital guidelines that involve quantitative measures of the Bank's assets,
liabilities, and certain off-balance-sheet items as calculated under regulatory
accounting practices. The Bank's capital amounts and classification are also
subject to qualitative judgments by the regulators about components, risk
weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain amounts and ratios (set forth in the table below)
of total and Tier I capital (as defined in the regulations) to risk-weighted
assets (as defined) and of Tier I capital (as defined) to average assets (as
defined). Management believes, as of September 30, 1996, that the Bank meets all
capital adequacy requirements to which it is subject.
As of September 30, 1996, the most recent notification from the Federal Deposit
Insurance Corporation categorized the Bank as well capitalized under the
regulatory framework for prompt corrective action. To be categorized as well
capitalized the Bank must maintain minimum total risk-based, Tier I risk-based,
and Tier I leverage ratios as set forth in the table. There are no conditions or
events since that notification that management believes have changed the
institution's category.
<PAGE>
The following table sets forth certain information concerning the Company's
regulatory capital at September 30, 1996 and 1995.
<TABLE>
<CAPTION>
September 30, 1996 September 30, 1995
Tier I Tier II Tier I Tier II
Tier I Risk- Risk- Tier I Risk- Risk-
Core Based Based Core Based Based
Capital Capital Capital Capital Capital Capital
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Equity Capital(1) $20,768 $20,768 $20,768 $21,834 $21,834 $21,834
Unrealized securities (gains) losses 1,145 1,145 1,145 (193) (193) (193)
Less intangible assets (44) (44) (44) (308) (308) (308)
Plus general valuation allowances(2) -- -- 1,530 -- -- 1,429
- -----------------------------------------------------------------------------------------------------------------------------
Total regulatory capital 21,869 21,869 23,399 21,333 21,333 22,762
Minimum required capital 12,528 6,208 12,416 11,131 5,469 10,937
- -----------------------------------------------------------------------------------------------------------------------------
Excess regulatory capital 9,341 15,661 10,983 10,202 15,864 11,825
- -----------------------------------------------------------------------------------------------------------------------------
Minimum required capital to be
well capitalized under Prompt
Corrective Action Provisions $15,660 $ 9,312 $15,520 $13,914 $ 8,203 $13,672
=============================================================================================================================
Regulatory capital as a percentage(3) 6.98% 14.09% 15.08% 7.67% 15.60% 16.65%
Minimum required capital percentage 4.00% 4.00% 8.00% 4.00% 4.00% 8.00%
- -----------------------------------------------------------------------------------------------------------------------------
Excess regulatory capital percentage 2.98% 10.09% 7.08% 3.67% 11.60% 8.65%
- -----------------------------------------------------------------------------------------------------------------------------
Minimum required capital percentage
to be well capitalized under
Prompt Corrective Action Provisions 5.00% 6.00% 10.00% 5.00% 6.00% 10.00%
=============================================================================================================================
</TABLE>
(1) Represents equity capital of the Bank as reported to the FDIC and the
Pennsylvania Department of Banking on Form 033 for the quarter ended
September 30, 1996 and 1995.
(2) Limited to 1.25% of risk adjusted assets.
(3) Tier I capital is calculated as a percentage of adjusted total average
assets of $313,201 and $278,272 at September 30, 1996 and 1995,
respectively. Tier I and Tier II risk-based capital are calculated as a
percentage of adjusted risk-weighted assets of $155,202 and $136,718 at
September 30, 1996 and 1995, respectively.
<PAGE>
(dollar amounts in thousands, except per share data)
(17) Employee Stock Compensation Program
In fiscal 1988, the Bank adopted an Employee Stock Compensation Program (the
Program) under which 113,588 shares of common stock can be issued. The Program
provides for the grant of both incentive stock options and compensatory stock
options. Further, the Program provides that the incentive stock option price to
purchase common stock is not less than the fair market value at the date of
grant and the compensatory stock option price is equal to or less than the fair
market value of the shares at date of grant, that all options terminate no later
than ten years from date of grant, and that options become exercisable on a
cumulative basis at 50% each year, commencing one year from date of grant. At
September 30, 1996, there were no remaining shares available for granting as
determined by the Program Administrators.
In fiscal 1994, the Company adopted the 1993 Employee Stock Compensation Program
("Employee Program") and the 1993 Directors' Stock Option Plan ("Directors'
Plan"). Under the 1993 Employee Program, each eligible participant may be
granted options to purchase common stock at an amount equal to or less than the
fair market value of the shares at the time of the grant of the option. At
September 30, 1996, 20,807 shares were available for granting as determined by
the Program Administrators. Under the 1993 Directors' Plan, each person who
serves as a non-employee director of the Company shall be granted as of December
31 of each year of the Directors' Plan an option to purchase 1,250 shares of
common stock exercisable at a price equal to the fair market value on the date
of the grant. As of September 30, 1996, 23,375 shares were available for
granting under the terms of the plan.
Stock option activity was as follows:
<TABLE>
<CAPTION>
1993 1993
1988 Employee Directors'
Program Program Plan
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
September 30, 1994 77,621 -- 6,250
Granted -- 26,460 6,250
Exercised (5,559) -- --
Forfeited (5,545) -- --
- -----------------------------------------------------------------------------------------------------------------------------
September 30, 1995 66,517 26,460 12,500
Granted -- 16,920 6,250
Exercised (9,803) (177) --
Forfeited (392) (1,029) --
Increase due to 10% stock dividend 6,751 3,522 1,875
- -----------------------------------------------------------------------------------------------------------------------------
September 30, 1996 63,073 45,696 20,625
- -----------------------------------------------------------------------------------------------------------------------------
Option price per share $4.23-15.45 $12.73-15.45 $12.73-15.45
Options available for granting at September 30, 1996 -- 20,807 23,375
=============================================================================================================================
</TABLE>
The above amounts reflect the 10% stock dividend paid in May 1996 and all
previous stock dividends.
<PAGE>
(dollar amounts in thousands, except per share data)
(18) Selected Quarterly Financial Data (Unaudited)
<TABLE>
<CAPTION>
Three Month Periods Ended
Dec. 31 March 31 June 30 Sept. 30
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Fiscal 1996:
Interest income $4,919 $5,069 $5,422 $5,576
Interest expense 2,879 2,883 2,977 3,093
- -----------------------------------------------------------------------------------------------------------------------------
Net interest income before provision for loan losses 2,040 2,186 2,445 2,483
Provision for loan losses 30 60 90 90
Other income 146 204 192 190
SAIF assessment -- -- -- 1,537
Operating expenses 1,563 1,604 1,667 1,702
- -----------------------------------------------------------------------------------------------------------------------------
Income before income taxes 593 726 880 (656)
Income tax provision 180 203 263 (420)
- -----------------------------------------------------------------------------------------------------------------------------
Net income $ 413 $ 523 $ 617 $ (236)
=============================================================================================================================
Earnings per share (Note 1) $ .30 $ .37 $ .44 $ (.17)
=============================================================================================================================
Fiscal 1995:
Interest income $4,562 $4,675 $4,925 $4,885
Interest expense 2,533 2,685 2,937 2,904
- -----------------------------------------------------------------------------------------------------------------------------
Net interest income before provision for loan losses 2,029 1,990 1,988 1,981
Provision for loan losses 90 70 60 10
Other income 131 151 164 158
Operating expenses 1,551 1,471 1,515 1,582
- -----------------------------------------------------------------------------------------------------------------------------
Income before income taxes 519 600 577 547
Income tax provision 177 196 170 185
=============================================================================================================================
Net income $ 342 $ 404 $ 407 $ 362
=============================================================================================================================
Earnings per share (Note 1) $ .25 $ .29 $ .29 $ .26
=============================================================================================================================
</TABLE>
<PAGE>
(dollar amounts in thousands, except per share data)
(19) Disclosures About Fair Value of Financial Instruments
Statement of Financial Accounting Standards No. 107, "Disclosure about Fair
Value of Financial Instruments" (SFASNo. 107), requires disclosure of fair value
information about financial instruments, whether or not recognized in the
Consolidated Statement of Financial Condition as of September 30, 1996 and 1995.
SFASNo. 107 excludes certain financial instruments and all non-financial
instruments from its disclosure requirements. Accordingly, the aggregate fair
value amounts presented do not represent the underlying value of Fidelity
Bancorp, Inc. and subsidiary. The carrying amounts reported in the Consolidated
Statements of Financial Condition approximate fair value for the following
financial instruments:cash, interest-earning deposits with other institutions,
investment securities available-for-sale, mortgage-backed securities
available-for-sale, and all deposits except time deposits.
At September 30, 1996 and 1995, respectively, the net carrying value of
investment securities exceeded the estimated fair value by approximately $50 and
$71. The net carrying value of mortgage-backed securities at September 30, 1996
and 1995, respectively, exceeded the estimated fair value by $457 and $2.0
million. Estimated fair values are based on quoted market prices, dealer quotes,
and prices obtained from independent pricing services. Refer to Notes 2 through
5 of the financial statements for the detail on breakdowns by type of investment
products.
The estimated fair value of loans exceeded the net carrying value at September
30, 1996 and 1995, respectively, by approximately $27 and $297. Loans with
comparable characteristics including collateral and repricing structures were
segregated for valuation purposes. Each loan pool was separately valued
utilizing a discounted cash flow analysis. Projected monthly cash flows were
discounted to present value using a market rate for comparable loans.
Characteristics of comparable loans included remaining term, coupon interest and
estimated prepayment speeds.
The fair market value of loan commitments at both September 30, 1996 and
September 30, 1995 was equal to the carrying value of the commitments on those
dates, respectively.
The carrying amounts and estimated fair values of deposits at September 30, 1996
and September 30, 1995 are as follows:
<TABLE>
<CAPTION>
September 30, 1996 September 30, 1995
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Noninterest-bearing:
Demand accounts $ 8,460 $ 8,460 $ 8,126 $ 8,126
Interest-bearing:
NOW and MMDA accounts 39,922 39,922 38,362 38,362
Passbook accounts 50,445 50,445 53,184 53,184
Time deposits 135,450 136,148 144,411 144,829
- -----------------------------------------------------------------------------------------------------------------------------
Total Deposits $234,277 $234,975 $244,083 $244,501
=============================================================================================================================
</TABLE>
<PAGE>
The carrying amounts of noninterest-bearing demand accounts, interest-bearing
NOWand MMDA accounts and passbook accounts approximate their fair values. Fair
values for time deposits are estimated using a discounted cash flow calculation
that applies contractual cost currently being offered in the existing portfolio
to current market rates being offered locally for deposits of similar remaining
maturities.
The carrying amounts and estimated fair values of advances and other borrowings
at September 30, 1996 and September 30, 1995 are as follows:
<TABLE>
<CAPTION>
September 30, 1996 September 30, 1995
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Advances and other borrowings $57,143 $57,097 $13,092 $13,058
=============================================================================================================================
</TABLE>
Fair values for advances and other borrowings are estimated using a discounted
cash flow calculation that applies contractual cost of the existing borrowings
to current market rates being offered for borrowings of similar remaining
maturities.
<PAGE>
(dollar amounts in thousands, except per share data)
(20) Fidelity Bancorp, Inc. Financial Information
(Parent Company Only)
Following are condensed financial statements for the parent company.
<TABLE>
<CAPTION>
Condensed Statements of Financial Condition
September 30,
1996 1995
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Cash in subsidiary bank $ 216 $ 37
Investment in subsidiary bank 20,768 21,835
Investment securities available-for-sale 783 259
Other assets 16 5
- -----------------------------------------------------------------------------------------------------------------------------
Total Assets $21,783 $22,136
- -----------------------------------------------------------------------------------------------------------------------------
Total Liabilities 5 4
- -----------------------------------------------------------------------------------------------------------------------------
Stockholders' Equity
Common stock ($.01 par value, 10,000,000 shares authorized;
1,373,151 and 1,235,734 shares issued and outstanding) 14 12
Additional paid-in capital 10,437 8,138
Unrealized loss on securities available-for-sale, net (1,196) 193
Retained earnings 12,523 13,789
- -----------------------------------------------------------------------------------------------------------------------------
Total Stockholders' Equity 21,778 22,132
- -----------------------------------------------------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity $21,783 $22,136
=============================================================================================================================
<CAPTION>
Condensed Statements of Income
September 30,
1996 1995 1994
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Equity in undistributed earnings of subsidiary $ 310 $1,000 $2,054
Dividends received from subsidiary 1,010 535 340
Other operating expenses (4) (29) (35)
Income tax provision (benefit) (1) (9) (13)
- -----------------------------------------------------------------------------------------------------------------------------
Net Income $1,317 $1,515 $2,372
=============================================================================================================================
<PAGE>
<CAPTION>
Condensed Statements of Cash Flows
September 30,
1996 1995 1994
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating Activities
Net income $1,317 $1,515 $2,372
Adjustments to reconcile net income to net cash
provided by operating activities:
Equity in undistributed earnings in subsidiary (310) (1,000) (2,054)
Other charges, net 2 -- --
- -----------------------------------------------------------------------------------------------------------------------------
Net cash provided (used) by operating activities 1,009 515 318
- -----------------------------------------------------------------------------------------------------------------------------
Investing Activities
Purchase of investment securities available-for-sale (548) (262) --
- -----------------------------------------------------------------------------------------------------------------------------
Net cash provided (used) by investing activities (548) (262) --
- -----------------------------------------------------------------------------------------------------------------------------
Financing Activities
Stock options exercised 70 32 58
Sale of stock through Dividend Reinvestment Plan 57 55 43
Dividends paid (409) (382) (341)
- -----------------------------------------------------------------------------------------------------------------------------
Net cash provided (used) by financing activities (282) (295) (240)
- -----------------------------------------------------------------------------------------------------------------------------
Increase (decrease) in cash 179 (42) 78
Cash at Beginning of Year 37 79 1
- -----------------------------------------------------------------------------------------------------------------------------
Cash at End of Year $ 216 $ 37 $ 79
=============================================================================================================================
</TABLE>
Fidelity Bancorp, Inc. is a bank holding company organized under the
Pennsylvania Business Corporation Law. It was organized to operate principally
as a holding company for its wholly owned subsidiary, Fidelity Savings Bank. The
Company acquired the Bank in a reorganization, approved by the stockholders of
the Bank on January 26, 1993, and completed on August 19, 1993.
(21) Contingent Liabilities
The Company is subject to a number of asserted and unasserted potential claims
encountered in the normal course of business. In the opinion of management and
legal counsel, the resolution of these claims will not have a material adverse
effect on the Company's financial position, liquidity or results of operations.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
General
The Company reported net income of $1.3 million, $1.5 million and $2.4 million
for fiscal 1996, 1995 and 1994, respectively. Included in fiscal 1996 results
was a one time pre-tax charge to recapitalize the Savings Association Insurance
Fund ("SAIF") of approximately $1.5 million. This one time charge, imposed on
all depository institutions with SAIF-insured deposits, was mandated by the
Deposit Insurance Funds Act of 1996 ("Act") that was signed into law on
September 30, 1996. The purpose of the assessment was to increase the SAIF
statutory reserve ratio to the required level of 1.25%. Included in fiscal 1994
results was a $530,000 cumulative effect of a change in accounting principle
which related to the adoption of Financial Accounting Standards Board's ("FASB")
Statement of Financial Accounting Standard ("SFAS") No.
109 relating to accounting for income taxes.
Continuing asset growth was attained in fiscal 1996. Assets were $317.9 million
at September 30, 1996, an increase of $36.1 million or 12.8% from September 30,
1995. The growth was primarily in the loan portfolio, which increased $30.4
million or 25.1% to $151.3 million at September 30, 1996. Stockholders' equity
decreased slightly from the prior year. At September 30, 1996, stockholder's
equity was $21.8 million, a decrease of $354,000 or 1.6% from September 30,
1995. This decrease primarily resulted from an increase in unrealized loss on
securities available-for-sale to $1.2 million at September 30, 1996, from an
unrealized gain on securities available-for-sale of $193,000 at September 30,
1995 and dividends paid of $409,000. Net income for the year substantially
offset this decrease.
Net interest income increased in fiscal 1996 to $9.2 million from $8.0 million
in fiscal 1995. Net interest income was $8.2 million in fiscal 1994. The
provision for loan losses continues to significantly impact profitability,
amounting to $270,000, $230,000, and $360,000 in fiscal 1996, 1995 and 1994,
respectively. In addition, results from the sale of securities have also
contributed to profitability, amounting to gains of $27,000 and $79,000 in
fiscal 1996 and 1994, respectively, versus a loss of $57,000 in fiscal 1995.
The operating results of the Bank depend primarily upon its net interest income,
which is the difference between the yield earned on its interest-earning assets
and the rates paid on its interest-bearing liabilities (interest-rate spread)
and also the relative amounts of its interest-earning assets and
interest-bearing liabilities. For the fiscal year ended September 30, 1996, the
tax-equivalent interest-rate spread increased to 3.17%, as compared to 2.88% in
fiscal 1995. The tax-equivalent spread in fiscal 1994 was 3.02%. The ratio of
average interest-earning assets to average interest-bearing liabilities
decreased to 104.2% in fiscal 1996, from 104.7% in fiscal 1995. The ratio was
104.5% in fiscal 1994. The increase in the spread for fiscal 1996 reflects
several factors, including the systematic purchase of tax exempt securities to
take advantage of their generally higher yield, and the increased use of
generally lower costing short term advances in place of longer term deposits to
fund growth. The Bank's operating results are also affected to varying degrees
by, among other things, service charges and fees, gains and losses on sales of
securities and loans, provision for loan losses, other operating income,
operating expenses and income taxes.
<PAGE>
Asset and Liability Management
The Bank in fiscal 1996 utilized strategies designed to increase net interest
income based on management's evaluation of interest rate movements, while at the
same time managing vulnerability to significant and prolonged increases in
interest rates. This process involves monitoring the imbalance between the
generally long-term, fixed rate nature of the Bank's interest-earning assets and
its generally short or medium-term, interest-bearing liabilities on a regular
basis and implementing actions designed to maintain this imbalance at levels
management feels is prudent. Although management of the Bank believes that steps
it has taken, as discussed below, have maintained the Bank's overall
vulnerability to increases in interest rates at an acceptable level, the Bank
continues to remain vulnerable to significant and prolonged increases in
interest rates because its interest-rate sensitive liabilities exceed its
interest-rate sensitive assets within short-term maturities.
The Bank continues to emphasize the origination of adjustable-rate mortgage
loans. Originations of such loans amounted to 20.7%, 68.2% and 38.5% of the
Bank's originations of mortgage loans in fiscal 1996, 1995 and 1994,
respectively. The amount of adjustable-rate loans originated in fiscal 1996
decreased, however, as market conditions caused the Bank's customers to
generally favor fixed rate loans. The Bank also is emphasizing the origination
of home equity loans, consumer loans (such as loans to finance the purchase of
automobiles), and commercial business loans. These types of loans tend to have
shorter maturities and higher interest rates than residential mortgage loans. In
addition, the Bank offers both secured and unsecured lines of credit to its
customers. These lines carry variable interest rates that adjust as the
underlying index, generally prime, moves. The Bank continues to offer long-term,
fixed-rate residential mortgage loans, but generally only under terms,
conditions, and documentation which permit the sale of such loans in the
secondary market. In fiscal 1996, however, the Bank adopted a strategy to keep
most of the fixed-rate single-family mortgage loans originated in the Bank's
portfolio. This strategy was adopted to increase the yield earned on the Bank's
portfolio of interest-earning assets and because management believed that a
significant or prolonged increase in interest rates was not likely at this time.
The Bank also invests in mortgage-backed securities, which includes
collateralized mortgage obligations (CMO's), and other investment securities. In
fiscal 1996, mortgage-backed securities purchased had both fixed and adjustable
rates. Other taxable investment securities purchased generally had stated final
maturities of two to ten years or less. The Bank also invests in tax-exempt
municipal bonds and may purchase such bonds with stated maturities of up to 30
years, although the stated maturities are generally shorter.
<PAGE>
The matching of assets and liabilities may be analyzed by examining the extent
to which such assets and liabilities are "interest rate sensitive" and by
monitoring an institution's interest rate sensitivity "gap". An asset or
liability is said to be interest rate sensitive within a specific time period if
it will mature or reprice within that time period. The interest rate sensitivity
gap is defined as the difference between interest-earning assets and
interest-bearing liabilities maturing or repricing within a given time period. A
gap is considered positive when the amount of interest rate sensitive assets
exceeds interest rate sensitive liabilities. A gap is considered negative when
the amount of interest rate sensitive liabilities exceeds interest rate
sensitive assets. During a period of rising interest rates, a negative gap would
tend to adversely affect net interest income, while a positive gap would tend to
result in an increase in net interest income. During a period of falling
interest rates, a negative gap would tend to result in an increase in net
interest income, while a positive gap would tend to adversely affect net
interest income. The Bank has seen an increase in its negative one year gap from
a negative 11.2% at September 30, 1995 to a negative 17.0% at September 30,
1996. The Bank considers this result at September 30, 1996 to be within its
acceptable target range. The table below shows the Bank's gap position at
September 30, 1996 based on certain assumptions as to prepayments and
amortization of loans, investments and deposit withdrawals.
<TABLE>
<CAPTION>
September 30, 1996
------------------------
Over Three After
Months One Year
Three Through Through After
Months Twelve Five Five
(dollars in thousands) Or Less Months Years Years
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest-earning assets $48,443 $44,779 $116,313 $97,258
Deposits, escrow
liabilities and borrowed funds 83,240 63,953 100,970 44,573
- -----------------------------------------------------------------------------------------------------------------------------
Interest sensitivity $(34,797) $(19,174) $ 15,343 $52,685
=============================================================================================================================
Cumulative interest sensitivity $(34,797) $(53,971) $(38,628) $14,057
=============================================================================================================================
Cumulative ratio as a percent of assets (10.9)% (17.0)% (12.2)% 4.4%
=============================================================================================================================
</TABLE>
In addition to managing the Bank's gap as discussed above, Fidelity has an Asset
Liability Management Committee composed of senior officers which meets
periodically to review the Bank's exposure to interest rate risk resulting from
other factors. Among the areas reviewed are progress on previously determined
strategies, national and local economic conditions, the projected interest rate
outlook, loan and deposit demand, pricing, liquidity position, capital position,
and regulatory developments. Management's evaluation of these factors indicates
the current strategies of emphasizing the origination and purchase of adjustable
rate or shorter-term loan products, while retaining in the portfolio the fixed
rate loans originated, purchasing investments with either fixed or adjustable
rates and competitively pricing deposits produces an acceptable level of
interest rate risk in the current environment.
<PAGE>
Liquidity and Capital Resources
Fidelity's primary sources of funds have historically consisted of deposits,
amortization and prepayments of outstanding loans and mortgage-backed
securities, borrowings from the FHLB of Pittsburgh and other sources, including
repurchase agreements, and sales of investments. During fiscal 1996, the Bank
used its capital resources primarily to meet its ongoing commitments to fund
maturing savings certificates and savings withdrawals, fund existing and
continuing loan commitments and asset growth and to maintain its liquidity. At
September 30, 1996 the total of approved loan commitments amounted to $1.6
million and the Bank had $4.1 million of undisbursed loan funds. The amount of
savings certificates which are scheduled to mature in the twelve-month period
ended September 30, 1997 is $83.2 million. Management believes that, by
evaluation of competitive instruments and pricing in its market area, it can, in
most circumstances, manage and control maturing deposits so that a substantial
amount of such deposits are redeposited in the Bank.
Capital
The Bank currently exceeds all regulatory capital requirements, having a
leverage ratio of Tier 1 capital to total assets of 6.98% and a ratio of
qualifying total capital to risk-weighted assets and off-balance sheet items of
15.08% at September 30, 1996. As a result, regulatory capital requirements
should have no material impact on operations.
Financial Condition
The Bank's assets were $317.9 million at September 30, 1996, an increase of
$36.1 million or 12.8% over assets at September 30, 1995. The growth primarily
reflects an increase in loans receivable. The growth was funded primarily by
advances from the FHLB of Pittsburgh.
Loan Portfolio
Net loans receivable increased $30.4 million or 25.1% to $151.3 million at
September 30, 1996 from $120.9 million at September 30, 1995. Loans originated
totaled $64.3 million in fiscal 1996 versus $35.6 million in fiscal 1995.
Mortgage loans originated amounted to $34.4 million and $16.9 million in fiscal
1996 and 1995, respectively. The Bank did not purchase any mortgage loans in
fiscal 1996 or 1995. The increase in mortgage loan originations in fiscal 1996
primarily reflects the stable economic environment that existed in the latter
part of fiscal 1996 as longer term interest rates declined and the Bank's
strategy of more aggressively pricing its mortgage products. The origination of
adjustable rate mortgages (ARM's) decreased to $7.1 million in fiscal 1996 from
$11.5 million in fiscal 1995. This decrease reflected an interest rate
environment in which customers increasingly preferred the stability of fixed
rate loans to the potential uncertainty of adjustable rates. Principal
repayments on outstanding loans also increased slightly in fiscal 1996 as
compared to fiscal 1995. The combination of the above factors resulted in an
overall increase in mortgage loans receivable to $106.3 million at September 30,
1996 from $87.7 million at September 30, 1995.
<PAGE>
Other loan originations, including installment loans and commercial business
loans, totaled $29.8 million in fiscal 1996 versus $19.7 million in fiscal 1995.
During fiscal 1996, the Bank continued to emphasize other loans, particularly
home equity loans and equity lines of credit, since they generally have shorter
terms than mortgage loans and would perform better in a rising rate environment.
The Bank was successful in this strategy and saw the balance of installment
loans increase to $35.8 million at September 30, 1996, as compared to $28.4
million at September 30, 1995. Commercial business loans also experienced a
significant increase, totaling $10.7 million at September 30, 1996 versus $6.2
million at September 30, 1995.
Non-Performing Assets
The following table sets forth information regarding non-accrual loans and real
estate owned at the dates indicated. The Bank did not have any accruing loans
which were 90 days or more overdue or any loans which were classified as
troubled debt restructurings at the dates presented.
<TABLE>
<CAPTION>
September 30,
1996 1995 1994
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Non-accrual residential real
estate loans (one-to-four family) $ 567,000 $ 227,000 $ 574,000
Non-accrual construction, multi-
family residential and
commercial real estate loans 134,000 -- 621,000
Non-accrual installment and
commercial business loans 457,000 85,000 87,000
- -----------------------------------------------------------------------------------------------------------------------------
Total non-performing loans $1,158,000 $ 312,000 $1,282,000
=============================================================================================================================
Total non-performing loans as
a percent of net loans receivable .77% .26% 1.14%
=============================================================================================================================
Total real estate owned, net of
related reserves $ 370,000 $1,062,000 $ 455,000
=============================================================================================================================
Total non-performing loans and real estate
owned as a percent of total assets .48% .49% .63%
=============================================================================================================================
</TABLE>
At September 30, 1996, non-accrual loans consisted of fifteen 1-4 family
residential real estate loans totaling $567,000, one single family construction
loan totaling $134,000, twenty-three installment loans totaling $125,000, three
commercial loans totaling $189,000, three commercial lines of credit totaling
$129,000, three personal lines of credit totaling $1,000 and eleven credit card
accounts totaling $13,000. Management has evaluated these loans and is satisfied
that the allowance for possible losses on loans at September 30, 1996 is
adequate. The allowance for possible losses on loans has increased from
$1,334,000 at September 30, 1994 to $1,429,000 at September 30, 1995 and to
$1,530,000 at September 30, 1996. The balance at September 30, 1996, at 1.01% of
net loans receivable and 132.1% of non-performing loans, is considered
reasonable by management.
<PAGE>
Mortgage-Backed Securities Held-to-Maturity
Mortgage-backed securities held-to-maturity decreased $61.0 million or 66.1% to
$31.3 million at September 30, 1996 from $92.3 million at September 30, 1995.
Purchases totaled $550,000 in fiscal 1996, all of which were adjustable-rate
mortgage-backed securities. The decrease in fiscal 1996 partially reflects the
transfer of approximately $55.0 million of mortgage-backed securities
held-to-maturity to mortgage-backed securities available-for-sale, as well as
normal principal repayments. The transfer was done according to provisions of "A
Guide to Implementation of Statement 115 on Accounting for Certain Investments
in Debt and Equity Securities" ("Guide") issued by the FASB on November 15,
1995. The one-time reclassification could be made without calling into question
the propriety of a company's stated intent in prior or subsequent periods. The
reclassification had to occur between November 15, 1995 and December 31, 1995.
The Company utilized this opportunity to reclassify securities in December 1995,
believing that such a reclassification provided additional flexibility in the
management of these assets. No sales were made from mortgage-backed securities
held-to-maturity in fiscal 1996.
Mortgage-Backed Securities Available-for-Sale
Mortgage-backed securities available-for-sale increased $53.3 million to $62.5
million at September 30, 1996 from $9.2 million at September 30, 1995. As
discussed above, approximately $55.0 million of mortgage-backed securities were
transferred to available-for-sale in December 1995 pursuant to the provisions of
the Guide. These securities may be held for indefinite periods of time and are
generally used as part of the Bank's asset/liability management strategy. These
securities may be sold in response to changes in interest rates, prepayment
rates or to meet liquidity needs. During fiscal 1996, the Bank purchased $13.3
million of these securities and sold $5.5 million. Sales of these securities in
fiscal 1996 resulted in a net pretax gain of $17,000.
Investment Securities Held-to-Maturity
Investment securities held-to-maturity decreased $9.9 million or 64.6% to $5.4
million at September 30, 1996, compared to $15.3 million at September 30, 1995.
These investments are comprised of U.S. Government and Agency securities and
asset-backed securities. The decrease in fiscal 1996 partially reflects the
transfer of approximately $8.2 million of investment securities held-to-maturity
to available-for-sale pursuant to provisions of the Guide as discussed above, as
well as other securities maturing or being called. In addition, no securities
were purchased in fiscal 1996 for the held to maturity category as management
decided to make most purchases in the available-for-sale category to increase
flexibility and liquidity in the management of security holdings. There were no
sales of investment securities held-to-maturity in fiscal 1996.
<PAGE>
Investment Securities Available-for-Sale
Investment securities available-for-sale increased $21.8 million or 74.8% to
$50.9 million at September 30, 1996, compared to $29.1 million at September 30,
1995. These securities provide an additional source of liquidity for the Bank
and consist of U.S. Government and Agency securities, tax-free municipal
obligations, mutual funds, Federal Home Loan Mortgage Corporation stock, and
other equity securities. The increase in fiscal 1996 partially reflects the
transfer of approximately $8.2 million of investment securities held to maturity
to available-for-sale. Purchases in fiscal 1996 totaled $25.5 million and sales
totaled $5.6 million, resulting in a net pretax gain of $10,000. Purchases
during fiscal 1996 were primarily tax-free municipal securities and U.S. Agency
securities.
Office Premises and Equipment
Office premises and equipment decreased $115,000 or 3.3% to $3.4 million at
September 30, 1996. There were no major equipment purchases nor major
renovations to branches or offices done in fiscal 1996.
Intangible Assets
Intangible assets, which consist of goodwill and core deposit intangibles, were
generated in the November 1991 branch acquisitions and amount to $44,000 at
September 30, 1996. These intangibles are being amortized on a straight line
basis over five years for book purposes. As a result of the Omnibus
Reconciliation Tax Act of 1993, the Bank made an election to amortize these
intangibles over 15 years for tax purposes and have them be fully tax
deductible.
Savings Deposits
Savings deposits decreased $9.8 million during fiscal 1996 to $234.3 million at
September 30, 1996. Deposit decreases occurred in time and passbook deposits,
while increases occurred in demand deposits, NOW accounts and money market
deposit accounts. This deposit outflow occurred in the later half of fiscal 1996
and was a situation experienced by much of the banking industry insured by SAIF.
During much of fiscal 1996, most SAIF insured institutions paid deposit
insurance premiums at a rate of $.23 per hundred dollars of deposits. Most
institutions insured by the Bank Insurance Fund ("BIF"), which included much of
the commercial banking industry, effectively had no deposit insurance premiums.
As a result, BIF insured institutions could be more aggressive at setting
deposit rates, and attracting deposits, particularly for time deposits, than
SAIF insured institutions. With the passage of the ACT on September 30, 1996,
the premium disparity has been significantly reduced. Effective January 1, 1997,
SAIF insured institutions will pay approximately $.064 per hundred dollars of
deposits while BIF insured institutions pay approximately $.013 per hundred
dollars of deposits.
The decrease in passbook accounts reflects the short term rate environment that
existed in fiscal 1996. Bank rates on such accounts stayed relatively low and
some depositors sought alternative higher yielding forms of investments. Demand
deposits and NOW accounts are relatively rate insensitive and the increased
balances in these categories reflects the increased emphasis management has
placed on attracting and retaining such accounts.
<PAGE>
Borrowings
Federal Home Loan Bank advances and reverse repurchase agreements outstanding
increased $44.1 million or 336.5% to $57.1 million at September 30, 1996, from
$13.1 million at September 30, 1995. The Bank continues to utilize FHLB advances
and reverse repurchase agreements as both a short-term funding source and as an
effective means to structure borrowings to complement asset/liability management
goals. The increased use of advances in fiscal 1996 reflects both the net
savings deposit outflow that occurred during the year and the need to fund the
growth the Bank experienced.
Stockholders' Equity
Stockholders' equity decreased $354,000 or 1.6% to $21.8 million at September
30, 1996 compared to $22.1 million at September 30, 1995. The decrease results
from an increase in unrealized losses on securities available-for-sale of $1.4
million and cash dividends paid of $409,000, substantially offset by 1996 net
income of $1.3 million, stock options exercised of $70,000, and stock issued
under the Dividend Reinvestment Plan of $57,000.
Results of Operations
Comparison of Fiscal Years Ended September 30, 1996, 1995, and 1994
Net income was $1.3 million for the year ended September 30, 1996 compared to
$1.5 million for fiscal 1995 and $2.4 million for fiscal 1994.
<PAGE>
Interest Rate Spread
The Bank's interest rate spread, the difference between yields on
interest-earning assets and the cost of funds, increased to 3.17% on a
tax-equivalent basis in fiscal 1996 from 2.88% in fiscal 1995. The spread was
3.02% in fiscal 1994. The following table shows the average tax-equivalent
yields earned on the Bank's interest-earning assets and the average rates paid
on its interest-bearing liabilities for the periods indicated, the resulting
interest rate spreads, and the net yields on interest-earning assets.
<TABLE>
<CAPTION>
Fiscal Years Ended September 30,
1996 1995 1994
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Average yield on:
Mortgage loans 8.33% 8.21% 8.22%
Mortgage-backed securities 6.29% 6.05% 5.79%
Installment loans 8.41% 8.31% 8.25%
Commercial business loans 9.86% 10.63% 8.69%
Interest-earning deposits with other
institutions, investment securities,
and FHLB stock(1) 6.98% 6.87% 5.58%
- -----------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets 7.44% 7.19% 6.78%
- -----------------------------------------------------------------------------------------------------------------------------
Average rates paid on:
Savings deposits 4.17% 4.24% 3.75%
Borrowed funds 4.95% 5.04% 3.90%
- -----------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 4.27% 4.31% 4.76%
- -----------------------------------------------------------------------------------------------------------------------------
Average interest rate spread 3.17% 2.88% 3.02%
=============================================================================================================================
Net yield on interest-earning assets 3.33% 3.08% 3.18%
=============================================================================================================================
</TABLE>
(1) Interest income on tax free investments has been adjusted for federal income
tax purposes using a rate of 34%.
Interest Income on Loans
Interest income on loans increased by $1.5 million or 15.4% to $11.5 million in
fiscal 1996 as compared to $10.0 million in fiscal 1995. The increase reflects
both an increase in the average yield earned on loans and an increase in the
average size of the loan portfolio. The average size of the loan portfolio
increased from an average balance of $119.3 million in fiscal 1995 to $135.9
million in fiscal 1996. The increase in the loan portfolio reflects both
management's continued efforts to expand lending and the decision to retain
newly originated mortgage loans in the portfolio, rather than selling them in
the secondary market. Interest income on loans increased by $923,000 or 10.2% to
$10.0 million in fiscal 1995 as compared to fiscal 1994. The increase primarily
reflects both an increase in the average yield earned on loans and an increase
in the average size of the loan portfolio.
<PAGE>
Interest Income on Mortgage-Backed Securities
Interest income on mortgage-backed securities decreased by $480,000 or 7.3% to
$6.1 million in fiscal 1996 from $6.6 million in fiscal 1995. The average
balance of mortgage-backed securities held, including mortgage-backed securities
available-for-sale, decreased from $109.0 million in fiscal 1995 to $97.3
million in fiscal 1996. The decrease was partially offset, however, by an
increase in the yield earned on these securities in fiscal 1996. The yield
earned on mortgage-backed securities is affected, to some degree, by the
repayment rate of loans underlying the securities. Premiums or discounts on the
securities, if any, are amortized to interest income over the life of the
securities using the level yield method. During periods of falling interest
rates, repayments of the loans underlying the securities generally increase,
which shortens the average life of the securities and accelerates the
amortization of the premium or discount. Falling rates, however, also tend to
increase the market value of the securities. A rising rate environment generally
causes a reduced level of loan repayments and a corresponding decrease in
premium/discount amortization rates. The decrease in the average balance
partially reflects the decreased emphasis placed on these securities in fiscal
1996, as growth for the Bank was generated in the loan and investment securities
portfolios.
Interest income on mortgage-backed securities was $6.6 million in both fiscal
1995 and 1994. The average balance of mortgage-baked securities, including
mortgage-backed securities available-for-sale, decreased to $109.0 million in
fiscal 1995 as compared to $114.2 million in fiscal 1994. The decrease was
offset, however, by an increase in the yield earned on these securities in
fiscal 1995.
Interest Income on Investments
Interest income on investments (including those available-for-sale), which
includes interest-earning deposits with other institutions and FHLB stock, was
$3.4 million in fiscal 1996, compared to $2.4 million in fiscal 1995. The
increase was due both to an increase in the average balance of such investments
to $55.0 million in fiscal 1996 as compared to $40.5 million in fiscal 1995, as
well as an increase in the average yield earned in fiscal 1996 as compared to
fiscal 1995. This increase in yield primarily reflects the systematic purchase
of longer term investment securities, particularly municipal obligations. Tax
free municipal obligations were purchased throughout fiscal 1996, both because
of their high tax-equivalent yield but also because of favorable call features.
Because of the increase in the Bank's loan portfolio, management decided to
decrease exposure, to the extent possible, to principal prepayment risk. Thus,
new purchases of mortgage-backed securities, which have prepayment risk, were
minimized in favor of securities, such as municipal obligations and other agency
notes, which are not subject to prepayment except at specifically defined call
dates.
Interest income on investments was $2.4 million in fiscal 1995 compared to $2.0
million in fiscal 1994. The increase was due both to an increase in the yield
earned on investments in fiscal 1995 and to an increase in the average balance
of the portfolio, which was $40.5 million in fiscal 1995 and $38.3 million in
fiscal 1994. The average yield earned on investments was higher in fiscal 1995,
as compared to fiscal 1994, due primarily to the replacement of lower yielding
securities as they matured or were sold with securities yielding a current
market rate.
<PAGE>
Interest Expense on Savings Deposits
Interest on deposits increased $89,000 or .9% to $10.1 million in fiscal 1996
from $10.0 million in fiscal 1995. The increase reflects an increase in the
average balance of deposits in fiscal 1996, as compared to fiscal 1995,
partially offset by a decrease in the average rate paid on deposits. The
decrease in rates results both from depositors continuing to maintain
significant amounts in lower costing NOW and passbook accounts and from older,
higher rate certificates of deposit maturing and being replaced with lower rate
certificates.
Interest on deposits increased $1.3 million or 14.1% to $10.0 million in fiscal
1995 from $8.7 million in fiscal 1994. The increase is primarily the result of
an increase in the average rate paid on deposits in fiscal 1995 as compared to
fiscal 1994, reflecting the higher interest rate environment that exists. Also,
the Bank experienced a shift in deposits from generally lower costing passbook
and money market accounts to fixed-rate certificates of deposit.
Interest Expense on Borrowed Funds
The Bank continued to use FHLB advances and repurchase agreements as cost
effective sources of funding in fiscal 1996. Interest expense on borrowed funds
increased $684,000 or 63.5% to $1.8 million in fiscal 1996 compared to fiscal
1995. The increase reflects a higher level of borrowing in fiscal 1996,
partially offset by a decrease in the cost of these funds. Interest expense on
borrowed funds increased $388,000 or 56.3% to $1.1 million in fiscal 1995 from
$689,000 in fiscal 1994. The increase reflects both a higher level of borrowing
in fiscal 1995, as well as higher rates paid.
Provision for Loan Losses
The provision for loan losses was $270,000, $230,000 and $360,000 for the fiscal
years ended September 30, 1996, 1995 and 1994, respectively. The variation in
the provisions reflects management's continuing evaluation of the balance in the
allowance for possible losses on loans, while at the same time experiencing a
favorable loan charge-off record. Based on these factors, the allowance has
grown from $1.3 million at September 30, 1994 to $1.5 million at September 30,
1996. Loan charge-offs, net of recoveries, were comparable in fiscal 1996 and
1995 at $169,000 and $135,000, respectively. Net charge-offs were $148,000 in
fiscal 1994.
A monthly review is conducted by management to determine that the allowance for
possible loan losses is adequate to absorb estimated loan losses. In determining
the level of allowances for possible loan losses, consideration is given to
general economic conditions, the diversification of the loan portfolio,
historical loss experience, identified credit problems, delinquency levels and
the adequacy of collateral. Although management believes that the current
allowance for loan losses is adequate, future additions to the reserves may be
necessary due to changes in economic conditions. In addition, the various
regulatory agencies review the adequacy of the allowance for loan losses as part
of their examination process and may require additions to the allowance based on
their judgment.
<PAGE>
Other Income
Fidelity's non-interest or total other income increased by $128,000 or 21.2% to
$732,000 in fiscal 1996 as compared to fiscal 1995. Other income decreased by
$23,000 or 3.7% to $604,000 in fiscal 1995 compared to fiscal 1994.
Included in non-interest income was service fee income on loans and late charges
which decreased by $10,000 in fiscal 1996 and by $10,000 in fiscal 1995 over the
respective prior years. The decrease in fiscal 1996 primarily reflects a
decrease in commercial loan fees as well as a reduction in fee income on loans
serviced for others. The decrease in fiscal 1995 reflects both a decrease in
late charges on mortgage loans and a reduction in fee income on loans serviced
for others. The portfolio of loans service for others decreased in fiscal 1996
and 1995 compared to the prior years, with a corresponding reduction in fees
earned.
The Bank recorded a net gain of $27,000 on the sale of investment and
mortgage-backed securities in fiscal 1996 as compared to a net loss on such
sales of $57,000 in fiscal 1995. Fiscal 1994 results showed a $79,000 net gain.
Sales in fiscal 1996 were made from the available-for-sale category and
reflected normal efforts to reposition portions of the portfolio at various
times during the year. Securities in the available-for-sale category represent
securities purchased for yield or asset/liability management purposes and can be
sold at any time. Sales made from the available-for-sale portfolio in fiscal
1995 were done to partially reposition the portfolio to reflect the higher
interest rate environment that existed. Funds from the sales were reinvested in
securities earning current market rates, however losses were realized on some
sales in the implementation of this strategy. The results for fiscal 1994
reflect the sale of securities from both the investment and available-for-sale
categories. Sales were made from the investment category in preparation for the
adoption of SFAS No. 115 on October 1, 1994.
Gain on sale of loans was $17,000, $18,000 and $24,000 in fiscal years 1996,
1995 and 1994, respectively. The Bank may sell a portion of the fixed-rate
mortgages it originates, generally those with terms greater than 15 years, to
the Federal National Mortgage Association ("FNMA"). In addition, the Bank sells
education loans to the Student Loan Marketing Association ("SLMA"). Such sales
generally result in some gain or loss being realized and are being done to
reduce the Bank's position in these loans, which are generally lower yielding
and subject to extensive and costly government regulation. The Bank does not
intend to originate additional loans for its portfolio, except those that will
be serviced by SLMA. Sales to FNMA and SLMA decreased in fiscal 1996, however
the net gains recorded in fiscal 1996, 1995 and 1994 reflect the timing of the
sales.
Other operating income includes miscellaneous sources of income which consist
primarily of various fees related to checking accounts, fees from the sale of
cashiers checks and money orders, and safe deposit box rental income. Such
income amounted to $614,000, $558,000 and $429,000 in fiscal 1996, 1995 and
1994, respectively. The increase in fiscal 1996 reflects an increase in rental
income from space at the Bank's Bloomfield branch that was rented throughout the
year, and increases in returned check charges and automated teller machine fees.
The increase in fiscal 1995 reflects increases in checking account service
charges related to the introduction of new checking account programs, increases
in fees related to automatic teller machine usage, and a gain on the sale of the
building housing the Bank's former East Ohio Street branch, which was closed in
March 1994. This gain amounted to $29,000.
<PAGE>
Other Expenses
Operating expenses increased $2.0 million or 31.9% to $8.1 million in fiscal
1996 and $502,000 or 8.9% to $6.1 million in fiscal 1995, from $5.6 million in
fiscal 1994.
Compensation, payroll taxes and fringe benefits, the largest component of
operating expenses, increased $170,000 or 5.5% to $3.2 million in fiscal 1996
and $282,000 or 10.1% to $3.1 million in fiscal 1995 over the respective prior
years. Factors contributing to the increases in both years were normal salary
increases and higher fringe benefit costs, as well as increases in the number of
employees.
Office occupancy and equipment expense increased $22,000 or 4.0% to $564,000 in
fiscal 1996 and $21,000 or 4.0% to $542,000 in fiscal 1995 over the respective
prior years. The increase in fiscal 1996 primarily reflects increased
maintenance costs on equipment and facilities. The increase in fiscal 1995
reflects increased property taxes and increased maintenance costs on some
equipment out of the warranty period.
Depreciation and amortization increased $ 17,000 or 3.9% to $456,000 in fiscal
1996 and $32,000 or 7.9% to $439,000 in fiscal 1995 over the respective prior
years. The increase in both years reflects new equipment purchased for both the
branch network and backoffice operations, as well as depreciation on facilities
renovated.
Premiums for federal deposit insurance were $2.1 million, $526,000 and $534,000
for the fiscal years 1996, 1995 and 1994, respectively. Fiscal 1996 results
include a one-time special assessment of $1.5 million to recapitalize the SAIF.
This one-time charge was mandated by the ACT and assessed to all SAIF insured
institutions. Exclusive of this one-time charge, the variance for the periods
reflects the varying deposit balances on which the premiums are based.
The Bank recorded net losses on real estate owned of $91,000, $9,000 and $2,000
in fiscal 1996, 1995 and 1994, respectively. The results reflect the costs
associated with the holding and disposition of properties during the periods.
The results in fiscal 1996 primarily reflect the write-down of one property to
fair value less estimated cost to sell. The property is now under agreement of
sale and no further write-downs are anticipated. The results in fiscal 1995 and
1994 do not contain individually significant transactions.
Intangible amortization was $264,000 in fiscal 1996, 1995 and 1994. The results
reflect the amortization of the intangibles generated by the three branch
acquisitions that occurred in November 1991, on a straight-line basis over five
years.
Other operating expenses, which consist primarily of check processing costs,
advertising, bank service charges, supervisory examination and assessment fees,
legal and other administrative expenses, amounted to $1.4 million in fiscal
1996, $1.3 million in fiscal 1995 and $1.1 million in fiscal 1994. Significant
variations in fiscal 1996, as compared to fiscal 1995, include increases in
legal fees, costs for new services offered such as debit cards, telephone
banking and automated teller machine statements. Partially offsetting these
increases was a decrease in advertising expenses. Significant variations in
fiscal 1995, as compared to fiscal 1994, include increased advertising expenses,
primarily relating to new checking products, increased stationary and supply
costs, postage expense and automated teller machine fees associated with the
installation of an additional machine.
<PAGE>
Income Taxes
The company generated taxable income and, as a consequence, recorded tax
provisions of $226,000, $728,000 and $1.0 million for fiscal 1996, 1995 and
1994, respectively. These changes reflect the difference in the Bank's
profitability for the periods as well as differences in the effective tax rate.
Impact of Inflation and Changing Prices
The Consolidated Financial Statements and related notes presented herein have
been prepared in accordance with generally accepted accounting principles which
require the measurement of financial position and operating results in terms of
historical dollars, without considering changes in the relative purchasing power
of money over time due to inflation.
Unlike most industrial companies, substantially all of the assets and
liabilities of the Bank are monetary in nature. As a result, interest rates have
a more significant impact on the Bank's performance than the effects of general
levels of inflation. Interest rates do not necessarily move in the same
direction or in the same magnitude as the prices of goods and services, since
such prices are affected by inflation to a larger extent than interest rates. In
the current interest rate environment, liquidity and the maturity structure of
the Company's assets and liabilities are critical to the maintenance of
acceptable performance levels.
Recent Accounting and Legislative Developments
On September 30, 1996, the President signed into law the Deposit Insurance Funds
Act of 1996 (the ACT). Among other things, the Act imposed a one time special
assessment on deposits insured by the SAIF designed to fully capitalize the SAIF
to the level required by law. This special assessment was approximately $1.5
million for the Bank. The Act also included a provision confirming that the
special assessment is deductible for Federal income tax purposes in the year
paid. The Act also provides for the eventual merger of the SAIF with the BIF and
reallocates payment of Financing Corporation bond obligations to both SAIF and
BIF insured institutions. In addition, the Act contains prohibitions on insured
institutions facilitating or encouraging the migration of SAIF deposits to the
BIF until the end of 1999. While the Bank has not yet determined the effect all
the provisions of the Act will have on it, it is expected that, as a result of
the recapitalization of SAIF, deposit insurance premiums will be significantly
reduced beginning in calendar year 1997 for all SAIF insured institutions. The
Bank currently estimates that deposit insurance premiums will fall to
approximately $.064 per hundred dollars of deposits, compared to the current
rate of $.23 per hundred.
In March 1995, the FASB released SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." SFAS No. 121 is
effective for fiscal years beginning after December 15, 1995, and establishes
guidelines for recognition of impairment losses related to long-lived assets and
certain intangibles and related goodwill for both assets to be held and used as
well as assets held for disposition. This statement excludes financial
instruments, long-term customer relationships of financial institutions,
mortgage and other servicing rights and deferred tax assets. The adoption of
SFAS No. 121 is not expected to be material to the Company's financial position
or results of operations.
<PAGE>
In May 1995, the FASB issued SFAS No. 122, "Accounting for Mortgage Servicing
Rights, an amendment of FASB Statement No. 65." SFAS No. 122 is to be applied
prospectively in fiscal years beginning after December 15, 1995 to transactions
in which an entity sells or securitizes mortgage loans with servicing rights
retained and to impairment evaluations of all amounts capitalized as mortgage
servicing rights, including those purchased before the adoption of this
Statement. The Company does not believe that the adoption of this Statement will
have a material effect on the financial position or results of operations of the
Company.
In October 1995 the FASB released SFAS No. 123, "Accounting for Stock-Based
Compensation." Effective for fiscal years beginning after December 15, 1995,
SFAS No. 123 outlines preferable accounting treatment and reporting guidelines
for employee stock option plans. The Company is currently analyzing the impact
of the adoption of the standard on the consolidated financial statements;
however, the adoption and concurrent application of the standard is not expected
to have a material impact.
The FASB released SFAS No. 125, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities," in June 1996. SFAS No. 125
is effective for transfers and servicing of financial assets and extinguishments
of liabilities occurring after December 31, 1996, and is to be applied
prospectively. SFAS No. 125 establishes standards for resolving issues related
to circumstances under which the transfer of financial assets should be
considered as sales of all or part of the assets or as secured borrowings and
about when a liability should be considered extinguished. The Company has not
yet determined the effect that the adoption of SFAS No. 125 would have on its
financial position or results of operations.
<PAGE>
Fidelity Savings Bank
Bank Headquarters - 1009 Perry Highway, Pittsburgh, Pennsylvania 15237
(412) 367-3300
- --------------------------------------------------------------------------------
Board of Directors
JOHN R. GALES
President
J.R. Gales & Associates
ROBERT F. KASTELIC
President
X-Mark Industries
OLIVER D. KEEFER
Owner
Ralph E. Lane Company
CHARLES E. NETTROUR
President
Martin & Nettrour, Inc.
Retirement Designs Unlimited, Inc.
JAMES E. SHEPARD
Retired President
Power Equipment Company
JOANNE ROSS WILDER
Attorney
Wilder, Mahood &Crenney, P.C.
WILLIAM L. WINDISCH
President, Chief Executive Officer
Director Emeritus
EVELYN R. YOUNG
Retired Department Head
Upper St. Clair High School
<PAGE>
Officers
WILLIAM L. WINDISCH
President, Chief Executive Officer
RICHARD G. SPENCER, CPA
Executive Vice President,
Chief Financial Officer, Treasurer
MICHAEL A. MOONEY
Executive Vice President, Chief Lending Officer
LISA M. CLINE
Vice President - Human Resources
and Administrative Services, Assistant Secretary
SANDRA L. LEE
Vice President - Operations
ANTHONY F. ROCCO
Vice President - Community Banking
MICHAEL D. MCGAHEY
Vice President
ARLENE P. PETROSKY
Vice President
SANDRA L. GRAHAM
Secretary
LISA L. GRIFFITH
Assistant Vice President,
Assistant Treasurer, Manager of Accounting
KENNETH J. BARKOVICH
Assistant Vice President
CHRISTINE J. HOFFMAN
Assistant Vice President
LYNNE A. MANSKI
Assistant Vice President
BERNARD T. UHRINEK
Assistant Vice President
<PAGE>
Fidelity Bancorp, Inc.
Corporate Headquarters - 1009 Perry Highway, Pittsburgh, Pennsylvania 15237
(412) 367-3300
- --------------------------------------------------------------------------------
Board of Directors
JOHN R. GALES
President
J.R. Gales & Associates
ROBERT F. KASTELIC
President
X-Mark Industries
OLIVER D. KEEFER
Owner
Ralph E. Lane Company
CHARLES E. NETTROUR
President
Martin & Nettrour, Inc.
Retirement Designs Unlimited, Inc.
JAMES E. SHEPARD
Retired President
Power Equipment Company
JOANNE ROSS WILDER
Attorney
Wilder, Mahood &Crenney, P.C.
WILLIAM L. WINDISCH
President, Chief Executive Officer
Officers
WILLIAM L. WINDISCH
President, Chief Executive Officer
RICHARD G. SPENCER, CPA
Vice President, Chief Financial Officer, Treasurer
MICHAEL A. MOONEY
Vice President
SANDRA L. GRAHAM
Secretary
LISA M. CLINE
Assistant Secretary
LISA L. GRIFFITH
Assistant Treasurer
<PAGE>
Stock Listing
NASDAQ Market System
Symbol FSBI
Investor Relations
Sandra L. Graham,
Corporate Secretary
Fidelity Bancorp, Inc.
1009 Perry Highway
Pittsburgh, Pennsylvania 15237
(412) 367-3300
Transfer Agent
Registrar and Transfer Company
10 Commerce Drive
Cranford, New Jersey 07016
(800) 866-1340
Independent Auditors
KPMG Peat Marwick LLP
One Mellon Bank Center
Pittsburgh, Pennsylvania 15219
Dividend Reinvestment
Plan Information
Investor Relations
Fidelity Bancorp, Inc.
1009 Perry Highway
Pittsburgh, Pennsylvania 15237
(412) 367-3300
Financial Information
Richard G. Spencer,
Chief Financial Officer
Fidelity Bancorp, Inc.
1009 Perry Highway
Pittsburgh, Pennsylvania 15237
(412) 367-3300
Annual Report on Form 10-KSB
Sandra L. Graham,
Corporate Secretary
Fidelity Bancorp, Inc.
1009 Perry Highway
Pittsburgh, Pennsylvania 15237
(412) 367-3300
<PAGE>
FIDELITY SAVINGS BANK
ALLISON PARK
Duncan Manor Shopping Plaza
Allison Park, Pennsylvania 15101
412-366-1200
BLOOMFIELD
4719 Liberty Avenue
Pittsburgh, Pennsylvania 15224
412-682-0311
BRIGHTON ROAD
3300 Brighton Road
Pittsburgh, Pennsylvania 15212
412-734-2675
MT. LEBANON
312 Beverly Road
Pittsburgh, Pennsylvania 15216
412-571-1333
MT. LEBANON
728 Washington Road
Pittsburgh, Pennsylvania 15228
412-561-2470
NORTHWAY
6000 Babcock Boulevard
Pittsburgh, Pennsylvania 15237
412-367-9010
PERRYSVILLE
1009 Perry Highway
Pittsburgh, Pennsylvania 15237
412-364-3200
ZELIENOPLE
251 S. Main Street
Zelienople, Pennsylvania 16063
412-452-6655
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1996
<PERIOD-END> SEP-30-1996
<CASH> 4,616,088
<INT-BEARING-DEPOSITS> 146,010
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 113,392,043
<INVESTMENTS-CARRYING> 36,676,073
<INVESTMENTS-MARKET> 36,169,160
<LOANS> 152,793,324
<ALLOWANCE> 1,530,257
<TOTAL-ASSETS> 317,874,041
<DEPOSITS> 234,275,620
<SHORT-TERM> 53,843,133
<LIABILITIES-OTHER> 4,677,193
<LONG-TERM> 3,300,000
0
0
<COMMON> 13,732
<OTHER-SE> 21,764,363
<TOTAL-LIABILITIES-AND-EQUITY> 317,874,041
<INTEREST-LOAN> 11,556,764
<INTEREST-INVEST> 9,445,720
<INTEREST-OTHER> 24,251
<INTEREST-TOTAL> 20,986,276
<INTEREST-DEPOSIT> 10,071,503
<INTEREST-EXPENSE> 11,832,574
<INTEREST-INCOME-NET> 9,153,702
<LOAN-LOSSES> 270,000
<SECURITIES-GAINS> 26,620
<EXPENSE-OTHER> 8,072,439
<INCOME-PRETAX> 1,543,322
<INCOME-PRE-EXTRAORDINARY> 1,543,322
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,317,322
<EPS-PRIMARY> .94
<EPS-DILUTED> .93
<YIELD-ACTUAL> 3.06
<LOANS-NON> 1,157,557
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,429,420
<CHARGE-OFFS> 270,554
<RECOVERIES> 101,391
<ALLOWANCE-CLOSE> 1,530,257
<ALLOWANCE-DOMESTIC> 1,530,257
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
