FORM 10-KSB
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.
---
[ X ] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 (NO FEE REQUIRED)
For the fiscal year ended September 30, 1997
[ ] 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: $24,845,000
<PAGE>
As of December 12, 1997, the aggregate market value of the 1,359,907 shares of
Common Stock of the Registrant issued and outstanding on such date, excluding
the 199,540 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 $37.4 million. This figure is based
on the last sale price of $27.50 per share of the Registrant's Common Stock on
December 12, 1997, as reported in The Wall Street Journal on December 15, 1997.
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 12, 1997: 1,559,447
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, 1997 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 3, 1998 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 Bank, PaSB ("Fidelity" 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
of 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.
The Company's other subsidiary is FB Capital Trust (the "Trust"), a statutory
business trust incorporated in Delaware. The Trust was created on May 13, 1997
to issue $10.25 million of 9.75% Preferred Securities, which are fully and
unconditionally guaranteed by the Company.
At September 30, 1997, the Company had total assets of $381.0 million, savings
deposits of $244.2 million and stockholders' equity of $25.9 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 has originated loans to small
businesses in its immediate market area.
The Bank's 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 has sought to improve profitability by (i) emphasizing
the origination and purchase of interest-rate sensitive assets and assets with
short-term maturities; and (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. The Bank
has emphasized the origination of adjustable-rate mortgage loans and home
equity, consumer and 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 $44.4 million or
11.6% of total assets at September 30, 1997. This negative gap position has
decreased on a percentage basis from September 30, 1996, when the Bank's
interest-bearing liabilities that matured or repriced within one year exceeded
its interest-earning assets with similar characteristics by $54.0 million or
17.0% 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 31.3%, 20.7%, and 68.2% of the Bank's originations of mortgage
loans in fiscal 1997, 1996, and 1995 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, the Bank 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"), although it has not sold any such loans to FNMA in fiscal
1997, 1996, or 1995.
Customer savings deposits with Fidelity 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 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.
Lending Activities
Loan Portfolio Composition. At September 30, 1997, Fidelity's net loan portfolio
totaled $182.9 million, representing approximately 48.0% of its $381.0 million
of total assets at that date. The Bank's loan portfolio at September 30, 1997
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, 1997, $105.9 million or 55.9% and $23.5 million or 12.4% of its total loan
portfolio consisted of conventional residential mortgage loans (including $4.1
million in loans for the construction of one-to-four family dwellings) and
commercial real estate loans, (including $3.6 million in loans for the
construction of commercial properties), respectively. In addition, at September
30, 1997, the Bank had $43.1 million or 22.8% of its total loan portfolio
invested in installment loans, and $16.9 million or 8.9% of its total loan
portfolio invested in commercial business loans.
<PAGE>
The following table sets forth information concerning Fidelity Bank's loan
portfolio by type at the dates indicated.
<TABLE>
<CAPTION>
As of September 30,
-----------------------------------------------------------------------
1997 1996 1995
----------------- ---------------- ----------------
Amount % Amount % Amount %
------ -- ------ -- ------ --
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Real estate loans:
Residential:
Single-family (one-to-four units) $ 97,698 51.6% $ 80,186 50.8% $ 60,160 47.4%
Multi-family (over four units) 4,165 2.2 4,435 2.8 5,156 4.1
Construction 7,614 4.0 7,645 4.8 6,911 5.4
Commercial 19,976 10.5 19,112 12.1 20,102 15.8
-------- ----- -------- ---- -------- ----
Total real estate loans 129,453 68.3 111,378 70.5 92,329 72.7
Installment loans 43,081 22.8 35,782 22.7 28,421 22.4
Commercial business loans 16,873 8.9 10,702 6.8 6,186 4.9
-------- ----- -------- ---- -------- ----
Total loans receivable 189,407 100.0% 157,862 100.0% 126,936 100.0%
====== ====== =====
Less:
Loans in process (3,695) (4,109) (3,664)
Unamortized premiums, discounts and
deferred loan fees (912) (960) (939)
Allowance for possible loan losses (1,931) (1,530) (1,429)
------- -------- --------
Net loans receivable $182,869 $151,263 $120,904
======== ======== ========
<PAGE>
<CAPTION>
As of September 30,
-----------------------------------------
1994 1993
---------------- -----------------
Amount % Amount %
------ -- ------ --
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Real estate loans:
Residential:
Single-family (one-to-four units) $ 61,570 52.7% $ 66,083 59.2%
Multi-family (over four units) 5,664 4.9 5,295 4.8
Construction 5,595 4.8 4,904 4.4
Commercial 17,032 14.6 15,532 13.9
-------- ---- ------- ----
Total real estate loans 89,861 77.0 91,814 82.3
Installment loans 22,992 19.7 16,276 14.6
Commercial business loans 3,918 3.3 3,451 3.1
-------- ---- -------- ----
Total loans receivable 116,771 100.0% 111,541 100.0%
===== =====
Less:
Loans in process (1,843) (2,772)
Unamortized premiums, discounts and
deferred loan fees (947) (1,062)
Allowance for possible loan losses (1,334) (1,122)
-------- --------
Net loans receivable $112,647 $106,585
======== ========
</TABLE>
Contractual Maturities. The following table sets forth the contractual
maturities of the total loans receivable of Fidelity Bank as of September 30,
1997 by categories of loans.
<TABLE>
<CAPTION>
Contractual Maturities Due
in Year(s) Ended September 30,
Balance Outstanding at 1999- After
September 30, 1997 1998 2002 2002
---------------------- ---- ---- ----
(In Thousands)
<S> <C> <C> <C> <C>
Real estate loans:
Residential $101,863 $ 2,296 $ 3,853 $ 95,714
Commercial 19,976 2,186 3,870 13,920
Construction 7,614 1,789 2,680 3,145
Installment loans 43,081 389 18,997 23,695
Commercial business loans 16,873 390 6,295 10,188
-------- ------- ------- --------
Total (1) $189,407 $ 7,050 $35,695 $146,662
======== ======= ======= ========
- -------------------
</TABLE>
(1) Of the $182.4 million of principal repayments contractually due after
September 30, 1998, $134.1 million have fixed rates of interest and $48.3
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 to purchase loans 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. The Bank reviews all such loans
to ensure each meets the same underwriting standards that Fidelity applies to
loans it originates. The Bank did not purchase any loans during fiscal 1997,
1996, or 1995.
Applications for all types of loans are taken at the Bank's home office and
branch offices by branch managers and loan originators 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, real estate brokers and mortgage loan 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 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 Bank has not sold loans to FNMA in fiscal 1997, 1996, or 1995, however,
preferring to retain the loans in its portfolio as part of its effort to
increase the overall size of the loan portfolio.
The following table shows total loans originated, purchased, sold and repaid
during the periods indicated.
<TABLE>
<CAPTION>
Fiscal Year Ended September 30,
-------------------------------------
1997 1996 1995
-------- -------- --------
(In Thousands)
<S> <C> <C> <C>
Real estate loan originations
Residential:
Single-family ................. $ 32,518 $ 31,411 $ 12,195
Multi-family .................. 470 134 454
Commercial .................... 2,763 2,893 4,613
-------- -------- --------
Total real estate
loan originations ......... $ 35,751 34,438 17,262
Installment loan originations ........ 22,837 20,411 14,116
Commercial business loan
originations ...................... 12,620 9,402 5,582
-------- -------- --------
Total loan originations ..... $ 71,208 64,251 36,960
Principal repayments on loans ........ 38,279 32,142 24,284
Sales of residential loans ........... 814 134 361
Sales of education loans ............. 585 1,042 1,649
-------- -------- --------
Total principal repayments
and sales of loans .......... 39,678 33,318 26,294
-------- -------- --------
Change in loans in process ........... 414 (445) (1,821)
Change in deferred loan fees ......... 48 (21) 8
Change in allowance for possible
loan losses ....................... (401) (101) (95)
Other changes, net ................... 15 (7) (501)
-------- -------- --------
Net increase (decrease) in loans ..... $ 31,606 $ 30,359 $ 8,257
======== ======== ========
</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,
1997, $101.8 million or 53.7% of the Bank's total loan portfolio consisted of
such loans (including $4.1 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 31.3%, 20.7% and 68.2% of
the total originations of mortgage loans by the Bank in fiscal 1997, 1996, and
1995, respectively, and amounted to approximately $38.5 million or 29.7% of the
Bank's portfolio of mortgage loans at September 30, 1997.
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, 1997, approximately $91.0 million or 70.3% 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 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 $214,600 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 $214,600, 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 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.
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
<PAGE>
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
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, 1997, $27.7 million or
14.6% of the Bank's total loan portfolio consisted of commercial real estate and
multi-family residential real estate loans (including $3.6 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, 1997, the Bank
had 23 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, 1997, 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.
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, 1997, the
Bank's limit on loans-to-one borrower was $4.9 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,
1997.
Installment Lending. The Bank offers a wide variety of installment loans,
including home equity loans and consumer loans.
<PAGE>
Home equity loans amounted to $37.3 million or 86.5% of the Bank's total
installment loan portfolio at September 30, 1997. 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, 1997, these loans amounted
to $2.6 million, which represented 6.0% of the Bank's total installment loan
portfolio. At September 30, 1997, motor vehicle loans amounted to $1.4 million
and unsecured loans and loans secured by property other than real estate
amounted to $1.2 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,
1997, these loans amounted to $3.2 million or 7.3% of the total installment loan
portfolio. That total consisted of $1.2 million of education loans, $848,000 of
savings account loans, $833,000 of credit card loans and $309,000 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 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 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, 1997, these loans amounted to $16.9
million or 8.9% 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
one or two 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 1997 Annual Report to
Stockholders, which is included as Exhibit 13 hereto ("Annual Report").
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 $7.7
million at September 30, 1995 to $5.3 million at September 30, 1997.
<PAGE>
Loans to Officers and Members of the Board of Directors. Certain officers and
members of the Board of Directors were customers of, and had transactions with,
the Bank in the ordinary course of business during the period from October 1,
1995 through September 30, 1997. All loans and commitments included in such
transactions were made on substantially the same terms, including interest rates
and collateral, as those prevailing at the time for comparable transactions with
other persons and did not involve more than normal risk of collectability or
present other unfavorable features.
Activity with respect to aggregate loans to officers and members of the Board of
the Bank is as follows:
<TABLE>
<CAPTION>
<S> <C>
Balance as of September 30, 1995 $ 1,071
New loans 1,905
Repayments (1,374)
-------
Balance as of September 30, 1996 $ 1,602
New loans 157
Repayments (314)
-------
Balance as of September 30, 1997 $ 1,445
=======
</TABLE>
Non-performing Loans and Real Estate Owned. When a borrower fails to make a
required payment on a loan, Fidelity 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's normal collection procedures
or an acceptable arrangement is not worked out with the borrower, Fidelity 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.
<PAGE>
If foreclosure is effected, the property is sold at a public auction in which
Fidelity may participate as a bidder. If Fidelity is the successful bidder, the
acquired real estate is then included in Fidelity "real estate owned" account
until it is sold. Although Fidelity 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 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.
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,
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Nonaccrual residential real estate
loans (one-to-four family) $ 94 $ 567 $ 227 $ 574 $ 550
Nonaccrual construction, multi-family
residential and commercial real
estate loans 751 134 -- 621 562
Nonaccrual installment and commercial
business loans 271 457 85 87 178
------ ------ ------ ------ ------
Total non-performing loans $1,116 $1,158 $ 312 $1,282 $1,290
====== ====== ====== ====== ======
Total nonperforming loans as a percent
of total loans receivable .59% .73% .25% 1.10% 1.16%
====== ====== ====== ====== ======
Total real estate owned, net of
related reserves $ -- $ 370 $1,062 $ 455 $ 339
====== ====== ====== ====== ======
Total nonperforming loans and real
estate owned as a percent of total
assets .29% .48% .49% .63% .63%
====== ====== ====== ====== ======
</TABLE>
<PAGE>
At September 30, 1997, non-accrual loans consisted of two 1-4 family residential
real estate loans totaling $94,000, one commercial real estate loan totaling
$751,000, five installment loans totaling $12,000, one commercial business loan
totaling $250,000, and seven credit card accounts totaling $9,000.
The Bank currently has no real estate owned.
The following table set forth an analysis of the Bank's allowance for loan
losses.
<TABLE>
<CAPTION>
Year Ended September 30,
--------------------------------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Balance at beginning of period $1,530 $1,429 $1,334 $1,122 $ 980
Provision charged to operations 500 270 230 360 655
------ ------ ------ ------ ------
Charge-offs:
Residential real estate 49 149 230 116 157
Installment 71 44 29 40 27
Commercial 3 78 116 3 340
Recoveries:
Residential real estate -- 55 120 -- --
Installment 8 10 11 6 7
Commercial 16 37 109 5 4
------ ------ ------ ------ ------
Net charge-off 99 169 135 148 513
------ ------ ------ ------ ------
Balance at end of period $1,931 $1,530 $1,429 $1,334 $1,122
====== ====== ====== ====== ======
Ratio of net charge-offs during
the period to average loans
outstanding during the period .06% .12% .11% .14% .46%
====== ====== ====== ====== ======
</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,
------------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
-------------- ---------------- ---------------- -------------- ------------------
Amount % Amount % Amount % Amount % Amount %
------ - ------ -- ------ -- ------ -- ------ --
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Residential real estate
loans ................. 707 53.8 $ 443 53.6% $ 385 51.5% $ 354 57.6% $ 269 64.0%
Commercial real estate
loans ................. 139 4.0 225 12.1 256 15.8 245 14.6 214 13.9
Construction loans ...... 53 10.5 60 4.8 61 5.4 58 4.8 50 4.4
Installment loans ....... 445 22.8 358 22.7 332 22.4 340 19.7 364 14.6
Commercial business loans 587 8.9 444 6.8 395 4.9 337 3.3 225 3.1
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
Total .......... $1,931 100% $1,530 100.0% $1,429 100.0% $1,334 100.0% $1,122 100.0%
====== ===== ====== ===== ====== ===== ====== ===== ====== =====
</TABLE>
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, 1997, the Bank recorded provisions
for loan losses of $500,000. At September 30, 1997, the Bank had an allowance
for possible loan losses of $1.9 million or 1.06% of net loans receivable. The
allowance for possible loan losses was 173.0% 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, 1997, the Bank had no allowances for
estimated losses on real estate owned recorded since it had no real estate
owned.
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.
<PAGE>
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.
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-to-maturity increased $2.8
million or 8.9% to $34.1 million at September 30, 1997 from $31.3 million at
September 30, 1996. During fiscal 1997, the Bank purchased $8.1 million of
mortgage-backed securities held-to-maturity, of which $2.0 million were
adjustable-rate. The Bank did not sell any mortgage-backed securities
held-to-maturity in fiscal 1997.
<PAGE>
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 $93.9 and $62.5 million at
September 30, 1997 and 1996, respectively. 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 $47.0 million of these securities and sold $8.6
million. Sales of these securities in fiscal 1997 resulted in a pretax loss of
$30,000.
<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,
-------------------------------------
1997 1996 1995
------- ------- -------
(In Thousands)
<S> <C> <C> <C>
Mortgage-backed securities
held-to-maturity:
GNMA .............................. $ 42 $ 55 $ 3,135
FNMA .............................. 9,167 10,556 40,330
FHLMC ............................. 13,977 16,734 23,440
FNMA Remic ........................ -- -- 335
FHLMC Remic ....................... 8,125 248 18,443
Other ............................. $ 2,754 $ 3,682 $ 6,641
------- ------- -------
Total ........................... $34,065 $31,275 $92,324
======= ======= =======
Mortgage-backed securities
available-for-sale:
GNMA .............................. $26,954 $ 7,011 $ --
FNMA .............................. 18,165 25,072 3,559
FHLMC ............................. 10,751 11,608 5,009
FNMA Remic ........................ 18,958 15,264 634
FHLMC Remic ....................... 17,582 5,059 --
Other ............................. 1,680 -- --
------- ------- -------
Total ........................... $94,090 $64,014 $ 9,202
======= ======= =======
</TABLE>
Information regarding the contractual maturities and weighted average yield of
the Bank's mortgage-backed securities portfolio at September 30, 1997 is
presented below.
<PAGE>
<TABLE>
<CAPTION>
Amounts at September 30, 1997 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 ..................... $ -- $ 4 $ 38 $ -- $ 42
FNMA ..................... -- -- 3,223 5,944 9,167
FHLMC .................... -- 915 369 12,693 13,977
FHLMC Remic .............. -- -- 166 7,959 8,125
Other .................... -- -- -- 2,754 2,754
------ ------- ------- ------- -------
Total .................. $ -- $ 919 $ 3,796 $29,350 $34,065
====== ======= ======= ======= =======
Weighted average yield ... --% 7.15% $ 6.38% 6.57% 6.57%
====== ======= ======= ======= =======
Mortgaged-backed securites
available-for-sale:
GNMA ..................... $ -- $ -- $ -- $26,954 $26,954
FNMA ..................... -- -- 11,881 6,284 18,165
FHLMC .................... -- 2,680 -- 8,071 10,751
FNMA Remic ............... -- 4,492 -- 14,466 18,958
FHLMC Remic .............. -- -- 5,043 12,539 17,582
Other .................... -- -- -- 1,680 1,680
------ ------- ------- ------- -------
Total .................. $ -- $ 7,172 $16,924 $69,994 $94,090
====== ======= ======= ======= =======
Weighted average yield ... -- 6.12% $ 5.59% 6.74% 6.48%
====== ======= ======= ======= =======
</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, 1997, there were no non-U.S. Government and U.S. Government
agency mortgage-backed securities that exceeded ten percent of stockholders
equity.
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, 1997, the Bank's investments amounted to $58.0
million, which includes $49.5 million available-for-sale, which represented
11.7% of total assets. Pursuant to Fidelity's 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.
<PAGE>
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 Company, in addition to being able to
invest in the same investments as the Bank, can also invest in equity
securities.
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.
The following tables set forth Fidelity's investment portfolio at carrying value
at the dates indicated.
<TABLE>
<CAPTION>
Available-for-sale
As of September 30,
-------------------------------------
1997 1996 1995
------- ------- -------
(In Thousands)
<S> <C> <C> <C>
Investment securities:
U.S. government and agency ...... $26,366 24,288 16,570
Obligations of state and
political subdivisions .......... 15,874 24,676 10,700
Mutual funds(1) ................... 1,628 1,520 1,430
FHLB stock ........................ 4,885 2,826 1,752
FHLMC preferred stock ............. 518 381 388
Equity securities ................. 187 64 --
------- ------- -------
Total ........................ $49,458 $53,755 $30,893
======= ======= =======
</TABLE>
(1) Consists of investment in the Federated Investors ARM Fund.
<PAGE>
<TABLE>
<CAPTION>
Held-to-maturity
As of September 30,
1997 1996 1995
------- ------- -------
(In Thousands)
<S> <C> <C> <C>
Investment securities:
U.S. Government and agency ........ $ 5,998 $ 3,997 $ 6,997
Obligations of state and
political subdivisions ............ 1,625 -- 6,227
Asset-backed securities .............. 918 1,404 2,052
------- ------- -------
$ 8,541 $ 5,401 $15,276
======= ======= =======
</TABLE>
The following tables set forth the carrying value, estimated market value,
weighted average life and weighted average tax-equivalent yield of Fidelity's
investment securities and interest-earning deposits with other institutions at
September 30, 1997.
<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 $26,284 $26,366 6.94 6.75%
Obligations of state and
political subdivisions 15,385 15,874 18.48 7.78
Mutual funds 1,653 1,628 -- 5.88
FHLMC preferred stock 501 518 -- 6.12
FHLB stock 4,885 4,885 -- 6.43
Equity securities 148 187 -- 2.83
------- ------- ----
Total investment securities 48,856 49,458 6.91
Interest-earning deposits
with other institutions 243 243 -- 5.82
------- ------- ----
Total investment securities
and interest-earning
deposits with other
institutions $49,099 $49,701 -- 6.90%
====== ====== ====
</TABLE>
<PAGE>
<TABLE>
<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 $5,998 $5,989 8.11 6.70%
Obligations of state and
political subdivisions 1,625 1,683 24.68 8.07
Asset-backed securities 918 926 6.83 7.38
------ ------ ----- ----
Total $8,541 $8,598 11.13 7.03%
====== ====== ===== ====
</TABLE>
At September 30, 1997, 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 September 30, 1997 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, 1997 Which Mature In
------------------------------------------------------------------------------------------
After One Year After Five Years
One Year of Less Through Five Years Through Ten Years After Ten Years
---------------- ------------------ ----------------- ---------------
Weighted Weighted Weighted Weighted
Average Average Average Average
Amount Yield Amount Yield Amount Yield Amount Yield
------ ----- ------ ----- ------ ----- ------ -----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. government and U.S. government
agency obligations ............. $ 997 5.29 $ 4,510 5.94% $20,859 6.99 -- --
Obligations of state and political
subdivisions ................... -- -- -- -- -- -- 15,874 7.78
Mutual funds ...................... 1,628 5.88 -- -- -- -- -- --
FHLB stock ........................ 4,885 6.43 -- -- -- -- --
FHLMC preferred stock ............. 518 6.12 -- -- -- -- -- --
Equity securities ................. 187 2.83 -- -- -- -- -- --
------- ---- ------- ---- ------- ---- ------- ----
Total ........................ $ 8,215 6.08% $ 4,510 5.94% $20,859 6.99% $15,874 7.78%
======= ==== ======= ==== ======= ==== ======= ====
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Held-to-Maturity
Amounts At September 30, 1997 Which Mature In
-------------------------------------------------------------------------------------------
After One Year After Five Years
One Year of Less Through Five Years Through Ten Years After Ten Years
--------------------- --------------------- ----------------- -----------------
Weighted Weighted Weighted Weighted
Average Average Average Average
Amount Yield Amount Yield Amount Yield Amount Yield
--------------------- --------------------- -------------------- -----------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. government and U.S. government
agency obligations ............. $ 998 5.36% $2,000 5.91% $ -- --% $3,000 7.67%
Obligations of state and political
subdivisions .................... -- -- -- -- -- -- 1,625 8.07
Asset-backed securities ........... 260 7.50 -- -- 658 7.34 -- --
------ ---- ------ ---- ------ ---- ------ ----
Total ........................ $1,258 5.80% $2,000 5.91% $ 658 7.34% $4,625 7.81%
====== ==== ====== ==== ====== ==== ====== ====
</TABLE>
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, 1997, such certificates
accounted for 2.4% 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.
<PAGE>
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,
-----------------------------------------------------------------------------------
1997 1996 1995
------------------- ----------------- -------------------
Average Average Average
Balance Rate Balance Rate Balance Rate
------- ---- ------- ---- ------- ----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Passbook and club accounts $ 47,514 2.78% $ 50,445 2.62% $ 53,184 3.08%
Checking accounts 33,841 1.18 30,944 1.10 29,172 1.54
Money market accounts 15,417 2.94 17,437 2.72 17,316 2.71
Certificates account 147,420 5.76 135,450 5.59 144,411 5.63
-------- ---- -------- ---- -------- ----
Total $244,192 4.37% $234,276 4.17% $244,083 4.24%
======== ==== ======== ===== ======== =====
</TABLE>
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, 1997, the Bank's total retirement
funds were $35.2 million or 14.4% 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.
<PAGE>
The following table sets forth the net savings deposit flows of the Bank during
the periods indicated.
<TABLE>
<CAPTION>
Fiscal Years Ended September 30,
1997 1996 1995
---- ---- ----
(In Thousands)
<S> <C> <C> <C>
Increase (decrease) before interest
credited $ 335 $(19,963) $ 5,672
Interest credited 9,581 10,156 10,107
-------- -------- -------
Net savings deposit increase (decrease) $ 9,916 $ (9,807) $15,779
======== ======== =======
</TABLE>
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, 1997
Maturing
---------------------------------------
At Within After
September 30, One Two Three Three
1997 Year Years Years Years
---- ---- ----- ----- -----
(In Thousands)
<S> <C> <C> <C> <C> <C>
Certificate accounts:
under 4.01% $ 42 $ 42 $ -- $ -- $ --
4.01% to 6.00% 120,815 65,555 38,006 4,968 12,284
6.01% to 8.00% 25,918 10,586 2,341 4,418 8,573
8.01% to 10.00% 645 538 87 -- 20
-------- -------- ------- ------- -------
Total certificate
accounts $147,420 $ 76,721 $40,434 $ 9,388 $20,877
======== ======== ======= ======= =======
</TABLE>
Maturities of certificates of deposit of $100,000 or more that were outstanding
as of September 30, 1997 are summarized as follows (in thousands):
<TABLE>
<CAPTION>
<S> <C>
3 months or less $ 1,496
Over 3 months through 6 months 1,597
Over 6 months through 12 months 1,204
Over 12 months 1,492
-------
Total $ 5,789
=======
</TABLE>
<PAGE>
The following table presents certain information concerning Fidelity's deposits
at September 30, 1997 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 $ 47,514 19.46% 2.50%
NOW accounts and
noninterest-bearing
checking accounts 33,841 13.86 1.50
Money market deposit
accounts 15,417 6.31 2.97
-------- ------ ----
Total 96,772 39.63 2.23
-------- ------ ----
Certificate accounts
maturing by quarter:
December 31, 1997 26,515 10.86 5.34
March 31, 1998 23,150 9.48 5.30
June 30, 1998 15,532 6.36 5.41
September 30, 1998 11,524 4.72 5.24
December 31, 1998 11,303 4.63 5.90
March 31, 1999 24,370 9.98 5.91
June 30, 1999 2,815 1.15 5.51
September 30, 1999 1,946 .80 5.75
December 31, 1999 1,559 .64 5.91
March 31, 2000 3,461 1.42 6.52
June 30, 2000 2,775 1.14 6.28
September 30, 2000 1,593 .65 5.74
Thereafter 20,877 8.55 6.12
-------- ------ ----
Total certificate
accounts 147,420 60.37 5.64
-------- ------ ----
Total savings deposits $244,192 100.00% 4.23%
======== ====== ====
</TABLE>
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,
1997, the Bank had $96.7 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 1997, the Bank had $1.2 million reverse
repurchase agreements outstanding.
On May 13, 1997, the Trust, a statutory business trust created under Delaware
law that is a subsidiary of the Company, issued $10.25 million, 9.75% Preferred
Securities ("Preferred Securities") with a stated value and liquidation
preference of $10 per share. The Trust's obligations under the Preferred
Securities issued are fully and unconditionally guaranteed by the Company. The
proceeds from the sale of the Preferred Securities of the Trust, as well as
proceeds from the issuance of common securities to the Company, were utilized by
the Trust to invest in $10.57 million of 9.75% Junior Subordinated Debentures
(the "Debentures") of the Company. The Debentures are unsecured and rank
subordinate and junior in right of payment to all indebtedness, liabilities and
obligations of the Company. The Debentures represent the sole assets of the
Trust. Interest on the Preferred Securities is cumulative and payable quarterly
in arrears. The Company has the right to optionally redeem the Debentures prior
to the maturity date of July 15, 2027, on or after July 15, 2002, at 100% of the
stated liquidation amount, plus accrued and unpaid distributions, if any, to the
redemption date. Under the occurrence of certain events, specifically, a Tax
Event, Investment Company Event or Capital Treatment Event as more fully defined
in the FB Capital Trust Prospectus dated May 8, 1997, the Company may redeem in
whole, but not in part, the Debentures prior to July 15, 2002. Proceeds from any
redemption of the Debentures would cause a mandatory redemption of the Preferred
Securities and the common securities having an aggregate liquidation amount
equal to the principal amount of the Debentures redeemed.
<PAGE>
The following table sets forth certain information regarding the short-term
borrowings (due within one year or less) of Fidelity Bank at the dates or for
the periods indicated.
<TABLE>
<CAPTION>
At or for the Year Ended September 30,
--------------------------------------
1997 1996 1995
---- ---- ----
(Dollars In Thousands)
<S> <C> <C> <C>
FHLB advances:
Average balance outstanding $ 4,069 $ 5,627 $ 5,356
Maximum amount outstanding
at any month-end during
the period 5,300 8,550 6,330
Average interest rate during
the period 4.90% 5.03% 4.76%
Balance outstanding at end of
period 3,300 5,300 3,250
Weighted average interest rate 5.10% 5.11% 4.86%
Reverse repurchase agreements:
Average balance outstanding $ 874 $ 1,216 $ 9,486
Maximum amount outstanding
at any month-end during
the period 1,528 4,565 15,471
Average interest rate during
the period 4.50% 4.75% 5.89%
Balance outstanding at end of
period 1,183 493 4,542
Weighted average interest rate 4.50% 4.50% 5.53%
Lines of credit:
Average balance outstanding $ -- -- $ 6,488
Maximum amount outstanding
at any month-end during
the period -- -- 10,150
Average interest rate during
the period -- -- 5.91%
Balance outstanding at end of
period -- -- --
Weighted average interest rate -- -- 5.34%
FHLB Repoplus Advances:
Average balance outstanding $39,208 $25,078 2,312
Maximum amount outstanding
at any month-end during
the period 52,350 51,350 5,000
Average interest rate during
the period 5.55% 5.43% 5.84%
Balance outstanding at end
of period 43,400 51,350 5,000
Weighted average interest rate 5.53% 5.46% 5.89%
Total average short-term borrowings $44,151 $30,504 $23,735
Average interest rate of total
short-term borrowings 5.47% 5.42% 5.60%
</TABLE>
<PAGE>
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. The Company's only subsidiaries at September 30, 1997 were
the Bank and FB Capital Trust.
Employees
At September 30, 1997, Fidelity had 91 full-time and 28 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.
Fidelity 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, however, in recent years significant competition has also come from mutual
funds. Particularly in times of high interest rates, Fidelity faces additional
significant competition for investors' funds from short-term money market mutual
funds and issuers of corporate and government securities. Fidelity competes for
savings deposits principally by offering depositors a variety of deposit
programs, convenient branch locations and hours, and other services. Fidelity
does not rely upon any individual group or entity for a material portion of its
savings deposits.
Fidelity's competition for real estate loans comes principally from mortgage
banking companies, commercial banks, savings banks and other financial
institutions. Fidelity 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 Bank. Substantially all of the Bank's deposits and loans are
<PAGE>
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 population in Allegheny County, the Bank's largest market area, is aging and
population growth is minimal. Areas to the north and south of Allegheny County
are, however, experiencing growth both in population and in the real estate
market. The area, like the nation as a whole, is currently experiencing low
unemployment and the labor market remains tight. The Bank believes the diversity
of the area's industry will continue to help provide for a stable economy for
the foreseeable 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,
-------------------------------------------------------------------------------
1997 1996
----------------------------------- --------------------------------------
Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate
------- -------- ---- ------- -------- ----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable $165,170 $ 13,634 8.25% $135,945 $11,482 8.45%
Mortgage-backed securities 109,251 6,964 6.37 97,340 6,120 6.29
Investment securities and
FHLB stock 53,956 3,646 6.76 54,242 3,816 7.04
Interest-earning deposits 158 11 6.96 769 24 3.12
-------- -------- ---- -------- ------- ----
Total interest-earning assets 328,535 24,255 7.39 288,296 21,442 7.44%
-------- ---- ------- -----
Non-interest-earning assets 11,362 11,433
-------- --------
Total assets $339,897 $299,729
======== ========
Interest-bearing liabilities:
Deposits $235,984 $ 9,566 4.05 $241,258 10,071 4.17
Borrowed funds 79,686 4,316 5.42 35,544 1,761 4.95
-------- ------- ---- -------- ------ ----
Total interest-bearing
liabilities 315,670 13,882 4.40 276,802 11,832 4.27
------- ---- ------ ----
Non-interest bearing
liabilities 410 832
-------- --------
Total liabilities 316,080 277,634
Stockholders' equity 23,817 22,095
-------- --------
Total liabilities and stock-
holders' equity $339,897 $299,729
======== ========
Net interest income; interest
rate spread $10,373 2.99% $ 9,610 3.17%
======= ===== ======= =====
Net interest margin(1) 3.16% 3.33%
===== =====
Average interest-earning assets
to average interest-bearing
liabilities 104.08% 104.22%
======= =======
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Year Ended September 30,
1995
--------------------------------------
Average Yield/
Balance Interest Rate
------- -------- ----
<S> <C> <C> <C>
Interest-earning assets:
Loans receivable $119,340 $ 9,953 8.34%
Mortgage-backed securities 109,010 6,600 6.05
Investment securities and
FHLB stock 39,596 2,714 6.85
Interest-earning deposits 892 69 7.78
-------- ------- ----
Total interest-earning assets 268,838 19,336 7.19
------- ----
Non-interest-earning assets 9,805
--------
Total assets $278,643
========
Interest-bearing liabilities:
Deposits $235,472 9,982 4.24
Borrowed funds 21,360 1,077 5.04
-------- ------- ----
Total interest-bearing
liabilities 256,832 11,059 4.31
------- ----
Non-interest bearing
liabilities 567
--------
Total liabilities 257,399
Stockholders' equity 21,244
--------
Total liabilities and stock-
holders' equity $278,643
========
Net interest income; interest
rate spread $ 8,277 2.88%
======= =====
Net interest margin(1) 3.08%
=====
Average interest-earning assets
to average interest-bearing
liabilities 104.68%
======
</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 1997 Fiscal 1996
Compared to Fiscal 1996 Compared to Fiscal 1995
----------------------- -----------------------
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 $1,534 $ (377) $ (56) $1,101 $ 609 $ 112 $ 10 $ 731
Mortgage-backed securities 740 94 10 844 (667) 214 (27) (480)
Installment loans 562 (11) (2) 549 485 33 6 524
Commercial business loans 494 6 2 502 370 (71) (25) 274
Investment securities and
other investments (5) (156) (22) (183) 969 56 32 1,057
------ ------- ------ ------ ------ ------- ------ ------
Total interest-earning assets 3,325 (444) (68) 2,813 1,766 344 (4) 2,106
------ ------- ------ ------ ------ ------- ------- ------
Interest expense on interest-
bearing liabilities:
Deposits (223) (288) 6 (505) 255 (162) (4) 89
Borrowed Funds 2,012 339 204 2,555 728 (32) (12) 684
------ ------- ------ ------ ------ ------- ------ -------
Total interest-bearing
liabilities 1,789 51 210 2,050 983 (194) (16) 773
------ ------- ------ ------ ------ ------- ------ -------
Net change in net interest income $1,536 $ (495) $ (278) $ 763 $ 783 $ 538 $ 12 $ 1,333
====== ======= ====== ====== ====== ======= ====== =======
</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,
------------------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Return on average assets .80% .44% .54%
Return on average equity 11.42 5.96 7.13
Average equity to assets ratio 7.01 7.37 7.85
Dividend payout ratio 19.48 31.81 25.96
</TABLE>
Asset and Liability Management
The Bank in fiscal 1997 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 Bank's
interest-earning assets and interest-bearing liabilities as of September 30,
1997. 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, 1997
------------------------------------------------------------------------
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 ............ $ 14,769 $ 20,032 $ 48,724 $ 42,233 $ 125,758
Mortgage-backed securities 33,285 19,383 49,622 25,626 127,916
Installment loans ......... 9,596 9,632 21,830 2,023 43,081
Commercial business loans . 6,852 1,364 8,657 -- 16,873
Investment securities and
other investments .. 2,097 4,998 8,998 42,149 58,242
--------- --------- --------- --------- ---------
Total interest-earning
assets ............. 66,599 55,409 137,831 112,031 371,870
--------- --------- --------- --------- ---------
Interest-bearing liabilities:
Passbook and club accounts -- -- 38,012 9,502 47,514
Checking accounts ......... 2,953 -- 25,301 5,587 33,841
Money market accounts ..... -- 7,709 7,708 -- 15,417
Certificate accounts ...... 26,515 50,206 65,086 5,613 147,420
Borrowed funds ............ 55,980 23,000 30,250 -- 109,230
--------- --------- --------- --------- ---------
Total interest-bearing
liabilities ........ 85,448 80,915 166,357 20,702 353,422
--------- --------- --------- --------- ---------
Interest sensitivity ........ $ (18,849) $ (25,506) $ (28,526) $ 91,329 $ 14,057
========= ========= ========= ========= =========
Cumulative interest
sensitivity ........ $ (18,849) $ (44,355) $ (72,881) $ 18,448
========= ========= ========= =========
Cumulative ratio as a
percent of assets .. (4.9)% (11.6)% (19.1)% 4.8%
========= ========= ========= ========
</TABLE>
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.
<PAGE>
BHCA - Activities and Other Limitations. The BHCA prohibits a bank holding
company from 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.
Pennsylvania banking law permits the interstate acquisition of banking
institutions by bank holding companies on a regional and reciprocal basis. 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 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; underwriting and dealing in government obligations and money market
instruments; providing foreign exchange advisory and transactional services;
acting as a futures commission merchant; providing check guaranty services; 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.
Capital Requirements(Consolidated). The Federal Reserve Board measures capital
adequacy for bank holding companies on the basis of a risk-based capital
framework and a leverage ratio. The guidelines include the concept of Tier 1
capital and total capital. Tier 1 capital is essentially common equity,
excluding net unrealized gain (loss) on equity securities available-for-sale and
goodwill, plus certain types of preferred stock, including the Preferred
Securities issued by the Trust in 1997. The Preferred Securities may comprise up
<PAGE>
to 25% of the Company's Tier 1 capital. Total capital includes Tier 1 capital
and other forms of capital such as the allowance for loan losses, subject to
limitations, and subordinated debt. The guidelines establish a minimum standard
risk-based target ratio of 8%, of which at least 4% must be in the form of Tier
1 capital. At September 30, 1997, the company had Tier 1 capital as a percentage
of risk-weighted assets of 18.29% and total risk-based capital as a percentage
of risk-weighted assets of 20.23%.
In addition, the Federal Reserve Board has established minimum leverage ratio
guidelines for bank holding companies. These guidelines currently provide for a
minimum ratio of Tier 1 capital as a percentage of average assets (the "Leverage
Ratio") of 3% for bank holding companies that meet certain criteria, including
that they maintain a Leverage Ratio of at least 100 to 200 basis points above
the minimum. At September 30, 1996, the Company has a Leverage Ratio of 9.11%
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 deposits of the Bank are insured to the maximum
extent permitted by the SAIF, which is administered by the FDIC, and are backed
by the full faith and credit of the U.S. Government. As insurer, the FDIC is
authorized to conduct examination of, and to require reporting by, FDIC-insured
institutions. It also may prohibit any FDIC-insured institution from engaging in
any activity the FDIC determines by regulation or order to pose a serious threat
to the FDIC. The FDIC also has the authority to initiate enforcement actions
against savings institutions.
<PAGE>
The BIF fund met its target reserve level in September 1995, but the SAIF was
not expected to meet its target reserve level until at least 2002. Consequently,
in late 1995, the FDIC approved a final rule regarding deposit insurance
premiums which, effective with respect to the semi-annual premium assessment
beginning January 1, 1996, reduced deposit insurance premiums for BIF member
institutions in the lowest risk category. Deposit insurance premiums from SAIF
members were maintained at their existing levels (23 basis points for
institutions in the lowest risk category).
On September 30, 1996, President Clinton signed into law legislation to
eliminate the premium differential between SAIF-insured institutions and
BIF-insured institutions by recapitalizing the SAIF's reserves to the required
ratio of 1.25% of insured deposits. The legislation provided that the holders of
SAIF-assessable deposits pay a one-time special assessment to recapitalize the
SAIF. The legislation also provided for the merger of the BIF and the SAIF, with
such merger being conditioned upon the prior elimination of the thrift charter.
Effective October 8, 1996, FDIC regulations imposed a one-time special
assessment equal to 65.7 basis points for all SAIF-assessable deposits as of
March 31, 1995, which was collected on November 27, 1996.
Following the imposition of the one-time special assessment, the FDIC lowered
assessment rates for SAIF members to reduce the disparity in the assessment
rates paid by BIF and SAIF members. Beginning October 1, 1996, effective BIF and
SAIF rates both range from zero basis points to 27 basis points. From 1997
through 1999, FDIC-insured institutions will pay approximately 1.3 basis points
of their BIF-assessable deposits and 6.4 basis points of their SAIF-assessable
deposits to fund the Financing Corporation.
The FDIC may terminate the deposit insurance of any insured depository
institution, including the Bank, if it determines after a hearing that the
institution has engaged or is engaging in unsafe or unsound practices, is in an
unsafe or unsound condition to continue operations, or has violated any
applicable law, regulation, order or any condition imposed by an agreement with
the FDIC. It also may suspend deposit insurance temporarily during the hearing
process for the permanent termination of insurance, if the institution has no
tangible capital. If insurance of accounts is terminated, the accounts at the
institution at the time of the termination, less subsequent withdrawals, shall
continue to be insured for a period of six months to two years, as determined by
the FDIC. Management is aware of no existing circumstances which would result in
termination of the Bank's deposit insurance.
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
<PAGE>
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.
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, 1997,
the Bank met each of its capital requirements.
The following table sets forth certain information concerning the Bank's
regulatory capital at September 30, 1997.
<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) $32,648 $32,648 $32,648
Less: unrealized securities gains (229) (229) (229)
Plus: general valuation allowance (2) -- -- 1,931
------- ------- -------
Total regulatory capital 32,419 32,419 34,350
Minimum required capital 14,795 7,419 14,838
------- ------- -------
Excess regulatory capital $17,624 $25,000 $19,512
======= ======= =======
Regulatory capital as a percentage (3) 8.76% 17.48% 18.52%
Minimum regulatory capital percentage 4.00 4.00 8.00
------- ------- -------
Excess regulatory capital
percentage 4.76% 13.48% 10.52%
======= ======= =======
</TABLE>
<PAGE>
(1) Represents equity capital of the Bank as reported to the FDIC and the
Pennsylvania Department of Banking on Form 032 for the quarter ended
September 30, 1997.
(2) Limited to 1.25% of risk adjusted assets.
(3) Tier 1 capital is calculated as a percentage of adjusted total average
assets of $369.9 million. Tier I and Tier II risk-based capital are
calculated as a percentage of adjusted risk-weighted assets of $185.5
million.
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.
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
<PAGE>
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 $4.9
million investment in stock of the FHLB of Pittsburgh at September 30, 1997,
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, 1997,
the Bank had $107.0 million of advances from the FHLB of Pittsburgh outstanding.
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, 1997, the Bank had $1.1 million
of assets classified as substandard.
<PAGE>
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.
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.
<PAGE>
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 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.
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
balance in the reserve account at the close of the last taxable year prior to
the most recent adoption of the experience method or on December 31, 1969,
whichever is later (assuming that the loans outstanding have not declined since
then)(the "base year"). For taxable years beginning after 1987, the base year
shall be the last taxable year beginning before 1988.
<PAGE>
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, 1997, 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.
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 its 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
<PAGE>
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.
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
<PAGE>
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, 1997, Fidelity 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, 1997.
<TABLE>
<CAPTION>
Net Book Value
Lease Expiration of Property and
Location Date (Including Leasehold Improvements
County Address Lease or Own Options) at September 30, 1997
- ------ ------- --------------------- ---------------------
<S> <C> <C> <C>
Allegheny 3300 Brighton Road
Pittsburgh PA 15212 Own $ 158,143
Allegheny 1009 Perry Highway
Pittsburgh PA 15237 Own 240,760
Butler 251 South Main Street
Zelienople PA 16063 Own 500,912
Allegheny 312 Beverly Road
Pittsburgh PA 15216 Lease 12/31/97 -0-
Allegheny 6000 Babcock Blvd.
Pittsburgh PA 15237 Lease 11/30/98 -0-
Allegheny 1701 Duncan Avenue
Allison Park PA 15101 Lease 01/31/00 10,819
Allegheny 4710 Liberty Avenue
Pittsburgh PA 15224 Own 638,551
Allegheny 728 Washington Road
Pittsburgh PA 15228 Own 257,917
-----------
Total $ 1,807,102
-----------
Allegheny Loan Center
1014 Perry Highway
Pittsburgh PA 15237 Lease 11/30/07 45,884
Allegheny Data Processing and
Checking Department
1015 Perry Highway
Pittsburgh PA 15237 Own 296,721
------------
Total
(including Loan and
Data Centers) $ 2,149,707
============
</TABLE>
<PAGE>
Management of Fidelity believes that the above properties are adequately covered
by insurance and are in good condition.
Fidelity generally does not invest in real estate directly. The real estate
activities of Fidelity 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, 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 49 of the
Company's Annual Report to Stockholders for fiscal 1997 ("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 35 to 47
of the Company's Annual Report.
Item 7. Financial Statements
The information required herein is incorporated by reference form pages 6 to 34
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 1998 Annual Meeting of Stockholders to
be filed within 120 days of September 30, 1997 ("Proxy Statement").
Item 10. Executive Compensation and Transactions
The information required herein is incorporated by reference from pages 10 to 17
of the Proxy Statement.
<PAGE>
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.
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 **
13 Annual Report to Stockholders
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, 1997.
<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, 1997 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, 1997
- -----------------------------
William L. Windisch, Director,
President and Chief Executive Officer
/s/ Richard G. Spencer December 23, 1997
- -----------------------------
Richard G. Spencer
Vice President and Treasurer
(also Principal Accounting Officer)
/s/ John R. Gales December 23, 1997
- -----------------------------
John R. Gales, Director
/s/ Robert F. Kastelic December 23, 1997
- -----------------------------
Robert F. Kastelic, Director
/s/ Oliver D. Keefer December 23, 1997
- -----------------------------
Oliver D. Keefer, Director
/s/ Charles E. Nettrour December 23, 1997
- -----------------------------
Charles E. Nettrour, Director
/s/ Joanne Ross Wilder December 23, 1997
- -----------------------------
Joanne Ross Wilder, Director
<TABLE>
<CAPTION>
Financial Highlights
- ------------------------------------------------------------------------------------------------------------------------------------
At or For the
Fiscal Years Ended September 30,
(in thousands, except per share data and percentages) 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Total assets $380,964 $317,874
Total savings deposits 244,192 234,276
Total loans receivable, net 182,869 151,263
Total stockholders' equity 25,881 21,778
- ----------------------------------------------------------------------------------------------------------------------------------
Net interest income $ 10,081 $ 9,154
Provision for loan losses 500 270
Net income(2) 2,719 1,317
- ----------------------------------------------------------------------------------------------------------------------------------
Earnings per share(1,2) $ 1.72 $ .85
Book value per share(1) 16.65 14.42
Average interest rate spread 2.99% 3.17%
Return on average assets (2) .80% .44%
Return on average stockholders' equity(2) 11.42% 5.96%
- ----------------------------------------------------------------------------------------------------------------------------------
Common shares outstanding(1) 1,554,775 1,510,466
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Fiscal 1996 per share amounts and common shares outstanding were restated
to reflect the 10% stock dividend paid on May 28, 1997.
(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
$1.42 per share, which reflects a return on average assets of .73% and a
return on average equity of 9.88%.
[GRAPHIC-GRAPHS FOR EARNINGS PER SHARE; RETURN ON EQUITY; AND RETURN ON ASSETS]
<PAGE>
To Our Stockholders
-------------------
Each year our goal at Fidelity is to achieve continued growth and record
earnings, thereby maximizing shareholder value. I am pleased to report that this
has been a successful year and one measure of that success is reflected in the
value of the stock. The price of the stock at fiscal year-end 1997 was $22.25,
an increase of 21.9% over year-end 1996.
OPERATING RESULTS
Net Income for fiscal 1997 was $2.7 million or $1.72 per share, compared to $1.3
million or $.85 per share in fiscal 1996. The 1996 results included a one time
expense assessment of $1.5 million to recapitalize the Savings Association
Insurance Fund (SAIF). Excluding this one time assessment, net income for fiscal
1996 would have been $2.2 million or $1.42 per share. Return on equity for
fiscal 1997 was 11.42% compared to 5.96% for fiscal 1996 and return on assets
for fiscal 1997 was .80% compared to .44% for fiscal 1996. Excluding the SAIF
assessment, 1996 results would have been 9.88% return on equity and .73% return
on assets.
Net interest income before provision for loan losses increased $927,000 or
10.1%, to $10.1 million for fiscal year-end 1997, up from $9.2 million for
fiscal year-end 1996. The increase was caused by the growth in the size of the
loan and investment portfolios.
The cost of interest-bearing liabilities in fiscal 1997 was 4.40%, compared to
4.27% in fiscal 1996. The cause of the increase was due in part to greater
wholesale funding levels used to finance the growth the Bank experienced. These
included Federal Home Loan Bank advances and the issuance of Trust Preferred
securities, funding sources which carry a higher cost than deposits.
Other income for fiscal 1997 was $882,000, up from $732,000 in fiscal 1996, an
increase of $150,000 or 20.5%. These figures include a net gain on the sale of
investments of $53,000 in fiscal 1997 compared to our fiscal 1996 gain of
$27,000. Operating expenses for fiscal 1997 and fiscal 1996 were both $6.5
million, exclusive of the 1996 one-time SAIF assessment. Operating expenses as a
percent of average assets were 1.91% in fiscal 1997, compared to 2.18% for
fiscal 1996, exclusive of the special SAIF assessment.
The provision for income taxes increased to $1.3 million in fiscal 1997, from
$226,000 in fiscal 1996. The increase primarily reflects the increased earnings
recorded in fiscal 1997.
[GRAPHIC-GRAPH OF TOTAL ASSETS]
CAPITAL
The Bank is well capitalized, with stockholders' equity remaining well above
regulatory requirements. At September 30, 1997 the Bank's Tier I core capital
ratio was 8.76%, compared to a requirement of 4.00%. At current year-end, book
value per share was $16.65, up from $14.42 at year-end 1996, an increase of
15.5%.
2
<PAGE>
ASSET QUALITY
Loan loss reserves increased by $401,000 or 26.2% to $1.9 million at September
30, 1997, from $1.5 million at September 30, 1996. The percentage of loan loss
reserves to net loans receivable at September 30, 1997 was 1.06%. Asset quality
remained sound with nonperforming loans and real estate owned at .29% of assets
at current fiscal year-end, down from .48% at the end of the previous fiscal
year.
[GRAPHIC-GRAPH SHOWING LOANS]
ASSETS
Assets increased from $317.9 million at fiscal year-end 1996 to $381.0 million
at September 30, 1997, an increase of 19.8%. Asset growth was funded principally
with Federal Home Loan Bank advances and other borrowings, which increased to
$108.1 million at fiscal year-end 1997, up from $57.1 million at fiscal year-end
1996. These borrowings were used to fuel the growth in both the loan and
investment portfolios. The investment portfolio increased by $33.1 million from
$153.0 million at September 30, 1996 to $186.2 million at September 30, 1997, an
increase of 21.6%.
LENDING
The loan portfolio expanded by $31.6 million or 20.9% to $182.9 million at
fiscal 1997 year-end, up from $151.3 million at fiscal year-end 1996. The
loan-to-asset ratio increased, although not significantly, over fiscal year-end
1996. The increases in the individual loan categories for 1997 include the
following: a) mortgage loans increased $18.5 million; b) installment loans
increased $7.3 million; and, c) commercial business loans increased $6.2
million. The Bank has and will continue its practice of being aggressive in the
pursuit of loans, yet conservative in their approval.
DIVIDEND
The Company continued its record of paying uninterrupted quarterly cash
dividends since it was formed in July of 1988. The fiscal 1997 dividend amount
was $.335 per share, an increase of 23.6% over the amount paid in fiscal 1996.
Additionally, a 10% stock dividend was paid in May 1997. The Board of Directors
intends to continue its current dividend payment practice and to enhance it
whenever it is deemed appropriate.
TRUSTPREFERRED SECURITIES
On May 13, 1997, the Bank completed an offering of $10,250,000 Trust Preferred
Securities (1,025,000 shares at $10.00 per share). The Securities carry an
interest rate of 9.75%, and represent undivided beneficial interests in the
assets of FB Capital Trust. FB Capital Trust is a Delaware statutory business
trust created as a new subsidiary of the Company to facilitate the transaction.
The proceeds from the sale of the Securities were used by the Trust to purchase
junior subordinated debentures issued by the Company. The proceeds received by
the Company from the sale of the debentures qualify as regulatory capital for
3
<PAGE>
continued from page three
the Company, a portion of which was contributed to the Bank as additional
capital. The remainder of the proceeds was held by the Company and used for
other general corporate purposes. The preferred shares are listed on the NASDAQ
National Market System under the symbol FSBIP.
[GRAPHIC-GRAPH SHOWING STOCK PRICE]
CONCLUDING COMMENT
In reflecting upon the accomplishments of this past year, the achieved results
would not have been possible without the support of the directors and the hard
work and dedication of the management and the staff of the Bank. My thanks to
this fine group of people for their strong support and diligent efforts.
Looking toward Fiscal 1998, I am reminded that success is a journey, not a
destination. Our focus will be on profitability and progressive growth to ensure
satisfactory returns for our stockholders. While challenges will present
themselves, we will view them as unresolved opportunities, thus enabling us to
meet them and to achieve another year of favorable returns in our operations and
expanded service to our customers.
Finally, on behalf of the directors, officers and staff, I thank you, our
stockholders, for your continued confidence and support.
Sincerely,
/S/William L. Windisch
- ----------------------
William L. Windisch
President
December 19, 1997
4
<PAGE>
<TABLE>
<CAPTION>
Financial Condition Data
September 30,
(in thousands) 1997 1996 1995 1994 1993
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Total assets $380,964 $317,874 $281,810 $273,564 $267,205
Loans, net 182,869 151,263 120,904 112,647 106,585
Mortgage-backed securities1 127,916 93,738 101,511 112,236 120,033
Investment securities and
other earning assets2 58,242 59,302 46,523 37,607 30,487
Savings deposits 244,192 234,276 244,083 228,304 234,091
Advances from FHLB
and other borrowings 108,133 57,143 13,092 22,601 12,309
Stockholders' equity
--substantially restricted 25,881 21,778 22,132 20,646 18,544
Number of full service offices 8 8 8 8 9
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
Operations Data
---------------
<TABLE>
<CAPTION>
Fiscal Years Ended September 30,
1997 1996 1995 1994 1993
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Interest income $23,963 $20,986 $19,047 $17,652 $18,515
Interest expense 13,882 11,832 11,059 9,435 9,982
- ------------------------------------------------------------------------------------------------------------------------------------
Net interest income 10,081 9,154 7,988 8,217 8,533
Provision for loan losses 500 270 230 360 655
- ------------------------------------------------------------------------------------------------------------------------------------
Net interest income after
provision for loan losses 9,581 8,884 7,758 7,857 7,878
Gain (loss) on sale of investments and
mortgage-backed securities, net 53 27 (57) 79 751
Gain on sale of loans 28 17 18 24 57
Service fees and other income 801 688 643 524 569
Operating expenses 6,488 8,073(3) 6,119 5,617 5,650
- ------------------------------------------------------------------------------------------------------------------------------------
Income before income tax provisions
and cumulative effect of change
in accounting principle 3,975 1,543 2,243 2,867 3,605
Income tax provision 1,256 226 728 1,025 1,411
- ------------------------------------------------------------------------------------------------------------------------------------
Net income before cumulative
effect of change in
accounting principle 2,719 1,317(3) 1,515 1,842 2,194
- ------------------------------------------------------------------------------------------------------------------------------------
Cumulative effect of change
in accounting principle -- -- -- 530 --
- ------------------------------------------------------------------------------------------------------------------------------------
Net income $ 2,719 $ 1,317(3) $ 1,515 $ 2,372 $ 2,194
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(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 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.
5
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors and Stockholders
Fidelity Bancorp, Inc. and Subsidiaries:
We have audited the accompanying consolidated statements of financial condition
of Fidelity Bancorp, Inc. and subsidiaries, as of September 30, 1997 and 1996,
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,
1997. 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 subsidiaries as of September 30, 1997 and 1996, and the results of
their operations and their cash flows for each of the years in the three-year
period ended September 30, 1997, in conformity with generally accepted
accounting principles.
/S/KPMG PEAT MARWICK LLP
Pittsburgh, Pennsylvania
October 31, 1997
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
September 30,
(in thousands, except per share data) 1997 1996
- ------------------------------------------------------------------------------------------------------------------
ASSETS
<S> <C> <C>
Cash and amounts due from depository institutions $ 3,731 $ 4,616
Interest-earning demand deposits with other institutions 243 146
Investment securities held-to-maturity
(market value of $8,598 and $5,351) (Notes 2, 11, 12, 14 and 20) 8,541 5,401
Investment securities available-for-sale
(cost of $43,971 and $51,074) (Notes 3, 12, 14 and 20) 44,573 50,929
Mortgage-backed securities held-to maturity
(market value of $34,042 and $30,818) (Notes 4, 12, 14 and 20) 34,065 31,275
Mortgage-backed securities available-for-sale
(cost of $94,090 and $64,014) (Notes 5, 12, 14 and 20) 93,851 62,463
Loans receivable, net of the allowance of $1,931 and $1,530
(Notes 6, 8, 12 and 20) 182,869 151,263
Real estate owned, net (Note 8) -- 370
Federal Home Loan Bank stock, at cost (Notes 9 and 12) 4,885 2,826
Accrued interest receivable:
Loans 932 850
Mortgage-backed securities 759 566
Investments and interest-earning deposits 724 727
Office premises and equipment, net (Note 10) 3,467 3,366
Deferred tax assets (Note 16) 852 1,926
Prepaid income taxes (Note 16) -- 324
Intangible assets -- 44
Prepaid expenses and sundry assets 1,472 782
- -----------------------------------------------------------------------------------------------------------------
$380,964 $317,874
- -----------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Savings deposits (Notes 11 and 20) $244,192 $234,276
Federal Home Loan Bank advances (Notes 12 and 20) 96,700 56,650
Guaranteed preferred beneficial interest in subordinated debt (Note 13) 10,250 --
Reverse repurchase agreements (Notes 14 and 20) 1,183 493
Advance payments by borrowers for taxes and insurance 1,097 1,317
Accrued interest on savings and other deposits 159 177
Accrued income taxes (Note 16) 204 --
Other accrued expenses and sundry liabilities 1,298 3,183
- -----------------------------------------------------------------------------------------------------------------
355,083 296,096
- -----------------------------------------------------------------------------------------------------------------
Stockholders' Equity (Notes 1, 16, 17, and 18):
Common stock, $0.01 par value per share;
10,000,000 shares authorized; 1,554,775 and
1,510,466 shares issued and outstanding 15 14
Additional paid-in capital 13,811 10,437
Retained earnings-- substantially restricted 11,822 12,523
Unrealized gain (loss) on securities available-for-sale, net 233 (1,196)
- -----------------------------------------------------------------------------------------------------------------
25,881 21,778
- -----------------------------------------------------------------------------------------------------------------
$380,964 $317,874
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
See Accompanying Notes to Consolidated Financial Statements.
7
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF INCOME
For the fiscal years ended September 30, 1997, 1996 and 1995
(in thousands, except per share data) 1997 1996 1995
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest income:
Loans $13,634 $11,482 $ 9,953
Mortgage-backed securities 6,964 6,120 6,600
Investment securities 3,354 3,360 2,425
Deposits with other institutions 11 24 69
- --------------------------------------------------------------------------------------------------------------
Total interest income 23,963 20,986 19,047
- --------------------------------------------------------------------------------------------------------------
Interest expense:
Savings deposits (Note 11) 9,566 10,071 9,982
Borrowed funds 3,924 1,761 1,077
Guaranteed preferred beneficial interest
in subordinated debt (Note 13) 392 -- --
- --------------------------------------------------------------------------------------------------------------
Total interest expense 13,882 11,832 11,059
- --------------------------------------------------------------------------------------------------------------
Net interest income before provision for loan losses 10,081 9,154 7,988
Provision for loan losses (Note 8) 500 270 230
- --------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 9,581 8,884 7,758
- --------------------------------------------------------------------------------------------------------------
Other income:
Service fee income 89 75 85
Gain (loss) on sale of investment and
mortgage-backed securities, net 53 27 (57)
Gain on sale of loans 28 17 18
Other operating income 712 613 558
- --------------------------------------------------------------------------------------------------------------
Total other income 882 732 604
- --------------------------------------------------------------------------------------------------------------
Operating expenses:
Compensation, payroll taxes and fringe benefits (Note 18) 3,682 3,238 3,068
Office occupancy and equipment expense 570 564 542
Depreciation and amortization 541 456 439
Federal insurance premiums 112 553 526
SAIF assessment -- 1,537 --
Loss on real estate owned, net 31 91 9
Intangible amortization 44 264 264
Other operating expenses 1,508 1,370 1,271
- --------------------------------------------------------------------------------------------------------------
Total operating expenses 6,488 8,073 6,119
- --------------------------------------------------------------------------------------------------------------
Income before income tax provision 3,975 1,543 2,243
Income tax provision (Note 16) 1,256 226 728
- --------------------------------------------------------------------------------------------------------------
Net income $ 2,719 $ 1,317 $ 1,515
- --------------------------------------------------------------------------------------------------------------
Primary earnings per share (Note 1) $ 1.72 $ .85 $ .99
- --------------------------------------------------------------------------------------------------------------
</TABLE>
See Accompanying Notes to Consolidated Financial Statements. 8
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
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, 1994 $ 12 $ 8,051 $12,656 $ (54) $ (19) $20,646
Employee stock ownership plan
debt repayment -- -- -- -- 19 19
Stock options exercised (Note 18) -- 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 18) -- 70 -- -- -- 70
Cash dividends paid -- -- (409) -- -- (409)
Stock dividend paid (Note 1) 12 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
Stock options exercised, including
tax benefit of $98 (Note 18) -- 390 -- -- -- 390
Cash dividends paid -- -- (517) -- -- (517)
Stock dividend paid (Note 1) 1 2,902 (2,903) -- $ -- --
Net income -- -- 2,719 -- -- 2,719
Net change in unrealized gain (loss)
on securities available-for-sale,
net of taxes -- -- -- 1,429 -- 1,429
Sale of stock through Dividend
Reinvestment Plan -- 82 -- -- -- 82
- ----------------------------------------------------------------------------------------------------------------
Balance at September 30, 1997 $15 $13,811 $11,822 $233 $ -- $25,881
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
See Accompanying Notes to Consolidated Financial Statements. 9
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENT OF CASH FLOWS
For the fiscal years ended September 30, 1997, 1996 and 1995
(in thousands) 1997 1996 1995
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating Activities:
Net income $ 2,719 $ 1,317 $ 1,515
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 500 270 230
Loss on real estate owned 31 91 9
Depreciation of premises and equipment 541 456 439
Deferred loan fee amortization (154) (235) (66)
Amortization of investment and mortgage-backed
securities discounts/premiums, net 317 321 437
Deferred income tax provision (453) (579) (116)
Amortization of intangibles 44 264 264
Net (gain) loss on sale of investments (83) (10) 131
Net (gain) loss on sale of mortgage-backed securities 30 (17) (74)
Loans held-for-sale originated (814) (134) (361)
Sale of loans held-for-sale 829 151 361
Net gain on sale of loans (28) (17) (18)
Increase in interest receivable (272) (241) (132)
(Increase) decrease in deferred tax assets 1,074 (1,110) (30)
Decrease in interest payable (18) (81) (122)
Increase (decrease) in accrued taxes 516 (257) (158)
SAIF assessment (1,537) 1,537 --
Tax benefit relating to stock benefit plan 98 -- --
Other changes-- net (470) 2,340 747
- --------------------------------------------------------------------------------------------------------------
Net cash provided (used) by operating activities 2,870 4,066 3,056
- --------------------------------------------------------------------------------------------------------------
Investing Activities:
Proceeds from sales of investments available-for-sale 16,301 5,556 6,881
Proceeds from sales of mortgage-backed securities available-for-sale 8,588 5,505 6,312
Proceeds from maturities and principal repayments
of investment securities available-for-sale 2,480 6,000 4,200
Proceeds from maturities and principal repayments
of mortgage-backed securities available-for-sale 8,130 7,778 2,475
Purchases of investment securities available-for-sale (11,594) (25,528) (26,684)
Purchases of mortgage-backed securities available-for-sale (47,029) (13,255) (7,079)
Proceeds from maturities and principal repayments
of investment securities held-to-maturity 1,487 1,649 7,230
Purchases of investment securities held-to-maturity (4,625) -- (473)
Net (increase) decrease in other interest-earning
deposits with other institutions -- -- 297
Proceeds from mortgage-backed securities
held-to-maturity principal repayments 5,162 6,438 9,551
Purchases of mortgage-backed securities held-to-maturity (8,066) (550) (891)
Principal repayments on first mortgage loans 16,864 15,247 13,475
Principal repayments on other loans 21,415 16,895 10,809
First mortgage loans originated and disbursed (34,937) (33,859) (15,080)
Sale of other loans 585 1,042 1,649
Other loans originated (35,457) (29,813) (19,698)
Additions to office premises and equipment (978) (341) (805)
Net purchases of FHLB stock (2,059) (1,074) (277)
- --------------------------------------------------------------------------------------------------------------
Net cash provided (used) by investing activities $(63,733) $(38,310) $(8,108)
- --------------------------------------------------------------------------------------------------------------
</TABLE>
(continued) 10
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENT OF CASH FLOWS
For the fiscal years ended September 30, 1997, 1996 and 1995
(in thousands) 1997 1996 1995
- --------------------------------------------------------------------------------------------------------------
Financing Activities:
<S> <C> <C> <C>
Net increase (decrease) in savings deposits $ 9,916 $ (9,807) $15,779
Increase (decrease) in reverse repurchase agreements 690 (4,049) (409)
FHLB advance repayments (1,496,450) (1,299,500) (53,400)
FHLB advances 1,536,500 1,347,600 44,300
Cash dividends paid (517) (409) (382)
Stock options exercised 292 70 32
Proceeds from sale of stock 82 57 55
Proceeds from guaranteed preferred beneficial interest
in subordinated debt 10,250 -- --
Debt issuance costs (688) -- --
- --------------------------------------------------------------------------------------------------------------
Net cash provided (used) by financing activities 60,075 33,962 5,975
- --------------------------------------------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents (788) (282) 923
Cash and cash equivalents at beginning of year 4,762 5,044 4,121
- --------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 3,974 $ 4,762 $ 5,044
- --------------------------------------------------------------------------------------------------------------
<CAPTION>
Supplemental Disclosure of Cash Flow Information
------------------------------------------------
For the fiscal years ended September 30, 1997, 1996 and 1995
(in thousands) 1997 1996 1995
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash paid during the year for:
Interest on deposits and other borrowings $ 13,433 $ 11,867 $11,255
Income taxes 335 1,011 1,008
- ----------------------------------------------------------------------------------------------------------------
Transfer of investment and mortgage-backed securities
from investment to available-for-sale -- 63,240 21,481
- ----------------------------------------------------------------------------------------------------------------
Transfer of loans to real estate owned $ 120 $ 536 $ 522
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
See Accompanying Notes to Consolidated Financial Statements. 11
<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 subsidiaries, Fidelity Bank, PaSB, a
Pennsylvania-chartered, FDIC-insured state savings bank and FBCapital Trust, a
statutory business trust incorporated in Delaware. 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 subsidiaries Fidelity Bank, PaSB (the
Bank) and FB Capital Trust (the Trust). Intercompany balances and 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.
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.
12
<PAGE>
LOANS
Loans receivable are stated at unpaid principal balances net of the allowance
for possible loan losses, net deferred loan fees and discounts. The Bank adopted
SFAS No. 114, "Accounting by Creditors for Impairment of a Loan" and SFAS No.
118, "Accounting by Creditors for Impairment of a Loan -- Income Recognition and
Disclosures," an amendment of SFAS No. 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.
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 No. 114
using major risk categories, 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 No. 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 reversed. 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.
The Bank 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
Bank 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 Bank 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.
13
<PAGE>
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.
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.
EARNINGS PER SHARE
Earnings per share for fiscal 1997, 1996 and 1995 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 weighted-average number of shares outstanding
(including common stock equivalents) for fiscal 1997, 1996 and 1995 were
1,581,458, 1,548,074, and 1,532,666, respectively, which gives retroactive
effect to the 10% common stock dividends declared by the Company's Board of
Directors and paid on May 28, 1997 and 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.
14
<PAGE>
(dollar amounts in thousands, except per share data)
(2) Investment Securities Held-to-Maturity
- --------------------------------------------------------------------------------
Investment securities held-to-maturity at September 30, 1997 and 1996 are as
follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Market
At September 30, 1997 Cost Gains Losses Value
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. government and agency obligations:
Due within one year $ 998 $-- $(2) $ 996
Due beyond one year, but within five years 2,000 1 (4) 1,997
Due beyond ten years 3,000 4 (8) 2,996
Asset-backed securities:
Contractually due within one year 260 -- -- 260
Contractually due beyond five years,
but within ten years 658 8 -- 666
Municipal obligations:
Due beyond ten years 1,625 58 -- 1,683
- ----------------------------------------------------------------------------------------------------------------
$8,541 $71 $(14) $8,598
- ----------------------------------------------------------------------------------------------------------------
<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 $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
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
At September 30, 1997, the Bank had no outstanding commitments to purchase
investment securities held-to-maturity. Non-taxable interest income was $26, $48
and $290 in fiscal 1997, 1996 and 1995, respectively. There were no sales of
investment securities held-to-maturity in 1995, 1996 or 1997.
15
<PAGE>
(dollar amounts in thousands, except per share data)
(3) Investment Securities Available-for-Sale
- --------------------------------------------------------------------------------
Investment securities available-for-sale at September 30, 1997 and 1996 are as
follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Market
At September 30, 1997 Cost Gains Losses Value
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. government and agency obligations:
Due within one year $ 1,000 $ -- $ (3) $ 997
Due beyond one year, but within five years 4,499 12 (1) 4,510
Due beyond five years, but within ten years 20,785 130 (56) 20,859
Municipal obligations:
Due beyond ten years 15,385 489 -- 15,874
Equity securities 148 39 -- 187
Mutual funds 1,653 -- (25) 1,628
Federal Home Loan Mortgage Corp.
Preferred Stock 501 17 -- 518
- -----------------------------------------------------------------------------------------------------------------
$43,971 $687 $(85) $44,573
- -----------------------------------------------------------------------------------------------------------------
<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
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
At September 30, 1997, the Bank had no outstanding commitments to purchase
investment securities available-for-sale. Non-taxable interest income was $906,
$1,140 and $183 in fiscal 1997, 1996 and 1995, respectively. Proceeds from sales
of investment securities available-for-sale were $16.3 million, $5.6 million and
$6.9 million in 1997, 1996 and 1995, respectively. Gross gains of $170, $33, and
$2 and gross losses of $87, $23, and $133 were realized on these sales in 1997,
1996 and 1995, respectively.
16
<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
Amortized Unrealized Unrealized Market
At September 30, 1997 Cost Gains Losses Value
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Government National Mortgage Association:
Contractually due beyond one year, but within five years $ 4 $ -- $ -- $ 4
Contractually due beyond five years, but within ten years 38 -- -- 38
Federal Home Loan Mortgage Corporation:
Contractually due beyond one year, but within five years 915 1 (1) 915
Contractually due beyond five years, but within ten years 369 15 -- 384
Contractually due beyond ten years 12,693 94 (113) 12,674
Federal National Mortgage Association:
Contractually due beyond five years, but within ten years 3,223 10 (43) 3,190
Contractually due beyond ten years 5,944 16 (26) 5,934
AA Rated Mortgage Certificates:
Contractually due beyond ten years 2,754 3 -- 2,757
Collateralized Mortgage Obligations:
Contractually due beyond one year, but within five years 166 8 -- 174
Contractually due beyond ten years 7,959 13 -- 7,972
- -----------------------------------------------------------------------------------------------------------------
$34,065 $160 $(183) $34,042
- -----------------------------------------------------------------------------------------------------------------
<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 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
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
At September 30, 1997, the Bank had no outstanding commitments to purchase
mortgage-backed securities held-to-maturity. There were no sales of
mortgage-backed securities classified as held-to-maturity during 1997, 1996, or
1995.
17
<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, 1997 Cost Gains Losses Value
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Government National Mortgage Association:
Contractually due beyond ten years $26,954 $203 $ (13) $27,144
Federal Home Loan Mortgage Corporation:
Contractually due beyond one year, but within five years 2,680 -- (29) 2,651
Contractually due beyond ten years 8,071 101 -- 8,172
Federal National Mortgage Association:
Contractually due beyond five years, but within ten years 11,881 -- (270) 11,611
Contractually due beyond ten years 6,284 15 (60) 6,239
Collateralized Mortgage Obligations:
Contractually due beyond one year, but within five years 4,492 4 -- 4,496
Contractually due beyond five years, but within ten years 5,043 -- (62) 4,981
Contractually due beyond ten years 28,685 40 (168) 28,557
- -----------------------------------------------------------------------------------------------------------------
$94,090 $363 $(602) $93,851
- -----------------------------------------------------------------------------------------------------------------
<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
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
At September 30, 1997, 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 1997, 1996 and 1995 were
$8.6 million, $5.5 million and $6.3 million, respectively. Gross gains of $34,
$29, and $85, and gross losses of $64, $12, and $11 were realized on these sales
in 1997, 1996 and 1995, respectively.
18
<PAGE>
(dollar amounts in thousands, except per share data)
(6) Loans Receivable
- --------------------------------------------------------------------------------
Loans receivable, net are summarized as follows:
<TABLE>
<CAPTION>
September 30,
1997 1996
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
First mortgage loans:
Conventional:
1-4 family dwellings $ 97,698 $ 80,186
Multi-family dwellings 4,165 4,435
Commercial 19,976 19,112
Construction 7,614 7,645
- ----------------------------------------------------------------------------------------------------------------
129,453 111,378
- ----------------------------------------------------------------------------------------------------------------
Less:
Loans in process (3,695) (4,109)
Unearned discounts and fees (912) (960)
- ----------------------------------------------------------------------------------------------------------------
124,846 106,309
- ----------------------------------------------------------------------------------------------------------------
Installment loans:
Home equity 37,271 30,070
Mobile home loans 68 169
Consumer loans 2,579 2,479
Other 3,163 3,064
- ----------------------------------------------------------------------------------------------------------------
43,081 35,782
- ----------------------------------------------------------------------------------------------------------------
Commercial business loans 16,873 10,702
- ----------------------------------------------------------------------------------------------------------------
Less: Allowance for possible loan losses (1,931) (1,530)
- ----------------------------------------------------------------------------------------------------------------
Loans receivable, net $182,869 $151,263
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
Commitments to originate loans at September 30, 1997 were approximately as
follows:
<TABLE>
<CAPTION>
Rate Amount
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C>
First mortgage loans:
Fixed-rate 6.50% to 7.75% $1,888
Adjustable-rate 8.75% to 8.75% 60
Other loans:
Fixed-rate 7.49% to 11.50% 674
Adjustable-rate 9.25% to 13.50% 83
- --------------------------------------------------------------------------------------------------------------
$2,705
- --------------------------------------------------------------------------------------------------------------
</TABLE>
(7) Loan Servicing Portfolio
- --------------------------------------------------------------------------------
The amount of loans serviced for others, which are not reflected in the
accompanying consolidated financial statements, was $5,317, $6,471, and $7,716
at September 30, 1997, 1996 and 1995, respectively.
19
<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, 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
Provision for loan losses 220 150 130 500
Charge-offs (49) (71) (3) (123)
Recoveries -- 8 16 24
- --------------------------------------------------------------------------------------------------------------
Balance at September 30, 1997 $ 899 $ 445 $ 587 $ 1,931
- --------------------------------------------------------------------------------------------------------------
</TABLE>
Non-accrual loans were approximately $1.1 million, $1.2 million and $312 at
September 30, 1997, 1996 and 1995, respectively. The foregone interest on those
loans for the periods ended September 30, 1997, 1996 and 1995, was $108, $61 and
$52, respectively. The amount of interest income on such loans actually included
in income in the periods ending September 30, 1997, 1996 and 1995 was $12, $58
and $27, respectively. There are no commitments to lend additional funds to
debtors in non-accrual status.
The recorded investment in loans that are considered to be impaired under SFAS
No. 114 was $753 and $319 at September 30, 1997 and September 30, 1996,
respectively. Included in this amount is $753 of impaired loans for which the
related allowance for credit losses is $66 and no 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 years ended September
30, 1997 and 1996 was approximately $722 and $281, respectively. For the fiscal
years ended September 30, 1997 and 1996, the Company recognized interest income
on those impaired loans of $0 and $20, respectively, 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,
1997 1996 1995
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Beginning of period balance $102 $ 8 $--
Provisions -- 102 8
Write-off (102) (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.
20
<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, 1997 and 1996 are summarized as
follows:
<TABLE>
<CAPTION>
1997 1996
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Land $ 309 $ 379
Office buildings 3,094 3,116
Furniture, fixtures and equipment 3,218 3,558
Leasehold improvements 148 102
- ------------------------------------------------------------------------------------------------------------
6,769 7,155
- ------------------------------------------------------------------------------------------------------------
Less accumulated depreciation and amortization (3,302) (3,789)
- ------------------------------------------------------------------------------------------------------------
Office premises and equipment, net $ 3,467 $ 3,366
- ------------------------------------------------------------------------------------------------------------
</TABLE>
The Bank has operating leases with respect to one records storage facility,
three branch offices, and the Bank's Loan Center, which expire on various dates
through fiscal 2007. Lease expense amounted to $83, $83, and $81 in fiscal years
1997, 1996 and 1995, respectively. Minimum annual lease commitments are
approximately as follows:
Years Ended September 30 Amount
-------------------------------------------
1998 134
1999 119
2000 82
2001 66
2002 66
Thereafter 330
21
<PAGE>
(dollar amounts in thousands, except per share data)
(11) Savings Deposits
- --------------------------------------------------------------------------------
Savings deposit balances at September 30, 1997 and 1996 are summarized as
follows:
<TABLE>
<CAPTION>
September 30,
Stated Rates 1997 1996
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Balance by type:
Savings Deposits:
Demand deposits noninterest-bearing $ 9,389 $ 8,460
NOW accounts 1.50% in 1997 and 1.50% in 1996 24,452 22,484
Passbooks 2.50% in 1997 and 2.50% in 1996 47,514 50,445
Money market
deposit accounts 2.97% in 1997 and 2.98% in 1996 15,417 17,437
- -----------------------------------------------------------------------------------------------------------------
96,772 98,826
- -----------------------------------------------------------------------------------------------------------------
Time Deposits:
Fixed-rate 3.00% to 4.99% 26,663 47,446
5.00% to 6.99% 108,076 71,113
7.00% to 8.99% 6,689 7,211
9.00% to 10.99% 103 120
Negotiated-rate 5.00% to 8.30% 5,889 9,560
- -----------------------------------------------------------------------------------------------------------------
147,420 135,450
- -----------------------------------------------------------------------------------------------------------------
$244,192 $234,276
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
The weighted-average interest rate for all deposits was 4.23% and 4.03% at
September 30, 1997 and 1996, respectively. Deposits with balances of $100 or
more totalled $5.8 million at September 30, 1997.
At September 30, 1997, investment securities with a carrying value of $1.0
million were pledged as required to secure deposits of public funds.
The maturities of time deposits at September 30, 1997 and 1996 are summarized as
follows:
<TABLE>
<CAPTION>
September 30,
1997 1996
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Within one year $ 76,721 $ 83,184
Beyond one year but within two years 40,434 19,507
Beyond two years but within three years 9,388 8,898
Beyond three years 20,877 23,861
- -----------------------------------------------------------------------------------------------------------------
$147,420 $135,450
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
Interest expense by deposit category is as follows:
<TABLE>
<CAPTION>
Years Ended September 30,
1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NOW accounts $ 345 $ 332 $ 443
Passbooks 1,262 1,366 1,772
Money market deposit accounts 445 478 578
Time deposits 7,514 7,895 7,189
- -----------------------------------------------------------------------------------------------------------------
$9,566 $10,071 $9,982
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
22
<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 1997 1996
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Due Date
RepoPlus Advance 5.79% $43,400 $51,350
February 24, 1997 5.14% -- 2,000
October 29, 1997 4.60% 300 300
February 26, 1998 5.14% 3,000 3,000
Convertible Select Advances:
February 14, 2002 5.29% 10,000 --
February 14, 2002 5.48% 10,000 --
March 19, 2002 6.08% 10,000 --
June 6, 2002 6.13% 5,000 --
June 20, 2002 6.20% 5,000 --
July 11, 2002 5.60% 10,000 --
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
At September 30, 1997, the Bank had two 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 $18.3 million, and expires on March 25, 1998. 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, 1998. This line of credit was not used
in fiscal 1997 or 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 1997 and 1996,
ranging individually from $50 to $17.1 million, and from $150 to $51.4 million,
respectively. The daily average balance during 1997 and 1996 was $39.2 and $25.1
million, respectively, and the daily average interest rate was 5.53% and 5.43%,
respectively, with an average interest rate at fiscal year-end 1997 of 5.79% and
fiscal year-end 1996 of 5.46%. The maximum amount outstanding at any month-end
during 1997 and 1996 was $52.4 and $51.4 million, respectively.
FHLB "Convertible Select" Advances are long term borrowings with terms of five
years, and which have a fixed rate for the first three months to three years of
the term. After the fixed rate term expires, and quarterly thereafter, the FHLB
may convert the advance to an adjustable-rate advance at their option. If the
advance is converted to an adjustable-rate advance, the Bank has the option at
the conversion date, and quarterly thereafter, to prepay the advance with no
prepayment fee. The Bank utilized "Convertible Select" Advances during fiscal
1997, with individual advances ranging from $5 to $10 million. The daily average
balance during 1997 was $25.7 million, and the daily average interest rate was
$5.60%, with an average interest rate at year end of 5.80%. The maximum amount
outstanding at any month end during 1997 was $50 million.
23
<PAGE>
(dollar amounts in thousands, except per share data)
(13) Guaranteed Preferred Beneficial Interest in Subordinated Debt
- --------------------------------------------------------------------------------
On May 13, 1997, the Trust, a statutory business trust created under Delaware
law that is a subsidiary of the Company, issued $10.25 million, 9.75% Trust
Preferred Securities ("Preferred Securities") with a stated value and
liquidation preference of $10 per share. The Trust's obligations under the
Preferred Securities issued are fully and unconditionally guaranteed by the
Company. The proceeds from the sale of the Preferred Securities of the Trust, as
well as proceeds from the issuance of common securities to the Company, were
utilized by the Trust to invest in $10.57 million of 9.75% Junior Subordinated
Debentures (the "Debentures") of the Company. The Debentures are unsecured and
rank subordinate and junior in right of payment to all indebtedness, liabilities
and obligations of the Company. The Debentures represent the sole assets of the
Trust. Interest on the Preferred Securities is cumulative and payable quarterly
in arrears. The Company has the right to optionally redeem the Debentures prior
to the maturity date of July 15, 2027, on or after July 15, 2002, at 100% of the
stated liquidation amount, plus accrued and unpaid distributions, if any, to the
redemption date. Under the occurrence of certain events, specifically, a Tax
Event, Investment Company Event or Capital Treatment Event as more fully defined
in the FBCapital Trust Prospectus dated May 8, 1997, the Company may redeem in
whole, but not in part, the Debentures prior to July 15, 2002. Proceeds from any
redemption of the Debentures would cause a mandatory redemption of the Preferred
Securities and the common securities having an aggregate liquidation amount
equal to the principal amount of the Debentures redeemed.
On July 17, 1997, on behalf of the Trust, the Company requested relief from the
Office of Chief Counsel of the Division of Corporation Finance of the Securities
and Exchange Commission, exempting the Trust from the reporting requirements of
the Securities Exchange Act of 1934. The Trust is a wholly-owned subsidiary of
the Company, has no independent operations and issued securities that contained
a full and unconditional guarantee of its parent, the Company.
<PAGE>
(14) 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, 1997, these agreements had a weighted-average interest rate of
4.50% and mature within one month. Short-term borrowings under repurchase
agreements averaged $873 and $1.3 million during 1997 and 1996, respectively.
The maximum amount outstanding at any month-end during 1997 was $1.5 million. At
September 30, 1997, 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 $1,183 4.50% $1,999 $2,002
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
24
<PAGE>
(dollar amounts in thousands, except per share data)
(15) Financial Instruments with Off-Balance Sheet Risk
- --------------------------------------------------------------------------------
At September 30, 1997, the Bank had outstanding commitments to originate loans
of $2.7 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, 1997 and 1996 was $11.5 million and $6.2 million, respectively,
for consumer lines of credit and $2.6 million and $3.5 million, respectively,
for commercial lines of credit. The interest rate for the consumer lines of
credit range from 8.5% to 18.0%, the majority of which is at variable rates. 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, 1997 and 1996 was $208 and $150,
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.
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, 1997, 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, 1997, except for the
commitments referenced above.
25
<PAGE>
(dollar amounts in thousands, except per share data)
(16) Income Taxes
- --------------------------------------------------------------------------------
The provision for (benefit from) income taxes in the Consolidated Statements of
Income consists of the following:
<TABLE>
<CAPTION>
Fiscal Years Ended September 30,
1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Current
Federal $ 535 $ 689 $ 732
State 268 55 112
- ---------------------------------------------------------------------------------------------------------------
Total current 803 744 844
- ---------------------------------------------------------------------------------------------------------------
Deferred federal 453 (518) (116)
- ---------------------------------------------------------------------------------------------------------------
Total $1,256 $ 226 $ 728
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
Total income tax provision for the years ended September 30, 1997, 1996 and 1995
was allocated as follows:
<TABLE>
<CAPTION>
1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Income $1,256 $226 $728
Stockholders' equity:
Unrealized gains (losses) on investment securities 621 (592) 86
Compensation expense for tax purposes in excess of amounts
amounts recognized for financial statement purposes (98) -- --
- ---------------------------------------------------------------------------------------------------------------
</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,
1997 1996 1995
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Expected federal tax rate 34.0% 34.0% 34.0%
Tax free interest (6.7) (21.3) (6.5)
State income tax, net of federal tax benefit 4.5 2.4 3.3
Other items, net (0.2) (0.5) 1.7
- ----------------------------------------------------------------------------------------------------------------
Actual tax rate incurred 31.6% 14.6% 32.5%
- ----------------------------------------------------------------------------------------------------------------
</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, 1997
and 1996 are presented below:
<TABLE>
<CAPTION>
1997 1996
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets (liabilities):
Deferred loan fees $158 $ 211
Fixed assets (53) (67)
Loan loss reserves 586 449
Intangible assets 276 287
Investment securities (115) 506
Savings Association Insurance Fund assessment -- 520
Other (net) -- 20
- -----------------------------------------------------------------------------------------------------------------
$852 $1,926
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
26
<PAGE>
(dollar amounts in thousands, except per share data)
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.
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 $2,679 of
the balances in retained income at September 30, 1997, represent base year bad
debt deductions for tax purposes only. No provision for federal income tax has
been made for such amount. 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.
On August 20, 1996, President Clinton signed legislation which eliminated 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 resulted from this new
legislation.
(17) 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, 1997, that the Bank meets all
capital adequacy requirements to which it is subject.
As of September 30, 1997, 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.
27
<PAGE>
(dollar amounts in thousands, except per share data)
The following table sets forth certain information concerning the Bank's
regulatory capital at September 30, 1997 and 1996.
<TABLE>
<CAPTION>
September 30, 1997 September 30, 1996
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> <C>
Equity Capital(1) $32,648 $32,648 $32,648 $20,768 $20,768 $20,768
Unrealized securities (gains) losses (229) (229) (229) 1,145 1,145 1,145
Less intangible assets -- -- -- (44) (44) (44)
Plus general valuation allowances(2) -- -- 1,931 -- -- 1,530
- -------------------------------------------------------------------------------------------------------------------
Total regulatory capital 32,419 32,419 34,350 21,869 21,869 23,399
Minimum required capital 14,795 7,419 14,838 12,528 6,208 12,416
- -------------------------------------------------------------------------------------------------------------------
Excess regulatory capital 17,624 25,000 19,512 9,341 15,661 10,983
- -------------------------------------------------------------------------------------------------------------------
Minimum required capital to be
well capitalized under Prompt
Corrective Action Provisions $18,494 $11,129 $18,548 $15,660 $ 9,312 $15,520
- -------------------------------------------------------------------------------------------------------------------
Regulatory capital as a percentage(3) 8.76% 17.48% 18.52% 6.98% 14.09% 15.08%
Minimum required capital percentage 4.00% 4.00% 8.00% 4.00% 4.00% 8.00%
- -------------------------------------------------------------------------------------------------------------------
Excess regulatory capital percentage 4.76% 13.48% 10.52% 2.98% 10.09% 7.08%
- -------------------------------------------------------------------------------------------------------------------
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 032 for the quarter ended
September 30, 1997.
(2) Limited to 1.25% of risk adjusted assets.
(3) Tier I capital is calculated as a percentage of adjusted total average
assets of $369,876 and $313,201 at September 30, 1997 and 1996,
respectively. Tier I and Tier II risk-based capital are calculated as a
percentage of adjusted risk-weighted assets of $185,477 and $155,202 at
September 30, 1997 and 1996, respectively.
(18) Employee Stock Compensation Program
- --------------------------------------------------------------------------------
In fiscal 1988, the Bank adopted an Employee Stock Compensation Program (the
Program) under which 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,
1997, there were no remaining shares available for granting as determined by the
Program Administrators.
28
<PAGE>
(dollar amounts in thousands, except per share data)
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, 1997, there were no remaining shares 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 1,512
shares of common stock exercisable at a price equal to the fair market value on
the date of the grant. As of September 30, 1997, 16,637 shares were available
for granting under the terms of the plan. Options granted under the Employee
Program and Directors' Plan will expire no later than 10 and 7 years,
respectively, from the date on which the option was or is granted. For the
periods presented, options granted for all Plans were granted at the fair market
value at the date of grant. Option information presented reflects the 10% stock
dividends paid in May 1997 and May 1996 and all previous stock dividends.
<TABLE>
<CAPTION>
Average 1993 Average 1993 Average
1988 Exercise Employee Exercise Directors' Exercise
Program Price Program Price Plan Price
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
September 30, 1994 77,621 $ 7.29 -- $ -- 6,250 $14.05
Granted -- -- 26,460 11.57 6,250 11.57
Exercised (5,559) 4.83 -- 0 -- --
Forfeited (4,235) 13.93 (1,310) 11.57 -- --
- -----------------------------------------------------------------------------------------------------------------------
September 30, 1995 67,827 7.08 25,150 11.57 12,500 12.81
Granted -- -- 16,920 13.64 6,250 13.64
Exercised (9,803) 5.98 (177) 11.57 -- --
Forfeited (392) 13.37 (1,029) 12.92 -- --
10% stock dividend 6,126 7.27 4,147 12.40 1,875 13.09
- -----------------------------------------------------------------------------------------------------------------------
September 30, 1996 63,758 7.23 45,011 12.39 20,625 13.09
Granted -- -- 21,690 18.18 8,250 18.18
Exercised (27,880) 5.12 (3,902) 11.98 (5,600) 14.43
Forfeited (34) 12.27 (1,620) 14.66 -- --
10% stock dividend 4,236 8.35 6,289 14.64 2,319 14.57
- -----------------------------------------------------------------------------------------------------------------------
September 30, 1997 40,080 $ 8.81 67,468 $14.43 25,594 $14.57
- -----------------------------------------------------------------------------------------------------------------------
Average contractual
life remaining in years 3.76 8.22 4.84
Option price
per share $3.85-$14.05 $11.57-$18.18 $11.57-$18.18
Options available
for granting at
September 30, 1997 -- -- 16,637
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
At September 30, 1997, 1996 and 1995, 100,582, 97,935 and 72,962 shares were
immediately exercisable at average prices of $11.42, $9.06 and $7.36,
respectively.
29
<PAGE>
(dollar amounts in thousands, except per share data)
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
- ---------------------------------------------------------------------------------------------------------------------
Number Weighted-average Number
Range of Outstanding Remaining Weighted-average Exercisable Weighted-average
Exercise Prices at 9/30/97 Contractual Life Exercise Price at 9/30/97 Exercise Price
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$3.85 to $5.80 17,575 1.10 years $ 4.40 17,575 $ 4.40
$7.17 to $11.57 39,359 6.83 11.00 39,359 11.00
$13.64 to $18.18 76,208 8.11 15.60 43,648 14.61
- ---------------------------------------------------------------------------------------------------------------------
133,142 6.81 $12.77 100,582 $11.42
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
In October 1995, the FASB issued Statement of Financial Accounting Standard No.
123, "Accounting for Stock-Based Compensation"("SFASNo. 123"). SFAS No. 123
establishes a fair value based method of accounting for stock-based compensation
plans. Effective for fiscal years beginning after December 15, 1995, SFAS No.
123 allows financial institutions to expense an estimated fair value of stock
options or to continue to measure compensation expense for stock option plans
using the intrinsic value method prescribed by Accounting Principles Board
Opinion No. 25 ("APBNo. 25"). Entities that elect to continue to measure
compensation expense based on APBNo. 25 must provide pro forma disclosures of
net income and earnings per share as if the fair value method of accounting has
been applied. The Company has elected to continue to measure compensation cost
using the intrinsic value method prescribed by APBNo. 25. Had the company used
the fair value method, net income and earnings per share would have been as
follows:
<TABLE>
<CAPTION>
September 30,
1997 1996
- -----------------------------------------------------------------------------------------------------
<S> <C> <C>
Net income
As reported $2,719 $1,317
Pro Forma 2,643 1,277
- -----------------------------------------------------------------------------------------------------
Primary earnings per share
As reported $11.72 $ .85
Pro Forma 1.67 .82
- -----------------------------------------------------------------------------------------------------
</TABLE>
Using a Black-Scholes option valuation model, the weighted-average fair value of
options granted during fiscal 1997 and 1996 under the 1993 Employee Program was
$4.86 and $3.27, respectively. The fair value of options granted under the 1993
Directors' Plan during fiscal 1997 and 1996 was $4.61 and $3.26, respectively.
The fair value for these options was estimated at the date of grant using a
Black-Scholes Option Valuation Model with the following weighted-average
assumptions for 1997 and 1996, respectively, for the 1993 Employee
Program:risk-free interest rates of 6.29% and 5.45%; dividend yields of 2.94%
and 3.58%; volatility factors of the expected market price of the Company's
common stock of 23.3% and 25.6%; and a weighted-average expected life of the
options of 7 years. The following weighted-average assumptions for 1997 and
1996, respectively, for the 1993 Directors' Plan were used:risk-free interest
rates of 6.21% and 5.38%; dividend yields of 2.53% and 2.97%; volatility factors
of the expected market price of the Company's common stock of 23.3% and 25.6%;
and a weighted-average expected life of the options of 5.4 years.
In management's opinion, existing stock option valuation models do not provide a
reliable single measure of the fair value of employee and director stock options
that have vesting provisions and are not transferable. In addition, option
valuation models require input of highly subjective assumptions including the
expected stock price volatility. Because the Company's stock options have
characteristics significantly different from those of traded options, and
because changes in the subjective input assumptions can materially affect the
fair value estimate, in management's opinion, the existing models do not
necessarily provide a reliable single measure of the fair value of its stock
options.
30
<PAGE>
(dollar amounts in thousands, except per share data)
(19) 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 1997:
Interest income $5,603 $5,680 $5,967 $6,713
Interest expense 3,152 3,194 3,432 4,104
- --------------------------------------------------------------------------------------------------------------------
Net interest income before provision for loan losses 2,451 2,486 2,535 2,609
Provision for loan losses 115 120 130 135
Other income 184 224 222 252
Operating expenses 1,590 1,567 1,610 1,721
- --------------------------------------------------------------------------------------------------------------------
Income before income taxes 930 1,023 1,017 1,005
Income tax provision 307 385 361 203
- --------------------------------------------------------------------------------------------------------------------
Net income $ 623 $ 638 $ 656 $ 802
- --------------------------------------------------------------------------------------------------------------------
Earnings per share $ .40 $ .40 $ .41 $ .51
- --------------------------------------------------------------------------------------------------------------------
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 (loss) before income taxes 593 726 880 (656)
Income tax provision 180 203 263 (420)
- --------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 413 $ 523 $ 617 $ (236)
- --------------------------------------------------------------------------------------------------------------------
Earnings (loss) per share $ .27 $ .34 $ .39 $ (.15)
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
(20) 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, 1997 and 1996.
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 subsidiaries. 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.
31
<PAGE>
(dollar amounts in thousands, except per share data)
At September 30, 1997, the estimated fair value of investment securities
exceeded the net carrying value by $57. At September 30, 1996, the net carrying
value of investment securities exceeded the estimated fair value by
approximately $50. The net carrying value of mortgage-backed securities at
September 30, 1997, exceeded the estimated fair value by $23. The net carrying
value of mortgage-backed securities at September 30, 1996, exceeded the
estimated fair value by $457. 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, 1997 and 1996, respectively, by approximately $2.5 million and $27. 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, 1997 and
September 30, 1996 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, 1997
and September 30, 1996 are as follows:
<TABLE>
<CAPTION>
September 30, 1997 September 30, 1996
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Noninterest-bearing:
Demand accounts $ 9,389 $ 9,389 $ 8,460 $ 8,460
Interest-bearing:
NOW and MMDA accounts 39,869 39,869 39,921 39,921
Passbook accounts 47,514 47,514 50,445 50,445
Time deposits 147,420 148,112 135,450 136,148
- -------------------------------------------------------------------------------------------------------------------
Total Deposits $244,192 $244,884 $234,276 $234,974
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
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, 1997 and September 30, 1996 are as follows:
<PAGE>
<TABLE>
<CAPTION>
September 30, 1997 September 30, 1996
------------------------ ----------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Advances and other borrowings $108,133 $108,087 $57,143 $57,097
- ----------------------------------------------------------------------------------------------------------------
</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.
32
<PAGE>
(dollar amounts in thousands, except per share data)
(21) 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,
1997 1996
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Cash in subsidiary bank $ 615 $ 216
Investment in subsidiary bank 32,648 20,768
Investment in subsidiary trust 320 --
Investment securities available-for-sale 1,194 783
Loan receivable from bank subsidiary 1,167 --
Other assets 739 16
- -----------------------------------------------------------------------------------------------------------------
Total Assets $36,683 $21,783
- -----------------------------------------------------------------------------------------------------------------
Liabilities
Subordinated debentures 10,567 --
Other liabilities 235 5
- -----------------------------------------------------------------------------------------------------------------
Total Liabilities 10,802 5
- -----------------------------------------------------------------------------------------------------------------
Stockholders' Equity
Common stock ($.01 par value, 10,000,000 shares authorized;
1,554,775 and 1,510,466 shares issued and outstanding) 15 14
Additional paid-in capital 13,811 10,437
Retained earnings 11,822 12,523
Unrealized gain (loss) on securities available-for-sale, net 233 (1,196)
- -----------------------------------------------------------------------------------------------------------------
Total Stockholders' Equity 25,881 21,778
- -----------------------------------------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity $36,683 $21,783
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CONDENSED STATEMENTS OF INCOME
September 30,
1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Equity in undistributed earnings of subsidiaries $2,400 $ 310 $1,000
Dividends received from subsidiary 520 1,010 535
Operating expenses (313) (4) (29)
Income tax provision (benefit) (112) (1) (9)
- ------------------------------------------------------------------------------------------------------------------
Net Income $2,719 $1,317 $1,515
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
33
<PAGE>
(dollar amounts in thousands, except per share data)
<TABLE>
<CAPTION>
CONDENSED STATEMENTS OF CASH FLOWS
September 30,
1997 1996 1995
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating Activities
Net income ................................................. $ 2,719 $ 1,317 $ 1,515
Adjustments to reconcile net income to net cash
provided by operating activities:
Equity in undistributed earnings in subsidiary ......... (2,400) (310) (1,000)
Increase in interest payable ........................... 218 -- --
Gain on sale of investments ............................ (36) -- --
Increase in interest receivable ........................ (39) -- --
- ----------------------------------------------------------------------------------------------------------------
Net cash provided (used) by operating activities ..... 462 1,009 515
- ----------------------------------------------------------------------------------------------------------------
Investing Activities
Capital contribution to Bank subsidiary .................... (8,000) -- --
Purchase of investment securities available-for-sale ....... (710) (548) (262)
Sale of investment securities available-for-sale ........... 145 -- --
Maturities and principal repayments of investment securities 250 -- --
Investment in trust subsidiary ............................. (317) -- --
Loan receivable from Bank subsidiary, net of repayments .... (1,167) -- --
- ----------------------------------------------------------------------------------------------------------------
Net cash provided (used) by investing activities ..... (9,799) (548) (262)
- ----------------------------------------------------------------------------------------------------------------
Financing Activities
Stock options exercised .................................... 292 70 32
Sale of stock through Dividend Reinvestment Plan ........... 82 57 55
Dividends paid ............................................. (517) (409) (382)
Issuance of subordinated debentures ........................ 10,567 -- --
Debt issuance costs ........................................ (688) -- --
- ----------------------------------------------------------------------------------------------------------------
Net cash provided (used) by financing activities ..... 9,736 (282) (295)
- ----------------------------------------------------------------------------------------------------------------
Increase (decrease) in cash .......................... 399 179 (42)
Cash at Beginning of Year .................................... 216 37 79
- ----------------------------------------------------------------------------------------------------------------
Cash at End of Year .......................................... $ 615 $ 216 $ 37
- ----------------------------------------------------------------------------------------------------------------
</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 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. On May 13, 1997, FB
Capital Trust, a statutory business trust, was created under Delaware law. The
Trust is a wholly-owned subsidiary of the Company.
(22) 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.
34
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
GENERAL
The Company reported net income of $2.7 million, $1.3 million and $1.5 million
for fiscal 1997, 1996 and 1995, 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.
Continuing asset growth was attained in fiscal 1997. Assets were $381.0 million
at September 30, 1997, an increase of $63.1 million or 19.8% from September 30,
1996. The growth was reflected primarily in the loan portfolio and in
mortgage-backed securities available-for-sale. The loan portfolio increased
$31.6 million or 20.9% to $182.9 million at September 30, 1997, and
mortgage-backed securities available-for-sale increased $31.4 million or 50.2%
for the same period. The growth was funded by increased deposits, an increase in
Federal Home Loan Bank advances, and the issuance of $10.25 million in Trust
Preferred Securities. Stockholders' equity also increased from the prior year.
At September 30, 1997, stockholders' equity was $25.9 million, an increase of
$4.1 million or 18.8% from September 30, 1996. This increase reflects both net
income for the year, as well as a decrease in unrealized loss on securities
available-for-sale from $1.2 million at September 30, 1996, to an unrealized
gain on securities available-for-sale of $233,000 at September 30, 1997.
Net interest income increased in fiscal 1997 to $10.1 million from $9.2 million
in fiscal 1996. Net interest income was $8.0 million in fiscal 1995. The
provision for loan losses continues to impact profitability, amounting to
$500,000, $270,000, and $230,000 in fiscal 1997, 1996 and 1995, respectively. In
addition, results from the sale of securities have contributed to profitability,
amounting to gains of $53,000 and $27,000 in fiscal 1997 and 1996, 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, 1997, the
tax-equivalent interest-rate spread decreased to 2.99%, as compared to 3.17% in
fiscal 1996. The tax-equivalent spread in fiscal 1995 was 2.88%. The ratio of
average interest-earning assets to average interest-bearing liabilities
decreased slightly to 104.1% in fiscal 1997, from 104.2% in fiscal 1996. The
ratio was 104.7% in fiscal 1995. The decrease in the spread for fiscal 1997
reflects several factors, including a decrease in the yield earned on the
mortgage loan portfolio, as well as the use of wholesale funding sources 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.
ASSET AND LIABILITY MANAGEMENT
The Company's vulnerability to interest rate risk exists to the extent that its
interest-bearing liabilities, consisting of customer deposits and borrowings,
mature or reprice more rapidly or on a different basis than its interest-earning
assets, which consist primarily of intermediate or long-term loans and
investments and mortgage-backed securities.
The principal determinant of the exposure of the Company's earnings to interest
rate risk is the timing difference between the repricing or maturity of the
Company's interest-earning assets and the repricing or maturity of its
interest-bearing liabilities. If the maturities of such assets and liabilities
were perfectly matched, and if the interest rates carried by its assets and
liabilities were equally flexible and moved concurrently, neither of which is
the case, the impact on net interest income of rapid increases or decreases in
interest rates would be minimized.
35
<PAGE>
The objective of interest rate risk management is to control, to the extent
possible, the effects that interest rate fluctuations have on net interest
income and on the net present value of the Company's interest-earning assets and
interest-bearing liabilities. Management and the Board are responsible for
managing interest rate risk and employing risk management policies that monitor
and limit exposure to interest rate risk. Interest rate risk is measured using
net interest margin simulation and asset/liability net present value sensitivity
analyses. These analyses provide a range of potential impacts on net interest
income and portfolio equity caused by interest rate movements.
The Company uses financial modeling to measure the impact of changes in interest
rates on the net interest margin. Assumptions are made regarding loan and
mortgage-backed securities prepayments and amortization rates of passbook, money
market and NOW account withdrawal rates. In addition, certain financial
instruments may provide customers with a degree of "optionality", whereby a
shift in interest rates may result in customers changing to an alternative
financial instrument, such as from a variable to fixed rate loan product. Thus,
the effects of changes in future interest rates on these assumptions may cause
actual results to differ from simulation results.
The Company has established the following guidelines for assuming interest rate
risk:
Net interest margin simulation - Given a+/-200 basis point parallel shift in
interest rates, the estimated net interest margin may not change by more than
15% for a one-year period.
Portfolio equity simulation - Portfolio equity is the net present value of the
Company's existing assets and liabilities. Given a +200 basis point change in
interest rates, portfolio equity may not decrease by more than 40% of total
stockholders' equity. Given a -200 basis point change in interest rates,
portfolio equity may not decrease by more than 20% of total stockholders'
equity.
The following table illustrates the simulated impact of a 100 basis point or 200
basis point upward or downward movement in interest rates on net interest
income, return on average equity, earnings per share and the change in portfolio
equity. This analysis was done assuming that interest-earning asset and
interest-bearing liability levels at September 30, 1997 remained constant. The
impact of the rate movements was developed by simulating the effect of rates
changing over a twelve-month period from the September 30, 1997 levels.
<PAGE>
INTEREST RATE SIMULATION SENSITIVITY ANALYSIS
Movements in interest rates from September 30, 1997 rates:
<TABLE>
<CAPTION>
Increase Decrease
- -----------------------------------------------------------------------------------------------
+100 bp +200 bp -100 bp -200 bp
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net interest income increase (decrease) (5.9)% (13.0)% 4.1% 5.0%
Increase (decrease) in return on average equity (15.2)% (33.4)% 10.2% 12.5%
Increase (decrease) in earnings per share $(.24) $(.53) $.17 $.20
Portfolio equity increase (decrease) (17.7)% (35.9)% 9.4% 3.6%
</TABLE>
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
36
<PAGE>
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 Company has seen a decrease in
its one year gap from a negative 17.0% at September 30, 1996 to a negative 11.6%
at September 30, 1997. The Bank considers this result at September 30, 1997 to
be within its acceptable target range. As part of its efforts to minimize the
impact of changes in interest rates, the Company continues to emphasize the
origination of loans with adjustable-rate features or which have shorter average
lives, the purchase of adjustable-rate securities, the extension of
interest-bearing liabilities when market conditions permit, and the maintenance
of a large portion of the investment and mortgage-backed securities portfolios
in the available-for-sale category that could be sold in response to interest
rate movements. The table below shows the Bank's gap position at September 30,
1997 based on certain assumptions as to prepayments and amortization of loans,
investments and deposit withdrawals. The assumptions used may not be indicative
of the actual prepayments and withdrawals which may be experienced by the
Company.
<TABLE>
<CAPTION>
September 30, 1997
- -------------------------------------------------------------------------------------------------------------------
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 $66,599 $55,409 $137,831 $112,031
Deposits, escrow
liabilities and borrowed funds 85,448 80,915 166,357 20,702
- -------------------------------------------------------------------------------------------------------------------
Interest sensitivity $(18,849) $(25,506) $(28,526) $91,329
- -------------------------------------------------------------------------------------------------------------------
Cumulative interest sensitivity $(18,849) $(44,355) $(72,881) $18,448
- -------------------------------------------------------------------------------------------------------------------
Cumulative ratio as a percent of total assets (4.9)% (11.6)% (19.1)% 4.8%
- -------------------------------------------------------------------------------------------------------------------
</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.
37
<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 1997, 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, 1997 the total of approved loan commitments amounted to $2.7
million and the Bank had $3.7 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 $76.7 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 8.76% and a ratio of
qualifying total capital to risk-weighted assets and off-balance sheet items of
18.52% at September 30, 1997. As a result, regulatory capital requirements
should have no material impact on operations.
FINANCIAL CONDITION
The Bank's assets were $381.0 million at September 30, 1997, an increase of
$63.1 million or 19.8% over assets at September 30, 1996. The growth primarily
reflects an increase in loans receivable and mortgage-backed securities
available-for-sale. The growth was funded by an increase in savings deposits,
advances from the FHLB of Pittsburgh, and the issuance of $10.25 million in
Trust Preferred Securities.
LOAN PORTFOLIO
Net loans receivable increased $31.6 million or 20.9% to $182.9 million at
September 30, 1997 from $151.3 million at September 30, 1996. Loans originated
totaled $70.8 million in fiscal 1997 versus $64.3 million in fiscal 1996.
Mortgage loans originated amounted to $34.5 million and $34.4 million in fiscal
1997 and 1996, respectively. The Bank did not purchase any mortgage loans in
fiscal 1997 or 1996. The relatively constant level of mortgage loan originations
in fiscal 1997 and 1996 reflects the Bank's continued emphasis on this type of
lending and loan pricing strategies that enabled the Bank to remain competitive
in the market. The origination of adjustable rate mortgages (ARM's) increased to
$10.8 million in fiscal 1997 from $7.1 million in fiscal 1996. This increase
reflected the increased popularity, particularly among commercial mortgage
customers, of adjustable rate loans with longer initial reset periods, usually
three to five years. Principal repayments on outstanding mortgage loans also
increased to $16.9 million in fiscal 1997 as compared to $15.2 million fiscal
1996. The combination of the above factors resulted in an overall increase in
mortgage loans receivable to $124.8 million at September 30, 1997 from $106.3
million at September 30, 1996.
Other loan originations, including installment loans and commercial business
loans, totaled $35.5 million in fiscal 1997 versus $29.8 million in fiscal 1996.
During fiscal 1997, the Bank continued to emphasize other loans, particularly
home equity loans, equity lines of credit and commercial business loans, 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 $43.1 million at September 30,
1997, as compared to $35.8 million at September 30, 1996. Commercial business
loans also experienced a significant increase, totaling $16.9 million at
September 30, 1997 versus $10.7 million at September 30, 1996.
38
<PAGE>
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,
1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Non-accrual residential real
estate loans (one-to-four family) $ 94,000 $ 567,000 $ 227,000
Non-accrual construction, multi-
family residential and
commercial real estate loans 751,000 134,000 --
Non-accrual installment and
commercial business loans 271,000 457,000 85,000
- ------------------------------------------------------------------------------------------------------------------
Total non-performing loans $1,116,000 $1,158,000 $ 312,000
- ------------------------------------------------------------------------------------------------------------------
Total non-performing loans as
a percent of net loans receivable .61% .77% .26%
- ------------------------------------------------------------------------------------------------------------------
Total real estate owned, net of
related reserves $ -- $ 370,000 $1,062,000
- ------------------------------------------------------------------------------------------------------------------
Total non-performing loans and real estate
owned as a percent of total assets .29% .48% .49%
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
At September 30, 1997, non-accrual loans consisted of two 1-4 family residential
real estate loans totaling $94,000, one commercial real estate property totaling
$751,000, five installment loans totaling $12,000, one commercial business loan
totaling $250,000, and seven credit card accounts totaling $9,000. The
commercial real estate loan is on an office building located in Pittsburgh and
is currently under agreement for sale. The commercial business loan is to a
dental supply company. Management has evaluated these loans and is satisfied
that the allowance for possible losses on loans at September 30, 1997 is
adequate. The allowance for possible losses on loans has increased from
$1,429,000 at September 30, 1995 to $1,530,000 at September 30, 1996 and to
$1,931,000 at September 30, 1997. The balance at September 30, 1997, at 1.06% of
net loans receivable and 173.0% of non-performing loans, is considered adequate
by management.
MORTGAGE-BACKED SECURITIES HELD-TO-MATURITY
Mortgage-backed securities held-to-maturity increased $2.8 million or 8.9% to
$34.1 million at September 30, 1997 from $31.3 million at September 30, 1996.
Purchases totaled $8.1 million in fiscal 1997. No sales were made from
mortgage-backed securities held-to-maturity in fiscal 1997.
39
<PAGE>
MORTGAGE-BACKED SECURITIES AVAILABLE-FOR-SALE
Mortgage-backed securities available-for-sale increased $31.4 million to $93.9
million at September 30, 1997 from $62.5 million at September 30, 1996. 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 1997, the Bank purchased $47.0 million of these
securities, of which $33.3 million had adjustable-rate features, and sold $8.6
million. Sales of these securities in fiscal 1997 resulted in a net pretax loss
of $30,000.
INVESTMENT SECURITIES HELD-TO-MATURITY
Investment securities increased $3.1 million or 58.1% to $8.5 million at
September 30, 1997, compared to $5.4 million at September 30, 1996. These
investments are comprised of U.S. Government and Agency securities, tax-exempt
municipal securities and asset-backed securities. The increase in fiscal 1997
reflects the purchase of $4.6 million of these securities, with $1 million of
the securities called in fiscal 1997. There were no sales of investment
securities held-to-maturity in fiscal 1997.
INVESTMENT SECURITIES AVAILABLE-FOR-SALE
Investment securities available-for-sale decreased $6.4 million or 12.5% to
$44.6 million at September 30, 1997 as compared to September 30, 1996. 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 preferred stock, and other equity
securities. Purchases in fiscal 1997 totaled $11.6 million and sales totaled
$16.3 million, resulting in a net pretax gain of $83,000.
OFFICE PREMISES AND EQUIPMENT
Office premises and equipment increased $101,000 or 3.0% to $3.5 million at
September 30, 1997. During fiscal 1997, loan department personnel moved to a new
leased facility and funds were expended for leasehold improvements. In addition,
a property was purchased that will be considered for a future branch site.
INTANGIBLE ASSETS
Intangible assets, which consist of goodwill and core deposit intangibles, were
generated in the November 1991 branch acquisitions. At September 30, 1997, these
intangibles have been fully amortized. These intangibles were 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 increased $9.9 million during fiscal 1997 to $244.2 million at
September 30, 1997. Deposit decreases occurred in money market and passbook
deposits, while increases occurred in demand deposits, NOW accounts and time
deposit accounts.
40
<PAGE>
The decrease in passbook and money market accounts reflects the short term rate
environment that existed in fiscal 1997. 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. The increase in
time deposits reflects a more aggressive position taken by the Bank to try to
attract such deposits. At various times during fiscal 1997, the Bank priced
certain certificates of deposit at or near the top of the local market in an
attempt to attract funds. This strategy was successful as time deposits
increased approximately $12.0 million.
BORROWINGS
Federal Home Loan Bank advances and reverse repurchase agreements outstanding
increased $40.7 million or 71.3% to $97.9 million at September 30, 1997, from
$57.1 million at September 30, 1996. 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 1997 reflects the need to fund
the growth the Bank experienced.
In May 1997, a statutory business trust created under Delaware law that is a
subsidiary of the Company, issued $10.25 million of 9.75% Preferred Securities.
A portion of the proceeds from the Preferred Securities count as Tier 1 capital
of the Company under Federal Reserve Board guidelines and the dividend payments
on the Preferred Securities are tax deductible to the Company. A portion of the
proceeds were used to contribute capital through an investment in the Bank. The
Company believed that this was a relatively inexpensive means to raise
additional regulatory capital which could then be leveraged to provide
additional growth and earnings opportunities. As evidenced by the overall growth
in assets that has occurred in fiscal 1997, this additional capital has been
leveraged and borrowings, as discussed above, have been incurred to fund the
growth.
STOCKHOLDERS' EQUITY
Stockholders' equity increased $4.1 million or 18.8% to $25.9 million at
September 30, 1997 compared to September 30, 1996. The increase results from
1997 net income of $2.7 million, stock options exercised of $390,000, stock
issued under the Dividend Reinvestment Plan of $82,000 and a decrease in
unrealized losses on securities available-for-sale of $1.4 million. Partially
offsetting these increases were cash dividends paid of $517,000.
RESULTS OF OPERATIONS
Comparison of Fiscal Years Ended September 30, 1997, 1996, and 1995
Net income was $2.7 million for the year ended September 30, 1997 compared to
$1.3 million for fiscal 1996 and $1.5 million for fiscal 1995.
41
<PAGE>
INTEREST RATE SPREAD
The Bank's interest rate spread, the difference between yields on
interest-earning assets and the cost of funds, decreased to 2.99% on a
tax-equivalent basis in fiscal 1997 from 3.17% in fiscal 1996. The spread was
2.88% in fiscal 1995. 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,
1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Average yield on:
Mortgage loans 8.01% 8.33% 8.21%
Mortgage-backed securities 6.37 6.29 6.05
Installment loans 8.38 8.41 8.31
Commercial business loans 9.90 9.86 10.63
Interest-earning deposits with other
institutions, investment securities,
and FHLB stock(1) 6.76 6.98 6.87
- -----------------------------------------------------------------------------------------------------------------
Total interest-earning assets 7.39 7.44 7.19
- -----------------------------------------------------------------------------------------------------------------
Average rates paid on:
Savings deposits 4.05 4.17 4.24
Borrowed funds 5.42 4.95 5.04
- -----------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 4.40 4.27 4.31
- -----------------------------------------------------------------------------------------------------------------
Average interest rate spread 2.99% 3.17% 2.88%
- -----------------------------------------------------------------------------------------------------------------
Net yield on interest-earning assets 3.16% 3.33% 3.08%
- -----------------------------------------------------------------------------------------------------------------
</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 $2.2 million or 18.8% to $13.6 million in
fiscal 1997 as compared to fiscal 1996. The increase primarily reflects an
increase in the average size of the loan portfolio, partially offset by a
decrease in the average yield earned on loans. The average size of the loan
portfolio increased from an average balance of $135.9 million in fiscal 1996 to
$165.2 million in fiscal 1997. 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 $1.5 million or
15.4% to $11.5 million in fiscal 1996 as compared to 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.
42
<PAGE>
INTEREST INCOME ON MORTGAGE-BACKED SECURITIES
Interest income on mortgage-backed securities increased by $844,000 or 13.8% to
$7.0 million in fiscal 1997 from $6.1 million in fiscal 1996. The average
balance of mortgage-backed securities held, including mortgage-backed securities
available-for-sale, increased from $97.3 million in fiscal 1996 to $109.3
million in fiscal 1997. The increase also reflected an increase in the yield
earned on these securities in fiscal 1997. 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 increase in the average balance partially reflects the increased emphasis
placed on these securities in fiscal 1997, to supplement the growth experienced
in the loan portfolio, and to leverage the capital obtained with the issuance of
the Preferred 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.
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 both fiscal 1997 and 1996. The results reflect both a decrease
in the average balance of such investments to $54.1 million in fiscal 1997 as
compared to $55.0 million in fiscal 1996, as well as a decrease in the average
tax-equivalent yield earned in fiscal 1997 as compared to fiscal 1996. This
decrease in yield primarily reflects the repositioning of a portion of the
investment portfolio for interest rate management purposes. Tax free municipal
obligations, which have high tax-equivalent yields but are generally longer
term, were sold in favor of more rate sensitive securities. Because of the
increase in the Bank's loan portfolio, a large portion of which is fixed-rate,
management decided to decrease exposure, to the extent possible, to rising rates
through the use of the investment portfolio.
Interest income on investments was $3.4 million in fiscal 1996, compared to $2.5
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.
INTEREST EXPENSE ON SAVINGS DEPOSITS
Interest on deposits decreased $505,000 or 5.0% to $9.6 million in fiscal 1997
from $10.1 million in fiscal 1996. The decrease reflects both a decrease in the
average balance of deposits in fiscal 1997, as compared to fiscal 1996, as well
as 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 $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.
43
<PAGE>
INTEREST EXPENSE ON BORROWED FUNDS
The Bank continued to use FHLB advances and repurchase agreements as cost
effective sources of funding in fiscal 1997, as well as issuing Preferred
Securities for the first time. Interest expense on borrowed funds increased $2.6
million or 145.1% to $4.3 million in fiscal 1997 compared to fiscal 1996. The
increase reflects a higher level of borrowing in fiscal 1997, as well as an
increase in the cost of these funds. Interest expense on borrowed funds
increased $684,000 or 63.5% to $1.8 million in fiscal 1996 from $1.1 million in
fiscal 1995. The increase reflects a higher level of borrowing in fiscal 1996,
partially offset by a decrease in rates paid.
PROVISION FOR LOAN LOSSES
The provision for loan losses was $500,000, $270,000 and $230,000 for the fiscal
years ended September 30, 1997, 1996 and 1995, respectively. The variation in
the provisions reflects management's decision to continue to increase the
balance in the allowance for possible losses on loans as the total loan
portfolio balance continues to grow, while at the same time experiencing a
favorable loan charge-off record. Based on these factors, the allowance has
grown from $1.4 million at September 30, 1995 to $1.9 million at September 30,
1997. Loan charge-offs, net of recoveries, improved to $99,000 in fiscal 1997,
compared to $169,000 in fiscal 1996. Net charge-offs were $135,000 in fiscal
1995.
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.
OTHER INCOME
Fidelity's non-interest or total other income increased by $150,000 or 20.5% to
$882,000 in fiscal 1997 as compared to fiscal 1996. Other income increased by
$128,000 or 21.2% to $732,000 in fiscal 1996 compared to fiscal 1995.
Included in non-interest income was service fee income on loans and late charges
which increased by $14,000 in fiscal 1997 and decreased by $10,000 in fiscal
1996 over the respective prior years. The increase in fiscal 1997 primarily
reflects an increase in commercial loan fees, partially offset by a decrease in
late charges on loans and fees on loans serviced for others. 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 Bank recorded a net gain of $53,000 on the sale of investment and
mortgage-backed securities in fiscal 1997 as compared to a net gain on such
sales of $27,000 in fiscal 1996. Fiscal 1995 results showed a $57,000 net loss.
Sales in fiscal 1997 and 1996 were made from the available-for-sale category and
reflected normal efforts to reposition portions of the portfolio at various
times during the years. 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.
Gain on sale of loans was $28,000, $17,000 and $18,000 in fiscal years 1997,
1996 and 1995, 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 may sell a portion of the loans originated under low income housing
programs in which it participates in the Pittsburgh area. Also, the Bank sells
education loans to the Student Loan Marketing Association ("SLMA"). Such sales
to SLMA generally result in some gain or loss being realized and are being done
to reduce the Bank's position in these loans, which
44
<PAGE>
are generally lower yielding and subject to extensive and costly government
regulation. The Bank does not intend to originate additional education loans for
its portfolio, except those that will be serviced by SLMA. Sales to FNMA, SLMA
and of low income housing program loans were $829,000, $134,000 and $361,000 in
fiscal 1997, 1996 or 1995, respectively, however the net gains recorded in those
years 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 $712,000, $613,000 and $558,000 in fiscal 1997, 1996 and
1995, respectively. The increase in fiscal 1997 primarily reflects increased
automatic teller machine fees and returned check charges. 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.
OTHER EXPENSES
Operating expenses decreased $1.6 million or 19.6% to $6.5 million in fiscal
1997 and increased $2.0 million or 31.9% to $8.1 million in fiscal 1996, from
$6.1 million in fiscal 1995.
Compensation, payroll taxes and fringe benefits, the largest component of
operating expenses, increased $444,000 or 13.7% to $3.7 million in fiscal 1997
and $170,000 or 5.5% to $3.2 million in fiscal 1996 over the respective prior
years. Factors contributing to the increases in both years were salary
increases, expenses related to recruiting new employees and higher fringe
benefit costs, as well as increases in the number of employees, particularly
related to the lending operations. In addition, higher bonuses were awarded in
fiscal 1997, reflecting the Bank's increased profitability.
Office occupancy and equipment expense increased $6,000 or 1.2% to $570,000 in
fiscal 1997 and $22,000 or 4.0% to $564,000 in fiscal 1996 over the respective
prior years. The increase in fiscal 1997 reflects increased maintenance costs on
equipment, partially offset by a reduction in property taxes due to the
successful appeal of the assessed valuation for tax purposes of two properties.
The increase in fiscal 1996 primarily reflects increased maintenance costs on
equipment and facilities.
Depreciation and amortization increased $85,000 or 18.7% to $541,000 in fiscal
1997 and $17,000 or 3.9% to $456,000 in fiscal 1996 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 $112,000, $2.1 million and $526,000
for the fiscal years 1997, 1996 and 1995, respectively. Fiscal 1996 results
include a one-time special assessment of $1.5 million to recapitalize the SAIF.
Exclusive of this one-time charge, federal deposit insurance premiums decreased
$441,000 or 79.7% in fiscal 1997. The amount of the premium is based on the
average amount of deposits outstanding. The premium rate for federal deposit
insurance decreased to approximately 6.4 basis points in fiscal 1997 from 23
basis points in fiscal 1996 and 1995 as a result of the recapitalization of the
SAIF.
The Bank recorded net losses on real estate owned of $31,000, $91,000 and $9,000
in fiscal 1997, 1996 and 1995, respectively. The results reflect the costs
associated with the holding and disposition of properties during the periods.
The results in fiscal 1997 reflect the sale of one property. The results in
fiscal 1996 primarily reflect the write-down of one property to fair value less
estimated cost to sell. The property was sold in fiscal 1997. The results in
fiscal 1995 did not contain individually significant transactions.
Intangible amortization was $44,000 in fiscal 1997 and $264,000 in fiscal 1996
and 1995. 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. The intangibles were fully amortized for book purposes in
fiscal 1997.
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 $1.5 million in fiscal
1997, $1.4 million in fiscal 1996 and $1.3 million in fiscal 1995. Significant
variations in
45
<PAGE>
fiscal 1997, as compared to fiscal 1996, include increases in bank service
charges related to the implementation of check imaging, advertising, auditing
costs, consulting fees, stationery and supplies and automatic teller machine
network costs. 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 in fiscal 1996 was a decrease in
advertising expenses.
INCOME TAXES
The company generated taxable income and, as a consequence, recorded tax
provisions of $1.3 million, $226,000 and $728,000 for fiscal 1997, 1996 and
1995, 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. Following the imposition of the one-time special
assessment, the FDIC lowered assessment rates for SAIF members to reduce the
disparity in the assessment rates paid by BIF and SAIF members. Beginning
October 1, 1996, effective SAIF rates range from zero basis points to 27 basis
points, which is the same range of premiums as the BIF rates. From 1997 through
1999, FDIC-insured institutions will pay approximately 6.4 basis points of their
SAIF-assessable deposits and approximately 1.3 basis points of their
BIF-assessable deposits to fund the Financing Corporation. Based upon assessable
deposit balances at September 30, 1997, the Bank would expect to pay
approximately $39,000 per quarter during fiscal 1998.
On October 1, 1996, the Company adopted SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of."
SFAS No. 121 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 was not material to the Company's financial
position and results of operations.
The FASB released SFAS No. 125, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities," which was effective for
transfers and servicing of financial assets and extinguishments of liabilities
occurring after December 31, 1996, and was to be applied prospectively. SFAS No.
125 establishes standards for resolving issues related to circumstances under
which the transfer of financial assets should be
46
<PAGE>
considered as sales of all or part of the assets or as secured borrowings and
about when a liability should beconsidered extinguished. The adoption of SFAS
No. 125 was immaterial to the Company's financial position and results of
operations.
In February 1997, the FASB released SFAS No. 128, "Earnings Per Share." SFAS No.
128 establishes standards for computing and presenting earnings per share
("EPS") and applies to entities with publicly held common stock or potential
common stock. SFAS No. 128 simplifies the standards for computing earnings per
share previously found in APB Opinion No. 15, Earnings Per Share, and makes them
comparable to international EPS standards. It replaces the presentation of
primary EPS and fully diluted with a presentation of basic EPS and diluted EPS.
Basic EPS excludes dilution and is computed by dividing income available to
common stockholders by the weighted-average number of common shares outstanding
for the period. Diluted EPS reflects the potential dilution that could occur if
securities or other contracts to issue commons stock were exercised or converted
into common stock or resulted in the issuance of common stock that then shared
in the earnings of the entity. Diluted EPS is computed similarly to fully
diluted EPS pursuant to APB Opinion No. 15. SFAS No. 128 is effective for
financial statements issued for periods ending after December 15, 1997,
including interim periods; earlier application is not permitted. Had the Company
applied SFAS No. 128 to the accompanying consolidated financial statements,
basic EPS would have been $1.77, $.88 and $1.02 for fiscal years 1997, 1996 and
1995, respectively. Diluted EPS would have been $1.71, $.85 and $.99 for fiscal
years 1997, 1996 and 1995, respectively.
In March 1997, the FASB issued SFAS No. 129, "Disclosure of Information About
Capital Structure." SFAS No. 129 continues the existing requirement to disclose
the pertinent rights and privileges of all securities other than ordinary common
stock but expands the number of companies subject to portions of its
requirements. Specifically, SFAS No. 129 requires all entities to provide the
capital structure disclosures previously required by APB Opinion No. 15.
Companies that were exempt from the provisions of APB Opinion No. 15 will now
need to make those disclosures. SFAS No. 129 is not expected to impact the
Company's current presentation regarding capital structure.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income".
SFAS No. 130 establishes standards for reporting and display of comprehensive
income and its components (revenues, expenses, gains and losses) in a full set
of general purpose financial statements. SFAS No. 130 requires that all items
that are required to be recognized under accounting standards as components of
comprehensive income be reported in a financial statement that is displayed with
the same prominence as other financial statements. SFAS No 130 requires that an
enterprise (a) classify items of other comprehensive income by their nature in a
financial statement and (b) display the accumulated balance of other
comprehensive income separately from retained earnings and additional paid-in
capital in the equity section of a statement of financial position. SFAS No. 130
is effective for fiscal years beginning after December 15, 1997.
Reclassification of financial statements for earlier periods provided for
comparative purposes is required.
YEAR 2000
The Company is aware of the issues associated with the programming code in
existing computer systems as the millennium (year 2000) approaches. The "year
2000" problem is pervasive and complex as virtually every computer operation
will be affected in some way by the rollover of the two digit year value to 00.
The issue is whether computer systems will properly recognize date sensitive
information when the year changes to 2000. Systems that do not properly
recognize such information could generate erroneous data or cause a system to
fail.
The Company is utilizing both internal and external resources to identify,
correct or reprogram, and test systems for year 2000 compliance. It is
anticipated that all reprogramming efforts will be completed by December 31,
1998, allowing adequate time for testing. To date, confirmations have been
received from the Company's primary processing vendors that plans are being
developed to address processing of transactions in the year 2000. Management has
not yet assessed the year 2000 compliance expense and related potential effect
on the Company's earnings.
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-END> SEP-30-1997
<CASH> 3,731,344
<INT-BEARING-DEPOSITS> 243,361
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 138,423,686
<INVESTMENTS-CARRYING> 42,605,607
<INVESTMENTS-MARKET> 42,640,000
<LOANS> 184,799,675
<ALLOWANCE> 1,930,603
<TOTAL-ASSETS> 380,963,636
<DEPOSITS> 244,192,275
<SHORT-TERM> 78,980,036
<LIABILITIES-OTHER> 1,660,115
<LONG-TERM> 30,250,000
0
0
<COMMON> 15,548
<OTHER-SE> 25,865,663
<TOTAL-LIABILITIES-AND-EQUITY> 380,963,636
<INTEREST-LOAN> 13,634,509
<INTEREST-INVEST> 10,317,623
<INTEREST-OTHER> 11,432
<INTEREST-TOTAL> 23,963,564
<INTEREST-DEPOSIT> 9,566,146
<INTEREST-EXPENSE> 13,882,174
<INTEREST-INCOME-NET> 10,081,390
<LOAN-LOSSES> 500,000
<SECURITIES-GAINS> 53,306
<EXPENSE-OTHER> 6,488,322
<INCOME-PRETAX> 3,974,542
<INCOME-PRE-EXTRAORDINARY> 2,718,542
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,718,542
<EPS-PRIMARY> 1.72
<EPS-DILUTED> 1.71
<YIELD-ACTUAL> 3.07
<LOANS-NON> 1,116,208
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,530,257
<CHARGE-OFFS> 123,490
<RECOVERIES> 23,836
<ALLOWANCE-CLOSE> 1,930,603
<ALLOWANCE-DOMESTIC> 1,930,603
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
