SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended September 30, 1998
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- or -
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number: 0-22288
FIDELITY BANCORP, INC.
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(Exact name of Registrant as specified in its Charter)
Pennsylvania 25-1705405
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(State or other jurisdiction of (I.R.S. Employer
of incorporation or organization) Identification No.)
1009 Perry Highway, Pittsburgh, Pennsylvania 15237
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (412) 367-3300
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Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 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 [ ]
<PAGE>
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates
of the Registrant, based on the closing sales price of the Registrant's Common
Stock as quoted on the National Market of The Nasdaq Stock Market on December
11, 1998 was $28.8 million.
As of December 11, 1998, the Registrant had outstanding 1,980,590
shares of Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
1. Parts II and IV -- Portions of the Registrant's Annual Report to
Stockholders for fiscal year ended September 30, 1998.
2. Part III -- Portions of the Registrant's Proxy Statement for a meeting
to be held on February 2, 1999.
<PAGE>
Part I
Fidelity Bancorp, Inc. (the "Company") may from time to time make
written or oral "forward-looking statements", including statements contained in
the Company's filings with the Securities and Exchange Commission (including
this Annual Report on Form 10-K and the exhibits thereto), in its reports to
stockholders and in other communications by the Company, which are made in good
faith by the Company pursuant to the "safe harbor" provisions of the Private
Securities Litigation Reform Act of 1995.
These forward-looking statements involve risks and uncertainties, such
as statements of the Company's plans, objectives, expectations, estimates and
intentions, that are subject to change based on various important factors (some
of which are beyond the Company's control). The following factors, among others,
could cause the Company's financial performance to differ materially from the
plans, objectives, expectations, estimates and intentions expressed in such
forward-looking statements: the strength of the United States economy in general
and the strength of the local economies in which the Company conducts
operations; the effects of, and changes in, trade, monetary and fiscal policies
and laws, including interest rate policies of the board of governors of the
federal reserve system, inflation, interest rates, market and monetary
fluctuations; the timely development of and acceptance of new products and
services of the Company and the perceived overall value of these products and
services by users, including the features, pricing and quality compared to
competitors' products and services; the willingness of users to substitute
competitors' products and services for the Company's products and services; the
success of the Company in gaining regulatory approval of its products and
services, when required; the impact of changes in financial services' laws and
regulations (including laws concerning taxes, banking, securities and
insurance); technological changes, acquisitions; changes in consumer spending
and saving habits; and the success of the Company at managing the risks
resulting from these factors.
The Company cautions that the listed factors are not exclusive. The
Company does not undertake to update any forward-looking statement, whether
written or oral, that may be made from time to time by or on behalf of the
Company.
Item 1. Description of Business
On August 19, 1993, Fidelity Bank, PaSB ("Fidelity" or the "Bank")
consummated its reorganization into a bank holding company form of organization
(the "Reorganization") and thereby became a wholly owned subsidiary of the
Company. The Company's other subsidiary, FB Capital Trust (the "Trust"), was
created in May 1997 solely to facilitate the issuance of preferred securities
and the sale of the Company's junior subordinated debentures. However, since the
primary activities of the Company are those of the Bank, much of the discussion
herein pertains to the Bank, even though comparisons to total assets,
liabilities, etc. are based on the Company's consolidated numbers.
The Bank is a Pennsylvania-chartered stock savings bank which is
headquartered in Pittsburgh, Pennsylvania. Deposits in the Bank are insured by
the Savings Association Insurance Fund ("SAIF") of the Federal Deposit Insurance
Corporation ("FDIC"). The Bank, incorporated in 1927, conducts business from
eight full-service offices located in Allegheny and Butler counties, two of five
Pennsylvania counties which comprise the metropolitan and suburban areas of
greater Pittsburgh.
At September 30, 1998, the Company had total assets of $406.0 million,
savings deposits of $261.7 million and stockholders' equity of $29.0 million.
The Bank's principal business consists of attracting deposits from the general
public through its home office and branch offices and investing such
<PAGE>
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, the Bank 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-earning that mature or reprice within one year exceed its
interest-bearing liabilities with similar characteristics equaled $4.1 million
or 1.0% of total assets at September 30, 1998. Adjustable-rate mortgage loans
amounted to 29.3%, 31.3% and 20.7% of the Bank's originations of mortgage loans
in fiscal 1998, 1997, and 1996 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.
Customer savings deposits with the Bank 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"). The Bank 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 Bank conducts its main business through its executive office
located at 1009 Perry Highway, Pittsburgh, Pennsylvania 15237, and eight (8)
branch offices located in Allegheny and Butler Counties in Pennsylvania. The
Bank's primary market area is in these counties in western Pennsylvania, and is
one of many financial institutions serving this market area. The competition for
deposit products and loan originations comes from other insured financial
institutions such as commercial banks, thrift institutions and credit unions in
the Bank's market area. Deposit competition also includes a number of insurance
products sold by local agents and investment products such as mutual funds and
other securities sold by local and regional brokers. The Bank's main office
telephone number is (412) 367-3300.
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Lending Activities
The following table sets forth information concerning the Bank's loan portfolio
by type at the dates indicated.
<TABLE>
<CAPTION>
As of September 30,
1998 1997 1996
---------------------- -------------------- --------------------
$ % $ % $ %
-------- ------- -------- ------ --------- ------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Real estate loans:
Residential:
Single-family (1-4 units).............. $115,559 49.1% $ 97,698 51.6% $ 80,186 50.8%
Multi-family (over 4 units)............ 4,262 1.8 4,165 2.2 4,435 2.8
Construction............................. 21,212 9.0 7,614 4.0 7,645 4.8
Commercial............................... 21,881 9.3 19,976 10.5 19,112 12.1
-------- ----- -------- ----- -------- -----
Total real estate loans............. 162,914 69.2 29,453 68.3 111,378 70.5
Installment loans.......................... 49,122 20.9 43,081 22.8 35,782 22.7
Commercial business and lease loans........ 23,157 9.9 16,873 8.9 10,702 6.8
-------- ----- -------- ----- -------- -----
Total loans receivable.............. 235,193 100.0% 189,407 100.0% 157,862 100.0%
===== ===== =====
Less:
Loans in process......................... (12,916) (3,695) (4,109)
Unamortized premiums,
discounts and deferred loan fees....... ( 1,142) (912) (960)
Allowance for possible loan losses....... ( 2,243) (1,931) (1,530)
-------- -------- --------
Net loans receivable................ $218,892 $182,869 $151,263
======== ======== ========
<CAPTION>
1995 1994
--------------------- --------------------
$ % $ %
--------- ------ --------- ----
<S> <C> <C> <C> <C>
Real estate loans:
Residential:
Single-family (1-4 units).............. $ 60,160 47.4% $61,570 52.7%
Multi-family (over 4 units)............ 5,156 4.1 5,664 4.9
Construction............................. 6,911 5.4 5,595 4.8
Commercial............................... 20,102 15.8 17,032 14.6
-------- ----- ------- -----
Total real estate loans............. 92,329 72.7 89,861 77.0
Installment loans.......................... 28,421 22.4 22,992 19.7
Commercial business and lease loans........ 6,186 4.9 3,918 3.3
Total loans receivable.............. 126,936 100.0% 116,771 100.0%
===== =====
Less:
Loans in process......................... (3,664) (1,843)
Unamortized premiums,
discounts and deferred loan fees....... (939) (947)
Allowance for possible loan losses....... (1,429) (1,334)
-------- --------
Net loans receivable................ $120,904 $112,647
======== ========
</TABLE>
3
<PAGE>
Contractual Maturities. The following table sets forth contractual
maturities of the total loans receivable of the Bank as of September 30, 1998 by
categories of loans.
<TABLE>
<CAPTION>
Contractual Maturities Due
in Year(s) Ended September 30,
--------------------------------------
1999- After
1999 2003 2003
-------- -------- --------
<S> <C> <C> <C>
Real estate loans:
Residential ..................... $ 868 $ 4,323 $114,630
Commercial ...................... 2,279 4,156 15,446
Construction .................... 2,684 1,799 16,729
Installment loans ................. 796 16,169 32,157
Commercial business and lease
loans ............................. 3,968 9,928 9,261
-------- -------- --------
Total(1) ................... $ 10,595 $ 36,375 $188,223
======== ======== ========
</TABLE>
(1) Of the $224.6 million of principal repayments contractually due after
September 30, 1999, $178.6 million have fixed rates of interest and $46
million have adjustable or floating rates of interest.
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, the 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 the Bank applies to
loans it originates. The Bank did not purchase any loans during fiscal 1998,
1997, or 1996.
<PAGE>
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
4
<PAGE>
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.
Generally, the Bank originated mortgage loans for inclusion in its loan
portfolio and not for sale in the secondary market. Although the Bank may sell
fixed-rate mortgage loans to FNMA, they prefer instead to retain the loans in
its portfolio as part of its effort to increase the overall size of the loan
portfolio.
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,
1998, $127.5 million or 54.2% of the Bank's total loan portfolio consisted of
such loans (including $11.9 million of residential construction loans).
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 the Bank 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 29.3%, 31.3% and
20.7% of the total originations of mortgage loans by the Bank in fiscal 1998,
1997, and 1996, respectively, and amounted to approximately $42.8 million or
26.2% of the Bank's portfolio of mortgage loans at September 30, 1998.
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, 1998, approximately $120.2 million or 73.8% 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"
5
<PAGE>
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 $227,150 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. The Bank also originates residential mortgage loans
in amounts over $227,150. The Bank will generally lend up to 80% of the
appraised value of the property securing such loans. These loans may have terms
of up to 30 years, but frequently 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
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,
the Bank 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, 1998,
$35.5 million or 15.1% of the Bank's total loan portfolio consisted of
commercial real estate and multi-family residential real estate loans (including
$9.3 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 the Bank in the past. At September 30, 1998,
the Bank had 52 construction projects of this type in process. In addition, the
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<PAGE>
Bank also engages in loans to finance the construction of commercial properties.
At September 30, 1998, the Bank had seven 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.
Installment Lending. The Bank offers a wide variety of installment
loans, including home equity loans and consumer loans.
Home equity loans amounted to $42.3 million or 86.1% of the Bank's
total installment loan portfolio at September 30, 1998. 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, 1998, these loans
amounted to $2.4 million, which represented 4.8% of the Bank's total installment
loan portfolio. At September 30, 1998, motor vehicle loans amounted to $1.4
million and unsecured loans and loans secured by property other than real estate
amounted to $1.0 million.
The Bank also makes other types of installment loans such as savings
account loans, education loans, credit card loans and overdraft loans. At
September 30, 1998, these loans amounted to $4.5 million or 9.1% of the total
installment loan portfolio. That total consisted of $1.2 million of education
loans, $630,000 of savings account loans, $2.3 million of credit card loans and
$360,000 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 the Bank underwrites the loans
in conformity to standards adopted by its Board of Directors.
Commercial Business Loans and Leases: 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, 1998, these
loans amounted to $19.5 million or 8.3% of the total loan portfolio. In
addition, the Bank makes commercial leases to businesses, typically for the
purchase of equipment. All leases are funded as capital leases and the Bank does
not assume any residual risk at the end of the lease term. At September 30,
1998, commercial leases amounted to $3.7 million or 1.6% of the total loan
portfolio.
Loans-to-One Borrower Limitations
The Federal law 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
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<PAGE>
30, 1998, the Bank's limit on loans-to-one borrower was $4.0 million, and the
Bank's largest loan or group of loans-to-one borrower, including related
entities, aggregated $2.2 million. This represents three commercial mortgage
loans, secured by four apartment buildings located in Allegheny county, and a
residential mortgage loan secured by a single family residence in Allegheny
county. The combined appraised value of the properties is $3.2 million. The
loans are current and performing at September 30, 1998.
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.
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
$6.5 million at September 30, 1996 to $6.1 million at September 30, 1998.
Non-performing Loans and Real Estate Owned. When a borrower fails to
make a required payment on a loan, the Bank 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 the Bank's normal collection procedures
or an acceptable arrangement is not worked out with the borrower, the Bank 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.
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<PAGE>
If foreclosure is effected, the property is sold at a public auction in
which the Bank may participate as a bidder. If the Bank is the successful
bidder, the acquired real estate is then included in the Bank "real estate
owned" account until it is sold. Although the Bank 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 the Bank 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.
9
<PAGE>
The following tables sets forth information regarding nonaccrual loans
and real estate owned by the Bank at the dates indicated. The Bank did not have
any accruing loans which were 90 days or more overdue or any loans which were
classified as troubled debt restructurings at the dates presented.
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
-------- -------- -------- ------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Nonaccrual residential real
estate loans (1-4 family)................ $ 224 $ 94 $ 567 $ 227 $ 574
Nonaccrual construction, multi-
family residential and
commercial real estate................... 199 751 134 -- 621
Nonaccrual installment and
commercial business loans............... 129 271 457 85 87
-------- ------ ------ ------- ------
Total non-performing loans................. $ 552 $1,116 $1,158 $ 312 $1,282
======== ====== ====== ======= ======
Total nonperforming loans as a
percent of total loans receivable........ .23% .59% .73% .25% 1.10%
======== ====== ====== ======= ======
Total real estate owned, net of
related reserves......................... $ 21 $ -- $ 370 $ 1,062 $ 455
======== ====== ====== ======= ======
Total nonperforming loans and real
estate owned as a percent of
total assets............................. .14% .29% .48% .49% .63%
======== ======= ======= ======= ======
</TABLE>
At September 30, 1998, non-accrual loans consisted of six 1-4 family
residential real estate loans totaling $224,000, one commercial real estate loan
totaling $199,000, seven installment loans totaling $28,000, and four commercial
business loan totaling $101,000.
The Bank currently has one property in real estate owned which is a
single-family residence valued at $21,000.
10
<PAGE>
The following table sets forth an analysis of the Bank's allowance for
loan losses.
<TABLE>
<CAPTION>
Year Ended September 30,
------------------------------------------------------
1998 1997 1996 1995 1994
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Balance at beginning of period $1,931 $1,530 $1,429 $1,334 $1,122
Provision charged to operations 405 500 270 230 360
------ ------ ------ ------ ------
Charge-offs:
Residential real estate ..... 3 49 149 230 116
Installment ................. 97 71 44 29 40
Commercial .................. 10 3 78 116 3
Recoveries:
Residential real estate ..... -- -- 55 120 --
Installment ................. 11 8 10 11 6
Commercial .................. 6 16 37 109 5
------ ------ ------ ------ ------
Net charge-offs ............... 93 99 169 135 148
------ ------ ------ ------ ------
Balance at end of period ...... $2,243 $1,931 $1,530 $1,429 $1,334
====== ====== ====== ====== ======
Ratio of net charge-offs during
the period to average loans
outstanding during the period .05% .06% .12% .11% .14%
====== ====== ====== ====== ======
</TABLE>
11
<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,
1998 1997 1996
--------------------- --------------------- ---------------------
$ % $ % $ %
------- ----- ----- ----- ------ ------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Residential real estate loans............. $ 719 49.1% $ 707 53.8% $ 443 53.6%
Commercial real estate loans.............. 162 11.1 139 4.0 225 12.1
Construction loans........................ 131 9.0 53 10.5 60 4.8
Installment loans......................... 478 20.9 445 22.8 358 22.7
Commercial business loans................. 753 9.9 587 8.9 444 6.8
------ ----- ------ ----- ------ -----
Total.............................. $2,243 100.0% $1,931 100.0% $1,530 100.0%
====== ===== ====== ===== ====== =====
<CAPTION>
1995 1994
---------------------- --------------------
$ % $ %
------- ------ ------ ------
<S> <C> <C> <C> <C>
Residential real estate loans............. $ 385 51.5% $ 354 57.6%
Commercial real estate loans.............. 256 15.8 245 14.6
Construction loans........................ 61 5.4 58 4.8
Installment loans......................... 332 22.4 340 19.7
Commercial business loans................. 395 4.9 337 3.3
------ ----- ------ -----
Total.............................. $1,429 100.0% $1,334 100.0%
====== ===== ====== =====
</TABLE>
12
<PAGE>
Management establishes both allowances for estimated losses on
delinquent loans when it determines that losses are anticipated to be incurred
and general loan loss allowances for losses management believes are inherent in
the portfolio. 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,
1998, the Bank recorded provisions for loan losses of $405,000. At September 30,
1998, the Bank had an allowance for possible loan losses of $2.2 million or
1.02% of net loans receivable. The allowance for possible loan losses was 406.3%
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, 1998, the Bank had no allowances
for estimated losses on real estate owned recorded.
The Bank's management believes that its present allowances are adequate
and that the carrying value of its real estate owned approximates the net
realizable value of the properties. However, while management uses the best
information available to make such determinations, future adjustments to
reserves may become necessary, based on changes in economic conditions, or as a
result of examinations by various regulatory agencies, who review the allowance
as a part of their examination procedures.
The Chief Lending Officer, Chief Financial Officer and the Collection
Manager meet monthly to review non-performing assets and any other assets that
may require classification or special consideration. Adjustments to the carrying
values of such assets are made as needed and a detailed report is submitted to
the Board of Directors on a monthly basis.
Investment Activities
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 the Federal National
Mortgage Association ("FNMA"), the Federal Home Loan Mortgage Corporation
("FHLMC") and Government National Mortgage Association ("GNMA")) that pool and
repackage the participation interests in the form of securities, to investors
such as the Bank.
Mortgage-backed securities typically are issued with stated principal
amounts, and the securities are backed by pools of mortgages that have loans
with interest rates that are within a range and have varying maturities. The
underlying pool of mortgages, i.e., fixed rate or adjustable rate, as well as
the prepayment risk, are passed on to the certificate holders. Accordingly, the
life of a mortgage-backed pass-through security approximates the life of the
underlying mortgages.
<PAGE>
The actual maturity of a mortgage-backed security may be less than its
stated maturity due to prepayments of the underlying mortgages. Prepayments that
are faster than anticipated may shorten the life of the security and adversely
affect its yield to maturity. The yield is based upon the interest income and
the amortization of any premium or discount related to the mortgage-backed
security. In accordance with generally accepted accounting principals, premiums
and discounts are amortized over the estimated lives of the loans, which
decrease and increase interest income, respectively. The prepayment assumptions
used to determine the amortization period for premiums and discounts can
significantly affect the yield of the mortgage-backed security, and these
assumptions are reviewed periodically to reflect actual
13
<PAGE>
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 decreased $14.2 million or 41.5% to $19.9 million at September
30, 1998 from $34.1 million at September 30, 1997. The Bank did not sell or
purchase any mortgage-backed securities held-to-maturity in fiscal 1998.
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 $83.0 and $93.9
million at September 30, 1998 and 1997, 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 1998, the Bank purchased $52.6 million of these securities and sold $43.8
million. Sales of these securities in fiscal 1998 resulted in a pretax loss of
$125,000.
14
<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,
-------------------------------------
1998 1997 1996
------- ------- -------
(In thousands)
<S> <C> <C> <C>
Mortgage-backed securities
held-to-maturity:
GNMA ............................ $ 28 $ 42 $ 55
FNMA ............................ 7,249 9,167 10,556
FHLMC ........................... 11,099 13,977 16,734
FNMA Remic ...................... -- -- --
FHLMC Remic ..................... 82 8,125 248
Other ........................... 1,455 2,754 3,682
------- ------- -------
Total ..................... $19,913 $34,065 $31,275
======= ======= =======
Mortgage-backed securities
available-for-sale:
GNMA ............................ $22,823 $26,954 $ 7,011
FNMA ............................ 8,615 18,165 25,072
FHLMC ........................... 7,101 10,751 11,608
FNMA Remic ...................... 11,841 18,958 15,264
FHLMC Remic ..................... 23,453 17,582 5,059
Other ........................... 8,895 1,680 --
------- ------- -------
Total ..................... $82,728 $94,090 $64,104
======= ======= =======
</TABLE>
15
<PAGE>
Information regarding the contractual maturities and weighted average
yield of the Bank's mortgage-backed securities portfolio at September 30, 1998
is presented below.
<TABLE>
<CAPTION>
Amounts at September 30, 1998 Which Mature In
-----------------------------------------------------------------
After After
One Year One to Five Five to 10 Over 10
or Less Years Years Years Total
---------- ----------- ------- ------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Mortgage-backed securities
held-to-maturity:
GNMA ................... $ -- $ 28 $ -- $ -- $ 28
FNMA ................... -- -- 2,396 4,853 7,249
FHLMC .................. -- 339 7,551 3,209 11,099
FHLMC Remic ............ -- 82 -- -- 82
Other .................. -- -- -- 1,455 1,455
---------- ----------- ------- ------- -------
Total ............. $ -- $ 449 $ 9,947 $ 9,517 $19,913
========== =========== ======= ======= =======
Weighted average yield ... --% 6.91% 6.62% 6.50% 6.57%
========== =========== ======= ======= =======
Mortgage-backed securities
available-for-sale:
GNMA ................... $ -- $ -- $ -- $22,823 $22,823
FNMA ................... -- -- 4,541 4,074 8,615
FHLMC .................. -- -- -- 7,101 7,101
FNMA Remic ............. -- -- 3,169 8,672 11,841
FHLMC Remic ............ -- -- -- 23,453 23,453
Other .................. -- -- 2,039 6,856 8,895
----------- ----------- ------- ------- -------
Total ............. $ -- $ -- $ 9,749 $72,979 $82,728
========== =========== ======= ======= =======
Weighted average yield ... --% --% 6.06% 6.69% 6.62%
========== =========== ======= ======= =======
</TABLE>
16
<PAGE>
As of September 30, 1998, non-U.S. Government and U.S. Government
agency mortgage-backed securities that exceeded ten percent of stockholders'
equity are as follows:
Issuer Book Value Market Value
------ ---------- ------------
(Dollars in thousands)
Paine Webber Mortgage Acceptance Corporation $3,112 $3,122
The above securities are fixed rate collateralized mortgage obligations that are
rated AAA by Moody's.
Investments
At September 30, 1998, the Bank's investments amounted to $69.3
million, which includes $57.6 million available-for-sale, which represented
17.1% of total assets. Pursuant to the Bank'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.
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.
17
<PAGE>
The following tables set forth the Bank's investment portfolio at
carrying value at the dates indicated.
<TABLE>
<CAPTION>
As of September 30,
-------------------------------
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Available-for-sale
Investment securities:
U.S. government and agency .................... $23,749 $26,366 $24,288
Obligations of state and political subdivisions 29,708 15,874 24,676
Mutual funds(1) ............................... 1,793 1,628 1,520
FHLB stock .................................... 5,050 4,885 2,826
FHLMC preferred stock ......................... 531 518 381
Equity securities ............................. 1,321 187 64
Trust preferred securities .................... 488 -- --
------- ------- -------
Total ................................... $62,640 $49,458 $53,755
======= ======= =======
Held-to-maturity
Investment securities:
U.S. government and agency .................... $ 5,000 $ 5,998 $ 3,997
Obligations of state and political subdivisions 1,625 1,625 --
Asset-backed securities ....................... -- 918 1,404
------- ------- -------
Total ................................... $ 6,625 $ 8,541 $ 5,401
======= ======= =======
</TABLE>
- -------------
(1) Consists of investment in the Federated Investors ARM Fund and Legg Mason
Value Trust Fund.
At September 30, 1998, 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.
18
<PAGE>
The following tables set forth the amount of each category of
investment securities of the Bank at September 30, 1998 which mature during each
of the periods indicated and the weighted average yield for each range at
maturities. The yields on the tax-exempt investments have been adjusted to their
pre-tax equivalents. At September 30, 1998, the Bank held 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.
<TABLE>
<CAPTION>
As of September 30,
After One Year
One Year of Less Through Five Years
-------------------------- -------------------------
Weighted Weighted
Average Average
Amount Yield Amount Yield
-------- ----- ------ -------
<S> <C> <C> <C> <C>
Available-for-sale
U.S. government and agency............ $ 6,499 5.80% $4,507 5.83%
Obligations of state and
political subdivisions.............. -- -- -- --
Mutual funds(1)....................... 1,847 4.96 -- --
FHLB stock............................ 5,050 6.50 -- --
FHLMC preferred stock................. 500 6.12 -- --
Equity securities..................... 1,580 2.09 -- --
Trust preferred securities............ 500 8.73 -- --
-------- ---- ------ ----
Total............................. $ 15,976 5.66% $ 4,507 5.83%
======== ===== ======= =====
Held-to-Maturity:
U.S. government and agency............ $ 5,000 6.84% $ -- --%
Obligations of state and
political subdivisions.............. -- -- -- --
Asset-backed securities............... -- -- -- --
-------- ---- ------- ----
Total............................. $ 5,000 6.84% $ -- --%
======== ===== ======= =====
(1) Consists of investment in the Federated Investors ARM Fund and Legg Mason
Value Trust Fund.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
After Five Years
Through Ten Years After Ten Years
------------------------ -----------------------
Weighted Weighted
Average Average
Amount Yield Amount Yield
------ ------- ------ ------
<S> <C> <C> <C> <C>
Available-for-sale
U.S. government and agency............ $ 8,504 6.95% $ 3,999 6.78%
Obligations of state and
political subdivisions.............. -- -- 28,814 7.36
Mutual funds(1)....................... -- -- -- --
FHLB stock............................ -- -- -- --
FHLMC preferred stock................. -- -- -- --
Equity securities..................... -- -- -- --
Trust preferred securities............ -- -- -- --
------- ------ ------- ----
Total............................. $ 8,504 6.95% $32,813 7.29%
======= ===== ======= ====
Held-to-Maturity:
U.S. government and agency............ $ -- --% $ -- --%
Obligations of state and
political subdivisions.............. -- -- 1,625 8.06
Asset-backed securities............... -- -- -- --
------- ----- ------- -----
Total............................. $ -- --% $ 1,625 8.06%
======= ===== ======= =====
</TABLE>
(1) Consists of investment in the Federated Investors ARM Fund and Legg
Mason Value Trust Fund.
19
<PAGE>
Sources of Funds
General. Savings deposits obtained through the home office and branch
offices have traditionally been the principal source of the Bank's funds for use
in lending and for other general business purposes. The Bank also derives funds
from scheduled amortizations and prepayments of outstanding loans and
mortgage-backed securities and sales of investments available-for-sale. The Bank
also may borrow funds from the FHLB of Pittsburgh and other sources. Borrowings
generally may be used on a short-term basis to compensate for seasonal or other
reductions in savings deposits or other inflows at less than projected levels,
as well as on a longer-term basis to support expanded lending activities.
Savings Deposits. The Bank's current savings deposit products include
passbook savings accounts, demand deposit accounts, NOW accounts, money market
deposit accounts and certificates of deposit ranging in terms from three months
to ten years. Included among these savings deposit products are Individual
Retirement Account ("IRA") certificates and Keogh Plan retirement certificates
(collectively "retirement accounts"). The Bank offers preferred rates for
certificates of deposit in denominations of $99,000 or more at terms ranging
from one month to five years and, at September 30, 1998, such certificates
accounted for 1.6% of total savings deposits.
The Bank's savings deposits are obtained primarily from residents of
Allegheny and Butler Counties. The principal methods used by the Bank to attract
savings deposit accounts include the offering of a wide variety of services and
accounts, competitive interest rates and convenient office locations and service
hours. The Bank does not currently pay, nor has it in the past paid, fees to
brokers to obtain its savings deposits.
The following table shows the distribution of, and certain other
information relating to the Bank's savings deposits by type as of the dates
indicated.
<TABLE>
<CAPTION>
September 30,
-------------------------------------------------------------------------------------------
1998 1997 1996
------------------------ -------------------------- ---------------------------
Average Average Average
Balance Rate Balance Rate Balance Rate
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Passbook and club accounts....... $ 47,423 2.53% $ 47,514 2.78% $ 50,445 2.62%
Checking accounts................ 36,846 1.09 33,841 1.18 30,944 1.10
Money market accounts............ 14,949 2.98 15,417 2.94 17,437 2.72
Certificate accounts............. 162,517 5.70 147,420 5.76 135,450 5.59
-------- ---- -------- ---- -------- ----
Total................... $261,735 4.32% $244,192 4.37% $234,276 4.17%
======== ==== ======== ==== ======== ====
</TABLE>
<PAGE>
In recent years, the Bank has been required by market conditions to
rely increasingly on newly-authorized types of short-term certificate accounts
and other savings deposit alternatives that are more responsive to market
interest rates than passbook accounts and regulated fixed-rate, fixed-term
certificates that were historically the Bank's primary source of savings
deposits. As a result of deregulation and consumer preference for shorter term,
market-rate sensitive accounts, the Bank has, like most financial institutions,
experienced a significant shift in savings deposits towards relatively
short-term, market-rate accounts. In recent years, the Bank has been successful
in attracting retirement accounts
20
<PAGE>
which have provided the Bank with a relatively stable source of funds. As of
September 30, 1998, the Bank's total retirement funds were $35.3 million or
13.5% of its total savings deposits.
The Bank attempts to control the flow of savings deposits by pricing
its accounts to remain generally competitive with other financial institutions
in its market area, but does not necessarily seek to match the highest rates
paid by competing institutions. In this regard, the senior officers of the Bank
meet weekly to determine the interest rates which the Bank will offer to the
general public.
Rates established by the Bank are also affected by the amount of funds
needed by the Bank on both a short-term and long-term basis, alternative sources
of funds and the projected level of interest rates in the future. The ability of
the Bank to attract and maintain savings deposits and the Bank's cost of funds
have been, and will continue to be, significantly affected by economic and
competitive conditions.
The following table 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.
<TABLE>
<CAPTION>
At Within After
September 30, One Two Three Three
1998 Year Years Years Years
-------- -------- -------- -------- --------
(In thousands)
<S> <C> <C> <C> <C> <C>
Certificate accounts:
Under 4.01% ............ $ 56 $ 56 $ -- $ -- $ --
4.01% to 6.00% ......... 146,262 103,526 22,352 8,866 11,518
6.01% to 8.00% ......... 16,089 2,442 4,607 978 8,062
8.01% to 10.00% ........ 110 91 -- 3 16
-------- -------- -------- -------- --------
Total certificate accounts $162,517 $106,115 $ 26,959 $ 9,847 $ 19,596
======== ======== ======== ======== ========
</TABLE>
Maturities of certificates of deposit of $100,000 or more that were
outstanding as of September 30, 1998 are summarized as follows:
(In thousands)
3 months or less ........................................... $1,367
Over 3 months through 6 months ............................. 1,892
Over 6 months through 12 months ............................ 440
Over 12 months ............................................. 384
------
Total ............................................. $4,083
======
<PAGE>
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 credit
worthiness 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
21
<PAGE>
and liability management through the extension of maturities of liabilities. At
September 30, 1998, the Bank had $100.2 million of advances outstanding.
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, 1998, the Bank had $1.9 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.
22
<PAGE>
The following table sets forth certain information regarding the
short-term borrowings (due within one year or less) of the Bank at the dates or
for the periods indicated.
<TABLE>
<CAPTION>
At or for the Year Ended September 30,
-----------------------------------------------
1998 1997 1996
------ ------- -------
(Dollars in thousands)
<S> <C> <C> <C>
FHLB advances:
Average balance outstanding........................ $1,177 $ 4,069 $ 5,627
Maximum amount outstanding at any
month-end during the period...................... 3,300 5,300 8,550
Average interest rate during the period............ 5.09% 4.90% 5.03%
Balance outstanding at end of period............... - 3,300 5,300
Weighted average interest rate..................... 5.13% 5.10% 5.11%
Reverse repurchase agreements:
Average balance outstanding........................ 1,807 874 1,216
Maximum amount outstanding at any
month-end during the period...................... 2,370 1,528 4,565
Average interest rate during the period............ 4.50% 4.50% 4.75%
Balance outstanding at end of period............... 1,870 1,183 493
Weighted average interest rate..................... 4.50% 4.50% 4.50%
Lines of credit:
Average balance outstanding........................ -- -- --
Maximum amount outstanding at any
month-end during the period...................... -- -- --
Average interest rate during the period............ -- -- --
Balance outstanding at end of period............... -- -- --
Weighted average interest rate..................... -- -- --
FHLB Repoplus Advances:
Average balance outstanding........................ 18,058 39,208 25,078
Maximum amount outstanding at any
month-end during the period...................... 34,050 52,350 51,350
Average interest rate during the period............ 5.71% 5.55% 5.43%
Balance outstanding at end of period............... 5,200 43,400 51,350
Weighted average interest rate..................... 5.75% 5.53% 5.46%
Total average short-term borrowings.................. 21,042 44,151 30,504
Average interest rate of total
short-term borrowings.............................. 5.42% 5.47% 5.42%
</TABLE>
Subsidiaries
Pennsylvania law permits a Pennsylvania-chartered savings institution
to invest up to 3% of its assets in the capital stock, securities or other
obligations of subsidiary corporations or service corporations. The Department
is empowered to authorize Pennsylvania-chartered savings institutions,
23
<PAGE>
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 Company's only subsidiaries
at September 30, 1998 were the Bank and FB Capital Trust. The Bank had no
subsidiaries at September 30, 1998.
Employees
At September 30, 1998, the Bank had 105 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.
The Bank 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, the Bank faces
additional significant competition for investors' funds from short-term money
market mutual funds and issuers of corporate and government securities. The Bank
competes for savings deposits principally by offering depositors a variety of
deposit programs, convenient branch locations and hours, and other services. The
Bank does not rely upon any individual group or entity for a material portion of
its savings deposits.
The Bank's competition for real estate loans comes principally from
mortgage banking companies, commercial banks, savings banks and other financial
institutions. The Bank 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 the Bank. Substantially all of the Bank's deposits and loans are
received from residents and businesses located in its primary market area. In
addition, the Bank participates in the MACTM and PLUSTM automatic teller machine
networks which provide locations throughout the Bank's primary market area, as
well as the rest of Pennsylvania and most other states.
The area's economy is reasonably diversified, including manufacturing,
transportation, utilities, banks, hospitals and educational services segments.
The 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,
24
<PAGE>
like the nation as a whole, continues to experience low unemployment and the
labor market remains tight. The region's unemployment rate has dropped to
approximately 4.3%, down from approximately 4.9% one year ago. Construction
activity remains strong, with residential construction up approximately 6.5%
over the year ago period. 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.
25
<PAGE>
Average Balance Sheet and Analysis of Net Interest Earnings
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%.
<TABLE>
<CAPTION>
Year Ended September 30,
-------------------------------------------------------------------------------------
1998 1997
--------------------------------------- ----------------------------------------
Average Average Average Average
Balance Interest Yield/Cost Balance Interest Yield/Cost
-------- -------- ------ -------- ------- ------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable(1).................... $201,036 $ 16,597 8.26% $165,170 $13,634 8.25%
Mortgage-backed securities............. 117,791 7,595 6.45 109,251 6,964 6.37
Investment securities and FHLB stock... 61,838 4,301 6.96 53,956 3,646 6.76
Interest-earning deposits.............. 1,127 74 6.57 158 11 6.96
-------- -------- ------ -------- ------- ------
Total interest-earning assets....... 381,792 28,567 7.48 328,535 24,255 7.39
------- ------- ------ ------- ------ ------
Non-interest-earning assets............. 14,294 11,362
------- -------
Total assets.......................... $396,086 $339,897
======== =======
Interest-bearing liabilities:
Deposits............................... $258,013 $10,940 4.24 $235,984 $9,566 4.05
Borrowed funds......................... 108,238 6,424 5.94 79,686 4,316 5.42
------- ------ ------ ------- ------ ------
Total interest-bearing liabilities... 366,251 17,364 4.74 315,670 13,882 4.40
------- ------ ------- ------- ------ ------
Non-interest bearing liabilities........ 814 410
------- -------
Total liabilities...................... 367,065 316,080
Stockholders' equity.................... 29,021 23,817
-------- -------
Total liabilities and $396,086 $339,897
======= =======
stockholders' equity.................
Net interest income..................... $11,203 $10,373
====== ======
Interest rate spread.................... 2.74% 2.99%
===== ======
Net interest margin(1) 2.93% 3.16%
===== ======
Ratio of average interest-earning assets
to average interest-bearing liabilities 104.24% 104.08%
====== ======
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
1996
----------------------------------------
Average Average
Balance Interest Yield/Cost
<S> <C> <C> <C>
Interest-earning assets:
Loans receivable(1).................... $135,945 $11,482 8.45%
Mortgage-backed securities............. 97,340 6,120 6.29
Investment securities and FHLB stock... 54,242 3,816 7.04
Interest-earning deposits.............. 769 24 3.12
------- ------- ------
Total interest-earning assets....... 288,296 21,442 7.44
------ ------
Non-interest-earning assets............. 11,433
-------
Total assets.......................... $299,729
=======
Interest-bearing liabilities:
Deposits............................... $241,258 $10,071 4.17
Borrowed funds......................... 35,544 1,761 4.95
------- ------ ------
Total interest-bearing liabilities... 276,802 11,832 4.27
------- ------ ----
Non-interest bearing liabilities........ 832
-------
Total liabilities...................... 277,634
Stockholders' equity.................... 22,095
-------
Total liabilities and $299,729
=======
stockholders' equity.................
Net interest income..................... $ 9,610
======
Interest rate spread.................... 3.17%
======
Net interest margin(1) 3.33%
======
Ratio of average interest-earning assets
to average interest-bearing liabilities 104.22%
======
</TABLE>
(1) Net interest margin is net interest income divided by average
interest-earning assets.
26
<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>
Year Ended September 30,
---------------------------------------------
1998 vs. 1997
Increase (Decrease)
Due to
---------------------------------------------
Rate/
Volume Rate Volume Net
------- ------- ------- -------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Interest income on interest-earning assets:
Mortgage loans ................................. $ 1,823 $ (68) $ (11) $ 1,744
Mortgage-backed securities ..................... 539 88 6 633
Installment loans .............................. 623 29 5 657
Commercial business loans ...................... 575 (11) (4) 560
Investment securities and other investments .... 664 61 (7) 718
------- ------- ------- -------
Total interest-earning assets .............. 4,224 99 (11) 4,312
------- ------- ------- -------
Interest expense on interest-bearing liabilities:
Deposits ........................................ 866 467 41 1,374
Borrowed funds .................................. 1,719 313 76 2,108
------- ------- ------- -------
Total interest-bearing liabilities .............. 2,585 780 117 3,482
------- ------- ------- -------
Net change in net interest income .............. $ 1,639 $ (681) $ (128) $ 830
======= ======= ======= =======
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Year Ended September 30,
1997 vs. 1996
Increase (Decrease)
Due to
----------------------------------------------
Rate/
Volume Rate Volume Net
------- ------ ------- -------
<S> <C> <C> <C> <C>
Interest income on interest-earning assets:
Mortgage loans ................................. $ 1,534 $ (377) $ (56) $ 1,101
Mortgage-backed securities ..................... 740 94 10 844
Installment loans .............................. 562 (11) (2) 549
Commercial business loans ...................... 494 6 2 502
Investment securities and other investments .... (5) (156) (22) (183)
------- ------ ------- -------
Total interest-earning assets .............. 3,325 (444) (68) 2,813
------- ------ ------- -------
Interest expense on interest-bearing liabilities:
Deposits ........................................ (223) (288) 6 (505)
Borrowed funds .................................. 2,012 339 204 2,555
------- ------ ------- -------
Total interest-bearing liabilities .............. 1,789 51 210 2,050
------- ------ ------- -------
Net change in net interest income .............. $ 1,536 $ (495) $ (278) $ 763
======= ====== ======== =======
</TABLE>
27
<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.
Year Ended September 30,
------------------------------------
1998 1997 1996
----- ---- ----
Return on average assets.............. .74% .80% .44%
Return on average equity.............. 10.64 11.42 5.96
Average equity to assets ratio........ 6.94 7.01 7.37
Dividend payout ratio ................ 21.77 19.01 31.06
Asset and Liability Management
The Bank in fiscal 1998 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 Company's 1998 Annual Report
to Stockholders, 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 the Bank's
interest-earning assets and interest-bearing liabilities as of September 30,
1998. 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.
28
<PAGE>
<TABLE>
<CAPTION>
September 30, 1998
----------------------------------------------------------------
Over Three
Months After One
Three Through Year After
Months Twelve Through Five Five
or Less Months Years Years Total
-------- -------- -------- -------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Interest-earning assets:
Mortgage loans ............................ $ 11,817 $ 23,899 $ 81,175 $ 46,023 $162,914
Mortgage-backed securities ................ 32,860 20,139 36,586 13,056 102,641
Installment loans ......................... 11,287 9,900 27,935 -- 49,122
Commercial business loans ................. 9,356 2,226 11,085 490 23,157
Investment securities and other investments 13,009 8,999 14,403 32,627 69,038
-------- -------- -------- -------- --------
Total interest-earning assets ...... 78,329 65,163 171,184 92,196 406,872
-------- -------- -------- -------- --------
Interest-bearing liabilities:
Passbook and club accounts ................ 2,371 7,113 11,856 26,083 47,423
Checking accounts ......................... 9,211 -- 16,581 11,054 36,846
Money market accounts ..................... 7,474 -- 7,475 -- 14,949
Certificate accounts ...................... 27,242 78,918 50,789 5,568 162,517
Borrowed funds ............................ 7,069 -- 75,000 31,376 113,445
-------- -------- -------- -------- --------
Total interest-bearing liabilities . 53,367 86,031 161,701 74,081 375,180
-------- -------- -------- -------- --------
Interest sensitivity ........................ $ 24,962 $(20,868) $ 9,483 $ 18,115 $ 31,692
======== ======== ======== ======== ========
Cumulative interest sensitivity ............. $ 24,962 $ 4,094 $ 13,577 $ 31,692 $ 31,692
======== ======== ======== ======== ========
Cumulative ratio as a percent of assets ..... 6.15% 1.01% 3.34% 7.81% 7.81%
======== ======== ======== ======== ========
</TABLE>
Regulation of the Company
Bank Holding Company Act ("BHCA") - General. The Company, as a bank
holding company, is subject to regulation and supervision by the Federal Reserve
Board. Under the BHCA, a bank holding company is required to file annually with
the Federal Reserve Board a report of its operations and, with its subsidiaries,
is subject to examination by the Federal Reserve Board.
BHCA - Activities and Other Limitations. The BHCA prohibits a bank
holding company 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.
<PAGE>
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
29
<PAGE>
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 Rreserve 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,
<PAGE>
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
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, 1998, the company had Tier 1 capital as a percentage
of risk-weighted assets of 16.17% and total risk-based capital as a percentage
of risk-weighted assets of 17.52%.
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
30
<PAGE>
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,
1998, the Company has a Leverage Ratio of 9.35%.
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
The Bank is 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.
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.
<PAGE>
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
31
<PAGE>
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. 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
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, 1998,
the Bank met each of its capital requirements.
The following table sets forth certain information concerning the
Bank's regulatory capital at September 30, 1998.
32
<PAGE>
<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) ...................... $ 27,325 $ 27,325 $ 27,325
Less: unrealized securities gains ...... (887) (887) (887)
Plus: general valuation allowance (2) .. -- -- 2,243
-------- -------- --------
Total regulatory capital ........... 26,438 26,438 28,681
Minimum required capital ............... 15,617 9,034 18,068
-------- -------- --------
Excess regulatory capital ........... $ 10,821 $ 17,404 $ 10,613
======== ======== ========
Regulatory capital as a percentage(3) .. 6.77% 11.71% 12.70%
Minimum regulatory capital percentage .. 4.00 4.00 8.00
-------- -------- --------
Excess regulatory capital percentage 2.77% 7.71% 4.70%
======== ======== ========
</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, 1998.
(2) Limited to 1.25% of risk adjusted assets.
(3) Tier 1 capital is calculated as a percentage of adjusted total average
assets of $390.4 million. Tier I and Tier II risk-based capital are
calculated as a percentage of adjusted risk-weighted assets of $225.8
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
<PAGE>
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.
33
<PAGE>
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 the Bank, 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 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. The Bank had a $5.1 million
investment in stock of the FHLB of Pittsburgh at September 30, 1998, 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.
34
<PAGE>
At September 30, 1998, the Bank had $100.2 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, 1998, the Bank had $552,000
of assets classified as substandard.
Interstate Acquisitions. The Commonwealth of Pennsylvania has enacted
legislation regarding the acquisition of commercial banks, bank holding
companies, savings banks and savings and loan associations located in
Pennsylvania by institutions located outside of Pennsylvania. The statute
dealing with savings institutions authorizes (i) a savings bank, savings and
loan association or holding company thereof located in Delaware, the District of
Columbia, Indiana, Kentucky, Maryland, New Jersey, Ohio, Virginia and West
Virginia (collectively, "regional institutions") to acquire the voting stock of,
merge or consolidate with, or purchase assets and assume liabilities of, a
Pennsylvania-chartered savings bank, (collectively, "Pennsylvania institutions")
and (ii) the establishment of branches in Pennsylvania by regional institutions,
in each case subject to certain conditions including reciprocal legislation in
the state in which the regional institution seeking entry into Pennsylvania is
located permitting comparable entry by Pennsylvania institutions and approval by
the Pennsylvania Department of Banking. The statute also provides for nationwide
branching by Pennsylvania-chartered savings banks and savings and loan
associations, subject to Pennsylvania Department of Banking approval and certain
other conditions. Of the states within the region, Delaware, Maryland, New
Jersey, Ohio and West Virginia currently have laws that permit Pennsylvania
institutions to branch into such states and/or acquire savings institutions
located is such states.
Miscellaneous. The Bank is subject to certain restrictions on loans to
the Company, on investments in the stock or securities thereof, on the taking of
such stock or securities as collateral for loans to any borrower, and on the
issuance of a guarantee or letter of credit on behalf of the Company. The Bank
is also subject to certain restrictions on most types of transactions with the
Company, requiring that the terms of such transactions be substantially
equivalent to terms of similar transactions with non-affiliated firms. In
addition, there will be various limitations on the distribution of dividends to
the Company by the Bank.
In addition to requiring a new system of risk-based insurance
assessments and a system of prompt corrective action with respect to
undercapitalized banks, as discussed above, the FDICIA also contains provisions
which are intended to enhance independent auditing requirements, amend various
consumer banking laws, limit the ability of "undercapitalized banks" to borrow
from the Federal Reserve Board's discount window, and require regulators to
perform annual on-site bank examinations and set standards for real estate
lending.
35
<PAGE>
Pennsylvania Bank Law
The Bank is incorporated under the Pennsylvania Banking Code of 1965,
which contains detailed provisions governing the organization, location of
offices, rights and responsibilities of directors, officers, employees and
members, as well as corporate powers, savings and investment operations and
other aspects of the Savings Bank and its affairs. The Banking Code delegates
extensive rulemaking power and administrative discretion to the Department so
that the supervision and regulation of state-chartered savings banks may be
flexible and readily responsive to changes in economic conditions and in savings
and lending practices.
One of the purposes of the Banking Code is to provide savings banks
with the opportunity to be competitive with each other and with other financial
institutions existing under other Pennsylvania laws and other state, federal and
foreign laws. A Pennsylvania savings bank may locate or change the location of
its principal place of business and establish an office anywhere in the
Commonwealth, with the prior approval of the Department.
The Department generally examines each savings bank not less frequently
than once every two years. Although the Department may accept the examinations
and reports of the FDIC in lieu of the Department's examination, the present
practice is for the Department to conduct a joint examination with the FDIC. The
Department may order any savings bank to discontinue any violation of law or
unsafe or unsound business practice and may direct any director, officer,
attorney or employee of a savings bank engaged in an objectionable activity,
after the Department has ordered the activity to be terminated, to show cause at
a hearing before the Department why such person should not be removed.
The foregoing references to laws and regulations which are applicable
to the 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.
Pennsylvania Taxation. The Company is subject to the Pennsylvania
Corporate Net Income Tax and Capital Stock and Franchise Tax. The Corporate Net
Income Tax rate is currently 12.25% and is imposed on the Company's
unconsolidated taxable income for federal purposes with certain adjustments.
36
<PAGE>
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.
Item 2. Properties
At September 30, 1998, the Bank conducted its business from its main
office in Pittsburgh, Pennsylvania and seven full-service branch offices located
in Allegheny and Butler counties.
37
<PAGE>
The following table sets forth certain information with respect to the
offices of the Bank as of September 30, 1998.
<TABLE>
<CAPTION>
Location
- -----------------------------------------------
Net Book Value
Lease Expiration of Property and
Date (including) Leasehold Improvements
County Address Lease or Own Options at September 30, 1998
------ ------- -------------------- ---------------------
<S> <C> <C> <C>
3300 Brighton Road
Allegheny Pittsburgh, PA 15212 Own $145,989
1009 Perry Highway
Allegheny Pittsburgh, PA 15237 Own 226,312
251 South Main Street
Butler Zelienople, PA 16063 Own 489,285
312 Beverly Road
Allegheny Pittsburgh, PA 15216 Lease 7/31/08 --
6000 Babcock Blvd.
Allegheny Pittsburgh, PA 15237 Lease 11/30/98 --
1701 Duncan Avenue
Allegheny Allison park, PA 15101 Lease 01/31/00 8,378
4710 Liberty Avenue
Allegheny Pittsburgh, PA 15224 Own 616,997
728 Washington Road
Allegheny Pittsburgh, PA 15228 Own 248,934
----------
Total $1,735,895
----------
Loan Center
1014 Perry Highway
Allegheny Pittsburgh, PA 15237 Lease 9/30/07 $64,592
Data Processing and
Checking Department
1015 Perry Highway
Allegheny Pittsburgh, PA 15237 Own 282,903
----------
Total (including Loan
and Data Centers) $2,083,390
==========
</TABLE>
<PAGE>
Management of the Bank believes that the above properties are
adequately covered by insurance and are in good condition. The Bank generally
does not invest in real estate directly. The real estate activities of the Bank
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 the Bank, 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 the Bank.
38
<PAGE>
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 1998 ("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. Selected Financial Data
The information contained in the section captioned "Selected Financial
Data" of the Annual Report is incorporated herein by reference.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The information required herein is incorporated by reference from pages
36 to 47 of the Company's Annual Report.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
The information required herein is incorporated by reference from pages
36 to 38 of the Company's annual report.
Item 8. Financial Statements
The information required herein is incorporated by reference from pages
6 to 46 of the Company's Annual Report.
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure
Not applicable.
PART III
Item 10. 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
2 to 3 of the Proxy Statement for the 1999 Annual Meeting of Stockholders to be
filed within 120 days of September 30, 1999 ("Proxy Statement").
Item 11. Executive Compensation and Transactions
The information required herein is incorporated by reference from pages
3 to 11 of the Proxy Statement.
39
<PAGE>
Item 12. Security Ownership of Certain Beneficial Owners and Management Contents
The information required herein is incorporated by reference from pages
2 to 3 of the Proxy Statement.
Item 13. Certain Relationships and Related Transactions
The information required herein is incorporated by reference from page
11 of the Proxy Statement.
Item 14. Exhibits, List and Reports on Form 8-K
(a.) Exhibits
The following exhibits are filed as part of this Form 10-K and this
list includes the Exhibit Index.
2 Agreement and Plan of Reorganization(1)
3.1 Articles of Incorporation(1)
3.2 Bylaws(1)
4 Common Stock Certificate(2)
10.1 Employee Stock Ownership Plan, as amended(2)
10.2 1988 Employee Stock Compensation Program(2)
10.3 1993 Employee Stock Compensation Program(3)
10.4 1997 Employee Stock Compensation Program(4)
10.5 1993 Directors' Stock Option Plan(3)
10.6 Employment Agreement between the Company, the Bank and William
L. Windisch(2)
10.7 1998 Group Term Replacement Plan
10.8 1998 Salary Continuation Plan Agreement by and between W.L.
Windisch, the Company and the Bank
10.9 1998 Salary Continuation Plan Agreement by and between R.G.
Spencer, the Company and the Bank
10.10 1998 Salary Continuation Plan Agreement by and between M.A.
Mooney, the Company and the Bank
13 1998 Annual Report to Stockholders
21 Subsidiaries (see Item 1. Description of Business)
23 Consent of Accountants
27 Financial Data Schedule (in electronic filing only)
(1) 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").
(2) Incorporated by reference from the Registration Statement.
(3) Incorporated by reference from an exhibit in Form S-8 filed with the
SEC on May 2, 1997.
(4) Incorporated by reference from an Exhibit in Form S-8 with the SEC on
March 12, 1998.
(b.) Reports on form 8-K
The Company did not file any reports on Form 8-K during the quarter
ended September 30, 1998.
40
<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, 1998 /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 December 23, 1998.
/s/ William L. Windisch /s/ Richard G. Spencer
- ----------------------- ----------------------
William L. Windisch Richard G. Spencer
Director, President and Vice President and Treasurer
Chief Executive Officer (also Principal Accounting Officer)
/s/ John R. Gales /s/ Robert F. Kastelic
- ----------------- ----------------------
John R. Gales Robert F. Kastelic
Director Director
/s/ Oliver D. Keefer /s/ Charles E. Nettrour
- -------------------- -----------------------
Oliver D. Keefer Charles E. Nettrour
Director Director
/s/ Joanne Ross Wilder
- ----------------------
Joanne Ross Wilder
Director
41
EXHIBIT 10.7
<PAGE>
FIDELITY BANK PaSB
OFFICER GROUP TERM REPLACEMENT PLAN
THIS AGREEMENT, hereby made and entered into this 30th day of March,
1998, to be effective January 1, 1998, by and between FIDELITY BANK PaSB, a
State Stock Savings Bank located in Pittsburgh, Pennsylvania (the "Company) and
the executive selected to participate in this Plan as detailed in Exhibit B.
INTRODUCTION
The Company wishes to attract and retain highly qualified executives.
To further this objective, the Company is willing to divide the death proceeds
of certain life insurance policies which are owned by the Company on the lives
of the participating executives with the designated beneficiary of each insured
participant executive. The Company will pay life insurance premiums from its
general assets.
Article 1
General Definitions
The following terms shall have the meanings specified:
1.1 "Compensation Committee" means either the Compensation Committee
designated from time to time by the Company's Board of Directors or a majority
of the Company's Board of Directors, either of which shall hereinafter be
referred to as the Compensation Committee.
1.2 "Insured" means the individual whose life is insured.
1.3 "Insurer" means the insurance company issuing the life insurance
policy on the life of the Insured.
1.4 "Other Group Term Coverage" means group term life insurance
maintained on a Participant's life owned by the Company that is in addition to
the Policies covered under this Plan.
1.5 "Participant" means the executive who is designated by the
Compensation Committee as eligible to participate in the Plan, elects in writing
to participate in the Plan using the form attached hereto as Exhibit A, and
signs a Split Dollar Endorsement for the Policy in which the executive is the
Insured.
1.6 "Policy" means the individual insurance policy adopted by the
Compensation Committee for purposes of insuring a Participant's life under this
Plan.
1.7 "Plan" means this instrument including all amendments thereto.
1
<PAGE>
1.8 "Termination of Employment" means that the Participant ceases to be
employed by the Company for any reason whatsoever other than by reason of a
leave of absence which is approved by the Company. For purposes of this
Agreement, if there is a dispute over the employment status of the Participant
or the date of the Participant's Termination of Employment, the Company shall
have the sole and absolute right to decide the dispute.
1.9 "Year of Service" means each computation period of twelve
consecutive months during which the Participant is employed on a full-time basis
by the Company, inclusive of any approved leave of absence. The initial
computation period shall commence on the Participant's date of employment and
ends twelve months thereafter.
Article 2
Participation
2.1 Eligibility to Participate. The Compensation Committee in its sole
discretion shall designate from time to time executives that are eligible to
participate in this Plan.
2.2 Participation. The eligible executive may participate in this Plan
by executing an Election to Participate and a Split Dollar Endorsement. The
Split Dollar Endorsement shall bind the executive and the executive's
beneficiaries, assigns and transferees, to the terms and conditions of this
Plan. An executive's participation is limited to only Policies where the
executive is the Insured. Exhibit B attached hereto sets forth the original
Participants and their corresponding Policies.
Article 3
Policy Ownership/Interests
3.1 Company Ownership. The Company shall own Policies on each
Participant's life and shall have the right to exercise all incidents of
ownership. With respect to each Policy, the Company shall be the direct
beneficiary of an amount of death proceeds equal to the greatest of: (1) the
cash surrender value of the Policy; (2) the aggregate premiums paid on the
Policy by the Company less any outstanding indebtedness to the Insurer; or (3)
the amount in excess of the benefit listed in Exhibit C.
3.2 Participant's Interest. Each Participant, or the Participant's
assignee, shall have the right to designate the beneficiary of the remaining
death proceeds of the Policy not paid to the Company as set forth in Section 3.1
hereto. The death benefit paid to the designated beneficiary of the Participant
or the Participant's assignee under the Policy shall constitute the sole
benefits provided under the Plan.
3.3 Option to Purchase. The Company shall not sell, surrender or
transfer ownership of a Policy while this Plan is in effect without first giving
the Insured or the Insured's transferee, the option to purchase the Policy for a
period of sixty (60) days from written notice of such intention.
2
<PAGE>
The purchase price shall be an amount equal to the cash surrender value of the
Policy. This provision shall not impair the right of the Company to terminate
this Plan, except as provided in Section 4.3 hereto.
Article 4
Premiums
4.1 Premium Payment. The Company shall pay all premiums due on all
Policies.
4.2 Imputed Income. The Company shall impute income to the Participant
in an amount equal to the current term rate for the Participant's age multiplied
by the aggregate death benefit payable to the Participant's beneficiary. The
"current term rate" is the minimum amount required to be imputed under Revenue
Rulings 64-328 and 66-110, or any subsequent applicable authority.
4.3 Benefit Vesting and Cash Payment. If Termination of Employment
occurs on or after the Participant attains age 55 years and has completed 15
Years of Service, the Company shall be required to provide continued coverage in
the amount listed in Exhibit C to the qualifying Participant. In addition, the
Company shall annually pay to the Participant an amount equal to the current
term rate imputed to the Participant until the earlier of the death of the
Participant or the date the Policy is no longer owned by the Company. In
calculating the cash payments due from the Company, the Company shall gross up
the payment to cover the estimated taxes on the imputed income reimbursement.
The Company's highest actual marginal income tax bracket for the calendar year
immediately preceding the payment to the Participant shall be used to estimate
the Participant's tax rate.
Article 5
General Limitations
Notwithstanding any provision of this Agreement to the contrary, the
Company shall not pay any benefit under this Agreement:
5.1 Termination for Cause. If the Company terminates the Participant's
employment for:
5.1.1 Gross negligence or gross neglect of duties;
5.1.2 Commission of a felony or of a gross misdemeanor involving
moral turpitude; or
5.1.3 Fraud, disloyalty, dishonesty or willful violation of any law or
significant Company policy committed in connection with the Participant's
employment and resulting in an adverse effect on the Company.
5.2 Suicide or Misstatement. No benefits shall be payable if the
Participant commits suicide within two years after the date of this Agreement,
or if the Participant has made any material misstatement of fact on any
application for life insurance purchased by the Company.
3
<PAGE>
Notwithstanding anything heretofore or hereinafter provided, should the Policy
adopted by the Compensation Committee for the purposes of this Plan contain a
suicide and/or factual misstatement contestability provision, a final
determination made under and in accordance with the terms of such Policy as to
the benefits payable due to the death of the Insured shall be final and
conclusive for the purposes of this Agreement.
Article 6
Assignment
Any Participant may assign without consideration all interests in the
Participant's Policy and in this Plan to any person, entity or trust. In the
event a Participant shall transfer all of the Participant's interest in the
Policy, then all of that Participant's interest in the Participant's Policy and
in the Plan shall be vested in the Participant's transferee, who shall be
substituted as a party hereunder, and that Participant shall have no further
interest in the Participant's Policy or in this Plan.
Article 7
Insurer
The Insurer shall be bound only by the terms of its corresponding
Policy. Any payments the Insurer makes or actions it takes in accordance with a
Policy shall fully discharge it from all claims, suits and demands of all
persons relating to that Policy. The Insurer shall not be bound by the
provisions of this Plan. The Insurer shall have the right to rely on the
Company's representations with regard to any definitions, interpretations or
Policy interests as specified under this Plan.
Article 8
Claims Procedure
8.1 Claims Procedure. The Company shall notify any person or entity
that makes a claim against this Group Term Replacement Plan (the "Claimant") in
writing, within ninety (90) days of Claimant's written application for benefits,
of Claimant's eligibility or ineligibility for benefits under this Plan. If the
Company determines that Claimant is not eligible for benefits or full benefits,
the notice shall set forth (1) the specific reasons for such denial (2) a
specific reference to the provisions of this Plan on which the denial is based,
(3) a description of any additional information or material necessary for the
Claimant to perfect Claimant's claim and a description of why it is needed, and
(4) an explanation of this Plan's claims review procedure and other appropriate
information as to the steps to be taken if the Claimant wishes to have the claim
reviewed. If the Company determines that there are special circumstances
requiring additional time to make a decision, the Company shall notify the
Claimant of the special circumstances and the date by which a decision is
expected to be made, and may extend the time for up to an additional ninety-day
period.
4
<PAGE>
8.2 Review Procedure. If a Claimant is determined by the Company not to
be eligible for benefits, or if the Claimant believes that Claimant is entitled
to greater or different benefits, the Claimant shall have the opportunity to
have such claim reviewed by the Company by filing a petition for review with the
Company within sixty (60) days after receipt of the notice issued by the
Company. Said petition shall state the specific reasons which the Claimant
believes entitle Claimant to benefits or to greater or different benefits.
Within sixty (60) days after receipt by the Company of the petition, the Company
shall afford the Claimant (and counsel, if any) an opportunity to present
Claimant's position to the Company orally or in writing, and the Claimant (or
counsel) shall have the right to review the pertinent documents. The Company
shall notify the Claimant of its decision in writing within the sixty-day
period, stating specifically the basis of its decision, written in a manner
calculated to be understood by the Claimant and the specific provisions of this
Plan on which the decision is based. If, because of the need for a hearing, the
sixty-day period is not sufficient, the decision may be deferred for up to
another sixty-day period at the election of the Company, but notice of this
deferral shall be given to the Claimant.
8.3 Limited Scope. The scope of this claims procedure is limited to
those matters that reference the Insured's rights and the powers and duties of
the Plan Administrator under the Plan. To the extent the resolution of the claim
involves application and interpretation of terms and conditions of the Policy or
the rights of any person thereunder, the Administrator shall take no action as
to such claim but shall take any and all action as may be necessary in order to
allow the Claimant to pursue such claim under the terms of the Policy, provided
however, all costs and expenses incident to prosecution of such claim shall be
born exclusively by the Claimant.
Article 9
Amendments and Termination
This Agreement may be amended or terminated only by a written agreement
signed by the Company and the Participant.
Article 10
Miscellaneous
10.1 Binding Effect. This Plan, in conjunction with each Split Dollar
Endorsement, shall bind each Participant and the Company, their beneficiaries,
survivors, executors, administrators and transferees, and any Policy
beneficiary.
10.2 No Guarantee of Employment. This Plan is not an employment policy
or contract. It does not give a Participant the right to remain an employee of
the Company, nor does it interfere with the Company's right to discharge a
Participant. It also does not require a Participant to remain an employee nor
interfere with a Participant's right to terminate employment at any time.
10.3 Applicable Law. The Plan and all rights hereunder shall be
governed by and construed according to the laws of the Commonwealth of
Pennsylvania, except to the extent preempted by the laws of the United States of
America.
5
<PAGE>
10.4 Notice. Any notice, consent or demand required or permitted to be
given under the provisions of this Split Dollar Plan by one party to another
shall be in writing, shall be signed by the party giving or making the same, and
may be given either by delivering the same to such other party personally, or by
mailing the same, by United States certified mail postage prepaid, to such
party, addressed to the party's last known address as shown on the records of
the Company. The date of such mailing shall be deemed the date of such mailed
notice, consent or demand.
10.5 Entire Agreement. This Plan constitutes the entire agreement
between the Company and the Participant as to the subject matter hereof. No
rights are granted to the Participant by virtue of this Plan other than those
specifically set forth herein.
10.6 Administration. The Company shall have powers which are necessary
to administer this Plan, including, but not limited to:
10.6.1 Interpreting the provisions of the Plan;
10.6.2 Establishing and revising the method of accounting for the
Plan;
10.6.3 Maintaining a record of benefit payments; and
10.6.4 Establishing rules and prescribing any forms necessary or
desirable to administer the Plan.
10.7 Agent/Representative. Neither the Plan nor the Administrator of
the Plan shall be or be deemed to be an agent or representative of any Insurer.
IN WITNESS WHEREOF, the Company executes this Plan as of the date
indicated above.
COMPANY:
FIDELITY BANK PaSB
By /s/William L. Windisch
Title President
Signed for
Assistant Secretary
6
EXHIBIT 10.8
<PAGE>
FIDELITY BANK PaSB
SALARY CONTINUATION AGREEMENT
THIS AGREEMENT is made this 30th day of March, 1998, to be effective
January 1, 1998, by and between FIDELITY BANCORP, INC., a Pennsylvania-chartered
bank holding company (the "Corporation"), FIDELITY BANK PaSB, a State Stock
Savings Bank located in Pittsburgh, Pennsylvania (the "Company") and WILLIAM L.
WINDISCH (the "Executive").
INTRODUCTION
To encourage the Executive to remain an employee of the Company, the
Company is willing to provide salary continuation benefits to the Executive. The
Company will pay the benefits from its general assets.
AGREEMENT
The Executive and the Company agree as follows:
Article 1
Definitions
1.1 Definitions. Whenever used in this Agreement, the following words
and phrases shall have themeanings specified:
1.1.1 "Change of Control" means that the Executive has been
terminated within 12 months of a change in control of a nature that
would be required to be reported in response to Item 6(e) of Schedule
14A of Regulation 14A promulgated under the Securities Exchange Act of
1934, as amended (the "Exchange Act") or any successor thereto;
provided that, without limitations, such a change in control shall be
deemed to have occurred if (A) any "person" (as such term is used in
Sections 13(d) and 14(d) of the Exchange Act) is or becomes the
"beneficial owner" (as defined in rule 13d-3 under the Exchange Act),
directly or indirectly, of securities of the Corporation representing
25% or more of the combined voting power of the Corporation's then
outstanding securities, or (B) during any period of two consecutive
years, individuals who at the beginning of such period constitute the
Board of Directors of the Corporation cease for any reason to
constitute at least a majority thereof, unless the election, or the
nomination for election by stockholders, of each director who was not a
director at the beginning of such period has been approved in advance
by directors representing at least two-thirds of the directors then in
office who were directors at the beginning of the period.
1
<PAGE>
1.1.2 "Code" means the lnternal Revenue Code of l986, as
amended.
1.1.3 "Disability" means, if the Executive is covered by a
Company- sponsored disability policy, total disability as defined in
such policy without regard to any waiting period. If the Executive is
not covered by such a policy, Disability means the Executive suffering
a sickness, accident or injury which, in the judgment of a physician
satisfactory to the Company, prevents the Executive from performing
substantially all of the Executive's normal duties for the Company. As
a condition to any benefits, the Company may require the Executive to
submit to such physical or mental evaluations and tests as the
Company's Board of Directors deems appropriate.
1.1.4 "Early Retirement Age" means the later of the
Executive's 55th birthday or the Executive's age after completing
fifteen (15) Years of Service.
1.1.5 "Early Retirement Date" means the month, day and year in
which Early Retirement occurs.
1.1.6 "Early Termination" means the Termination of Employment
before Early Retirement Age for reasons other than death, Disability,
Termination for Cause or following a Change of Control.
1.1.7 "Early Termination Date" means the month, day and year
in which Early Termination occurs.
1.1.8 "Normal Retirement Age" means the Executive's 7Oth
birthday.
1.1.9 "Normal Retirement Date" means the later of the Normal
Retirement Age or Termination of Employment.
1.1.10 "Plan Year" means a twelve-month period commencing on
January 1 and ending on December 31 of each year. The initial Plan Year
shall commence on the effective date of this Agreement.
1.1.11 "Termination for Cause" See Section 5.2.
1.1.12 "Termination of Employment" means that the Executive
ceases to be employed by the Company for any reason whatsoever other
than by reason of a leave of absence which is approved by the Company.
For purposes of this Agreement, if there is a dispute over the
employment status of the Executive or the date of the Executive's
Termination of Employment, the Company shall have the sole and absolute
right to decide the dispute.
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1.1.13 "Year of Service" means each computation period of
twelve consecutive months during which the Executive is employed on a
full-time basis by the Company, inclusive of any approved leave of
absence. The initial computation period shall commence on the
Executive's date of employment and end twelve months thereafter.
Article 2
Lifetime Benefits
2.1 Normal Retirement Benefit. Upon Termination of Employment on or
after the Normal Retirement Age for reasons other than death, the Company shall
pay to the Executive the benefit described in this Section 2.1 in lieu of any
other benefit under this Agreement.
2.1.1 Amount of Benefit. The annual benefit under this Section
2.1 is $47,000 (Forty-seven Thousand Dollars). The Company's Board of
Directors, in its sole discretion, may increase the benefit under this
Section 2.1.1; however, any increase shall require the recalculation of
Schedule A.
2.1.2 Payment of Benefit. The Company shall pay the annual
benefit to the Executive in 12 equal monthly installments payable on
the first day of each month commencing with the month following a
period of sixty (60) days after the Executive's Normal Retirement Date
and continuing for 179 additional months.
2.2 Early Retirement Benefit. Upon Early Retirement, the Company shall
pay to the Executive the benefit described in this Section 2.2 in lieu of any
other benefit under this Agreement.
2.2.1 Amount of Benefit. The benefit under this Section 2.2 is
the Early Retirement amount set forth in Schedule A for the Plan Year
ending immediately prior to the Early Retirement Date.
2.2.2 Payment of Benefit. The Company shall pay the annual
benefit to the Executive in 12 equal monthly installments payable on
the first day of each month commencing with the month following a
period of 60 days after said Termination of Employment and continuing
for 179 months.
2.3 Early Termination Benefit. If the Executive terminates employment
prior to Early Retirement Age, other than by reason of death or Disability, the
Executive will not be entitled to a benefit under this Agreement. However, the
Company's Board of Directors, in its sole discretion, may provide a benefit to
the Executive upon Early Termination.
2.4 Disability Benefit. If the Executive terminates employment due to
Disability prior to Normal Retirement Age, the Company shall pay to the
Executive the benefit described in this Section 2.4 in lieu of any other benefit
under this Agreement.
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2.4.1 Amount of Benefit. The benefit under this Section 2.4 is
the Disability amount set forth in Schedule A for the Plan Year ending
immediately prior to the date in which Termination of Employment
occurs.
2.4.2 Payment of Benefit. The Company shall pay the benefit to
the Executive in a lump sum on the first day of the month following a
period of ninety (90) days after said Termination of Employment.
2.5 Change of Control Benefit. Upon a Change of Control, the Company
shall pay to the Executive the benefit described in this Section 2.5 in lieu of
any other benefit under this Agreement.
2.5.1 Amount of Benefit. The benefit under this Section 2.5 is
the Change of Control amount set forth in Schedule A for the Plan Year
ending immediately prior to the date in which Termination of Employment
occurs.
2.5.2 Payment of Benefit. The Company shall pay the benefit to
the Executive in a lump sum on the first day of the month following a
period of sixty (60) days after said Termination of Employment.
Article 3
Death Benefits
3.1 Death During Active Service. If the Executive dies while in the
active service of the Company, the Company shall pay to the Executive's
beneficiary the benefit described in this Section 3. 1. This benefit
shall be paid in lieu of the Lifetime Benefits of Article 2.
3.1.1 Amount of Benefit. The annual benefit under this Section
3.1 is the Normal Retirement Benefit amount described in Section 2.1.1.
3.1.2 Payment of Benefit. The Company shall pay the annual
benefit to the beneficiary in 12 equal monthly installments payable on
the first day of each month commencing with the month following a
period of sixty (60) days after the Executive's death and continuing
for 179 additional months.
3.2 Death During Benefit Period. If the Executive dies after the
benefit payments have commenced under this Agreement but before receiving all
such payments, the Company shall pay the remaining benefits to the Executive's
beneficiary at the same time and in the same amounts they would have been paid
to the Executive had the Executive survived.
3.3 Death Following Termination of Employment But Before Benefits
Commence. If the Executive is entitled to benefits under this Agreement, but
dies prior to receiving said benefits, the
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Company shall pay to the Executive's beneficiary the same benefits, in the same
manner, they would have been paid to the Executive had the Executive survived;
however, said benefit payments will commence upon the Executive's death.
Article 4
Beneficiaries
4.1 Beneficiary Designations. The Executive shall designate a
beneficiary by filing a written designation with the Company. The Executive may
revoke or modify the designation at any time by filing a new designation.
However, designations will only be effective if signed by the Executive and
accepted by the Company during the Executive's lifetime. The Executive's
beneficiary designation shall be deemed automatically revoked if the beneficiary
predeceases the Executive, or if the Executive names a spouse as beneficiary and
the marriage is subsequently dissolved. If the Executive dies without a valid
beneficiary designation, all payments shall be made to the Executive's estate.
4.2 Facility of Payment. If a benefit is payable to a minor, to a
person declared incapacitated, or to a person incapable of handling the
disposition of his or her property, the Company may pay such benefit to the
guardian, legal representative or person having the care or custody of such
minor, incapacitated person or incapable person. The Company may require proof
of incapacity, minority or guardianship as it may deem appropriate prior to
distribution of the benefit. Such distribution shall completely discharge the
Company from all liability with respect to such benefit.
Article 5
General Limitations
Notwithstanding any provision of this Agreement to the contrary, the
Company shall not pay any benefit under this Agreement:
5.1 Excess Parachute Payment. To the extent the benefit would create an
excise tax under the excess parachute rules of Section 28OG of the Code.
5.2 Termination for Cause. If the Company terminates the Executive's
employment for:
5.2.1 Gross negligence or gross neglect of duties;
5.2.2 Commission of a felony or of a gross misdemeanor
involving moral turpitude; or
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5.2.3 Fraud, disloyalty, dishonesty or willful violation of
any law or significant Company policy committed in connection
with the Executive's employment and resulting in an adverse
effect on the Company.
5.3 Competition After Termination of Employment. No benefits shall be
payable if the Executive, without the prior written consent of the Company,
engages in, becomes interested in, directly or indirectly, as a sole proprietor,
as a partner in a partnership, or as a substantial shareholder in a corporation,
or becomes associated with, in the capacity of employee, director, officer,
principal, agent, trustee or in any other capacity whatsoever, any enterprise
conducted in the trading area (a 50 mile radius) of the business of the Company,
which enterprise is, or may deemed to be, competitive with any business carried
on by the Company as of the date of the Executive's retirement or Termination of
Employment. This section shall not apply following a Change of Control.
5.4 Suicide or Misstatement. No benefits shall be payable if the
Executive commits suicide within two years after the date of this Agreement, or
if the Executive has made any material misstatement of fact on any application
for life insurance purchased by the Company. In addition to and not as
limitation of the preceding, should the Company acquire a policy of insurance
for the purpose of protecting the Company as to the financial risks incident to
it entering into the Salary Continuation Agreement and the Executive has
knowledge of such fact, no benefit shall be payable to the Executive hereunder
in an amount that would exceed the amount provided by the policy of insurance as
a result of the event that would cause benefits to be payable hereunder.
Article 6
Claims and Review Procedures
6.1 Claims Procedure. The Company shall notify any person or entity
that makes a claim against the Agreement (the "Claimant") in writing, within
ninety (90) days of Claimant's written application for benefits, of Claimant's
eligibility or ineligibility for benefits under the Agreement. If the Company
determines that the Claimant is not eligible for benefits or full benefits, the
notice shall set forth (1) the specific reasons for such denial, (2) a specific
reference to the provisions of the Agreement on which the denial is based, (3) a
description of any additional information or material necessary for the Claimant
to perfect Claimant's claim and a description of why it is needed, and (4) an
explanation of the Agreement's claim review procedure and other appropriate
information as to the steps to be taken if the Claimant wishes to have the claim
reviewed. If the Company determines that there are special circumstances
requiring additional time to make a decision, the Company shall notify the
Claimant of the special circumstances and the date by which a decision is
expected to be made, and may extend the time for up to an additional ninety-day
period.
6.2 Review Procedure. If the Claimant is determined by the Company not
to be eligible for benefits, or if the Claimant believes that Claimant is
entitled to greater or different benefits, the
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Claimant shall have the opportunity to have such claim reviewed by the Company
by filing a petition for review with the Company within sixty (60) days after
receipt of the notice issued by the Company. Said petition shall state the
specific reasons which the Claimant believes entitle Claimant to benefits or to
greater or different benefits. Within sixty (60) days after receipt by the
Company of the petition, the Company shall afford the Claimant (and counsel, if
any) an opportunity to present Claimant's position to the Company orally or in
writing, and the Claimant (or counsel) shall have the right to review the
pertinent documents. The Company shall notify the Claimant of its decision in
writing within the sixty-day period, stating specifically the basis of its
decision, written in a manner calculated to be understood by the Claimant and
the specific provisions of the Agreement on which the decision is based. If,
because of the need for a hearing, the sixty-day period is not sufficient, the
decision may be deferred for up to another sixty-day period at the election of
the Company, but notice of this deferral shall be given to the Claimant.
6.3 Claims for Benefits Conditioned on the Payment Insurance. Should
the Executive or the Executive's beneficiary be denied a benefit hereunder due
to operation of paragraph 5.4 hereof based upon refusal of an insurance company
to make payment under a policy owned and benefiting the Company, the Company
will either allow the Executive or the Executive's beneficiary to join in any
claim or action commenced by the Company under the Policy or take such action as
may be required that would permit the Executive or the Executive's beneficiary
to contest the refusal of the Insurance Company to make payment.
Article 7
Amendments and Termination
This Agreement may be amended or terminated only by a written agreement
signed by the Company and the Executive.
Article 8
Miscellaneous
8.1 Binding Effect. This Agreement shall bind the Executive and the
Company, and their beneficiaries, survivors, executors, successors,
administrators and transferees.
8.2 No Guarantee of Employment. This Agreement is not an employment
policy or contract. It does not give the Executive the right to remain an
employee of the Company, nor does it interfere with the Company's right to
discharge the Executive. It also does not require the Executive to remain an
employee nor interfere with the Executive's right to terminate employment at any
time.
8.3 Non-Transferability. Benefits under this Agreement cannot be sold,
transferred, assigned, pledged, attached or encumbered in any manner.
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8.4 Reorganization. The Company shall not merge or consolidate into or
with another company, or reorganize, or sell substantially all of its assets to
another company, firm, or person unless such succeeding or continuing company,
firm or person agrees to assume and discharge the obligations of the Company
under this Agreement. Upon the occurrence of such event, the term "Company" as
used in this Agreement shall be deemed to refer to the successor or survivor
company.
8.5 Tax Withholding. The Company shall withhold any taxes that are
required to be withheld from the benefits provided under this Agreement.
8.6 Applicable Law. The Agreement and all rights hereunder shall be
governed by the laws of the Commonwealth of Pennsylvania, except to the extent
preempted by the laws of the United States of America.
8.7 Unfunded Arrangement. The Executive and beneficiary are general
unsecured creditors of the Company for the payment of benefits under this
Agreement. The benefits represent the mere promise by the Company to pay such
benefits. The rights to benefits are not subject in any manner to anticipation,
alienation, sale, transfer, assignment, pledge, encumbrance, attachment, or
garnishment by creditors. Any insurance on the Executive's life is a general
asset of the Company to which the Executive and beneficiary have no preferred or
secured claim.
8.8 Recovery of Estate Taxes. If the Executive's gross estate for
federal estate tax purposes includes any amount determined by reference to and
on account of this Agreement, and if the beneficiary is other than the
Executive's estate, then the Executive's estate shall be entitled to recover
from the beneficiary receiving such benefit under the terms of the Agreement, an
amount by which the total estate tax due by the Executive's estate, exceeds the
total estate tax which would have been payable if the value of such benefit had
not been included in the Executive's gross estate. If there is more than one
person receiving such benefit, the right of recovery shall be against each such
person. In the event the beneficiary has a liability hereunder, the beneficiary
may petition the Company for a lump sum payment in an amount not to exceed the
beneficiary's liability hereunder.
8.9 Entire Agreement. This Agreement constitutes the entire agreement
between the Company and the Executive as to the subject matter hereof. No rights
are granted to the Executive by virtue of this Agreement other than those
specifically set forth herein.
8.10 Administration. The Company shall have powers which are necessary
to administer this Agreement, including but not limited to:
8.10.1 Interpreting the provisions of the Agreement;
8.10.2 Establishing and revising the method of accounting for
the Agreement;
8.10.3 Maintaining a record of benefit payments; and
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8.10.4 Establishing rules and prescribing any forms necessary
or desirable to administer the Agreement.
8.11 Designated Fiduciary. For purposes of the Employee Retirement
Income Security Act of 1974, if applicable, the Company shall be the named
fiduciary and plan administrator under the Agreement. The named fiduciary may
delegate to others certain aspects of the management and operation
responsibilities of the plan including the employment of advisors and the
delegation of ministerial duties to qualified individuals.
IN WITNESS WHEREOF, the Executive and a duly authorized Company officer
have signed this Agreement.
EXECUTIVE: CORPORATION:
FIDELITY BANCORP, INC.
/s/William L. Windisch By /s/Richard G. Spencer
- ---------------------- ---------------------
William L. Windisch
Title Vice President and C.F.O.
COMPANY:
FIDELITY BANK PaSB
By /s/Richard G. Spencer
---------------------
Title Executive Vice President and C.F.O.
9
EXHIBIT 10.9
<PAGE>
FIDELITY BANK PaSB
SALARY CONTINUATION AGREEMENT
THIS AGREEMENT is made this 27th day of March, 1998, to be effective
January 1, 1998, by and between FIDELITY BANCORP, INC., a Pennsylvania-chartered
bank holding company (the "Corporation"), FIDELITY BANK PaSB, a State Stock
Savings Bank located in Pittsburgh, Pennsylvania (the "Company") and RICHARD G.
SPENCER (the "Executive").
INTRODUCTION
To encourage the Executive to remain an employee of the Company, the
Company is willing to provide salary continuation benefits to the Executive. The
Company will pay the benefits from its general assets.
AGREEMENT
The Executive and the Company agree as follows:
Article 1
Definitions
1.1 Definitions. Whenever used in this Agreement, the following words
and phrases shall have themeanings specified:
1.1.1 "Change of Control" means that the Executive has been
terminated within 12 months of a change in control of a nature that
would be required to be reported in response to Item 6(e) of Schedule
14A of Regulation 14A promulgated under the Securities Exchange Act of
1934, as amended (the "Exchange Act") or any successor thereto;
provided that, without limitations, such a change in control shall be
deemed to have occurred if (A) any "person" (as such term is used in
Sections 13(d) and 14(d) of the Exchange Act) is or becomes the
"beneficial owner" (as defined in rule 13d-3 under the Exchange Act),
directly or indirectly, of securities of the Corporation representing
25% or more of the combined voting power of the Corporation's then
outstanding securities, or (B) during any period of two consecutive
years, individuals who at the beginning of such period constitute the
Board of Directors of the Corporation cease for any reason to
constitute at least a majority thereof, unless the election, or the
nomination for election by stockholders, of each director who was not a
director at the beginning of such period has been approved in advance
by directors representing at least two-thirds of the directors then in
office who were directors at the beginning of the period.
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1.1.2 "Code" means the lnternal Revenue Code of l986, as
amended.
1.1.3 "Disability" means, if the Executive is covered by a
Company- sponsored disability policy, total disability as defined in
such policy without regard to any waiting period. If the Executive is
not covered by such a policy, Disability means the Executive suffering
a sickness, accident or injury which, in the judgment of a physician
satisfactory to the Company, prevents the Executive from performing
substantially all of the Executive's normal duties for the Company. As
a condition to any benefits, the Company may require the Executive to
submit to such physical or mental evaluations and tests as the
Company's Board of Directors deems appropriate.
1.1.4 "Early Retirement Age" means the later of the
Executive's 55th birthday or the Executive's age after completing
fifteen (15) Years of Service.
1.1.5 "Early Retirement Date" means the month, day and year in
which Early Retirement occurs.
1.1.6 "Early Termination" means the Termination of Employment
before Early Retirement Age for reasons other than death, Disability,
Termination for Cause or following a Change of Control.
1.1.7 "Early Termination Date" means the month, day and year
in which Early Termination occurs.
1.1.8 "Normal Retirement Age" means the Executive's 65th
birthday.
1.1.9 "Normal Retirement Date" means the later of the Normal
Retirement Age or Termination of Employment.
1.1.10 "Plan Year" means a twelve-month period commencing on
January 1 and ending on December 31 of each year. The initial Plan Year
shall commence on the effective date of this Agreement.
1.1.11 "Termination for Cause" See Section 5.2.
1.1.12 "Termination of Employment" means that the Executive
ceases to be employed by the Company for any reason whatsoever other
than by reason of a leave of absence which is approved by the Company.
For purposes of this Agreement, if there is a dispute over the
employment status of the Executive or the date of the Executive's
Termination of Employment, the Company shall have the sole and absolute
right to decide the dispute.
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1.1.13 "Year of Service" means each computation period of
twelve consecutive months during which the Executive is employed on a
full-time basis by the Company, inclusive of any approved leave of
absence. The initial computation period shall commence on the
Executive's date of employment and end twelve months thereafter.
Article 2
Lifetime Benefits
2.1 Normal Retirement Benefit. Upon Termination of Employment on or
after the Normal Retirement Age for reasons other than death, the Company shall
pay to the Executive the benefit described in this Section 2.1 in lieu of any
other benefit under this Agreement.
2.1.1 Amount of Benefit. The annual benefit under this Section
2.1 is $41,000 (Forty-one Thousand Dollars). The Company's Board of
Directors, in its sole discretion, may increase the benefit under this
Section 2.1.1; however, any increase shall require the recalculation of
Schedule A.
2.1.2 Payment of Benefit. The Company shall pay the annual
benefit to the Executive in 12 equal monthly installments payable on
the first day of each month commencing with the month following a
period of sixty (60) days after the Executive's Normal Retirement Date
and continuing for 179 additional months.
2.2 Early Retirement Benefit. Upon Early Retirement, the Company shall
pay to the Executive the benefit described in this Section 2.2 in lieu of any
other benefit under this Agreement.
2.2.1 Amount of Benefit. The benefit under this Section 2.2 is
the Early Retirement amount set forth in Schedule A for the Plan Year
ending immediately prior to the Early Retirement Date.
2.2.2 Payment of Benefit. The Company shall pay the annual
benefit to the Executive in 12 equal monthly installments payable on
the first day of each month commencing with the month following a
period of 60 days after said Termination of Employment and continuing
for 179 months.
2.3 Early Termination Benefit. If the Executive terminates employment
prior to Early Retirement Age, other than by reason of death or Disability, the
Executive will not be entitled to a benefit under this Agreement. However, the
Company's Board of Directors, in its sole discretion, may provide a benefit to
the Executive upon Early Termination.
2.4 Disability Benefit. If the Executive terminates employment due to
Disability prior to Normal Retirement Age, the Company shall pay to the
Executive the benefit described in this Section 2.4 in lieu of any other benefit
under this Agreement.
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2.4.1 Amount of Benefit. The benefit under this Section 2.4 is
the Disability amount set forth in Schedule A for the Plan Year ending
immediately prior to the date in which Termination of Employment
occurs.
2.4.2 Payment of Benefit. The Company shall pay the benefit to
the Executive in a lump sum on the first day of the month following a
period of ninety (90) days after said Termination of Employment.
2.5 Change of Control Benefit. Upon a Change of Control, the Company
shall pay to the Executive the benefit described in this Section 2.5 in lieu of
any other benefit under this Agreement.
2.5.1 Amount of Benefit. The benefit under this Section 2.5 is
the Change of Control amount set forth in Schedule A for the Plan Year
ending immediately prior to the date in which Termination of Employment
occurs.
2.5.2 Payment of Benefit. The Company shall pay the benefit to
the Executive in a lump sum on the first day of the month following a
period of sixty (60) days after said Termination of Employment.
Article 3
Death Benefits
3.1 Death During Active Service. If the Executive dies while in the
active service of the Company, the Company shall pay to the Executive's
beneficiary the benefit described in this Section 3.1. This benefit
shall be paid in lieu of the Lifetime Benefits of Article 2.
3.1.1 Amount of Benefit. The annual benefit under this Section
3.1 is the Normal Retirement Benefit amount described in Section 2.1.1.
3.1.2 Payment of Benefit. The Company shall pay the annual
benefit to the beneficiary in 12 equal monthly installments payable on
the first day of each month commencing with the month following a
period of sixty (60) days after the Executive's death and continuing
for 179 additional months.
3.2 Death During Benefit Period. If the Executive dies after the
benefit payments have commenced under this Agreement but before receiving all
such payments, the Company shall pay the remaining benefits to the Executive's
beneficiary at the same time and in the same amounts they would have been paid
to the Executive had the Executive survived.
3.3 Death Following Termination of Employment But Before Benefits
Commence. If the Executive is entitled to benefits under this Agreement, but
dies prior to receiving said benefits, the
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Company shall pay to the Executive's beneficiary the same benefits, in the same
manner, they would have been paid to the Executive had the Executive survived;
however, said benefit payments will commence upon the Executive's death.
Article 4
Beneficiaries
4.1 Beneficiary Designations. The Executive shall designate a
beneficiary by filing a written designation with the Company. The Executive may
revoke or modify the designation at any time by filing a new designation.
However, designations will only be effective if signed by the Executive and
accepted by the Company during the Executive's lifetime. The Executive's
beneficiary designation shall be deemed automatically revoked if the beneficiary
predeceases the Executive, or if the Executive names a spouse as beneficiary and
the marriage is subsequently dissolved. If the Executive dies without a valid
beneficiary designation, all payments shall be made to the Executive's estate.
4.2 Facility of Payment. If a benefit is payable to a minor, to a
person declared incapacitated, or to a person incapable of handling the
disposition of his or her property, the Company may pay such benefit to the
guardian, legal representative or person having the care or custody of such
minor, incapacitated person or incapable person. The Company may require proof
of incapacity, minority or guardianship as it may deem appropriate prior to
distribution of the benefit. Such distribution shall completely discharge the
Company from all liability with respect to such benefit.
Article 5
General Limitations
Notwithstanding any provision of this Agreement to the contrary, the
Company shall not pay any benefit under this Agreement:
5.1 Excess Parachute Payment. To the extent the benefit would create an
excise tax under the excess parachute rules of Section 28OG of the Code.
5.2 Termination for Cause. If the Company terminates the Executive's
employment for:
5.2.1 Gross negligence or gross neglect of duties;
5.2.2 Commission of a felony or of a gross misdemeanor
involving moral turpitude; or
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5.2.3 Fraud, disloyalty, dishonesty or willful violation of
any law or significant Company policy committed in connection
with the Executive's employment and resulting in an adverse
effect on the Company.
5.3 Competition After Termination of Employment. No benefits shall be
payable if the Executive, without the prior written consent of the Company,
engages in, becomes interested in, directly or indirectly, as a sole proprietor,
as a partner in a partnership, or as a substantial shareholder in a corporation,
or becomes associated with, in the capacity of employee, director, officer,
principal, agent, trustee or in any other capacity whatsoever, any enterprise
conducted in the trading area (a 50 mile radius) of the business of the Company,
which enterprise is, or may deemed to be, competitive with any business carried
on by the Company as of the date of the Executive's retirement or Termination of
Employment. This section shall not apply following a Change of Control.
5.4 Suicide or Misstatement. No benefits shall be payable if the
Executive commits suicide within two years after the date of this Agreement, or
if the Executive has made any material misstatement of fact on any application
for life insurance purchased by the Company. In addition to and not as
limitation of the preceding, should the Company acquire a policy of insurance
for the purpose of protecting the Company as to the financial risks incident to
it entering into the Salary Continuation Agreement and the Executive has
knowledge of such fact, no benefit shall be payable to the Executive hereunder
in an amount that would exceed the amount provided by the policy of insurance as
a result of the event that would cause benefits to be payable hereunder.
Article 6
Claims and Review Procedures
6.1 Claims Procedure. The Company shall notify any person or entity
that makes a claim against the Agreement (the "Claimant") in writing, within
ninety (90) days of Claimant's written application for benefits, of Claimant's
eligibility or ineligibility for benefits under the Agreement. If the Company
determines that the Claimant is not eligible for benefits or full benefits, the
notice shall set forth (1) the specific reasons for such denial, (2) a specific
reference to the provisions of the Agreement on which the denial is based, (3) a
description of any additional information or material necessary for the Claimant
to perfect Claimant's claim and a description of why it is needed, and (4) an
explanation of the Agreement's claim review procedure and other appropriate
information as to the steps to be taken if the Claimant wishes to have the claim
reviewed. If the Company determines that there are special circumstances
requiring additional time to make a decision, the Company shall notify the
Claimant of the special circumstances and the date by which a decision is
expected to be made, and may extend the time for up to an additional ninety-day
period.
6.2 Review Procedure. If the Claimant is determined by the Company not
to be eligible for benefits, or if the Claimant believes that Claimant is
entitled to greater or different benefits, the
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Claimant shall have the opportunity to have such claim reviewed by the Company
by filing a petition for review with the Company within sixty (60) days after
receipt of the notice issued by the Company. Said petition shall state the
specific reasons which the Claimant believes entitle Claimant to benefits or to
greater or different benefits. Within sixty (60) days after receipt by the
Company of the petition, the Company shall afford the Claimant (and counsel, if
any) an opportunity to present Claimant's position to the Company orally or in
writing, and the Claimant (or counsel) shall have the right to review the
pertinent documents. The Company shall notify the Claimant of its decision in
writing within the sixty-day period, stating specifically the basis of its
decision, written in a manner calculated to be understood by the Claimant and
the specific provisions of the Agreement on which the decision is based. If,
because of the need for a hearing, the sixty-day period is not sufficient, the
decision may be deferred for up to another sixty-day period at the election of
the Company, but notice of this deferral shall be given to the Claimant.
6.3 Claims for Benefits Conditioned on the Payment Insurance. Should
the Executive or the Executive's beneficiary be denied a benefit hereunder due
to operation of paragraph 5.4 hereof based upon refusal of an insurance company
to make payment under a policy owned and benefiting the Company, the Company
will either allow the Executive or the Executive's beneficiary to join in any
claim or action commenced by the Company under the Policy or take such action as
may be required that would permit the Executive or the Executive's beneficiary
to contest the refusal of the Insurance Company to make payment.
Article 7
Amendments and Termination
This Agreement may be amended or terminated only by a written agreement
signed by the Company and the Executive.
Article 8
Miscellaneous
8.1 Binding Effect. This Agreement shall bind the Executive and the
Company, and their beneficiaries, survivors, executors, successors,
administrators and transferees.
8.2 No Guarantee of Employment. This Agreement is not an employment
policy or contract. It does not give the Executive the right to remain an
employee of the Company, nor does it interfere with the Company's right to
discharge the Executive. It also does not require the Executive to remain an
employee nor interfere with the Executive's right to terminate employment at any
time.
8.3 Non-Transferability. Benefits under this Agreement cannot be sold,
transferred, assigned, pledged, attached or encumbered in any manner.
7
<PAGE>
8.4 Reorganization. The Company shall not merge or consolidate into or
with another company, or reorganize, or sell substantially all of its assets to
another company, firm, or person unless such succeeding or continuing company,
firm or person agrees to assume and discharge the obligations of the Company
under this Agreement. Upon the occurrence of such event, the term "Company" as
used in this Agreement shall be deemed to refer to the successor or survivor
company.
8.5 Tax Withholding. The Company shall withhold any taxes that are
required to be withheld from the benefits provided under this Agreement.
8.6 Applicable Law. The Agreement and all rights hereunder shall be
governed by the laws of the Commonwealth of Pennsylvania, except to the extent
preempted by the laws of the United States of America.
8.7 Unfunded Arrangement. The Executive and beneficiary are general
unsecured creditors of the Company for the payment of benefits under this
Agreement. The benefits represent the mere promise by the Company to pay such
benefits. The rights to benefits are not subject in any manner to anticipation,
alienation, sale, transfer, assignment, pledge, encumbrance, attachment, or
garnishment by creditors. Any insurance on the Executive's life is a general
asset of the Company to which the Executive and beneficiary have no preferred or
secured claim.
8.8 Recovery of Estate Taxes. If the Executive's gross estate for
federal estate tax purposes includes any amount determined by reference to and
on account of this Agreement, and if the beneficiary is other than the
Executive's estate, then the Executive's estate shall be entitled to recover
from the beneficiary receiving such benefit under the terms of the Agreement, an
amount by which the total estate tax due by the Executive's estate, exceeds the
total estate tax which would have been payable if the value of such benefit had
not been included in the Executive's gross estate. If there is more than one
person receiving such benefit, the right of recovery shall be against each such
person. In the event the beneficiary has a liability hereunder, the beneficiary
may petition the Company for a lump sum payment in an amount not to exceed the
beneficiary's liability hereunder.
8.9 Entire Agreement. This Agreement constitutes the entire agreement
between the Company and the Executive as to the subject matter hereof. No rights
are granted to the Executive by virtue of this Agreement other than those
specifically set forth herein.
8.10 Administration. The Company shall have powers which are necessary
to administer this Agreement, including but not limited to:
8.10.1 Interpreting the provisions of the Agreement;
8.10.2 Establishing and revising the method of accounting for
the Agreement;
8.10.3 Maintaining a record of benefit payments; and
8
<PAGE>
8.10.4 Establishing rules and prescribing any forms necessary
or desirable to administer the Agreement.
8.11 Designated Fiduciary. For purposes of the Employee Retirement
Income Security Act of 1974, if applicable, the Company shall be the named
fiduciary and plan administrator under the Agreement. The named fiduciary may
delegate to others certain aspects of the management and operation
responsibilities of the plan including the employment of advisors and the
delegation of ministerial duties to qualified individuals.
IN WITNESS WHEREOF, the Executive and a duly authorized Company officer
have signed this Agreement.
EXECUTIVE: CORPORATION:
FIDELITY BANCORP, INC.
/s/Richard G. Spencer By /s/William L. Windisch
- --------------------- ----------------------
Richard G. Spencer Title President
COMPANY:
FIDELITY BANK PaSB
By /s/William L. Windisch
----------------------
Title President
9
EXHIBIT 10.10
<PAGE>
FIDELITY BANK PaSB
SALARY CONTINUATION AGREEMENT
THIS AGREEMENT is made this 30th day of March, 1998, to be effective
January 1, 1998, by and between FIDELITY BANCORP, INC., a Pennsylvania-chartered
bank holding company (the "Corporation"), FIDELITY BANK PaSB, a State Stock
Savings Bank located in Pittsburgh, Pennsylvania (the "Company") and MICHAEL A.
MOONEY (the "Executive").
INTRODUCTION
To encourage the Executive to remain an employee of the Company, the
Company is willing to provide salary continuation benefits to the Executive. The
Company will pay the benefits from its general assets.
AGREEMENT
The Executive and the Company agree as follows:
Article 1
Definitions
1.1 Definitions. Whenever used in this Agreement, the following words
and phrases shall have themeanings specified:
1.1.1 "Change of Control" means that the Executive has been
terminated within 12 months of a change in control of a nature that
would be required to be reported in response to Item 6(e) of Schedule
14A of Regulation 14A promulgated under the Securities Exchange Act of
1934, as amended (the "Exchange Act") or any successor thereto;
provided that, without limitations, such a change in control shall be
deemed to have occurred if (A) any "person" (as such term is used in
Sections 13(d) and 14(d) of the Exchange Act) is or becomes the
"beneficial owner" (as defined in rule 13d-3 under the Exchange Act),
directly or indirectly, of securities of the Corporation representing
25% or more of the combined voting power of the Corporation's then
outstanding securities, or (B) during any period of two consecutive
years, individuals who at the beginning of such period constitute the
Board of Directors of the Corporation cease for any reason to
constitute at least a majority thereof, unless the election, or the
nomination for election by stockholders, of each director who was not a
director at the beginning of such period has been approved in advance
by directors representing at least two-thirds of the directors then in
office who were directors at the beginning of the period.
1
<PAGE>
1.1.2 "Code" means the lnternal Revenue Code of l986, as
amended.
1.1.3 "Disability" means, if the Executive is covered by a
Company- sponsored disability policy, total disability as defined in
such policy without regard to any waiting period. If the Executive is
not covered by such a policy, Disability means the Executive suffering
a sickness, accident or injury which, in the judgment of a physician
satisfactory to the Company, prevents the Executive from performing
substantially all of the Executive's normal duties for the Company. As
a condition to any benefits, the Company may require the Executive to
submit to such physical or mental evaluations and tests as the
Company's Board of Directors deems appropriate.
1.1.4 "Early Retirement Age" means the later of the
Executive's 55th birthday or the Executive's age after completing
fifteen (15) Years of Service.
1.1.5 "Early Retirement Date" means the month, day and year in
which Early Retirement occurs.
1.1.6 "Early Termination" means the Termination of Employment
before Early Retirement Age for reasons other than death, Disability,
Termination for Cause or following a Change of Control.
1.1.7 "Early Termination Date" means the month, day and year
in which Early Termination occurs.
1.1.8 "Normal Retirement Age" means the Executive's 65th
birthday.
1.1.9 "Normal Retirement Date" means the later of the Normal
Retirement Age or Termination of Employment.
1.1.10 "Plan Year" means a twelve-month period commencing on
January 1 and ending on December 31 of each year. The initial Plan Year
shall commence on the effective date of this Agreement.
1.1.11 "Termination for Cause" See Section 5.2.
1.1.12 "Termination of Employment" means that the Executive
ceases to be employed by the Company for any reason whatsoever other
than by reason of a leave of absence which is approved by the Company.
For purposes of this Agreement, if there is a dispute over the
employment status of the Executive or the date of the Executive's
Termination of Employment, the Company shall have the sole and absolute
right to decide the dispute.
2
<PAGE>
1.1.13 "Year of Service" means each computation period of
twelve consecutive months during which the Executive is employed on a
full-time basis by the Company, inclusive of any approved leave of
absence. The initial computation period shall commence on the
Executive's date of employment and end twelve months thereafter.
Article 2
Lifetime Benefits
2.1 Normal Retirement Benefit. Upon Termination of Employment on or
after the Normal Retirement Age for reasons other than death, the Company shall
pay to the Executive the benefit described in this Section 2.1 in lieu of any
other benefit under this Agreement.
2.1.1 Amount of Benefit. The annual benefit under this Section
2.1 is $75,000 (Seventy-five Thousand Dollars). The Company's Board of
Directors, in its sole discretion, may increase the benefit under this
Section 2.1.1; however, any increase shall require the recalculation of
Schedule A.
2.1.2 Payment of Benefit. The Company shall pay the annual
benefit to the Executive in 12 equal monthly installments payable on
the first day of each month commencing with the month following a
period of sixty (60) days after the Executive's Normal Retirement Date
and continuing for 179 additional months.
2.2 Early Retirement Benefit. Upon Early Retirement, the Company shall
pay to the Executive the benefit described in this Section 2.2 in lieu of any
other benefit under this Agreement.
2.2.1 Amount of Benefit. The benefit under this Section 2.2 is
the Early Retirement amount set forth in Schedule A for the Plan Year
ending immediately prior to the Early Retirement Date.
2.2.2 Payment of Benefit. The Company shall pay the annual
benefit to the Executive in 12 equal monthly installments payable on
the first day of each month commencing with the month following a
period of 60 days after said Termination of Employment and continuing
for 179 months.
2.3 Early Termination Benefit. If the Executive terminates employment
prior to Early Retirement Age, other than by reason of death or Disability, the
Executive will not be entitled to a benefit under this Agreement. However, the
Company's Board of Directors, in its sole discretion, may provide a benefit to
the Executive upon Early Termination.
2.4 Disability Benefit. If the Executive terminates employment due to
Disability prior to Normal Retirement Age, the Company shall pay to the
Executive the benefit described in this Section 2.4 in lieu of any other benefit
under this Agreement.
3
<PAGE>
2.4.1 Amount of Benefit. The benefit under this Section 2.4 is
the Disability amount set forth in Schedule A for the Plan Year ending
immediately prior to the date in which Termination of Employment
occurs.
2.4.2 Payment of Benefit. The Company shall pay the benefit to
the Executive in a lump sum on the first day of the month following a
period of ninety (90) days after said Termination of Employment.
2.5 Change of Control Benefit. Upon a Change of Control, the Company
shall pay to the Executive the benefit described in this Section 2.5 in lieu of
any other benefit under this Agreement.
2.5.1 Amount of Benefit. The benefit under this Section 2.5 is
the Change of Control amount set forth in Schedule A for the Plan Year
ending immediately prior to the date in which Termination of Employment
occurs.
2.5.2 Payment of Benefit. The Company shall pay the benefit to
the Executive in a lump sum on the first day of the month following a
period of sixty (60) days after said Termination of Employment.
Article 3
Death Benefits
3.1 Death During Active Service. If the Executive dies while in the
active service of the Company, the Company shall pay to the Executive's
beneficiary the benefit described in this Section 3.1. This benefit
shall be paid in lieu of the Lifetime Benefits of Article 2.
3.1.1 Amount of Benefit. The annual benefit under this Section
3.1 is the Normal Retirement Benefit amount described in Section 2.1.1.
3.1.2 Payment of Benefit. The Company shall pay the annual
benefit to the beneficiary in 12 equal monthly installments payable on
the first day of each month commencing with the month following a
period of sixty (60) days after the Executive's death and continuing
for 179 additional months.
3.2 Death During Benefit Period. If the Executive dies after the
benefit payments have commenced under this Agreement but before receiving all
such payments, the Company shall pay the remaining benefits to the Executive's
beneficiary at the same time and in the same amounts they would have been paid
to the Executive had the Executive survived.
3.3 Death Following Termination of Employment But Before Benefits
Commence. If the Executive is entitled to benefits under this Agreement, but
dies prior to receiving said benefits, the
4
<PAGE>
Company shall pay to the Executive's beneficiary the same benefits, in the same
manner, they would have been paid to the Executive had the Executive survived;
however, said benefit payments will commence upon the Executive's death.
Article 4
Beneficiaries
4.1 Beneficiary Designations. The Executive shall designate a
beneficiary by filing a written designation with the Company. The Executive may
revoke or modify the designation at any time by filing a new designation.
However, designations will only be effective if signed by the Executive and
accepted by the Company during the Executive's lifetime. The Executive's
beneficiary designation shall be deemed automatically revoked if the beneficiary
predeceases the Executive, or if the Executive names a spouse as beneficiary and
the marriage is subsequently dissolved. If the Executive dies without a valid
beneficiary designation, all payments shall be made to the Executive's estate.
4.2 Facility of Payment. If a benefit is payable to a minor, to a
person declared incapacitated, or to a person incapable of handling the
disposition of his or her property, the Company may pay such benefit to the
guardian, legal representative or person having the care or custody of such
minor, incapacitated person or incapable person. The Company may require proof
of incapacity, minority or guardianship as it may deem appropriate prior to
distribution of the benefit. Such distribution shall completely discharge the
Company from all liability with respect to such benefit.
Article 5
General Limitations
Notwithstanding any provision of this Agreement to the contrary, the
Company shall not pay any benefit under this Agreement:
5.1 Excess Parachute Payment. To the extent the benefit would create an
excise tax under the excess parachute rules of Section 28OG of the Code.
5.2 Termination for Cause. If the Company terminates the Executive's
employment for:
5.2.1 Gross negligence or gross neglect of duties;
5.2.2 Commission of a felony or of a gross misdemeanor
involving moral turpitude; or
5
<PAGE>
5.2.3 Fraud, disloyalty, dishonesty or willful violation of
any law or significant Company policy committed in connection
with the Executive's employment and resulting in an adverse
effect on the Company.
5.3 Competition After Termination of Employment. No benefits shall be
payable if the Executive, without the prior written consent of the Company,
engages in, becomes interested in, directly or indirectly, as a sole proprietor,
as a partner in a partnership, or as a substantial shareholder in a corporation,
or becomes associated with, in the capacity of employee, director, officer,
principal, agent, trustee or in any other capacity whatsoever, any enterprise
conducted in the trading area (a 50 mile radius) of the business of the Company,
which enterprise is, or may deemed to be, competitive with any business carried
on by the Company as of the date of the Executive's retirement or Termination of
Employment. This section shall not apply following a Change of Control.
5.4 Suicide or Misstatement. No benefits shall be payable if the
Executive commits suicide within two years after the date of this Agreement, or
if the Executive has made any material misstatement of fact on any application
for life insurance purchased by the Company. In addition to and not as
limitation of the preceding, should the Company acquire a policy of insurance
for the purpose of protecting the Company as to the financial risks incident to
it entering into the Salary Continuation Agreement and the Executive has
knowledge of such fact, no benefit shall be payable to the Executive hereunder
in an amount that would exceed the amount provided by the policy of insurance as
a result of the event that would cause benefits to be payable hereunder.
Article 6
Claims and Review Procedures
6.1 Claims Procedure. The Company shall notify any person or entity
that makes a claim against the Agreement (the "Claimant") in writing, within
ninety (90) days of Claimant's written application for benefits, of Claimant's
eligibility or ineligibility for benefits under the Agreement. If the Company
determines that the Claimant is not eligible for benefits or full benefits, the
notice shall set forth (1) the specific reasons for such denial, (2) a specific
reference to the provisions of the Agreement on which the denial is based, (3) a
description of any additional information or material necessary for the Claimant
to perfect Claimant's claim and a description of why it is needed, and (4) an
explanation of the Agreement's claim review procedure and other appropriate
information as to the steps to be taken if the Claimant wishes to have the claim
reviewed. If the Company determines that there are special circumstances
requiring additional time to make a decision, the Company shall notify the
Claimant of the special circumstances and the date by which a decision is
expected to be made, and may extend the time for up to an additional ninety-day
period.
6.2 Review Procedure. If the Claimant is determined by the Company not
to be eligible for benefits, or if the Claimant believes that Claimant is
entitled to greater or different benefits, the
6
<PAGE>
Claimant shall have the opportunity to have such claim reviewed by the Company
by filing a petition for review with the Company within sixty (60) days after
receipt of the notice issued by the Company. Said petition shall state the
specific reasons which the Claimant believes entitle Claimant to benefits or to
greater or different benefits. Within sixty (60) days after receipt by the
Company of the petition, the Company shall afford the Claimant (and counsel, if
any) an opportunity to present Claimant's position to the Company orally or in
writing, and the Claimant (or counsel) shall have the right to review the
pertinent documents. The Company shall notify the Claimant of its decision in
writing within the sixty-day period, stating specifically the basis of its
decision, written in a manner calculated to be understood by the Claimant and
the specific provisions of the Agreement on which the decision is based. If,
because of the need for a hearing, the sixty-day period is not sufficient, the
decision may be deferred for up to another sixty-day period at the election of
the Company, but notice of this deferral shall be given to the Claimant.
6.3 Claims for Benefits Conditioned on the Payment Insurance. Should
the Executive or the Executive's beneficiary be denied a benefit hereunder due
to operation of paragraph 5.4 hereof based upon refusal of an insurance company
to make payment under a policy owned and benefiting the Company, the Company
will either allow the Executive or the Executive's beneficiary to join in any
claim or action commenced by the Company under the Policy or take such action as
may be required that would permit the Executive or the Executive's beneficiary
to contest the refusal of the Insurance Company to make payment.
Article 7
Amendments and Termination
This Agreement may be amended or terminated only by a written agreement
signed by the Company and the Executive.
Article 8
Miscellaneous
8.1 Binding Effect. This Agreement shall bind the Executive and the
Company, and their beneficiaries, survivors, executors, successors,
administrators and transferees.
8.2 No Guarantee of Employment. This Agreement is not an employment
policy or contract. It does not give the Executive the right to remain an
employee of the Company, nor does it interfere with the Company's right to
discharge the Executive. It also does not require the Executive to remain an
employee nor interfere with the Executive's right to terminate employment at any
time.
8.3 Non-Transferability. Benefits under this Agreement cannot be sold,
transferred, assigned, pledged, attached or encumbered in any manner.
7
<PAGE>
8.4 Reorganization. The Company shall not merge or consolidate into or
with another company, or reorganize, or sell substantially all of its assets to
another company, firm, or person unless such succeeding or continuing company,
firm or person agrees to assume and discharge the obligations of the Company
under this Agreement. Upon the occurrence of such event, the term "Company" as
used in this Agreement shall be deemed to refer to the successor or survivor
company.
8.5 Tax Withholding. The Company shall withhold any taxes that are
required to be withheld from the benefits provided under this Agreement.
8.6 Applicable Law. The Agreement and all rights hereunder shall be
governed by the laws of the Commonwealth of Pennsylvania, except to the extent
preempted by the laws of the United States of America.
8.7 Unfunded Arrangement. The Executive and beneficiary are general
unsecured creditors of the Company for the payment of benefits under this
Agreement. The benefits represent the mere promise by the Company to pay such
benefits. The rights to benefits are not subject in any manner to anticipation,
alienation, sale, transfer, assignment, pledge, encumbrance, attachment, or
garnishment by creditors. Any insurance on the Executive's life is a general
asset of the Company to which the Executive and beneficiary have no preferred or
secured claim.
8.8 Recovery of Estate Taxes. If the Executive's gross estate for
federal estate tax purposes includes any amount determined by reference to and
on account of this Agreement, and if the beneficiary is other than the
Executive's estate, then the Executive's estate shall be entitled to recover
from the beneficiary receiving such benefit under the terms of the Agreement, an
amount by which the total estate tax due by the Executive's estate, exceeds the
total estate tax which would have been payable if the value of such benefit had
not been included in the Executive's gross estate. If there is more than one
person receiving such benefit, the right of recovery shall be against each such
person. In the event the beneficiary has a liability hereunder, the beneficiary
may petition the Company for a lump sum payment in an amount not to exceed the
beneficiary's liability hereunder.
8.9 Entire Agreement. This Agreement constitutes the entire agreement
between the Company and the Executive as to the subject matter hereof. No rights
are granted to the Executive by virtue of this Agreement other than those
specifically set forth herein.
8.10 Administration. The Company shall have powers which are necessary
to administer this Agreement, including but not limited to:
8.10.1 Interpreting the provisions of the Agreement;
8.10.2 Establishing and revising the method of accounting for
the Agreement;
8.10.3 Maintaining a record of benefit payments; and
8
<PAGE>
8.10.4 Establishing rules and prescribing any forms necessary
or desirable to administer the Agreement.
8.11 Designated Fiduciary. For purposes of the Employee Retirement
Income Security Act of 1974, if applicable, the Company shall be the named
fiduciary and plan administrator under the Agreement. The named fiduciary may
delegate to others certain aspects of the management and operation
responsibilities of the plan including the employment of advisors and the
delegation of ministerial duties to qualified individuals.
IN WITNESS WHEREOF, the Executive and a duly authorized Company officer
have signed this Agreement.
EXECUTIVE: CORPORATION:
FIDELITY BANCORP, INC.
/s/Michael A. Mooney By /s/William L. Windisch
- -------------------- ----------------------
Michael A. Mooney Title President
COMPANY:
FIDELITY BANK PaSB
By /s/William L. Windisch
----------------------
Title President
9
CORPORATE PROFILE, MISSION AND MISSION STATEMENT
CORPORATE PROFILE
- --------------------------------------------------------------------------------
FIDELITY BANCORP, INC. (the Company) is a bank holding company organized
under the Pennsylvania Business Corporation Law. It was organized to
operate principally as a holding company for its wholly owned subsidiary,
Fidelity Bank (the Bank). The Bank is a Pennsylvania-chartered,
FDIC-insured stock savings bank conducting business through eight offices
located in Allegheny and Butler counties.
MISSION
- --------------------------------------------------------------------------------
FIDELITY BANK will offer its consumer and commercial customers a wide
range of high quality, fairly priced products and services. The Bank will
be sensitive to changing customer needs, and will adapt its products and
services quickly to satisfy the desires of its client base.
MISSION STATEMENT
- --------------------------------------------------------------------------------
The Board of Directors and Management are dedicated to excellence within
community banking, which is best achieved through a commitment to:
maximizing stockholder value, thereby assuring the financial success
of the independent bank franchise
ensuring customer satisfaction by offering quality products and
services that are delivered in an efficient and convenient manner
the employment and retention of a competent and dedicated staff
the communities served by Fidelity Bank.
<PAGE>
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS AND CORPORATE INFORMATION
FINANCIAL HIGHLIGHTS
- -----------------------------------------------------------------------------------------------------------------------------
At or For the
Fiscal Years Ended September 30,
(in thousands, except per share data and percentages) 1998 1997
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Total assets $406,030 $380,964
Total savings deposits 261,735 244,192
Total loans receivable, net 218,892 182,869
Total stockholders' equity 29,021 25,881
- --------------------------------------------------------------------------------------------------------------------------
Net interest income $ 10,683 $ 10,081
Provision for loan losses 405 500
Net income 2,925 2,719
- -----------------------------------------------------------------------------------------------------------------------------
Diluted earnings per share(1) $ 1.44% $ 1.37%
Book value per share(1) 14.67% 13.32%
Average interest rate spread 2.74% 2.99%
Return on average assets .74% .80%
Return on average stockholders' equity 10.64% 11.42%
- -----------------------------------------------------------------------------------------------------------------------------
Common shares outstanding1 1,978,543 1,943,469
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Per share amounts and common shares outstanding were restated to
reflect the 25% stock split paid on March 31, 1998.
[GRAPHIC-CHART DEPICTING RETURN ON EQUITY]
[GRAPHIC-CHART DEPICTING EARNINGS PER SHARE (Diluted)]
[GRAPHIC-CHART DEPICTING STOCK PRICE]
[GRAPHIC-CHART DEPICTING BOOK VALUE PER SHARE]
<PAGE>
TO OUR STOCKHOLDERS
I am pleased to report that 1998 was a year filled with accomplishment and
growth. The year presented many challenges, and one of the most significant was
caused by the substantial decline in interest rates. This decline caused a
narrowing of our net interest margin to 2.93%. Even though the interest margin
narrowed, net earnings reached an all time high of slightly under $3 million, a
growth of approximately 7.6%. In addition to net earnings, we achieved record
highs in several other significant areas. Year end assets exceeded $406 million,
a growth of approximately 6.6%; deposits experienced an approximate growth of 7%
to $262 million; and loans experienced a growth of approximately 20% ending the
year at $219 million. The growth in loans was principally responsible for the
record earnings. In addition to the achievements described above, asset quality
continued to improve throughout 1998. At the end of fiscal 1997, non-performing
loans and real estate owned were .29% of assets. By the end of fiscal 1998, this
ratio had declined to .14%. This means that while the loan portfolio grew by $36
million, non-performing loans and real estate owned declined by $.5 million.
Concurrent with the $36 million in loan growth, the allowance for possible loan
losses to net loans remained above 1.0%, declining slightly from 1.06% at the
end of last year to 1.02% at the end of this year.
[GRAPHIC-CHART DEPICTING NET INCOME]
[GRAPHIC-CHART DEPICTING RETURN ON ASSETS]
[GRAPHIC-CHART DEPICTING NON-PERFORMING ASSETS]
For the 10th consecutive year the Company has paid uninterrupted quarterly cash
dividends. Additionally, a 25% stock split was paid on March 31, 1998. The cash
dividend of $.09 per share was maintained throughout the year, both before and
after the split. This gave an effective cash dividend yield of 2%. Shareholders
are aware that this was a very turbulent year for the stock market. Bank stocks
were directly affected by the turbulence. Our stock opened the fiscal year at a
fraction below 18, reached a high of 28 on May 15, and then declined to 20 at
fiscal year end. These figures are adjusted to reflect the stock split. When
considering both the cash dividend and market appreciation, investors earned an
annualized total return of 12%.
A key focus of the Bank's strategic business plan for a number of years has been
to make the Bank a full financial services provider to our small business
customers, as well as our consumer customers. This year we are able to report
good results in the small business area in both commercial loans and demand
deposits. Commercial loans, including commercial mortgages, and leases increased
to approximately $45 million and now make up slightly more than 19% of total
loans and demand deposits grew approximately 5%. We have also introduced
commercial equipment leasing, which
2
<PAGE>
has had a very positive impact on our earnings. The Bank is now well positioned
to meet all of the financial needs of the small businesses in our market
communities.
[GRAPHIC-CHART DEPICTING ASSETS]
[GRAPHIC-CHART DEPICTING LOANS]
[GRAPHIC-CHART DEPICTING DEPOSITS]
In our continuing effort to further strengthen our commercial presence in the
community, the Bank opened its ninth branch office in the Pittsburgh area
commonly known as the "Strip District" on October 1, 1998. This is a commercial
area largely populated by wholesale and retail food businesses and entertainment
facilities, along with a wide variety of professional, service, distribution and
light manufacturing companies. Unlike our other branches, which principally
serve the local residents in the communities surrounding the branches, this
newest office is targeting the businesses in the area and the employees of those
firms. We view this office as having unlimited opportunities to expand our small
business loan and demand deposit portfolios and are looking forward to meeting
the unique needs of this eclectic community.
Continuing to move toward achieving our goal of becoming a full financial
services provider, the Company recently introduced the Fidelity Impact
Investments and Insurance Services program. We can now offer to our customers
and the general public full brokerage service, asset allocation programs,
retirement plans, and college tuition savings plans, as well as insurance
services including life, disability, fixed and variable annuities and other
insurance alternatives. This program also offers the sale of mutual funds, and
the purchase and sale of stocks and bonds. These services are provided through
Robert Thomas Securities, a subsidiary of Raymond James Financial, Inc., a
member of the National Association of Securities Dealers (NASD). Although this
service has been offered for only several months, customer response has been
very good and we anticipate substantial growth over the coming year.
In order to make our customers' banking experience as easy and efficient as
possible, we are continuing to expand the automated services we offer. We have
implemented an enhanced, user friendly telephone banking system, which is
available to both our consumer and commercial customers. This system allows
customers to inquire into all of their accounts and to transfer funds between
them. Judging from the heavy usage this system gets, customers have affirmed
that the ease and convenience of telephone banking is a service they appreciate.
We have also added two additional ATM's to our network with a third to be placed
in the near future. Now there is an ATM located in all of our branches except in
the Northway branch. The Bank has had an internet site for several years. It is
presently being redesigned and will be completed in the near future. One of the
goals to be accomplished with the new design is to be able to offer internet
banking. A date has not yet been established for the introduction of this
service.
A new marketing tool, a Marketing Central Information File, has recently been
installed to enhance our ability to do targeted marketing. Once all
3
<PAGE>
current data is input into this file, we will have the capability to better
analyze our current customer base and offer the types of specific accounts and
services that are pertinent to each customer on an individual basis. We expect
this new marketing approach to be effective in elevating the level of service we
provide to existing customers and in promoting the development of new customers.
The approach of the year 2000 poses a potential problem to businesses in regards
to computer readiness. To become Year 2000 (Y2K) ready means simply that all
hardware, software, processing systems, and vendors utilized by the Bank in its
operations are able to correctly process without error all calculations in
relation to dates in and after the year 2000. In May of 1997 we formed a
committee to identify all areas of concern and develop a Strategic Plan to
insure that the Bank computers will be ready. The Federal Deposit Insurance
Corporation (FDIC), our Federal bank regulator, has been consulting with us as
we work toward our goal. The Plan was broken down into five areas of
concentration: awareness, assessment, renovation, validation and implementation.
We have completed the awareness and assessment phases. The renovation and
validation phases are under way. We expect to have these areas completed by
March 31, 1999. We are on schedule towards becoming Year 2000 ready and will
continue to provide periodic progress reports to our shareholders.
[GRAPHIC-CHART DEPICTING STOCKHOLDERS' EQUITY]
[GRAPHIC-CHART DEPICTING OPERATING EXPENSES AS A % OF AVERAGE ASSETS]
Looking back at the past year's accomplishments, I reflect upon the efforts of
the staff. The success we achieved was the result of a total team effort, one in
which every person played an important part. This hard working group of people
is totally dedicated to the accomplishments of the Bank and I salute them for
their loyalty. Additionally, what we accomplished would not have occurred
without the complete and total support of the Board of Directors. I want to
thank both the Board and the staff for making 1998 a successful year. This is a
fine team of people and I sincerely appreciate their efforts.
Each time we close out a fiscal year, we look ahead to the future with positive
anticipation, confident that we will meet the challenges set before us. In this
coming year we expect to continue to be challenged by low interest rates,
competition for loans and deposits, and rapidly changing technology. We will
diligently pursue our ambitious goals, adapt quickly to change and combat
negative conflict with a positive approach, so that one year from now, as we
look back over our accomplishments, we will view our success with satisfaction.
On behalf of the Directors, Officers and staff, I want to thank the shareholders
for their continued support.
Sincerely,
/S/William L. Windisch
- ----------------------
William L. Windisch
President
December 22, 1998
4
<PAGE>
<TABLE>
<CAPTION>
FINANCIAL CONDITION DATA
September 30,
(in thousands) 1998 1997 1996 1995 1994
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Total assets $406,030 $380,964 $317,874 $281,810 $273,564
Loans, net 218,892 182,869 151,263 120,904 112,647
Mortgage-backed securities1 102,870 127,916 93,738 101,511 112,236
Investment securities and
other earning assets2 69,878 58,242 59,302 46,523 37,607
Savings deposits 261,735 244,192 234,276 244,083 228,304
Advances from FHLB
and other borrowings 112,320 108,133 57,143 13,092 22,601
Stockholders' equity
--substantially restricted 29,021 25,881 21,778 22,132 20,646
Number of full service offices 8 8 8 8 8
- -----------------------------------------------------------------------------------------------------------------------------
<CAPTION>
OPERATIONS DATA
- -----------------------------------------------------------------------------------------------------------------------------
Fiscal Years Ended September 30,
1998 1997 1996 1995 1994
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Interest income $28,047 $23,963 $20,986 $19,047 $17,652
Interest expense 17,364 13,882 11,832 11,059 9,435
- -----------------------------------------------------------------------------------------------------------------------------
Net interest income 10,683 10,081 9,154 7,988 8,217
Provision for loan losses 405 500 270 230 360
- -----------------------------------------------------------------------------------------------------------------------------
Net interest income after
provision for loan losses 10,278 9,581 8,884 7,758 7,857
Gain (loss) on sale of investments and
mortgage-backed securities, net 84 53 27 (57) 79
Gain on sale of loans 11 28 17 18 24
Service fees and other income 1,071 801 688 643 524
Operating expenses 7,315 6,488 8,073(3) 6,119 5,617
- -----------------------------------------------------------------------------------------------------------------------------
Income before income tax provisions
and cumulative effect of change
in accounting principle 4,129 3,975 1,543 2,243 2,867
Income tax provision 1,204 1,256 226 728 1,025
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
Net income before cumulative
effect of change in
accounting principle 2,925 2,719 1,317(3) 1,515 1,842
- -----------------------------------------------------------------------------------------------------------------------------
Cumulative effect of change
in accounting principle -- -- -- -- 530
- -----------------------------------------------------------------------------------------------------------------------------
Net income $ 2,925 $ 2,719 $ 1,317(3) $ 1,515 $ 2,372
- -----------------------------------------------------------------------------------------------------------------------------
</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, 1998 and 1997,
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,
1998. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Fidelity Bancorp,
Inc. and subsidiaries as of September 30, 1998 and 1997, and the results of
their operations and their cash flows for each of the years in the three-year
period ended September 30, 1998, in conformity with generally accepted
accounting principles.
/s/KPMG Peat Marwick LLP
- ------------------------
KPMG Peat Marwick LLP
Pittsburgh, Pennsylvania
October 30, 1998
6
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
September 30,
(in thousands, except per share data) 1998 1997
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash and amounts due from depository institutions $ 2,539 $ 3,731
Interest-earning demand deposits with other institutions 613 243
Investment securities held-to-maturity
(market value of $6,750 and $8,598) (Notes 2, 11, 12, 14 and 21) 6,625 8,541
Investment securities available-for-sale
(cost of $56,750 and $43,971) (Notes 3, 12, 14 and 21) 57,590 44,573
Mortgage-backed securities held-to maturity
(market value of $20,155 and $34,042) (Notes 4, 12, 14 and 21) 19,913 34,065
Mortgage-backed securities available-for-sale
(cost of $82,728 and $94,090) (Notes 5, 12, 14 and 21) 82,957 93,851
Loans receivable, net of the allowance of $2,243 and $1,931
(Notes 6, 8, 12 and 21) 218,892 182,869
Real estate owned, net (Note 8) 21 --
Federal Home Loan Bank stock, at cost (Notes 9 and 12) 5,050 4,885
Accrued interest receivable:
Loans 1,122 932
Mortgage-backed securities 606 759
Investments and interest-earning deposits 845 724
Office premises and equipment, net (Note 10) 3,446 3,467
Deferred tax assets (Note 16) 700 852
Prepaid expenses and sundry assets 5,125 1,472
- -----------------------------------------------------------------------------------------------------------------------------
$406,044 $380,964
- -----------------------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Savings deposits (Notes 11 and 21) $261,735 $244,192
Federal Home Loan Bank advances (Notes 12 and 21) 100,200 96,700
Guaranteed preferred beneficial interest in Company's debentures (Note 13) 10,250 10,250
Reverse repurchase agreements (Notes 14 and 21) 1,870 1,183
Advance payments by borrowers for taxes and insurance 1,126 1,097
Accrued interest on savings and other deposits 92 159
Accrued income taxes (Note 16) 171 204
Other accrued expenses and sundry liabilities 1,579 1,298
- -----------------------------------------------------------------------------------------------------------------------------
377,023 355,083
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
Stockholders' Equity (Notes 1, 16, 17, and 18):
Common stock, $0.01 par value per share;
10,000,000 shares authorized; 1,978,543 and
1,943,469 shares issued and outstanding 20 15
Additional paid-in capital 14,168 13,811
Retained earnings-- substantially restricted 14,106 11,822
Unrealized gain on securities available-for-sale, net 727 233
- -----------------------------------------------------------------------------------------------------------------------------
29,021 25,881
- -----------------------------------------------------------------------------------------------------------------------------
$406,044 $380,964
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
See Accompanying Notes to Consolidated Financial Statements.
7
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF INCOME
For the fiscal years ended September 30, 1998, 1997 and 1996
(in thousands, except per share data) 1998 1997 1996
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest income:
Loans $16,597 $13,634 $11,482
Mortgage-backed securities 7,597 6,964 6,120
Investment securities 3,779 3,354 3,360
Deposits with other institutions 74 11 24
- --------------------------------------------------------------------------------------------------------------------------
Total interest income 28,047 23,963 20,986
- --------------------------------------------------------------------------------------------------------------------------
Interest expense:
Savings deposits (Note 11) 10,940 9,566 10,071
Borrowed funds 5,400 3,924 1,761
Guaranteed preferred beneficial interest
in Company's debentures (Note 13) 1,024 392 --
- --------------------------------------------------------------------------------------------------------------------------
Total interest expense 17,364 13,882 11,832
- --------------------------------------------------------------------------------------------------------------------------
Net interest income before provision for loan losses 10,683 10,081 9,154
Provision for loan losses (Note 8) 405 500 270
- --------------------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 10,278 9,581 8,884
- --------------------------------------------------------------------------------------------------------------------------
Other income:
Service fee income 130 89 75
Gain (loss) on sale of investment and
mortgage-backed securities, net 84 53 27
Gain on sale of loans 11 28 17
Other operating income 941 712 613
- --------------------------------------------------------------------------------------------------------------------------
Total other income 1,166 882 732
- --------------------------------------------------------------------------------------------------------------------------
Operating expenses:
Compensation, payroll taxes and fringe benefits (Notes 18 and 19) 4,291 3,682 3,238
Office occupancy and equipment expense 669 570 564
Depreciation and amortization 516 541 456
Federal insurance premiums 155 112 553
SAIF assessment -- -- 1,537
Loss on real estate owned, net 12 31 91
Intangible amortization -- 44 264
Other operating expenses 1,672 1,508 1,370
- --------------------------------------------------------------------------------------------------------------------------
Total operating expenses 7,315 6,488 8,073
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Income before income tax provision 4,129 3,975 1,543
Income tax provision (Note 16) 1,204 1,256 226
- --------------------------------------------------------------------------------------------------------------------------
Net income $ 2,925 $ 2,719 $ 1,317
- --------------------------------------------------------------------------------------------------------------------------
Basic earnings per share (Note 1) $ 1.49 $ 1.42 $ .70
Diluted earnings per share (Note 1) $ 1.44 $ 1.37 $ .67
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
See Accompanying Notes to Consolidated Financial Statements.
8
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the fiscal years ended September 30, 1998, 1997 and 1996
Unrealized
Gain (Loss)
Additional on Securities
Common Paid-In Retained Available-
(in thousands) Stock Capital Earnings For-Sale Total
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
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) 2 2,172 (2,174) -- --
Net income -- -- 1,317 -- 1,317
Effect of change in accounting for certain
debt and equity securities at date of one-time
reclassification, net of deferred taxes (Note 1) -- -- -- (539) (539)
Net change in unrealized gain (loss)
on securities available-for-sale,
net of taxes -- -- -- (850) (850)
Sale of stock through Dividend
Reinvestment Plan -- 57 -- -- 57
- --------------------------------------------------------------------------------------------------------------------------
Balance at September 30, 1996 14 10,437 12,523 (1,196) 21,778
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
Stock options exercised, including
tax benefit of $71 (Note 18) 1 251 -- -- 252
Cash dividends paid -- -- (641) -- (641)
Stock split paid (Note 1) 4 (4) -- -- --
Net income -- -- 2,925 -- 2,925
Net change in unrealized gain (loss)
on securities available-for-sale,
net of taxes -- -- -- 494 494
Sale of stock through Dividend
Reinvestment Plan -- 110 -- -- 110
- ---------------------------------------------------------------------------------------------------------------------------
Balance at September 30, 1998 $20 $14,168 $14,106 $727 $29,021
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
See Accompanying Notes to Consolidated Financial Statements.
9
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the fiscal years ended September 30, 1998, 1997 and 1996
(in thousands) 1998 1997 1996
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating Activities:
Net income $ 2,925 $ 2,719 $ 1,317
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 405 500 270
Loss on real estate owned 12 31 91
Depreciation of premises and equipment 516 541 456
Deferred loan fee amortization (175) (154) (235)
Amortization of investment and mortgage-backed
securities discounts/premiums, net 397 317 321
Deferred income tax provision 75 (453) (579)
Amortization of intangibles -- 44 264
Net (gain) loss on sale of investments (209) (83) (10)
Net (gain) loss on sale of mortgage-backed securities 125 30 (17)
Loans held-for-sale originated (372) (814) (134)
Sale of loans held-for-sale 374 829 151
Net gain on sale of loans (11) (28) (17)
Increase in interest receivable (158) (272) (241)
(Increase) decrease in deferred tax assets 166 1,074 (1,110)
Decrease in interest payable (67) (18) (81)
Increase (decrease) in accrued taxes (47) 516 (257)
SAIF assessment -- (1,537) 1,537
Tax benefit relating to stock benefit plan 71 98 --
Other changes-- net (3,235) (55) 2,340
- -----------------------------------------------------------------------------------------------------------------------------
Net cash provided (used) by operating activities 792 3,285 4,066
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Investing Activities:
Proceeds from sales of investments available-for-sale 17,345 16,301 5,556
Proceeds from sales of mortgage-backed securities available-for-sale 43,760 8,588 5,505
Proceeds from maturities and principal repayments
of investment securities available-for-sale 5,255 2,480 6,000
Proceeds from maturities and principal repayments
of mortgage-backed securities available-for-sale 19,812 8,130 7,778
Purchases of investment securities available-for-sale (35,168) (11,594) (25,528)
Purchases of mortgage-backed securities available-for-sale (52,578) (47,029) (13,255)
Proceeds from maturities and principal repayments
of investment securities held-to-maturity 14,921 1,487 1,649
Purchases of investment securities held-to-maturity (12,997) (4,625) --
Proceeds from mortgage-backed securities
held-to-maturity principal repayments 13,987 5,162 6,438
Purchases of mortgage-backed securities held-to-maturity -- (8,066) (550)
Principal repayments on first mortgage loans 25,666 16,864 15,247
Principal repayments on other loans 23,599 21,415 16,895
First mortgage loans originated and disbursed (49,537) (34,522) (33,859)
Sale of other loans 709 585 1,042
Other loans originated (37,055) (35,457) (29,813)
Additions to office premises and equipment (512) (978) (341)
Net purchases of FHLB stock (165) (2,059) (1,074)
- -----------------------------------------------------------------------------------------------------------------------------
Net cash provided (used) by investing activities $(22,958) $(64,148) $(38,310)
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
(continued)
10
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS - continued
For the fiscal years ended September 30, 1998, 1997 and 1996
(in thousands) 1998 1997 1996
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Financing Activities:
Net increase (decrease) in savings deposits $ 17,543 $ 9,916 $ (9,807)
Increase (decrease) in reverse repurchase agreements 687 690 (4,049)
FHLB advance repayments (939,321) (1,496,450) (1,299,500)
FHLB advances 942,821 1,536,500 1,347,600
Cash dividends paid (641) (517) (409)
Stock options exercised 181 292 70
Proceeds from sale of stock 110 82 57
Proceeds from guaranteed preferred beneficial interest
in subordinated debt -- 10,250 --
Debt issuance costs (36) (688) --
- -----------------------------------------------------------------------------------------------------------------------------
Net cash provided (used) by financing activities 21,344 60,075 33,962
- -----------------------------------------------------------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents (822) (788) (282)
Cash and cash equivalents at beginning of year 3,974 4,762 5,044
- -----------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 3,152 $ 3,974 $ 4,762
- -----------------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
- -----------------------------------------------------------------------------------------------------------------------------
<CAPTION>
For the fiscal years ended September 30, 1998, 1997 and 1996
(in thousands) 1998 1997 1996
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash paid during the year for:
Interest on deposits and other borrowings $ 17,322 $ 13,433 $ 11,867
Income taxes 1,225 335 1,011
- -----------------------------------------------------------------------------------------------------------------------------
Transfer of investment and mortgage-backed securities
from investment to available-for-sale -- -- 63,240
- -----------------------------------------------------------------------------------------------------------------------------
Transfer of loans to real estate owned $ 21 $ 120 $ 536
- -----------------------------------------------------------------------------------------------------------------------------
</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
<PAGE>
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.
(Note continued)
12
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
Purchases and sales of securities are accounted for on a settlement-date basis
which is not materially different than the use of the trade-date basis. Gains
and losses on the sale of securities are recognized using the specific
identification method.
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
<PAGE>
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.
(Note continued)
13
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
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.
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
In February 1997, the FASB issued SFAS No. 128, "Earnings per Share." FAS No.
128 provides revised reporting standards for earnings per share (EPS) and is
effective for financial statement periods ending after December 15, 1997. SFAS
No. 128 eliminates primary and fully diluted EPS disclosures and adds new
disclosures of basic 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 common stock were exercised or converted into common stock or resulted in
the issuance of common stock that then shared in the earnings of the Company.
The Company adopted SFAS No. 128 as of December 31, 1997 and all prior period
per share amounts have been restated. In addition, all weighted average share
and per share amounts reflect the 25% stock split paid on March 31, 1998, and
the 10% stock dividends paid on May 28, 1997 and May 31, 1996. The following
table sets forth the computation of basic and diluted earnings per share:
(Note continued)
14
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
<TABLE>
<CAPTION>
(dollar amounts in thousands, except per share data)
September 30,
1998 1997 1996
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Basic earnings per share:
Net income $2,925 $2,719 $1,317
Weighted average shares outstanding 1,962,834 1,918,734 1,877,834
Earnings per share $1.49 $1.42 $.70
Diluted earnings per share:
Net income $2,925 $2,719 $1,317
Weighted average shares outstanding 1,962,834 1,918,734 1,877,834
Dilutive effect of employee stock options 66,290 71,170 73,959
Total diluted weighted average shares outstanding 2,029,124 1,989,904 1,951,793
Earnings per share $1.44 $1.37 $.67
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
(2) INVESTMENT SECURITIES HELD-TO-MATURITY
Investment securities held-to-maturity at September 30, 1998 and 1997 are as
follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Market
At September 30, 1998 Cost Gains Losses Value
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. government and agency obligations:
Due within one year $5,000 $31 $ -- $5,031
Municipal obligations:
Due beyond ten years 1,625 94 -- 1,719
- -----------------------------------------------------------------------------------------------------------------------------
$6,625 $125 $ -- $6,750
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
<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
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
At September 30, 1998, the Bank had no outstanding commitments to purchase
investment securities held-to-maturity. Non-taxable interest income was $91, $26
and $48 in fiscal 1998, 1997 and 1996, respectively. There were no sales of
investment securities held-to-maturity in 1998, 1997 or 1996.
15
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
(dollar amounts in thousands, except per share data)
(3) INVESTMENT SECURITIES AVAILABLE-FOR-SALE
Investment securities available-for-sale at September 30, 1998 and 1997 are as
follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Market
At September 30, 1998 Cost Gains Losses Value
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. government and agency obligations:
Due within one year $ 6,499 $ 32 $ -- $ 6,531
Due beyond one year, but within five years 4,507 48 -- 4,555
Due beyond five years, but within ten years 8,504 120 -- 8,624
Due beyond ten years 3,999 40 -- 4,039
Municipal obligations:
Due beyond ten years 28,814 894 -- 29,708
Equity securities 1,580 -- (259) 1,321
Mutual funds 1,847 -- (54) 1,793
Trust preferred securities
Due beyond ten years 500 -- (12) 488
Federal Home Loan Mortgage Corp.
Preferred Stock 500 31 -- 531
- ----------------------------------------------------------------------------------------------------------------------------
$56,750 $1,165 $(325) $57,590
- -----------------------------------------------------------------------------------------------------------------------------
<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
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
At September 30, 1998, the Bank had no outstanding commitments to purchase
investment securities available-for-sale. Non-taxable interest income was
$1,138, $906 and $1,140 in fiscal 1998, 1997 and 1996, respectively. Proceeds
from sales of investment securities available-for-sale were $17.3 million, $16.3
million and $5.6 million in 1998, 1997 and 1996, respectively. Gross gains of
$218, $170, and $33 and gross losses of $9, $87, and $23 were realized on these
sales in 1998, 1997 and 1996, respectively.
16
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
(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, 1998 Cost Gains Losses Value
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Government National Mortgage Association:
Contractually due beyond one year, but within five years $ 28 $ 1 $ -- $ 29
Federal Home Loan Mortgage Corporation:
Contractually due beyond one year, but within five years 339 -- (3) 336
Contractually due beyond five years, but within ten years 7,551 93 -- 7,644
Contractually due beyond ten years 3,209 48 -- 3,257
Federal National Mortgage Association:
Contractually due beyond five years, but within ten years 2,396 8 (5) 2,399
Contractually due beyond ten years 4,853 107 -- 4,960
AA Rated Mortgage Certificates:
Contractually due beyond ten years 1,455 -- (12) 1,443
Collateralized Mortgage Obligations:
Contractually due beyond one year, but within five years 82 5 -- 87
- -----------------------------------------------------------------------------------------------------------------------------
$19,913 $ 262 $(20) $20,155
- -----------------------------------------------------------------------------------------------------------------------------
<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
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
At September 30, 1998, 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 1998, 1997, or
1996.
17
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
(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, 1998 Cost Gains Losses Value
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Government National Mortgage Association:
Contractually due beyond ten years $22,823 $259 $ (58) $23,024
Federal Home Loan Mortgage Corporation:
Contractually due beyond ten years 7,101 63 -- 7,164
Federal National Mortgage Association:
Contractually due beyond five years, but within ten years 4,541 -- (17) 4,524
Contractually due beyond ten years 4,074 7 (7) 4,074
Collateralized Mortgage Obligations:
Contractually due beyond five years, but within ten years 5,208 2 -- 5,210
Contractually due beyond ten years 38,981 108 (128) 38,961
- -----------------------------------------------------------------------------------------------------------------------------
$82,728 $439 $(210) $82,957
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
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
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
At September 30, 1998, the Bank had outstanding commitments to purchase $5.0
million of mortgage-backed securities available-for-sale. Proceeds from sales of
mortgage-backed securities available-for-sale during 1998, 1997 and 1996 were
$43.8 million, $8.6 million and $5.5 million, respectively. Gross gains of $160,
$34, and $29, and gross losses of $285, $64, and $12 were realized on these
sales in 1998, 1997 and 1996, respectively.
18
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
(dollar amounts in thousands, except per share data)
(6) LOANS RECEIVABLE
Loans receivable, net are summarized as follows:
<TABLE>
<CAPTION>
September 30,
1998 1997
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
First mortgage loans:
Conventional:
1-4 family dwellings $115,559 $ 97,698
Multi-family dwellings 4,262 4,165
Commercial 21,881 19,976
Construction 21,212 7,614
- -----------------------------------------------------------------------------------------------------------------------------
162,914 129,453
- -----------------------------------------------------------------------------------------------------------------------------
Less:
Loans in process (12,916) (3,695)
Unearned discounts and fees (1,142) (912)
- -----------------------------------------------------------------------------------------------------------------------------
148,856 124,846
- -----------------------------------------------------------------------------------------------------------------------------
Installment loans:
Home equity 42,290 37,271
Mobile home loans 13 68
Consumer loans 2,359 2,579
Other 4,460 3,163
- -----------------------------------------------------------------------------------------------------------------------------
49,122 43,081
- -----------------------------------------------------------------------------------------------------------------------------
Commercial business loans and leases:
Commercial business loans 19,509 16,325
Commercial leases 3,648 548
- -----------------------------------------------------------------------------------------------------------------------------
23,157 16,873
- -----------------------------------------------------------------------------------------------------------------------------
Less: Allowance for possible loan losses (2,243) (1,931)
- -----------------------------------------------------------------------------------------------------------------------------
Loans receivable, net $218,892 $182,869
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
Commitments to originate loans at September 30, 1998 were approximately as
follows:
<TABLE>
<CAPTION>
Rate Amount
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
First mortgage loans:
Fixed-rate 6.00% to 8.00% $1,166
Other loans:
Fixed-rate 7.49% to 13.75% 488
Adjustable-rate 6.375% to 13.75% 1,686
- -----------------------------------------------------------------------------------------------------------------------------
$3,340
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
(7) LOAN SERVICING PORTFOLIO
The amount of loans serviced for others, which are not reflected in the
accompanying consolidated financial statements, was $6,119, $5,317, and $6,471
at September 30, 1998, 1997 and 1996, respectively.
19
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
(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, 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
Provision for loan losses 115 120 170 405
Charge-offs (2) (98) (10) (110)
Recoveries -- 11 6 17
- -----------------------------------------------------------------------------------------------------------------------------
Balance at September 30, 1998 $ 1,012 $ 478 $ 753 $ 2,243
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
Non-accrual loans were approximately $.6 million, $1.1 million and $1.2 million
at September 30, 1998, 1997 and 1996, respectively. The foregone interest on
those loans for the periods ended September 30, 1998, 1997 and 1996, was $25,
$108 and $61, respectively. The amount of interest income on such loans actually
included in income in the periods ending September 30, 1998, 1997 and 1996 was
$30, $12 and $58, 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 $275 and $753 at September 30, 1998 and 1997, respectively. Included
in the 1998 amount is $275 of impaired loans for which the related allowance for
credit losses is $93 and no impaired loans that as a result of write-downs do
not have an allowance for credit losses. Included in the 1997 amount is $753 of
impaired loans for which the related allowance for credit losses was $66 and no
impaired loans that as a result of write-downs did not have an allowance for
credit losses. The average recorded investment in impaired loans during the
fiscal years ended September 30, 1998, 1997 and 1996 was approximately $205,
$722, and $281, respectively. For the fiscal years ended September 30, 1998,
1997, and 1996, the Company recognized interest income on those impaired loans
of $17, $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,
1998 1997 1996
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Beginning of period balance -- $102 $ 8
Provisions -- -- 102
Write-off -- (102) (8)
- -----------------------------------------------------------------------------------------------------------------------------
End of period balance -- $ -- $102
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
(Note continued)
20
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
(dollar amounts in thousands, except per share data)
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.
(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, 1998 and 1997 are summarized as
follows:
<TABLE>
<CAPTION>
1998 1997
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Land $ 309 $ 309
Office buildings 3,107 3,094
Furniture, fixtures and equipment 3,178 3,218
Leasehold improvements 174 148
- -----------------------------------------------------------------------------------------------------------------------------
6,768 6,769
- -----------------------------------------------------------------------------------------------------------------------------
Less accumulated depreciation and amortization (3,322) (3,302)
- -----------------------------------------------------------------------------------------------------------------------------
Office premises and equipment, net $ 3,446 $ 3,467
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
The Bank has operating leases with respect to one records storage facility, four
branch offices, and the Bank's Loan Center, which expire on various dates
through fiscal 2008. Lease expense amounted to $157, $83, and $83 in fiscal
years 1998, 1997 and 1996, respectively. Minimum annual lease commitments are
approximately as follows:
Years Ended September 30 Amount
- --------------------------------------------------------------------------------
1999 $219
2000 $193
2001 $177
2002 $177
2003 $177
Thereafter $793
21
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
(dollar amounts in thousands, except per share data)
(11) SAVINGS DEPOSITS
Savings deposit balances at September 30, 1998 and 1997 are summarized as
follows:
<TABLE>
<CAPTION>
September 30,
Stated Rates 1998 1997
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance by type:
Savings Deposits:
Demand deposits noninterest-bearing $ 9,865 $ 9,389
NOW accounts 1.50% in 1998 and 1.50% in 1997 26,981 24,452
Passbooks 2.50% in 1998 and 2.50% in 1997 47,423 47,514
Money market
deposit accounts 2.98% in 1998 and 2.98% in 1997 14,949 15,417
- -----------------------------------------------------------------------------------------------------------------------------
99,218 96,772
- -----------------------------------------------------------------------------------------------------------------------------
<CAPTION>
<S> <C> <C> <C>
Time Deposits:
Fixed-rate 1.00% to 2.99% 34 0
3.00% to 4.99% 32,469 26,663
5.00% to 6.99% 120,299 108,076
7.00% to 8.99% 5,494 6,689
9.00% to 10.99% 68 103
Negotiated-rate 5.00% to 8.30% 4,153 5,889
- -----------------------------------------------------------------------------------------------------------------------------
162,517 147,420
- -----------------------------------------------------------------------------------------------------------------------------
$261,735 $244,192
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
The weighted-average interest rate for all deposits was 4.25% and 4.23% at
September 30, 1998 and 1997, respectively. Deposits with balances of $100 or
more totalled $4.1 million at September 30, 1998.
At September 30, 1998, investment securities with a carrying value of $2.0
million were pledged as required to secure deposits of public funds.
<PAGE>
The maturities of time deposits at September 30, 1998 and 1997 are summarized as
follows:
<TABLE>
<CAPTION>
September 30,
1998 1997
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Within one year $106,115 $ 76,721
Beyond one year but within two years 26,959 40,434
Beyond two years but within three years 9,847 9,388
Beyond three years 19,596 20,877
- -----------------------------------------------------------------------------------------------------------------------------
$162,517 $147,420
- -----------------------------------------------------------------------------------------------------------------------------
<CAPTION>
Interest expense by deposit category is as follows: Years Ended September 30,
1998 1997 1996
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NOW accounts $ 380 $ 345 $ 332
Passbooks 1,193 1,262 1,366
Money market deposit accounts 419 445 478
Time deposits 8,948 7,514 7,895
- -----------------------------------------------------------------------------------------------------------------------------
$10,940 $9,566 $10,071
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
22
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
(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 1998 1997
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Due Date
RepoPlus Advance 6.50% $5,200 $43,400
October 29, 1997 4.60% -- 300
February 26, 1998 5.14% -- 3,000
Convertible Select Advances:
February 14, 2002 5.29% -- 10,000
February 14, 2002 5.48% 10,000 10,000
March 19, 2002 6.08% 10,000 10,000
June 6, 2002 6.13% 5,000 5,000
June 20, 2002 6.20% 5,000 5,000
July 11, 2002 5.60% 10,000 10,000
October 3, 2002 5.42% 10,000 --
November 18, 2002 5.32% 10,000 --
January 6, 2003 5.58% 10,000 --
September 15, 2003 4.78% 5,000 --
April 25, 2005 5.55% 5,000 --
February 20, 2008 5.48% 10,000 --
June 2, 2008 5.17% 5,000 --
- -----------------------------------------------------------------------------------------------------------------------------
Total FHLB Advances $100,200 $96,700
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
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 $21.2 million, and expires on March 25, 1999. 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, 1999. This line of credit was not used
in fiscal 1997 or 1998.
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 1998 and 1997,
ranging individually from $50 to $16.2 million, and from $50 to $17.1 million,
<PAGE>
respectively. The daily average balance during 1998 and 1997 was $18.1 and $39.2
million, respectively, and the daily average interest rate was 5.75% and 5.53%,
respectively, with an average interest rate at fiscal year-end 1998 of 6.50% and
fiscal year-end 1997 of 5.79%. The maximum amount outstanding at any month-end
during 1998 and 1997 was $34.1 and $52.4 million, respectively.
FHLB "Convertible Select" Advances are long-term borrowings with terms of up to
ten years, and which have a fixed rate for the first three months to five 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
1998, with individual advances ranging $5 to $10 million. The daily average
balance during 1998 was $77.4 million, and the daily average interest rate was
5.64%, with an average interest rate at year end of 5.54%. The maximum amount
outstanding at any month end during 1998 was $95 million.
23
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
(dollar amounts in thousands, except per share data)
(13) GUARANTEED PREFERRED BENEFICIAL INTEREST IN COMPANY'S DEBENTURES
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. On January 29,
1998, the Company received notification from the Division exempting the Trust
from the reporting requirements.
(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.
<PAGE>
At September 30, 1998, these agreements had a weighted-average interest rate of
4.50% and mature within one month. Short-term borrowings under repurchase
agreements averaged $1.8 million and $873 during 1998 and 1997, respectively.
The maximum amount outstanding at any month-end during 1998 was $2.4 million. At
September 30, 1998, short-term borrowings under agreements to repurchase
securities sold are summarized as follows:
<TABLE>
<CAPTION>
Collateral
- -----------------------------------------------------------------------------------------------------------------------------
Weighted U.S. Government &
Repurchase Average Federal Agency Obligations
- -----------------------------------------------------------------------------------------------------------------------------
Liability Interest Rate Book Value Market Value
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Within 30 days $1,870 4.50% $3,499 $3,537
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
24
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
(dollar amounts in thousands, except per share data)
(15) FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
At September 30, 1998, the Bank had outstanding commitments to originate loans
of $3.3 million and an outstanding commitment to purchase $5.0 million of
when-issued mortgage-backed securities available-for-sale.
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, 1998 and 1997 was $16.9 million and $11.5 million,
respectively, for consumer lines of credit and $9.0 million and $2.6 million,
respectively, for commercial lines of credit. The interest rate for the consumer
lines of credit range from 8.50% to 18.00%, 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, 1998 and 1997 was $519 and $208,
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, 1998, 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, 1998, except for the
commitments referenced above.
<PAGE>
(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,
1998 1997 1996
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Current
Federal $ 984 $ 535 $ 689
State 295 268 55
- -----------------------------------------------------------------------------------------------------------------------------
Total current 1,279 803 744
- -----------------------------------------------------------------------------------------------------------------------------
Deferred federal (75) 453 (518)
- -----------------------------------------------------------------------------------------------------------------------------
Total $1,204 $1,256 $ 226
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
(Note continued)
25
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
(dollar amounts in thousands, except per share data)
Total income tax provision for the years ended September 30, 1998, 1997 and 1996
was allocated as follows:
<TABLE>
<CAPTION>
1998 1997 1996
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Income $1,204 $1,256 $226
Stockholders' equity:
Unrealized gains (losses) on investment securities 227 621 (592)
Compensation expense for tax purposes in excess of amounts
recognized for financial statement purposes (71) (98) --
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
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,
1998 1997 1996
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Expected federal tax rate 34.0% 34.0% 34.0%
Tax free interest (8.6) (6.7) (21.3)
State income tax, net of federal tax benefit 4.7 4.5 2.4
Other items, net (0.9) (0.2) (0.5)
- -----------------------------------------------------------------------------------------------------------------------------
Actual tax rate incurred 29.2% 31.6% 14.6%
- -----------------------------------------------------------------------------------------------------------------------------
</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, 1998
and 1997 are presented below:
<TABLE>
<CAPTION>
1998 1997
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets (liabilities):
Deferred loan fees $105 $158
Fixed assets (24) (53)
Loan loss reserves 692 586
Intangible assets 242 276
Investment securities (342) (115)
Other (net) 27 --
- -----------------------------------------------------------------------------------------------------------------------------
$700 $852
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
The Bank has determined that it is not required to establish a valuation
allowance for deferred tax assets in accordance with SFASNo. 109 since it is
more likely than not that the deferred tax assets 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, 1998, 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.
(Note continued)
26
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
(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 ceratin mandatory -- and possibly additional discretionary -- actions
by regulators that, if undertaken, could have a direct material effet 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 1 capital (as defined in the regulations) to risk-weighted
assets (as defined) and of Tier I capital (as defined) to average assets (as
defined). Managemenet believes, as of September 30, 1998, that the Bank meets
all capital adequacy requirements to which it is subject.
As of September 30, 1998, 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, 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.
The Federal Reserve Board (FRB) measures capital adequacy for bank holding
companies on the basis of a risk-based capital framework and a leverage ratio.
The minimum ratio of total risk-based capital to risk-weighted assets is 8%. At
least half of the total capital must be common stockholders' equity (not
inclusive of net unrealized gains and losses on available-for-sale debt
securities and net unrealized gainls on available-for-sale equity securities)
and perpetual preferred stock, less good-will and other nonqualifying intangible
assets ("Tier I Capital"). The remained (i.e. the "Tier II risk-based capital")
may consist of hybrid capital instruments, perpetual debt, term subordinated
debt, other preferred stock and a limited amount of the allowance for loan
losses. At September 30,l 1998, the Company had Tier I capital as a percentage
of risk-weighted assets of 16.17% and total risk-based capital as a percentage
of risk-weighted assets of 17.52%(4)
In addition, the Federal Reserve Board has established minimum leverage ration
guidelilnes for bank holding companies. These guidelilnes currently provide for
a minimum ratio of Tier I capital as a percentage of average total assets (the
"Leverage Ratio") of 3% for bank holding companies that meet certain criteria,
including that they maintain the highest regulatory rating. The minimum leverage
ratio for all other bank holding companies is 4%. At September 30, 1998, the
Company had a Leverage Ratio of 9.35%.(4).
<PAGE>
A reconciliation of Stockholders' Equity to Regulatory Capital is as follows:
Total Stockholders' equity as September 30, 1998 (1) $29,021
Less: Unrealized securities gains (net) (927)
Plus: Qualifying preferred securites (2) 9,365
- -----------------------------------------------------------------
Tier I Capital at September 30, 1998 37,459
Plus: Qualifying loan loss allowance(3) 2,243
Remaining preferred securities(2) 885
- -----------------------------------------------------------------
Total capital at September 30, 1998 $40,587
- -----------------------------------------------------------------
(1) Represents consolidated equity capital of the Company as reported to the FRB
on form FR Y-9C for the quarter ended September 30, 1998.
(2) Amount included in Tier I capital is limited to 25% of total Tier I capital;
the remaining balance is allowabel as Tier II capital.
(3) Limited to 1.l25% of risk adjusted assets.
(4) The leverage ration is Tier I capital as a percentage of adjusted total
assets of $400,562 at September 30, 1998. Tier I and Tier II risk-based capital
is calculated as a percentage of risk-weighted assets of #231,601 as of
September 30, 1998.
(Note continued)
27
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
(dollar amounts in thousands, except per share data)
The following table sets forth certain information concerning the Bank's
regulatory capital at September 30, 1998 and 1997.
<TABLE>
<CAPTION>
September 30, 1998 September 30, 1997
Tier I Tier II Tier I Tier II
Tier I Risk- Risk- Tier I Risk- Risk-
Core Based Based Core Based Based
Capital Capital Capital Capital Capital Capital
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Equity Capital(1) $27,325 $27,325 $27,325 $32,648 $32,648 $32,648
Unrealized securities (gains) losses (887) (887) (887) (229) (229) (229)
Less intangible assets -- -- -- -- -- --
Plus general valuation allowances(2) -- -- 2,243 -- -- 1,931
- -----------------------------------------------------------------------------------------------------------------------------
Total regulatory capital 26,438 26,438 28,681 32,419 32,419 34,350
Minimum required capital 15,617 9,034 18,068 14,795 7,419 14,838
- -----------------------------------------------------------------------------------------------------------------------------
Excess regulatory capital 10,821 17,404 10,613 17,624 25,000 19,512
- -----------------------------------------------------------------------------------------------------------------------------
Minimum required capital to be
well capitalized under Prompt
Corrective Action Provisions $19,521 $13,551 $22,585 $18,494 $11,129 $18,548
- -----------------------------------------------------------------------------------------------------------------------------
Regulatory capital as a percentage(3) 6.77% 11.71% 12.70% 8.76% 17.48% 18.52%
Minimum required capital percentage 4.00% 4.00% 8.00% 4.00% 4.00% 8.00%
- -----------------------------------------------------------------------------------------------------------------------------
Excess regulatory capital percentage 2.77% 7.71% 4.70% 4.76% 13.48% 10.52%
- -----------------------------------------------------------------------------------------------------------------------------
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, 1998.
(2) Limited to 1.25% of risk adjusted assets.
(3) Tier I capital is calculated as a percentage of adjusted total average
assets of $390,428 and $369,876 at September 30, 1998 and 1997, respectively.
Tier I and Tier II risk-based capital are calculated as a percentage of adjusted
risk-weighted assets of $225,845 and $185,477 at September 30, 1998 and 1997,
respectively.
<PAGE>
(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,
1998, there were no remaining shares available for granting as determined by the
Program Administrators.
(Note continued)
28
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
(dollar amounts in thousands, except per share data)
The Company has also adopted the 1993 Employee Stock Compensation Program ("1993
Employee Program"), the 1997 Employee Stock Compensation Program ("1997 Employee
Program") and the 1993 Directors' Stock Option Plan ("Directors' Plan"). Under
the 1993 Employee Program and the 1997 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. 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 1,890 shares of common stock
exercisable at a price equal to the fair market value on the date of the grant.
Options granted under the 1993 Employee Program, 1997 Employee Program and
Directors' Plan will expire no later than 10, 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 25% stock split paid in
March 1998, the 10% stock dividends paid in May 1997 and May 1996 and all
previous stock dividends.
<TABLE>
<CAPTION>
Average 1993 Average 1993 Average 1997 Average
1988 Exercise Employee Exercise Directors' Exercise Employee Exercise
Program Price Program Price Plan Price Program Price
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
September 30, 1995 67,827 $ 5.66 25,150 $9.26 12,500 $10.25 $-- $--
Granted -- -- 16,920 10.91 6,250 10.91 -- --
Exercised (9,803) 4.78 (177) 9.26 -- -- -- --
Forfeited (392) 10.70 (1,029) 10.34 -- -- -- --
10% stock dividend 6,126 5.82 4,147 9.92 1,875 10.47 -- --
- -----------------------------------------------------------------------------------------------------------------------------
September 30, 1996 63,758 5.78 45,011 9.91 20,625 10.47 -- --
Granted -- -- 21,690 14.54 8,250 14.54 -- --
Exercised (27,880) 4.10 (3,902) 9.58 (5,600) 11.54 -- --
Forfeited (34) 9.82 (1,620) 11.73 -- -- -- --
10% stock dividend 4,236 6.68 6,289 11.71 2,319 11.65 -- --
- -----------------------------------------------------------------------------------------------------------------------------
September 30, 1997 40,080 7.05 67,468 11.53 25,594 11.65 -- --
Granted -- -- -- -- 7,560 23.20 22,820 23.20
Exercised (18,730) 4.29 (7,255) 10.52 (100) 14.54 -- --
Forfeited -- -- (2,873) 13.01 -- -- (1,179) 23.20
25% stock split 6,551 8.43 15,539 11.49 8,263 14.29 5,622 23.20
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
September 30, 1998 27,901 $19.22 72,879 $11.56 41,317 $14.29 27,263 23.20
- -----------------------------------------------------------------------------------------------------------------------------
Average contractual
life remaining in years 4.53 7.22 4.39 9.26
Option price
per share $3.08-$11.24 $9.26-$14.54 $9.26-23.20 23.20
Options available
for granting at
September 30, 1998 -- -- 11,346 166,487
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
At September 30, 1998, 1997 and 1996, 148,560, 125,727 and 122,418 shares were
immediately exercisable at average prices of $12.67, $9.14 and $7.25,
respectively.
(Note continued)
29
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
(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 9/30/98 Contractual Life Exercise Price at 9/30/98 Exercise Price
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$3.08 to $4.64 2,678 1.61 years $ 3.98 2,678 $ 3.98
$5.74 to $9.26 45,311 5.34 8.82 45,311 5.34
$10.91 to $14.54 84,658 6.24 12.53 79,804 12.41
$23.20 36,713 7.89 23.20 20,767 23.20
- -----------------------------------------------------------------------------------------------------------------------------
169,360 6.22 $13.71 148,560 $12.67
- -----------------------------------------------------------------------------------------------------------------------------
</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,
1998 1997 1996
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income
As reported $2,925 $2,719 $1,317
Pro Forma 2,751 2,643 1,277
- -----------------------------------------------------------------------------------------------------------------------------
Basic earnings per share
As reported $ 1.49 $ 1.42 $ .70
Pro Forma $ 1.40 1.38 .68
Diluted earnings per share
As reported $ 1.44 1.37 .67
Pro Forma $ 1.35 1.33 .65
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
Using a Black-Scholes option valuation model, the weighted-average fair value of
options granted during fiscal 1998 under the 1997 Employee Program was $8.31 and
during fiscal 1997 and 1996 under the 1993 Employee Program was $3.89 and $2.62,
respectively. The fair value of options granted under the 1993 Directors' Plan
during fiscal 1998, 1997 and 1996 was $8.11, $3.69 and $2.61, respectively.
(Note continued)
30
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
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 1998 for the 1997 Employee Program: risk-free interest rate of
5.72%; dividend yield of 2.30%; volatility factor of the expected market price
of the Company's common stock of 23.8%; 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 Employee Program were used: 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 1998, 1997 and 1996, respectively, for the 1993
Directors' Plan were used: risk-free interest rates of 5.71%, 6.21% and 5.38%;
dividend yields of 2.04%, 2.53% and 2.97%; volatility factors of the expected
market price of the Company's common stock of 23.4%, 23.3% and 25.6; and a
weighted-average expected life of the options of 6.2, 5.4 and 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.
(19) EMPLOYEE BENEFIT PLANS
POST-RETIREMENT BENEFITS PLAN
During 1998, the Bank established a non-qualified Salary Continuation Plan
covering certain officers of the Bank. The Plan is unfunded and provides
benefits to participants based upon amounts stipulated in the Plan agreements
for a period of 15 years from normal retirement, as defined in the respective
Plan agreements. Participants vest in benefits based upon years of service from
Plan initiation to normal retirement age. Expense is being accrued based on the
present value of future benefits which the participant is vested in. Expense
recognized under the Plan for 1998 was approximately $78,000.
The Bank has entered into life insurance policies designed to offset the Bank's
contractual obligation to pay preretirement death benefits and to recover the
cost of providing benefits. Participants in the Plan are the insured under the
policy, and the Bank is the owner and beneficiary.
GROUP TERM REPLACEMENT PLAN
The Bank has purchased life insurance policies on the lives of certain officers
of the Bank. By way of separate split dollar agreements, the policy interest is
divided between the Bank and the officer. The Bank owns the policy cash
surrender value, including accumulated policy earnings, and the policy death
benefits over and above the cash surrender value are endorsed to the employee
and beneficiary. Death benefit payments are the obligation of the insurance
company. The Bank has no benefit obligation to the officer, accordingly, no
expense is accrued as a result of the Plan. Income recognized in 1998 as a
result of increased cash surrender value was approximately $42,000.
31
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
(dollar amounts in thousands, except per share data)
(20) 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 1998:
Interest income $6,996 $6,855 $7,089 $7,107
Interest expense 4,311 4,301 4,373 4,379
- -----------------------------------------------------------------------------------------------------------------------------
Net interest income before provision for loan losses 2,685 2,554 2,716 2,728
Provision for loan losses 115 110 90 90
Other income 219 307 315 325
Operating expenses 1,762 1,751 1,857 1,945
- -----------------------------------------------------------------------------------------------------------------------------
Income before income taxes 1,027 1,000 1,084 1,018
Income tax provision 359 335 349 161
- -----------------------------------------------------------------------------------------------------------------------------
Net income $ 668 $ 665 $ 735 $ 857
- -----------------------------------------------------------------------------------------------------------------------------
Basic earnings per share $ .34 $ .34 $ .38 $ .43
Diluted earnings per share $ .33 $ .33 $ .36 $ .42
- -----------------------------------------------------------------------------------------------------------------------------
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
- -----------------------------------------------------------------------------------------------------------------------------
Basic earnings per share $ .33 $ .33 $ .34 $ .42
Diluted earnings per share $ .32 $ .32 $ .33 $ .40
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
(21) 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, 1998 and 1997.
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.
(Note continued)
32
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
(dollar amounts in thousands, except per share data)
At September 30, 1998, the estimated fair value of investment securities
exceeded the net carrying value by $125. At September 30, 1997, the net carrying
value of investment securities exceeded the estimated fair value by
approximately $57. The estimated fair value of mortgage-backed securities at
September 30, 1998, exceeded the net carrying value by $242. The net carrying
value of mortgage-backed securities at September 30, 1997, exceeded the
estimated fair value by $23. 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, 1998 and 1997 by approximately $1.8 million and $2.5 million, respectively.
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, 1998 and 1997
was equal to the carrying value of the commitments on those dates.
The carrying amounts and estimated fair values of deposits at September 30, 1998
and September 30, 1997 are as follows:
<TABLE>
<CAPTION>
September 30, 1998 September 30, 1997
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Noninterest-bearing:
Demand accounts $ 9,865 $ 9,865 $ 9,389 $ 9,389
Interest-bearing:
NOW and MMDA accounts 41,930 41,930 39,869 39,869
Passbook accounts 47,423 47,423 47,514 47,514
Time deposits 162,517 164,893 147,420 148,112
- -----------------------------------------------------------------------------------------------------------------------------
Total Deposits $261,735 $264,111 $244,192 $244,884
- -----------------------------------------------------------------------------------------------------------------------------
</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.
<PAGE>
The carrying amounts and estimated fair values of advances and other borrowings
at September 30, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
September 30, 1998 September 30, 1997
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Advances and other borrowings $112,320 $115,738 $108,133 $108,087
- -----------------------------------------------------------------------------------------------------------------------------
</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.
33
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
(dollar amounts in thousands, except per share data)
(22) 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,
1998 1997
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Cash in subsidiary bank $ 1,674 $ 615
Investment in subsidiary bank 26,465 32,648
Investment in subsidiary trust 309 320
Investment securities available-for-sale 7,979 1,194
Mortgage-backed securities available-for-sale 1,413 --
Loan receivable from bank subsidiary -- 1,167
Other assets 1,818 739
- -----------------------------------------------------------------------------------------------------------------------------
Total Assets $39,658 $36,683
- -----------------------------------------------------------------------------------------------------------------------------
Liabilities
Subordinated debentures 10,567 10,567
Other liabilities 70 235
- -----------------------------------------------------------------------------------------------------------------------------
Total Liabilities 10,637 10,802
- -----------------------------------------------------------------------------------------------------------------------------
Stockholders' Equity
Common stock ($.01 par value, 10,000,000 shares authorized;
1,978,543 and 1,943,469 shares issued and outstanding) 20 15
Additional paid-in capital 14,168 13,811
Retained earnings 14,106 11,822
Unrealized gain (loss) on securities available-for-sale, net 727 233
- -----------------------------------------------------------------------------------------------------------------------------
Total Stockholders' Equity 29,021 25,881
- -----------------------------------------------------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity $39,658 $36,683
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CONDENSED STATEMENTS OF INCOME
September 30,
1998 1997 1996
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Equity in undistributed earnings of subsidiaries $2,117 $2,400 $ 310
Dividends received from subsidiary 1,167 520 1,010
Interest income 577 96 36
Interest expense (1,055) (403) --
Other income 74 36 --
Other expenses (32) (42) $(40)
Income tax provision (benefit) (77) (112) $(1)
- -----------------------------------------------------------------------------------------------------------------------------
Net Income $2,925 $2,719 $1,317
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
(Note continued)
34
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
(dollar amounts in thousands, except per share data)
<TABLE>
<CAPTION>
CONDENSED STATEMENTS OF CASH FLOWS
September 30,
1998 1997 1996
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating Activities
Net income $2,925 $2,719 $1,317
Adjustments to reconcile net income to net cash
provided by operating activities:
Equity in undistributed earnings in subsidiary (2,117) (2,400) (310)
Increase in interest payable -- 218 --
Gain on sale of investments (74) (36) --
Increase in interest receivable (109) (39) --
Other changes, net 14 -- 2
- -----------------------------------------------------------------------------------------------------------------------------
Net cash provided (used) by operating activities 639 462 1,009
- -----------------------------------------------------------------------------------------------------------------------------
Investing Activities
Capital contribution to Bank subsidiary (1,000) (8,000) --
Purchase of investment securities and
mortgage-backed securities available-for-sale (4,082) (710) (548)
Sale of investment securities available-for-sale 2,105 145 --
Maturities and principal repayments
of investment securities and mortgage-backed
securities available-for-sale 2,616 250 --
Investment in trust subsidiary -- (317) --
Loan receivable from Bank subsidiary, net of repayments 1,167 (1,167) --
- -----------------------------------------------------------------------------------------------------------------------------
Net cash provided (used) by investing activities 806 (9,799) (548)
- -----------------------------------------------------------------------------------------------------------------------------
Financing Activities
Stock options exercised 181 292 70
Sale of stock through Dividend Reinvestment Plan 110 82 57
Dividends paid (641) (517) (409)
Issuance of subordinated debentures -- 10,567 --
Debt issuance costs (36) (688) --
- -----------------------------------------------------------------------------------------------------------------------------
Net cash provided (used) by financing activities (386) 9,736 (282)
- -----------------------------------------------------------------------------------------------------------------------------
Increase (decrease) in cash 1,059 399 179
Cash at Beginning of Year 615 216 37
- -----------------------------------------------------------------------------------------------------------------------------
Cash at End of Year $ 1,674 $ 615 $ 216
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
During fiscal 1998, $9.0 million of investment securities available-for-sale
were transferred to the Company from the Bank representing distributions of
prior years' undistributed earnings. 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.
(23) 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.
35
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
GENERAL
The Company reported net income of $2.9 million, $2.7 million and $1.3 million
for fiscal 1998, 1997 and 1996, 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.
Moderate asset growth was attained in fiscal 1998. Assets were $406.0 million at
September 30, 1998, an increase of $25.1 million or 6.6% from September 30,
1997. The growth was reflected primarily in the loan portfolio and in investment
securities available-for-sale, partially offset by a decrease in mortgage-backed
securities. The loan portfolio increased $36.0 million or 19.7% to $218.9
million at September 30, 1998, and investment securities available-for-sale
increased $13.0 million or 29.2% for the same period, while mortgage-backed
securities decreased by $25.0 million or 19.6%. The growth was funded by
increased deposits and an increase in Federal Home Loan Bank advances.
Stockholders' equity also increased from the prior year. At September 30, 1998,
stockholder's equity was $29.0 million, an increase of $3.1 million or 12.1%
from September 30, 1997. This increase reflects both net income for the year, as
well as an increase in unrealized gain on securities available-for-sale from
$233,000 at September 30, 1997, to $727,000 at September 30, 1998.
Net interest income increased in fiscal 1998 to $10.7 million from $10.1 million
in fiscal 1997. Net interest income was $9.2 million in fiscal 1996. The
provision for loan losses continues to significantly impact profitability,
amounting to $405,000, $500,000, and $270,000 in fiscal 1998, 1997 and 1996,
respectively. In addition, results from the sale of securities have also
contributed to profitability, amounting to gains of $84,000, $53,000 and $27,000
in fiscal 1998, 1997 and 1996, respectively.
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, 1998, the
tax-equivalent interest-rate spread decreased to 2.74%, as compared to 2.99% in
fiscal 1997. The tax-equivalent spread in fiscal 1996 was 3.17%. The ratio of
average interest-earning assets to average interest-bearing liabilities
increased slightly to 104.2% in fiscal 1998, from 104.1% in fiscal 1997. The
ratio was 104.2% in fiscal 1996. The decrease in the spread for fiscal 1998
reflects several factors, including a decrease in the yield earned on the
mortgage loan portfolio, as well as the continued 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.
<PAGE>
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.
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.
36
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS - continued
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
and the change in portfolio equity. This analysis was done assuming that
interest-earning asset and interest-bearing liability levels at September 30,
1998 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, 1998 levels.
INTEREST RATE SIMULATION SENSITIVITY ANALYSIS
Movements in interest rates from September 30, 1998 rates:
<TABLE>
<CAPTION>
Increase Decrease
- -----------------------------------------------------------------------------------------------------------------------------
+100 bp +200 bp -100 bp -200 bp
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net interest income increase (decrease) (1.6)% (6.8)% 2.4% 2.0%
Increase (decrease) in return on average equity (2.8)% (12.0)% 4.1% 3.4%
Increase (decrease) in basic and diluted
earnings per share (2.9)% (12.5)% 4.3% 3.7%
Portfolio equity increase (decrease) (7.6)% (36.4)% 0.6% 4.4%
</TABLE>
<PAGE>
The matching of assets and liabilities may be analyzed by examining the extent
to which such assets and liabilities are "interest rate sensitive" and by
monitoring an institution's interest rate sensitivity "gap". An asset or
liability is said to be interest rate sensitive within a specific time period if
it will mature or reprice within that time period. The interest rate sensitivity
gap is defined as the difference between interest-earning assets and
interest-bearing liabilities maturing or repricing within a given time period. A
gap is considered positive when the amount of interest rate sensitive assets
exceeds interest rate sensitive liabilities. A gap is considered negative when
the amount of interest rate sensitive liabilities exceeds interest rate
sensitive assets. During a period of rising interest rates, a negative gap would
tend to adversely affect net interest income, while a positive gap would tend to
result in an increase in net interest income. During a period of falling
interest rates, a negative gap would tend to result in an increase in net
interest income, while a positive gap would tend to adversely affect net
interest income. The Company has seen a decrease in its one year gap from a
negative 11.6% at September 30, 1997 to a positive 1.0% at September 30, 1998.
The Bank considers this result at September 30, 1998 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, 1998 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.
37
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS - continued
<TABLE>
<CAPTION>
September 30, 1998
-----------------------
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 $78,329 $65,163 $171,184 $92,196
Deposits, escrow
liabilities and borrowed funds 53,367 86,031 161,701 74,081
- -----------------------------------------------------------------------------------------------------------------------------
Interest sensitivity $24,962 $(20,868) $9,483 $18,115
- -----------------------------------------------------------------------------------------------------------------------------
Cumulative interest sensitivity $24,962 $4,094 $13,577 $31,692
- -----------------------------------------------------------------------------------------------------------------------------
Cumulative ratio as a percent of total assets 6.1% 1.0% 3.3% 7.8%
- -----------------------------------------------------------------------------------------------------------------------------
</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.
<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 1998, 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, 1998 the total of approved loan commitments amounted to $3.3
million and the Bank had $12.9 million of undisbursed loan funds. The amount of
savings certificates which are scheduled to mature in the twelve-month period
ended September 30, 1998 is $106.2 million. Management believes that, by
evaluation of competitive instruments and pricing in its market area, it can, in
most circumstances, manage and control maturing deposits so that a substantial
amount of such deposits are redeposited in the Bank.
CAPITAL
The Bank currently exceeds all regulatory capital requirements, having a
leverage ratio of Tier 1 capital to total assets of 6.77% and a ratio of
qualifying total capital to risk-weighted assets and off-balance sheet items of
12.70% at September 30, 1998. As a result, regulatory capital requirements
should have no material impact on operations.
FINANCIAL CONDITION
The Bank's assets were $406.0 million at September 30, 1998, an increase of
$25.1 million or 6.6% over assets at September 30, 1997. The growth primarily
reflects an increase in loans receivable and investment securities
available-for-sale, partially offset by a decrease in mortgage-backed
securities. The growth was primarily funded by an increase in savings deposits,
and to a lesser degree, advances from the FHLB of Pittsburgh.
38
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS - continued
LOAN PORTFOLIO
Net loans receivable increased $36.0 million or 19.7% to $218.9 million at
September 30, 1998 from $182.9 million at September 30, 1997. Loans originated
totaled $105.6 million in fiscal 1998 versus $70.0 million in fiscal 1997.
Mortgage loans originated amounted to $58.8 million and $34.9 million in fiscal
1998 and 1997, respectively. The Bank did not purchase any mortgage loans in
fiscal 1998 or 1997. The increase in the level of mortgage loan originations in
fiscal 1998 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. In addition, the Bank increased the number of full time mortgage
originators employed and increased the amount of business done with independent
mortgage loan brokers. All loans originated through brokers are in the Bank's
primary market area. The origination of adjustable rate mortgages (ARM's)
increased to $17.7 million in fiscal 1998 from $10.8 million in fiscal 1997.
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 $25.7 million in fiscal 1998 as compared to $16.9 million
fiscal 1997. The combination of the above factors resulted in an overall
increase in mortgage loans receivable to $148.9 million at September 30, 1998
from $124.8 million at September 30, 1997.
Other loan originations, including installment loans and commercial business
loans, totaled $37.1 million in fiscal 1998 versus $35.5 million in fiscal 1997.
During fiscal 1998, 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. In addition, the Bank increased the number of
commercial business loan officers employed. The Bank was successful in this
strategy and saw the balance of installment loans increase to $49.1 million at
September 30, 1998, as compared to $43.1 million at September 30, 1997.
Commercial business loans and leases also experienced a significant increase,
totaling $23.2 million at September 30, 1998 versus $16.9 million at September
30, 1997.
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.
<PAGE>
<TABLE>
<CAPTION>
September 30,
1998 1997 1996
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Non-accrual residential real
estate loans (one-to-four family) $ 224,000 $ 94,000 $ 567,000
Non-accrual construction, multi-
family residential and
commercial real estate loans 199,000 751,000 134,000
Non-accrual installment and
commercial business loans 129,000 271,000 457,000
- -----------------------------------------------------------------------------------------------------------------------------
Total non-performing loans $552,000 $1,116,000 $1,158,000
- -----------------------------------------------------------------------------------------------------------------------------
Total non-performing loans as
a percent of net loans receivable .25% .61% .77%
- -----------------------------------------------------------------------------------------------------------------------------
Total real estate owned, net of
related reserves $ 21,000 $ -- $ 370,000
- -----------------------------------------------------------------------------------------------------------------------------
Total non-performing loans and real estate
owned as a percent of total assets .14% .29% .48%
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
39
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS - continued
At September 30, 1998, non-accrual loans consisted of six 1-4 family residential
real estate loans totaling $224,000, one commercial real estate property
totaling $199,000, seven installment loans totaling $28,000, and four commercial
business loan totaling $101,000. The commercial real estate loan is on a retail
building that is currently leased. The Bank has begun foreclosure proceedings on
the loan. Three of the commercial business loans are commercial leases on
equipment and the fourth is an SBA guaranteed loan on a retail establishment
that has declared bankruptcy. Management has evaluated these loans and is
satisfied that the allowance for possible losses on loans at September 30, 1998
is adequate. The allowance for possible losses on loans has increased from $1.5
million at September 30, 1996 to $1.9 million at September 30, 1997 and to $2.2
million at September 30, 1998. The balance at September 30, 1998, at 1.02% of
net loans receivable and 406.3% of non-performing loans, is considered
reasonable by management.
MORTGAGE-BACKED SECURITIES HELD-TO-MATURITY
Mortgage-backed securities held-to-maturity decreased $14.1 million or 41.5% to
$19.9 million at September 30, 1998 from $34.1 million at September 30, 1997. No
purchases or sales of mortgage-backed securities held-to-maturity were made in
fiscal 1998. The decrease in the balance represents principal payments received
in fiscal 1998.
MORTGAGE-BACKED SECURITIES AVAILABLE-FOR-SALE
Mortgage-backed securities available-for-sale decreased $10.9 million to $83.0
million at September 30, 1998 from $93.9 million at September 30, 1997. 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 1998, the Bank purchased $52.6 million of these
securities, of which $18.3 million had adjustable-rate features, and sold $43.8
million. Sales of these securities in fiscal 1998 resulted in a net pretax loss
of $125,000.
INVESTMENT SECURITIES HELD-TO-MATURITY
Investment securities decreased $1.9 million or 22.4% to $6.6 million at
September 30, 1998, compared to $8.5 million at September 30, 1997. These
investments are comprised of U.S. Government and Agency securities, tax-exempt
municipal securities and asset-backed securities. The decrease in fiscal 1998
reflects the purchase of $13.0 million of these securities, with $14.9 million
of the securities called or matured in fiscal 1998. There were no sales of
investment securities held-to-maturity in fiscal 1998.
INVESTMENT SECURITIES AVAILABLE-FOR-SALE
Investment securities available-for-sale increased $13.0 million or 29.2% to
$57.6 million at September 30, 1998 as compared to September 30, 1997. These
securities provide an additional source of liquidity for the Bank and the
Company and consist of U.S. Government and Agency securities, tax-free municipal
obligations, mutual funds, Federal Home Loan Mortgage Corporation stock, and
other equity securities. Purchases in fiscal 1998 totaled $35.2 million and
sales totaled $17.3 million, resulting in a net pretax gain of $209,000.
<PAGE>
OFFICE PREMISES AND EQUIPMENT
Office premises and equipment decreased $22,000 or .6% to $3.4 million at
September 30, 1998. During fiscal 1998, renovations of some of the Company's
back office facilities were undertaken. In addition, costs were incurred to
upgrade certain equipment to meet Year 2000 requirements. These additions were
offset by depreciation on existing facilities and equipment.
40
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS - continued
SAVINGS DEPOSITS
Savings deposits increased $17.5 million during fiscal 1998 to $261.7 million at
September 30, 1998. Deposit increases occurred in demand deposits, NOW accounts
and time deposit accounts, while balances in money markets decreased and
balances in passbook accounts were essentially unchanged.
The stability in passbook accounts reflects the low interest rate environment
that existed in much of fiscal 1998, as well as the relative uncertainly
surrounding the stock market in late fiscal 1998. Bank rates on such accounts
stayed relatively constant and some depositors sought the safety and certainty
of these products. 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. During fiscal 1998, 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 $15.1 million.
BORROWINGS
Federal Home Loan Bank advances and reverse repurchase agreements outstanding
increased $4.2 million or 4.3% to $102.1 million at September 30, 1998, from
$97.9 million at September 30, 1997. 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.
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.
STOCKHOLDERS' EQUITY
Stockholders' equity increased $3.1 million or 12.1% to $29.0 million at
September 30, 1998 compared to September 30, 1997. The increase results from
1998 net income of $2.9 million, stock options exercised of $181,000, stock
issued under the Dividend Reinvestment Plan of $110,000 and an increase in
unrealized gains on securities available-for-sale of $494,000.
Partially offsetting these increases were cash dividends paid of $641,000.
RESULTS OF OPERATIONS
Comparison of Fiscal Years Ended September 30, 1998, 1997, and 1996
Net income was $2.9 million for the year ended September 30, 1998 compared to
$2.7 million for fiscal 1997 and $1.3 million for fiscal 1996.
41
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS - continued
INTEREST RATE SPREAD
The Bank's interest rate spread, the difference between yields on
interest-earning assets and the cost of funds, decreased to 2.74% on a
tax-equivalent basis in fiscal 1998 from 2.99% in fiscal 1997. The spread was
3.17% in fiscal 1996. 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,
1998 1997 1996
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Average yield on:
Mortgage loans 7.96% 8.01% 8.33%
Mortgage-backed securities 6.45 6.37 6.29
Installment loans 8.45 8.38 8.41
Commercial business loans 9.84 9.90 9.86
Interest-earning deposits with other
institutions, investment securities,(1)
and FHLB stock 6.95 6.76 6.98
- ----------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets 7.48 7.39 7.44
- ----------------------------------------------------------------------------------------------------------------------------
Average rates paid on:
Savings deposits 4.24 4.05 4.17
Borrowed funds 5.94 5.42 4.95
- ----------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 4.74 4.40 4.27
- -----------------------------------------------------------------------------------------------------------------------------
Average interest rate spread 2.74% 2.99% 3.17%
- -----------------------------------------------------------------------------------------------------------------------------
Net yield on interest-earning assets 2.93% 3.16% 3.33%
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Interest income on tax free investments has been adjusted for federal income
tax purposes using a rate of 34%.
<PAGE>
INTEREST INCOME ON LOANS
Interest income on loans increased by $3.0 million or 21.7% to $16.6 million in
fiscal 1998 as compared to fiscal 1997. The increase primarily reflects an
increase in the average size of the loan portfolio. The average yield earned on
the loan portfolio was comparable between years. The average size of the loan
portfolio increased from an average balance of $165.2 million in fiscal 1997 to
$201.0 million in fiscal 1998. 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 $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.
42
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS - continued
INTEREST INCOME ON MORTGAGE-BACKED SECURITIES
Interest income on mortgage-backed securities increased by $633,000 or 9.1% to
$7.6 million in fiscal 1998 from $7.0 million in fiscal 1997. The average
balance of mortgage-backed securities held, including mortgage-backed securities
available-for-sale, increased from $109.3 million in fiscal 1997 to $117.8
million in fiscal 1998. The increase also reflected an increase in the yield
earned on these securities in fiscal 1998. 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.
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.
INTEREST INCOME ON INVESTMENTS
Interest income on investments (including those available-for-sale), which
includes interest-earning deposits with other institutions and FHLB stock,
increased to $3.9 million in fiscal 1998. It was $3.4 million in both fiscal
1997 and 1996. The fiscal 1998 results reflect both an increase in the average
balance of such investments to $63.0 million in fiscal 1998 as compared to $54.1
million in fiscal 1997, as well as an increase in the average tax-equivalent
yield earned in fiscal 1998 as compared to fiscal 1997.
Interest income on investments 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.
INTEREST EXPENSE ON SAVINGS DEPOSITS
Interest on deposits increased $1.4 million or 14.4% to $10.9 million in fiscal
1998 from $9.6 million in fiscal 1997. The increase reflects both an increase in
the average balance of deposits in fiscal 1998, as compared to fiscal 1997, as
well as an increase in the average rate paid on deposits. The increase in rates
results primarily from the growth in certificate of deposit accounts, which are
generally higher costing than other types of 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.
<PAGE>
INTEREST EXPENSE ON BORROWED FUNDS
Interest expense on borrowed funds increased $2.1 million or 48.8% to $6.4
million in fiscal 1998 compared to fiscal 1997. The increase reflects a higher
level of borrowing in fiscal 1998, as well as an increase in the cost of these
funds. The Bank continued to use FHLB advances and repurchase agreements as cost
effective sources of funding in fiscal 1998 and 1997, as well as issuing
Preferred Securities for the first time in fiscal 1997. 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.
43
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS - continued
PROVISION FOR LOAN LOSSES
The provision for loan losses was $405,000, $500,000 and $270,000 for the fiscal
years ended September 30, 1998, 1997 and 1996, 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. Based on these factors, the allowance has
grown from $1.5 million at September 30, 1996 to $2.2 million at September 30,
1998. Loan charge-offs, net of recoveries, improved to $92,000 in fiscal 1998,
compared to $100,000 in fiscal 1997. Net charge-offs were $169,000 in fiscal
1996.
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 $285,000 or 32.3% to
$1.2 million in fiscal 1998 as compared to fiscal 1997. Other income increased
by $150,000 or 20.5% to $882,000 in fiscal 1997 compared to fiscal 1996.
Included in non-interest income was service fee income on loans and late charges
which increased by $42,000 in fiscal 1998 and increased by $14,000 in fiscal
1997 over the respective prior years. The increase in fiscal 1998 is primarily
attributable to an increase in late charges on mortgage loans, the imposition of
a late charge on credit cards and the collection of a fee related to a program
whereby customers could skip their regular loan payments over the Christmas
holidays. 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 Bank recorded a net gain of $84,000 on the sale of investment and
mortgage-backed securities in fiscal 1998 as compared to a net gain on such
sales of $53,000 in fiscal 1997. Fiscal 1996 results showed a $27,000 net gain.
All sales in fiscal 1998, 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 to reflect changing economic conditions, changing
market conditions and to carry out asset/liability management strategies.
Gain on sale of loans was $11,000, $28,000 and $17,000 in fiscal years 1998,
1997 and 1996, 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
<PAGE>
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 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 not significant, at under $1 million in each of fiscal 1998,
1997 or 1996, 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 $941,000, $712,000 and $614,000 in fiscal 1998, 1997 and
1996, respectively. The increase in fiscal 1998 is primarily due to debit card
fees, the imposition of a surcharge beginning April 1, 1998 on nonbank customers
for the use of the Bank's automated teller machines, and earnings on the cash
surrender value of life insurance policies on certain executive officers. The
increase in fiscal 1997 primarily reflects increased automatic teller machine
fees and returned check charges.
44
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS - continued
OTHER EXPENSES
Operating expenses increased $827,000 or 12.7% to $7.3 million in fiscal 1998
and decreased $1.6 million or 19.6% to $6.5 million in fiscal 1997, from $8.1
million in fiscal 1996.
Compensation, payroll taxes and fringe benefits, the largest component of
operating expenses, increased $609,000 or 16.5% to $4.3 million in fiscal 1998
and $444,000 or 13.7% to $3.7 million in fiscal 1997 over the respective prior
years. Factors contributing to the increases in both years were normal salary
increases, resulting higher payroll taxes, an increases in the number of
employees on the payroll, particularly professionals related to lending
operations, higher bonuses awarded, and an increase in retirement and health
care expenses. In addition, the Bank began to offer brokerage services in fiscal
1998 and additional staffing and personnel costs were incurred to establish this
function.
Office occupancy and equipment expense increased $99,000 or 17.3% to $669,000 in
fiscal 1998 and $6,000 or 1.2% to $570,000 in fiscal 1997 over the respective
prior years. The increase in fiscal 1998 primarily reflects rent expense on the
Company's new loan center, as well as some costs associated with establishing
that facility, partially offset by reduced equipment maintenance costs. 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.
Depreciation and amortization decreased $25,000 or 4.5% to $516,000 in fiscal
1998 and increased $85,000 or 18.7% to $541,000 in fiscal 1997 over the
respective prior years. The decrease in fiscal 1998 reflects some equipment
becoming fully depreciated, partially offset by increases in depreciation and
amortization on new and renovated facilities. The increase in fiscal 1997 years
reflects new equipment purchased for both the branch network and back office
operations, as well as depreciation on facilities renovated.
Premiums for federal deposit insurance were $155,000, $112,000 and $2.1 million
for the fiscal years 1998, 1997 and 1996, respectively. For fiscal 1998 and
1997, the amount of the premiums is based on the average amount of deposits
outstanding and is currently approximately 6.10 basis points. Fiscal 1996
results included a one-time special assessment of $1.5 million to recapitalize
the SAIF. Exclusive of this one-time charge, federal deposit insurance premiums
decreased $448,000 or 80.0% in fiscal 1997.
The Bank recorded net losses on real estate owned of $12,000, $31,000 and
$91,000 in fiscal 1998, 1997 and 1996, respectively. The results reflect the
costs associated with the holding and disposition of properties during the
periods. The results in fiscal 1998 and 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.
Intangible amortization was zero in fiscal 1998, $44,000 in fiscal 1997 and
$264,000 in fiscal 1996. 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.
<PAGE>
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 $1.7 million in fiscal
1998, $1.5 million in fiscal 1997 and $1.4 million in fiscal 1996. Significant
variations in fiscal 1998, compared to fiscal 1997, included increases in
advertising, stationary and supplies, consulting fees and costs related tot he
introduction of a new credit card program. Partially offsetting these increases
was a decrease in legal fees. Significant variations in 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,
stationary and supplies and automatic teller machine network costs.
INCOME TAXES
The company generated taxable income and, as a consequence, recorded tax
provisions of $1.2 million, $1.3 million and $226,000 for fiscal 1998, 1997 and
1996, respectively. These changes reflect the difference in the Bank's
profitability for the periods as well as differences in the effective tax rate.
The decreased effective tax rate in fiscal 1998 primarily results from the
Bank's increased purchases of tax-exempt investments.
45
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS - continued
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 tot he maintenance of
acceptable performance levels.
YEAR 2000
The Year 2000 problem exists because many computer systems use only the last two
digits to refer to a year. This convention could affect date-sensitive
calculations that treat "00" as the year 1900, rather than 2000. An additional
issue is that 1900 was not a leap year, whereas the year 2000 is. Therefore,
some programs may not properly provide for February 29, 2000. This anomaly could
result in miscalculations when processing critical date-sensitive information
after December 31, 1999.
The following discussion of the implications of the Year 2000 problem for the
Company contains numerous forward looking statements based on inherently
uncertain information. The cost of the project and the date on which the Company
plans to complete Year 2000 modifications are based on management's best
estimates, which are derived utilizing a number of assumptions of future events
including the continued availability of internal and external resources, third
party modifications and other factors. However, there can be no guarantee that
these statements will be achieved and actual results could differ. Moreover,
although management believes it will be able to make the necessary modifications
in advance, there can be no guarantee that failure to modify the systems would
not have a material adverse impact on the Company.
In May 1997 the Company established a Year 2000 Compliance Committee (the
"Committee") and subsequently developed a Year 2000 Compliance Plan (the
"Plan"). The objectives of the Plan and the Committee are to prepare the Company
for the new millennium. The Plan encompasses the following phases: Awareness,
Assessment, Renovation, Validation and Implementation. These phases will enable
the Company to identify risks, develop an action plan, perform adequate testing
and complete affirmation that its processing systems will be Year 2000 ready.
Execution of the Plan is currently on target. The Company is currently in Phases
3 and 4, Renovation and Validation, which involves replacement and/or testing of
changes to hardware and software accompanied by monitoring and testing with
vendors. Concurrently, the Company is also addressing some issues related to the
Implementation Phase. Prioritization of the most critical software applications
and hardware configurations have been addressed, along with contract and service
agreements. A significant portion of the Company's data processing software is
provided by third party vendors. The Company has maintained ongoing contact with
these vendors so that modification of the software for Year 2000 readiness is a
<PAGE>
top priority. The Company, in coordination with these vendors, is currently
testing all significant applications and this testing is expected to be
substantially completed, though there is no assurance, by December 31, 1998. In
addition, all significant hardware that required replacement or upgrade has been
purchased or the upgrade completed. Testing of his equipment is currently being
performed and is expected to be substantially completed, though there is no
assurance, by December 31, 1999. The Company has contacted all other material
vendors and suppliers regarding their Year 2000 state of readiness. Each of
these third parties has delivered written assurance to the Company that they
expect to be Year 2000 compliant prior to the Year 2000. The Company has
completed contacting all material customers and non-information technology
suppliers (i.e., utility systems, telephone systems and security systems)
regarding their Year 2000 state of readiness. The Validation phase is targeted
for completion by March 31, 1999. The Implementation Phase is to certify that
systems are Year 2000 ready, along with assurances that any new systems are
compliant on a going-forward basis. The Implementation Phase is targeted for
completion by June 30, 1999.
Monitoring and managing the Year 2000 project will result in additional direct
and indirect costs to the Company. Direct costs include potential charges by
third party software vendors for product enhancements, the replacement of
computer
46
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS - continued
hardware and related equipment that was not Year 2000 ready with equipment that
is, costs involved in testing software and hardware products for Year 2000
compliance, and any resulting costs for developing and implementing contingency
plans for critical software and hardware products which are not enhanced.
Indirect costs will principally consist of the time devoted by existing
employees in managing vendor progress, testing enhanced software and hardware
products and implementing any necessary contingency plans. Total direct costs
are estimated not to exceed $500,000, but are not expected to be material to the
Company's results of operations in any one quarter or fiscal year. This estimate
includes the cost, and resulting depreciation, of accelerating the replacement
of computer equipment that is currently fully depreciated, or would have been by
the Year 2000, and that would have been replaced in the ordinary course of
business over the next two years. Year 2000 remediation costs are not expected
to have a material adverse impact on the long-term results of operations,
liquidity or consolidated financial position of the Company. The Company does
not separately track the internal costs incurred for the Year 2000 project; such
costs are principally the related payroll costs for its information systems
group and other employees involved in the project.
The Company is developing remediation contingency plans and business resumption
plans specific to the Year 2000. Remediation contingency plans address the
actions to be taken if the current approach to remediating a system is falling
behind schedule or otherwise appears to be in jeopardy of failing to deliver a
year 2000 ready system when needed. Business resumption contingency plans
address the actions that would be taken if critical business functions can not
be carried out in the normal manner upon entering the next century due to system
or supplier failure.
Despite the best efforts of management to address this issue, the vast number of
external entities that have direct and indirect business relationships with the
Company, such as customers, vendors, payment system providers and other
financial and governmental institutions makes it impossible to assure that
failure to achieve compliance by one or more of these entities would not have
material adverse impact on the operations of the Company.
RECENT ACCOUNTING AND LEGISLATIVE DEVELOPMENTS
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.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information." SFAS No. 131 establishes standards for
reporting information about operating segments. It also establishes standards
<PAGE>
for related disclosures about products and services, geographic areas, and major
customers. SFAS No. 131 is effective for fiscal years beginning after December
31, 1997. Management does not anticipate that the adoption of this standard will
have a material impact on the Company's reporting.
In June 1998, the FASB released SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 establishes accounting and
reporting standards for derivative instruments and hedging activities. It
requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those instruments
at fair value. The accounting for changes in the fair value of a derivative
(that is, gains and losses) depends on the intended use of the derivative and
the resulting designation. This statement is effective for all fiscal quarters
of fiscal years beginning after June 15, 1999. Earlier application is
encouraged, however, this statement should not be applied retroactively to
financial statements of prior periods. The Company does not currently
participate in any activity that qualifies as derivative or hedging and,
therefore, does not expect this statement to have a material effect on the
financial statements.
47
<PAGE>
CORPORATE INFORMATION
CORPORATE INFORMATION
- --------------------------------------------------------------------------------
ANNUAL MEETING The annual meeting of the stockholders will be held at 5:00 p.m.,
on Tuesday, February 2, 1999 at the Perrysville Office of the Bank at 1009
Perry Highway, Pittsburgh, Pennsylvania. Stockholders are encouraged to
attend.
ANNUAL REPORT ON FORM 10-K A copy of Fidelity Bancorp, Inc.'s Annual Report on
Form 10-K is available without charge to stockholders upon written request.
Requests should be addressed to Investor Relations at the Company's
headquarters. Also, periodic reporting documents filed with the Securities
and Exchange Commission can be found on the SEC's website:
http://www.sec.gov.
INVESTOR RELATIONS Analysts, investors, stockholders and others seeking
financial information are asked to contact Richard G. Spencer, Chief
Financial Officer, at the Company's headquarters. Requests for all other
information should be addressed to Investor Relations at the Company's
headquarters.
STOCK TRANSFER/ADDRESS CHANGES The Transfer Agent and Registrar of Fidelity
Bancorp, Inc. is Registrar and Transfer Company. Questions regarding transfer
of stock, address changes or lost certificates should be directed to Investor
Relations at the Company's headquarters or to the transfer agent, Registrar
and Transfer Company.
DIVIDEND REINVESTMENT PLAN INFORMATION The Fidelity Bancorp, Inc. Dividend
Reinvestment Plan enables shareholders of common stock to reinvest quarterly
dividends for the purchase of additional shares. Registered holders who
enroll in this plan may also make optional cash purchases of additional
shares of stock conveniently and without paying brokerage commissions or
service charges. A brochure describing the plan and an application to
participate may be obtained from Investor Relations.
INVESTOR RELATIONS
Fidelity Bancorp, Inc.
1009 Perry Highway
Pittsburgh, Pennsylvania 15237
(412) 367-3300, X3139
TRANSFER AGENT
Registrar and Transfer Company
10 Commerce Drive
Cranford, New Jersey 07016
(800) 866-1340
<PAGE>
DIVIDEND REINVESTMENT
PLAN INFORMATION
Investor Relations
Fidelity Bancorp, Inc.
1009 Perry Highway
Pittsburgh, Pennsylvania 15237
(412) 367-3300, X3139
FINANCIAL INFORMATION
Richard G. Spencer
Chief Financial Officer
Fidelity Bancorp, Inc.
1009 Perry Highway
Pittsburgh, Pennsylvania 15237
(412) 367-3300, X3121
ANNUAL REPORT
ON FORM 10-K
Investor Relations
Fidelity Bancorp, Inc.
1009 Perry Highway
Pittsburgh, Pennsylvania 15237
(412) 367-3300, X3139
48
<PAGE>
CAPITAL STOCK INFORMATION
STOCK INFORMATION
- --------------------------------------------------------------------------------
The following table sets forth the fiscal 1998, 1997 and 1996 high and low
prices as reported on the NASDAQ National Market System and the dividends
declared per common share. Amounts shown have been adjusted to reflect the 25%
stock split paid in March 1998 and the 10% stock dividends paid in May 1997 and
May 1996.
<TABLE>
<CAPTION>
Stock Price Dividends
- -----------------------------------------------------------------------------------------------------------------------------
Quarter Ended: High Low Cash Stock
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
September 30, 1998 $23.88 $17.50 $.090 --
June 30, 1998 $28.00 $22.00 .090 25%
March 31, 1998 $25.59 $21.70 .072 --
December 31, 1997 $23.41 $17.80 .072 --
- -----------------------------------------------------------------------------------------------------------------------------
September 30, 1997 $18.59 $16.00 $.072 --
June 30, 1997 $17.20 $14.73 .065 10%
March 31, 1997 $17.36 $13.45 .065 --
December 31, 1996 $14.91 $13.45 .058 --
- -----------------------------------------------------------------------------------------------------------------------------
September 30, 1996 $14.36 $11.64 $.058 --
June 30, 1996 $12.73 $11.23 .053 10%
March 31, 1996 $12.39 $10.91 .053 --
December 31, 1995 $11.91 $10.75 .053 --
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
As of September 30, 1998, Fidelity Bancorp, Inc. had 1,978,543 shares of stock
outstanding and approximately 625 stockholders, including beneficial owners
whose stock is held in nominee name.
<PAGE>
COMMON STOCK
MARKET MAKERS
- --------------------------------------------------------------------------------
NASDAQ National Market:
Common Stock
Symbol FSBI
MARKET MAKERS
Legg Mason Wood Walker Inc. (LEGG)
2500 CNG Tower
625 Liberty Avenue
Pittsburgh, PA 15222 -- (800) 346-5075
Ryan, Beck &Co. (RYAN)
80 Main Street
West Orange, NJ 07039 -- (800) 395-7926
Herzog, Heine, Geduld, Inc. (HRZG)
525 Washington Boulevard
Pavonia, NJ 07310 -- (800) 221-3600
TRUST PREFERRED SECURITIES
MARKET MAKERS
NASDAQ National Market:
Trust Preferred Securities
Symbol FSBIP
MARKET MAKERS
Ryan, Beck &Co. (RYAN)
80 Main Street
West Orange, NJ 07039 -- (800) 395-7926
The Ohio Company
155 E. Broad Street
Columbus, OH 43215 -- (800) 848-0927
49
<PAGE>
FIDELITY BANK
BANK HEADQUARTERS
1009 Perry Highway, Pittsburgh, Pennsylvania 15237 o (412) 367-3300
FAX (412) 364-6504 o E-Mail: [email protected]
BOARD OF DIRECTORS
- --------------------------------------------------------------------------------
JOHN R. GALES
President
J.R. Gales & Associates
CHARLES E. NETTROUR
President
Martin & Nettrour, Inc.
Retirement Designs Unlimited, Inc.
ROBERT F. KASTELIC
President
X-Mark Industries
JOANNE ROSS WILDER
Attorney
Wilder, Mahood &Crenney, P.C.
OLIVER D. KEEFER
Owner
Ralph E. Lane Company
WILLIAM L. WINDISCH
President
Chief Executive Officer
JAMES E. SHEPARD
Director Emeritus
Retired President
Power Equipment Company
<PAGE>
OFFICERS
- --------------------------------------------------------------------------------
WILLIAM L. WINDISCH
President
Chief Executive Officer
RICHARD G. SPENCER, CPA
Executive Vice President
Chief Financial Officer
Treasurer
MICHAEL A. MOONEY
Executive Vice President
Chief Lending Officer
LISA M. CLINE
Senior Vice President
Human Resources
and Administrative Services
Assistant Secretary
SANDRA L. LEE
Senior Vice President
Operations
ANTHONY F. ROCCO
Senior Vice President
Community Banking
SUSAN J. LOWE
Corporate Secretary
ANTHONY J. PARAVATI
Vice President
Commercial Loan Officer
ARLENE P. PETROSKY
Vice President
Commercial Loan Officer
DAVID A. RENO
Vice President
Commercial Real Estate
Loan Officer
LISA L. GRIFFITH, CPA
Assistant Vice President
Assistant Treasurer
Controller
KENNETH J. BARKOVICH
Assistant Vice President
Branch Manager
<PAGE>
LEONARD T. CONLEY
Assistant Vice President
Residential Lending
CHRISTINE J. HOFFMAN
Assistant Vice President
Operations
NEAL H. JACKSON
Assistant Vice President
Branch Manager
LYNNE A. MANSKI
Assistant Vice President
Marketing
LINDA D. METZMAIER
Assistant Vice President
Internal Audit/Compliance
BERNARD T. UHRINEK
Assistant Vice President
Data Processing
LINDA M. YON
Assistant Vice President
Branch Manager
50
<PAGE>
FIDELITY BANCORP, INC.
CORPORATE HEADQUARTERS
1009 Perry Highway, Pittsburgh, Pennsylvania 15237 o (412) 367-3300
FAX (412) 364-6504 o E-Mail: [email protected]
BOARD OF DIRECTORS
- --------------------------------------------------------------------------------
JOHN R. GALES
President
J.R. Gales & Associates
CHARLES E. NETTROUR
President
Martin & Nettrour, Inc.
Retirement Designs Unlimited, Inc.
ROBERT F. KASTELIC
President
X-Mark Industries
JOANNE ROSS WILDER
Attorney
Wilder, Mahood &Crenney, P.C.
OLIVER D. KEEFER
Owner
Ralph E. Lane Company
WILLIAM L. WINDISCH
President
Chief Executive Officer
<PAGE>
OFFICERS
- --------------------------------------------------------------------------------
WILLIAM L. WINDISCH
President
Chief Executive Officer
RICHARD G. SPENCER, CPA
Vice President
Chief Financial Officer
Treasurer
MICHAEL A. MOONEY
Vice President
SUSAN J. LOWE
Corporate Secretary
LISA M. CLINE
Assistant Secretary
LISA L. GRIFFITH, CPA
Assistant Treasurer
Independent Auditors
KPMG PEAT MARWICK LLP
One Mellon Bank Center
Pittsburgh, Pennsylvania 15219
51
<PAGE>
BANK BRANCH LOCATIONS
ALLISON PARK
Duncan Manor Shopping Plaza
Allison Park, Pennsylvania 15101
412-366-1200
BLOOMFIELD
4719 Liberty Avenue
Pittsburgh, Pennsylvania 15224
412-682-0311
BRIGHTON ROAD
3300 Brighton Road
Pittsburgh, Pennsylvania 15212
412-734-2675
MT. LEBANON
312 Beverly Road
Pittsburgh, Pennsylvania 15216
412-571-1333
MT. LEBANON
728 Washington Road
Pittsburgh, Pennsylvania 15228
412-561-2470
NORTHWAY
6000 Babcock Boulevard
Pittsburgh, Pennsylvania 15237
412-367-9010
PERRYSVILLE
1009 Perry Highway
Pittsburgh, Pennsylvania 15237
412-364-3200
STRIPDISTRICT
2034 Penn Avenue
Pittsburgh, Pennsylvania 15222
412-402-1000
ZELIENOPLE
251 S. Main Street
Zelienople, Pennsylvania 16063
724-452-6655
52
Exhibit 23
<PAGE>
The Board of Directors
Fidelity Bancorp Inc:
We consent to the incorporation by reference in the registration statements on
Form S-8 pertaining to the Fidelity Bancorp, Inc.'s 1997 Employee Stock
Compensation Program filed March 12, 1998, and the 1993 Employee Stock
Compensation Program and 1993 Directors' Stock Option Plan filed May 2, 1997, of
our report dated October 30, 1998, relating to the consolidated statements of
financial condition of Fidelity Bancorp, Inc. as of September 30, 1998 and 1997,
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, 1998,
which report appears in the September 30, 1998, annual report on Form 10-K of
Fidelity Bancorp, Inc.
/s/KPMG Peat Marwick LLP
- ------------------------
KMPG Peat Marwick LLP
Pittsuburgh, Pennsylvania
December 23, 1998
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