SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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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, 1999
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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
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Commission File Number: 0-22288
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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
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Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
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(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
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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
15, 1999 was $19.4 million.
As of December 15, 1999, the Registrant had outstanding 1,892,178
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, 1999.
2. Part III -- Portions of the Registrant's Proxy Statement for a meeting to
be held on February 8, 2000.
<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; and disruption in data processing caused by
computer malfunctions associated with the year 2000 problem may be greater than
expected.
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
nine 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, 1999, the Company had total assets of $482.5 million,
savings deposits of $269.1 million and stockholders' equity of $26.0 million.
The Bank's principal business consists of attracting
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deposits from the general public through its home office and branch offices and
investing such deposits primarily in single-family (one-to-four family)
residential loans, mortgage-backed securities and, to a lesser extent,
commercial real estate loans in the Bank's primary market area. In recent years,
the Bank has also been an active originator of home equity and consumer loans
and has originated loans to small businesses in its immediate market area.
The Bank's earnings have historically depended primarily on its level
of net interest income, which is determined by the difference between the yield
earned on its loans, investment and mortgage-backed securities and other
interest-earning assets and the rate paid on its deposits and borrowings. In
recent years, 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-bearing liabilities that mature or reprice within one year exceed its
interest-earning assets with similar characteristics equaled $42.2 million or
8.7% of total assets at September 30, 1999. Adjustable-rate mortgage loans
amounted to 9.7%, 29.3% and 31.3% of the Bank's originations of mortgage loans
in fiscal 1999, 1998, and 1997 respectively. While the origination of
adjustable-rate mortgage loans has been emphasized in recent years, customer
prefrences for fixed rate mortgages have increased, thus decreasing the
proportion of adjustable-rate mortgages originated. 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 also
continues to offer long-term, fixed-rate residential mortgage loans.
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 nine (9)
branch offices located in Allegheny and Butler Counties in Pennsylvania. The
Bank's main office telephone number is (412) 367-3300. 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. Competition for deposits also includes insurance products sold by local
agents and investment products such as mutual funds and other securities sold by
local and regional brokers.
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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,
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1999 1998 1997 1996 1995
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$ % $ % $ % $ % $ %
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(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real estate loans:
Residential:
Single-family (1-4 units)............. $156,112 53.0% $115,559 49.1% $ 97,698 51.6% $ 80,186 50.8% $ 60,160 47.4%
Multi-family (over 4 units)........... 4,007 1.4 4,262 1.8 4,165 2.2 4,435 2.8 5,156 4.1
Construction............................ 22,689 7.7 21,212 9.0 7,614 4.0 7,645 4.8 6,911 5.4
Commercial.............................. 26,513 9.0 21,881 9.3 19,976 10.5 19,112 12.1 20,102 15.8
------- ------ ------- ----- ------- ----- ------- ----- ------- -----
Total real estate loans............ 209,321 71.1 162,914 69.2 29,453 68.3 111,378 70.5 92,329 72.7
Installment loans......................... 57,869 19.6 49,122 20.9 43,081 22.8 35,782 22.7 28,421 22.4
Commercial business and lease loans....... 27,394 9.3 23,157 9.9 16,873 8.9 10,702 6.8 6,186 4.9
------ ------ ------- ----- ------- ----- ------ ----- ------- -----
Total loans receivable............. 294,584 100.00% 235,193 100.0% 189,407 100.0% 157,862 100.0% 126,936 100.0%
====== ===== ===== ===== =====
Less:
Loans in process........................ (14,696) (12,916) (3,695) (4,109) (3,664)
Unamortized premiums,
discounts and deferred loan fees...... (1,453) ( 1,142) (912) (960) (939)
Allowance for possible loan losses...... (2,477) ( 2,243) (1,931) (1,530) (1,429)
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Net loans receivable............... $275,958 $218,892 $182,869 $151,263 $120,904
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</TABLE>
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Contractual Maturities. The following table sets forth contractual
maturities of the total loans receivable of the Bank as of September 30, 1999 by
categories of loans.
Contractual Maturities Due
in Year(s) Ended September 30,
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2001- After
2000 2004 2004
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Real estate loans:
Residential $ 619 $ 4,517 $154,983
Commercial 607 4,035 21,871
Construction 1,318 1,993 19,378
Installment loans 405 17,150 40,314
Commercial business and lease loans 6,331 11,075 9,988
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Total(1) $ 9,280 $38,770 $246,534
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(1) Of the $285.3 million of principal repayments contractually due after
September 30, 2000, $242.8 million have fixed rates of interest and $42.5
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 1999,
1998, or 1997.
Applications for all types of loans are taken at the Bank's home office
and branch offices by branch managers and loan originators and forwarded to the
administrative office for processing. In most cases, an interview with the
applicant is conducted at the branch office by a branch manager. Residential and
commercial real estate loan originations are primarily attributable to walk-in
and existing customers, real estate brokers and mortgage loan brokers.
Installment loans are primarily obtained through existing and walk-in customers.
The Board of Directors has delegated authority to the Loan Committee, consisting
of the President, Executive Vice President and Chief Financial Officer and
Executive Vice President and Chief Lending Officer, to approve first mortgage,
home equity, secured consumer, unsecured consumer and commercial loans up to
$500,000, $200,000, $75,000, $50,000, and $400,000, respectively. Any loan in
excess of those amounts must be approved by the Board of Directors. The Board of
Directors has further delegated authority to the Bank's President to approve
first mortgage, home equity, secured consumer,
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unsecured consumer and commercial loans up to $200,000, $125,000, $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 to a lesser extent the purchase of loan
participations secured primarily by first mortgage liens on existing
single-family residences. At September 30, 1999, $174.5 million or 59.2% of the
Bank's total loan portfolio consisted of such loans (including $18.4 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 9.7%, 29.3% and
31.3% of the total originations of mortgage loans by the Bank in fiscal 1999,
1998, and 1997, respectively, and amounted to approximately $39.0 million or
18.6% of the Bank's portfolio of mortgage loans at September 30, 1999.
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, 1999, approximately $170.3 million or 81.4% of the mortgage loans in the
Bank's loan portfolio consisted of loans which provide for fixed rates of
interest. Although these loans provide for repayments of principal over a fixed
period of up to 30 years, it is the Bank's experience that such loans have
remained outstanding for a substantially shorter period of time. The Bank's
policy is to enforce the "due-on-sale" clauses contained in most of its
fixed-rate, conventional mortgage loans, which generally permit the Bank to
require payment of the outstanding loan balance if the mortgaged property is
sold or transferred and, thus, contributes to shortening the average life of
such loans.
The Bank will lend generally up to 80% of the appraised value of the
property securing the loan (referred to as the loan-to-value ratio) up to a
maximum amount of $240,000 but will lend up to 95% of the appraised value up to
the same amount if the borrower obtains private mortgage insurance on the
portion of
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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 $240,000. 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, 1999,
$30.5 million or 10.4% of the Bank's total loan portfolio consisted of
commercial real estate and multi-family residential real estate loans (including
$4.3 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 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
third parties 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, 1999, the Bank had 93
construction projects of this type in process. In addition, the Bank also
engages in loans to finance the construction of commercial properties. At
September 30, 1999, the Bank had 3 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.
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Home equity loans amounted to $51.3 million or 88.7% of the Bank's
total installment loan portfolio at September 30, 1999. 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, 1999, these loans
amounted to $1.8 million, which represented 3.1% of the Bank's total installment
loan portfolio. At September 30, 1999, motor vehicle loans amounted to $1.1
million and unsecured loans and loans secured by property other than real estate
amounted to $700,000.
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, 1999, these loans amounted to $4.8 million or 8.2% of the total
installment loan portfolio. That total consisted of $720,000 of education loans,
$565,000 of savings account loans, $2.9 million of credit card loans and
$607,000 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, 1999, these
loans amounted to $22.1 million or 7.5% 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,
1999, commercial leases amounted to $5.3 million or 1.8% 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 30, 1999, the Bank's limit on loans-to-one
borrower was $5.2 million, and the Bank's largest loan or group of loans-to-one
borrower, including related entities, aggregated $2.0 million. This represents a
$4.0 million commercial real estate development loan which the Bank participates
at a rate of 51%. The Bank serviced this loan and at September 30, 1999 it was
current and performing. This loan was paid in full on October 15, 1999.
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
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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
$6.1 million at September 30, 1998 to $4.5 million at September 30, 1999.
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.
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.
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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>
1999 1998 1997 1996 1995
--------- ------- ------ ------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Nonaccrual residential real
estate loans (1-4 family) ........... $ 250 $ 246 $ 94 $ 567 $ 227
Nonaccrual construction, multi-
family residential and
commercial real estate .............. 1,362 199 751 134 --
Nonaccrual installment and
commercial business loans .......... 773 107 271 457 85
--------- ------ ------ ------ ------
Total non-performing loans ............ $ 2,385 $ 552 $1,116 $1,158 $ 312
========= ====== ====== ====== ======
Total nonperforming loans as a
percent of total loans receivable ... .81% .23% .59% .73% .25%
========= ====== ====== ====== ======
Total real estate owned, net of
related reserves .................... $ 107 $ 21 $ -- $ 370 $1,062
========= ====== ====== ====== ======
Total nonperforming loans and real
estate owned as a percent of
total assets ........................ .52% .14% .29% .48% .49%
========= ====== ====== ====== ======
</TABLE>
At September 30, 1999 non-accrual s consisted of four 1-4 family
residential real estate loans totaling $250,000, four commercial real estate
loans totaling $1.4 million, 15 installment loans totaling $220,000, and six
commercial business loan totaling $552,000. The largest non-accrual loan is a
commercial real estate loan for $958,000 on a retail complex. Subsequent to
September 30, 1999, the property was sold by the borrower to an independent
third party and the loan was paid off in full, including all delinquent interest
and late fees.
The Bank currently has one property in real estate owned which is a
single-family residence valued at $107,000.
9
<PAGE>
The following table sets forth an analysis of the Bank's allowance for
loan losses.
<TABLE>
<CAPTION>
Year Ended September 30,
----------------------------------------------
1999 1998 1997 1996 1995
------ ------ ------ ------ ------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Balance at beginning of period ........... $2,243 $1,931 $1,530 $1,429 $1,334
Provision charged to operations .......... 520 405 500 270 230
------ ------ ------ ------ ------
Charge-offs:
Residential real estate ................ -- 3 49 136 158
Commercial real estate ................. 183 -- -- 13 72
Installment ............................ 89 97 71 44 29
Commercial ............................. 54 10 3 78 116
Recoveries:
Residential real estate ................ 10 -- -- 55 120
Commercial real estate ................. -- -- -- -- --
Installment ............................ 10 11 8 10 11
Commercial ............................. 20 6 16 37 109
------ ------ ------ ------ ------
Net charge-offs .......................... 286 93 99 169 135
------ ------ ------ ------ ------
Balance at end of period ................. $2,477 $2,243 $1,931 $1,530 $1,429
====== ====== ====== ====== ======
Ratio of net charge-offs during
the period to average loans
outstanding during the period .......... .12% .05% .06% .12% .11%
====== ====== ====== ====== ======
</TABLE>
10
<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,
---------------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
------------------ ----------------- -------------------- ------------------ ----------------
$ % $ % $ % $ % $ %
------- --------- ------ -------- -------- --------- -------- ---------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Residential real estate loans... 720 48.3% $ 719 49.1% $ 707 53.8% $ 443 53.6% $ 385 51.5%
Commercial real estate loans.... 102 8.6 162 11.1 139 4.0 225 12.1 256 15.8
Construction loans.............. 202 14.2 131 9.0 53 10.5 60 4.8 61 5.4
Installment loans............... 534 19.6 478 20.9 445 22.8 358 22.7 332 22.4
Commercial business loans....... 919 9.3 753 9.9 587 8.9 444 6.8 395 4.9
--- ------ ----- ----- ----- ----- ----- ----- ----- -----
Total.................... $2,477 100.00% $2,243 100.0% $1,931 100.0% $1,530 100.0% $1,429 100.0%
===== ====== ===== ===== ===== ===== ===== ===== ===== =====
</TABLE>
11
<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 allowance for loan losses management believes are inherent
in the portfolio. In determining the appropriate level of the allowance for loan
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,
1999, the Bank recorded provisions for loan losses of $520,000. At September 30,
1999, the Bank had an allowance for loan losses of $2.5 million or .90% of net
loans receivable. The allowance for loan losses was 103.9% 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, 1999, the Bank had no allowances
for estimated losses on real estate owned recorded.
The Bank's management believes that its present allowances are
appropriate 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
the allowance 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.
The actual maturity of a mortgage-backed security may be less than its
stated maturity due to prepayments of the underlying mortgages. Prepayments that
are faster than anticipated may shorten the life of the security and adversely
affect its yield to maturity. The yield is based upon the interest income and
the amortization of any premium or discount related to the mortgage-backed
security. In accordance with generally accepted accounting principals, premiums
and discounts are amortized over the estimated lives of the loans, which
decrease and increase interest income, respectively. The prepayment assumptions
used to determine the amortization period for premiums and discounts can
significantly affect the yield of the mortgage-backed security, and these
assumptions are reviewed periodically to reflect actual prepayments. Although
prepayments of underlying mortgages depend on many factors, including the type
of mortgages,
12
<PAGE>
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 $6.5
million or 32.7% to $13.4 million at September 30, 1999 from $19.9 million at
September 30, 1998. The Bank did not sell or purchase any mortgage-backed
securities held-to-maturity in fiscal 1999.
Mortgage-backed securities available-for-sale were $82.9 and $83.0
million at September 30, 1999 and 1998, 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 1999, the Bank purchased $38.5 million of these securities and sold $8.6
million. Sales of these securities in fiscal 1999 resulted in a pretax loss of
$127,000.
The following table sets forth the composition and amortized cost of
the Bank's mortgage-backed securities at the dates indicated.
September 30,
-----------------------------
1999 1998 1997
-------- --------- --------
(In thousands)
Mortgage-backed securities
held-to-maturity:
GNMA .............................. $ 19 $ 28 $ 42
FNMA .............................. 5,270 7,249 9,167
FHLMC ............................. 8,104 11,099 13,977
FHLMC Remic ....................... 7 82 8,125
Other ............................. -- 1,455 2,754
------- ------- -------
Total ....................... $13,400 $19,913 $34,065
======= ======= =======
Mortgage-backed securities
available-for-sale:
GNMA .............................. $23,016 $22,823 $26,954
FNMA .............................. 15,866 8,615 18,165
FHLMC ............................. 6,601 7,101 10,751
FNMA Remic ........................ 8,957 11,841 18,958
FHLMC Remic ....................... 19,016 23,453 17,582
Collateralized mortgage obligations 11,840 8,895 1,680
------- ------- -------
Total ....................... $85,296 $82,728 $94,090
======= ======= =======
13
<PAGE>
Information regarding the contractual maturities and weighted average
yield of the Bank's mortgage-backed securities portfolio at September 30, 1999
is presented below.
Amounts at September 30, 1999 Which Mature In
---------------------------------------------
After After
One Year One to Five Five to 10 Over 10
or Less Years Years Years Total
------- ----- ----- ----- -----
(Dollars in thousands)
Mortgage-backed securities
held-to-maturity:
GNMA ................... $ -- $ 19 $ -- $ -- $ 19
FNMA ................... -- 1,505 73 3,692 5,270
FHLMC .................. -- 148 5,730 2,226 8,104
FHLMC Remic ............ 7 -- -- -- 7
------- ------- ------- ------- -------
Total ............. $ 7 $ 1,672 $ 5,803 $ 5,918 $13,400
======= ======= ======= ======= =======
Weighted average yield ... 24.6% 5.44% 6.74% 6.45% 6.45%
======= ======= ======= ======= =======
Mortgage-backed securities
available-for-sale:
GNMA ................... $ -- $ -- $ -- $23,016 $23,016
FNMA ................... -- 3,144 -- 12,722 15,866
FHLMC .................. -- -- -- 6,601 6,601
FNMA Remic ............. -- -- 798 8,159 8,957
FHLMC Remic ............ -- -- -- 19,016 19,016
Collateralized mortgage
obligations ....... -- -- 2,318 9,522 11,840
------- ------- ------- ------- -------
Total ............. $ -- $ 3,144 $ 3,116 $79,036 $85,296
======= ======= ======= ======= =======
Weighted average yield ... -- % 5.38% 6.36% 6.34% 6.30%
======= ======= ======= ======= =======
As of September 30, 1999, 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)
GE Capital Mortgage Services, Inc. $4,046 $3,908
PNC Mortgage Securities Corporation $4,693 $4,408
The above securities are fixed rate collateralized mortgage obligations that are
rated AAA by Moody's.
Investments
At September 30, 1999, the Bank's investments amounted to $90.2
million, which includes $77.7 million available-for-sale, which represented
18.7% 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, municipal
obligations, asset-backed securities, and corporate obligations.
14
<PAGE>
It is the Bank's policy that investments are to be made with a primary
consideration for safety and liquidity. Pursuant to this policy, the Bank
invests only in government and government-guaranteed securities, federal funds,
banker acceptances, A-rated commercial paper and corporate obligations, money
market accounts, mutual funds, repurchase agreements, certain collateralized
investments and FHLMC preferred stock. The Company, in addition to being able to
invest in the same investments as the Bank, can also invest in equity
securities.
The method of calculating the carrying value of the Bank's investments
differs by type of security. Investment account securities held to maturity are
carried at cost, adjusted for amortization of premium and accretion of
discounts, if any, over the term of the security. Management has the intent and
ability to hold these securities to maturity.
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
accumulated other comprehensive income. Gains or losses on the sale of
available-for-sale securities are recognized using the specific identification
method.
The following tables set forth the Bank's investment portfolio at
carrying value at the dates indicated.
As of September 30,
----------------------------
1999 1998 1997
------- ------- -------
Available-for-sale
Investment securities:
U.S. government and agency $26,313 $23,749 $26,366
Municipal obligations .... 39,563 29,708 15,874
Corporate obligations .... 1,469 -- --
Commercial paper ......... 500 -- --
Asset-backed securities .. 5,371 -- --
Mutual funds(1) .......... 1,895 1,793 1,628
FHLB stock ............... 8,795 5,050 4,885
FHLMC preferred stock .... 514 531 518
Equity securities ........ 1,411 1,321 187
Trust preferred securities 701 488 --
------- ------- -------
Total .............. $86,532 $62,640 $49,458
======= ======= =======
Held-to-maturity
Investment securities:
U.S. government and agency $ 2,000 $ 5,000 $ 5,998
Municipal obligations .... 1,625 1,625 1,625
Asset-backed securities .. -- -- 918
------- ------- -------
Total .............. $ 3,625 $ 6,625 $ 8,541
======= ======= =======
- ----------------
(1) Consists of investment in the Federated Investors ARM Fund and Legg Mason
Value Trust Fund.
15
<PAGE>
At September 30, 1999, non-U.S. Government and U.S. Government agency
securities that exceeded ten percent of stockholders' equity are as follows:
Issuer Book Value Market Value
------ ---------- ------------
(Dollars in thousands)
Student Loan Mortgage Association $5,263 $5,372
The above securities are floating rate collateralized student loan
obligations rated AAA by Moody's.
16
<PAGE>
The following tables set forth the amount of each category of
investment securities of the Bank at September 30, 1999 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.
<TABLE>
<CAPTION>
As of September 30,
----------------------------------------------------------------------------------------------
After One Year After Five Years
One Year or Less Through Five Years Through Ten Years After Ten Years
------------------- ---------------------- ----------------------- ------------------------
Weighted Weighted Weighted Weighted
Average Average Average Average
Amount Yield Amount Yield Amount Yield Amount Yield
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Available-for-sale
U.S. government and agency $ 1,500 5.61% $ 4,499 5.48% $12,436 6.58% $ 8,986 6.60%
Municipal obligations .... -- -- -- -- 1,388 4.12 40,624 5.31
Corporate obligations .... -- -- 1,480 6.67 -- -- -- --
Commercial paper ......... 494 5.17 -- -- -- -- -- --
Asset-backed securities .. -- -- -- -- -- 5,263 5.90
Mutual funds(1) .......... 1,945 5.78 -- -- -- -- -- --
FHLB stock ............... 8,795 6.75 -- -- -- -- -- --
FHLMC preferred stock .... 501 6.12 -- -- -- -- -- --
Equity securities ........ 1,580 2.50 -- -- -- -- -- --
Trust preferred securities -- -- -- -- -- 750 9.02
------- ---- ---- ----- ------- ---- ------ ----
Total ................ $14,815 5.98% $ 5,979 5.77% $13,824 6.33% $55,623 5.62%
====== ==== ====== ===== ====== ==== ====== =====
Held-to-Maturity:
U.S. government and agency $ -- -- % $ -- -- % $ -- -- % $ 2,000 6.75%
Municipal obligations .... -- -- -- -- -- 1,625 5.63
---- ----- ---- ------ ---- ------- ----
Total ................ $ -- -- % $ -- -- % $ -- -- % $ 3,625 6.25%
======= ==== ===== ===== ====== ==== ======= =====
</TABLE>
- ----------
(1) Consists of investment in the Federated Investors ARM Fund and Legg Mason
Value Trust Fund.
17
<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, 1999, such certificates
accounted for 1.1% of total savings deposits.
The Bank's savings deposits are obtained primarily from residents of
Allegheny and Butler Counties. The principal methods used by the Bank to attract
savings deposit accounts include the offering of a wide variety of services and
accounts, competitive interest rates and convenient office locations and service
hours. The Bank does not currently pay, nor has it in the past paid, fees to
brokers to obtain its savings deposits.
The following table shows the distribution of, and certain other
information relating to the Bank's savings deposits by type as of the dates
indicated.
<TABLE>
<CAPTION>
September 30,
-------------------------------------------------------------
1999 1998 1997
------------------ ------------------- --------------------
Average Average Average
Balance Rate Balance Rate Balance Rate
------- ---- ------- ---- ------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Passbook and club accounts.. $ 48,473 2.53% $ 47,423 2.53% $ 47,514 2.78%
Checking accounts........... 42,901 1.03 36,846 1.09 33,841 1.18
Money market accounts....... 17,539 3.00 14,949 2.98 15,417 2.94
Certificate accounts........ 160,205 5.14 162,517 5.70 147,420 5.76
------- ---- ------- ---- ------- ----
Total.............. $269,118 3.88% $261,735 4.32% $244,192 4.37%
======= ==== ======= ==== ======= ====
</TABLE>
In recent years, the Bank has been required by market conditions to
rely increasingly on newly-authorized types of short-term certificate accounts
and other savings deposit alternatives that are more responsive to market
interest rates than passbook accounts and regulated fixed-rate, fixed-term
certificates that were historically the Bank's primary source of savings
deposits. As a result of deregulation and consumer preference for shorter term,
market-rate sensitive accounts, the Bank has, like most financial institutions,
experienced a significant shift in savings deposits towards relatively
18
<PAGE>
short-term, market-rate accounts. In recent years, the Bank has been successful
in attracting retirement accounts which have provided the Bank with a relatively
stable source of funds. As of September 30, 1999, the Bank's total retirement
funds were $35.4 million or 13.1% 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.
At Within After
September 30, One Two Three Three
1999 Year Years Years Years
---- ---- ----- ----- -----
(In thousands)
Certificate accounts:
Under 4.01% ............ $ 1,599 $ 1,599 $ -- $ -- $ --
4.01% to 6.00% ......... 144,753 100,166 25,022 6,243 13,322
6.01% to 8.00% ......... 13,834 4,736 981 7,242 875
8.01% to 10.00% ........ 19 -- 3 16 --
-------- -------- -------- -------- -------
Total certificate accounts $160,205 $106,501 $ 26,006 $ 13,501 $14,197
======== ======== ======== ======== =======
Maturities of certificates of deposit of $100,000 or more that were
outstanding as of September 30, 1999 are summarized as follows:
(In thousands)
3 months or less..................... $ 1,197
Over 3 months through 6 months....... 1,371
Over 6 months through 12 months...... 200
Over 12 months....................... 200
------
Total....................... $ 2,968
======
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
19
<PAGE>
and range of maturities. FHLB advances are generally available to meet seasonal
and other withdrawals of deposit accounts and to expand lending, as well as to
aid the effort of members to establish better asset and liability management
through the extension of maturities of liabilities. At September 30, 1999, the
Bank had $170.6 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, 1999, the Bank had $3.0 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.
20
<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.
At or for the Year Ended September 30,
--------------------------------------
1999 1998 1997
---- ---- ----
(Dollars in thousands)
FHLB advances:
Average balance outstanding.............. -- $1,177 $ 4,069
Maximum amount outstanding at any
month-end during the period............ -- 3,300 5,300
Weighted average interest rate
during the period................... -- 5.09% 4.90%
Balance outstanding at end of period..... -- -- 3,300
Weighted average interest rate
at end of period.................... -- 5.13% 5.10%
Reverse repurchase agreements:
Average balance outstanding.............. 2,765 1,807 874
Maximum amount outstanding at any
month-end during the period............ 3,792 2,370 1,528
Weighted average interest rate
during the period................... 4.06% 4.50% 4.50%
Balance outstanding at end of period..... 3,041 1,870 1,183
Weighted average interest rate
at end of period.................... 4.25% 4.50% 4.50%
FHLB Repoplus Advances:
Average balance outstanding.............. 24,674 18,058 39,208
Maximum amount outstanding at any
month-end during the period............ 48,900 34,050 52,350
Weighted average interest rate
during the period................... 5.14% 5.75% 5.53%
Balance outstanding at end of period..... 47,600 5,200 43,400
Weighted average interest rate
at end of period.................... 5.48% 6.50% 5.79%
Total average short-term borrowings........ 34,824 21,042 44,151
Average interest rate of total
short-term borrowings.................... 5.32% 5.42% 5.47%
Subsidiaries
Pennsylvania law permits a Pennsylvania-chartered savings institution
to invest up to 3% of its assets in the capital stock, securities or other
obligations of subsidiary corporations or service corporations. The Department
is empowered to authorize Pennsylvania-chartered savings institutions, upon
specific application, to invest a greater percentage of assets in subsidiaries.
As a result of FIRREA, the types of activities and the magnitude of the Bank's
activities in its investments in service corporations
21
<PAGE>
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, 1999 were the Bank and FB Capital Trust. The Bank
had no subsidiaries at September 30, 1999.
Employees
At September 30, 1999, the Bank had 101 full-time and 24 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 nine 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, PLUSTM, and Freedom 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.
22
<PAGE>
The area, 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 4.2%, down from approximately 4.5% one year ago. Construction
activity remains strong, with several major commercial projects underway or in
process, and residential construction up approximately 4.7% 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.
23
<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,
----------------------------------------------------------------------------------------------------
1999 1998 1997
------------------------------- ------------------------------------ -----------------------------
Average Average Average Average Average Average
Balance Interest Yield/Cost Balance Interest Yield/Cost Balance Interest Yield/Cost
------- -------- ---------- ------- -------- ---------- ------- -------- ----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable(1)............ $246,327 $19,410 7.88% $201,036 $ 16,597 8.26% $165,170 $13,634 8.25%
Mortgage-backed securities..... 108,051 6,738 6.24 117,791 7,597 6.45 109,251 6,964 6.37
Investment securities
and FHLB stock............... 81,828 5,581 6.82 61,838 4,301 6.96 53,956 3,646 6.76
Interest-earning deposits...... 536 31 5.78 1,127 74 6.57 158 11 6.96
-------- ------ ---- ------- ------- ---- ------- ------ ----
Total interest-earning
assets.................... 436,742 31,760 7.27 381,792 28,569 7.48 328,535 24,255 7.39
------- ------ ---- ------- ------- ---- ------- ------ ----
Non-interest-earning assets..... 16,862 14,294 11,362
------- ------- -------
Total assets 453,604 $396,086 $339,897
======= ======== =======
Interest-bearing liabilities:
Deposits....................... $268,553 10,545 3.93 $258,013 $10,940 4.24 $235,984 $9,566 4.05
Borrowed funds................. 154,574 8,684 5.62 108,238 6,424 5.94 79,686 4,316 5.42
------- ----- ---- ------- ------ ---- ------ ------ ----
Total interest-
bearing liabilities......... 423,127 19,229 4.54 366,251 17,364 4.74 315,670 13,882 4.40
------- ------ ---- ------- ------ ---- ------- ------ ----
Non-interest bearing
liabilities................... 2,282 814 410
------- ------- -------
Total liabilities.............. 425,409 367,065 316,080
Stockholders' equity............ 28,195 29,021 23,817
------- ------- -------
Total liabilities and
stockholders' equity......... $453,604 $396,086 $339,897
======== ======== ========
Net interest income............. $12,531 $11,205 $10,373
====== ====== ======
Interest rate spread............ 2.73% 2.74% 2.99%
==== ==== ====
Net interest margin(1).......... 2.87% 2.93% 3.16%
==== ==== ====
Ratio of average
interest-earning assets
to average interest-bearing
liabilities................... 103.22% 104.24% 104.08%
====== ====== ======
</TABLE>
- -----------
(1) Net interest margin is net interest income divided by average
interest-earning assets.
24
<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). 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,
----------------------------------------------------------------------------------
1999 vs. 1998 1998 vs. 1997
--------------------------------------- ---------------------------------------
Increase (Decrease) Increase (Decrease)
Due to Due to
--------------------------------------- ---------------------------------------
Rate/ Rate/
Volume Rate Volume Net Volume Rate Volume Net
------- ------- ------ ------- ------- ------- ----- -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest income on interest-earning assets:
Mortgage loans .................................. $ 2,654 $ (607) $ (108) $ 1,939 $ 1,823 $ (68) $ (11) $ 1,744
Mortgage-backed securities ...................... (643) (236) 20 (859) 539 88 6 633
Installment loans ............................... 638 (172) (22) 444 623 29 5 657
Commercial business and lease loans ............. 724 (240) (54) 430 575 (11) (4) 560
Investment securities and other investments ..... 1,462 (183) (42) 1,237 664 61 (7) 718
------- ------- ------ ------- ------- ------- ------- -------
Total interest-earning assets ............... 4,835 (1,438) (206) 3,191 4,224 99 (11) 4,312
------- ------- ------- ------- ------- ------- ------- -------
Interest expense on interest-bearing liabilities:
Deposits ........................................ 410 (771) (34) (395) 866 467 41 1,374
Borrowed funds .................................. 2,660 (306) (94) 2,260 1,719 313 76 2,108
------- ------- ------ ------- ------- ------- ------- -------
Total interest-bearing liabilities .............. 3,070 (1,077) (128) 1,865 2,585 780 117 3,482
------- ------- ------ ------- ------- ------- ------- -------
Net change in net interest income ........... $ 1,765 $ (361) $ ( 78) $(1,326) $ 1,639 $ (681) (128) $ 830
======= ======= ====== ======= ======= ======= ======= =======
</TABLE>
25
<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,
------------------------
1999 1998 1997
---- ---- ----
Return on average assets ..... .74% .74% .80%
Return on average equity ..... 11.98 10.64 11.42
Average equity to assets ratio 6.22 6.94 7.01
Dividend payout ratio ........ 22.09 21.77 19.01
Asset and Liability Management
The Bank in fiscal 1999 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 1999 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,
1999. 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.
26
<PAGE>
<TABLE>
<CAPTION>
September 30, 1999
----------------------------------------------------------------
Over Three
Months After One
Three Through After One 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 ............................ $ 16,572 $ 22,777 $ 80,043 $ 75,233 $ 194,625
Mortgage-backed securities ................ 19,395 13,778 29,948 35,575 98,696
Installment loans ......................... 14,194 15,028 27,148 1,499 57,869
Commercial business and lease loans ....... 8,456 3,007 13,635 2,296 27,394
Investment securities and other investments 10,620 1,200 6,882 75,528 94,230
--------- --------- --------- --------- ---------
Total interest-earning assets ...... 69,237 55,790 157,656 190,131 472,814
--------- --------- --------- --------- ---------
Interest-bearing liabilities:
Passbook and club accounts ................ -- -- 36,355 12,118 48,473
Checking accounts ......................... -- -- 32,833 10,068 42,901
Money market accounts ..................... -- 8,770 8,769 -- 17,539
Certificate accounts ...................... 30,742 75,759 49,023 4,681 160,205
Borrowed funds ............................ 41,939 10,000 93,000 40,250 185,189
--------- --------- --------- --------- ---------
Total interest-bearing liabilities . 72,681 94,529 219,980 67,117 454,307
--------- --------- --------- --------- ---------
Interest sensitivity ........................ $ (3,444) (38,739) $ (62,324) $ 123,014 $ 18,507
========= ========= ========= ========= =========
Cumulative interest sensitivity ............. $ (3,444) $ (42,183) $(104,507) $ 18,507 $ 18,507
========= ========= ========= ========= =========
Cumulative ratio as a percent of assets ..... (.71%) (8.74%) (21.66%) 3.83% 3.83%
========= ========= ========= ========= =========
</TABLE>
Regulation of the Company
Recent Developments - Financial Modernization. On November 12, 1999,
President Clinton signed into law the Gramm-Leach-Bliley Act (the "Act") which
will, effective March 11, 2000, permit qualifying bank holding companies to
become financial holding companies and thereby affiliate with securities firms
and insurance companies and engage in other activities that are financial in
nature. The Act defines "financial in nature" to include securities
underwriting, dealing and market making; sponsoring mutual funds and investment
companies; insurance underwriting and agency; merchant banking activities; and
activities that the Board has determined to be closely related to banking. A
qualifying national bank also may engage, subject to limitations on investment,
in activities that are financial in nature, other than insurance underwriting,
insurance company portfolio investment, real estate development, and real estate
investment, through a financial subsidiary of the bank.
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.
27
<PAGE>
BHCA - Activities and Other Limitations. The BHCA prohibits a bank
holding company from acquiring direct or indirect ownership or control of more
than 5% of the voting shares of any bank, or increasing such ownership or
control of any bank, without prior approval of the Federal Reserve Board. The
BHCA also generally prohibits a bank holding company from acquiring any bank
located outside of the state in which the existing bank subsidiaries of the bank
holding company are located unless specifically authorized by applicable state
law. Pennsylvania banking law permits the interstate acquisition of banking
institutions by bank holding companies on a regional and reciprocal basis. No
approval under the BHCA is required, however, for a bank holding company already
owning or controlling 50% of the voting shares of a bank to acquire additional
shares of such bank.
The BHCA also prohibits a bank holding company, with certain
exceptions, from acquiring more than 5% of the voting shares of any company that
is not a bank and from engaging in any business other than banking or managing
or controlling banks. Under the BHCA, the Federal Reserve Board is authorized to
approve the ownership of shares by a bank holding company in any company, the
activities of which the Federal Reserve Board has determined to be so closely
related to banking or to managing or controlling banks as to be a proper
incident thereto. In making such determinations, the Federal Reserve Board is
required to weigh the expected benefit to the public, such as greater
convenience, increased competition or gains in efficiency, against the possible
adverse effects, such as undue concentration of resources, decreased or unfair
competition, conflicts of interest or unsound banking practices.
The Federal Reserve Board has by regulation determined that certain
activities are closely related to banking within the meaning of the BHCA. These
activities include providing services for internal operations for itself and its
subsidiaries and operating a mortgage company, finance company, credit card
company, factoring company, trust company or savings association; performing
certain data processing operations; providing limited securities brokerage
services; acting as an investment or financial advisor; acting as an insurance
agent for certain types of credit-related insurance; leasing personal property
on a full-payout, non-operating basis; providing tax planning and preparation
services; operating a collection agency; providing certain courier services;
providing management consulting services to depository institutions; issuing and
selling money orders, travelers checks and savings bonds; performing real estate
and personal property appraisals; arranging commercial real estate equity
financing; underwriting and dealing in government obligations and money market
instruments; providing foreign exchange advisory and transactional services;
acting as a futures commission merchant; providing check guaranty services; and
operating a credit bureau. The Federal Reserve Board also has determined that
certain other activities, including real estate brokerage and syndication, land
development, property management and underwriting of life insurance not related
to credit transactions, are not closely related to banking and a proper incident
thereto.
Capital Requirements (Consolidated). The Federal Reserve Board measures
capital adequacy for bank holding companies on the basis of a risk-based capital
framework and a leverage ratio. The guidelines include the concept of Tier 1
capital and total capital. Tier 1 capital is essentially common equity,
excluding net unrealized gain (loss) on equity securities available-for-sale and
goodwill, plus certain types of preferred stock, including the Preferred
Securities issued by the Trust in 1997. The Preferred Securities may comprise up
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, 1999, the company had Tier 1 capital as a percentage
of risk-weighted assets of 13.94% and total risk-based capital as a percentage
of risk-weighted assets of 14.90%.
28
<PAGE>
In addition, the Federal Reserve Board has established minimum leverage
ratio guidelines for bank holding companies. These guidelines currently provide
for a minimum ratio of Tier 1 capital as a percentage of average assets (the
"Leverage Ratio") of 3% for bank holding companies that meet certain criteria,
including that they maintain a Leverage Ratio of at least 100 to 200 basis
points above the minimum. At September 30, 1999, the Company has a Leverage
Ratio of 8.80%.
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. 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.
29
<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
1.2 basis points of their BIF-assessable deposits and 5.9 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, 1999,
the Bank met each of its capital requirements.
30
<PAGE>
The following table sets forth certain information concerning the
Bank's regulatory capital at September 30, 1999.
Tier I Tier I Tier II
Core Risk-Based Risk-Based
Capital Capital Capital
------- ------- -------
(Dollars in thousands)
Equity Capital(1) ...................... $ 28,288 $ 28,288 $ 28,288
Unrealized securities (gains) losses ... 3,833 3,833 3,833
Plus: general valuation allowance (2) .. -- -- 2,477
-------- -------- --------
Total regulatory capital ........... 32,121 32,121 34,598
Minimum required capital ............... 17,833 11,271 22,542
-------- -------- --------
Excess regulatory capital ........... $ 14,288 $ 20,850 $ 12,056
======== ======== ========
Regulatory capital as a percentage(3) .. 7.20% 11.40% 12.28%
Minimum regulatory capital percentage .. 4.00 4.00 8.00
-------- -------- --------
Excess regulatory capital percentage 3.20% 7.40% 4.28%
======== ======== ========
- -----------------
(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, 1999.
(2) Limited to 1.25% of risk adjusted assets.
(3) Tier 1 capital is calculated as a percentage of adjusted total average
assets of $445.8 million. Tier I and Tier II risk-based capital are
calculated as a percentage of adjusted risk-weighted assets of $281.8
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
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)
31
<PAGE>
require the institution or company to increase its ratio of tangible equity to
assets; (3) restrict the rates of interest that the institution or company may
pay; or (4) take any other action that would better carry out the purpose of
prompt corrective action. The Bank believes that it is in compliance with each
of the standards adopted.
Regulatory Enforcement Authority. FIRREA included substantial
enhancement to the enforcement powers available to federal banking regulators.
This enforcement authority includes, among other things, the ability to assess
civil money penalties, to issue cease-and-desist or removal orders and to
initiate injunctive actions against banking organizations and
institution-affiliated parties, as defined. In general, these enforcement
actions may be initiated for violations of laws and regulations and unsafe or
unsound practices. Other actions or inactions may provide the basis for
enforcement actions, including misleading or untimely reports filed with
regulatory authorities. FIRREA significantly increased the amount of and grounds
for civil money penalties and requires, except under certain circumstances,
public disclosure of final enforcement actions by the federal banking agencies.
In addition, under FIRREA and regulations adopted by the FDIC thereunder, the
FDIC must be given 30 days' notice of any changes in directors or senior
executive officers of 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
32
<PAGE>
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 $8.8 million investment in stock of the
FHLB of Pittsburgh at September 30, 1999, which complied with this requirement.
Advances from the FHLB of Pittsburgh are secured by a member's shares
of stock in the FHLB of Pittsburgh, certain types of mortgages and other assets.
Interest rates charged for advances vary depending upon maturity, the cost of
funds to the FHLB of Pittsburgh and the purpose of the borrowing. At September
30, 1999, the Bank had $170.6 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, 1999, the Bank had $2.5 million
of assets classified as substandard.
Interstate Acquisitions. The Commonwealth of Pennsylvania has enacted
legislation regarding the acquisition of commercial banks, bank holding
companies, savings banks and savings and loan associations located in
Pennsylvania by institutions located outside of Pennsylvania. The statute
dealing with savings institutions authorizes (i) a savings bank, savings and
loan association or holding company thereof located in Delaware, the District of
Columbia, Indiana, Kentucky, Maryland, New Jersey, Ohio, Virginia and West
Virginia (collectively, "regional institutions") to acquire the voting stock of,
merge or consolidate with, or purchase assets and assume liabilities of, a
Pennsylvania-chartered savings bank, (collectively, "Pennsylvania institutions")
and (ii) the establishment of branches in Pennsylvania by regional institutions,
in each case subject to certain conditions including reciprocal legislation in
the state in which the regional institution seeking entry into Pennsylvania is
located permitting comparable entry by Pennsylvania institutions and approval by
the Pennsylvania Department of Banking. The statute also provides for nationwide
branching by Pennsylvania-chartered savings banks and savings and loan
associations, subject to Pennsylvania Department of Banking approval and certain
other conditions. Of the states within the region, Delaware, Maryland, New
Jersey, Ohio and West Virginia currently have laws that permit Pennsylvania
institutions to branch into such states and/or acquire savings institutions
located is such states.
Miscellaneous. The Bank is subject to certain restrictions on loans to
the Company, on investments in the stock or securities thereof, on the taking of
such stock or securities as collateral for loans to any borrower, and on the
issuance of a guarantee or letter of credit on behalf of the Company. The Bank
is also subject to certain restrictions on most types of transactions with the
Company, requiring that the terms of such transactions be substantially
equivalent to terms of similar transactions with non-affiliated firms. In
addition, there will be various limitations on the distribution of dividends to
the Company by the Bank.
33
<PAGE>
In addition to requiring a new system of risk-based insurance
assessments and a system of prompt corrective action with respect to
undercapitalized banks, as discussed above, the FDICIA also contains provisions
which are intended to enhance independent auditing requirements, amend various
consumer banking laws, limit the ability of "undercapitalized banks" to borrow
from the Federal Reserve Board's discount window, and require regulators to
perform annual on-site bank examinations and set standards for real estate
lending.
Pennsylvania Bank Law
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.
34
<PAGE>
Bad Debt Reserves. Savings institutions such as the Bank, which meet
certain definitional tests primarily relating to their assets and the nature of
their businesses, are permitted to establish a reserve for bad debts and to make
annual additions to the reserve. These additions may, within specified formula
limits, be deducted in arriving at the Bank's taxable income.
Pennsylvania Taxation. The Company is subject to the Pennsylvania
Corporate Net Income Tax and Capital Stock and Franchise Tax. The Corporate Net
Income Tax rate is currently 12.25% and is imposed on the Company's
unconsolidated taxable income for federal purposes with certain adjustments. In
general, the Capital Stock Tax is a property tax imposed at a rate of 1.3% of a
corporation's capital stock value, which is determined in accordance with a
fixed formula based on average net income and net worth.
The Bank is subject to tax under the Pennsylvania Mutual Thrift
Institutions Tax Act ("MITA"), currently at the rate of 11.5% on the Bank's net
earnings, determined in accordance with GAAP, as shown on its books. For fiscal
years beginning in 1983, and thereafter, net operating losses may be carried
forward and allowed as a deduction for three succeeding years. MITA exempts the
Bank from all other corporate taxes imposed by Pennsylvania for state tax
purposes, and from all local taxes imposed by political subdivisions thereof,
except taxes on real estate and real estate transfers.
35
<PAGE>
Item 2. Properties
At September 30, 1999, the Bank conducted its business from its main
office in Pittsburgh, Pennsylvania and eight full-service branch offices located
in Allegheny and Butler counties.
The following table sets forth certain information with respect to the
offices of the Bank as of September 30, 1999.
<TABLE>
<CAPTION>
Location
- ------------------------------------------------ Net Book Value
Lease Expiration of Property and
Date (including) Leasehold Improvements
County Address Lease or Own Options at September 30, 1999
------ ------- -------------------- ---------------------
<S> <C> <C> <C>
3300 Brighton Road
Allegheny Pittsburgh, PA 15212 Own $133,869
1009 Perry Highway
Allegheny Pittsburgh, PA 15237 Own 209,210
251 South Main Street
Butler Zelienople, PA 16063 Own 467,265
312 Beverly Road
Allegheny Pittsburgh, PA 15216 Lease 7/31/08 193,667
6000 Babcock Blvd.
Allegheny Pittsburgh, PA 15237 Lease 11/30/98 --
1701 Duncan Avenue
Allegheny Allison park, PA 15101 Lease 01/31/00 5,937
4710 Liberty Avenue
Allegheny Pittsburgh, PA 15224 Own 595,444
728 Washington Road
Allegheny Pittsburgh, PA 15228 Own 239,952
2034 Penn Avenue
Allegheny Pittsburgh, PA 1522 Own 974,080
----------
Total $2,819,424
Loan Center
1014 Perry Highway
Allegheny Pittsburgh, PA 15237 Lease 9/30/07 57,394
Data Processing and
Checking Department
1015 Perry Highway
Allegheny Pittsburgh, PA 15237 Own 271,894
---------
Total (including Loan
and Data Centers) $3,148,712
=========
</TABLE>
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."
36
<PAGE>
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.
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 1999 ("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.
37
<PAGE>
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 2000 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.
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.
<TABLE>
<CAPTION>
<S> <C>
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
10.11 1998 Stock Compensation Plan(5)
</TABLE>
38
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
13 1999 Annual Report to Stockholders
21 Subsidiaries (see Item 1. Description of Business - Subsidiaries)
23 Consent of Accountants
27 Financial Data Schedule (in electronic filing only)
</TABLE>
- -------------
(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 filed with the SEC on
March 12, 1998.
(5) Incorporated by reference from an exhibit in Form S-8 filed with the SEC on
January 25, 1999.
(b.) Reports on form 8-K
The Company did not file any reports on Form 8-K during the quarter
ended September 30, 1999.
39
<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 22, 1999 /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 22, 1999.
<TABLE>
<CAPTION>
<S> <C>
/s/ William L. Windisch /s/ Richard G. Spencer
- ----------------------------------------------- ---------------------------------------
William L. Windisch Richard G. Spencer
Director, President and Chief Executive Officer Executive Vice President and Treasurer
(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
</TABLE>
40
EXHIBIT 13
<PAGE>
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:
o maximizing stockholder value, thereby assuring the Financial
success of the independent bank franchise
o ensuring customer satisfaction by offering quality products and
services that are delivered in an efficient and convenient manner
o the employment and retention of a competent and dedicated staff
o the communities served by Fidelity Bank.
Annual Report 1999 - Fidelity Bancorp, Inc. and Subsidiaries -
<PAGE>
Corporate Profile and Financial Highlights
- --------------------------------------------------------------------------------
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 nine offices
located in Allegheny and Butler counties.
Financial Highlights
--------------------
<TABLE>
<CAPTION>
...........................................................................................At or For the
.................................................................................Fiscal Years Ended September 30,
(in thousands, except per share data and percentages)..................................1999................1998
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Total assets..........................................................................$482,543.............$406,044
Total savings deposits.................................................................269,118..............261,735
Total loans receivable, net............................................................275,958..............218,892
Total stockholders' equity..............................................................26,046...............29,021
- --------------------------------------------------------------------------------------------------------------------
Net interest income....................................................................$11,746..............$10,683
Provision for loan losses..................................................................520..................405
Net income...............................................................................3,379................2,925
- --------------------------------------------------------------------------------------------------------------------
Diluted earnings per share1..............................................................$1.68................$1.44
Book value per share1....................................................................13.47................14.67
Average interest rate spread..............................................................2.73%................2.74%
Return on average assets....................................................................74%..................74%
Return on average stockholders' equity...................................................11.98%...............10.64%
- --------------------------------------------------------------------------------------------------------------------
Common shares outstanding(1).........................................................1,934,308............1,978,543
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
1 Per share amounts and common shares outstanding were restated to reflect
the 25% stock split paid on March 31, 1998.
Annual Report 1999 - Fidelity Bancorp, Inc. and Subsidiaries - Page 1
<PAGE>
Letter to Our Stockholders
- --------------------------------------------------------------------------------
To Our Stockholders
-------------------
The country's economy experienced strong growth and expansion in 1999, which
positively impacted individuals and businesses alike. Fidelity Bancorp was among
those companies that enjoyed a successful year, achieving record operating
results. New highs were achieved in many areas of operation, as the following
illustrates:
o Net income increased by 15.5% to $3.38 million
o Diluted earnings-per-share grew 16.7% to $1.68
o Return-on-equity increased by 12.6% to 11.98%
o Assets grew 18.8% to $483 million
o Loans increased by 26.1% to $276 million
o The investment portfolio increased to $187 million
o Deposits reached $269 million
To more fully understand the respective areas of the Company's operation that
contributed to the above results, the following synopses are offered.
[NET INCOME GRAPH OMITTED]
1995 1996 1997 1998 1999
---- ---- ---- ---- ----
(Dollars in Millions)
1.52 2.19* 2.72 2.93 3.38
*Excluding SAIF Assessment
Capital - A key objective of the Bank's Business Plan is to make the most
effective use of capital. The Board of Directors has determined that the best
way to accomplish this goal is to utilize capital to increase earnings by
steadily increasing the Bank's assets. During this past year assets were
increased through the substantial acquisition of new loans and investment
securities. This growth was funded by a combination of customer deposits and
funds borrowed from the Federal Home Loan Bank. Through this utilization of
capital, the capital-to-assets ratio declined from 7.15% to 5.40%, the desired
level specified in the Business Plan. Significant growth in interest income was
attained through this asset acquisition, while maintaining a stable net interest
margin.
Earnings - Per share earnings reached an all time high of $1.68 per diluted
share, up from $1.44 last year. These earnings produced a return on equity of
11.98%, up from 10.64% the prior year, and a return on assets of .74%, which was
equal to last year.
[EARNINGS PER SHARE (DILUTED) GRAPH OMITTED]
1995 1996 1997 1998 1999
---- ---- ---- ---- ----
$0.79 $1.12* $1.37 $1.44 $1.68
*Excluding SAIF Assessment
[RETURN ON EQUITY GRAPH OMITTED]
1995 1996 1997 1998 1999
---- ---- ---- ---- ----
7.13% 9.88%* 11.42% 10.64% 11.98%
*Excluding SAIF Assessment
Stock Performance - Our stock performed below expectations during 1999, as did
community bank stocks in general. This was a year in which high-tech stocks were
"in" and value investing was "out." As our quarterly press releases announced
continual earnings growth, the price of our shares steadily dropped. At
September 30, 1998 the price of the stock was $20 per share and by the end of
September 1999, had fallen to $14.75 per share, a decline of approximately 35%.
To further illustrate the impact that this investing preference had on our
stock, the price/earnings multiple (P/E) at the end of September 1998 was 13.8
times earnings and by the end of September 1999 had declined to 8.9 times
earnings. Additionally, the price-to-book ratio at the end of September 1998 was
136% and by the end of September 1999 had declined to 110%. This represents a
decline of 36% and 20% respectively. As shareholders, we know that cycles such
as this occur periodically in the stock market. We also know that we can expect
this to be a temporary situation, with our stock price recovering to more normal
levels over time.
Stock Buyback - It has always been the philosophy of the Board of Directors and
the management of the Company to do whatever they considered best to support the
value of the stock. During the past
PAGE 2 - Annual Report 1999 - Fidelity Bancorp, Inc. and Subsidiaries
<PAGE>
Letter to Our Stockholders - continued
- --------------------------------------------------------------------------------
year a decision was made to repurchase some of the Bank's outstanding shares
because of the low price. This positive action is in the best interest of the
stockholders. To date 86,675 shares have been repurchased at an average price of
$16.26. Additional shares may be repurchased as they become available.
[ASSETS GRAPH OMITTED]
1995 1996 1997 1998 1999
---- ---- ---- ---- ----
(Dollars in Millions)
281.8 317.9 381.0 406.0 482.5
Other Income - Unlike interest income earned on loan and security investments,
"other income" refers to fees and charges assessed by the Bank for services
rendered to customers. Until recently, this area was a minor source of earnings.
As the Bank's interest margin has receded in the last several years, other
income has become a more important source of revenue. This past year other
income has grown by more than 30% over last year's results.
[LOANS GRAPH OMITTED]
1995 1996 1997 1998 1999
---- ---- ---- ---- ----
(Dollars in Millions)
120.9 151.3 182.9 218.9 276.0
Other Expense - The expenses that the Company incurs in covering its cost of
operation are collectively referred to as "other expense." We have a long
history of maintaining a low expense ratio. An expense ratio below 2% of assets
is considered to be in the most desirable range. This year the Company's expense
ratio was 1.80% of assets, down from 1.85% last year. Even though the Company
grew by more than $75 million in assets, we were able to reduce the expense
ratio while managing that growth.
Loans - This was an extraordinary year for the origination of new loans. The
amount invested in new loans surpassed $120 million. To put this in perspective,
in 1998 we originated approximately$95 million in new loans and approximately$65
million in 1997. The current year origination volume resulted in growth of
approximately 30% in the mortgage portfolio, 18% in the consumer loan portfolio,
and 18% in the commercial loan portfolio. Overall outstanding loan balances
achieved an increase in excess of $57 million.
[DEPOSITS GRAPH OMITTED]
1995 1996 1997 1998 1999
---- ---- ---- ---- ----
(Dollars in Millions)
244.1 234.3 244.2 261.7 269.1
Asset Quality - Credit quality is often considered to be the area in which a
bank is most at risk and, therefore, always a matter of concern. Due to the
country's strong economy, credit quality has not been an issue for the last five
years. However, when the future of the economy, even though appearing strong,
becomes somewhat uncertain as it has recently, credit quality can show signs of
deterioration. This past year we experienced a decline in credit quality, as
non-performing assets, as a percent of total assets, increased from .14% to
.52%, which, while higher, is still well within the acceptable range.
Deposits - Sustaining consistent deposit growth is a challenge for all banks. To
a large degree this is caused by the fact that consumers generally have become
very adept at managing their finances to achieve a higher return. Our deposit
customers, like most consumers, have been reducing their bank deposit balances
and investing an increasing amount of their long-term savings in other forms,
such as stocks and mutual funds. Total deposit account balances grew by less
than 3% this past year, even though our deposit management practices continue to
bring new customers and new accounts to the Bank in record numbers.
Impact Update - Another key objective in the Bank's strategic plan is to become
a full financial- services provider. Towards that end, last year we introduced
the new "Fidelity Impact Investment and Insurance Services" program. Through
this program our customers and the general public can purchase
Annual Report 1999 - Fidelity Bancorp, Inc. and Subsidiaries - Page 3
<PAGE>
Letter to Our Stockholders - continued
- --------------------------------------------------------------------------------
mutual funds, stocks, and bonds, as well as obtain financial planning and 401-K
plan administration. With the first year behind us we are able to say that the
Fidelity Impact program has had a very solid beginning. As we continue to expand
and develop the program, we expect Fidelity Impact to contribute favorably to
earnings during fiscal year 2000.
What's New - This year we totally redesigned our Internet website. Much more
information is now available to our customers. We are currently investigating
the installation of on-line banking through our website and expect to have this
service available in 2000. Our website can be found at www.fidelitybank-pa.com
-----------------------
[OTHER INCOME AS A % OF AVERAGE ASSETS GRAPH OMITTED]
1995 1996 1997 1998 1999
---- ---- ---- ---- ----
Percent
0.22 0.24 0.26 0.29 0.34
Looking Ahead - 1999 was a very fulfilling, although difficult year for the
Company. Concerns over the Year 2000 problem were uppermost in our minds and
consumed a great amount of energy. With that behind us now, we can refocus our
efforts on meeting the challenges of the changing banking environment of the
21st century. With the barriers between banking, and the securities and
insurance businesses having been removed by recent legislation, we will continue
the transformation of the Bank into a full service financial firm. Additionally,
we will continue our efforts to implement the use of new technologies to more
effectively meet customers' ever-changing needs in a cost-effective manner. And,
as we pursue our daily activities, we will never lose sight of our primary goal
- - to continue to enhance the value of the Company for the benefit of our
shareholders.
As I look to the future, I must also take a moment to pay tribute to the past
years of hard work and effort that have brought us to this point. Just 12 short
years ago, Fidelity Bank converted to a stock form of ownership. At that time,
there were six branch offices and total assets were$136 million. Today, with
nine offices and total assets surpassing $482 million, I think we can say with
pride that we've come a long way.
[OPERATING EXPENSES AS A % OF AVERAGE ASSETS GRAPH OMITTED]
1995 1996 1997 1998 1999
---- ---- ---- ---- ----
Percent
2.20 2.18* 1.91 1.85 1.80
* Excluding SAIF Assessment
The one constant over the years, which has always been the backbone of the Bank,
is the fine team of men and women who make up the Bank's staff. Each year I have
had the pleasure of watching their diligent efforts and dedication produce
remarkable results, with 1999 being the best year ever. As we close the chapter
on the 20th century, I wish to express my gratitude to this outstanding group of
people for all that they have contributed through the years to get us to this
point. I also extend my thanks to the Board of Directors for their endless
support.
As we embark on the 21st century, I am excited over the limitless possibilities
it presents and look forward with enthusiasm to meeting the challenges and
opportunities that will arise this year and in future years.
To you, our shareholders, I extend my sincere thanks on behalf of the directors,
officers and staff, for your continued support.
Sincerely,
/s/ William L. Windisch
William L. Windisch
President
January 7, 2000
Page 4 - Annual Report 1999 - Fidelity Bancorp, Inc. and Subsidiaries
<PAGE>
Selected Financial Data
- --------------------------------------------------------------------------------
Financial Condition Data
------------------------
<TABLE>
<CAPTION>
..............................................................................September 30,
(in thousands)..........................................1999.........1998.........1997.........1996.........1995
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Total assets........................................$482,543......$406,044.....$380,964.....$317,874.....$281,810
Loans, net...........................................275,958.......218,892......182,869......151,263......120,904
Mortgage-backed securities(1).........................96,250.......102,870......127,916.......93,738......101,511
Investment securities and
other earning assets(2)...............................90,521........69,878.......58,242.......59,302.......46,523
Savings deposits.....................................269,118.......261,735......244,192......234,276......244,083
Advances from FHLB
and other borrowings.................................183,891.......112,320......108,133.......57,143.......13,092
Stockholders' equity
- -- substantially restricted...........................26,046........29,021.......25,881.......21,778.......22,132
Number of full service offices.............................9.............8............8............8............8
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
Operations Data
---------------
<TABLE>
<CAPTION>
....................................................................Fiscal Years Ended September 30,
........................................................1999.........1998.........1997.........1996.........1995
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Interest income......................................$30,975.......$28,047......$23,963......$20,986......$19,047
Interest expense......................................19,229........17,364.......13,882.......11,832.......11,059
- -----------------------------------------------------------------------------------------------------------------
Net interest income...................................11,746........10,683.......10,081........9,154........7,988
Provision for loan losses................................520...........405..........500..........270..........230
- -----------------------------------------------------------------------------------------------------------------
Net interest income after
provision for loan losses...........................11,226........10,278........9,581........8,884........7,758
Gain (loss) on sale of investments and
mortgage-backed securities, net.........................64............84...........53...........27..........(57)
Gain on sale of loans.....................................17............11...........28...........17...........18
Service fees and other income..........................1,442.........1,071..........801..........688..........643
Operating expenses.....................................8,153.........7,315........6,488........8,073(3).....6,119
- -----------------------------------------------------------------------------------------------------------------
Income before income tax provision.....................4,596.........4,129........3,975........1,543........2,243
Income tax provision...................................1,217.........1,204........1,256..........226..........728
- -----------------------------------------------------------------------------------------------------------------
Net income..........................................$3,379........$2,925.......$2,719.......$1,317(3)....$1,515
- -----------------------------------------------------------------------------------------------------------------
Diluted earnings per share(4)........................$1.68.........$1.44........$1.37.........$.67.........$.79
Cash dividends per share(4)...........................$.38.........$.324.........$.26........$.217........$.205
- -----------------------------------------------------------------------------------------------------------------
</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, operating expenses would have been $6,536, and diluted earnings per
share would have been $1.12 per share.
4 Per share amounts were restated to reflect the 25% stock split paid in
March 1998 and the 10% stock dividend paid in May 1997 and 1996.
Annual Report 1999 - Fidelity Bancorp, Inc. and Subsidiaries Page 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, 1999 and 1998,
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,
1999. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects ,the financial position of Fidelity Bancorp,
Inc. and subsidiaries as of September 30, 1999 and 1998, and the results of
their operations and their cash flows for each of the years in the three-year
period ended September 30, 1999, in conformity with generally accepted
accounting principles.
/s/ KPMG LLP
Pittsburgh, Pennsylvania
October 29, 1999
Page 6 - Annual Report 1999 - Fidelity Bancorp, Inc. and Subsidiaries
<PAGE>
Consolidated Statements of Financial Condition
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
.............................................................................................September 30,
(in thousands, except per share data).................................................1999................1998
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Cash and amounts due from depository institutions....................................$4,304..............$2,539
Interest-earning demand deposits with other institutions................................364.................613
Investment securities held-to-maturity
(market value of $3,509 and $6,750)
(Notes 2, 11, 12, 14 and 21)........................................................3,625...............6,625
Investment securities available-for-sale
(cost of $81,446 and $56,750) (Notes 3, 12, 14 and 21).............................77,737..............57,590
Mortgage-backed securities held-to maturity (market value of $13,288 and $20,155)
(Notes 4, 12, 14 and 21)...........................................................13,400..............19,913
Mortgage-backed securities available-for-sale (cost of $85,296 and $82,728)
(Notes 5, 12, 14 and 21)...........................................................82,850..............82,957
Loans receivable, net of the allowance of $2,477 and $2,243
(Notes 6, 8, 12 and 21)...........................................................275,958.............218,892
Real estate owned, net (Note 8).........................................................107..................21
Federal Home Loan Bank stock, at cost (Notes 9 and 12)................................8,795...............5,050
Accrued interest receivable:
Loans...............................................................................1,271...............1,122
Mortgage-backed securities............................................................552.................606
Investments and interest-earning deposits...........................................1,063.................845
Office premises and equipment, net (Note 10)..........................................4,700...............3,446
Deferred tax assets (Note 16).........................................................3,155.................700
Prepaid expenses and sundry assets....................................................4,662...............5,125
- -----------------------------------------------------------------------------------------------------------------
.....................................................................................$482,543............$406,044
- -----------------------------------------------------------------------------------------------------------------
Liabilities and Stockholders' Equity
Liabilities:
Savings and time deposits (Notes 11 and 21)......................................$269,118............$261,735
Federal Home Loan Bank advances (Notes 12 and 21).................................170,600.............100,200
Guaranteed preferred beneficial interest in Company's debentures (Note 13).........10,250..............10,250
Reverse repurchase agreements (Notes 14 and 21).....................................3,041...............1,870
Advance payments by borrowers for taxes and insurance...............................1,298...............1,126
Accrued interest payable............................................................1,153.................731
Accrued income taxes (Note 16)........................................................199.................171
Other accrued expenses and sundry liabilities.........................................838.................940
- -----------------------------------------------------------------------------------------------------------------
......................................................................................456,497.............377,023
- -----------------------------------------------------------------------------------------------------------------
Stockholders' Equity (Notes 1, 16, 17, and 18):
Common stock, $0.01 par value per share;
10,000,000 shares authorized; 1,989,883 and
1,978,543 shares issued..............................................................20..................20
Treasury stock, at cost - 55,575 shares..............................................(953).................--
Additional paid-in capital.........................................................14,305..............14,168
Retained earnings -- substantially restricted......................................16,736..............14,106
Accumulated other comprehensive income (loss), net of tax..........................(4,062)................727
- -----------------------------------------------------------------------------------------------------------------
.......................................................................................26,046..............29,021
- -----------------------------------------------------------------------------------------------------------------
.....................................................................................$482,543............$406,044
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
See Accompanying Notes to Consolidated Financial Statements.
Annual Report 1999 - Fidelity Bancorp, Inc. and Subsidiaries - Page 7
<PAGE>
Consolidated Statements of Income
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
For the fiscal years ended September 30, 1999, 1998 and 1997
(in thousands, except per share data).........................................1999..........1998...........1997
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest income:
Loans......................................................................$19,410........$16,597.......$13,634
Mortgage-backed securities...................................................6,738..........7,597.........6,964
Investment securities........................................................4,796..........3,779.........3,354
Deposits with other institutions................................................31.............74............11
- -----------------------------------------------------------------------------------------------------------------
Total interest income.....................................................30,975.........28,047........23,963
- -----------------------------------------------------------------------------------------------------------------
Interest expense:
Savings and time deposits (Note 11).........................................10,545.........10,940.........9,566
Borrowed funds...............................................................7,660..........5,400.........3,924
Guaranteed preferred beneficial interest in Company's debentures (Note 13)...1,024..........1,024...........392
- -----------------------------------------------------------------------------------------------------------------
Total interest expense....................................................19,229.........17,364........13,882
- -----------------------------------------------------------------------------------------------------------------
Net interest income before provision for loan losses..........................11,746.........10,683........10,081
Provision for loan losses (Note 8)...............................................520............405...........500
- -----------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses...........................11,226.........10,278.........9,581
- -----------------------------------------------------------------------------------------------------------------
Other income:
Loan service charges and fees..................................................161............130............89
Gain on sale of investment and mortgage-backed securities, net..................64.............84............53
Gain on sale of loans...........................................................17.............11............28
Deposit service charges and fees...............................................566............413...........408
Other operating income.........................................................715............528...........304
- -----------------------------------------------------------------------------------------------------------------
Total other income.........................................................1,523..........1,166...........882
- -----------------------------------------------------------------------------------------------------------------
Operating expenses:
Compensation, payroll taxes and fringe benefits (Notes 18 and 19)............4,805..........4,291.........3,682
Office occupancy and equipment expense.........................................811............669...........570
Depreciation and amortization..................................................582............516...........541
Federal insurance premiums.....................................................156............155...........112
(Gain) loss on real estate owned, net..........................................(36)............12............31
Intangible amortization.........................................................--.............--............44
Other operating expenses.....................................................1,835..........1,672.........1,508
- -----------------------------------------------------------------------------------------------------------------
Total operating expenses...................................................8,153..........7,315.........6,488
- -----------------------------------------------------------------------------------------------------------------
Income before income tax provision.............................................4,596..........4,129.........3,975
Income tax provision (Note 16).................................................1,217..........1,204.........1,256
- -----------------------------------------------------------------------------------------------------------------
Net income................................................................$3,379.........$2,925........$2,719
- -----------------------------------------------------------------------------------------------------------------
Basic earnings per share (Note 1)............................................$1.72..........$1.49.........$1.42
Diluted earnings per share (Note 1)..........................................$1.68..........$1.44.........$1.37
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
See Accompanying Notes to Consolidated Financial Statements.
Page 8 - Annual Report 1999 - Fidelity Bancorp, Inc. and Subsidiaries
<PAGE>
Consolidated Statements of Stockholders' Equity
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
For the fiscal years ended September 30, 1999, 1998 and 1997.............................Accumulated
............................................................................................Other........Total
..................................................Additional............................Comprehensive...Stock-
......................................Common........Paid-In.....Treasury.....Retained...Income (Loss)..holders'
(in thousands).........................Stock........Capital.......Stock......Earnings....Net of Tax.....Equity
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at September 30, 1996............$14........$10,437.......$ --.... ....$12,523.......$(1,196)......$21,778
Comprehensive income:
Net income...............................--.............--.........--...........2,719............--.........2,719
Other comprehensive income,
net of tax of $621.....................--..... .......--.........--..............--.........1,429.........1,429
- -----------------------------------------------------------------------------------------------------------------
Total comprehensive income................--.............--.........--...........2,719.........1,429.........4,148
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)...........--............--
Sale of stock through Dividend
Reinvestment Plan.......................--.............82.........--..............--............--............82
- -----------------------------------------------------------------------------------------------------------------
Balance at September 30, 1997.............15.........13,811.........--..........11,822...........233........25,881
Comprehensive income:
Net income..............................--.............--.........--...........2,925............--.........2,925
Other comprehensive income,
net of tax of $227....................--.............--.........--..............--...........494...........494
- -----------------------------------------------------------------------------------------------------------------
Total comprehensive income................--.............--.........--...........2,925...........494.........3,419
Stock options exercised, including
tax benefit of $71 (Note 18).............1............251.........--..............--............--...........252
Stock split paid (Note 1)..................4............(4).........--..............--............--............--
Cash dividends paid.......................--............--..........--............(641)...........--..........(641)
Sale of stock through Dividend
Reinvestment Plan.........................--...........110..........--..............--............--...........110
- -----------------------------------------------------------------------------------------------------------------
Balance at September 30, 1998.............20........14,168..........--...........14,106..........727........29,021
Comprehensive income:
Net income..............................--............--..........--............3,379...........--.........3,379
Other comprehensive loss,
net of tax of ($2,410).................--............--..........--...............--.......(4,740).......(4,740)
Reclassification adjustment,
net of tax of ($25)...................--............--..........--...............--..........(49)..........(49)
- -----------------------------------------------------------------------------------------------------------------
Total comprehensive income (loss):........--............--..........--............3,379.......(4,789).......(1,410)
Stock options exercised...................--............39..........--...............--...........--............39
Cash dividends paid.......................--............--..........--.............(749)..........--..........(749)
Treasury stock purchased
(55,575 shares).........................--............--........(953)..............--...........--..........(953)
Sale of stock through Dividend
Reinvestment Plan.......................--............98..........--...............--...........--............98
- -----------------------------------------------------------------------------------------------------------------
Balance at September 30, 1999............$20.......$14,305.......$(953).........$16,736......$(4,062)......$26,046
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
See Accompanying Notes to Consolidated Financial Statements.
Annual Report 1999 - Fidelity Bancorp, Inc. and Subsidiaries - Page 9
<PAGE>
Consolidated Statements of Cash Flows
- --------------------------------------------------------------------------------
For the fiscal years ended September 30, 1999, 1998 and 1997
<TABLE>
<CAPTION>
(in thousands)................................................................1999..........1998...........1997
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating Activities:
Net income..................................................................$3,379.........$2,925........$2,719
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses..................................................520............405...........500
(Gain) loss on real estate owned..........................................(36).............12............31
Depreciation of premises and equipment.....................................582............516...........541
Deferred loan fee amortization............................................(260)..........(175).........(154)
Amortization of investment and mortgage-backed
securities discounts/premiums, net.......................................341............397...........317
Deferred income tax provision...............................................21.............75..........(453)
Amortization of intangibles.................................................--.............--............44
Net gain on sale of investments...........................................(191)..........(209)..........(83)
Net loss on sale of mortgage-backed securities.............................127............125............30
Loans held-for-sale originated............................................(973)..........(372).........(814)
Sale of loans held-for-sale................................................978............374...........829
Net gain on sale of loans..................................................(17)...........(11)..........(28)
Increase in interest receivable...........................................(313)..........(158).........(272)
Increase in interest payable...............................................422.............42...........449
Increase (decrease) in accrued taxes........................................28............(47)..........516
SAIF assessment.............................................................--.............--........(1,537)
Tax benefit relating to stock benefit plan..................................--.............71............98
Other changes -- net.......................................................572.........(3,178)..........552
- -----------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities..................................5,180............792.........3,285
- -----------------------------------------------------------------------------------------------------------------
Investing Activities:
Proceeds from sales of investments available-for-sale........................3,424.........17,345........16,301
Proceeds from sales of mortgage-backed securities available-for-sale.........8,577.........43,760.........8,588
Proceeds from maturities and principal repayments
of investment securities available-for-sale...............................12,508..........5,255.........2,480
Proceeds from maturities and principal repayments
of mortgage-backed securities available-for-sale..........................26,963.........19,812.........8,130
Purchases of investment securities available-for-sale......................(40,400).......(35,168)......(11,594)
Purchases of mortgage-backed securities available-for-sale.................(38,532).......(52,578)......(47,029)
Proceeds from maturities and principal repayments
of investment securities held-to-maturity..................................5,000.........14,921.........1,487
Purchases of investment securities held-to-maturity.........................(2,004).......(12,997).......(4,625)
Proceeds from mortgage-backed securities
held-to-maturity principal repayments......................................6,436.........13,987.........5,162
Purchases of mortgage-backed securities held-to-maturity........................--.............--........(8,066)
Net increase in loans......................................................(58,701).......(37,327)......(32,530)
Sale of other loans..........................................................1,266............709...........585
Additions to office premises and equipment..................................(1,845)..........(512).........(978)
Net purchases of FHLB stock.................................................(3,745)..........(165).......(2,059)
- -----------------------------------------------------------------------------------------------------------------
Net cash used by investing activities...................................$(81,053)......$(22,958).....$(64,148)
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
(continued)
Page 10 - Annual Report 1999 - Fidelity Bancorp, Inc. and Subsidiaries
<PAGE>
Consolidated Statements of Cash Flows - continued
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
For the fiscal years ended September 30, 1999, 1998 and 1997
(in thousands)................................................................1999..........1998...........1997
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Financing Activities:
Net increase in savings and time deposits...................................$7,383........$17,543........$9,916
Increase in reverse repurchase agreements....................................1,171............687...........690
Net increase in FHLB advances...............................................70,400..........3,500........40,050
Cash dividends paid...........................................................(749)..........(641).........(517)
Stock options exercised.........................................................39............181...........292
Proceeds from sale of stock.....................................................98............110............82
Acquisition of treasury stock.................................................(953)............--............--
Proceeds from guaranteed preferred beneficial interest in subordinated debt.....--.............--........10,250
Debt issuance costs.............................................................--............(36).........(688)
- -----------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities.................................77,389.........21,344........60,075
- -----------------------------------------------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents...............................1,516...........(822).........(788)
Cash and cash equivalents at beginning of year.................................3,152..........3,974.........4,762
- -----------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year..................................$4,668.........$3,152........$3,974
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
Supplemental Disclosure of Cash Flow Information
------------------------------------------------
<TABLE>
<CAPTION>
For the fiscal years ended September 30, 1999, 1998 and 1997
(in thousands)................................................................1999..........1998...........1997
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash paid during the year for:
Interest on deposits and other borrowings..................................$18,807........$17,322.......$13,433
Income taxes.................................................................1,210..........1,225...........335
- -----------------------------------------------------------------------------------------------------------------
Transfer of loans to real estate owned..........................................$134............$21..........$120
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
See Accompanying Notes to Consolidated Financial Statements.
Annual Report 1999 - Fidelity Bancorp, Inc. and Subsidiaries - Page 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 nine 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
The Company classifies investment securities as either: (1) Securities
Held-to-Maturity -- debt securities that the Company has the positive intent and
ability to hold to maturity and which are 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 which are 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 which
are reported at fair value, with unrealized gains and losses, net of taxes,
included as a separate component of accumulated other comprehensive income. The
cost of securities sold is determined on a specific identification basis.
Loans
Loans receivable are stated at unpaid principal balances net of the allowance
for possible loan losses, net deferred loan fees and discounts. Loans 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
(Note contiued)
Page 12 - Annual Report 1999 - Fidelity Bancorp, Inc. and Subsidiaries
<PAGE>
Notes to Consolidated Financial Statements - continued
- --------------------------------------------------------------------------------
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 identifies and evaluates
impaired loans 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 are provided for in
the allowance for loan losses. 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, which are evaluated collectively for impairment.
The Bank reviews its loans for impairment on a quarterly basis.
The accrual of interest on all loans is discontinued when, in management's
opinion, the borrower may be unable to meet payments as they become due or when
the loan becomes 90 days past due, whichever occurs first. When interest accrual
is discontinued, all unpaid accrued interest is reversed. Such interest
ultimately collected is credited to income in the period of recovery or applied
to reduce principal if there is sufficient doubt about the collectability of
principal.
The Bank is a party to financial instruments with off-balance sheet risk
(commitments to extend credit) in the normal course of business to meet the
financing needs of its customers. Commitments to extend credit are agreements to
lend to a customer as long as there is no violation of any condition established
in the commitment. Commitments generally have fixed expiration dates or other
termination clauses and may require payment of a fee. Since some of the
commitments are expected to expire without being drawn upon, the total
commitment amount does not necessarily represent future cash requirements. The
Bank evaluates each customer's credit worthiness on a case-by-case basis using
the same credit policies in making commitments and conditional obligations as it
does for on-balance sheet instruments. The amount of collateral obtained, if
deemed necessary by the Bank upon extension of credit, is based on management's
credit evaluation of the counter-party.
Real Estate Owned
Real estate owned consists of properties acquired through foreclosure and are
recorded at the lower of cost (principal balance of the former mortgage loan
plus costs of obtaining title and possession) or fair value less estimated cost
to sell. Costs relating to development and improvement of the property are
capitalized, whereas costs of holding such real estate are expensed as incurred.
Additional write-downs are charged to income, and the carrying value of the
property reduced, when the carrying value exceeds fair value less estimated cost
to sell.
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 probable losses based on management's evaluation of portfolio
risk, past and expected 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.
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.
(Notes continued)
Annual Report 1999 - Fidelity Bancorp, Inc. and Subsidiaries - Page 13
<PAGE>
Notes to Consolidated Financial Statements - continued
- --------------------------------------------------------------------------------
(dollar amounts in thousands, except per share data)
Income Taxes
The Company accounts for income taxes by use of the asset and liability method.
Under the asset and liability method, 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. 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" which
provides reporting standards for earnings per share (EPS) including 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 dividend paid on May 28, 1997. The following table sets forth the
computation of basic and diluted earnings per share:
<TABLE>
<CAPTION>
..........................................................................................September 30,....
................................................................................1999..........1998.......1997
<S> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------------
Basic earnings per share:
Net income....................................................................$3,379.......$2,925......$2,719
Weighted average shares outstanding........................................1,968,952....1,962,834...1,918,734
Earnings per share.............................................................$1.72........$1.49.......$1.42
Diluted earnings per share:
Net income....................................................................$3,379.......$2,925......$2,719
Weighted average shares outstanding........................................1,968,952....1,962,834...1,918,734
Dilutive effect of employee stock options.....................................44,248.......66,290......71,170
Total diluted weighted average shares outstanding..........................2,013,200....2,029,124...1,989,904
Earnings per share.............................................................$1.68........$1.44.......$1.37
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
(Note continued)
Page 14 - Annual Report 1999 - Fidelity Bancorp, Inc. and Subsidiaries
<PAGE>
Notes to Consolidated Financial Statements - continued
- --------------------------------------------------------------------------------
(dollar amounts in thousands, except per share data)
Comprehensive Income
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 (revenue, 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. For the
fiscal years ended September 30, 1999, 1998 and 1997, the Company's total
comprehensive income (loss) was $(1,410), $3,419 and $4,148, respectively. Total
comprehensive income is comprised of net income of $3,379, $2,925 and $2,719,
respectively, and other comprehensive income (loss) of $(4,789), $494 and
$1,429, net of tax, respectively. Other comprehensive income consists of
unrealized gains and losses on investment securities and mortgage-backed
securities available-for-sale.
(2) Investment Securities Held-to-Maturity
------------------------------------------
Investment securities held-to-maturity at September 30, 1999 and 1998 are as
follows:
<TABLE>
<CAPTION>
.................................................................................Gross.........Gross
...................................................................Amortized..Unrealized....Unrealized....Market
At September 30, 1999................................................Cost........Gains........Losses.......Value
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. government and agency obligations:
Due beyond ten years..............................................$2,000.........$--........$(119).......$1,881
Municipal obligations:
Due beyond ten years...............................................1,625...........3...........--.........1,628
- -----------------------------------------------------------------------------------------------------------------
....................................................................$3,625..........$3........$(119).......$3,509
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
<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>
At September 30, 1999, the Bank had no outstanding commitments to purchase
investment securities held-to-maturity. Non-taxable interest income was $91,
$91, and $26 in fiscal 1999, 1998 and 1997, respectively. There were no sales of
investment securities held-to-maturity in 1999, 1998 or 1997.
(Note continued)
Annual Report 1999 - Fidelity Bancorp, Inc. and Subsidiaries - Page 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, 1999 and 1998 are as
follows:
<TABLE>
<CAPTION>
.................................................................................Gross.........Gross
...................................................................Amortized..Unrealized....Unrealized....Market
At September 30, 1999................................................Cost........Gains........Losses.......Value
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. government and agency obligations:
Due within one year...............................................$1,500.........$..2...........$--.......$1,502
Due beyond one year, but within five years.........................4,499...........--...........(16).......4,483
Due beyond five years, but within ten years.......................12,436...........--..........(376)......12,060
Due beyond ten years...............................................8,986...........--..........(718).......8,268
Asset-backed securities:
Due beyond ten years...............................................5,263..........108............--.......5,371
Municipal obligations:
Due beyond five years, but within ten years........................1,388...........--...........(48).......1,340
Due beyond ten years..............................................40,624...........88........(2,489)......38,223
Corporate obligations:
Due within one year..................................................494............6............--..........500
Due beyond one year, but within five years.........................1,480...........--...........(11).......1,469
Equity securities....................................................1,580...........--..........(169).......1,411
Mutual funds.........................................................1,945...........14...........(64).......1,895
Trust preferred securities:
Due beyond ten years.................................................750...........--...........(49).........701
Federal Home Loan Mortgage Corp.
Preferred Stock......................................................501...........13............--..........514
- ------------------------------------------------------------------------------------------------------------------
...................................................................$81,446.........$231.......$(3,940).....$77,737
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
<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
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
At September 30, 1999, the Bank had no outstanding commitments to purchase
investment securities available-for-sale. Non-taxable interest income was
$1,770, $1,138 and $906 in fiscal 1999, 1998 and 1997, respectively. Proceeds
from sales of investment securities available-for-sale were $3.4 million, $17.3
million and $16.3 million in 1999, 1998 and 1997, respectively. Gross gains of
$191, $218, and $170 and gross losses of $0, $9, and $87 were realized on these
sales in 1999, 1998 and 1997, respectively.
Page 16 - Annual Report 1999 - Fidelity Bancorp, Inc. and Subsidiaries
<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, 1999.................................................Cost.......Gains........Losses........Value
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Government National Mortgage Association:
Contractually due beyond one year, but within five years.............$19.........$--..........$--...........$19
Federal Home Loan Mortgage Corporation:
Contractually due beyond one year, but within five years.............148..........--...........--...........148
Contractually due beyond five years,
but within ten years.......................................5,730..........40..........(54)........5,716
Contractually due beyond ten years.................................2,226...........4..........(52)........2,178
Federal National Mortgage Association:
Contractually due beyond one year, but within five years...........1,505..........--..........(28)........1,477
Contractually due beyond five years, but within ten years.............73...........3...........--............76
Contractually due beyond ten years.................................3,692..........12..........(38)........3,666
Collateralized Mortgage Obligations:
Contractually due within one year......................................7...........1...........--.............8
- ------------------------------------------------------------------------------------------------------------------
...................................................................$13,400.........$60........$(172)......$13,288
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
<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
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
At September 30, 1999, 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 1999, 1998, or
1997.
Annual Report - Fidelity Bancorp, Inc. and Subsidiaries - Page 17
<PAGE>
Notes to Consolidated Financial Statements - continued
- --------------------------------------------------------------------------------
(dollar amounts in thousands, except per share data)
(5) Mortgage-Backed Securities Available-For-Sale
-------------------------------------------------
<TABLE>
<CAPTION>
Mortgage-backed securities available-for-sale are as follows:
.................................................................................Gross.........Gross
...................................................................Amortized..Unrealized....Unrealized....Market
At September 30, 1999................................................Cost........Gains........Losses.......Value
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Government National Mortgage Association:
Contractually due beyond ten years...............................$23,016.........$ --........$(605)......$22,411
Federal Home Loan Mortgage Corporation:
Contractually due beyond ten years.................................6,601...........--.........(182)........6,419
Federal National Mortgage Association:
Contractually due beyond one year, but within five years...........3,144...........--..........(72)........3,072
Contractually due beyond ten years................................12,722...........--.........(550).......12,172
Collateralized Mortgage Obligations:
Contractually due beyond five years, but within ten years..........3,116............1..........(48)........3,069
Contractually due beyond ten years................................36,697...........79.......(1,069).......35,707
- ------------------------------------------------------------------------------------------------------------------
...................................................................$85,296..........$80......$(2,526)......$82,850
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
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>
At September 30, 1999, the Bank had no outstanding commitments to purchase
mortgage-backed securities available-for-sale. Proceeds from sales of
mortgage-backed securities available-for-sale during 1999, 1998 and 1997
were$8.6 million, $43.8 million and $8.6 million, respectively. Gross gains of
$0, $160, and $34, and gross losses of $127, $285, and $64 were realized on
these sales in 1999, 1998 and 1997, respectively.
Page 18 - Annual Report - Fidelity Bancorp, Inc. and Subsidiaries
<PAGE>
Notes to Consolidated Financial Statements - continued
- --------------------------------------------------------------------------------
(dollar amounts in thousands, except per share data)
(6) Loans Receivable
--------------------
<TABLE>
<CAPTION>
Loans receivable, net are summarized as follows:
..............................................................................................September 30,
.........................................................................................1999.............1998
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
First mortgage loans:
Conventional:
1-4 family dwellings................................................................$156,112.........$115,559
Multi-family dwellings.................................................................4,007............4,262
Commercial..............................................................................26,513...........21,881
Construction............................................................................22,689...........21,212
- ------------------------------------------------------------------------------------------------------------------
.........................................................................................209,321..........162,914
- ------------------------------------------------------------------------------------------------------------------
Less:
Loans in process.......................................................................(14,696).........(12,916)
Unearned discounts and fees.............................................................(1,453)..........(1,142)
- ------------------------------------------------------------------------------------------------------------------
.........................................................................................193,172..........148,856
- ------------------------------------------------------------------------------------------------------------------
Installment loans:
Home equity.............................................................................51,316...........42,290
Consumer loans...........................................................................1,802............2,359
Credit cards.............................................................................2,859............2,311
Other....................................................................................1,892............2,162
- ------------------------------------------------------------------------------------------------------------------
..........................................................................................57,869...........49,122
- ------------------------------------------------------------------------------------------------------------------
Commercial business loans and leases:
Commercial business loans...............................................................22,072...........19,509
Commercial leases........................................................................5,322............3,648
- ------------------------------------------------------------------------------------------------------------------
..........................................................................................27,394...........23,157
- ------------------------------------------------------------------------------------------------------------------
Less: Allowance for loan losses...........................................................(2,477)..........(2,243)
- ------------------------------------------------------------------------------------------------------------------
Loans receivable, net...............................................................$275,958.........$218,892
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
Commitments to originate loans at September 30, 1999 were approximately as
follows:
<TABLE>
<CAPTION>
....................................................................................Rate.............Amount
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
First mortgage loans:
Fixed-rate.....................................................................7.00% to 8.25%........$742
Other loans:
Fixed-rate.....................................................................7.09% to 13.75%......1,117
Adjustable-rate................................................................7.375% to 12.25%.....1,223
- ------------------------------------------------------------------------------------------------------------------
.....................................................................................................$3,082
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
The Bank conducts its business through nine offices located in the greater
Pittsburgh metropolitan area. At September 30, 1999, 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.
Annual Report - Fidelity Bancorp, Inc. and Subsidiaries - Page 19
<PAGE>
Notes to Consolidated Financial Statements - continued
- --------------------------------------------------------------------------------
(dollar amounts in thousands, except per share data)
(7) Loan Servicing Portfolio
----------------------------
The amount of loans serviced for others, which are not reflected in the
accompanying consolidated financial statements, was $4,532, $6,119, and $5,317
at September 30, 1999, 1998 and 1997, respectively.
(8) Allowance for Losses on Loans and Real Estate Owned
-------------------------------------------------------
Changes in the allowance for 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, 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
Provision for loan losses....................................185.............135..............200..........520
Charge-offs.................................................(183)............(89).............(54)........(326)
Recoveries....................................................10..............10...............20...........40
- ------------------------------------------------------------------------------------------------------------------
Balance at September 30, 1999.............................$1,024............$534.............$919.......$2,477
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
Non-accrual loans were approximately $2.4 million, $.6 million and $1.1 million
at September 30, 1999, 1998 and 1997, respectively. The foregone interest on
those loans for the periods ended September 30, 1999, 1998 and 1997, was $165,
$25 and $108, respectively. The amount of interest income on such loans actually
included in income in the periods ending September 30, 1999, 1998 and 1997 was
$63, $30 and $12, 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 $304 and $275 at September 30, 1999 and 1998, respectively. Included
in the 1999 amount is $304 of impaired loans for which the related allowance for
credit losses is $50 and no impaired loans that as a result of write-downs do
not have an allowance for credit losses. Included in the 1998 amount is $275 of
impaired loans for which the related allowance for credit losses was $93 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, 1999, 1998 and 1997 was approximately $326,
$205, and $722, respectively. For the fiscal years ended September 30, 1999,
1998, and 1997, the Company recognized interest income on those impaired loans
of $6, $17, and $0, respectively, using the cash basis of income recognition.
Changes in the allowance for losses on real estate owned are as follows:
<TABLE>
<CAPTION>
............................................................................................Fiscal Years
..........................................................................................Ended September 30,.
....................................................................................1999..........1998.......1997
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Beginning of period balance.........................................................$--...........$--.......$102
Provisions...........................................................................--............--.........--
Write-off............................................................................--............--.......(102)
- ------------------------------------------------------------------------------------------------------------------
End of period balance...............................................................$--...........$--........$--
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
(Note continued)
Page 20 - Annual Report - Fidelity Bancorp, Inc. and Subsidiaries
<PAGE>
Notes to Consolidated Financial Statements - continued
- --------------------------------------------------------------------------------
(dollar amounts in thousands, except per share data)
Management believes that the allowances for losses on loans and real estate
owned are appropriate. 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 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, 1999 and 1998 are summarized as
follows:
.............................................................1999..........1998
- --------------------------------------------------------------------------------
Land.........................................................$509..........$309
Office buildings............................................3,780.........3,107
Furniture, fixtures and equipment...........................2,904.........3,178
Leasehold improvements........................................500...........174
- --------------------------------------------------------------------------------
............................................................7,693.........6,768
- --------------------------------------------------------------------------------
Less accumulated depreciation and amortization.............(2,993).......(3,322)
- --------------------------------------------------------------------------------
Office premises and equipment, net.......................$4,700........$3,446
- --------------------------------------------------------------------------------
The Bank has operating leases with respect to one records storage facility,
three branch offices, and the Bank's Loan Center, which expire on various dates
through fiscal 2008. Lease expense amounted to $226, $157, and $83 in fiscal
years 1999, 1998 and 1997, respectively. Minimum annual lease commitments are
approximately as follows:
......Years Ended September 30..............Amount
- --------------------------------------------------
................2000.........................125
................2001..........................93
................2002..........................90
................2003..........................90
................2004..........................90
.............Thereafter......................292
Annual Report - Fidelity Bancorp, Inc. and Subsidiaries - Page 21
<PAGE>
Notes to Consolidated Financial Statements - continued
- --------------------------------------------------------------------------------
(dollar amounts in thousands, except per share data)
(11) Savings and Time Deposits
------------------------------
Savings and time deposit balances at September 30, 1999 and 1998 are summarized
as follows:
<TABLE>
<CAPTION>
.............................................................................................September 30,
............................................Stated Rates..............................1999.................1998
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance by type:
Savings Deposits:
.....Demand deposits..............noninterest-bearing.................................$13,144..............$9,865
.....NOW accounts...................1.50% in 1999 and 1.50% in 1998....................29,757..............26,981
.....Passbooks......................2.50% in 1999 and 2.50% in 1998....................48,473..............47,423
.....Money market
deposit accounts..........3.00% in 1999 and 2.98% in 1998....................17,539..............14,949
- ------------------------------------------------------------------------------------------------------------------
......................................................................................108,913..............99,218
- ------------------------------------------------------------------------------------------------------------------
Time Deposits:
.....Fixed-rate.............................1.00% to 2.99%..................................1..................34
............................................3.00% to 4.99%.............................79,657..............32,469
............................................5.00% to 6.99%.............................72,218.............120,299
............................................7.00% to 8.99%..............................5,266...............5,494
............................................9.00% to 10.99%................................16..................68
.....Negotiated-rate........................4.01% to 7.10%..............................3,047...............4,153
- ------------------------------------------------------------------------------------------------------------------
......................................................................................160,205.............162,517
- ------------------------------------------------------------------------------------------------------------------
.....................................................................................$269,118............$261,735
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
The weighted-average interest rate for all deposits was 3.81% and 4.25% at
September 30, 1999 and 1998, respectively. Time deposits with balances of $100
or more totalled $3.0 million at September 30, 1999.
At September 30, 1999, investment securities with a carrying value of $2.0
million were pledged as required to secure deposits of public funds.
The maturities of time deposits at September 30, 1999 and 1998 are summarized as
follows:
<TABLE>
<CAPTION>
.............................................................................................September 30,
......................................................................................1999.................1998
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Within one year......................................................................$106,501............$106,115
Beyond one year but within two years...................................................26,006..............26,959
Beyond two years but within three years................................................13,501...............9,847
Beyond three years but within four years................................................3,991..............10,005
Beyond four years but within five years.................................................5,525...............3,951
Beyond five years.......................................................................4,681...............5,640
- ------------------------------------------------------------------------------------------------------------------
.....................................................................................$160,205............$162,517
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Interest expense by deposit category is as follows:..................................Years Ended September 30,
....................................................................................1999........1998.........1997
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NOW accounts........................................................................$427........$380.........$345
Passbooks..........................................................................1,233.......1,193........1,262
Money market deposit accounts........................................................423.........419..........445
Time deposits......................................................................8,462.......8,948........7,514
- ------------------------------------------------------------------------------------------------------------------
.................................................................................$10,545.....$10,940.......$9,566
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
Page 22 - Annual Report 1999 - Fidelity Bancorp, Inc. and Subsidiaries
<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:
............................................................September 30,
..................................Interest Rate........1999..............1998
- --------------------------------------------------------------------------------
Due Date
RepoPlus Advances.....................5.48%............$47,600..........$5,200
Fixed Rate Advances:
October 30, 2000...................4.68%..............3,000..............--
October 29, 2001...................4.80%..............5,000..............--
Convertible Select Advances:
June 21, 2001......................5.25%.............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..........10,000
November 18, 2002..................5.32%.............10,000..........10,000
January 6, 2003....................5.58%.............10,000..........10,000
September 15, 2003.................4.78%..............5,000...........5,000
April 25, 2005.....................5.55%..............5,000...........5,000
February 20, 2008..................5.48%.............10,000..........10,000
June 2, 2008.......................5.17%..............5,000...........5,000
December 18, 2008..................5.15%.............10,000..............--
- --------------------------------------------------------------------------------
Total FHLB Advances...................................$170,600........$100,200
- --------------------------------------------------------------------------------
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 remaining maximum borrowing
capacity with the FHLB of Pittsburgh at September 30, 1999 is $39.7 million.
FHLB "RepoPlus" Advances are short-term borrowings maturing within one day to
one year, 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 1999 and 1998, ranging
individually from $50 to $34,900, and from $50 to $16,200, respectively. The
daily average balance during 1999 and 1998 was $24.7 and $18.1 million,
respectively, and the daily average interest rate was 5.14% and 5.75%,
respectively, with an average interest rate at fiscal year-end 1999 of 5.48% and
fiscal year-end 1998 of 6.50%. The maximum amount outstanding at any month-end
during 1999 and 1998 was $48.9 and $34.1 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
1999 and 1998, with individual advances ranging $5 to $10 million each year. The
daily average balance during 1999 and 1998 was $105.6 million and $77.4 million,
respectively. The daily average interest rate during 1999 and 1998 was 5.53% and
5.64%, respectively. The average interest rate at fiscal year end 1999 and 1998
was 5.51% and 5.54%, respectively. The maximum amount outstanding at any month
end during 1999 and 1998 was $115 million and $95 million, respectively.
Annual Report 1999 - Fidelity Bancorp, Inc. and Subsidiaries - Page 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.
At September 30, 1999, these agreements had a weighted-average interest rate of
4.25% and mature within one month. Short-term borrowings under repurchase
agreements averaged $2.8 million and $1.8 million during 1999 and 1998,
respectively. The maximum amount outstanding at any month-end was $3.8 million
and $2.4 million during 1999 and 1998, respectively. At September 30, 1999,
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.......$3,041.............4.25%..............$4,495..........$4,484
- ------------------------------------------------------------------------------------
</TABLE>
Page 24 - Annual Report 1999 - Fidelity Bancorp, Inc. and Subsidiaries
<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, 1999, the Bank had outstanding commitments to originate loans
of $3.1 million.
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, 1999 and 1998 was $18.1 million and $16.9 million,
respectively, for consumer lines of credit and $10.8 million and $9.0 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, 1999 and 1998 was $134 and $519,
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 does not have any off-balance sheet risk at September 30, 1999, except
for the commitments referenced above.
(16) Income Taxes
-----------------
The provision for (benefit from) income taxes in the Consolidated Statements of
Income consists of the following:
............................................Fiscal Years Ended September 30,
...........................................1999............1998.........1997
- --------------------------------------------------------------------------------
Current
Federal..................................$928...........$984..........$535
State.....................................310............295...........268
- --------------------------------------------------------------------------------
Total current.............................1,238..........1,279...........803
- --------------------------------------------------------------------------------
Deferred federal..........................(21)...........(75)..........453
- --------------------------------------------------------------------------------
Total....................................$1,217.........$1,204........$1,256
- --------------------------------------------------------------------------------
(Note continued)
Annual Report 1999 - Fidelity Bancorp, Inc. and Subsidiaries - Page 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, 1999, 1998 and 1997
was allocated as follows:
<TABLE>
<CAPTION>
..............................................................................1999..........1998..........1997
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Income......................................................................$1,217.........$1,204........$1,256
Stockholders' equity:
Accumulated other comprehensive income (loss)...........................(2,435)...........227...........621
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,
..............................................................................1999............1998.........1997
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Expected federal tax rate.......................................................34.0%..........34.0%.........34.0%
Tax free interest..............................................................(11.4)..........(8.6).........(6.7)
State income tax, net of federal tax benefit.....................................4.5............4.7...........4.5
Other items, net................................................................(0.6)..........(0.9).........(0.2)
- ------------------------------------------------------------------------------------------------------------------
Actual tax rate incurred........................................................26.5%..........29.2%.........31.6%
- ------------------------------------------------------------------------------------------------------------------
</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, 1999
and 1998 are presented below:
<TABLE>
<CAPTION>
...............................................................................................1999..........1998
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets (liabilities):
Deferred loan fees............................................................................$53..........$105
Fixed assets..................................................................................(23)..........(24)
Loan loss reserves............................................................................784...........692
Intangible assets.............................................................................185...........242
Investment securities.......................................................................2,092..........(342)
Other (net)....................................................................................64............27
- ------------------------------------------------------------------------------------------------------------------
.............................................................................................$3,155..........$700
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
The Bank has determined that it is not required to establish a valuation
allowance for deferred tax assets 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.
Tax basis bad debt reserves established after 1987 are treated 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, 1999, 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.
Page 26 - Annual Report 1999 - Fidelity Bancorp, Inc. and Subsidiaries
<PAGE>
Notes to Consolidated Financial Statements - continued
- --------------------------------------------------------------------------------
(dollar amounts in thousands, except per share data)
(17) Stockholders' Equity
-------------------------
The Bank is subject to various regulatory capital requirements administered by
the federal banking agencies. Failure to meet minimum capital requirements can
initiate certain mandatory -- and possibly additional discretionary -- actions
by regulators, that, if undertaken, could have a direct material effect on the
Bank's financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Bank must meet specific
capital guidelines that involve quantitative measures of the Bank's assets,
liabilities, and certain off-balance-sheet items as calculated under regulatory
accounting practices. The Bank's capital amounts and classification are also
subject to qualitative judgments by the regulators about components, risk
weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in the table
below) of total and Tier I capital (as defined in the regulations) to
risk-weighted assets (as defined) and of Tier I capital (as defined) to average
assets (as defined). Management believes, as of September 30, 1999, that the
Bank meets all capital adequacy requirements to which it is subject.
As of September 30, 1999, the most recent notification from the Federal Deposit
Insurance Corporation categorized the Bank as well capitalized under the
regulatory framework for prompt corrective action. To be categorized as well
capitalized the Bank must maintain minimum total risk-based, Tier I risk-based,
and Tier I leverage ratios as set forth in the table. There are no conditions or
events since that notification that management believes have changed the
institution's category.
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 gains on available-for-sale equity securities) and
perpetual preferred stock, less goodwill and other nonqualifying intangible
assets ("Tier I Capital"). The remainder (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, 1999, the Company had Tier I capital as a
percentage of risk-weighted assets of 13.94% and total risk-based capital as a
percentage of risk-weighted assets of 14.90%.(4)
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 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, 1999, the
Company had a Leverage Ratio of 8.80%.(4)
A reconciliation of Stockholders' Equity to Regulatory Capital is as follows:
Total Stockholders' equity at September 30, 1999(1)..........$26,046
Plus: Unrealized securities losses (net).....................3,894
Qualifying preferred securities(2)...........................9,980
- --------------------------------------------------------------------
Tier I Capital at September 30, 1999..........................39,920
Plus: Qualifying loan loss allowance(3)......................2,477
Remaining preferred securities(2)..........................270
- --------------------------------------------------------------------
Total capital at September 30, 1999..........................$42,667
- --------------------------------------------------------------------
1 Represents consolidated equity capital of the Company as reported to the
FRB on form FR Y-9C for the quarter ended September 30, 1999.
2 Amount included in Tier I capital is limited to 25% of total Tier I
capital; the remaining balance is allowable as Tier II capital.
3 Limited to 1.25% of risk adjusted assets.
4 The leverage ratio is Tier I capital as a percentage of adjusted total
assets of $453,604 at September 30, 1999. Tier I and Tier II risk-based
capital is calculated as a percentage of risk-weighted assets of $286,309
as of September 30, 1999.
(Note continued)
Annual Report 1999 - Fidelity Bancorp, Inc. and Subsidiaries - Page 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, 1999 and 1998.
<TABLE>
<CAPTION>
.....................................................September 30, 1999...................September 30, 1998
...........................................................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)..............................$28,288.....$28,288....$28,288......$27,325.....$27,325...$27,325
Unrealized securities (gains) losses.............3,833.......3,833......3,833.........(887).......(887).....(887)
Plus general valuation allowances(2)................--..........--......2,477...........--..........--.....2,243
- ------------------------------------------------------------------------------------------------------------------
Total regulatory capital...................32,121......32,121.....34,598.......26,438......26,438....28,681
Minimum required capital........................17,833......11,271.....22,542.......15,617.......9,034....18,068
- ------------------------------------------------------------------------------------------------------------------
Excess regulatory capital..................14,288......20,850.....12,056.......10,821......17,404....10,613
- ------------------------------------------------------------------------------------------------------------------
Minimum required capital to be
well capitalized under
Prompt Corrective Action Provisions........$22,291.....$16,906....$28,177......$19,521.....$13,551...$22,585
- ------------------------------------------------------------------------------------------------------------------
Regulatory capital as a percentage(3).............7.20%......11.40%.....12.28%........6.77%......11.71%....12.70%
Minimum required capital percentage...............4.00%.......4.00%......8.00%........4.00%.......4.00%.....8.00%
- ------------------------------------------------------------------------------------------------------------------
Excess regulatory capital percentage.........3.20%.......7.40%......4.28%........2.77%.......7.71%.....4.70%
- ------------------------------------------------------------------------------------------------------------------
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, 1999.
2 Limited to 1.25% of risk adjusted assets.
3 Tier I capital is calculated as a percentage of adjusted total average
assets of $445,816 and $390,428 at September 30, 1999 and 1998,
respectively. Tier I and Tier II risk-based capital are calculated as a
percentage of adjusted risk-weighted assets of $281,773 and $225,845 at
September 30, 1999 and 1998, respectively.
(18) Employee Stock Compensation Program
----------------------------------------
In fiscal 1988, the Bank adopted an Employee Stock Compensation Program (the
Program) under which shares of common stock can be issued. The Program provides
for the grant of both incentive stock options and compensatory stock options.
Further, the Program provides that the incentive stock option price to purchase
common stock is not less than the fair market value at the date of grant and the
compensatory stock option price is equal to or less than the fair market value
of the shares at date of grant, that all options terminate no later than ten
years from date of grant, and that options become exercisable on a cumulative
basis at 50% each year, commencing one year from date of grant. At September 30,
1999, there were no remaining shares available for granting as determined by the
Program Administrators.
(Note continued)
Page 28 - Annual Report 1999 - Fidelity Bancorp, Inc. and Subsidiaries
<PAGE>
Notes to Consolidated Financial Statements - contiued
- --------------------------------------------------------------------------------
(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 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 and the 10% stock dividend paid in May 1997.
<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, 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
- ------------------------------------------------------------------------------------------------------------------------------------
September 30, 1998................27,901........9.22........72,879.........11.56....41,317........14.29..27,263.........23.20
Granted...............................--..........--............--..........--.......9,450........18.00..26,870.........17.25
Exercised.........................(3,993).......5.20........(1,583)........10.26......(100).......14.54......--............--
Forfeited.............................--..........--...........(13)........14.54........--...........--..(1,449)........18.27
- ------------------------------------------------------------------------------------------------------------------------------------
September 30, 1999................23,908.......$9.89........71,283........$11.59....50,667.......$14.98..52,684........$20.30
- ------------------------------------------------------------------------------------------------------------------------------------
Average contractual
life remaining in years...........3.87 .....................6.23....................3.91.................8.75
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Option price
per share...............$3.08 - $11.24.................$9.26 - $14.54........$9.26 - $23.20......$17.25 - $23.20
Options available
for granting at
September 30, 1999....................--........................--......................--..............141,066
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
At September 30, 1999, 1998 and 1997, 181,521, 148,560 and 125,727 shares were
immediately exercisable at average prices of $14.15, $12.67 and $9.14,
respectively.
(Note continued)
Annual Report 1999 - Fidelity Bancorp, Inc. and Subsidiaries - Page 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 9/30/99...Contractual Life....Exercise Price..............at 9/30/99......Exercise Price
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$3.08 to $7.22...........7,234........2.99 years............$6.79.....................7,234.............$6.79
$9.26 to $14.54........119,724........5.05..................11.55...................119,724.............11.55
$17.25 to $23.20........71,584........7.95..................20.38....................54,563.............20.84
- -------------------------------------------------------------------------------------------------------------------
.......................198,542........6.02.................$14.56...................181,521............$14.15
- -------------------------------------------------------------------------------------------------------------------
</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,
...................................................................................1999........1998........1997
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income
As reported.....................................................................$3,379......$2,925......$2,719
Pro Forma........................................................................3,261.......2,751.......2,643
- -------------------------------------------------------------------------------------------------------------------
Basic earnings per share
As reported......................................................................$1.72.......$1.49.......$1.42
Pro Forma.........................................................................1.66........1.40........1.38
Diluted earnings per share..............................................................
As reported.......................................................................1.68........1.44........1.37
Pro Forma.........................................................................1.62........1.35........1.33
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
Using a Black-Scholes option valuation model, the weighted-average fair value of
options granted during fiscal 1999 and 1998 under the 1997 Employee Program was
$4.03 and $8.31, respectively, and during fiscal 1997 under the 1993 Employee
Program was $3.89. The fair value of options granted under the 1993 Directors'
Plan during fiscal 1999, 1998 and 1997 was $4.24, $8.11 and $3.69, respectively.
(Note continued)
Page 30 - Annual Report 1999 - Fidelity Bancorp, Inc. and Subsidiaries
<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 1999 and 1998, respectively, for the 1997 Employee Program:
risk-free interest rate of 4.58% and 5.72%; dividend yield of 3.15% and 2.30%;
volatility factor of the expected market price of the Company's common stock of
24.9% and 23.8%; and a weighted-average expected life of the options of 7 years.
The following weighted-average assumptions for 1997 for the 1993 Employee
Program were used: risk-free interest rate of 6.29%; dividend yield of 2.94%;
volatility factor of the expected market price of the Company's common stock of
23.3%; and a weighted-average expected life of the options of 7 years. The
following weighted-average assumptions for 1999, 1998 and 1997, respectively,
for the 1993 Directors' Plan were used: risk-free interest rates of 4.37%, 5.71%
and 6.21%; dividend yields of 2.71%, 2.04% and 2.53%; volatility factors of the
expected market price of the Company's common stock of 24.8%, 23.4% and 23.3;
and a weighted-average expected life of the options of 6.2, 6.2 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 1999 and 1998 was approximately $107,000 and
$78,000, respectively.
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 1999 and 1998
as a result of increased cash surrender value was approximately $54,000 and
$42,000, respectively.
Annual Report 1999 - Fidelity Bancorp, Inc. and Subsidiaries - Page 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 1999:
Interest income.......................................................$7,396......$7,451.....$7,844......$8,284
Interest expense.......................................................4,626.......4,628......4,815.......5,160
- -------------------------------------------------------------------------------------------------------------------
Net interest income before provision for loan losses...................2,770.......2,823......3,029.......3,124
Provision for loan losses................................................105.........100........155.........160
Other income.............................................................325.........418........372.........408
Operating expenses.....................................................1,986.......2,071......2,030.......2,066
- -------------------------------------------------------------------------------------------------------------------
Income before income taxes.............................................1,004.......1,070......1,216.......1,306
Income tax provision.....................................................301.........286........334.........296
- -------------------------------------------------------------------------------------------------------------------
Net income..............................................................$703........$784.......$882......$1,010
- -------------------------------------------------------------------------------------------------------------------
Basic earnings per share................................................$.35........$.40.......$.45........$.52
Diluted earnings per share..............................................$.35........$.39.......$.44........$.50
- -------------------------------------------------------------------------------------------------------------------
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
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
(21) Disclosures About Fair Value of Financial Instruments
----------------------------------------------------------
Statement of Financial Accounting Standards No. 107, "Disclosure about Fair
Value of Financial Instruments" (SFAS No. 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, 1999 and 1998.
SFAS No. 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)
Page 32 - Annual Report 1999 - Fidelity Bancorp, Inc. and Subsidiaries
<PAGE>
Notes to Consolidated Financial Statements - continued
- --------------------------------------------------------------------------------
(dollar amounts in thousands, except per share data)
At September 30, 1999, the net carrying value of investment securities exceeded
the estimated fair value by approximately $116. At September 30, 1998, the
estimated fair value of investment securities exceeded the net carrying value by
$125. The net carrying value of mortgage-backed securities at September 30,
1999, exceeded the estimated fair value by $112. The estimated fair value of
mortgage-backed securities at September 30, 1998, exceeded the net carrying
value by $242. 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, 1999 and 1998 by approximately $6.6 million and $1.8 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, 1999 and 1998
was equal to the carrying value of the commitments on those dates.
The carrying amounts and estimated fair values of deposits at September 30, 1999
and September 30, 1998 are as follows:
<TABLE>
<CAPTION>
..............................................................September 30, 1999............September 30, 1998
...........................................................Carrying......Estimated........Carrying.....Estimated
............................................................Amount......Fair Value.........Amount.....Fair Value
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Noninterest-bearing:
.....Demand accounts.........................................$13,144......$13,144............$9,865.......$9,865
Interest-bearing:
.....NOW and MMDA accounts....................................47,296.......47,296............41,930.......41,930
.....Passbook accounts........................................48,473.......48,473............47,423.......47,423
.....Time deposits...........................................160,205......161,320...........162,517......164,893
- -------------------------------------------------------------------------------------------------------------------
Total Deposits..............................................$269,118.....$270,233..........$261,735.....$264,111
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
The carrying amounts of noninterest-bearing demand accounts, interest-bearing
NOW and MMDA accounts and passbook accounts approximate their fair values. Fair
values for time deposits are estimated using a discounted cash flow calculation
that applies contractual cost currently being offered in the existing portfolio
to current market rates being offered locally for deposits of similar remaining
maturities.
The carrying amounts and estimated fair values of advances and other borrowings
at September 30, 1999 and 1998 are as follows:
<TABLE>
<CAPTION>
..............................................................September 30, 1999............September 30, 1998
...........................................................Carrying......Estimated........Carrying.....Estimated
............................................................Amount......Fair Value.........Amount.....Fair Value
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Advances and other borrowings..............................$183,891......$178,456.........$112,320.....$115,738
- -------------------------------------------------------------------------------------------------------------------
</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.
Annual Report 1999 - Fidelity Bancorp, Inc. and Subsidiaries - page 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.
Condensed Statements of Financial Condition
<TABLE>
<CAPTION>
...............................................................................................September 30,
.............................................................................................1999..........1998
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Cash......................................................................................$2,421........$1,674
Investment in subsidiary bank.............................................................28,288........27,325
Investment in subsidiary trust...............................................................324...........309
Investment securities available-for-sale...................................................4,167.........7,979
Mortgage-backed securities available-for-sale................................................767.........1,413
Other assets.................................................................................867...........958
- -------------------------------------------------------------------------------------------------------------------
Total Assets...........................................................................$36,834.......$39,658
- -------------------------------------------------------------------------------------------------------------------
Liabilities
Subordinated debentures..................................................................$10,567.......$10,567
Other liabilities............................................................................221............70
- -------------------------------------------------------------------------------------------------------------------
Total Liabilities.......................................................................10,788........10,637
- -------------------------------------------------------------------------------------------------------------------
Stockholders' Equity
Common stock ($.01 par value, 10,000,000 shares authorized;
1,989,883 and 1,978,543 shares issued).......................................................20............20
Treasury stock, at cost -- 55,575 shares....................................................(953)...........--
Additional paid-in capital................................................................14,305........14,168
Retained earnings.........................................................................16,736........14,106
Accumulated other comprehensive income, net of tax........................................(4,062)..........727
- -------------------------------------------------------------------------------------------------------------------
Total Stockholders' Equity..............................................................26,046........29,021
- -------------------------------------------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity.............................................$36,834.......$39,658
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
Condensed Statements of Income
<TABLE>
<CAPTION>
........................................................................................September 30,
...............................................................................1999..........1998..........1997
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Equity in undistributed earnings of subsidiaries..............................$2,713........$2,117........$2,400
Dividends received from subsidiary.............................................1,137.........1,167...........520
Interest income..................................................................475...........577............96
Interest expense..............................................................(1,055).......(1,055).........(403)
Other income.....................................................................--.............74............36
Other expenses...................................................................(76)..........(32)..........(42)
Income tax provision (benefit)..................................................(185)..........(77).........(112)
- -------------------------------------------------------------------------------------------------------------------
Net Income................................................................$3,379........$2,925........$2,719
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
(Note continued)
Page 34 - Annual Report 1999 - Fidelity Bancorp, Inc. and Subsidiaries
<PAGE>
Notes to Consolidated Financial Statements - continued
- --------------------------------------------------------------------------------
(dollar amounts in thousands, except per share data)
<TABLE>
<CAPTION>
Condensed Statements of Cash Flows
.........................................................................................September 30,
...............................................................................1999..........1998.........1997
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating Activities
Net income..................................................................$3,379........$2,925........$2,719
Adjustments to reconcile net income to net cash
provided by operating activities:
Equity in undistributed earnings in subsidiary..........................(2,713).......(2,117).......(2,400)
Increase in interest payable................................................--............--...........218
Gain on sale of investments.................................................--...........(74)..........(36)
Increase in interest receivable.............................................64..........(109)..........(39)
Other changes, net.........................................................217............14............--
- -------------------------------------------------------------------------------------------------------------------
Net cash provided (used) by operating activities.........................947...........639...........462
- -------------------------------------------------------------------------------------------------------------------
Investing Activities
Capital contribution to Bank subsidiary.....................................(3,000).......(1,000).......(8,000)
Purchase of investment securities and
mortgage-backed securities available-for-sale...............................(255).......(4,082).........(710)
Sale of investment securities available-for-sale................................--.........2,105...........145
Maturities and principal repayments
of investment securities and mortgage-backed
securities available-for-sale............................................4,620.........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.......................1,365...........806........(9,799)
- -------------------------------------------------------------------------------------------------------------------
Financing Activities
Stock options exercised.........................................................39...........181...........292
Sale of stock through Dividend Reinvestment Plan................................98...........110............82
Dividends paid................................................................(749).........(641).........(517)
Stock repurchase..............................................................(953)...........--............--
Issuance of subordinated debentures.............................................--............--........10,567
Debt issuance costs.............................................................--...........(36).........(688)
- -------------------------------------------------------------------------------------------------------------------
Net cash provided (used) by financing activities......................(1,565).........(386)........9,736
- -------------------------------------------------------------------------------------------------------------------
Increase (decrease) in cash..............................................747.........1,059...........399
- -------------------------------------------------------------------------------------------------------------------
Cash at Beginning of Year......................................................1,674...........615...........216
- -------------------------------------------------------------------------------------------------------------------
Cash at End of Year...........................................................$2,421........$1,674..........$615
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
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,
after consultation with 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.
Annual Report 1999 - Fidelity Bancorp, Inc. and Subsidiaries - Page 35
<PAGE>
Management's Discussion and Analysis of Financial Condition and Results
of Operations
- --------------------------------------------------------------------------------
The Private Securities Litigation Reform Act of 1995 contains safe harbor
provisions regarding forward-looking statements. When used in this discussion,
the words "believes," "anticipates," "contemplates," "expects," and similar
expressions are intended to identify forward-looking statements. Such statements
are subject to certain risks and uncertainties which could cause actual results
to differ materially from those projected. Those risks and uncertainties include
changes in interest rates, risks associated with the effect of integrating newly
acquired businesses, the ability to control costs and expenses, and general
economic conditions. Fidelity Bancorp, Inc., undertakes no obligation to
publicly release the results of any revisions to those forward-looking
statements which may be made to reflect events or circumstances after the date
hereof or to reflect the occurrence of unanticipated events.
General
The Company reported record net income of $3.379 million or $1.68 per share on a
diluted basis for fiscal 1999 compared to $2.925 million or $1.44 per share in
fiscal 1998 and $2.719 million or $1.37 per share for 1997.
The Company is also reporting improving returns on average equity (ROE). ROE was
11.98%, 10.64% and 11.42% for fiscal years 1999, 1998 and 1997, respectively.
Return on average assets (ROA) was .74%, .74% and .80% for fiscal 1999, 1998 and
1997, respectively.
The Company has increased its emphasis on expense control. The ratio of
operating expenses to average assets for fiscal 1999 was 1.80% compared to 1.85%
in fiscal 1998 and 1.91% in fiscal 1997.
Loan growth was significant in fiscal 1999 as loan originations increased
substantially. Mortgage loans originated totaled $81 million, consumer loans
originated totaled $33 million and commercial business and lease loans
originated totaled $14 million. The combination of generally low interest rates
throughout much of fiscal 1999 and the Company's ability to take advantage of
increased opportunities to lend led to these substantial originations. While
originations were up, however, the Company continues to lend primarily in its
market area.
The Bank also opened its ninth full service branch in October 1998. The branch
is located at 2034 Penn Avenue in Pittsburgh's Strip District. This area of
Pittsburgh is primarily commercial in nature, with many small to medium sized
businesses located there. Such businesses are the type the Bank typically
markets its products and services to and believes this branch will provide such
opportunities. The branch was initially leased; however, the building was
purchased in June 1999.
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, 1999, the
tax-equivalent interest-rate spread decreased slightly to 2.73%, as compared to
2.74% in fiscal 1998. The tax-equivalent spread in fiscal 1997 was 2.99%. The
ratio of average interest-earning assets to average interest-bearing liabilities
decreased slightly to 103.2% in fiscal 1999, from 104.2% in fiscal 1998. The
ratio was 104.1% in fiscal 1997. The slight decrease in the spread for fiscal
1999 reflects several factors, including a decrease in the yield earned on
interest-earning assets, substantially offset by a decrease in the cost of
interest-bearing liabilities. The Bank's operating results are also affected to
varying degrees by, among other things, service charges and fees, gains and
losses on sales of securities and loans, provision for loan losses, other
operating income, operating expenses and income taxes.
Asset and Liability Management
The Company's vulnerability to interest rate risk exists to the extent that its
interest-bearing liabilities, consisting of customer deposits and borrowings,
mature or reprice more rapidly or on a different basis than its interest-earning
assets, which consist primarily of intermediate or long-term loans and
investments and mortgage-backed securities.
The principal determinant of the exposure of the Company's earnings to interest
rate risk is the timing difference between the repricing or maturity of the
Company's interest-earning assets and the repricing or maturity of its
interest-bearing liabilities. If the maturities of such assets and liabilities
were perfectly matched, and if the interest rates carried by its assets and
liabilities were equally flexible and moved concurrently, neither of which is
the case, the impact on net interest income of rapid increases or decreases in
interest rates would be minimized.
Page 36 - Annual Report 1999 - Fidelity Bancorp, Inc. and Subsidiaries
<PAGE>
Management's Discussion and Analysis - continued
- --------------------------------------------------------------------------------
The objective of interest rate risk management is to control, to the extent
possible, the effects that interest rate fluctuations have on net interest
income and on the net present value of the Company's interest-earning assets and
interest-bearing liabilities. Management and the Board are responsible for
managing interest rate risk and employing risk management policies that monitor
and limit exposure to interest rate risk. Interest rate risk is measured using
net interest margin simulation and asset/liability net present value sensitivity
analyses. These analyses provide a range of potential impacts on net interest
income and portfolio equity caused by interest rate movements.
The Company uses financial modeling to measure the impact of changes in interest
rates on 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 50% 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,
1999 remained constant. The impact of the rate movements was developed by
simulating the effect of rates changing immediately from the September 30, 1999
levels.
Interest Rate Simulation Sensitivity Analysis
Movements in interest rates from September 30, 1999 rates:
<TABLE>
<CAPTION>
..........................................................Increase...............Decrease
- -----------------------------------------------------------------------------------------------
......................................................+100 bp +200 bp....-100 bp....-200 bp
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net interest income increase (decrease)...............(4.0)%......(8.4)%.......2.4%......1.2%
Portfolio equity increase (decrease).................(22.0)%.....(42.9)%......17.2%.....13.7%
</TABLE>
The matching of assets and liabilities may be analyzed by examining the extent
to which such assets and liabilities are "interest rate sensitive" and by
monitoring an institution's interest rate sensitivity "gap." An asset or
liability is said to be interest rate sensitive within a specific time period if
it will mature or reprice within that time period. The interest rate sensitivity
gap is defined as the difference between interest-earning assets and
interest-bearing liabilities maturing or repricing within a given time period. A
gap is considered positive when 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 change in its one year gap from a
positive 1.0% at September 30, 1998 to a negative 8.7% at September 30, 1999.
The Bank considers this result at September 30, 1999 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
Annual Report 1999 - Fidelity Bancorp, Inc. and Subsidiaries - Page 37
<PAGE>
Management's Discussion and Analysis - continued
- --------------------------------------------------------------------------------
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, 1999 based on certain
assumptions as to prepayments and amortization of loans, investments and deposit
withdrawals. The assumptions used may not be indicative of the actual
prepayments and withdrawals which may be experienced by the Company.
<TABLE>
<CAPTION>
...............................................................................September 30, 1999
------------------------
.............................................................................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..........................................$69,237.......$55,790.....$157,656.....$190,131
Deposits, escrow
liabilities and borrowed funds..................................72,681........94,529......219,980.......67,117
- --------------------------------------------------------------------------------------------------------------------
Interest sensitivity.............................................$(3,444).....$(38,739)....$(62,324)....$123,014
- --------------------------------------------------------------------------------------------------------------------
Cumulative interest sensitivity..................................$(3,444).....$(42,183)...$(104,507).....$18,507
- --------------------------------------------------------------------------------------------------------------------
Cumulative ratio as a percent of total assets........................(.7%)........(8.7%)......(21.7%)........3.8%
- --------------------------------------------------------------------------------------------------------------------
</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.
Certain shortcomings are inherent in the method of analysis presented in the
previous table. For example, although certain assets and liabilities may have
similar maturities or periods of repricing, they may react in different degrees
to changes in market interest rates. Also, the interest rates on certain types
of assets and liabilities may fluctuate in advance of changes in market interest
rates, while interest rates on other types may lag behind changes in market
rates. Additionally, certain assets, such as adjustable-rate mortgage loans,
have features which restrict changes in interest rates on a short-term basis
over the life of the assets. Further, in the event of a change in interest rate,
prepayment levels and decay rates on core deposits may deviate significantly
from those assumed in calculating the table.
Liquidity and Capital Resources
The Bank'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 1999, 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, 1999 the total of approved loan commitments amounted to $3.1
million and the Bank had $14.7 million of undisbursed loan funds. The amount of
savings certificates which are scheduled to mature in the twelve-month period
ended September 30, 2000 is $106.4 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.
Page 38 - Annual Report 1999 - Fidelity Bancorp, Inc. and Subsidiaries
<PAGE>
Management's Discussion and Analysis - continued
- --------------------------------------------------------------------------------
Capital
The Bank currently exceeds all regulatory capital requirements, having a
leverage ratio of Tier 1 capital to total assets of 6.80% and a ratio of
qualifying total capital to risk-weighted assets and off-balance sheet items of
12.28% at September 30, 1999. As a result, regulatory capital requirements
should have no material impact on operations.
Financial Condition
The Bank's assets were $482.5 million at September 30, 1999, an increase of
$76.5 million or 18.8% over assets at September 30, 1998. The growth primarily
reflects an increase in loans receivable and investment securities
available-for-sale, partially offset by a decrease in investment securities and
mortgage-backed securities held-to-maturity. The growth was primarily funded by
an increase in advances from the Federal Home Loan Bank of Pittsburgh, and to a
lesser degree, savings deposits.
Loan Portfolio
Net loans receivable increased $57.1 million or 26.1% to $276.0 million at
September 30, 1999 from $218.9 million at September 30, 1998. Loans originated
totaled $142.6 million in fiscal 1998, including amounts disbursed under lines
of credit, versus $105.6 million in fiscal 1998.
Mortgage loans originated amounted to $81.5 million and $58.8 million in fiscal
1999 and 1998, respectively. The Bank did not purchase any mortgage loans in
fiscal 1999 or 1998. The increase in the level of mortgage loan originations in
fiscal 1999 reflects several factors. First, mortgage interest rates were very
low during much of the first half of fiscal 1999, causing both a significant
amount of refinancing activity and an increase in home purchases. Even after
mortgage rates began to rise in the second half of fiscal 1999, rates were still
low by historical standards and originations continued at a strong pace. Only at
the end of the fiscal year did rates rise sufficiently to cause a significant
decrease in refinancing and home purchase activity. Also, the Bank continued to
emphasize mortgage lending and maintained loan pricing strategies that enabled
the Bank to remain competitive in the market. In addition, the Bank 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) decreased to $11.9 million in
fiscal 1999 from $17.7 million in fiscal 1998. This decrease reflected the
increased popularity of fixed rate loans with customers as mortgage rates were
low. Principal repayments on outstanding mortgage loans also increased to $34.3
million in fiscal 1999 as compared to $25.7 million fiscal 1998, reflecting the
refinancing activity mentioned earlier. The combination of the above factors
resulted in an overall increase in mortgage loans receivable to $193.2 million
at September 30, 1999 from $148.9 million at September 30, 1998.
Other loan originations, including installment loans, commercial business loans
and disbursements under lines of credit, totaled $61.1 million in fiscal 1999
versus $46.8 million in fiscal 1998. During fiscal 1999, the Bank continued to
emphasize other loans, particularly home equity loans, equity lines of credit
and commercial business loans, since they generally have shorter terms than
mortgage loans and would perform better in a rising rate environment. The Bank
was successful in this strategy and saw the balance of installment loans
increase to $57.9 million at September 30, 1999, as compared to $49.1 million at
September 30, 1998. Commercial business loans and leases also experienced an
increase, totaling $27.4 million at September 30, 1999 versus $23.2 million at
September 30, 1998.
Annual Report 1999 - Fidelity Bancorp, Inc. and Subsidiaries - Page 39
<PAGE>
Management's Discussion and Analysis - continued
- --------------------------------------------------------------------------------
Non-Performing Assets
The following table sets forth information regarding non-accrual loans and real
estate owned at the dates indicated. The Bank did not have any accruing loans
which were 90 days or more overdue or any loans which were classified as
troubled debt restructurings at the dates presented.
<TABLE>
<CAPTION>
....................................................................................September 30,
......................................................................1999..............1998.............1997
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Non-accrual residential real estate loans (one-to-four family).....$..250,000..........$246,000.......$...94,000
Non-accrual construction, multi-family residential
and commercial real estate loans..................................1,362,000...........199,000..........751,000
Non-accrual installment and
commercial business loans...........................................773,000...........107,000..........271,000
- --------------------------------------------------------------------------------------------------------------------
Total non-performing loans.........................................$2,385,000..........$552,000.......$1,116,000
- --------------------------------------------------------------------------------------------------------------------
Total non-performing loans as a percent
of net loans receivable..................................................86%...............25%..............61%
- --------------------------------------------------------------------------------------------------------------------
Total real estate owned, net of related reserves...................$..107,000..........$.21,000.......$.......--
- --------------------------------------------------------------------------------------------------------------------
Total non-performing loans and real estate
owned as a percent of total assets.......................................52%...............14%..............29%
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
At September 30, 1999, non-accrual loans consisted of four 1-4 family
residential real estate loans totaling $250,000, four commercial real estate
loans totaling $1.4 million, 15 installment loans totaling $220,000, and six
commercial business loans totaling $552,000. The largest non-accrual loan is a
commercial real estate loan for $958,000 on a retail complex. Subsequent to
September 30, 1999, the property was sold by the borrower to an independent
third party and the loan was paid off in full, including all delinquent interest
and late fees.
Management has evaluated these loans and is satisfied that the allowance for
losses on loans at September 30, 1999 is appropriate. The allowance for losses
on loans has increased from $1,931,000 at September 30, 1997 to $2,243,000 at
September 30, 1998 and to $2,477,000 at September 30, 1999. The balance at
September 30, 1999, at .90% of net loans receivable and 103.8% of non-performing
loans, is considered appropriate by management.
The Bank currently has one property in real estate owned which is a
single-family residence with a fair value less estimated costs to sell of
$107,000.
Mortgage-Backed Securities Held-to-Maturity
Mortgage-backed securities held-to-maturity decreased $6.5 million or 32.7% to
$13.4 million at September 30, 1999 from $19.9 million at September 30, 1998. No
purchases or sales of mortgage-backed securities held-to-maturity were made in
fiscal 1999. The decrease in the balance represents principal payments received
in fiscal 1999.
Mortgage-Backed Securities Available-for-Sale
Mortgage-backed securities available-for-sale decreased $107,000 to $82.9
million at September 30, 1999 from $83.0 million at September 30, 1998. 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 1999, the Bank purchased $38.5 million of these
securities and sold $8.6 million. Sales of these securities in fiscal 1999
resulted in a net pretax loss of $127,000.
Page 40 - Annual Report 1999 - Fidelity Bancorp, Inc. and Subsidiaries
<PAGE>
Management's Discussion and Analysis - continued
- --------------------------------------------------------------------------------
Investment Securities Held-to-Maturity
Investment securities decreased $3.0 million or 45.3% to $3.6 million at
September 30, 1999, compared to $6.6 million at September 30, 1998. These
investments are comprised of U.S. Government and Agency securities and
tax-exempt municipal securities. The decrease in fiscal 1999 reflects the
purchase of $2.0 million of these securities, with $5.0 million of the
securities called or matured in fiscal 1999. There were no sales of investment
securities held-to-maturity in fiscal 1999.
Investment Securities Available-for-Sale
Investment securities available-for-sale increased $20.1 million or 35.0% to
$77.7 million at September 30, 1999 as compared to September 30, 1998. These
securities provide an additional source of liquidity for the Bank and the
Company and consist of U.S. Government and Agency securities, taxable and
tax-free municipal obligations, asset-backed securities, corporate obligations,
mutual funds, Federal Home Loan Mortgage Corporation stock, and other equity
securities. Purchases in fiscal 1999 totaled $40.4 million and sales totaled
$3.4 million, resulting in a net pretax gain of $191,000.
Office Premises and Equipment
Office premises and equipment increased $1.3 million or 36.4% to $4.7 million at
September 30, 1999. During fiscal 1999, the Bank purchased the building housing
its Strip District branch office, which had previously been leased. In addition,
significant renovations were done to the Brighton road office. Finally, the
Bank's wide area network was upgraded, including personal computers,
communication devices and network software.
Savings Deposits
Savings deposits increased $7.4 million during fiscal 1999 to $269.1 million at
September 30, 1999. Deposit increases occurred in demand deposits, NOW accounts,
money markets and passbook accounts, while balances in time deposit accounts
decreased.
The increase in passbook and money market accounts reflects the low interest
rate environment that existed in much of fiscal 1999. 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 decrease in time deposits reflects the competitive nature of the
Bank's primary market area for time deposits from other banks and thrifts, as
well as the competition the Bank faces for theses deposits from alternative
sources such as the stock market and mutual funds.
Borrowings
Federal Home Loan Bank advances and reverse repurchase agreements outstanding
increased $71.6 million or 70.1% to $173.6 million at September 30, 1999, from
$102.1 million at September 30, 1998. 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 fiscal 1999, the Bank planned for and experienced
significant growth to enhance earnings. This growth was primarily funded by FHLB
advances.
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 decreased $3.0 million or 10.2% to $26.0 million at
September 30, 1999 compared to September 30, 1998. This result reflects net
income of $3.4 million, stock options exercised of $39,000, and stock issued
under the Dividend Reinvestment Plan of $98,000. Offsetting these increases were
common stock cash dividends paid of $749,000, an increase in unrealized holding
losses, net of gains, on securities available-for-sale of $4.8 million, and the
purchase of treasury stock at cost for $953,000.
Annual Report 1999 - Fidelity Bancorp, Inc. and Subsidiaries - Page 41
<PAGE>
Management's Discussion and Analysis - continued
- --------------------------------------------------------------------------------
Results of Operations
Comparison of Fiscal Years Ended September 30, 1999, 1998, and 1997
Net income was $3.4 million for the year ended September 30, 1999 compared to
$2.9 million for fiscal 1998 and $2.7 million for fiscal 1997.
Interest Rate Spread
The Company's interest rate spread, the difference between yields on
interest-earning assets and the cost of funds, decreased to 2.73% on a
tax-equivalent basis in fiscal 1999 from 2.74% in fiscal 1998. The spread was
2.99% in fiscal 1997. The following table shows the average tax-equivalent
yields earned on the Company'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.
...............................................Fiscal Years Ended September 30,
..............................................1999...........1998..........1997
- --------------------------------------------------------------------------------
Average yield on:
Mortgage loans. ..............................7.62%.....7.96%...........8.01%
Mortgage-backed securities....................6.24......6.45............6.37
Installment loans.............................8.14......8.45............8.38
Commercial business loans.....................9.02......9.84............9.90
Interest-earning deposits with other
institutions, investment securities,
and FHLB stock(1)...........................6.81......6.95............6.76
- --------------------------------------------------------------------------------
Total interest-earning assets...................7.27......7.48............7.39
- --------------------------------------------------------------------------------
Average rates paid on:
Savings and time deposits.....................3.93......4.24............4.05
Borrowed funds................................5.62......5.94............5.42
- --------------------------------------------------------------------------------
Total interest-bearing liabilities..............4.54......4.74............4.40
- --------------------------------------------------------------------------------
Average interest rate spread....................2.73%.....2.74%...........2.99%
- --------------------------------------------------------------------------------
Net yield on interest-earning assets............2.87%.....2.93%...........3.16%
- --------------------------------------------------------------------------------
1 Interest income on tax free investments has been adjusted for federal
income tax purposes using a rate of 34%.
Interest Income on Loans
Interest income on loans increased by $2.8 million or 16.9% to $19.4 million in
fiscal 1999 as compared to fiscal 1998. 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 the loan portfolio. The average size of
the loan portfolio increased from an average balance of $201.0 million in fiscal
1998 to $246.3 million in fiscal 1999. The increase in the loan portfolio
reflects 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 $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.
Page 42 - Annual Report 1999 - Fidelity Bancorp, Inc. and Subsidiaries
<PAGE>
Management's Discussion and Analysis - continued
- --------------------------------------------------------------------------------
Interest Income on Mortgage-Backed Securities
Interest income on mortgage-backed securities decreased by $859,000 or 11.3% to
$6.7 million in fiscal 1999 from $7.6 million in fiscal 1998. The average
balance of mortgage-backed securities held, including mortgage-backed securities
available-for-sale, decreased from $117.8 million in fiscal 1998 to $108.1
million in fiscal 1999. The results also reflected a decrease in the yield
earned on these securities in fiscal 1999. 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.
Rising rates generally decrease the market value of the 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.
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 $4.8 million in fiscal 1999. It was $3.9 million in fiscal 1998.
The fiscal 1999 results reflect an increase in the average balance of such
investments to $82.4 million in fiscal 1999 as compared to $63.0 million in
fiscal 1998, partially offset by a decrease in the average tax-equivalent yield
earned in fiscal 1999 as compared to fiscal 1998.
Interest income on investments increased to $3.9 million in fiscal 1998 from
$3.4 million in fiscal 1997. 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 Expense on Savings and Time Deposits
Interest on deposits decreased $395,000 or 3.6% to $10.5 million in fiscal 1999
from $10.9 million in fiscal 1998. The decrease reflects a decrease in the
average rate paid on deposits in fiscal 1999, as compared to fiscal 1998,
partially offset by an increase in the average balance of deposits in fiscal
1999. The decrease in rates results primarily from the low interest rate
environment that existed in fiscal 1999.
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.
Interest Expense on Borrowed Funds
Interest expense on borrowed funds increased $2.3 million or 35.2% to $8.7
million in fiscal 1999 compared to fiscal 1998. The increase reflects a higher
level of borrowing in fiscal 1999, partially offset by a decrease in the cost of
these funds. The Bank continued to use FHLB advances and repurchase agreements
as cost effective sources of funding in fiscal 1999, particularly to fund the
Bank's planned growth that occurred in fiscal 1999. 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. In addition, the Company
issued Preferred Securities for the first time in fiscal 1997. The cost of these
remained constant in fiscal 1998 and 1999.
Annual Report 1999 - Fidelity Bancorp, Inc. and Subsidiaries - Page 43
<PAGE>
Management's Discussion and Analysis - continued
- --------------------------------------------------------------------------------
Provision for Loan Losses
The provision for loan losses was $520,000, $405,000 and $500,000 for the fiscal
years ended September 30, 1999, 1998 and 1997, respectively. The provisions
reflect management's evaluation of the loan portfolio, current economic
conditions, and other factors as described below. Based on this evaluation, the
allowance has grown from $1.9 million at September 30, 1997 to $2.5 million at
September 30, 1999, an increase of 28.3%, while the net loan portfolio has
increased 50.9% during the same period. Loan charge-offs, net of recoveries,
were $286,000 in fiscal 1999, compared to $93,000 in fiscal 1998. Net
charge-offs were $99,000 in fiscal 1997.
A monthly review is conducted by management to determine that the allowance for
loan losses is appropriate to absorb estimated loan losses. In determining the
level of allowances for 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 appropriate, future provisions to the allowance 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
Non-interest or other income increased by $357,000 or 30.6% to $1.5 million in
fiscal 1999 as compared to fiscal 1998. Other income increased by $284,000 or
32.2% to $1.2 million in fiscal 1998 compared to fiscal 1997.
Included in non-interest income was service fee income on loans and late charges
which increased by $31,000 in fiscal 1999 and increased by $41,000 in fiscal
1998 over the respective prior years. The increase in fiscal 1999 is primarily
attributable to the collection of title insurance fees related to mortgages
originated. The Bank became licensed to collect such fees in fiscal 1999. The
increase in fiscal 1998 primarily reflected 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 Bank recorded net gains of $64,000, $84,000 and $53,000 on the sale of
investment and mortgage-backed securities in fiscal 1999, 1998, and 1997,
respectively. All sales in fiscal 1999, 1998 and 1997 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 $17,000, $11,000 and $28,000 in fiscal years 1999,
1998 and 1997, respectively. The Bank sells a portion of the loans originated
under low income housing programs in which it participates in the Pittsburgh
area. Also, the Bank sells education loans to the Student Loan Marketing
Association ("SLMA"). Such sales to SLMA generally result in some gain or loss
being realized and are being done to reduce the Bank's position in these loans,
which 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 SLMA and of low income housing program loans were not significant, at
$1.3 million in fiscal 1999 and under $1 million in fiscal 1998 and 1997,
however the net gains recorded in those years reflect the timing of the sales.
Deposit service charges and fee income was $566,000, $413,000 and $408,000 in
fiscal 1999, 1998 and 1997, respectively. The increase in fiscal 1999 primarily
reflects fees generated by the new Strip District branch and the revamping of
the Bank's service charge structure for deposit accounts, which resulted in
increased fees collected on these accounts. There were no significant variances
in this category between fiscal 1998 and 1997.
Other operating income includes miscellaneous sources of income, which consist
primarily of automated teller machine fees, fees from the sale of cashiers
checks and money orders, and safe deposit box rental income. Such income
amounted to $715,000, $528,000 and $304,000 in fiscal 1999, 1998 and 1997,
respectively. The increase in fiscal 1999 reflects several factors, the most
significant of which were an increase in the surcharge for non-customers for the
use of the Bank's automated teller machines and an increase in earnings on the
cash surrender value of life insurance policies on certain executive officers.
Finally, the Bank earned fees from a program, introduced in July 1998, to sell
non-insured investment products such as mutual funds and annuities to both Bank
and nonbank customers. The increase in
Page 44 - Annual Report 1999 - Fidelity Bancorp, Inc. and Subsidiaries
<PAGE>
Management's Discussion and Analysis - continued
- --------------------------------------------------------------------------------
fiscal 1998 is primarily due to 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.
Other Expenses
Operating expenses increased $838,000 or 11.5% to $8.2 million in fiscal 1999
and increased $827,000 or 12.7% to $7.3 million in fiscal 1998, from $6.5
million in fiscal 1997.
Compensation, payroll taxes and fringe benefits, the largest component of
operating expenses, increased $514,000 or 12.0% to $4.8 million in fiscal 1999
and $609,000 or 16.5% to $4.3 million in fiscal 1998 over the respective prior
years. Factors contributing to the increases in both years were normal salary
increases, resulting in higher payroll taxes, increases in the number of
employees on the payroll, higher bonuses awarded, and an increase in retirement
and health care expenses. The increase in the number of employees for fiscal
1999 primarily reflects staffing additions for the branch office opened in
Pittsburgh's Strip District in October 1998, as well as staffing for the Bank's
new brokerage services program.
Office occupancy and equipment expense increased $142,000 or 21.2% to $811,000
in fiscal 1999 and $99,000 or 17.3% to $669,000 in fiscal 1998 over the
respective prior years. The increase in fiscal 1999 primarily reflects costs
associated with renovating and opening the Bank's new Strip District branch in
October 1998, which was a leased facility until the Bank purchased the building
in June 1999. Additionally, the increase reflects increased equipment costs, a
portion of which was incurred addressing the Year 2000 problem. 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.
Depreciation and amortization increased $66,000 or 12.7% to $582,000 in fiscal
1999 and decreased $25,000 or 4.5% to $516,000 in fiscal 1998 over the
respective prior years. The results for fiscal 1999 reflect additional
depreciation on equipment added or updated during the past year, depreciation on
renovations completed on the Bank's data processing and back office location,
and amortization and depreciation on the Bank's new Strip District office. The
decrease in fiscal 1998 reflects some equipment becoming fully depreciated,
partially offset by increases in depreciation and amortization on new and
renovated facilities.
Premiums for federal deposit insurance were $156,000, $155,000 and $112,000 for
the fiscal years 1999, 1998 and 1997, respectively. The amount of the premiums
is based on the average amount of deposits outstanding.
The Bank recorded a net gain on real estate owned of $36,000 in fiscal 1999,
compared to net losses of $12,000 and $31,000 in fiscal 1998 and 1997,
respectively. The results reflect the costs associated with the holding and
disposition of properties during the periods. At September 30, 1999, the Bank
had one single family property classified as real estate owned.
Intangible amortization was zero in fiscal 1999 and 1998, and $44,000 in fiscal
1997. The results reflect the amortization of the intangibles generated by the
three branch acquisitions that occurred in November 1991, on a straight-line
basis over five years. The intangibles were fully amortized for book purposes in
fiscal 1997.
Other operating expenses, which consist primarily of check processing costs,
advertising, bank service charges, supervisory examination and assessment fees,
legal and other administrative expenses, amounted to $1.8 million in fiscal
1998, $1.7 million in fiscal 1998 and $1.5 million in fiscal 1997. Significant
variations in fiscal 1999, compared to fiscal 1998, include increases in
consulting fees, telephone expenses, legal fees, and expenses related to credit
cards issued by the Bank, partially offset by a decrease in stationary and
supplies expense. Significant variations in fiscal 1998 included increases in
advertising, stationary and supplies, consulting fees and costs related to the
introduction of a new credit card program. Partially offsetting these increases
was a decrease in legal fees.
Income Taxes
The Company generated taxable income and, as a consequence, recorded tax
provisions of $1.2 million, $1.2 million and $1.3 million for fiscal 1999, 1998
and 1997, respectively. These changes reflect the difference in the Company's
profitability for the periods as well as differences in the effective tax rate,
which was 26.5%, 29.2% and 31.6% for fiscal 1999, 1998 and 1997, respectively.
The decreased effective tax rate in fiscal 1999 and 1998 primarily results from
the Bank's increased purchases of tax-exempt investments.
Annual Report 1999 - Fidelity Bancorp, Inc. and Subsidiaries -Page 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 Company are monetary in nature. As a result, interest rates
have a more significant impact on the Company'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 results 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.
Year 2000 issues expose the Company to a number of risks, any one of which, if
realized, could have a material adverse effect on the Company's business,
results of operations or financial condition. These risks include the
possibility that, to the extent certain vendors fail to adequately address Year
2000 issues, the Company may suffer disruptions in important services on which
the Company depends, such as telecommunications, electrical power and data
processing. Year 2000 issues could affect the Company's liquidity if customer
withdrawals in anticipation of the Year 2000 are greater than expected or if the
Company's lenders are unable to provide the Company with funds when and as
needed by the Company. Year 2000 issues also create additional credit risk to
the Company insofar as the failure of the Company's customers and counterparties
to adequately address Year 2000 issues could increase the likelihood that these
customers and counterparties become delinquent or default on the obligations to
the Company. In addition to increasing the Company's risk exposure to problem
loans, credit losses and liquidity problems, Year 2000 issues expose the Company
to increased risk of litigation losses and expenses relating to the foregoing.
There are other Year 2000 risks besides those described above that may impact
the Company's business, results of operations and financial condition.
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. Prioritization of the most
critical software applications and hardware configurations has 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 top priority. The Company, in
coordination with these vendors, has successfully completed testing all critical
applications. In addition, all significant hardware that required replacement or
Page 46 - Annual Report 1999 - Fidelity Bancorp, Inc. and Subsidiaries
<PAGE>
Management's Discussion and Analysis - continued
- --------------------------------------------------------------------------------
upgrade has been purchased and installed or the upgrade completed. Testing of
this equipment has also been completed. 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 Company is relying on the
utility companies' internal testing and representations that they will provide
the required services that drive the Company's data and communication systems.
Any failure of the utilities to adequately address the Year 2000 issue could
result in the Company being unable to service its customers on a timely basis.
The Validation phase is now complete. 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, and is also now complete.
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 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 $450,000, and are not expected to be material
to the Company's results of operations in any one quarter or fiscal year. As of
September 30, 1999, substantially all of the direct costs have been incurred.
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 has developed 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 cannot 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 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 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. In June 1999, the FASB issued SFAS No. 137,
"Accounting for Derivative Instruments and Hedging Activities - Deferral of the
Effective Date of SFAS No. 133 - and Amendment of SFAS No. 133," which delays
the effective date of SFAS No. 133 until fiscal years beginning after June 15,
2000. The impact of adopting this statement on the Company's financial position,
results of operations and cash flow subsequent to the effective date is not
currently estimable and will depend on the financial position of the Company and
the future and purpose of any derivative instruments in use by management at
that time. The Company has no plans to adopt the provisions of this statement
prior to the effective date.
Annual Report 1999 - Fidelity Bancorp, Inc. and Subsidiaries - Page 47
<PAGE>
Corporate Information
- --------------------------------------------------------------------------------
Corporate Information
---------------------
Annual Meeting The annual meeting of the stockholders will be held at 5:00 p.m.,
on February 8, 2000 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/cgi-bib/srch-edgar?0000769207
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.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Investor Relations Dividend Reinvestment Plan Information Financial Information
Fidelity Bancorp, Inc. Investor Relations Richard G. Spencer
1009 Perry Highway Fidelity Bancorp, Inc. Chief Financial Officer
Pittsburgh, Pennsylvania 15237 1009 Perry Highway Fidelity Bancorp, Inc.
(412) 367-3300, X3139 Pittsburgh, Pennsylvania 15237 1009 Perry Highway
(412) 367-3300, X3139 Pittsburgh, Pennsylvania 15237
Transfer Agent (412) 367-3300, X3121
Registrar and Transfer Company Annual Report
10 Commerce Drive on Form 10-K
Cranford, New Jersey 07016
(800) 866-1340 Investor Relations
Fidelity Bancorp, Inc.
1009 Perry Highway
Pittsburgh, Pennsylvania 15237
(412) 367-3300, X3139
</TABLE>
Page 48 - Annual Report 1999 - Fidelity Bancorp, Inc. and Subsidiaries
<PAGE>
Capital Stock Information
- --------------------------------------------------------------------------------
Stock Information
-----------------
The following table sets forth the fiscal 1999, 1998 and 1997 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 dividend paid in May 1997.
....................................Stock Price................Dividends
- --------------------------------------------------------------------------------
Quarter Ended:.............High........Low...........Cash........Stock
- --------------------------------------------------------------------------------
......September 30, 1999........$17.38.....$14.75..........$.100.........--
......June 30, 1999..............18.00......17.12............100.........--
......March 31, 1999.............18.12......16.38............090.........--
......December 31, 1998..........18.25......16.50............090.........--
- --------------------------------------------------------------------------------
......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.........--
- --------------------------------------------------------------------------------
As of September 30, 1999, Fidelity Bancorp, Inc. had 1,934,308 shares of stock
outstanding and approximately 600 stockholders, including beneficial owners
whose stock is held in nominee name.
COMMON STOCK TRUST PREFERRED SECURITIES
MARKET MAKERS MARKET MAKERS
- ------------------------------------- -------------------------------------
NASDAQ National Market: NASDAQ National Market:
Common Stock Trust Preferred Securities
Symbol FSBI Symbol FSBIP
MARKET MAKERS MARKET MAKERS
Legg Mason Wood Walker Inc. (LEGG) Ryan, Beck &Co. (RYAN)80 Main Street
2500 CNG Tower West Orange, NJ 07039--(800) 395-7926
625 Liberty Avenue
Pittsburgh, PA 15222--(800) 346-5075 The Ohio Company
155 E. Broad Street
Ryan, Beck & Co. (RYAN) Columbus, OH 43215 -- (800) 848-0927
80 Main Street
West Orange, NJ 07039--(800) 395-7926
Herzog, Heine, Geduld, Inc. (HRZG)
525 Washington Boulevard
Pavonia, NJ 07310--(800) 221-3600
Sandler O'Neill & Partners, L.P.
Two World Trade Center, 104th Floor
New York, NY 10048 -- (800) 635-6851
Annual Report 1999 - Fidelity Bancorp, Inc. and Subsidiaries - Page 49
<PAGE>
Fidelity Bank
-------------
BANK HEADQUARTERS
1009 Perry Highway, Pittsburgh, Pennsylvania 15237 - (412) 367-3300
FAX (412) 364-6504 - E-Mail: [email protected]
<TABLE>
<CAPTION>
BOARD OF DIRECTORS
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
JOHN R. GALES ROBERT F. KASTELIC OLIVER D. KEEFER
President President Owner
J.R. Gales & Associates X-Mark/CDT Ralph E. Lane Company
CHARLES E. NETTROUR JOANNE ROSS WILDER
President Attorney WILLIAM L. WINDISCH
Martin & Nettrour, Inc. Wilder, Mahood & Crenney, P.C. President
Retirement Designs Unlimited, Inc. Chief Executive Officer
JAMES E. SHEPARD
Director Emeritus
Retired President
Power Equipment Company
</TABLE>
<TABLE>
<CAPTION>
OFFICERS
- ------------------------------------------------------------------------------------------------------------
<S><C> <C> <C>
WILLIAM L. WINDISCH LISA L. GRIFFITH, CPA DANIEL J. GOZZARD
President Vice President Assistant Vice President
Chief Executive Officer Assistant Treasurer Commercial Loan Officer
Controller
RICHARD G. SPENCER, CPA CHRISTINE J. HOFFMAN
Executive Vice President LEONARD T. CONLEY Assistant Vice President
Chief Financial Officer Vice President Operations
Treasurer Residential Lending
NEAL H. JACKSON
MICHAEL A. MOONEY LINDA D. METZMAIER Assistant Vice President
Executive Vice President Vice President Branch Manager
Chief Lending Officer Internal Audit/Compliance
LYNNE A. MANSKI
RICHARD L. BARRON ANTHONY J. PARAVATI Assistant Vice President
Senior Vice President Vice President Marketing
Human Resources Commercial Loan Officer
Assistant Secretary DONNA M. TILL
ARLENE P. PETROSKY Assistant Vice President
SANDRA L. LEE Vice President Branch Manager
Senior Vice President Commercial Loan Officer
Operations BERNARD T. UHRINEK
KENNETH J. BARKOVICH Assistant Vice President
ANTHONY F. ROCCO Assistant Vice President Data Processing
Senior Vice President Branch Manager
Community Banking LINDA M. YON
KAREN W. CARTWRIGHT Assistant Vice President
SUSAN J. LOWE Assistant Vice President Branch Manager
Corporate Secretary Financial Consultant/Registered Principal
</TABLE>
Page 50 - Annual Report 1999 - Fidelity Bancorp, Inc. and Subsidiaries
<PAGE>
Fidelity Bancorp, Inc.
----------------------
CORPORATE HEADQUARTERS
1009 Perry Highway, Pittsburgh, Pennsylvania 15237 oo(412) 367-3300
FAX (412) 364-6504 o E-Mail: [email protected]
<TABLE>
<CAPTION>
BOARD OF DIRECTORS
- ---------------------------------------------------------------------------------------------------
<S><C> <C> <C>
JOHN R. GALES ROBERT F. KASTELIC OLIVER D. KEEFER
President President Owner
J.R. Gales & Associates X-Mark/CDT Ralph E. Lane Company
CHARLES E. NETTROUR JOANNE ROSS WILDER WILLIAM L. WINDISCH
President Attorney President
Martin & Nettrour, Inc. Wilder, Mahood & Crenney, P.C. Chief Executive Officer
Retirement Designs Unlimited, Inc.
</TABLE>
OFFICERS
- --------------------------------------------------------------------------------
WILLIAM L. WINDISCH SUSAN J. LOWE
President Corporate Secretary
Chief Executive Officer
LISA L. GRIFFITH, CPA
RICHARD G. SPENCER, CPA Assistant Treasurer
Executive Vice President
Chief Financial Officer RICHARD L. BARRON
Treasurer Assistant Secretary
MICHAEL A. MOONEY
Executive Vice President
Independent Auditors
KPMG LLP
One Mellon Bank Center
Pittsburgh, Pennsylvania 15219
Annual Report 1999 - Fidelity Bancorp, Inc. and Subsidiaries - Page 51
<PAGE>
Bank Branch Locations
---------------------
ALLISON PARK
1701 Duncan Avenue
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
Page 52 - Annual Report 1999 - Fidelity Bancorp, Inc. and Subsidiaries
EXHIBIT 23
<PAGE>
The Board of Directors
Fidelity Bancorp, Inc.
We consent to incorporation by reference in the registratioin statements on Form
S-8 pertaining to the Fidelity Bancorp, Inc.'s 1998 Stock Compensation Plan
filed January 25, 1999, the 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 29, 1999,
relating to the consolidated statements of financial condition of Fidelity
Bancorp, Inc. as of September 30, 1999 and 1998, 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, 1999, which report appears in the
September 30, 1999, annual report on Form 10-K of Fidelity Bancorp, Inc.
/s/KPMG LLP
Pittsburgh, Pennsylvania
December 18, 1999
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
ANNUAL REPORT ON FORM 10-K AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL INFORMATION.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-END> SEP-30-1999
<CASH> 4,304
<INT-BEARING-DEPOSITS> 364
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 160,587
<INVESTMENTS-CARRYING> 17,025
<INVESTMENTS-MARKET> 16,797
<LOANS> 278,435
<ALLOWANCE> 2,477
<TOTAL-ASSETS> 482,543
<DEPOSITS> 269,118
<SHORT-TERM> 50,641
<LIABILITIES-OTHER> 3,488
<LONG-TERM> 133,250
0
0
<COMMON> 20
<OTHER-SE> 26,026
<TOTAL-LIABILITIES-AND-EQUITY> 482,543
<INTEREST-LOAN> 19,410
<INTEREST-INVEST> 11,534
<INTEREST-OTHER> 31
<INTEREST-TOTAL> 30,975
<INTEREST-DEPOSIT> 10,545
<INTEREST-EXPENSE> 19,229
<INTEREST-INCOME-NET> 11,746
<LOAN-LOSSES> 520
<SECURITIES-GAINS> 64
<EXPENSE-OTHER> 8,153
<INCOME-PRETAX> 4,596
<INCOME-PRE-EXTRAORDINARY> 4,596
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,379
<EPS-BASIC> 1.72
<EPS-DILUTED> 1.68
<YIELD-ACTUAL> 2.69
<LOANS-NON> 2,385
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 2,243
<CHARGE-OFFS> (326)
<RECOVERIES> 40
<ALLOWANCE-CLOSE> 2,477
<ALLOWANCE-DOMESTIC> 2,477
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
