-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, KK4A8pQPJY5qFNZNk2wocdPE7k5eosPnGTjkA1K/ffaE/DqE/luO+lbjQLTD7PuL 4vsoLL/q+fD5P/Oj9SBOhg== 0000912219-96-000004.txt : 19961212 0000912219-96-000004.hdr.sgml : 19961212 ACCESSION NUMBER: 0000912219-96-000004 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19960930 FILED AS OF DATE: 19961211 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: FIDELITY BANCORP INC /DE/ CENTRAL INDEX KEY: 0000912219 STANDARD INDUSTRIAL CLASSIFICATION: SAVINGS INSTITUTION, FEDERALLY CHARTERED [6035] IRS NUMBER: 363915246 STATE OF INCORPORATION: DE FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-22826 FILM NUMBER: 96678958 BUSINESS ADDRESS: STREET 1: 5455 WEST BELMONT AVENUE CITY: CHICAGO STATE: IL ZIP: 60641 BUSINESS PHONE: 3127364414 MAIL ADDRESS: STREET 1: 5455 WEST BELMONT AAVENUE CITY: CHICAGO STATE: IL ZIP: 60641 10-K 1 FIDELITY BANCORP, INC. FORM 10-K, 9/30/96 =============================================================================== SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K Annual Report Pursuant to Section 13 of the Securities Exchange Act of 1934 For the fiscal year ended September 30, 1996 Commission file number 0-22826 FIDELITY BANCORP, INC. (Exact name of registrant as specified in its charter) Delaware 36-3915246 (State of incorporation) (I.R.S. Employer Identification No.) 5455 West Belmont Avenue, Chicago, Illinois 60641 (Address of principal executive offices) Telephone (773) 736 - 4414 Securities registered pursuant to Section 12 (b) of the Act: None Securities registered pursuant to Section 12 (g) of the Act: Common Stock, par value $.01 (Title of class) The registrant (1) has filed all reports required to be filed by Section 13 or 15 (D) of the Securities Exchange Act of 1934 during the preceding twelve months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No . Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this form 10-K. [ X ] The aggregate market value of the voting stock held by non-affiliates of the registrant, i.e., persons other than directors and executive officers of the registrant is $41,990,830 and is based upon the last sales price as quoted on Nasdaq Stock Market for November 27, 1996. The Registrant has 2,784,075 shares of common stock outstanding as of November 27, 1996 DOCUMENTS INCORPORATED BY REFERENCE Portions of the Proxy Statement for the 1997 Annual Meeting of Stockholders are incorporated by reference into Part III of this Form 10-K. =============================================================================== ITEM 1. BUSINESS GENERAL On December 3, 1993, Fidelity Bancorp, Inc., a Delaware corporation (the "Company") completed its public offering of its common stock and acquired Fidelity Federal Savings Bank, (the "Bank") as part of the Bank's conversion from a federally-chartered mutual savings bank to a federally-chartered stock savings bank. The Company issued and sold 3,782,350 shares of common stock at $10.00 per share, thereby completing the conversion. As a result of stock repurchase programs, outstanding shares of common stock at September 30, 1996 totalled 2,866,108. The Company's common stock is listed on the Nasdaq National Market and trades under the symbol "FBCI". Currently, the Company does not transact any material business other than through its sole subsidiary, the Bank. Originally organized in 1906, the Bank conducts its business through its main office and four full-service branch offices, located in Chicago, Franklin Park, and Schaumburg, Illinois. The Bank's results of operations are dependent on net interest income which is the difference between interest earned on its loan and investment portfolios, and its cost of funds, consisting of interest paid on deposits and Federal Home Loan Bank ("FHLB") advances. In addition to traditional mortgage loans, consumer loans, and retail banking products, the Bank generates non-interest income such as transactional fees, and fees and commissions from its full-service securities brokerage services offered through INVEST Financial Corporation ("INVEST") as well as insurance and annuity products. The Bank's operating expenses primarily consist of employee compensation, occupancy expenses, federal deposit insurance premiums and other general and administrative expenses. The Bank's results of operations are also significantly affected by general economic and competitive conditions, particularly changes in market interest rates, government policies and actions of regulatory authorities. As a federally chartered savings bank, the Bank's deposits are insured by the Federal Deposit Insurance Corporation ("FDIC"), up to applicable limits. The Bank is a member of the FHLB of Chicago, which is one of the twelve regional banks for federally insured savings institutions comprising the FHLB system. The Bank is regulated by the Office of Thrift Supervision ("OTS") and the FDIC. The Bank is further regulated by the Board of Governors of the Federal Reserve System as to reserves required to be maintained against deposits and certain other matters. MARKET AREA AND COMPETITION The Bank's market area for deposits is concentrated in the neighborhoods surrounding its offices in the northwest Chicago and suburban areas. The Bank's primary market area for lending includes northwest Chicago, western Cook County and adjacent areas in DuPage, Kane and Lake Counties, Illinois, and to a lesser extent McHenry County and the remainder of Cook County, Illinois. Management believes that its offices are located in communities that can generally be characterized as consisting of stable, residential neighborhoods of predominately one- to four-family residences. The Chicago metropolitan area is a highly competitive market. The Bank's market share of deposits and loan originations in the Chicago metropolitan area amounts to less than one percent. Competition comes from savings institutions and commercial banks, many of which have greater financial resources than the Bank. Additional competitors for loans are mortgage brokerage, mortgage banking and insurance companies and to a lesser extent credit unions. Competition for deposits includes traditional savings institutions, commercial banks and credit unions, and also includes mutual funds, brokerage firms, insurance companies and corporate deferred compensation and savings plans. Changes in federal and state banking laws have allowed industry consolidation into larger financial entities, some based in other states and foreign countries. Increased competition for loans and deposits may also come from the reduction of barriers to interstate banking. The Bank serves its community with a wide selection of mortgage and consumer loans and retail deposit and investment services. Management believes the Bank's major appeal to consumers in its market area is its financial and customer service. REGULATORY ENVIRONMENT The Bank is subject to extensive regulation, supervision and examination by the OTS, as its chartering authority and primary federal regulator, and by the FDIC, which insures its deposits up to applicable limits. Such regulation and supervision establish a comprehensive framework of approved activities in which the Bank can engage. The regulations are designed primarily for the protection of the insurance fund and depositors. The regulatory structure also gives the regulatory authorities wide discretion in connection with their supervisory and enforcement activities. Any change in regulation, whether by the OTS, the FDIC or Congress, could have a material impact on the Bank and its operations. See Item 7. "Management's Discussion and Analysis - Regulation and Supervision." ITEM 2. PROPERTIES The Bank conducts its business through five full-service offices. All offices have ATM facilities. All offices, except for the Franklin Park branch, have drive through facilities. Management believes that the current facilities are adequate to meet the present and immediately foreseeable needs of the Bank and the Company. Certain information concerning the offices of the Company and the Bank is set forth below.
Net Book Value Original Date of Property or Leased Leased or Leasehold Improvements or Location Acquired at September 30, 1996 Owned (In thousands) EXECUTIVE AND HOME OFFICE: Various dates 5455 W. Belmont Ave. commencing in Chicago, IL 60641 1955 $ 515 Owned BRANCHES: Higgins Branch 6360 W. Higgins Road Chicago, IL 60630 1984 344 Owned Franklin Park Branch 10227 W. Grand Ave. Franklin Park, IL 60131 1980 87 Leased Schaumburg Branch 2425 West Schaumburg Rd Schaumburg, IL 60194 1995 1,072 Leased Harlem Avenue Branch 3940 North Harlem Ave. Chicago, IL 60634 1995 288 Owned ------- $ 2,306 =======
ITEM 3. LEGAL PROCEEDINGS The Bank is involved in legal proceedings regarding the Bennett Funding Group ("BFG") bankruptcy proceedings, in which the Bank has an investment in commercial leases guaranteed by BFG. See discussion in "CLASSIFIED ASSETS". The Bankruptcy Trustee has filed an adversary complaint against the Bank for claimed violations of the automatic stay provisions of the bankruptcy code with respect to post-petition collection efforts of the Bank. The monies collected by the Bank, aggregating approximately $60,000, have since been remitted to the Trustee's escrow account after obtaining assurances from the court that the funds would be protected pending the outcome of the litigation. The Trustee's claim for $10 million for sanctions and actual damages based on the Bank's post-petition collection activity is also being vigorously contested. The Trustee has also filed an adversary proceeding against 60 banks, including the Bank, asserting various causes of action. The results of these adversary proceeding are not expected to have a material adverse impact on the Bank. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS None. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Company's common stock is traded over-the-counter and quoted on the NASDAQ Stock Market under the symbol "FBCI". As of November 27, 1996, there were 2,784,078 shares of common stock outstanding and 643 stockholders of record, not including the number of persons or entities whose stock is held in nominee or "street" name through various brokerage firms or banks. The table below sets forth the high and low sales prices during each period as reported on Nasdaq Stock Market and does not necessarily reflect retail markups, markdowns, or commissions: 1996 1995 High Low High Low First Quarter 16 14 12 1/4 9 1/4 Second Quarter 16 1/4 14 1/2 11 3/4 10 Third Quarter 17 15 13 3/4 11 Fourth Quarter 17 1/8 15 1/2 15 3/4 13 1/4 Such over-the-counter market quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not necessarily represent actual transactions. As of September 30, 1996, the Company had repurchased 920,442 shares of its common stock since its initial public offering. During fiscal 1994 and 1995, the Company completed its first two 5% stock repurchase programs and began its third. It acquired 505,456 common shares at a cost of $6.0 million or $11.87 per share. During fiscal 1996, the Company completed its third stock repurchase program. It also began and completed its fourth and fifth programs and began its sixth on August 8, 1996. The Company believes such repurchases increase the long-term potential return to stockholders. The price, timing of purchases and actual number of shares repurchased in the future will be based on the impact to stockholder value. The Board of Directors declared per share dividends aggregating $0.24 and $0.12 during fiscal 1996 and 1995, respectively. In addition, the Board of Directors declared a regular quarterly dividend of $0.06 per share, payable on November 15, 1996 to shareholders of record as of October 31, 1996. ITEM 6. SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA The following table sets forth certain financial data at or for the periods indicated. This information should be read in conjunction with the Consolidated Financial Statements and the notes thereto.
At and For the Years Ended September 30, 1996 1995 1994 1993 1992 (Dollars in thousands, except per share data) SELECTED OPERATING DATA: Interest income $ 31,554 26,169 21,113 20,967 22,467 Interest expense 18,129 13,752 9,759 10,253 13,384 ------ ------ ------ ------ ------ Net interest income before provision for loan losses 13,425 12,417 11,354 10,714 9,083 Provision for loan losses 410 192 48 57 106 ------ ------ ------ ------ ------ Net interest income after provision for loan losses 13,015 12,225 11,306 10,657 8,977 Non-interest income: Gain on sale of investment securities available for sale - 274 - 695 767 Gain (loss) on sale of loans receivable - - (17) 61 - Fees and commissions 379 398 680 1,479 1,296 Insurance and annuity commissions 519 519 536 388 433 Other 59 38 42 93 125 ------ ------ ------ ------ ------ Total non-interest income 957 1,229 1,241 2,716 2,621 Non-interest expense 10,595 8,337 8,164 7,129 6,532 ------ ------ ------ ------ ------ Income before income taxes and cumulative effect of change in accounting principle 3,377 5,117 4,383 6,244 5,066 Income tax expense 1,235 2,033 1,703 2,628 1,892 ------ ------ ------ ------ ------ Income before cumulative effect of change in accounting principle 2,142 3,084 2,680 3,616 3,174 Cumulative effect of change in accounting principle - - - - 420 ------ ------ ------ ------ ------ Net income $ 2,142 3,084 2,680 3,616 2,754 ====== ====== ====== ====== ====== SELECTED FINANCIAL CONDITION DATA: Total assets $ 475,862 393,664 338,082 273,557 275,031 Loans receivable, net 354,255 266,735 216,657 203,990 205,164 Mortgage-backed securities held to maturity, net 21,673 26,484 29,565 - - Investment securities available for sale 78,104 84,579 70,963 12,287 20,423 Deposits 302,934 275,993 238,062 247,863 253,199 Borrowed funds 115,300 54,032 42,000 - - Stockholders' equity 48,828 53,792 53,477 21,100 17,484
September 30, 1996 1995 1994 1993 1992 SELECTED FINANCIAL RATIOS AND OTHER DATA: Return on average assets 0.50% 0.85% 0.84% 1.31% 1.02% Return on average stockholders' equity 4.08 5.62 5.62 18.50 16.87 Average stockholders' equity to average assets 12.27 15.12 14.89 7.07 6.06 Stockholders' equity to total assets 10.26 13.66 15.82 7.71 6.36 Non interest expense to average assets 2.48 2.30 2.53 2.56 2.42 Interest rate spread during period 2.57 2.80 3.01 3.66 3.09 Net interest margin 3.23 3.52 3.63 3.98 3.45 ASSET QUALITY RATIOS: Non-performing loans to loans receivable, net 0.87 0.23 0.13 0.10 0.21 Non-performing assets to total assets 0.67 0.16 0.11 0.08 0.18 Allowance for loan losses to total loans 0.23 0.15 0.11 0.11 0.09 Allowance for loan losses to non-performing loans 26.25 65.32 80.85 112.02 43.55 REGULATORY CAPITAL RATIOS: Tangible 8.04 10.51 11.09 7.28 5.88 Core 8.04 10.51 11.09 7.28 5.88 Risk-based 16.89 20.71 19.61 15.95 12.15 OTHER DATA: Loan originations (dollars in thousands) $139,589 77,880 64,543 80,504 75,796 Number of deposit accounts 24,553 20,488 20,095 20,779 23,096 Book value per share outstanding $ 17.04 16.41 14.88 N/A N/A Earnings per share - fully diluted $ 0.72 0.93 0.71 N/A N/A
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION MANAGEMENT STRATEGY The Company is pursuing a strategy that is designed to improve its performance by positioning the Bank as a locally managed full-service community bank in an increasingly competitive environment. Although mortgage lending is expected to continue as an important part of the Company's business, a key component of the Company's strategy is the provision of nonbanking financial services and products, such as annuity and insurance products and brokerage services through INVEST to retain and attract customers. In addition, the third party loan originator network enables the Company to be a competitive, low cost provider of single- and multi-family mortgage loans. The nonbanking financial services and products are also intended to generate additional fee income and thereby improve profitability. The Company also intends to diversify its asset base and at the same time develop further customer relationships through increased consumer lending activities, such as home equity lending. Finally, the Company will continue to pursue opportunities for growth and expansion in the Bank's existing marketplace, whether through acquisitions, such as the Bank's acquisition of deposits from the RTC in 1992, or through additional facilities, such as the Schaumburg and Harlem Avenue offices, opened in fiscal 1995. The Company may seek additional asset growth to further leverage its net worth. In the event that its traditional retail sources of funding and investment opportunities (i.e., deposits and direct lending) are insufficient for this purpose, or appear to be inappropriately priced, the Bank may further utilize the wholesale markets, such as FHLB advances, for funding or mortgage-backed securities for investment opportunities. ASSET/LIABILITY MANAGEMENT The Company's overall asset/liability strategy is directed toward managing the Bank's exposure to interest rate risk in changing interest rate environments. Asset/liability management is a daily function of the Bank's management due to continual fluctuations in interest rates and financial markets. 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 special time period if it will mature or reprice within that time period. The interest rate sensitivity gap is defined as the difference between the amount of interest- earning assets maturing or repricing within that time period. A gap is considered positive when the amount of interest rate sensitive assets exceeds the amount of interest rate sensitive liabilities. A gap is considered negative when the amount of interest rate sensitive liabilities exceeds the amount of 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. At September 30, 1996, total interest-earning assets maturing, repricing, or estimated to mature, reprice or decay, within one year exceeded total interest- bearing liabilities maturing, repricing, or estimated to prepay, in the same period by $161.8 million, representing a cumulative one year negative gap of 34.0% of assets. Thus, during future periods of rising interest rates, the costs on interest-bearing liabilities may increase more quickly than the yields on interest-earning assets, which could adversely affect net interest income. Conversely, in a period of falling interest rates, the yields on its interest- earning assets may decrease at a slower pace than the cost of its interest- bearing liabilities. The Company closely monitors its interest rate risk as such risk relates to its operational strategies. Management's interest rate sensitivity strategy is designed to provide a relatively stable stream of net interest income in moderately varying interest rate environments. The following table sets forth the scheduled repricing or maturity of the Company's assets and liabilities at September 30, 1996, based on certain assumptions used by the OTS with respect to NOW, checking and passbook account withdrawals. The Company's loan prepayment assumptions are based on national experience data. These assumptions may not be indicative of the actual prepayments and withdrawals experienced by the Company. The effect of these assumptions is to quantify the dollar amount of items that are interest-sensitive and may be repriced within each of the periods specified. The table does not necessarily indicate the impact of general interest rate movements on the Company's net interest yield because the repricing of certain categories of assets and liabilities is subject to competitive and other pressures beyond the Company's control. As a result, certain assets and liabilities indicated as maturing or otherwise repricing within a stated period may, in fact, mature or reprice at different times and at different volumes.
At September 30, 1996 More More than than More More More More 3 3 6 than than than than More mths or mths to mths 1 yr 3 yrs to 5 yrs 10 yrs to than less 6 mths to 1 yr to 3 yrs 5 yrs to 10 yrs 20 yrs 20 yrs Total (Dollars in thousands) INTEREST-EARNING ASSETS Mortgage loans (1) $ 14,251 17,292 36,265 146,552 68,875 27,658 27,115 2,107 340,115 Consumer loans (1) 2,148 1,302 2,193 5,879 2,063 - - - 13,585 Mortgage-backed securities 731 708 1,348 4,623 11,211 2,125 927 - 21,673 Interest-earning deposits 225 - - - - - - - 225 Mutual funds, investment securities available for sale, federal funds sold and FHLB stock (2) 11,221 794 1,601 3,259 13,333 57,037 - - 87,245 ------ ----- ------ ------- ------ ------ ------ ----- ------- Total interest-earning assets $ 28,576 20,096 41,407 160,313 95,482 86,820 28,042 2,107 462,843 ====== ====== ====== ======= ====== ====== ====== ===== ======= INTEREST-BEARING LIABILITIES Passbook accounts $ 3,828 3,828 6,978 22,226 14,490 18,390 12,722 3,615 86,077 NOW accounts 1,390 1,390 2,206 4,562 1,221 1,638 899 165 13,471 Money market accounts 2,454 2,454 3,382 5,851 1,631 2,104 1,114 202 19,192 Certificate accounts 32,754 67,884 46,032 32,928 - - - - 179,598 Borrowed funds 77,300 - - 38,000 - - - - 115,300 ------ ----- ------ ------- ------ ------ ------ ----- ------- Total interest-bearing liabilities 117,726 75,556 58,598 103,567 17,342 22,132 14,735 3,982 413,638 ====== ====== ====== ======= ====== ====== ====== ===== ======= Interest sensitivity gap $ (89,150) (55,460) (17,191) 56,746 78,140 64,688 13,307 (1,875) 49,205 ====== ====== ====== ======= ====== ====== ====== ===== ======= Cumulative interest sensitivity gap $ (89,150)(144,610)(161,801) (105,055) (26,915) 37,773 51,080 49,205 ====== ====== ====== ======= ====== ====== ====== ===== Cumulative interest sensibility gap as a percentage of total assets (18.7)% (30.4)% (34.0)% (22.1)% (5.7)% 7.9% 10.7% 10.3% Cumulative net interest- earning assets as a percentage of interest- sensitive liabilities 24.3% 25.2% 35.8% 70.4% 92.8% 109.6% 112.5% 111.9%
(1) For purposes of the gap analysis, mortgage and consumer loans are not reduced by non-performing loans or by the allowance for loan losses. (2) Category includes $65 million in callable federal agency securities. Because of interest rate increases since the purchase of these securities. They are shown as repricing at their respective maturity dates although there can be no assurance that the securities will not be called before maturity. The issues include $10 million 7.125% FNMA due 11/7/2005 callable 11/7/97, $20 million 8% FNMA due 5/15/2006 callable 5/15/97, $5 million 6.85% FHLB due 11/8/2002 callable 11/8/96, $10 million 7% FHLB 1/19/2006 callable 1/19/97, $10 million 6.37% FHLB due 3/13/2001 callable 12/13/96, and $10 million 7.65% due 3/27/2006 callable 12/27/96. RATE/VOLUME ANALYSIS The table below presents the extent to which changes in interest rates and changes in the volume of interest-earning assets and interest-bearing liabilities have affected the Company's interest income and interest expense during the period indicated. Information is provided in each category with respect to (i) changes attributable to changes in volume (changes in volume multiplied by prior rate), (ii) changes attributable to changes in rate (changes in rate multiplied by prior volume), and (iii) the net changes. The changes attributable to the combined impact of volume and rate have been allocated proportionately to the changes due to volume and the changes due to rate.
Years ended September 30 1996 Compared to 1995 1995 Compared to 1994 Increase (Decrease) Due to Increase (Decrease) Due to Volume Rate Total Volume Rate Total (in thousands) INTEREST-EARNING ASSETS: Loans receivable, net $ 4,915 (337) 4,578 $ 3,751 (435) 3,316 Mortgage-backed securities (544) (55) (599) 1,530 (5) 1,525 Interest-earning deposits (5) 11 6 (93) 44 (49) Investment securities, mutual funds, and federal funds sold 538 862 1,400 (1,236) 1,500 264 ------ ---- ----- ------ ----- ----- Total $ 4,904 481 5,385 3,952 1,104 5,056 ====== ==== ====== ====== ===== ====== INTEREST-BEARING LIABILITIES: Passbook accounts (278) 115 (163) 31 (36) (5) NOW accounts 21 (37) (16) (394) 33 (361) Money market accounts 416 37 453 50 114 164 Certificate accounts 2,017 684 2,701 1,118 1,201 2,319 Borrowed funds 1,584 (182) 1,402 1,450 426 1,876 ------ ---- ----- ------ ----- ----- Total $ 3,760 617 4,377 2,255 1,738 3,993 ------ ==== ====== ------ ===== ====== Net change in net interest income $ 1,008 $ 1,063 ====== ======
AVERAGE BALANCE SHEETS The following table sets forth certain information relating to the Company's average balance sheets and reflects the average yield on assets and average cost of liabilities for the periods indicated. Such yields and costs are derived by dividing income or expense by the average balance of assets or labilities, respectively, for the years shown. Average balances are derived from average daily balances. The yields and costs include fees, which are considered adjustments to yields.
For years ended September 30, 1996 1995 1994 Average Average Average Average Yield/ Average Yield/ Average Yield/ Balance Interest Cost Balance Interest Cost Balance Interest Cost (dollars in thousands) INTEREST-EARNING ASSETS: Mortgage loans, net $ 290,054 22,715 7.83% 228,331 18,137 7.94% 183,936 15,079 8.20% Consumer loans, net 15,061 1,192 7.91% 14,107 1,192 8.45% 11,581 934 8.06% Mortgage-backed securities 24,331 1,703 7.00% 32,081 2,302 7.18% 10,753 777 7.23% Interest-earning deposits 1,049 60 5.72% 1,156 54 4.67% 3,627 103 2.84% Mutual funds, investment securities available for sale, commercial paper and federal funds sold 85,282 5,884 6.90% 76,672 4,484 5.85% 102,633 4,220 4.11% ------ ----- ---- ------- ------ ---- -------- ------ ---- Total interest-earning assets 415,777 31,554 7.59% 352,347 26,169 7.43% 312,530 21,113 6.76% Non-interest earning assets 12,188 10,805 7,767 ------ ------- ------- Total assets $ 427,965 363,152 320,297 ======= ======= ======= INTEREST-BEARING LIABILITIES: Deposits: Passbook accounts 79,727 2,455 3.08% 88,863 2,618 2.95% 102,231 2,979 2.91% NOW accounts 14,775 329 2.23% 13,895 345 2.48% 12,710 350 2.75% Money market accounts 19,796 841 4.25% 9,934 388 3.91% 8,305 224 2.70% Certificate accounts 172,863 10,316 5.97% 138,390 7,615 5.50% 116,099 5,296 4.56% ------ ----- ---- ------- ------ ---- -------- ------ ---- Total deposits 287,161 13,941 4.85% 251,082 10,966 4.37% 239,345 8,849 3.70% Borrowed funds 74,078 4,188 5.65% 46,224 2,786 6.03% 20,614 910 4.41% ------ ----- ---- ------- ------ ---- -------- ------ ---- Total interest-bearing liabilities 361,239 18,129 5.02% 297,306 13,752 4.63% 259,959 9,759 3.75% Non-interest bearing deposits 5,162 3,442 7,039 Other liabilities 9,066 7,489 5,610 ------ ------- -------- Total liabilities 375,467 308,237 272,608 Stockholders' equity 52,498 54,915 47,689 ------ ------- -------- Total liabilities and stockholders' equity $ 427,965 363,152 320,297 ======= ======= ======= Net interest income/interest rate spread (1) 13,425 2.57% 12,417 2.80% 11,354 3.01% ====== ==== ====== ==== ====== ==== Net earning assets/net interest margin (2) $ 54,538 3.23% 55,041 3.52% 52,571 3.63% ======= ==== ======= ==== ======= ==== Ratio of interest-earning assets to interest-bearing liabilities 1.15x 1.19x 1.20x ======= ======= =======
(1) Interest rate spread represents the difference between the average rate on interest-earning assets and the average cost of interest- bearing liabilities. (2) Net interest margin represents net interest income divided by average interest-earning assets. COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED SEPTEMBER 30, 1996 AND SEPTEMBER 30, 1995 GENERAL. The Company's net income decreased to $2.1 million, or $0.72 per fully-diluted share, from $3.1 million, or $0.93 per fully-diluted share, a 30.5% decrease in fully-diluted earnings per share over the previous year. The current year decrease was a result of a one-time special assessment charge related to the Bank's deposit insurance premium. This one-time charge is the result of legislation passed on September 30, 1996, regarding the Savings Association Insurance Fund ("SAIF"). To cover the special assessment called for by the legislation, the Bank recorded a pre-tax charge of $1.6 million. Excluding the one-time charge related to the Bank's deposit insurance premium, net income was $3.2 million, or $1.06 per fully diluted share. This compares with $3.1 million, or $0.93 per fully diluted share for the prior year, a 14.0 percent increase in earnings per share. INTEREST INCOME. Interest income increased 20.6% to $31.6 million from $26.2 million in 1995. The increase was due primarily to an increase in loans receivable, including a larger number of multi-family residential loans. The average yield on interest-earning assets improved slightly during 1996 to 7.59% compared to 7.43% in 1995. An increase of 18.0% in average earning assets combined with the slightly higher yield contributed to the significant increase in interest income. Average loans receivable increased by $62.7 million to $305.1 million in 1996 and the average investment portfolio increased $8.6 million. INTEREST EXPENSE. Interest expense for the year was $18.1 million, compared with $13.8 million in 1995, the result of deposit growth and an increase in borrowed funds. The average interest cost of savings deposits increased 48 basis points to 4.85% in 1996, primarily due to increased rates on certificates of deposit. Average borrowings increased $27.9 million in 1996. The cost of borrowed funds in 1996 averaged 38 basis points lower than the previous year due in part to the Bank's ability to borrow utilizing FHLB Community Investment Program advances. NET INTEREST INCOME BEFORE PROVISION FOR LOAN LOSSES. Net interest income is the principal source of earnings for the Company, and consists of interest income on loans, mortgage-backed and investment securities, offset by interest expense on deposits and borrowed funds. Net interest income before provision for loan losses increased $1.0 million or 8.1%, to $13.4 million for the year ended September 30, 1996, from $12.4 million in 1995. The net interest margin declined to 3.23% for the year ended September 30, 1996, compared with 3.52% for 1995. The decrease in the net interest margin in 1996 was primarily due to a 16 basis point increase in average interest earning assets, offset by an increase in the average cost of funds of 38 basis points. PROVISION FOR LOAN LOSSES. The provision for loan losses is recorded quarterly to provide coverage for possible future losses. The Company provided $410,000 in 1996 compared to $192,000 in 1995. The increased provision accommodated the increase in loans receivable, changes in the components of the loan portfolio and the Bennett commercial leases. See "CLASSIFIED ASSETS". The Company evaluates its loan portfolio quarterly in conjunction with the current level of non-performing loans and general economic conditions. At September 30, 1996, non-performing mortgages and consumer loans amounted to $1.1 million or 0.22% of total assets, compared to $617,000 or 0.16% of total assets at September 30, 1995. Total non-performing assets, including commercial leases, were $3.2 million or 0.67% of total assets at September 30, 1996. NON-INTEREST INCOME. Non-interest income decreased to $957,000 from $1.2 million for 1996 compared to 1995. Excluding a non-recurring $274,000 gain on sale of investment securities available for sale in 1995, non-interest income remained stable at approximately $950,000. NON-INTEREST EXPENSE. Non-interest expense for 1996 included a one-time SAIF special assessment of $1.6 million, thus increasing total non-interest expense to $10.6 million from $8.3 million one year ago. Exclusive of this charge, non-interest expense increased $633,000. This increase was primarily the result of expanding the branch network in 1995 to include two new offices. Operating expenses, excluding the SAIF special assessment, as a percentage of average assets for the year ended September 30, 1996 were 2.1%, down from 2.3% in 1995. Slight increases were noted in all general and administrative expenses. Included in non-interest expense was a $10,000 recapture of an allowance for credit enhancement losses. The balance of the allowance was recaptured due to the pay-off of the related loan. See "CLASSIFIED ASSETS". INCOME TAX EXPENSE. For the year ended September 30, 1996, federal and state income tax expense totaled $1.2 million, or an effective rate of 36.6%, compared to $2.0 million or an effective rate of 39.7% for 1995. Income taxes decreased in 1996 as a direct result of decreased earnings before income taxes. COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED SEPTEMBER 30, 1995 AND SEPTEMBER 30, 1994 GENERAL. The Company's net income increased to $3.1 million, or $0.93 per fully-diluted share, from $2.7 million, or $0.71 per fully-diluted share, a 31.0% increase in fully-diluted earnings per share over the previous year. The increase in net income for the year was primarily due to a 9.4% increase in net interest income before provision for loan losses. INTEREST INCOME. Interest income increased 23.9% to $26.2 million from $21.1 million in 1994. The average yield on interest-earning assets improved during 1995 to 7.43% compared to 6.76% in 1994 due to an increase in short-term interest rates yielding higher rates for liquid investments, as well as increasing indices which improved the yields on adjustable-rate loans and mortgage-backed securities. Due to the rise in interest rates during 1995, the significant refinance activity noted in 1994 slowed and many customers chose adjustable-rate loans. Average loans receivable increased by $46.9 million to $242.4 million in 1995. The origination and purchase of loans receivable utilized funds decreasing the average balance of interest-earning deposits, assets held for sale, and federal funds sold to $77.8 million, from $106.3 million in 1994. INTEREST EXPENSE. Interest expense on deposits increased from $8.8 million to $11.0 million during the year. Consistent with the interest rate increases in fiscal 1995, the average cost of savings deposits increased 67 basis points to 4.37%. In addition to the interest rate increase, the Bank noted significant growth in the deposit portfolio. In addition to the higher-rate promotional certificates of deposit offered in conjunction with the opening of the Bank's two newest offices, the Bank also created a money management account that attracted $14.2 million in its first 10 months. The Bank continued to utilize FHLB of Chicago advances to supply funds for loan origination and investment portfolio opportunities. Average outstanding advances more than doubled to $46.2 million in 1995. Consistent with interest rate increases, the average cost of advances increased 162 basis points to 6.03% in 1995. NET INTEREST INCOME BEFORE PROVISION FOR LOAN LOSSES. Net interest income before provision for loan losses increased from $11.4 million, or 9.4%, to $12.4 million for the year ended September 30, 1995. Net interest margin was 3.52% for the year ended September 30, 1995, compared with 3.63% for 1994. During the 1995 fiscal year, asset yields did not rise as quickly as liability costs, resulting in the interest margin compression. PROVISION FOR LOAN LOSSES. The provision for loan losses is recorded to provide coverage for losses on loans unknown to the Bank at the current time. Although the loan portfolio grew by 22.9% during 1995, the ratio of the allowance for loan losses to non-performing loans only increased 11.3% to 53.0% at September 30, 1995. The Company provided $192,000 in 1995 compared to $48,000 in 1994. The increased provision accommodated the increase in loans receivable and changes in the components of the loan portfolio, such as a $2.5 million commercial loan and $2.4 million in commercial equipment leases, which generally have a higher degree of risk. At September 30, 1995, the allowance for loan losses was $403,000. The Company evaluates its loan portfolio quarterly in conjunction with the current level of non-performing loans and general economic conditions. At September 30, 1995 non-performing loans were only 0.28% of total loans receivable. NON-INTEREST INCOME. Non-interest income remained stable at $1.2 million for 1995 and 1994. The decrease in fees and commissions can be attributed to the cessation of operations at Fidelity Loan Services, Inc. ("FLSI"), the Bank's loan origination subsidiary. This $282,000 decrease was entirely offset by the non-recurring gain on sale of assets available for sale during 1995. During 1995, management redeemed the balance of an investment in an adjustable-rate mortgage mutual fund ("ARM fund") and sold an available-for-sale mortgage- backed security to build liquidity for anticipated loan demand. A net gain of $274,000 was recorded on these sales. NON-INTEREST EXPENSE. Non-interest expense for 1995 rose 2.1% to $8.3 million as a result of franchise expansion. Despite the costs associated with adding two new offices, operating expenses as a percentage of average assets for the year ended September 30, 1995 were 2.3%, down from 2.5% in 1994. Slight increases were noted in all general and administrative expenses. Included in non-interest expense was a $90,000 recapture of an allowance for credit enhancement losses. The allowance was reduced due to improving debt coverage ratios associated with the property and no longer considered necessary by management. INCOME TAX EXPENSE. For the year ended September 30, 1995, federal and state taxes totaled $2.0 million, equal to an effective rate of 39.7%, compared to $1.7 million, or an effective rate of 38.8% for 1994. REVIEW OF FINANCIAL CONDITION Total assets at September 30, 1996 increased to $475.9 million from $393.7 million at September 30, 1995. The growth in assets was primarily the result of increased loan originations, which totaled $139.6 million, up 79.2% from the prior year. The increase in loan originations was due to the expansion of the Bank's third party originator ("TPO") network. The TPO network gives the Company the ability to keep overhead expenses in check without constraining the Bank's ability to grow loan volumes. Deposits also grew, exceeding the $300 million mark for the first time. Deposits totaled $302.9 million at September 30, 1996, up 9.8% from the previous year. Growth in deposits for the year was achieved as the result of new household acquisitions at all offices. A successful third quarter campaign aimed at retaining maturing certificates of deposit was also an important factor in deposit growth. Cash and due from banks, interest-earning deposits, federal funds sold and mutual funds increased to $7.4 million at September 30, 1996. The higher investment in dollar-denominated mutual funds was established to maintain the higher liquidity required by deposit growth. The Bank used available cash and FHLB advances to fund increased loan volume. Stock in the FHLB Chicago increased $2.8 million due to the increase in borrowings from the FHLB of Chicago. Investment securities available for sale decreased $6.5 million to $78.1 million at September 30, 1996 compared to $84.6 million at September 30, 1995. The decrease resulted primarily from the principal repayments on the Company's portfolio of asset-backed securities. Loans receivable increased $87.5 million to $354.3 million at September 30, 1996. The increase was due to record mortgage loan production of $139.6 million. The continued utilization of the Bank's TPO network brought loan originations up 79.2% from the previous year. These originations were offset by repayments of $50.8 million. Real estate in foreclosure consisted of two properties at September 30, 1996. Both are one- to four- family properties where the current appraised value is greater than the outstanding loan amount. Management has considered these factors in its loan allowance valuation and does not anticipate any losses on these loans. Deposits increased $26.9 million to $302.9 million at September 30, 1996. The increase was a result of an expanded customer base and retail network. A promotional 7-month certificate of deposit contributed $39.4 million to the gross $234.4 million deposit inflow. FHLB advances remain a cost effective source of funding for increased loan activity. During 1996, borrowed funds more than doubled to $115.3 million at September 30, 1996. The Bank continued to utilize advances to supply funds for loan origination and investment portfolio opportunities. The borrowings included $38 million in FHLB Community Investment Program advances at favorable fixed rates. Advance payments by borrowers for real estate taxes were lower during fiscal 1996 because Cook County real estate taxes were paid in the fourth quarter of 1996. The balance at September 30, 1995 was unusually high because Cook County real estate taxes were not due until November 3, 1995. Stockholders' equity decreased 9.2% to $48.8 million at September 30, 1996. The decrease was a result of earnings of $2.1 million offset by dividends of $740,000 paid to stockholders and the $6.7 million purchase of treasury shares through the Company's stock buy back programs. During 1996, the Company repurchased 414,986 shares for $6.7 million. LIQUIDITY AND CAPITAL RESOURCES Liquidity management for the Bank is both a daily and long-term function of management's strategy. The Company's primary sources of funds are deposits and borrowings, amortization and prepayment of loan principal and mortgage-backed securities, maturities of investment securities and operations. While maturing investments and scheduled loan repayments are relatively predictable, deposit flows and loan prepayments are greatly influenced by interest rates, floors and caps on loan rates, general economic conditions and competition. The Bank generally manages the pricing of its deposits to be competitive and increase core deposit relationships, but has from time to time decided not to pay deposit rates that are as high as those of its competitors and, when necessary, to supplement deposits with FHLB advances. Federal regulations require the Bank to maintain minimum levels of liquid assets. This requirement, which may be varied at the direction of the OTS depending upon economic conditions and deposit flows, is based upon a percentage of deposits and short-term borrowings. The current required ratio is 5.0%. The Bank has historically maintained its liquidity ratio for regulatory purposes at levels in excess of those required. At September 30, 1996 the Bank's liquidity ratio was 8.22%. The Company's cash flows are comprised of three classifications: cash flows from operating activities, cash flows from investing activities, and cash flows from financing activities. Cash flows provided by operating activities, consisting primarily of interest and dividends received less interest paid on deposits, were $5.0 million for the year ended September 30, 1996. During the year, the Bank used $82.7 million in investing activities, consisting primarily of loan originations, offset partially by principal collections on loans, mortgage-backed securities, and investment securities available for sale. Net cash provided by financing activities amounted to $77.9 million for the year ended September 30, 1996. Financing sources included $26.9 and $61.3 million in deposits and FHLB advances, respectively. At September 30, 1996, the Bank had outstanding loan commitments of $7.4 million. Management anticipates that it will have sufficient funds available to meet its current loan commitments. Certificates of deposit scheduled to mature in one year or less from September 30, 1996 totalled $134.7 million. Management believes that a significant portion of such deposits will remain with the Bank. The Bank's Tangible and Core (leverage) Capital of $37.6 million at September 30, 1996 was 8.0% of Adjusted Tangible Assets. This exceeded the Tangible Capital and Core Capital requirements of 1.5% and 3% by $30.6 and $23.6 million respectively. The Bank's Risk-based Capital of $38.0 million was 16.9% of Total Risk-Weight Assets at September 30, 1996 which exceeds the Risk-based Capital requirement of 8% by $20.0 million. LENDING ACTIVITIES LOAN AND MORTGAGE-BACKED SECURITIES PORTFOLIO COMPOSITIONS. The Bank's loan portfolio consists primarily of conventional first mortgage loans secured by one- to four-family residences. At September 30, 1996, the Bank's gross loans receivable portfolio was $353.7 million, of which $277.0 million were one- to four-family residential mortgage loans. Of the one- to four-family residential mortgage loans outstanding at that date, 33.3% were fixed-rate and 66.7% were adjustable-rate mortgage ("ARM") loans. In November 1995, the Bank closed a $3.7 million fixed-rate commercial loan for a golf course in a western Chicago suburb. The Bank services the entire loan and another institution has a participation for $1.89 million, resulting in a net loan of $1.85 million for the Bank. Through regular monthly payments, the Bank's outstanding portion at September 30, 1996 was $1.83 million. The remainder of the Bank's loan portfolio at September 30, 1996 consisted of $55.3 million of multi-family loans, $5.7 million in commercial property loans, and $13.6 million of consumer loans. Consumer loans consisted primarily of home equity and second mortgage loans. During 1995 the Bank purchased four pools of full pay-out commercial equipment leases totalling $3.0 million. At September 30, 1996, the outstanding balance of these leases amounted to $2.0 million. See further discussion of these leases included in "CLASSIFIED ASSETS". During 1994 the Bank expanded its delivery system for mortgage loans to include TPO's whereby these mortgage brokers have agreed to originate loans for the Bank's portfolio. Throughout 1996 and 1995, the loan department continued to seek and sign agreements with new TPO's. At September 30, 1996 the Bank had a network of 35 TPO's. The TPO program produced $115.2 million or 89.2% of the Bank's one- to four-family and multi-family mortgage loan originations in 1996. Loan origination standards of the Bank generally conform to the requirements for sale to the Federal Home Loan Mortgage Corporation ("FHLMC"). On occasion the Bank sells fixed-rate mortgage loans to the FHLMC. There were no sales during the year ended September 30, 1996 and 1995. At September 30, 1996, the unpaid balance of total mortgage loans sold to the FHLMC and serviced by the Bank was $12.0 million. The Bank's investment policy permits the investment in mortgage-backed securities. The Bank purchases FHLMC Gold mortgage-backed securities to coincide with its ongoing asset/liability management objectives and to supplement its own loan origination program. The FHLMC mortgage-backed securities owned by the Bank are guaranteed by the FHLMC and are collateralized with generic pools of single family mortgages with security coupons ranging from 7.00% to 7.50%. With respect to prepayment risk, these securities are likely to exhibit substantially the same characteristics as the whole loans owned by the Bank. Prepayments are not expected to have a material effect on the yield or the recoverability of the carrying amounts of these securities. At September 30, 1996, total mortgage-backed securities aggregated $21.7 million, or 4.6% of total assets. The fair value of these securities was approximately $21.8 million at September 30, 1996. Currently all loans originated or purchased by the Bank and mortgage-backed securities are held for investment. The following table sets forth the composition of the Bank's loan portfolio and mortgage-backed securities held to maturity, in dollar amounts and in percentages of the respective portfolios at the dates indicated.
At September 30, 1996 1995 1994 Percent Percent Percent Amount of Total Amount of Total Amount of Total (Dollars in thousands) Mortgage loans: One- to four-family $ 277,086 78.34% $ 203,974 76.40% $ 163,845 75.41% Multi-family 55,341 15.65 45,698 17.12 41,224 18.98 Commercial 5,656 1.60 2,478 0.93 - - Commercial leases 2,032 0.57 2,373 0.89 - - ------- ----- ------- ---- ------ ----- Total mortgage loans 340,115 96.16 254,523 95.34 205,069 94.39 Consumer loans 13,585 3.84 12,442 4.66 12,196 5.61 ------- ----- ------- ---- ------ ----- Gross loans receivable 353,700 100.00% 266,965 100.00% 217,265 100.00% ====== ====== ====== Less: Loans in process 3 77 - Unearned discounts and deferred loan fees (costs) (1,368) (250) 380 Allowance for loan losses 810 403 228 ------- ------- ------ Loans receivable, net $ 354,255 $ 266,735 $ 216,657 ======= ======= ======= Mortgage-backed securities - FHLMC $ 21,647 100.00% $ 26,435 100.00% $ 29,485 100.00% ====== ====== ====== Net premiums 26 49 80 ------- ------- ------ Mortgage-backed securities, net $ 21,673 $ 26,484 $ 29,565 ======= ======= =======
At September 30, 1993 1994 Percent Percent Amount of Total Amount of Total (Dollars in thousands) Mortgage loans: One- to four-family $ 152,504 74.31% $ 168,521 81.62% Multi-family 40,846 19.90 24,952 12.08 Construction 738 0.36 1,497 0.72 ------- ----- ------- ---- Total mortgage loans 194,088 94.57 194,970 94.42 Consumer loans 11,144 5.43 11,524 5.58 ------- ----- ------- ---- Gross loans receivable 205,232 100.00% 206,494 100.00% ====== ====== Less: Loans in process 140 35 Unearned discounts and deferred loan fees (costs) 869 1,106 Allowance for loan losses 233 189 ------- ------- Loans receivable, net $ 203,990 $ 205,164 ======= ======= The following table sets forth the Bank's loan originations, purchases of loans, commercial leases, and mortgage-backed securities held to maturity, sales and principal repayments for the periods indicated:
Years Ended September 30, 1996 1995 1994 (in thousands) Mortgage Loans (gross): At beginning of period $ 254,523 205,069 194,088 Mortgage loans originated: One- to four- family 108,698 62,309 48,037 Multi-family 20,220 7,994 9,003 Commercial 4,129 2,500 - ------- ------- ------- Total mortgage loans originated 133,047 72,803 57,040 One- to four- family mortgage loans purchased - - 3,369 Commercial leases purchased - 3,000 - Transfer of mortgage loans to foreclosed real estate (113) (193) (88) Transfer of mortgage loans from foreclosed real estate - 113 - Sale of commercial loan participation (1,890) - - Principal repayments (45,405) (26,269) (43,875) One- to four- family mortgage participations securitized (47) - - Sale of loans to FHLMC - - (5,465) ------- ------- ------- At end of period $ 340,115 254,523 205,069 ------- ------- ------- Consumer loans (gross): At beginning of period $ 12,442 12,196 11,144 Consumer loans originated 6,615 5,077 7,503 Principal repayments (5,472) (4,831) (6,451) ------- ------ ------ At end of period 13,585 12,442 12,196 ------- ------ ------ Total loans (gross) $ 353,700 266,965 217,265 ======= ======= ======= Mortgage-backed securities held to maturity: At beginning of period $ 26,435 29,485 - Mortgage-backed securities purchased - - 30,301 One- to four- family mortgage participations securitized 47 - - Amortization and principal repayments (4,835) (3,050) (816) ------- ------ ------ At end of period $ 21,647 26,435 29,485 ======= ======= ======= LOAN AND MORTGAGE-BACKED SECURITIES MATURITY AND REPRICING. The following table shows the maturity or period to repricing of the Bank's loans and mortgage-backed securities held to maturity portfolios at September 30, 1996. The table does not include prepayments or scheduled principal amortization. Principal repayments and prepayments on loans and mortgage-backed securities held to maturity totalled $55.7 million, $34.1 million, and $51.6 million for the years ended September 30, 1996, 1995 and 1994, respectively.
At September 30, 1996 Fixed Rate Adjustable Rate Other Loans Totals Mortgage- Commercial Total Backed One-to- One-to- Equip- Loans Securities Four Multi- Four Multi- Commer- ment Receiv- Held to Family Family Family Family cial Leases Consumer able Maturity Total (in thousands) AMOUNTS DUE: Within one year $ 8,384 782 45,011 12,317 640 674 5,643 73,451 2,787 76,238 After one year: One to three years 15,287 830 96,343 32,179 555 1,358 5,879 152,431 4,623 157,054 Three to five years 13,029 540 43,454 7,391 4,461 - 2,063 70,938 11,185 82,123 Five to 10 years 26,792 866 - - - - - 27,658 2,125 29,783 10 to 20 years 26,679 436 - - - - - 27,115 927 28,042 Over 20 years 2,107 - - - - - - 2,107 - 2,107 ------- ---- ------- ------ ----- ----- ----- ------- ------ ------- Total due after one year 83,894 2,672 139,797 39,570 5,016 1,358 7,942 280,249 18,860 299,109 Total amounts due $ 92,278 3,454 184,808 51,887 5,656 2,032 13,585 353,700 21,647 375,347 Less: Loans in process 3 - 3 Unearned discounts, premiums and deferred loan fees (costs), net (1,368) (26) (1,394) Allowance for possible loan losses 810 - 810 ------ ------ ------ Loan receivable and mortgage- backed securities held to maturity, net $354,255 21,673 375,928 ======== ======= ======= ONE- TO FOUR-FAMILY MORTGAGE LENDING. The Bank primarily originates first mortgage loans secured by one- to four-family residences located in its primary market area, including townhouse and condominium units. Typically, such residences are single or two-family homes that serve as the primary residence of the owner. To a lesser extent, the Bank also originates loans secured by non-owner occupied one- to four-family residential real estate. Loan originations are generally obtained from existing or past customers, members of the local communities, third party mortgage originators located in the Bank's market area, local real estate agent referrals, and builder/developer referrals within the Bank's market area. The Bank offers fixed-rate and ARM loans, which are generally amortized over 30 years, with terms of up to 30 years. Loan rates are based on market conditions. The Bank originates zero-point loans, and loans with discount points and fees for related origination expenses, such as appraisals and other closing costs, on one- to four-family residential mortgage loans. Generally, all residential mortgage loans originated by the Bank are underwritten in conformity with FHLMC guidelines. The ARM loans generally reprice on a one, three, or five year basis. As a general matter, the Bank does not offer "teaser rates" on its ARM loans, nor does it offer loans with a negative amortization feature. At time of origination, the Bank determines whether to sell or retain fixed-rate, one- to four-family residential first mortgages loans, while generally retaining the servicing right for loans sold. ARM loans originated are normally held for investment. The Bank generally makes first mortgage loans secured by one- to four-family, owner-occupied residential real estate in amounts up to 95% of the lower of the purchase price or the appraised value. The Bank also originates first mortgage loans secured by one- to four-family residential investment (i.e., other than owner occupied) properties in amounts up to 75% of the appraised value of the property. It is the Bank's general policy to require private mortgage insurance ("PMI") on any conventional loan with a loan to value ratio greater than 80% for one- to four-family homes, townhouses, and condominium units. In addition, the Bank usually requires certain housing expense to income ratios and monthly debt payment to income ratios for all borrowers which vary depending on the loan to value ratio and other compensating factors. Mortgage loans originated by the Bank generally include due-on-transfer clauses which provide the Bank with the contractual rights to deem the loan immediately due and payable, in most instances, in the event that the borrower transfers ownership of the property without the Bank's consent. It is the Bank's policy to enforce due-on-transfer provisions. MULTI-FAMILY AND COMMERCIAL REAL ESTATE LENDING. The Bank originates fixed and adjustable rate multi-family loans secured by properties (five units or more) typically located in its primary market area. These loans generally have rate and payment adjustment periods of 3 to 5 years, with amortizations of up to 30 years. The Bank customarily charges origination fees of up to 3% of the loan amount for newly originated loans and lesser fees for renewals or modifications of existing loans. The Bank's policies generally require personal guarantees from the borrowers, with joint and several liability. The Bank's underwriting decisions relating to these loans are primarily based upon the net operating income generated by the property in relation to the debt service ("debt coverage ratio"), the borrower's cash-at-risk position, financial resources and income level of the borrower, the borrower's experience in owning or managing similar property, the marketability of the property and the Bank's lending relationship with the borrower. The Bank originates multi-family loans in amounts up to 85% of the lower of the appraised value of the property or the purchase price. The Bank generally requires a minimum debt coverage ratio of 1.15x on multi-family properties, utilizing forecasted net operating income. As of September 30, 1996, $55.3 million, or 15.6%, of the Bank's loan portfolio consisted of multi-family loans. Multi-family mortgage loans typically involve substantially larger loan balances than single-family mortgage loans, and are dependent on successful property operation as well as on general and local economic conditions. In connection with the Bank's policy of maintaining an interest-rate sensitive loan portfolio, the Bank has originated loans secured by commercial real estate, which generally carry a higher yield and are made for a shorter term than fixed-rate one- to four-family residential loans. Commercial real estate loans are generally granted in amounts up to 75% of the appraised value of the property, as determined by an independent appraiser previously approved by the Bank. The Bank's commercial real estate loans are secured by improved properties located in the Chicago metropolitan area. As of September 30, 1996, $5.7 million, or 1.6%, of the Bank's loan portfolio consisted of commercial loans. Loans secured by commercial real estate properties are generally larger and involve a greater degree of risk than residential mortgage loans. Because payments on loans secured by commercial real estate properties are often dependent on the successful operation or management of the properties, repayment of such loans may be subject to adverse conditions in the real estate market or the economy. The Bank seeks to minimize these risks by lending primarily on existing income-producing properties and generally restricting such loans to properties in the Chicago area. The Bank analyzes the financial condition of the borrower and the reliability and predictability of the net income generated by the security property in determining whether to extend credit. In addition, the Bank usually requires a net operating income to debt service ratio of at least 1.15 times. CONSTRUCTION LENDING. The Bank does not actively solicit construction loans, although it will consider such loans on a case-by-case basis as presented. Construction lending generally is considered to involve a higher degree of risk than lending on improved, owner-occupied real estate. Construction loans are dependent largely upon the accuracy of the initial estimate of the property's value at completion of construction or development and the estimated cost (including interest) of construction. During the construction phase, a number of factors could result in delays and cost overruns. COMMERCIAL LEASES. The Bank purchased 454 full-payout commercial equipment leases located in various parts of the country with original aggregate outstanding principal balances of $3.0 million during fiscal 1995. These leases were all originated by, serviced by, and financially guaranteed by Bennett Funding Group of Syracuse, New York. See further discussion in "CLASSIFIED ASSETS". CONSUMER, HOME EQUITY AND OTHER LENDING. The Bank offers a variety of consumer loans, although its current portfolio consists primarily of home equity and second mortgage loans. Also included in consumer loans are installment loans secured by automobiles, boats and recreational vehicles, and other secured and unsecured loans. As of September 30, 1996, $13.6 million or 3.8% of the Bank's loan portfolio consisted of consumer loans. The Bank's home equity loans consist of fixed and adjustable rate mortgage loans generally secured by second mortgages on one- to four-family owner- occupied residential properties located in its primary market area. The second mortgage loan products are currently offered in both fixed and adjustable rate, fixed-term loans for up to 30 years. CREDIT ENHANCEMENT ACTIVITY. In 1985, the Bank, in participation with six other financial institutions, entered into a credit enhancement agreement with a local municipality to guarantee the repayment of municipal revenue bonds (the "Bonds"), in an original aggregate amount of $11.0 million, the proceeds of which were used by an unrelated corporation to finance the development of an apartment building complex. The Bonds were secured by first mortgages on the apartment building, which is located in Glendale Heights, Illinois. The Bank's share of the guarantee amounted to $2.0 million. The related bonds were paid in full on May 1, 1996. At that time the Bank was released from all obligations pertaining to the enhancement. LOAN APPROVAL PROCEDURES AND AUTHORITY. Certain officers have authority to approve loans up to specified dollar amounts. One- to four-family mortgage loans conforming to agency standards and all consumer loans may be approved by the Vice President - Personal Banking, Vice President - Loan Servicing/Closing and designated underwriters up to the agency maximum loan limitations. Non- conforming one- to four-family first mortgage loans may be approved by the Senior Vice President - Loan Investments in amounts up to $500,000. Secured mortgage and unsecured consumer loans may be approved by designated personal banking managers. The Bank's policies generally provide that all other loans are to be approved by the Board or certain committees which include Board members. All multi-family loans over $500,000 and one- to four-family construction loans over $500,000 require the approval of a majority of the Board. For all loans originated by the Bank, upon receipt of a completed loan application from a prospective borrower, a credit report is ordered, income and certain other information generally is verified and, if necessary, additional financial information is required. All borrowers of one- to four-family residential mortgage loans are qualified pursuant to applicable agency guidelines. The Bank's policies require appraisals on all real estate intended to secure a proposed loan, which currently are performed by independent appraisers designated and approved by the Bank. Further, under current OTS regulations, all loan transactions of $1.0 million or more, non-residential transactions of $250,000 or more, and complex residential transactions of $250,000 or more, the Bank requires appraisals conducted by state certified or licensed appraisers. The Board, at least annually, approves the independent appraisers used by the Bank and reviews the Bank's appraisal policy. It is the Bank's policy to obtain title insurance on all real estate first mortgage loans. Borrowers must also obtain hazard insurance prior to closing. Borrowers generally are required to advance funds on a monthly basis together with each payment of principal and interest to a mortgage escrow account from which the Bank makes disbursements for items such as real estate taxes and hazard insurance premiums. DELINQUENCIES AND CLASSIFIED ASSETS. DELINQUENT LOANS. The Board of Directors performs a monthly review of all delinquent loans. The procedures taken by the Bank with respect to delinquencies vary depending on the nature of the loan and period of delinquency. The Bank's policies generally provide that delinquent mortgage loans be reviewed and that a written late charge notice be mailed no later than the twentieth day of delinquency. The policies also require telephone contacts for loans more than 20 days late to ascertain the reasons for the delinquency and the prospects of repayment. Face-to-face interviews and collection notices are generally required for loans more than 30 days delinquent and on a case-by-case basis for mortgage loans. After 60 days, the Bank will either set a date by which the loan must be brought current, enter into a written forbearance agreement, foreclose on any collateral or take other appropriate action. The Bank policies regarding delinquent consumer loans are similar except that telephone contacts and correspondence will generally occur after a consumer loan is more than 15 days delinquent. It is the Bank's general policy to discontinue the accrual of interest on all first mortgage loans 90 days past due. Consumer loans continue to accrue interest until a determination made by the Bank that the loan may result in a loss. Property acquired by the Bank as a result of a foreclosure on a mortgage loan is classified as real estate owned and is recorded at the lower of the unpaid principal balance or fair value at the date of acquisition and subsequently carried at the lower of cost or net realizable value. Set forth below is certain information regarding delinquent loans at September 30, 1996, 1995 and 1994:
At September 30, 1996 At September 30, 1995 60-89 Days 90 Days or More 60-89 Days 90 Days or More ----------------- ------------------ ----------------- ----------------- Number Principal Number Principal Number Principal Number Principal of Balance of Balance of Balance of Balance Loans of Loans Loans of Loans Loans of Loans Loans of Loans (Dollars in thousands) One- to four- family 6 $ 141 7 $ 671 4 $ 121 10 $ 604 Commercial - - 2 378 - - - - Commercial leases (1) - - 1 2,032 - - - - -- --- -- ------ -- ---- -- ---- Total mortgage loans 6 141 10 3,081 4 121 10 604 Consumer 1 5 2 5 4 22 3 13 -- --- -- ------ -- ---- -- ---- Total loans 7 $ 146 12 $ 3,086 8 $ 143 13 $ 617 == === == ====== == ==== == ==== Delinquent loans to total loans 0.04% 0.87% 0.09% 0.23% === ====== ==== ====
At September 30, 1994 60-89 Days 90 Days or More ----------------- ------------------ Number Principal Number Principal of Balance of Balance Loans of Loans Loans of Loans (Dollars in thousands) One- to four- family 5 $ 196 5 $ 116 Multi-family - - 1 163 -- --- -- ----- Total mortgage loans 5 196 6 279 Consumer 1 1 2 3 -- --- -- ----- Total loans 6 $ 197 8 $ 282 == === == ====== Delinquent loans to total loans 0.09% 0.13% === ======
(1) Relates to leases purchased from Bennett Funding Group - see further discussion in "CLASSIFIED ASSETS". For purposes of this table, the portfolio of leases has been considered to be one loan due to the collectibility issues related to the leases. NON-PERFORMING ASSETS. The following table sets forth information regarding non-accrual loans, which are 90 days or more past due, and real estate in foreclosure. Prior to September 30, 1995, the Bank ceased accruing interest on mortgage loans 60 days past due, effective October 1, 1995, the Bank conformed with industry standards and ceased accruing interest on mortgage loans 90 days past due. The Bank continues accruing interest on all consumer loans until a loss determination is made. Upon determination that the loan will result in a loss, the Bank discontinues the accrual of interest and/or establishes a reserve in the amount of the anticipated loss. For the year ended September 30, 1996, interest income on non-accrual loans included in net income amounted to less than $1,000. If all non-accrual mortgage loans, as of September 30, 1996, had been currently performing in accordance with their original terms, the Bank would have recognized interest income from such loans of $44,000.
At September 30, 1996 1995 1994 1993 1992 (Dollars in thousands) Non-accrual mortgage loans $ 1,049 $ 604 $ 279 $ 208 $ 429 Non-accrual commercial leases 2,032 - - - - Non-accrual consumer loans 5 13 3 - 5 ----- --- --- --- --- Total non-accrual loans 3,086 617 282 208 434 Consumer loans 90 days or more past due and still accruing - - - - - ----- --- --- --- --- Total non-performing loans 3,086 617 282 208 434 Real estate in foreclosure 97 - 88 - 64 ----- --- --- --- --- Total non-performing assets $ 3,183 $ 617 $ 370 $ 208 $ 498 ===== === === === === Total non-performing loans to total loans 0.87% 0.23% 0.13% 0.10% 0.21% ===== === === === === Total non-performing assets to total assets 0.67% 0.16% 0.11% 0.08% 0.18% ===== === === === ===
CLASSIFIED ASSETS. Federal regulations require the Bank to classify loans and other assets such as debt and equity securities, considered by the OTS to be of lesser quality, as "substandard", "doubtful" or "loss" assets. The Bank's classification policies provide that assets will be classified according to OTS regulations. An asset is considered "substandard" if it is inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. "Substandard" assets include those characterized by the "distinct possibility" that the insured institution will sustain "some loss" if the deficiencies are not corrected. Assets classified as "doubtful" have all of the weaknesses inherent in those classified "substandard," with the added characteristic that the weaknesses present make "collection or liquidation in full," on the basis of currently existing facts, conditions, and values, "highly questionable and improbable." Assets classified as "loss" are those considered "uncollectible" and of such little value that their continuance as assets without the establishment of a specific loss reserve is not warranted. Assets which do not currently expose the insured institution to sufficient risk to warrant classification in one of the aforementioned categories but possess weaknesses are required to be designated "special mention" by management. When the Bank determines that an asset should be classified, it generally does not establish a specific allowance for such asset unless it determines that such asset may result in a loss. The Bank may, however, increase its general valuation allowance in an amount deemed prudent. General valuation allowances represent loss allowances which have been established to recognize the inherent risk associated with lending activities, but which, unlike specific allowances, have not been allocated to particular problem assets. The Bank's policies provide for the establishment of a specific allowance equal to 100% of each asset classified as "loss" or to charge-off such amount. A savings institution's determination as to the classification of its assets and the amount of its valuation allowances is subject to review by the OTS which can order the establishment of additional general or specific loss allowances. The Bank reviews the problem loans in its portfolio on a monthly basis to determine whether any loans require classification in accordance with applicable regulations; and believes its classification policies are consistent with OTS policies. As of September 30, 1996, the Bank had classified assets of $3.2 million. Classified loans of $1.1 million were categorized as substandard, consisting of 7 residential mortgage loans, 2 commercial loans, and 2 unsecured lines of credit. In addition to the mortgage and consumer portfolio, the Bank classified its investment in commercial leases as substandard. There were no assets classified as doubtful. From October 1994 through January 1995, the Bank purchased 454 full-payout commercial equipment leases located in various parts of the country with original aggregate outstanding principal balances of $3.0 million. Since that time normal lease payments had reduced the aggregate outstanding balance to $2.0 million at February 29, 1996. These leases were all originated by, serviced by, and financially guaranteed by Bennett Funding Group of Syracuse, New York ("BFG"). On March 29, 1996 it was reported that BFG was the target of a civil complaint filed by the Securities and Exchange Commission. On that same date BFG filed a Chapter 11 bankruptcy petition in the Northern District of New York and halted payments on the lease agreements. The Bankruptcy Trustee is currently collecting the lease payments from the lessees and holding them in escrow pending the outcome of the litigation concerning BFG, its creditors, and related issues. This disruption of payment flows from the servicer, BFG, has caused the Company to classify all the leases as substandard, place them on non-accrual status and to categorize them as non- performing and impaired. The Bank is vigorously pursuing available legal remedies in an attempt to protect and collect amounts due under the terms of the underlying leases. The substance of the Bank's claims center on the assertion that the Bank has a perfected security interest in the leases and the proceeds thereof. The Trustee disagrees. The opinion of the Bank's bankruptcy counsel at this time is that the Bank's position should ultimately prevail. There can be no assurance, however, of the actual results of this legal process or the extent of the Bank's recovery, if any. The Bank has estimated what is believed to be the realizable value of the leases and established a valuation allowance of $406,000. In the event that the outcome of the litigation is not favorable, i.e. the Bank's status is that of an unsecured creditor, the recovery may be substantially smaller. Any recovery by the Bank of less than the net book value of the leases will cause additional losses to the Bank. ALLOWANCE FOR LOAN LOSSES. The allowance for loan losses is established through a provision for loan and lease losses based on management's evaluation of the risk inherent in its loan portfolio and the general economy. Such evaluation, which includes a review of all loans on which full collection may not be reasonably assured, considers among other matters the estimated net realizable value of the underlying collateral, economic conditions, historical loan loss experience and other factors that warrant recognition in providing for an adequate loan loss allowance. In recent years, in light of the general economic conditions, management has, from time to time, increased its provision to account for its evaluation of the potential effects of such conditions. The Bank will continue to monitor and modify its allowances for loan losses as conditions dictate. Although the Bank maintains its allowance at a level which it considers adequate to provide for potential losses, there can be no assurances that such losses will not exceed the estimated amounts. The following table sets forth the Bank's allowance for loan losses at the dates indicated.
At or for the Years Ended September 30, 1996 1995 1994 1993 1992 (Dollars in thousands) Balance at beginning of period $ 403 $ 228 $ 233 $ 189 $ 88 Provision for loan losses 410 192 48 57 106 Charge offs: One-to four-family (8) (2) - - - Multi-family - (5) (21) - - Consumer loans (26) (19) (32) (13) (5) ---- ---- ---- ---- ---- Total Charge-offs (34) (26) (53) (13) (5) Recoveries - Consumer loans 31 9 - - - ---- ---- ---- ---- ---- Balance at end of period $ 810 $ 403 $ 228 $ 233 $ 189 ==== ==== ==== ==== ==== Ratio of charge-offs during the period to average loans outstanding during the period 0.01% 0.01% 0.03% 0.01% - % ==== ==== ==== ==== ==== Ratio of allowance for loan losses to net loans receivable at end of period 0.23% 0.15% 0.11% 0.11% 0.09% ==== ==== ==== ==== ==== Ratio of allowance for loan losses to total non-performing loans at end of period 26.25% 65.32% 80.85% 112.02% 43.55% ===== ===== ===== ====== ===== Ratio of allowance for loan losses to non-performing assets at end of period 25.48% 65.32% 61.62% 112.02% 37.95% ===== ===== ===== ====== =====
The Bank's allowance for loan losses has been established as an allowance for future losses on its entire portfolio. For internal purposes, the Bank does not allocate the allowance among loan classifications. In the following table, the allowance for loan losses has been allocated by category for purposes of complying with public disclosure requirements. The amount allocated on the following table to any category should not be interpreted as an indication of future charge-offs and the amounts allocated are not intended to reflect the amount that may be available for future losses on any category since the Bank's allowance is a general allowance. The following table also sets forth the percent of loans in each category to total loans.
At September 30, 1996 1995 1994 % of Loans % of Loans % of Loans in Category in Category in Category of Total of Total of Total Outstanding Outstanding Outstanding Amount Loans Amount Loans Amount Loans (Dollars in thousands) Mortgage loans: One- to four- family $ 90 78.34% $ 70 76.40% $ 48 75.41% Multi-family 57 15.65 46 17.12 42 18.98 Commercial 104 1.60 89 0.93 - - Commercial leases 406 0.57 24 0.89 - - Consumer loans 150 3.84 132 4.66 130 5.61 Unallocated 3 - 42 - 8 - ---- ------ ---- ------ ---- ------ Total allowance for loan losses $ 810 100.00% $ 403 100.00% $ 228 100.00% ==== ====== ==== ====== ==== ======
At September 30, 1993 1992 % of Loans % of Loans in Category in Category of Total of Total Outstanding Outstanding Amount Loans Amount Loans (Dollars in thousands) Mortgage loans: One- to four- family $ 37 74.31% $ 20 81.62% Multi-family 41 19.90 28 12.08 Construction 37 0.36 75 0.72 Consumer loans 112 5.43 34 5.58 Unallocated 6 - 32 - ---- ---- ---- ----- Total allowance for loan losses $ 233 100.00% $ 189 100.00% ==== ====== ==== ======
INVESTMENT ACTIVITIES The investment policy of the Bank, established by the Board of Directors and implemented by the Asset/Liability Committee, attempts to provide and maintain liquidity, generate a favorable return on investments without incurring undue interest rate and credit risk, and complement the Bank's lending activities. Federally chartered savings institutions have the authority to invest in various types of liquid assets, including United States Treasury obligations, securities of various federal agencies, certain certificates of deposit of insured banks and savings institutions, certain bankers' acceptances, repurchase agreements and federal funds. Subject to various restrictions, federally chartered savings institutions may also invest their assets in commercial paper, investment grade corporate debt securities, asset-backed securities, and mutual funds whose assets conform to the investments that a federally chartered savings institution is otherwise authorized to make directly. The following table sets forth certain information regarding the amortized cost and fair value of the Company's investment securities portfolio at the dates indicated:
At September 30, 1996 1995 1994 Amortized Fair Amortized Fair Amortized Fair Cost Value Cost Value Cost Value (in thousands) Interest-earning deposits: FHLB daily investment $ - - 897 897 1,348 1,348 Money market fund 225 225 369 369 58 58 ---- --- --- --- ----- ----- Total interest-bearing deposits $ 225 225 1,266 1,266 1,406 1,406 ==== === ===== ===== ===== ===== Federal funds sold $ 200 200 200 200 450 450 ==== === ===== ===== ===== ===== Mutual funds: AMF ARM Fund $ - - - - 7,673 7,514 Federated Liquid Cash Trust 3,146 3,146 227 227 1,215 1,215 ----- ----- --- --- ----- ----- Total mutual funds $ 3,146 3,146 227 227 8,888 8,729 ===== ===== ===== ===== ===== ===== FHLB-Chicago Stock $ 5,795 5,795 3,000 3,000 2,269 2,269 ===== ===== ===== ===== ===== ===== Investment securities available for sale: U.S. Government and agencies $ 66,000 64,972 47,000 47,206 5,085 5,029 Corporate asset-backed securities 7,331 7,267 14,532 14,275 23,493 22,958 Corporate debt securities 5,973 5,865 23,138 23,098 43,450 42,976 ------- ------ ------ ------ ------ ------ Total investment securities available for sale $ 79,304 78,104 84,670 84,579 72,028 70,963 ======= ====== ====== ====== ====== ====== The table below sets forth certain information regarding the carrying value, weighted average yields and maturities of the Company's investment securities available for sale at September 30, 1996.
At September 30, 1996 One Year One to Five to More than or Less Five Years 10 Years 10 Years Total Avg Wtd Wtd Wtd Wtd remaining Wtd Amtzd Avg Amtzd Avg Amtzd Avg Amtzd Avg Years to Amtzd Fair Avg Cost Yield Cost Yield Cost Yield Cost Yield Maturity Cost Value Yield (dollars in thousands) U.S. Government and agencies $ - - % 11,000 6.31% 55,000 7.49% - - 4.2 66,000 64,972 7.46% Corporate asset-backed securities 3,524 4.87 3,807 4.76 - - - - 1.7 7,331 7,267 4.87 Corporate debt securities - - 3,000 9.00 2,973 6.56 - - 5.4 5,973 5,865 7.79 ------ ==== ------ ==== ----- ==== ---- ==== ==== ------ ------ ==== $3,524 17,807 57,973 - 79,304 78,104 ====== ====== ====== ==== ====== ====== SOURCES OF FUNDS GENERAL. Deposits, loan repayments, and cash flows generated from operations are the primary sources of the Bank's funds for use in lending, investing and for other general purposes. The Bank also utilizes FHLB advances from time to time. DEPOSITS. The Bank offers a variety of deposit accounts having a range of interest rates and terms. The Bank's deposits consist of passbook savings, NOW, Super NOW, money market and certificate accounts. The flow of deposits is influenced significantly by general economic conditions, changes in money market rates, prevailing interest rates and competition. The Bank's deposits are obtained primarily from the areas in which its home office is located. The Bank relies primarily on customer service and long-standing relationships with customers to attract and retain these deposits. Certificate accounts in excess of $100,000 are not solicited by the Bank nor does the Bank use brokers to obtain deposits. Management constantly monitors the Bank's deposit accounts and, based on historical experience, management believes it will retain a large portion of such accounts upon maturity. The following table presents the deposit activity of the Bank for the periods indicated.
Years Ended September 30, 1996 1995 1994 (in thousands) Deposits $ 234,407 180,925 144,236 Withdrawals (214,502) (149,135) (161,322) ------- ------- ------- Net withdrawals in excess of deposits 19,905 31,790 (17,086) Interest credited on deposits 7,036 6,141 7,285 ------- ------- ------- Total increase (decrease) in deposits $ 26,941 37,931 (9,801) ======= ======= =======
The following table sets forth time deposits over $100,000 at September 30, 1996:
Maturity Period (in thousands) Three months or less $ 1,819 Over three through six months 5,716 Over six through 12 months 4,655 Over 12 months 8,098 ------- $ 20,288 ======= /TABLE The following table sets forth the distribution of the Bank's deposit accounts at the dates indicated and the weighted average nominal interest rates on each category of deposits presented. Management does not believe that the use of fiscal year-end balances instead of average balances resulted in any material difference in the information presented.
At September 30, 1996 1995 Weighted Weighted Percent of Average Percent of Average Total Nominal Total Nominal Amount Deposits Rate Amount Deposits Rate (dollars in thousands) Passbook Savings $ 86,077 28.41% 3.35% $ 81,979 9.70% 3.06% Transaction Accounts: NOW/non-interest bearing 4,596 1.52 - 4,822 1.75 - NOW 13,471 4.45 2.17 15,078 5.46 2.79 Money management 16,364 5.40 4.39 14,230 5.16 5.20 Money market 2,828 0.93 2.85 4,204 1.52 2.86 ------ ----- ---- ------ ---- ---- Total transaction accounts 37,259 12.30 2.93 38,334 13.89 3.34 Certificate Accounts: 3 month 572 0.19 4.80 205 1.07 4.10 6 month 12,287 4.06 5.00 12,891 4.67 5.45 7 month 39,411 13.01 5.83 - - - 8 month 5,191 1.71 5.15 16,667 6.04 6.34 10 month 5,277 1.74 5.34 15,775 5.72 6.08 12 month 11,789 3.89 5.35 13,241 4.80 5.78 13 month 19,760 6.52 5.93 22,455 8.14 7.66 15 month 31,806 10.50 5.91 17,707 6.42 5.76 24 month 22,515 7.43 6.38 22,069 8.00 6.17 36 month 7,924 2.62 5.64 9,961 3.61 5.25 36 month rising rate 12,467 4.12 5.94 11,236 4.07 5.36 60 month 10,399 3.43 5.78 13,073 4.74 6.27 Other 200 0.07 5.65 400 0.14 5.76 ------ ----- ---- ------ ---- ---- Total certificate accounts 179,598 59.29 5.79 155,680 56.41 6.14 ------ ----- ---- ------ ---- ---- Total Deposits $ 302,934 100.00% 4.75% $ 275,993 100.00% 4.83% ======= ====== ==== ======= ====== ====
At September 30, 1994 Weighted Percent of Average Total Nominal Amount Deposits Rate (dollars in thousands) Passbook Savings $ 95,511 40.12% 2.85% Transaction Accounts: NOW/non-interest bearing 4,133 1.74 - NOW 12,533 5.26 2.27 Money market 6,825 2.87 2.60 ------ ----- ---- Total transaction accounts 23,491 9.87 1.91 Certificate Accounts: 3 month 305 0.13 3.27 6 month 15,584 6.55 3.73 8 month 12,394 5.21 4.13 10 month 4,242 1.78 3.67 12 month 11,134 4.68 3.75 15 month 14,608 6.14 4.42 24 month 11,584 4.87 4.43 36 month 15,012 6.31 5.27 36 month rising rate 20,923 8.79 5.31 60 month 13,070 5.49 6.43 Other 204 0.09 3.76 ------ ----- ---- Total certificate accounts 119,060 50.01 4.69 Total Deposits $ 238,062 100.00% 3.68% ======= ====== ==== /TABLE The following table presents, by various rate categories, the amount of certificate accounts outstanding at September 30, 1996, 1995 and 1994 and the periods to maturity of the certificate accounts outstanding at September 30, 1996.
Period to maturity from September 30, 1996 At September 30, Two to Within One to Three There- 1996 1995 1994 One Year Two Years Years after Total (in thousands) Certificate accounts: 2.99% or less $ 587 1,358 1,302 383 66 124 14 587 3.00% to 3.99% - 214 32,444 - - - - - 4.00% to 4.99% 4,080 12,677 40,799 3,361 3 716 - 4,080 5.00% to 5.99% 107,182 58,669 36,546 86,326 13,363 5,591 1,902 107,182 6.00% to 6.99% 60,437 50,977 3,638 37,279 20,987 112 2,059 60,437 7.00% to 7.99% 7,312 31,096 4,051 7,312 - - - 7,312 8.00% to 8.99% - 689 253 - - - - - 9.00% to 9.99% - - 27 - - - - - 10.00% to 10.99% - - - - - - - - ------- ------- ------- ------- ------ ----- ----- ------- Total $ 179,598 155,680 119,060 134,661 34,419 6,543 3,975 179,598 ======= ======= ======= ======= ====== ===== ===== =======
BORROWINGS Although deposits are the Bank's primary source of funds, the Bank's policy has been to utilize borrowings, such as advances from the FHLB-Chicago when they are a less costly source of funds or can be invested at a positive rate of return. The Bank obtains advances from the FHLB-Chicago secured by its capital stock in the FHLB-Chicago and certain of its mortgage loans. Such advances are made pursuant to several different credit programs, each of which has its own interest rate and range of maturities. The maximum amount that the FHLB- Chicago will advance to member institutions, including the Bank, for purposes other than meeting withdrawals, fluctuates from time to time in accordance with the policies of the OTS and the FHLB-Chicago. The maximum amount of FHLB- Chicago advances to a member institution generally is reduced by borrowings from any other source. At September 30, 1996, the Bank's FHLB-Chicago advances totalled $115.3 million. The following table sets forth certain information regarding borrowings at and for the date indicated:
At and for the Years Ended September 30, 1996 1995 1994 (in thousands) FHLB-CHICAGO ADVANCES Average balance outstanding $ 74,078 46,224 20,614 Maximum amount outstanding at any month-end during the year 115,300 56,733 42,000 Balance outstanding at year end 115,300 54,032 42,000 Weighted average interest rate during the year 5.65% 6.03% 4.41% Weighted average interest rate at end of year 6.00% 5.88% 4.88%
SUBSIDIARY ACTIVITY Fidelity Corporation, incorporated in 1970, is a wholly-owned subsidiary of the Bank. Fidelity Corporation's business is safe deposit box rentals, and annuity and insurance sales primarily to customers of the Bank. In addition, in cooperation with INVEST, full service securities brokerage services are offered to customers and non-customers of the Bank. Fidelity Corporation owns a 7.64% ownership interest as a limited partner and a .08% ownership interest as a general partner in an Illinois limited partnership formed in 1987 for the purpose of (i) developing, in the City of Evanston, Illinois, a public parking garage containing 602 parking spaces, which was sold in 1989 to the City of Evanston, and (ii) developing, managing and operating a 190 unit luxury rental apartment building adjacent thereto. Fidelity Corporation's investment in this limited partnership, represented by its capital contributions, totalled $680,000 at September 30, 1996. Losses to Fidelity Corporation other than any liability as a general partner are limited to its capital contributions. Profits to Fidelity Corporation, if any, are initially expected to be derived from partnership operations and, after pro- rata payment of "Preferred Distributions" to the partners (including Fidelity Corporation), are to be equal to Fidelity Corporation's pro-rata ownership interests in the partnership. The apartment complex, which was completed in August 1990, was 99% occupied as of September 30, 1996. The Bank is not aware of any present plans for the disposition of this project by the partnership, nor is it aware of any further funding needs of the partnership. Fidelity Corporation's portion of the operating losses for the year ended September 30, 1996 was $35,000. Losses from the operations of the property are primarily due to the expensing of certain organizational and marketing costs and non-cash expenses such as amortization and depreciation. The losses from the partnership have reduced the Bank's income. Real estate development and investment activities involve varying degrees of risk. In the case of rental property, decreases in occupancy rates, increases in operating expenses, declines in the underlying value of the project or in its general market area, adverse changes in local, regional and/or national economic conditions, or a combination of these or other factors can have a negative effect on the profitability and value of the project. The Bank currently does not intend to engage in further real estate development activities. At September 30, 1996, Fidelity Corporation had assets of $930,000. Fidelity Loan Services, Inc., ("FLSI"), incorporated in 1989, is a wholly-owned subsidiary of the Bank that ceased operations in October 1994. PERSONNEL As of September 30, 1996, the Company had 91 full-time employees and 28 part- time employees. The employees are not represented by a collective bargaining unit and the Company considers its relationship with its employees to be excellent. SUPERVISION AND REGULATION GENERAL The growth and earnings performance of the Company can be affected not only by management decisions and general economic conditions, but also by the policies of various governmental regulatory authorities including, but not limited to, the OTS, the FDIC, the Board of Governors of the Federal Reserve System (the "Federal Reserve Board"), the Internal Revenue Service and state taxing authorities and the SEC. Financial institutions and their holding companies are extensively regulated under federal and state law. The effect of such statutes, regulations and policies can be significant, and cannot be predicted with a high degree of certainty. Federal and state laws and regulations generally applicable to financial institutions, such as the Company and the Bank, regulate, among other things, the scope of business, investments, reserves against deposits, capital levels relative to operations, the nature and amount of collateral for loans, the establishment of branches, mergers, consolidations and dividends. The system of supervision and regulation applicable to the Company and the Bank establishes a comprehensive framework for their respective operations and is intended primarily for the protection of the FDIC's deposit insurance funds and the depositors, rather than the shareholders, of financial institutions. The following references to material statutes and regulations affecting the Company and the Bank are brief summaries thereof and do not purport to be complete, and are qualified in their entirety by reference to such statutes and regulations. Any change in applicable law or regulations may have a material effect on the business of the Company and the Bank. RECENT REGULATORY DEVELOPMENTS On September 30, 1996, President Clinton signed into law the Economic Growth and Regulatory Paperwork Reduction Act of 1996" (the Regulatory Reduction Act ). Subtitle G of the Regulatory Reduction Act consists of the Deposit Insurance Funds Act of 1996" (the DIFA ). The DIFA provides for a one-time special assessment on each depository institution holding deposits subject to assessment by the FDIC for the Savings Association Insurance Fund (the SAIF ) in an amount which, in the aggregate, will increase the designated reserve ratio of the SAIF (i.e., the ratio of the insurance reserves of the SAIF to total SAIF-insured deposits) to 1.25% on October 1, 1996. Subject to certain exceptions, the special assessment is payable in full on November 27, 1996. As a SAIF-member, the Bank is subject to the special assessment. Under the DIFA, the amount of the special assessment payable by an institution is to be determined on the basis of the amount of SAIF-assessable deposits held by the institution on March 31, 1995, or acquired by the institution after March 31, 1995 from another institution which held the deposits as of that date but is no longer in existence on November 27, 1996. The DIFA provides for a 20% discount in calculating the SAIF-assessable deposits of certain Oakar banks (i.e., Bank Insurance Fund ( BIF ) member banks that hold deposits acquired from a SAIF member that are deemed to remain SAIF insured) and certain Sasser banks (i.e., banks that converted from thrift to bank charters but remain SAIF members). The DIFA also exempts certain institutions from payment of the special assessment (including institutions that are undercapitalized or that would become undercapitalized as a result of payment of the special assessment), and allows an institution to pay the special assessment in two installments if there is a significant risk that by paying the special assessment in a lump sum, the institution or its holding company would be in default under or in violation of terms or conditions of debt obligations or preferred stock issued by the institution or its holding company and outstanding on September 13, 1995. On October 8, 1996, the FDIC adopted a final regulation implementing the SAIF special assessment. In that regulation, the FDIC set the special assessment rate at 0.657% of SAIF-assessable deposits held on March 31, 1995. The FDIC has notified the Bank that the dollar amount of the special assessment payable by the Bank is estimated to be $1.6 million, which the Bank included in other liabilities at September 30, 1996. In light of the recapitalization of the SAIF pursuant to the special assessment authorized by the DIFA, the FDIC, on October 8, 1996, issued a proposed rule that would reduce regular semi-annual SAIF assessments from the current range of 0.23% - 0.31% of deposits to a range of 0% - 0.27% of deposits. Under the proposal, the new rates would be effective October 1, 1996 for Oakar and Sasser banks, but would not take affect for other SAIF-assessable institutions until January 1, 1997. From October 1, 1996 through December 31, 1996, SAIF- assessable institutions other than Oakar and Sasser banks would, under the proposal, be assessed at rates ranging from 0.18% to 0.27% of deposits, which represents the amount the FDIC calculates as necessary to cover the interest due for that period on outstanding obligations of the Financing Corporation (the FICO ), discussed below. Because SAIF-assessable institutions have already been assessed at current rates (i.e., 0.23% - 0.31% of deposits) for the semi-annual period ending December 31, 1996, the proposal contemplates that the FDIC will refund the amount collected from such institutions for the period from October 1, 1996 through December 31, 1996 which exceeds the amount due for that period under the reduced assessment schedule. Assuming the proposal is adopted as proposed, and assuming the Bank retains its current risk classification under the FDIC s risk-based assessment system, the deposit insurance assessments payable by the Bank will be reduced significantly, to the same level currently paid by the Bank s BIF-member competitors. Prior to the enactment of the DIFA, a substantial amount of the SAIF assessment revenue was used to pay the interest due on bonds issued by the FICO, the entity created in 1987 to finance the recapitalization of the Federal Savings and Loan Insurance Corporation (the "FSLIC"), the SAIF s predecessor insurance fund. Pursuant to the DIFA, the interest due on outstanding FICO bonds will be covered by assessments against both SAIF and BIF member institutions beginning January 1, 1997. Between January 1, 1997 and December 31, 1999, FICO assessments against BIF-member institutions cannot exceed 20% of the FICO assessments charged SAIF-member institutions. From January 1, 2000 until the FICO bonds mature in 2019, FICO assessments will be shared by all FDIC-insured institutions on a pro rata basis. The FDIC estimates that the FICO assessments for the period January 1, 1997 through December 31, 1999 will be approximately 0.013% of deposits for BIF members versus approximately 0.064% of deposits for SAIF members, and will be less than 0.025% of deposits thereafter. The DIFA also provides for a merger of the BIF and the SAIF on January 1, 1999, provided there are no state or federally chartered, FDIC-insured savings associations existing on that date. To facilitate the merger of the BIF and the SAIF, the DIFA directs the Treasury Department to conduct a study on the development of a common charter and to submit a report, along with appropriate legislative recommendations, to the Congress by March 31, 1997. In addition to the DIFA, the Regulatory Reduction Act includes a number of statutory changes designed to eliminate duplicative, redundant or unnecessary regulatory requirements. Further, the Regulatory Reduction Act removes the percentage of assets limitations on the aggregate amount of credit card and education loans that may be made by a savings association, such as the Bank; increases from 10% to 20% of total assets the aggregate amount of commercial loans that a savings association may make, provided that any amount in excess of 10% of total assets represents small business loans; allows education, small business, and credit card to be counted in full in determining a savings association s compliance with the qualified thrift lender ( QTL ) test; and provides that a savings association may be deemed to meet the QTL test if it qualifies as a domestic building and loan association under the Internal Revenue Code. The Regulatory Reduction Act also clarifies the liability of a financial institution, when acting as a lender or in a fiduciary capacity, under the federal environmental clean-up laws. Although the full impact of the Regulatory Reduction Act on the operations of the Company and the Bank cannot be determined at this time, management believes that the legislation will reduce compliance costs to some extent and allow the Company and the Bank somewhat greater operating flexibility. THE COMPANY GENERAL. The Company, as the sole shareholder of the Bank, is a savings and loan holding company. As a savings and loan holding company, the Company is registered with, and is subject to regulation by, the OTS under the Home Owners' Loan Act, as amended (the "HOLA"). Under the HOLA, the Company is subject to periodic examination by the OTS and is required to file periodic reports of its operations and such additional information as the OTS may require. INVESTMENTS AND ACTIVITIES. The HOLA prohibits a savings and loan holding company, directly or indirectly, or through one or more subsidiaries from (i) acquiring control of, or acquiring by merger or purchase of assets, another savings association or savings and loan holding company without the prior written approval of the OTS; (ii) subject to certain exceptions, acquiring more than 5% of the issued and outstanding shares of voting stock of a savings association or savings and loan holding company except as part of an acquisition of control approved by the OTS; or (iii) acquiring or retaining control of a financial institution that does not have SAIF or BIF insurance of accounts. A savings and loan holding company may acquire savings associations located in more than one state in both supervisory transactions involving failing savings associations and nonsupervisory acquisitions of healthy institutions, subject to the requirement that in any nonsupervisory transaction, the law of the state in which the savings association to be acquired is located must specifically authorize the proposed acquisition, by language to that effect and not merely by implication. State laws vary in the extent to which they allow interstate acquisitions of savings associations. Illinois law presently permits financial institution holding companies located in any state of the United States to acquire financial institutions or financial institution holding companies located in Illinois, subject to certain conditions. A savings and loan holding company that controls only one savings association subsidiary is generally not subject to any restrictions on the non-banking activities that the holding company may conduct either directly or through a non-banking subsidiary, so long as the holding company's savings association subsidiary constitutes a qualified thrift lender. If, however, the OTS determines that there is reasonable cause to believe that the continuation by a savings and loan holding company of a particular activity constitutes a serious risk to the financial safety, soundness or stability of its savings association subsidiary, the OTS may require the holding company to cease engaging in the activity (or divest any subsidiary which engages in the activity) or may impose such restrictions on the holding company and the subsidiary savings association as deemed necessary to address the risk, including imposing limitations on (i) the payment of dividends by the savings association to the holding company, (ii) transactions between the savings association and its affiliates and (iii) any activities of the savings association that might create a serious risk that liabilities of the holding company and its affiliates may be imposed on the savings association. Federal legislation also prohibits acquisition of control of a savings association or savings and loan holding company, such as the Company, without prior notice to certain federal bank regulators. Control is defined in certain cases as acquisition of 10% of the outstanding shares of a savings association or savings and loan holding company. DIVIDENDS. The General Corporation Law of the State of Delaware allows the Company to pay dividends only out of its surplus, or if the Company has no such surplus, out of its net profits for the fiscal year in which the dividend is declared and/or the preceding fiscal year. The Company's ability to pay dividends is also dependent upon the ability of the Bank to pay dividends to the Company. OTS regulations impose certain restrictions on the ability of the Bank to pay dividends to the Company. See "--THE BANK--DIVIDENDS." FEDERAL SECURITIES REGULATION. The Company's common stock is registered with the SEC under the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Consequently, the Company is subject to the information, proxy solicitation, insider trading and other restrictions and requirements of the SEC under the Exchange Act. THE BANK GENERAL. The Bank is a federally chartered savings association, the deposits of which are insured by the SAIF of the FDIC. As a SAIF-insured, federally chartered savings association, the Association is subject to the examination, supervision, reporting and enforcement requirements of the OTS, as the chartering authority for federal savings associations, and the FDIC as administrator of the SAIF. The Bank is also a member of the Federal Home Loan Bank System (the "FHLB System"), which provides a central credit facility primarily for member institutions. DEPOSIT INSURANCE. As an FDIC-insured institution, the Bank is required to pay deposit insurance premium assessments to the FDIC. The amount each institution pays for FDIC deposit insurance is determined in accordance with a risk-based assessment system under which all insured depository institutions are placed into one of nine categories and assessed insurance premiums based upon their level of capital and supervisory evaluation. Institutions classified as well- capitalized (as defined by the FDIC) and considered healthy pay the lowest premium while institutions that are less than adequately capitalized (as defined by the FDIC) and considered of substantial supervisory concern pay the highest premium. Risk classification of all insured institutions is made by the FDIC for each semi-annual assessment period. As of September 30, 1996, SAIF-member institutions were assessed at rates ranging from 0.23% of deposits to 0.31% of deposits. The FDIC has proposed to reduce SAIF assessment rates to a range of 0.18% - 0.27% of deposits for the period October 1, 1996 through December 31, 1996, and to a range of 0% - 0.27% of deposits commencing January 1, 1997. See "--RECENT REGULATORY DEVELOPMENTS." The FDIC may terminate the deposit insurance of any insured depository institution if the FDIC 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 in writing by, or written agreement with, the FDIC. The FDIC may also suspend deposit insurance temporarily during the hearing process for a permanent termination of insurance if the institution has no tangible capital. Management of the Company is not aware of any activity or condition that could result in termination of the deposit insurance of the Bank. FICO ASSESSMENTS. Since 1987, a portion of the deposit insurance assessments paid by SAIF members, such as the Bank, have been used to cover interest payments due on the outstanding obligations of the FICO, the entity created to finance the recapitalization of the FSLIC, the SAIF's predecessor insurance fund. Pursuant to federal legislation enacted September 30, 1996, commencing January 1, 1997, SAIF members and BIF members will be subject to assessments to cover the interest payment on outstanding FICO obligations. Such FICO assessments will be in addition to amounts assessed by the FDIC for deposit insurance. Until January 1, 2000, the FICO assessments made against BIF members may not exceed 20% of the amount of the FICO assessments made against SAIF members. It is estimated that SAIF members will pay FICO assessments equal to 0.064% of deposits while BIF members will pay FICO assessments equal to 0.013% of deposits. Between January 1, 2000 and the maturity of the outstanding FICO obligations in 2019, BIF members and SAIF members will share the cost of the interest on the FICO bonds on a pro rata basis. It is estimated that FICO assessments during this period will be less than 0.025% of deposits. OTS ASSESSMENTS. Savings associations are required to pay assessments to the OTS to fund the operations of the OTS. The amount of the OTS assessment is based upon each institution's total assets, including consolidated subsidiaries, as reported to the OTS on the quarterly Thrift Financial Reports. During the year ended September 30, 1996, the Bank paid total OTS assessments of $97,000. CAPITAL REQUIREMENTS. The OTS has established the following minimum capital standards for savings associations, such as the Bank: a core capital requirement, consisting of a minimum ratio of core capital (consisting primarily of stockholders' equity) to total assets of 3%; a tangible capital requirement consisting of a minimum ratio of tangible capital (defined as core capital minus all intangible assets other than a specified amount of purchased mortgage servicing rights) to total assets of 1.5%; and a risk-based capital requirement, consisting of a minimum ratio of total capital to total risk- weighted assets of 8%, at least one-half of which must consist of core capital. The capital requirements described above are minimum requirements. Higher capital levels will be required if warranted by the particular circumstances or risk profiles of individual institutions. For example, the regulations of the OTS provide that additional capital may be required to take adequate account of an institution's exposure to interest rate risk and the risks posed by concentrations of credit and nontraditional activities. At September 30, 1996, the Bank exceeded its minimum regulatory capital requirements, as follows:
4.0% Actual Required Excess Actual Required Capital Capital Capital Percentage Percentage(1) (dollars in thousands) Risk-based $ 38,042 18,020 20,022 16.9% 8.0% Tangible 37,639 7,023 30,616 8.0 1.5 Core (leverage) 37,639 14,046 23,593 8.0 3.0 (1) Although the OTS capital regulations require savings institutions to meet a 1.5% tangible capital ratio and a 3% core (leverage) capital ratio, the prompt corrective action standards discussed below also establish, in effect, a minimum 2% tangible capital standard, a 4% core (leverage) capital ratio (3% for institutions receiving the highest rating on the CAMEL financial institution rating system), and, together with the risk-based standard itself, a 4% Tier 1 risk-based capital standard. Federal law provides the OTS with broad power to take prompt corrective action to resolve the problems of undercapitalized savings associations. The extent of the OTS's powers depends on whether the institution in question is "well capitalized," "adequately capitalized," "undercapitalized," "significantly undercapitalized" or "critically undercapitalized." Depending upon the capital category to which an institution is assigned, the OTS's corrective powers include: requiring the submission of a capital restoration plan; placing limits on asset growth and restrictions on activities; requiring the institution to issue additional capital stock (including additional voting stock) or to be acquired; restricting transactions with affiliates; restricting the interest rate the institution may pay on deposits; ordering a new election of directors of the institution; requiring that senior executive officers or directors be dismissed; prohibiting the institution from accepting deposits from correspondent banks; requiring the institution to divest certain subsidiaries; prohibiting the payment of principal or interest on subordinated debt; and ultimately, appointing a receiver for the institution. DIVIDENDS. OTS regulations impose limitations upon all capital distributions by thrifts, including cash dividends. The rule establishes three tiers of institutions. An institution that exceeds all fully phased-in capital requirements before and after the proposed capital distribution ( Tier 1 Institution ) could, after prior notice to, but without the approval of, the OTS, make capital distributions during a calendar year of up to the higher of (i) 100% of its net income to date during the calendar year plus the amount that would reduce by one-half its surplus capital ratio (the excess capital over its fully phased-in capital requirements) at the beginning of the calendar year, or (ii) 75% of its net income over the most recent preceding four quarter period. Any additional capital distributions would require prior regulatory approval. As of September 30, 1996, the Bank was a Tier 1 Institution. The payment of dividends by any financial institution or its holding company is affected by the requirement to maintain adequate capital pursuant to applicable capital adequacy guidelines and regulations. As described above, the Bank exceeded its minimum capital requirements under applicable guidelines as of September 30, 1996. Further, under applicable regulations of the OTS, the Bank may not pay dividends in an amount which would reduce its capital below the amount required for the liquidation account established in connection with the Bank's conversion from the mutual to the stock form of ownership in 1993. For the year ended September 30, 1996, approximately $4.3 million was paid as dividends to the Company by the Bank. INSIDER TRANSACTIONS. The Bank is subject to certain restrictions imposed by the Federal Reserve Act on any extensions of credit to the Company and its subsidiaries, on investments in the stock or other securities of the Company and its subsidiaries and the acceptance of the stock or other securities of the Company or its subsidiaries as collateral for loans. Certain limitations and reporting requirements are also placed on extensions of credit by the Bank to its directors and officers, to directors and officers of the Company and its subsidiaries, to principal stockholders of the Company, and to "related interests" of such directors, officers and principal stockholders. In addition, such legislation and regulations may affect the terms upon which any person becoming a director or officer of the Company or one of its subsidiaries or a principal stockholder of the Company may obtain credit from banks with which the Bank maintains a correspondent relationship. SAFETY AND SOUNDNESS STANDARDS. The OTS has adopted guidelines which establish operational and managerial standards to promote the safety and soundness of savings associations. The guidelines set forth standards for internal controls, information systems, internal audit systems, loan documentation, credit underwriting, interest rate exposure, asset growth, compensation, fees and benefits, asset quality and earnings. In general, the guidelines prescribe the goals to be achieved in each area, and each institution is responsible for establishing its own procedures to achieve those goals. If an institution fails to comply with any of the standards set forth in the guidelines, the OTS may require the institution to submit a plan for achieving and maintaining compliance. The preamble to the guidelines states that the OTS expects to require a compliance plan from an institution whose failure to meet one or more of the guidelines is of such severity that it could threaten the safety and soundness of the institution. Failure to submit an acceptable plan, or failure to comply with a plan that has been accepted by the OTS, would constitute grounds for further enforcement action. QUALIFIED THRIFT LENDER TEST. Under the qualified thrift lender ("QTL") test in effect during the year ended September 30, 1996, the Bank generally was required to invest at least 65% of its portfolio assets in "qualified thrift investments," as measured on a monthly average basis in nine out of every 12 months. Qualified thrift investments for purposes of the QTL test consist principally of residential mortgage loans, mortgage-backed securities and other housing and consumer-related investments. The term "portfolio assets" is statutorily defined to mean a savings association's total assets less goodwill and other intangible assets, the association's business property and a limited amount of its liquid assets. As of September 30, 1996, the Bank satisfied the QTL test, with a ratio of qualified thrift investments to portfolio assets of 85.3%. Under amendments to the HOLA enacted September 30, 1996, the Bank will be deemed to satisfy the QTL test if it either holds qualified thrift investments equaling 65% or more of its portfolio assets, as described above, or qualifies as a domestic building and loan association under the Internal Revenue Code. See "--RECENT REGULATORY DEVELOPMENTS." LIQUIDITY REQUIREMENTS. OTS regulations currently require each savings association to maintain, for each calendar month, an average daily balance of liquid assets (including cash, certain time deposits, bankers' acceptances, and specified United States Government, state or federal agency obligations) equal to at least 5% of the average daily balance of its net withdrawable accounts plus short-term borrowings (i.e., those repayable in 12 months or less) during the preceding calendar month. This liquidity requirement may be changed from time to time by the OTS to an amount within a range of 4% to 10% of such accounts and borrowings, depending upon economic conditions and the deposit flows of savings associations. OTS regulations also require each savings association to maintain, for each calendar month, an average daily balance of short-term liquid assets (generally liquid assets having maturities of 12 months or less) equal to at least 1% of the average daily balance of its net withdrawable accounts plus short-term borrowings during the preceding calendar month. Penalties may be imposed for failure to meet liquidity ratio requirements. At September 30, 1996, the Bank was in compliance with OTS liquidity requirements, with an overall liquidity ratio of 8.2% and a short- term liquidity ratio of 1.5%. FEDERAL HOME LOAN BANK SYSTEM. The Bank is a member of the FHLB System, which consists of twelve regional FHLBs. The FHLB System provides a central credit facility primarily for member institutions. The Bank is a member of the FHLB of Chicago, and as such is required to own shares of capital stock in that FHLB in an amount at least equal to 1% of the aggregate principal amount of its unpaid residential mortgage loans and similar obligations at the beginning of each year, or 1/20th of its advances (borrowings) from the FHLB of Chicago, whichever is greater. The Bank is in compliance with this requirement with an investment in FHLB of Chicago stock of $5.8 million at September 30, 1996. The FHLBs are required to provide funds to cover certain FICO obligations and to contribute funds for affordable housing programs. These requirements could reduce the dividends paid by the FHLBs on their outstanding stock and could also result in the FHLBs imposing higher rates of interest on advances to their members, which could reduce the Bank's net interest income. During the fiscal year ended September 30, 1996, the Bank received dividends on its stock in the FHLB of Chicago totalling $271,000. FEDERAL RESERVE SYSTEM. Federal Reserve Board regulations require savings institutions to maintain non-interest earning reserves against their transaction accounts (primarily NOW and regular checking accounts), as follows: for accounts aggregating $52.0 million or less, the reserve requirement is 3%; and for accounts greater than $52.0 million, the reserve requirement is $1.6 million plus 10% of the amount of total transaction accounts in excess of $52.0 million. The first $4.3 million of otherwise reservable balances are exempted from the reserve requirements. These reserve requirements are subject to annual adjustment by the Federal Reserve Board. The Bank is in compliance with the foregoing requirements. The balances used to meet the reserve requirements imposed by the Federal Reserve Board may be used to satisfy liquidity requirements imposed by the OTS. IMPACT OF NEW ACCOUNTING STANDARDS In March 1995, the FASB issued Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of". SFAS No. 121 is effective for fiscal years beginning after December 15, 1995. SFAS No. 121 provides guidance for the recognition and measurement of impairment of long-lived assets, certain identifiable intangibles, and goodwill related both to assets to be held and used and assets to be disposed of. SFAS No. 121 requires entities to perform separate calculations for assets to be held and used to determine whether recognition of an impairment loss is required and, if so, to measure that impairment. SFAS No. 121 requires long-lived assets and certain identifiable intangibles to be disposed of to be reported at the lower of carrying amount or fair value less costs to sell. The Company will implement SFAS No. 121 on October 1, 1996. The adoption of SFAS No. 121 will not have a material impact of the Company's financial position or results of operations. In May 1995, the FASB issued SFAS No. 122, "Accounting for Mortgage Servicing Rights." SFAS No. 122 is effective for fiscal years beginning after December 15, 1995, with earlier application encouraged. SFAS No. 122 requires the recognition of a separate assets related to rights to service loans for others, however those servicing rights are acquired. SFAS No. 122 also requires an assessment of the capitalized mortgage rights for impairment based on the fair value of those rights. The Company will implement the provisions of SFAS No. 122 on October 1, 1996. The adoption of SFAS No. 122 will not have a material impact of the Company's financial position or results of operations. In October 1995, the FASB issued SFAS No. 123 "Accounting for Stock-Based Compensation". SFAS No. 123 is effective for fiscal years beginning after December 15, 1995, the fiscal year beginning October 1, 1996 for the Company. SFAS No. 123 allows for alternative accounting treatment for stock-based compensation which the Company currently reports under Accounting Principles Board (APB) No. 25, "Accounting for Stock Issued to Employees." The Company does not intend to elect the fair value-based method of expense recognition for stock-based compensation as contemplated by SFAS No. 123, but rather will adopt the pro forma disclosure alternative provided in SFAS No. 123, and continue to account for stock-based compensation under APB No. 25. In June 1996, the FASB issued SFAS No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities." SFAS No. 125, among other things, applies a "financial-components approach" that focuses on control, whereby an entity recognizes the financial and servicing assets it controls and the liabilities it has incurred, derecognizes assets when control has been surrendered, and derecognizes liabilities when extinguished. SFAS No. 125 provides consistent standards for distinguishing transfers of financial assets that are sales from transfers that are secured borrowings. SFAS No. 125 is effective for transfers and servicing of financial assets and extinguishments of liabilities occurring after December 31, 1996. The Company does not expect this pronouncement to have a significant impact on its consolidated financial condition or results of operations. No other new accounting policies were adopted and the application of existing policies was not changed during fiscal 1996. ITEM 8. FINANCIAL STATEMENTS and SUPPLEMENTARY DATA CONSOLIDATED STATEMENTS of FINANCIAL CONDITION (Dollars in thousands) September 30, 1996 and 1995
ASSETS 1996 1995 Cash and due from banks $ 3,848 2,649 Interest-earning deposits 225 1,266 Federal funds sold 200 200 Investment in dollar-denominated mutual funds, at fair value 3,146 227 FHLB of Chicago stock, at cost 5,795 3,000 Mortgage-backed securities held to maturity, at amortized cost (approximate fair value of $21,766 and $26,769 at September 30, 1996 and 1995) 21,673 26,484 Investment securities available for sale, at fair value 78,104 84,579 Loans receivable, net of allowance for loan losses of $810 and $403 at September 30, 1996 and 1995 354,255 266,735 Accrued interest receivable 3,199 2,910 Real estate in foreclosure 97 - Premises and equipment 3,780 3,988 Deposit base intangible 158 219 Other assets 1,382 1,407 -------- ------- $ 475,862 393,664 ======== ======= LIABILITIES and STOCKHOLDERS' EQUITY LIABILITIES Deposits 302,934 275,993 Borrowed funds 115,300 54,032 Advance payments by borrowers for taxes and insurance 1,953 4,908 Other liabilities 6,847 4,939 -------- ------- Total liabilities 427,034 339,872 STOCKHOLDERS' EQUITY Preferred stock, $.01 par value; authorized 2,500,000 shares; none outstanding - - Common stock, $.01 par value; authorized 8,000,000 shares; issued 3,782,350 shares; 2,866,108 and 3,278,894 shares outstanding at September 30, 1996 and 1995, respectively 38 38 Additional paid-in capital 37,079 36,795 Retained earnings, substantially restricted 27,851 26,449 Treasury stock, at cost (916,242 and 503,456 shares at September 30, 1996 and 1995, respectively) (12,619) (5,978) Common stock acquired by Employee Stock Ownership Plan (2,078) (2,494) Common stock acquired by Bank Recognition and Retention Plans (708) (963) Unrealized loss on investment securities available for sale, less applicable taxes (735) (55) -------- ------- Total stockholders' equity 48,828 53,792 -------- ------- Commitments and contingencies $475,862 393,664 ======== =======
See accompanying notes to consolidated financial statements. CONSOLIDATED STATEMENTS of EARNINGS (Dollars in thousands, except per share data) Years ended September 30, 1996, 1995, and 1994
1996 1995 1994 INTEREST INCOME: Loans receivable $ 23,907 19,329 16,013 Investment securities 5,772 4,240 2,325 Mortgage-backed securities 1,703 2,302 777 Interest earning deposits 60 54 103 Federal funds sold 38 24 1,035 Commercial paper - - 209 Investment in dollar-denominated mutual funds 74 220 651 ------- ------ ------ 31,554 26,169 21,113 INTEREST EXPENSE: Deposits 13,941 10,966 8,849 Borrowed funds 4,188 2,786 910 ------- ------ ------ 18,129 13,752 9,759 Net interest income before provision for loan losses 13,425 12,417 11,354 Provision for loan losses 410 192 48 ------- ------ ------ Net interest income after provision for loan losses 13,015 12,225 11,306 NON-INTEREST INCOME: Gain (loss) on sale of investment securities available for sale - 274 (17) Fees and commissions 379 398 680 Insurance and annuity commissions 519 519 536 Other 59 38 42 ------- ------ ------ 957 1,229 1,241 NON-INTEREST EXPENSE: General and administrative expenses: Salaries and employee benefits 4,878 4,570 4,451 Office occupancy and equipment 1,208 1,220 1,119 Data processing 449 407 315 Advertising and promotions 421 476 466 Federal deposit insurance premiums 2,294 564 560 Other 1,294 1,118 1,172 ------- ------ ------ Total general and administrative expenses 10,544 8,355 8,083 Amortization of intangible 61 72 81 Recapture of credit enhancement losses (10) (90) - ------- ------ ------ 10,595 8,337 8,164 Income before income taxes 3,377 5,117 4,383 Income tax expense 1,235 2,033 1,703 ------- ------ ------ NET INCOME $ 2,142 3,084 2,680 ======= ====== ====== Earnings per share - primary $0.72 0.94 0.71 Earnings per share - fully diluted $0.72 0.93 0.71
See accompanying notes to consolidated financial statements. CONSOLIDATED STATEMENTS of CHANGES IN STOCKHOLDERS' EQUITY (Dollars in thousands) Years ended September 30, 1996, 1995, and 1994
Unrealized Common Loss On Common Stock Investment Additional Stock Acquired Securities Common Paid-in Retained Treasury Acquired By Available Stock Capital Earnings Stock By ESOP By BRRP's For Sale Total Balance at September 30, 1993 $ - - 21,100 - - - - 21,100 Net income - - 2,680 - - - - 2,680 Net proceeds of common stock issued 37 35,188 - - (2,909) - - 32,316 Adjustment to paid-in capital resulting from BRRP stock purchase 1 1,454 - - - (1,455) - - Purchase of treasury stock 189,117 shares) - - - (2,045) - - - (2,045) Amortization of award of BRRP stock - - - - - 236 - 236 Unrealized loss on investment securities available for sale - - - - - - (810) (810) --- ------ ------- ------ ------ ------ ----- ------ Balance at September 30, 1994 38 36,642 23,780 (2,045) (2,909) (1,219) (810) 53,477 Net income - - 3,084 - - - - 3,084 Purchase of treasury stock (316,339 shares) - - - (3,957) - - - (3,957) Cash dividends ($.12 per share) - - (415) - - - - (415) Amortization of award of BRRP stock - - - - - 256 - 256 Cost of ESOP shares released - - - - 415 - - 415 Exercise of stock options and reissuance of treasury shares (2,000 shares) - (4) - 24 - - - 20 Tax benefit related to vested BRRP stock - 26 - - - - - 26 Tax benefit related to stock options exercised - 1 - - - - - 1 Market adjustment for committed ESOP shares - 130 - - - - - 130 Change in unrealized loss on investment securities available for sale - - - - - - 755 755 --- ------ ------- ------ ------ ------ ----- ------ Balance at September 30, 1995 38 36,795 26,449 (5,978) (2,494) (963) (55) 53,792 Net income - - 2,142 - - - - 2,142 Purchase of treasury stock (414,986 shares) - - - (6,669) - - - (6,669) Cash dividends ($.24 per share) - - (740) - - - - (740) Amortization of award of BRRP stock - - - - - 255 - 255 Cost of ESOP shares released - - - - 416 - - 416 Exercise of stock options and reissuance of treasury shares (2,200 shares) - (6) - 28 - - - 22 Tax benefit related to vested BRRP stock - 51 - - - - - 51 Tax benefit related to stock options exercised - 3 - - - - - 3 Market adjustment for committed ESOP shares - 236 - - - - - 236 Change in unrealized loss on investment securities available for sale - - - - - - (680) (680) --- ------ ------- ------ ------ ------ ----- ------ Balance at September 30, 1996 $38 37,079 27,851 (12,619) (2,078) (708) (735) 48,828 === ====== ======= ====== ====== ====== ===== ======
See accompanying notes to consolidated financial statements. CONSOLIDATED STATEMENTS of CASH FLOWS (Dollars in thousands)
Years ended September 30, 1996 1995 1994 Cash flows from operating activities: Net income $2,142 3,084 2,680 Adjustment to reconcile net income to net cash provided by operating activities: Depreciation 385 342 353 Deferred income taxes (229) 217 (183) Provision for loan losses 410 192 48 Recapture of credit enhancement provision for loss (10) (90) - Net amortization and accretion of premiums and discounts 210 698 400 Amortization of cost of stock benefit plans 255 256 236 Principal payment on ESOP loan 416 415 - Market adjustment for committed ESOP shares 236 130 - Deferred loan fees, net of amortization (1,144) (631) (606) Amortization of deposit base intangible 61 72 81 Federal Home Loan Bank of Chicago stock dividends - (40) - Loss (gain) on sale of investment securities available for sale - (274) 17 Origination of loans held for sale - - (5,004) Proceeds from sale of loans - - 5,448 Increase in accrued interest receivable (289) (549) (1,109) Decrease (increase) in other assets, net (41) (34) 483 Increase in other liabilities, net 2,621 804 811 ------ ----- ------ NET CASH PROVIDED by OPERATING ACTIVITIES 5,023 4,592 3,655 CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from maturities of investment securities available for sale 63,000 22,686 11,215 Proceeds from sale of investment securities available for sale - 14,627 - Proceeds from redemption of mutual funds 40 8,552 16,562 Proceeds from redemption of Federal Home Loan Bank of Chicago stock 179 - - Proceeds from loan participation sold 1,890 - - Proceeds from sale of real estate owned - 161 - Purchase of dollar-denominated mutual funds (2,959) (12) (4,415) Purchase of Federal Home Loan Bank of Chicago stock (2,974) (691) - Purchase of investment securities available for sale (65,000) (59,450) (78,485) Purchase of mortgage-backed securities held to maturity - - (30,399) Loans originated for investment (139,589) (77,880) (59,539) Purchase of loans receivable - (3,000) (3,369) Purchase of premises and equipment (177) (1,946) (228) Principal repayments collected on loans receivable 50,820 31,100 50,748 Principal repayments collected on investment securities available for sale 7,203 9,229 6,649 Principal repayments collected on mortgage-backed securities held to maturity 4,835 3,050 816 ------ ----- ------ NET CASH USED IN INVESTING ACTIVITIES (82,732) (53,574) (90,445) CASH FLOWS FROM FINANCING ACTIVITIES: Net increase (decrease) in deposits 26,941 37,931 (9,801) Net increase in borrowed funds 61,268 12,032 42,000 Net increase (decrease) in advance payments by borrowers for taxes and insurance (2,955) 3,931 (265) Net proceeds from sale of stock - - 32,316 Purchase of treasury stock (6,669) (3,957) (2,045) Payment of common stock dividends (740) (415) - Proceeds from exercise of stock options 22 20 - ------ ----- ------ NET CASH PROVIDED BY FINANCING ACTIVITIES 77,867 49,542 62,205 Net change in cash and cash equivalents 158 560 (24,585) Cash and cash equivalents at beginning of year 4,115 3,555 28,140 ------ ----- ------ Cash and cash equivalents at end of year $ 4,273 4,115 3,555 ====== ===== ====== CASH PAID DURING THE YEAR FOR: Interest $ 17,825 13,674 9,451 Income taxes 1,371 1,543 1,559 NON-CASH INVESTING ACTIVITIES - Loans transferred to real estate in foreclosure 113 193 88
See accompanying notes to consolidated financial statements. (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Fidelity Bancorp, Inc. (the "Company") is a Delaware corporation incorporated on September 7, 1993 for the purpose of becoming the savings and loan holding company for Fidelity Federal Savings Bank (the "Bank"). On December 15, 1993, the Bank converted from a mutual to a stock form of ownership, and the Company completed its initial public offering and with a portion of the net proceeds acquired all of the issued and outstanding capital stock of the Bank. The accounting and reporting policies of the Company and its subsidiary conform to generally accepted accounting principles (GAAP) and to general practices within the thrift industry. In order to prepare the Bank's financial statements in conformity with GAAP, management is required to make certain estimates that affect the amounts reported in the financial statements and accompanying notes. These estimates may differ from actual results. The following describes the more significant accounting policies. PRINCIPLES OF CONSOLIDATION The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary, Fidelity Federal Savings Bank and the Bank's wholly owned operating subsidiary, Fidelity Corporation. All significant intercompany accounts and transactions have been eliminated in consolidation. INVESTMENTS IN MUTUAL FUNDS Investments in mutual funds are designated as available for sale and are carried at fair value. MORTGAGE-BACKED SECURITIES HELD TO MATURITY Management determines the appropriate classification of securities at the time of purchase. The current mortgage-backed securities portfolio is designated as held to maturity, as management has the ability and positive intent to hold these securities to maturity. These securities are carried at cost, adjusted for premiums and discounts. Amortization of premiums and accretion of discounts is recognized into interest income by the interest method over the remaining contractual lives of the securities. INVESTMENT SECURITIES Investment securities which the entity has the positive intent and ability to hold to maturity are classified as "held to maturity" and measured at amortized cost. Investments purchased for the purpose of being sold are classified as trading securities and measured at fair value with any changes in fair value included in earnings. All other investments that are not classified as "held to maturity" or "trading" are classified as "available for sale". Investments available for sale are measured at fair value with any changes in fair value reflected as a separate component of stockholders' equity, net of related tax effects. All government and corporate securities are classified as available for sale, and there are no trading securities. LOANS RECEIVABLE Loans receivable are stated at unpaid principal balances less loans in process, deferred loan fees or costs, unearned discounts, and allowances for loan losses. Loan fees or costs are deferred, net of certain direct costs associated with loan originations. Net deferred fees or costs are amortized as yield adjustments over the contractual life of the loan using the interest method. On October 1, 1995, the Company adopted Financial Accounting Standards Board Statement No. 114, "Accounting by Creditors for Impairment of a Loan," as amended by Statement No. 118, "Accounting by Creditors for Impairment of a Loan - - Income Recognition and Disclosures". Statement No. 114 requires that impaired loans be measured at the present value of expected future cash flows discounted at the loan's effective interest rate, or, as a practical expedient, at the loan's observable market price or at the fair value of the collateral if the loan is collateral dependent. Statement No. 118 eliminates the provisions for Statement No. 114 that describe how a creditor should report interest income on an impaired loan and allows a creditor to use existing methods to recognize, measure, and display interest income on an impaired loan. The allowance for loan losses is increased by charges to operations and decreased by charge-offs, net of recoveries. The allowance for loan losses reflects management's estimate of the reserves needed to cover the risks inherent in the Bank's loan portfolio. In determining a proper level of loss reserves, management periodically evaluates the adequacy of the allowance based on general trends in the real estate market, known and inherent risks in the portfolio, adverse situations that may affect the borrower's ability to repay, estimated value of any underlying collateral, and current and prospective economic conditions. The Bank's recent historical trends have resulted in no significant losses on loans that are 90 days or greater delinquent and on loans which management believes are uncollectible. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Bank's allowance for losses on loans receivable. Such agencies may require the Bank to recognize additions to the allowance for loan losses based on their judgements of information available to them at the time of their examination. REAL ESTATE IN FORECLOSURE Real estate acquired through foreclosure or deed in lieu of foreclosure is carried at the lower of fair value or the related loan balance at the date of foreclosure, less estimated costs to dispose. Valuations are periodically performed by management and an allowance for losses is established by a charge to operations if the carrying value of a property subsequently exceeds its estimated net realizable value. PREMISES AND EQUIPMENT Premises and equipment are stated at cost less accumulated depreciation and amortization. Depreciation and amortization of premises and equipment are computed using the straight-line method over the estimated useful life of the respective asset. Useful lives are 25 to 40 years for office buildings, and 3 to 10 years for furniture, fixtures, and equipment. Amortization of leasehold improvements is computed on the straight-line method over the lesser of the term of the lease or the useful life of the property. DEPOSIT BASE INTANGIBLE The deposit base intangible arising from the Bank's branch purchase and assumption of the deposit liabilities is being amortized over 10 years, using the interest method. Accumulated amortization as of September 30, 1996 and 1995 was $354,000 and $293,000, respectively. EMPLOYEE STOCK OWNERSHIP PLAN ("ESOP") Compensation expense under the ESOP is equal to the fair value of common shares released or committed to be released annually to participants in the ESOP. Common stock purchased by the ESOP and not committed to be released to participants is included in the consolidated statements of financial condition at cost as a reduction of stockholders' equity. INCOME TAXES Deferred income taxes arise from the recognition of certain items of income and expense for tax purposes in years different from those in which they are recognized in the consolidated financial statements. Income tax benefits attributable to vested Bank Recognition and Retention Plans ("BRRP") stock and exercised non-qualified stock options are credited to additional paid-in- capital. Deferred income taxes are accounted for under the asset and liability method, whereby deferred income taxes are recognized for the tax consequences of "temporary differences" by applying the applicable tax rate to differences between the financial statement carrying amounts and the tax basis of existing assets and liabilities. The effect on deferred taxes of a change in tax rates is recognized in income in the period that includes the enactment date of any such tax law change. A valuation allowance is established on deferred tax assets when, in the opinion of management, the realization of the deferred tax asset does not meet the "more likely than not" criteria. INSURANCE AND ANNUITY COMMISSIONS Insurance and annuity commissions are recognized as income as of the date of inception of the related policy and contracts. Income is reduced for commissions applicable to return premiums when the credit is issued to the policyholder. CASH AND CASH EQUIVALENTS For purposes of reporting cash flows, cash and cash equivalents include cash and due from banks, interest-bearing deposits, and federal funds sold. EARNINGS PER SHARE Earnings per share of common stock for the year ended September 30, 1996 has been determined by dividing net income by 2,984,863 and 2,993,069, the weighted average number of primary and fully diluted shares of common stock and common stock equivalents outstanding, respectively. Earnings per share of common stock for the year ended September 30, 1995 has been determined by dividing net income by 3,281,872 and 3,331,536, the weighted average number of primary and fully diluted shares of common stock and common stock equivalents outstanding, respectively. Pro forma earnings per share of common stock for the year ended September 30, 1994 has been determined by dividing net income by 3,753,567 and 3,773,119, the weighted average number of primary and fully diluted shares of common stock and common stock equivalents, respectively, outstanding as if the Company's initial public offering took place on October 1, 1993. Stock options are regarded as common stock equivalents and are therefore considered in both the primary and fully diluted earnings per share calculations. Common stock equivalents are computed using the treasury stock method. ESOP shares are only considered outstanding for earnings per share calculations when they are committed to be released, effective October 1, 1994. (2) MORTGAGE-BACKED SECURITIES HELD TO MATURITY Mortgage-backed securities held to maturity are summarized as follows:
1996 1995 Gross Gross Gross Gross Amortized unrealized unrealized Fair Amortized unrealized unrealizef Fair cost gains losses value cost gains losses value (in thousands) Federal Home Loan Mortgage Corporation $ 21,673 93 - 21,766 26,484 285 - 26,769
There were no sales of mortgage-backed securities held to maturity during the years ended September 30, 1996, 1995, and 1994. (3) INVESTMENT SECURITIES AVAILABLE FOR SALE Investment securities available for sale are summarized as follows:
1996 1995 Gross Gross Gross Gross Amortized unrealized unrealized Fair Amortized unrealized unrealized Fair cost gains losses value cost gains losses value (in thousands) U.S. Government and agency obligations due: Within one year $ - - - - 1,000 2 - 1,002 After one year to five years 11,000 - 479 10,521 26,000 19 9 26,010 After 5 years to 10 years 55,000 - 549 54,451 20,000 194 - 20,194 -------- --- ----- ------- ------- ---- --- ------- 66,000 - 1,028 64,972 47,000 215 9 47,206 ======== === ===== ======= ======= ==== === ======= Corporate debt securities due: Within one year - - - - 20,138 - 40 20,098 After one year to five years 3,000 - 30 2,970 3,000 - - 3,000 After 5 years to 10 years 2,973 - 78 2,895 - - - - -------- --- ---- ------- ------- ---- --- ------- 5,973 - 108 5,865 23,138 - 40 23,098 ======== === ===== ======= ======= ==== === ======= Corporate asset-backed securities 7,331 4 68 7,267 14,532 - 257 14,275 -------- --- ---- ------- ------- ---- --- ------- $ 79,304 4 1,204 78,104 84,670 215 306 84,579 ======== === ===== ======= ======= ==== === =======
Proceeds from the sale of investment securities available for sale during 1995 were $14.6 million. There were no sales of investment securities available for sale in 1996 and 1994. Gross realized gains of $409,000 and gross realized losses of $121,000 were recorded in 1995. The fair value of all investment securities available for sale is based upon quoted market prices. Actual maturities may differ from contractual maturities shown in the table above because the borrowers may have the right to call or prepay obligations with or without prepayment penalties. (4) LOANS RECEIVABLE Loans receivable are summarized as follows at September 30:
1996 1995 (in thousands) One-to-four family mortgages $ 277,086 203,974 Multifamily mortgages 55,341 45,698 Commercial 5,656 2,478 Commercial leases 2,032 2,373 Consumer loans 13,585 12,442 --------- -------- Gross loans receivable 353,700 266,965 Less: Loans in process (3) (77) Deferred loan costs 1,414 270 Allowance for losses on loans (810) (403) Unearned discount on consumer loans (46) (20) --------- -------- $ 354,255 266,735 ========= ======== Weighted average interest rate 7.74% 8.00% ====== ======
Mortgage loans serviced for others are not included in the accompanying consolidated statements of financial condition. The unpaid principal balances of these loans at September 30, 1996, 1995, and 1994 were approximately $14,857,000, $16,528,000, and $18,753,000, respectively. Custodial balances maintained in connection with the mortgage loans serviced for others are included in deposits at September 30, 1996, 1995, and 1994 and were approximately $246,000, $601,000, and $255,000, respectively. Service fee income for the years ended September 30, 1996, 1995, and 1994 was $59,000, $60,000, and $79,000, respectively. Activity in the allowance for loan losses is summarized as follows for the years ended September 30:
1996 1995 1994 (in thousands) Balance at beginning of year $ 403 228 233 Provision for loan losses 410 192 48 Charge-offs (34) (26) (53) Recoveries 31 9 - ----- ---- ---- Balance at end of year $ 810 403 228 ===== ==== ====
Non-accrual loans receivable were as follows:
Principal Percent of Balance total loans Number in thousands) receivable September 30, 1996: Loans receivable 11 $ 1,054 0.30% Commercial leases, Bennett Funding Group 1 2,032 0.57% September 30, 1995 13 617 0.23% September 30, 1994 8 282 0.13%
On October 1, 1995, the Company adopted Statements No. 114 and 118. The Company's non-performing loan policies, which address nonaccrual loans and any other loans where the Company may be unable to collect all amounts due according to the contractual terms of the loan, meet the definition set forth for impaired loans in Statement No. 114. On October 1, 1995, the Company had no impaired loans under the guidelines of Statement No. 114. At September 30, 1996, the recorded investment in loans considered to be impaired under Statement No. 114 was $2.0 million, which solely consisted of certain commercial equipment leases as more fully discussed below. For statistical and discussion purposes, the leases are considered to be one loan. From October 1994 through January 1995, the Bank purchased 454 full-payout commercial equipment leases located in various parts of the country with original aggregate outstanding principal balances of $3.0 million. Since that time, normal lease payments have reduced the aggregate outstanding balance to $2.0 million. These leases were all originated by, serviced by, and financially guaranteed by Bennett Funding Group ("BFG") of Syracuse, New York. On March 29, 1996, it was reported that BFG was the target of a civil complaint filed by the Securities and Exchange Commission. On that same date, BFG filed a Chapter 11 bankruptcy petition in the Northern District of New York and halted payments on lease agreements. The Bankruptcy Trustee is currently collecting the lease payments from the lessees and holding them in escrow pending the outcome of the litigation concerning BFG, its creditors, and related issues. The Company is vigorously pursuing legal remedies in an attempt to collect and protect amounts due under the terms of the underlying leases. There can be no assurance that additional losses will not be incurred in connection with the BFG leases. The Bank's $2.0 million of commercial equipment leases originated by BFG meet the criteria for impaired loans. The average recorded investment in impaired loans for the year ended September 30, 1996 was $ 1.2 million. The related allowance for impaired loans was $406,000 at September 30, 1996. For the year ended September 30, 1996, the Company's income recognition for these loans was limited to actual cash received, prior to the BFG bankruptcy filing, which amounted to $88,000. (5) ACCRUED INTEREST RECEIVABLE Accrued interest receivable is summarized as follows at September 30:
1996 1995 (in thousands) Loans receivable $ 1,831 1,366 Mortgage-backed securities 129 158 Investment securities available for sale 1,269 1,416 Investment in dollar-denominated mutual funds 13 - Reserve for uncollected interest (43) (30) ------ ----- $ 3,199 2,910 ====== =====
(6) PREMISES AND EQUIPMENT Premises and equipment are summarized as follows at September 30:
1996 1995 (in thousands) Land $ 803 796 Buildings 3,513 3,419 Leasehold improvements 1,374 1,374 Furniture, fixtures, and equipment 2,993 2,917 ------ ----- 8,683 8,506 Less accumulated depreciation and amortization 4,903 4,518 ------ ----- $ 3,780 3,988 ====== =====
Depreciation and amortization of premises and equipment for the years ended September 30, 1996, 1995, and 1994 was $385,000, $342,000, and $353,000, respectively. The Bank is obligated under non-cancelable leases on two of its branches. Both leases contain renewal options and rent escalation clauses. Rent expense under these leases for the years ended September 30, 1996, 1995, and 1994 approximated $148,000, $130,000, and $42,000, respectively. The projected minimum rentals under existing leases as of September 30, 1996, are as follows: Year ended September 30, Amount 1997 $ 136,000 1998 92,000 1999 97,000 2000 98,000 2001 99,000 Thereafter 748,000 --------- Total $ 1,270,000
(7) DEPOSITS Deposits are summarized as follows at September 30:
1996 1995 Stated or Stated or Weighted Percent Weighted Percent Average of total Average of total Rate Amount deposits Rate Amount deposits (Dollars in thousands) Passbook accounts 3.35% $ 86,077 28.4% 3.06 81,979 29.7% NOW accounts 2.17 18,067 6.0 2.02 19,900 7.2 Money market and management accounts 4.16 19,192 6.3 4.67 18,434 6.7 ---- ------- ---- ----- ------ ----- 123,336 40.7 120,313 43.6 Certificate accounts: 91-day certificates 4.80 572 0.2 4.10 205 0.1 6-month certificates 5.00 12,287 4.1 5.45 12,891 4.7 7-month certificates 5.83 39,411 13.0 - - - 8-month certificates 5.15 5,191 1.7 6.34 16,667 6.0 10-month certificates 5.34 5,277 1.7 6.08 15,775 5.7 12-month certificates 5.35 11,789 3.9 5.78 13,241 4.8 13-month certificates 5.93 19,760 6.5 7.66 22,455 8.2 15-month certificates 5.91 31,806 10.6 5.76 17,707 6.4 24-month certificates 6.38 22,515 7.4 6.17 22,069 8.0 36-month certificates 5.64 7,924 2.6 5.25 9,961 3.6 36-month rising rate certificates 5.94 12,467 4.1 5.36 11,236 4.1 60-month certificates 5.78 10,399 3.4 6.27 13,073 4.7 Other certificates 5.65 200 0.1 5.76 400 0.1 ---- ------- ---- ----- ------- ----- 179,598 59.3 155,680 56.4 ------- ---- ------- ----- 4.75% $302,934 100.0% 4.83 275,993 100.0% ==== ======= ===== ===== ======= =====
The contractual maturities of certificate accounts are as follows at September 30:
1996 1995 Amount Percent Amount Percent (in thousands) (in thousands) Under 12 months $ 134,661 75.0% 110,199 70.8 12 to 36 months 40,962 22.8 40,201 25.8 Over 36 months 3,975 2.2 5,280 3.4 --------- ----- ------- ----- $ 179,598 100.0% 155,680 100.0 ========= ===== ======= =====
The aggregate amount of certificate accounts with a balance of $100,000 or greater at September 30, 1996 and 1995 was approximately $20,288,000 and $23,854,000, respectively. Interest expense on deposit accounts is summarized as follows for the years ended September 30:
1996 1995 1994 (in thousands) NOW accounts $ 329 345 350 Money market and management accounts 841 388 224 Passbook accounts 2,455 2,618 2,979 Certificate accounts 10,316 7,615 5,296 ------ ------ ----- $ 13,941 10,966 8,849 ====== ====== =====
(8) BORROWED FUNDS Borrowed funds are summarized as follows at September 30:
Interest rate Amount 1996 1995 1996 1995 (in thousands) Secured advances from the FHLB of Chicago: Fixed rate advances due: January 3,1996 - % 5.82 $ - 50,000 January 5,1998 5.29 - 24,000 - August 16,1998 6.04 - 14,000 - Open line advance, due on demand 6.22 6.66 77,300 4,032 ---- ----- ------- ------ $ 115,300 54,032 ========= ====== Weighted average rate 6.00% 5.88 ====== =====
The Bank has adopted a collateral pledge agreement whereby the Bank has agreed to at all times keep on hand, free of all other pledges, liens, and encumbrances, first mortgages with unpaid principal balances aggregating no less than 167% of the outstanding secured advances from the Federal Home Loan Bank of Chicago (the "FHLB-Chicago"). All stock in the FHLB-Chicago is pledged as additional collateral for these advances. (9) REGULATORY CAPITAL The Bank is subject to regulatory capital requirements under the OTS. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional discretionary actions by regulators which could have a material impact 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 as calculated under regulatory accounting purposes. OTS regulations require all savings institutions to meet three capital requirements: a tangible capital to adjusted total assets ratio of 1.5%, a core capital to adjusted total assets ratio of 3.0%, and a risk-based capital to total risk-weighted assets ratio of 8.0%. Management believes, as of September 30, 1996, that the Bank meets all capital adequacy requirements to which it is subject. The following table reflects the Bank's regulatory capital as of September 30, 1996 as it relates to its three capital adequacy requirements.
Required For Capital Actual Adequacy Purposes Excess Amount Ratio Amount Ratio Amount (dollars in thousands) As of September 30, 1996: Risk-based $ 38,042 16.9% $ 18,020 8.0% $ 20,022 Tangible 37,639 8.0 7,023 1.5 30,616 Core (leverage) 37,639 8.0 14,046 3.0 23,593 As of September 30, 1995: Risk-based $ 40,717 20.7% $ 15,733 8.0% $ 24,984 Tangible 40,314 10.5 5,755 1.5 34,559 Core (leverage) 40,314 10.5 11,509 3.0 28,805 Core capital is defined as common stockholder's equity plus non-cumulative perpetual preferred stock and related surplus, and minority interests in equity accounts of consolidated subsidiaries, plus 90% of the fair value of readily marketable purchased mortgage servicing rights, less non-qualifying intangible assets, such as goodwill and core deposit intangibles. Tangible capital is defined as core capital less all intangible assets other than a limited amount of readily marketable purchased mortgage servicing rights. The risk-based requirement requires the Bank to maintain risk-based capital of 8% of total risk-weighted assets. Assets of the Bank, including certain off-balance sheet items, are adjusted to reflect degrees of credit risk to compute total risk- weighted assets. Capital for this computation includes core capital plus supplementary capital, which included general loan loss reserves. OTS regulations require that in meeting the tangible, core, and risk-based capital standards, institutions must generally deduct investments in and loans to subsidiaries engaged in activities not permissible for a national bank. (10) INCOME TAXES Income tax expense is summarized as follows for the years ended September 30: 1996 1995 1994 (in thousands) Current: Federal $ 1,425 1,515 1,189 State 27 237 237 ------ ----- ----- Total current 1,452 1,752 1,426 Deferred: Federal (177) 229 220 State (40) 52 57 ------ ----- ----- Total deferred (217) 281 277 ------ ----- ----- $ 1,235 2,033 1,703 ====== ===== =====
The reasons for the difference between the effective tax rate and the corporate Federal income tax rate of 34% are detailed as shown below for the years ended September 30:
1996 1995 1994 Federal income tax rate 34.0% 34.0 34.0 State income taxes, net of federal benefit - 3.7 4.4 Other 2.6 2.0 0.4 ------ ----- ----- Effective income tax rate 36.6% 39.7 38.8 ====== ===== =====
Retained earnings at September 30, 1996 includes $4.6 million of "base-year" tax bad debt reserves for which no provision for Federal income tax has been made. If in the future this amount, or a portion thereof, is used for certain purposes other than to absorb losses on bad debts, a federal and state tax liability will be imposed on the amount so used at the then current corporate income tax rate. The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities are presented below at September 30:
1996 1995 (in thousands) Deferred tax assets: Deferred compensation $ 8 4 Allowance for loan loss 315 160 Unrealized loss on investment securities available for sale 465 36 Accrual for SAIF special assessment 629 - Other 109 47 ---- --- Deferred tax assets 1,526 247 Deferred tax liabilities: Deferred loan fees and costs (1,151) (599) FHLB stock, due to stock dividends (149) (149) Property and equipment, due to depreciation (89) (27) Tax bad debt reserves (808) (748) Tax basis in partnership less than book (170) (164) Pension plan (29) (61) Other (81) (98) ------ ----- Deferred tax liabilities (2,477) (1,846) ------ ----- Net deferred tax liability $ (951) (1,599) ====== ======
Management believes that it is more likely than not that the deferred tax assets will be realized, therefore, no valuation allowance has been recorded at September 30, 1996 and 1995. (11) PENSION PLAN The Bank has a noncontributory defined benefit pension plan which covers substantially all full-time employees who are 21 years of age and older and have been employed for a minimum of one year. Pension costs are accrued and funded as computed by the consulting actuary, using the entry age normal actuarial cost method. Total pension expense for the years ended September 30, 1996, 1995, and 1994 was approximately $111,000, $93,000, and $98,000, respectively. Accumulated benefit obligation, projected benefit obligation, accrued pension liability, and net periodic pension cost, as estimated by the consulting actuary, and plan net assets as of August 31, the date of the latest actuarial valuation, are as follows:
1996 1995 (in thousands) Actuarial present value of accumulated benefit obligation, including vested benefits of $744 and $636 in 1996 and 1995, respectively $ 782 668 ===== ==== Actuarial present value of projected benefit obligation $(1,378) (1,195) Plan assets at fair value 1,086 901 ----- ----- Plan assets less than projected benefit obligation (292) (294) Unrecognized net gain from past experience different from that assumed, and effects of changes in assumptions 69 107 Unrecognized transition obligation, being recognized over 17 years (68) (74) ----- ----- Net accrued pension cost $ (291) (261) ===== ====
Net pension costs include the following components for the years ended September 30:
1996 1995 1994 (in thousands) Service cost - benefits earned during the period $ 110 89 91 Interest cost on projected benefit obligation 87 77 68 Actuarial return on plan assets (116) (107) (10) Net amortization and deferral 30 34 (51) ---- --- --- Net periodic pension cost $ 111 93 98 ==== === ===
The discount rate used in determining the actuarial present value of the projected benefit obligation at the beginning of the year to determine the net periodic pension cost and at the end of the year for the present value of the benefit obligations during 1996 and 1995 was 7.25% and 8.00% in 1994. The expected long-term rate of return on assets was 8.00% during 1996, 1995, and 1994. The rate of increase in future compensation was 6.00% in 1996, 1995, and 1994. The Bank sponsors the Fidelity Federal Savings Bank Supplemental Retirement Plan. The Supplemental Retirement Plan is intended to provide retirement benefits and preretirement death and disability benefits for certain officers of the Bank. The expense for the years ended September 30, 1996, 1995, and 1994 was approximately $121,000, $96,000 and $ 91,000, respectively. (12) Officer, Director, and Employee Benefit Plans EMPLOYEE STOCK OWNERSHIP PLAN ("ESOP"). In conjunction with the Bank's conversion, the Bank formed an ESOP. The ESOP covers substantially all full- time employees over the age of 21 and with more than one year of employment. The ESOP borrowed $2.9 million from the Company and purchased 290,950 common shares of the Company issued in the conversion. The Bank has committed to make discretionary contributions to the ESOP sufficient to service the requirements of the loan over a period not to exceed seven years. Expense related to the ESOP was $416,000, $415,000 and $312,000 for the years ended September 30, 1996, 1995 and 1994, respectively. On October 1, 1994, the Company adopted the provisions of Statement of Position 93-6, (SOP 93-6), "Employers' Accounting for Employee Stock Ownership Plans", issued by the American Institute of Certified Public Accountants. SOP 93-6 requires the Company to consider outstanding only those shares of the ESOP that are committed to be released when calculating both primary and fully diluted earnings per share. SOP 93-6 also requires the Company to record the difference between the fair value of the shares committed to be released and the cost of those shares to the ESOP as a charge to additional paid-in-capital with the corresponding increase or decrease to compensation expense. The adoption of SOP 93-6 had the effect of increasing additional paid-in-capital and compensation expense by $236,000 and 130,000 in 1996 and 1995, respectively. STOCK OPTION PLANS In conjunction with the conversion, the Company and its stockholders adopted an incentive stock option plan for the benefit of employees of the Company and a directors' stock option plan for the benefit of outside directors of the Company. The number of shares of common stock authorized under the employees' and directors' plans is 363,687, equal to 10% of the total number of shares issued in the Company's initial stock offering. The exercise price must be at least 100% of the fair market value of the common stock on the date of grant, and the option term cannot exceed 10 years. Under the employees' plan, options granted become exercisable at a rate of 20% per year commencing one year from the date of the grant. There were 102,386 option grants exercisable at September 30, 1996 for the employees' plan. Options issued to outside directors of the Company are immediately exercisable.
Employees' Plan Directors' Plan Amount Exercise Amount Exercise Price Price Granted at conversion - December 15, 1993 256,712 $ 10.00 66,410 $ 10.00 Options granted 1,500 11.75 - - ------- ----- ------ ----- Options outstanding at September 30, 1994 258,212 10.01 66,410 10.00 Options granted 1,500 10.25 - - Options forfeited (3,000) 10.00 (11,621) 10.00 Options exercised - - (2,000) 10.00 ------- ----- ------ ----- Options outstanding at September 30, 1995 256,712 10.01 52,789 10.00 Options granted 3,000 15.31 - - Options exercised - - (2,200) 10.00 ------- ----- ------ ----- Options outstanding at September 30, 1996 259,712 $ 10.07 50,589 $ 10.00 ======= ===== ====== =====
BANK RECOGNITION AND RETENTION PLANS ("BRRPs") In conjunction with the Bank's conversion, the Bank formed two BRRPs, which were authorized to acquire 4.0%, or 145,475 shares, of the common stock issued in the conversion. The shares were purchased by the Bank from the authorized but unissued shares of common stock at a price of $10 per share. The $1.5 million contribution to the BRRPs is being amortized to compensation expense as the Bank's employees and directors become vested in those shares. At September 30, 1996, 14,251 plan shares had not yet been awarded. The aggregate purchase price of all shares owned by the BRRPs is reflected as a reduction of stockholders' equity and to the extent shares have been awarded, is shown as amortized expense as the Bank's employees and directors become vested in their stock awards. For the years ended September 30, 1996, 1995, and 1994, 25,304, 25,104, and 4,986 shares, respectively, were vested and distributed to employees. For the years ended September 30, 1996, 1995, and 1994, $255,000, $256,000, and $236,000, respectively, was reflected as compensation expense. (13) Commitments and Contingencies The Bank is a party to financial instruments with off-balance sheet risk in the normal course of its business. These instruments include commitments to originate loans and letters of credit. The instruments involve credit and interest rate risk in excess of the amount recognized in the consolidated statements of financial condition. The Bank evaluates each customer's creditworthiness on a case-by-case basis. Commitments to originate mortgage loans at September 30, 1996 and 1995 of $7.4 million and $4.6 million, respectively, represented amounts which the Bank plans to fund within the normal commitment period of 60 to 90 days. Of the commitments to originate loans at September 30, 1996, $238,000 represented commitments for fixed rate loans with interest rates ranging from 8.00% to 8.750%. The estimated fair value of these commitments approximates the commitment amount. Because the creditworthiness of each customer is reviewed prior to the extension of the commitment, the Bank adequately controls the credit risk on these commitments, as it does for loans recorded on the consolidated statements of financial condition. The Bank conducts substantially all of its lending activities in the Chicagoland area in which it serves. Management believes the Bank has a diversified loan portfolio and the concentration of lending activities in these local communities does not result in an acute dependence upon the economic conditions of the lending region. The Bank had guaranteed indebtedness in the amount of $2.0 million of an unrelated corporation which financed the development of an apartment complex located in Glendale Heights, Illinois. The related bonds were paid in full on May 1, 1996. At that time the Bank was released from all obligations pertaining to the enhancement. An allowance for credit enhancement loss was established in prior years. In 1995, $90,000 of the allowance was reversed due to improving debt coverage ratios of the property. In 1996 the Company recaptured its remaining $10,000 credit enhancement loss provision on the credit enhancement. The Company is involved in various litigation arising in the normal course of business. In the opinion of management, based on the advice of legal counsel, liabilities arising from such claims, if any, would not have a material effect on the Company's financial statements. (14) Fair Value Disclosures Fair value disclosures are required under Statement of Financial Accounting Standards No. 107, "Disclosures about Fair Value of Financial Instruments." Such fair value disclosures are made at a specific point in time, based upon relevant market information and information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Company's entire holdings of a particular financial instrument. Because no market exists for a portion of the Company's financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect these estimates. Fair value estimates are based on existing on- and off-balance sheet financial instruments without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments. The tax ramifications related to the realization of the unrealized gains and losses have a significant effect on the fair value estimates and have not been considered in any estimates. Reasonable comparability of fair values among financial institutions is not practical due to the variety of assumptions and valuation methods used in calculating the estimates. CASH AND DUE FROM BANKS, INTEREST-EARNING DEPOSITS, FEDERAL FUNDS SOLD, INVESTMENT IN DOLLAR-DENOMINATED MUTUAL FUNDS For these short-term instruments, the carrying value is a reasonable estimate of fair value. INVESTMENT SECURITIES The fair value of investment securities, which includes investment securities, mortgage-backed securities, and FHLB of Chicago stock, is the quoted market price, if available, or the quoted market price for similar securities. FHLB of Chicago stock is recorded at redemption value, which is equal to cost. LOANS RECEIVABLE Fair values are estimated for portfolios of loans with similar financial characteristics. Loans are segregated by type such as one- to-four family, multi-family, commercial, and consumer. For variable rate loans that reprice frequently and for which that has been no significant change in credit risk, fair values equal carrying values. The fair values for fixed- rate loans were based on estimates using discounted cash flow analyses and current interest rates being offered for loans with similar terms to borrowers of similar credit quality. ACCRUED INTEREST RECEIVABLE AND PAYABLE The carrying value of accrued interest receivable and payable approximates fair value due to the relatively short period of time between accrual and expected realization. DEPOSITS The fair values for demand deposits with no stated maturity are equal to the amount payable on demand as of September 30, 1996 and 1995, respectively. The fair value for fixed-rate certificate accounts is based on the discounted value of contractual cash flows using the interest rates currently being offered for certificates of similar maturities as of September 30, 1996 and 1995, respectively. BORROWED FUNDS Rates currently available to the Company for debt with similar terms and remaining maturities are used to estimate fair value of existing debt. The estimated fair value of the Company's financial instruments at September 30, 1996 and 1995 are as follows:
1996 1995 Net carrying Estimated Net carrying Estimated amount fair value amount fair value (in thousands) FINANCIAL ASSETS: Cash and due from banks $ 3,848 3,848 2,649 2,649 Interest-earning deposits 225 225 1,266 1,266 Federal funds sold 200 200 200 200 Investment in dollar- denominated mutual funds 3,146 3,146 227 227 Investment securities 106,772 105,665 114,154 114,348 Loans receivable 355,082 355,122 266,945 269,402 Accrued interest receivable 3,199 3,199 2,910 2,910 ------- ------- ------- ------- Total financial assets $ 472,472 471,405 388,351 391,002 ======= ======= ======= ======= FINANCIAL LIABILITIES: Noninterest-bearing deposits 4,596 4,596 5,610 5,610 NOW, money market and management, and passbook accounts 118,740 118,740 114,703 114,703 Certificate accounts 179,598 179,598 155,680 156,246 Borrowed funds 115,300 115,104 54,032 53,996 Accrued interest payable 752 752 447 447 ------- ------- ------- ------- Total financial liabilities $ 418,986 418,790 330,472 331,002 ======= ======= ======= ======= /TABLE (15) Condensed Parent Company Only Financial Information The following condensed statements of financial condition, as of September 30, 1996 and 1995 and condensed statements of earnings and cash flows for the years ended September 30, 1996 and 1995 and the period from December 15, 1993 (date of commencement of operations) to September 30, 1994 for Fidelity Bancorp, Inc. should be read in conjunction with the consolidated financial statements and the notes thereto.
STATEMENT OF FINANCIAL CONDITION September 30, 1996 1995 (in thousands) ASSETS Cash and cash equivalents $ 1,708 1,406 Investment in dollar-denominated mutual funds 146 177 Investment securities available for sale 5,642 8,317 Equity investment in the Bank 42,474 44,764 Other assets 2,242 2,704 ------- ------ $ 52,212 57,368 ======= ====== LIABILITIES AND STOCKHOLDERS' EQUITY: Accrued taxes and other liabilities 346 277 STOCKHOLDERS' EQUITY: Common stock 38 38 Additional paid-in capital 36,636 36,639 Retained earnings 27,851 26,449 Treasury stock (12,619) (5,978) Unrealized loss on investment securities available for sale (40) (57) ------- ------ Total Stockholders' equity 51,866 57,091 ------- ------ $ 52,212 57,368 ======= ======
STATEMENTS OF EARNINGS Year ended Period from September 30, December 15, 1993 to 1996 1995 September 30, 1994 (in thousands) Equity in earnings of the Bank $ 1,992 2,807 2,517 Interest income 651 843 607 Interest expense - - (74) Non-interest expense (387) (420) (304) Income before income taxes 2,256 3,230 2,746 Provision for federal and state income taxes (114) (146) (66) ------ ----- ----- Net income $ 2,142 3,084 2,680 ====== ===== =====
STATEMENTS OF CASH FLOWS Year ended Period from September 30, December 15, 1993 to 1996 1995 September 30, 1994 (in thousands) OPERATING ACTIVITIES: Net income $ 2,142 3,084 2,680 Equity in undistributed earnings of the Bank (1,992) (2,807) (2,517) Dividends received from the Bank 4,282 - - Net amortization and accretion of premiums and discounts 1 1 - Decrease (increase) in other assets 46 (1) (209) Increase in accrued taxes and other liabilities 60 30 286 ------ ----- ----- Net cash provided by operating activities 4,539 307 240 INVESTING ACTIVITIES: Purchase of capital stock of the Bank - - (18,340) Purchase of assets available for sale - - (15,486) Principal repayments collected on investment securities 2,703 3,899 3,174 Purchase of mutual funds (9) (12) (4,415) Redemption of mutual funds 40 1,000 3,250 Disbursement of loan to ESOP trust - - (2,909) Principal payment received on ESOP loan 416 415 - ------ ----- ----- Net provided by (used in)investing activities 3,150 5,302 (34,726) FINANCING ACTIVITIES: Net proceeds from sale of common stock - - 36,680 Purchase of treasury stock (6,669) (3,957) (2,045) Payment of common stock dividends (740) (415) - Proceeds from exercise of stock options 22 20 - ------ ----- ----- Net cash provided by (used in) financing activities (7,387) (4,352) 34,635 ------- ----- ----- Net increase in cash and cash equivalents 302 1,257 149 Cash and cash equivalents at beginning of period 1,406 149 - ------- ----- ----- Cash and cash equivalents at end of period $ 1,708 1,406 149 ====== ===== ===== /TABLE (16) Quarterly Results of Operations The following table sets forth certain unaudited income and expense and per share data on a quarterly basis for the three-month period indicated:
Year ended September 30, 1996 Year ended September 30, 1995 1st Qtr 2nd Qtr 3rd Qtr 4th Qtr 1st Qtr 2nd Qtr 3rd Qtr 4th Qtr (in thousands, except per share data) Interest income $ 7,407 7,493 8,053 8,601 6,095 6,417 6,556 7,101 Interest expense 4,228 4,197 4,649 5,055 2,878 3,199 3,613 4,062 ----- ----- ----- ----- ----- ----- ----- ----- Net interest income before provision for loan losses 3,179 3,296 3,404 3,546 3,217 3,218 2,943 3,039 Provision for loan losses - 80 10 320 82 20 90 - ----- ----- ----- ----- ----- ----- ----- ----- Net interest income after provision for loan losses 3,179 3,216 3,394 3,226 3,135 3,198 2,853 3,039 Gain on sale of investment securities available for sale - - - - - 3 271 - Other income 237 276 210 234 263 215 261 216 Non-interest expense 2,219 2,211 2,239 3,926 (1) 2,107 2,058 2,032 2,140 ----- ----- ----- ----- ----- ----- ----- ----- Income before income tax expense (benefit) 1,197 1,281 1,365 (466) 1,291 1,358 1,353 1,115 Income tax expense (benefit) 465 497 530 (257) 517 541 542 433 ----- ----- ----- ----- ----- ----- ----- ----- Net income (loss) $ 732 784 835 (209) 774 817 811 682 ===== ===== ===== ===== ===== ===== ===== ===== Earnings (loss) per share $ 0.23 0.26 0.28 (0.07) 0.23 0.25 0.25 0.21 ===== ===== ===== ===== ===== ===== ===== ===== Cash dividends declared per share $ 0.06 0.06 0.06 0.06 - 0.04 0.04 0.04 ===== ===== ===== ===== ===== ===== ===== =====
(1) Fourth quarter non-interest expense includes a one-time special assessment charge resulting from legislation passed on September 30, 1996, regarding the Savings Association Insurance Fund (SAIF). To cover the special assessment called for by the legislation, the bank recorded a pre-tax charge of $1.6 million. Independent Auditor's Report The Board of Directors Fidelity Bancorp, Inc. Chicago, Illinois: We have audited the accompanying consolidated statements of financial condition of Fidelity Bancorp, Inc. (the Company) and subsidiary as of September 30, 1996 and 1995, and the related consolidated statements of earnings, changes in stockholders' equity, and cash flows for each of the years in the three-year period ended September 30, 1996. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Fidelity Bancorp, Inc. and subsidiary as of September 30, 1996 and 1995, and the results of their operations and their cash flows for each of the years in the three-year period ended September 30, 1996, in conformity with generally accepted accounting principles. KPMG PEAT MARWICK LLP Chicago, Illinois November 1, 1996 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information relating to Directors and Executive Officers will appear in the Registrant's Proxy Statement for the Annual Meeting of Stockholders to be held on January 29, 1997 and is incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION The information relating to executive compensation will appear in the Registrant's Proxy Statement for the Annual Meeting of Stockholders to be held on January 29, 1997 and is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information relating to security ownership of certain beneficial owners and management is will appear in the Registrant's Proxy Statement for the Annual Meeting of Stockholders to be held of on January 29, 1997 and is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information relating to certain relationships and related transactions will appear in the COMPENSATION sections of the Registrant's Proxy Statement for the Annual Meeting of Stockholders to be held of on January 29, 1997 and is incorporated herein by reference. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES, AND REPORTS ON FORM 8-K The following documents are filed as part of this report: (a) EXHIBITS (required by the SEC Regulation SK-8) Exhibit No. 3.1 Restated Certificate of Incorporation of Fidelity Bancorp, Inc.* 3.2 Bylaws of Fidelity Bancorp, Inc.* 4.0 Stock Certificate of Fidelity Bancorp, Inc.* 10.1 Employment Agreements between the Bank and Executive and Employee Agreement between the Company and Executive * 10.2 Special Termination Agreement between the Bank and Executive and Special Termination Agreement between the Company and Executive * 10.6 Employee Stock Ownership Plan and Trust *** 10.8 Recognition and Retention Plan and Trust * 10.9 Incentive Stock Option Plan ** 10.10 Stock Option Plan for Outside Directors ** 21.0 Subsidiary information is incorporated herein by reference to "Part II - Subsidiaries" (b) REPORTS on FORM 8-K On October 21, 1996, the Company announced that its 1997 annual meeting of shareholders will be held on January 29, 1997. - ----------------- * Incorporated herein by reference into this document from the exhibits to Form S-1, Registration Statement as amended, originally filed on October 28, 1993, Registration No. 33-68670. ** Incorporated herein by reference into this document from the exhibits to Form S-8, Registration Statement, filed on April 20, 1994, Registration No. 33-78000. *** Incorporated herein by reference into this document from the exhibits to Form 10-K, filed on December 9, 1994. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized. FIDELITY BANCORP, INC. By: /s/ Raymond S. Stolarczyk ------------------------- Raymond S. Stolarczyk Date: December 11, 1996 Chairman of the Board and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons in the capacities and on the dates indicated: Name Title Date /s/ Raymond S. Stolarczyk Chairman and Chief Executive December 11, 1996 - ------------------------- Officer Raymond S. Stolarczyk /s/ Thomas E. Bentel President and Chief December 11, 1996 - ------------------------- Operating Officer Thomas E. Bentel /s/ Grant M. Berntson Senior Vice President and December 11, 1996 - ------------------------- Corporate Secretary Grant M. Berntson /s/ James R. Kinney Senior Vice President and December 11, 1996 - ------------------------- Chief Financial Officer James R. Kinney /s/ Paul J. Bielat Director December 11, 1996 - ------------------------- Paul J. Bielat /s/ Myron H. Dudek Director December 11, 1996 - ------------------------- Myron H. Dudek /s/ Patrick J. Flynn Director December 11, 1996 - ------------------------- Patrick J. Flynn /s/ Raymond J. Horvat Director December 11, 1996 - ------------------------- Raymond J. Horvat /s/ Bonnie J. Stolarczyk Director December 11, 1996 - ------------------------- Bonnie J. Stolarczyk EX-17 2 FINANCIAL DATA SCHEDULE [ARTICLE] 9 [LEGEND] This schedule contains summary financial information extracted from the Consolidated Statement of Condition at September 30, 1996 and the Consolidated Statement of Earnings for the year ended September 30, 1996 and is qualified in its entirety by reference to such financial statements. [/LEGEND] [MULTIPLIER] 1000 [PERIOD-TYPE] YEAR [FISCAL-YEAR-END] SEP-30-1996 [PERIOD-END] SEP-30-1996 [CASH] 3848 [INT-BEARING-DEPOSITS] 225 [FED-FUNDS-SOLD] 200 [TRADING-ASSETS] 0 [INVESTMENTS-HELD-FOR-SALE] 81250 [INVESTMENTS-CARRYING] 27468 [INVESTMENTS-MARKET] 27561 [LOANS] 355065 [ALLOWANCE] 810 [TOTAL-ASSETS] 475862 [DEPOSITS] 302934 [SHORT-TERM] 77300 [LIABILITIES-OTHER] 8800 [LONG-TERM] 38000 [PREFERRED-MANDATORY] 0 [PREFERRED] 0 [COMMON] 38 [OTHER-SE] 48790 [TOTAL-LIABILITIES-AND-EQUITY] 475862 [INTEREST-LOAN] 23907 [INTEREST-INVEST] 7475 [INTEREST-OTHER] 172 [INTEREST-TOTAL] 31554 [INTEREST-DEPOSIT] 13941 [INTEREST-EXPENSE] 18129 [INTEREST-INCOME-NET] 13425 [LOAN-LOSSES] 410 [SECURITIES-GAINS] 0 [EXPENSE-OTHER] 10595 [INCOME-PRETAX] 3377 [INCOME-PRE-EXTRAORDINARY] 0 [EXTRAORDINARY] 0 [CHANGES] 0 [NET-INCOME] 2142 [EPS-PRIMARY] .72 [EPS-DILUTED] .72 [YIELD-ACTUAL] 2.57 [LOANS-NON] 3086 [LOANS-PAST] 0 [LOANS-TROUBLED] 0 [LOANS-PROBLEM] 0 [ALLOWANCE-OPEN] 403 [CHARGE-OFFS] 34 [RECOVERIES] 31 [ALLOWANCE-CLOSE] 810 [ALLOWANCE-DOMESTIC] 0 [ALLOWANCE-FOREIGN] 0 [ALLOWANCE-UNALLOCATED] 3
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