SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
|X| Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the fiscal year ended September 30, 2002
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- or -
| | Transition Report Pursuant to Section 13 or 15(d) Of the Securities
Exchange Act of 1934
For the transition period from to
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Commission File Number: 0-22288
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FIDELITY BANCORP, INC.
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(Exact name of Registrant as specified in its Charter)
Pennsylvania 25-1705405
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(State or other jurisdiction of (I.R.S. Employer
of incorporation or organization) Identification No.)
1009 Perry Highway, Pittsburgh, Pennsylvania 15237
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (412) 367-3300
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Securities registered pursuant to Section 12(b) of the Act: None
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Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
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(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates
of the Registrant, based on the closing sales price of the Registrant's Common
Stock as quoted on the Nasdaq National Market System on December 20, 2002 was
$42.6 million.
As of December 20, 2002, the Registrant had outstanding 2,337,467
shares of Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
1. Portions of the Registrant's Annual Report to Stockholders for fiscal year
ended September 30, 2002. (Parts II and IV)
2. Portions of the Registrant's Proxy Statement for the Annual Meeting of
Stockholders for the fiscal year ended September 30, 2002. (Part III)
PART I
Fidelity Bancorp, Inc. (the "Company") may from time to time make
written or oral "forward- looking statements", including statements contained in
the Company's filings with the Securities and Exchange Commission (including
this Annual Report on Form 10-K and the exhibits thereto), in its reports to
stockholders and in other communications by the Company, which are made in good
faith by the Company pursuant to the "safe harbor" provisions of the Private
Securities Litigation Reform Act of 1995.
These forward-looking statements involve risks and uncertainties, such
as statements of the Company's plans, objectives, expectations, estimates and
intentions, that are subject to change based on various important factors (some
of which are beyond the Company's control). The following factors, among others,
could cause the Company's financial performance to differ materially from the
plans, objectives, expectations, estimates and intentions expressed in such
forward-looking statements: the strength of the United States economy in general
and the strength of the local economies in which the Company conducts
operations; the effects of, and changes in, trade, monetary and fiscal policies
and laws, including interest rate policies of the board of governors of the
federal reserve system, inflation, interest rates, market and monetary
fluctuations; the timely development of and acceptance of new products and
services of the Company and the perceived overall value of these products and
services by users, including the features, pricing and quality compared to
competitors' products and services; the willingness of users to substitute
competitors' products and services for the Company's products and services; the
success of the Company in gaining regulatory approval of its products and
services, when required; the impact of changes in financial services' laws and
regulations (including laws concerning taxes, banking, securities and
insurance); technological changes, acquisitions; changes in consumer spending
and saving habits; and the success of the Company at managing the risks
resulting from these factors.
The Company cautions that the listed factors are not exclusive. The
Company does not undertake to update any forward-looking statement, whether
written or oral, that may be made from time to time by or on behalf of the
Company.
Item 1. Description of Business
The Company, a Pennsylvania corporation headquartered in Pittsburgh,
Pennsylvania, provides a full range of banking services through its wholly owned
banking subsidiary, Fidelity Bank, PaSB (the "Bank"). The Company's other wholly
owned subsidiaries, FB Capital Trust and FB Statutory Capital Trust II,
collectively, the "Trusts" were formed solely to facilitate the issuance of
preferred securities. Accordingly, the Company conducts no significant business
or operations of its own other than holding all the outstanding stock of the
Bank and the Trust. Because the primary activities of the Company are those of
the Bank, references to the Bank used throughout this document, unless the
context indicates otherwise, generally refer to the consolidated entity.
On February 22, 2002, the Company completed its acquisition of Carnegie
Financial Corporation. Additionally, in September 2002, the Company, the Bank,
and First Pennsylvania Savings Association entered into an amended and restated
agreement and plan of merger conversion, whereby First Pennsylvania Savings
Association will merge with and into the Bank. The merger is expected to be
consummated during the first quarter of fiscal 2003.
The Bank is a Pennsylvania-chartered stock savings bank which is
headquartered in Pittsburgh, Pennsylvania. Deposits in the Bank are insured by
the Savings Association Insurance Fund ("SAIF") of the Federal Deposit Insurance
Corporation ("FDIC"). The Bank, incorporated in 1927, conducts business
1
from eleven full-service offices located in Allegheny and Butler counties, two
of five Pennsylvania counties which comprise the metropolitan and suburban areas
of greater Pittsburgh. The Bank's wholly owned subsidiary, FBIC, Inc., was
incorporated in the State of Delaware in July 2000. FBIC, Inc. was formed to
hold and manage the Bank's fixed rate residential mortgage loan portfolio which
may include engaging in mortgage securitization transactions. Total assets of
FBIC, Inc. as of September 30, 2002 amounted to $44.0 million.
Competition
The Bank is one of many financial institutions serving its market area.
The competition for deposit products and loan originations comes from other
insured financial institutions such as commercial banks, thrift institutions and
credit unions in the Bank's market area. Competition for deposits also includes
insurance products sold by local agents and investment products such as mutual
funds and other securities sold by local and regional brokers.
2
Lending Activities
The following table sets forth the composition of the Registrant's loan
portfolio in dollar amounts and in percentages of the respective portfolios at
the dates indicated.
At September 30,
-------------------------------------------------------------------------------------------
2002 2001 2000 1999 1998
---------------- ---------------- ---------------- ----------------- ---------------
$ % $ % $ % $ % $ %
-------- ----- -------- ----- -------- ------ -------- ------ --------- -----
(Dollars in Thousands)
Real estate loans:
Residential:
Single-family (1-4 units).......... $169,849 51.5% $189,626 57.5% $207,853 59.6% $156,112 53.0% $115,559 49.1%
Multi-family (over 4 units)........ 7,217 2.2 6,400 2.0 5,282 1.5 4,007 1.4 4,262 1.8
Construction:
Residential........................ 11,372 3.4 4,577 1.4 3,972 1.1 13,053 4.4 11,891 5.0
Commercial......................... 8,205 2.5 4,706 1.4 6,928 2.0 9,636 3.3 9,321 4.0
Commercial........................... 29,036 8.8 23,775 7.2 22,706 6.5 26,513 9.0 21,881 9.3
-------- ----- -------- ------ -------- ----- -------- ----- ------ ----
Total real estate loans......... 225,679 68.4 229,084 69.5 246,741 70.7 209,321 71.1 162,914 69.2
Installment loans...................... 61,872 18.8 67,725 20.5 68,614 19.7 57,869 19.6 49,122 20.9
Commercial business and lease loans.... 42,258 12.8 32,834 10.0 33,584 9.6 27,394 9.3 23,157 9.9
-------- ----- -------- ----- -------- ----- -------- ----- ------ ----
Total loans receivable.......... 329,809 100.0% 329,643 100.0% 348,939 100.0% 294,584 100.0% 235,193 100.0%
===== ===== ===== ===== =====
Less:
Loans in process..................... (9,065) (6,341) (6,558) (14,696) (12,916)
Unamortized premiums,
discounts and deferred loan fees... (1,368) (1,831) (2,033) (1,453) ( 1,142)
Allowance for possible loan losses... (3,056) (2,871) (2,910) (2,477) ( 2,243)
-------- -------- -------- ------- -------
Net loans receivable............ $316,320 $318,600 $337,438 $275,958 $218,892
======== ======== ======== ======== ========
3
Loan Maturity Tables
The following table sets forth the estimated maturity of the
Registrant's loan portfolio at September 30, 2002. The table does not include
prepayments or scheduled principal repayments. Prepayments and scheduled
principal repayments on loans totaled $117.8 million for the year ended
September 30, 2002. All loans are shown as maturing based on contractual
maturities.
Due Due after
within 1 through Due after
1 year 5 years 5 years Total
------ ------- ------- -----
(In thousands)
Real estate loans:
Residential ......................... $ 586 $ 4,948 $171,532 $177,066
Commercial .......................... 1,662 2,915 24,459 29,036
Construction......................... 1,897 2,084 15,596 19,577
Installment loans....................... 12,122 14,157 35,593 61,872
Commercial business and lease loans..... 13,986 14,752 13,520 42,258
------ ------ -------- -------
Total......................... $30,253 $38,856 $260,700 $329,809
======= ======= ======== ========
The following table sets forth the dollar amount of all loans at
September 30, 2002, due after September 30, 2003, which have fixed interest
rates and floating or adjustable interest rates.
Floating or
Fixed Rates Adjustable Rates Total
----------- ---------------- -----
(In thousands)
Real estate loans:
Residential ........................... $143,907 $32,573 $176,480
Commercial ............................ 8,597 18,777 27,374
Construction........................... 11,377 6,303 17,680
Installment loans......................... 49,217 533 49,750
Commercial business and lease loans....... 19,083 9,189 28,272
------- ------- --------
Total............................ $232,181 $67,375 $299,556
======== ======= ========
Contractual principal repayments of loans do not necessarily reflect
the actual term of the Bank's loan portfolio. The average life of mortgage loans
is substantially less than their average contractual maturities because of loan
payments and prepayments and because of enforcement of due-on-sale clauses,
which generally give the Bank the right to declare a loan immediately due and
payable in the event, among other things, that the borrower sells the real
property subject to the mortgage and the loan is not repaid. The average life of
mortgage loans tends to increase, however, when current mortgage loan rates are
substantially higher than rates on existing mortgage loans and, conversely,
decrease when current mortgage loan rates are substantially lower than rates on
existing mortgage loans.
Real Estate Lending. The Bank concentrates its lending activities on
the origination of loans and to a lesser extent the purchase of loan
participations secured primarily by first mortgage liens on existing
single-family residences. At September 30, 2002, real estate lending included
$177.1 million of residential
4
loans, $11.4 million of residential construction loans, $29.0 million of
commercial real estate loans, and $8.2 million of commercial construction loans.
The Bank originates single-family residential loans and construction
residential loans which provide for annual interest rate adjustments. The
adjustable-rate residential mortgage loans offered by the Bank in recent years
have 10, 15 or 30-year terms and interest rates which adjust every year
generally in accordance with the index of average yield on U.S. Treasury
Securities adjusted to a constant maturity of one year. There is generally a 2%
cap or limit on any increase or decrease in the interest rate per year with a 5%
or 6% limit on the amount by which the interest can increase over the life of
the loan. The Bank has not engaged in the practice of using a cap on the
payments that could allow the loan balance to increase rather than decrease,
resulting in negative amortization. At September 30, 2002 approximately $61.7
million or 27.4% of the mortgage loans in the Bank's loan portfolio consisted of
loans which provide for adjustable rates of interest.
The Bank also originates fixed-rate loans on single family residential
loans and construction residential loans with terms of 10, 15, 20 or 30 years in
order to provide a full range of products to its customers, but generally only
under terms, conditions and documentation which permit the sale of a portion of
these loans in the secondary market. Additionally, the Bank also offers a
10-year balloon loan with payments based on 30-year amortization. At September
30, 2002, approximately $163.9 million or 72.6% of the mortgage loans in the
Bank's loan portfolio consisted of loans which provide for fixed rates of
interest. Although these loans provide for repayments of principal over a fixed
period of up to 30 years, it is the Bank's experience that such loans have
remained outstanding for a substantially shorter period of time. The Bank's
policy is to enforce the "due-on-sale" clauses contained in most of its
fixed-rate, adjustable rate, and conventional mortgage loans, which generally
permit the Bank to require payment of the outstanding loan balance if the
mortgaged property is sold or transferred and, thus, contributes to shortening
the average life of such loans.
The Bank will lend generally up to 80% of the appraised value of the
property securing the loan (referred to as the loan-to-value ratio) up to a
maximum amount of $300,700 but will lend up to 95% of the appraised value up to
the same amount if the borrower obtains private mortgage insurance on the
portion of the principal amount of the loan that exceeds 80% of the value of the
property securing the loan. The Bank also originates residential mortgage loans
in amounts over $300,700. The Bank will generally lend up to 80% of the
appraised value of the property securing such loans. These loans may have terms
of up to 30 years, but frequently have terms of 10 or 15 years or are 10-year
balloon loans with payments based on 15-year to 30-year amortization. Generally,
such loans will not exceed a maximum loan amount of $1.0 million, although the
Bank may consider loans above that limit on a case-by-case basis.
The Bank also, in recent years, has developed single-family residential
mortgage loan programs targeted to the economically disadvantaged and minorities
in the Bank's primary lending area. Under the programs, the Bank will lend up to
97% of the appraised value of the property securing the loan as well as reducing
the closing costs the borrower is normally required to pay. The Bank does not
believe that these loans pose a significantly greater risk of non-performance
than similar single-family residential mortgage loans underwritten using the
Bank's normal criteria.
The Bank requires the properties securing mortgage loans it originates
and purchases to be appraised by independent appraisers who are approved by or
who meet certain prescribed standards established by the Board of Directors. The
Bank also requires title, hazard and (where applicable) flood insurance in order
to protect the properties securing its residential and other mortgage loans.
Borrowers
5
are subject to employment verification and credit evaluation reports, and must
meet established underwriting criteria with respect to their ability to make
monthly mortgage payments.
In addition to loans secured by single-family residential real estate,
the Bank also originates, to a lesser extent, loans secured by commercial real
estate and multi-family residential real estate. Over 95% of this type of
lending is done within the Bank's primary market area. At September 30, 2002
$29.0 million consisted of commercial real estate, $7.2 million consisted of
multi-family residential real estate loans, and $8.2 million consisted of
commercial construction loans.
Although terms vary, commercial and multi-family residential real
estate loans are generally made for terms of up to 10 years with a longer period
for amortization and in amounts of up to 80% of the lesser of appraised value or
sales price. These loans may be made with adjustable rates of interest, but the
Bank also will make fixed-rate commercial or multi-family real estate loans on a
10 or 7 year payment basis, with the period of amortization negotiated on a
case-by-case basis.
The Bank also engages in loans to finance the construction of
one-to-four family dwellings. This activity is generally limited to individual
units and may, to a limited degree, include speculative construction by
developers. The inspections, for approval of payment vouchers, are performed by
third parties and are based on stages of completion. Applications for
construction loans primarily are received from former borrowers and builders who
have worked with the Bank in the past.
Loans to finance commercial and multi-family residential real estate
and for the financing of construction generally provide a greater rate of return
but are considered to have a greater risk of loss than loans to finance the
purchase of single-family, owner-occupied dwellings.
Installment Lending. The Bank offers a wide variety of installment
loans, including home equity loans and consumer loans. At September 30, 2002,
home equity loans amounted to $58.5 million or 94.6% of the Bank's total
installment loan portfolio. These loans are made on the security of the
unencumbered equity in the borrower's residence. Home equity loans are made at
fixed rates for terms of up to 15 years, and home equity lines of credit are
made at variable rates. Home equity loans generally may not exceed 80% of the
value of the security property when aggregated with all other liens, although a
limited number of loans up to 100% value may be made at increased rates.
Consumer loans consist of motor vehicle loans, other types of secured
consumer loans and unsecured personal loans. At September 30, 2002, these loans
amounted to $1.3 million, which represented 2.1% of the Bank's total installment
loan portfolio. At September 30, 2002, motor vehicle loans amounted to $748,000
and unsecured loans and loans secured by property other than real estate
amounted to $539,000.
The Bank also makes other types of installment loans such as savings
account loans, education loans, credit card loans, personal lines of credit and
overdraft loans. At September 30, 2002, these loans amounted to $2.0 million or
3.3% of the total installment loan portfolio. That total consisted of $46,000 of
education loans, $652,000 of savings account loans, $1.3 million of personal
lines of credit and $21,000 of overdraft loans.
Consumer, credit card and overdraft loans and, to a lesser extent, home
equity loans may involve a greater risk of nonpayment than traditional first
mortgage loans on single-family residential dwellings.
6
However, such loans generally provide a greater rate of return, and the Bank
underwrites the loans in conformity to standards adopted by its Board of
Directors.
Commercial Business Loans and Leases. Commercial business loans of both
a secured and unsecured nature are made by the Bank for business purposes to
incorporated and unincorporated businesses. Typically, these are loans made for
the purchase of equipment, to finance accounts receivable and to finance
inventory, as well as other business purposes. At September 30, 2002, these
loans amounted to $38.3 million or 11.6% of the total loan portfolio. In
addition, the Bank makes commercial leases to businesses, typically for the
purchase of equipment. All leases are funded as capital leases and the Bank does
not assume any residual risk at the end of the lease term. At September 30,
2002, commercial leases amounted to $4.0 million or 1.2% of the total loan
portfolio.
Loan Servicing and Sales. In addition to interest earned on loans, the
Bank receives income through the servicing of loans and loan fees charged in
connection with loan originations and modifications, late payments, changes of
property ownership and for miscellaneous services related to its loans. Income
from these activities varies from period to period with the volume and type of
loans made. The Bank recognized loan servicing fees of $1,000 for the year ended
September 30, 2002. As of September 30, 2002, loans serviced for others totaled
$16,000.
The Bank charges loan origination fees which are calculated as a
percentage of the amount loaned. The fees received in connection with the
origination of conventional, single-family, residential real estate loans have
generally amounted to two to three points (one point being equivalent to 1% of
the principal amount of the loan). In addition, the Bank typically receives fees
of one or two points in connection with the origination of conventional,
multi-family residential loans and commercial real estate loans. Loan fees and
certain direct costs are deferred, and the net fee or cost is amortized into
income using the interest method over the expected life of the loan.
The Bank sells fixed-rate residential mortgage loans in the secondary
market through an arrangement with several investors. This program allows the
Bank to offer more attractive rates in its highly competitive market. The Bank
does not service those loans sold in the secondary market. Customers may choose
to have their loan serviced by the Bank, however, the loan is priced slightly
higher and retained in the Bank's loan portfolio. For the year ended September
30, 2002, the Bank sold $17.3 million of fixed rate mortgage loans.
Loan Approval Authority and Underwriting. Applications for all types of
loans are taken at the Bank's home office and branch offices by branch managers
and loan originators and forwarded to the administrative office for processing.
In most cases, an interview with the applicant is conducted at the branch office
by a branch manager. Residential and commercial real estate loan originations
are primarily attributable to walk-in and existing customers, real estate
brokers and mortgage loan brokers. Installment loans are primarily obtained
through existing and walk-in customers. The Board of Directors has delegated
authority to the Loan Committee, consisting of the Chairman, President,
Executive Vice President and Chief Lending Officer, to approve first mortgage,
home equity, secured consumer, unsecured consumer and commercial loans up to
$500,000, $200,000, $75,000, $50,000, and $400,000, respectively. Any loan in
excess of those amounts must be approved by the Board of Directors. The Board of
Directors has further delegated authority to the Bank's Chairman to approve
first mortgage, home equity, secured consumer, unsecured consumer and commercial
loans up to $200,000, $125,000, $75,000, $50,000, and $125,000, respectively.
The terms of the delegation also permit the Chairman to delegate authority to
any other Bank officer under the same or more limited terms. Pursuant to this
authority, the Chairman of the
7
Bank has delegated to the Executive Vice President and Chief Lending Officer,
subject to certain conditions, the authority to approve motor vehicle loans,
secured personal loans and unsecured personal loans up to $50,000, $50,000, and
$15,000, respectively; to approve first mortgage one-to-four family loans up to
$175,000, with a loan-to-value of 65% or less; to approve home equity loans up
to $100,000 if the amount of the loan is not in excess of 80% of the equity; to
approve commercial loans up to $100,000; to approve education loans up to levels
approved by the Pennsylvania Higher Education Assistance Agency; and to approve
checking account overdraft protection loans that conform to the parameters of
the program.
Classified Assets. Federal regulations provide for a classification
system for problem assets of insured institutions, including assets previously
treated as "scheduled items." Under this classification system, problem assets
of insured institutions are classified as "substandard," "doubtful" or "loss."
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 the
weaknesses inherent in those classified "substandard," with the added
characteristic that the weaknesses present make "collection of principal 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
that do not expose the Registrant to risk sufficient to warrant classification
in one of the above categories, but which possess some weakness, are required to
be designated "special mention" by management.
When an insured institution classifies problem assets as either
"substandard" or "doubtful," it may establish allowances for loan losses in an
amount deemed prudent by management. When an insured institution classifies
problem assets as "loss," it is required either to establish an allowance for
losses equal to 100% of that portion of the assets so classified or to charge
off such amount. An institution's determination as to the classification of its
assets and the amount of its allowances is subject to review by the Federal
Deposit Insurance Corporation ("FDIC") which may order the establishment of
additional loss allowances.
Included in non-performing loans at September 30, 2002 are nine
single-family residential real estate loans totaling $515,000, three commercial
real estate loans totaling $408,000, 23 home equity and installment loans
totaling $273,000, and 17 commercial business loans totaling $1.5 million. Such
non- performing loans consisted of all substandard and loss classified assets.
See "Non-Performing Loans and Real Estate Owned."
At September 30, 2001, non-accrual loans consisted of four 1-4 family
residential real estate loans totaling $110,000, six commercial real estate
loans totaling $814,000, twenty-nine installment loans totaling $242,000, and
ten commercial business loans totaling $1.182 million. Such non-performing loans
consisted of all substandard, doubtful and loss classified assets. See
"Non-Performing Loans and Real Estate Owned."
At September 30, 2000, non-accrual loans consisted of ten 1-4 family
residential real estate loans totaling $520,000, seven commercial real estate
loans totaling $624,000, sixty installment loans totaling $762,000, and seven
commercial business loans totaling $55,000. Such non-performing loans consisted
of all substandard, doubtful, and loss classified assets. See "Non-Performing
Loans and Real Estate Owned."
8
At September 30, 1999, non-accrual loans consisted of four 1-4 family
residential real estate loans totaling $250,000, four commercial real estate
loans totaling $1.362 million, 15 installment loans totaling $220,000, and six
commercial business loans totaling $553,000. Such non-performing loans consisted
of all substandard and loss classified assets. See "Non-Performing Loans and
Real Estate Owned."
The following table sets forth the Registrant's classified assets in
accordance with its classification system.
At September 30,
---------------------------------------------
2002 2001 2000 1999
------ ------ ------ ------
(In Thousands)
Special Mention $ 768 $ 559 $ 872 $ --
Substandard 2,609 2,176 1,871 2,357
Doubtful 45 142 72 --
Loss 3 30 18 28
------ ------ ------ ------
$3,425 $2,907 $2,833 $2,385
====== ====== ====== ======
Non-Performing Loans and Real Estate Owned. When a borrower fails to
make a required payment on a loan, the Bank attempts to cause the default to be
cured by contacting the borrower. In general, contacts are made after a payment
is more than 15 days past due, and a late charge is assessed at that time. In
most cases, defaults are cured promptly. If the delinquency on a mortgage loan
exceeds 90 days and is not cured through the Bank's normal collection procedures
or an acceptable arrangement is not worked out with the borrower, the Bank will
normally institute measures to remedy the default, including commencing a
foreclosure action or, in special circumstances, accepting from the mortgagor a
voluntary deed of the secured property in lieu of foreclosure.
The remedies available to a lender in the event of a default or
delinquency with respect to residential mortgage loans, and the procedures by
which such remedies may be exercised, are subject to Pennsylvania laws and
regulations. Under Pennsylvania law, a lender is prohibited from accelerating
the maturity of a residential mortgage loan, commencing any legal action
(including foreclosure proceedings) to collect on such loan, or taking
possession of any loan collateral until the lender has first provided the
delinquent borrower with at least 30 days' prior written notice specifying the
nature of the delinquency and the borrower's right to correct such delinquency.
Additionally, a lender is restricted in exercising any remedies it may have with
respect to loans for one- and two-family principal residences located in
Pennsylvania (including the lender's right to foreclose on such property) until
the lender has provided the delinquent borrower with written notice detailing
the borrower's rights to seek consumer credit counseling and state financial
assistance.
Loans are placed on non-accrual status when, in the judgment of
management, the probability of collection of interest is deemed to be
insufficient to warrant further accrual, generally when a loan is ninety days or
more delinquent. When a loan is placed on non-accrual status, previously accrued
but unpaid interest is deducted from interest income. The President, Chief
Lending Officer, Chief Financial Officer and the Collection Manager meet monthly
to review non-performing assets and any other assets that may
9
require classification or special consideration. Adjustments to the carrying
values of such assets are made as needed and a detailed report is submitted to
the Board of Directors on a monthly basis.
Real estate owned consists of properties acquired through foreclosure
and are recorded at the lower of cost (principal balance of the former mortgage
loan plus costs of obtaining title and possession) or fair value less estimated
cost to sell. Costs relating to development and improvement of the property are
capitalized, whereas costs of holding such real estate are expensed as incurred.
Additional write downs are charged to income, and the carrying value of the
property reduced, when the carrying value exceeds fair value less estimated cost
to sell.
The following table sets forth information regarding nonaccrual loans
and real estate owned by the Bank at the dates indicated. The Bank has no loans
categorized as troubled debt restructurings within the meaning of the Statement
of Financial Accounting Standards ("SFAS") 15. The recorded investment in loans
that are considered to be impaired under SFAS 114, as amended by SFAS 118, was
$1.9 million at September 30, 2002, for which the related allowance for credit
losses was $333,000. Interest income that would have been recorded and collected
on loans accounted for on a non-accrual basis under the original terms of such
loans was $205,000 for the year ended September 30, 2002.
At September 30,
--------------------------------------------
2002 2001 2000 1999 1998
------ ------ ------ ------ ------
(Dollars in thousands)
Nonaccrual residential real
estate loans (1-4 family) $ 515 $ 110 $ 520 $ 250 $ 246
Nonaccrual construction, multi-
family residential and
commercial real estate 408 814 624 1,362 199
Nonaccrual installment loans 273 242 762 220 6
Nonaccrual commercial business
loans 1,461 1,182 55 553 101
------ ------ ------ ------ ------
Total non-performing loans $2,657 $2,348 $1,961 $2,385 $ 552
====== ====== ====== ====== ======
Total nonperforming loans as a
percent of total loans receivable .81% .71% .56% .81% .23%
====== ====== ====== ====== ======
Total real estate owned, net $ 658 $ 314 $ 181 $ 107 $ 21
====== ====== ====== ====== ======
Total nonperforming loans and real
estate owned as a percent of
total assets .54% .48% .39% .52% .14%
====== ====== ====== ====== ======
10
The following table sets forth an analysis of the Bank's allowance for
loan losses.
Year Ended September 30,
-------------------------------------------------------
2002 2001 2000 1999 1998
------- ------- ------- ------- -------
(Dollars in thousands)
Balance at beginning of period $ 2,871 $ 2,910 $ 2,477 $ 2,243 $ 1,931
Allowance for loan losses
of Pennwood Bancorp, Inc. -- -- 358 -- --
Allowance for loan losses of
Carnegie Financial Corporation 204 -- -- -- --
Provision for loan losses 400 475 470 520 405
Charge-offs:
Residential real estate (32) (14) (12) -- (3)
Commercial real estate (81) (95) (165) (183) --
Installment (130) (428) (181) (89) (97)
Commercial (277) (108) (67) (54) (10)
Recoveries:
Residential real estate 4 -- -- 10 --
Commercial real estate 10 96 -- -- --
Installment 26 25 15 10 11
Commercial 61 10 15 20 6
------- ------- ------- ------- -------
Net charge-offs (419) (514) (395) (286) (93)
------- ------- ------- ------- -------
Balance at end of period $ 3,056 $ 2,871 $ 2,910 $ 2,477 $ 2,243
======= ======= ======= ======= =======
Ratio of net charge-offs during
the period to average loans
outstanding during the period .13% .15% .13% .12% .05%
======= ======= ======= ======= =======
11
Analysis of the Allowance for Loan Losses
The following table sets forth the allocation of the allowance by
category and the percent of loans in each category to total loans, which
management believes can be allocated only on an approximate basis. The
allocation of the allowance to each category is not necessarily indicative of
future loss and does not restrict the use of the allowance to absorb losses in
any category.
At September 30,
--------------------------------------------------------------------------------------
2002 2001 2000 1999 1998
---------------- ---------------- ----------------- ---------------- ----------------
$ % $ % $ % $ % $ %
-------- ------- ------- ------- -------- ------- -------- ------- ------- --------
(Dollars in thousands)
Residential real estate loans.... $ 917 53.7% $1,176 59.5% $ 986 61.1% $ 720 48.3% $ 719 49.1%
Commercial real estate loans..... 624 8.8 246 7.2 219 6.5 102 8.6 162 11.1
Construction loans............... 146 5.9 60 2.8 50 3.1 202 14.2 131 9.0
Installment loans................ 488 18.8 483 20.5 706 19.7 534 19.6 478 20.9
Commercial business loans........ 881 12.8 906 10.0 949 9.6 919 9.3 753 9.9
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
Total..................... $3,056 100.0% $2,871 100.0% $2,910 100.0% $2,477 100.0% $2,243 100.0%
====== ===== ====== ===== ====== ===== ====== ===== ====== =====
12
Investment Activities
The Bank is required under federal regulation to maintain a sufficient
level of liquid assets (including specified short-term securities and certain
other investments), as determined by management and defined and reviewed for
adequacy by the Federal Deposit Insurance Corporation during its regular
examinations. The Federal Deposit Insurance Corporation, however, does not
prescribe by regulation a minimum amount or percentage of liquid assets. The
level of liquid assets varies depending upon several factors, including: (i) the
yields on investment alternatives, (ii) management's judgment as to the
attractiveness of the yields then available in relation to other opportunities,
(iii) expectation of future yield levels, and (iv) management's projections as
to the short-term demand for funds to be used in loan origination and other
activities. Investment securities, including mortgage-backed securities, are
classified at the time of purchase, based upon management's intentions and
abilities, as securities held to maturity or securities available for sale. Debt
securities acquired with the intent and ability to hold to maturity are
classified as held to maturity and are stated at cost and adjusted for
amortization of premium and accretion of discount, which are computed using the
level yield method and recognized as adjustments of interest income. All other
debt securities are classified as available for sale to serve principally as a
source of liquidity.
Current regulatory and accounting guidelines regarding investment
securities (including mortgage backed securities) require us to categorize
securities as "held to maturity," "available for sale" or "trading." At
September 30, 2002, the Bank had securities classified as "held to maturity" and
"available for sale" in the amount of $81.6 million and $162.4 million,
respectively and had no securities classified as "trading." Securities
classified as "available for sale" are reported for financial reporting purposes
at the fair market value with net changes in the market value from period to
period included as a separate component of stockholders' equity, net of income
taxes. At September 30, 2002, the Registrant's securities available for sale had
an amortized cost of $157.6 million and market value of $162.4 million. The
changes in market value in our available for sale portfolio reflect normal
market conditions and vary, either positively or negatively, based primarily on
changes in general levels of market interest rates relative to the yields of the
portfolio. Additionally, changes in the market value of securities available for
sale do not affect our income nor does it affect the Bank's regulatory capital
requirements or its loan-to-one borrower limit.
At September 30, 2002, the Bank's investment portfolio policy allowed
investments in instruments such as: (i) U.S. Treasury obligations, (ii) U.S.
federal agency or federally sponsored agency obligations, (iii) municipal
obligations, (iv) mortgage-backed securities, (v) banker's acceptances, (vi)
certificates of deposit, (vii) investment grade corporate bonds and commercial
paper, (viii) real estate mortgage investment conduits, (ix) equity securities,
and mutual funds; and (xi) trust preferred securities. The Board of Directors
may authorize additional investments.
As a source of liquidity and to supplement its lending activities, the
Bank has invested in residential mortgage-backed securities. Mortgage-backed
securities can serve as collateral for borrowings and, through repayments, as a
source of liquidity. Mortgage-backed securities represent a participation
interest in a pool of single-family or other type of mortgages. Principal and
interest payments are passed from the mortgage originators, through
intermediaries (generally quasi-governmental agencies) that pool and repackage
the participation interests in the form of securities, to investors, like us.
The quasi- governmental agencies, which include GinnieMae, FreddieMac, and
FannieMae, guarantee the payment of principal and interest to investors.
13
Mortgage-backed securities typically are issued with stated principal
amounts. The securities are backed by pools of mortgages that have loans with
interest rates that are within a set range and have varying maturities. The
underlying pool of mortgages can be composed of either fixed rate or adjustable
rate mortgage loans. Mortgage-backed securities are generally referred to as
mortgage participation certificates or pass-through certificates. The interest
rate risk characteristics of the underlying pool of mortgages (i.e., fixed rate
or adjustable rate) and the prepayment risk, are passed on to the certificate
holder. The life of a mortgage-backed pass-through security is equal to the life
of the underlying mortgages. Expected maturities will differ from contractual
maturities due to scheduled repayments and because borrowers may have the right
to call or prepay obligations with or without prepayment penalties.
Mortgage-backed securities issued by GinnieMae, FreddieMac, and FannieMae make
up a majority of the pass-through certificates market.
The Bank also invests in mortgage-related securities, primarily
collateralized mortgage obligations, issued or sponsored by GinnieMae,
FreddieMac, and FannieMae, as well as private issuers. Investments in private
issuer collateralized mortgage obligations are made because these issues
generally are higher yielding than agency sponsored collateralized mortgage
obligations with similar average life and payment characteristics. All such
investments are rated AAA. Collateralized mortgage obligations are a type of
debt security that aggregates pools of mortgages and mortgage-backed securities
and creates different classes of collateralized mortgage obligations securities
with varying maturities and amortization schedules as well as a residual
interest with each class having different risk characteristics. The cash flows
from the underlying collateral are usually divided into "tranches" or classes
whereby tranches have descending priorities with respect to the distribution of
principal and interest repayment of the underlying mortgages and mortgage backed
securities as opposed to pass through mortgage backed securities where cash
flows are distributed pro rata to all security holders. Unlike mortgage
backed-securities from which cash flow is received and prepayment risk is shared
pro rata by all securities holders, cash flows from the mortgages and mortgage
backed securities underlying collateralized mortgage obligations are paid in
accordance with a predetermined priority to investors holding various tranches
of such securities or obligations. A particular tranche or class may carry
prepayment risk which may be different from that of the underlying collateral
and other tranches. Collateralized mortgage obligations attempt to moderate
reinvestment risk associated with conventional mortgage-backed securities
resulting from unexpected prepayment activity.
14
Investment and Mortgage-Backed Securities Portfolio
Investment Securities
The following tables set forth the composition and amortized cost of
the Bank's investment and mortgage-backed securities at the dates indicated.
At September 30,
---------------------------------------
2002 2001 2000
--------- ------- -------
Available-for-sale (Dollars in thousands)
Investment securities:
U.S. government and agency.............. $22,030 $17,762 $23,589
Municipal obligations................... 36,039 39,670 38,031
Corporate obligations................... 17,321 13,557 4,453
Asset-backed securities................. -- 5,327 5,294
Mutual funds(1)......................... 4,533 4,240 2,063
FHLB stock.............................. 10,120 9,872 10,764
FreddieMac preferred stock.............. 1,519 1,420 920
FannieMae preferred stock............... -- 250 250
Equity securities....................... 1,262 1,341 1,304
Trust preferred securities.............. 4,601 3,104 1,250
------- ------- ------
Total............................. $97,425 $96,543 $87,918
======= ======= =======
Held-to-maturity
Investment securities:
U.S. government and agency.............. $13,801 $ 966 $ 2,958
Municipal obligations................... 17,389 12,662 5,347
Corporate obligations................... 8,008 6,207 1,631
------- ------- ------
Total............................. $39,198 $19,835 $ 9,936
======= ======= =======
- ----------------
(1) Consists of investment in the Asset Management Fund ARM Fund and Legg Mason
Value Trust Fund.
At September 30, 2002, non-U.S. Government and U.S. Government agency
securities that exceeded ten percent of stockholders' equity are as follows.
Such securities were rated AAA by Standard and Poors.
Issuer Book Value Market Value
------ ---------- ------------
(Dollars in thousands)
The Asset Management Fund ARM Fund $4,438 $4,446
====== ======
15
Mortgage-Backed Securities
At September 30,
---------------------------
2002 2001 2000
------- ------- -------
(In thousands)
Mortgage-backed securities
held-to-maturity:
GinnieMae ......................... $ 2,050 $ 3,397 $ 10
FannieMae ......................... 13,158 5,581 4,167
FreddieMac ........................ 12,518 11,148 6,571
GinnieMae Remic ................... 678 1,978 --
FannieMae Remic ................... -- 3,346 --
FreddieMac Remic .................. 6,961 4,232 1,701
Collateralized Mortgage Obligations 7,038 993 --
------- ------- -------
Total ....................... $42,403 $30,675 $12,449
======= ======= =======
Mortgage-backed securities
available-for-sale:
GinnieMae ......................... $10,450 $15,525 $20,438
FannieMae ......................... 18,756 13,841 13,363
FreddieMac ........................ 11,326 5,373 5,813
GinnieMae Remic ................... 1,236 1,844 --
FannieMae Remic ................... 3,102 4,860 7,671
FreddieMac Remic .................. 17,729 9,726 15,912
Collateralized Mortgage Obligations 7,672 10,765 10,441
------- ------- -------
Total ....................... $70,271 $61,934 $73,638
======= ======= =======
As of September 30, 2002, there were no U.S. Government and U.S.
Government agency mortgage- backed securities that exceeded ten percent of
stockholders' equity.
16
The following tables set forth the amount of each category of
investment securities of the Bank at September 30, 2002 which mature during each
of the periods indicated and the weighted average yield for each range at
maturities. The yields on the tax-exempt investments have been adjusted to their
pre-tax equivalents.
After One Year After Five Years
One Year or Less Through Five Years Through Ten Years After Ten Years Total
------------------- ------------------ ------------------ ----------------- -----------------
(Dollars in thousands)
Weighted Weighted Weighted Weighted Weighted
Average Average Average Average Average
Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield
------ ------- ------ ------- ------ ------- ------ ------- ------ -----
Available-for-sale:
U.S. government and agency..... $ -- --% $17,094 4.70% $3,998 4.61% $ 938 6.66% $22,030 4.77%
Municipal obligations.......... -- -- 1,384 5.80 949 7.24 33,706 7.13 36,039 7.08
Corporate obligations.......... 1,491 3.89 14,773 5.91 1,057 6.88 -- -- 17,321 5.79
Mutual funds(1)................ 4,533 3.15 -- -- -- -- -- -- 4,533 3.15
FHLB stock..................... 10,120 3.28 -- -- -- -- -- -- 10,120 3.28
FreddieMac preferred stock..... 1,519 5.30 -- -- -- -- -- -- 1,519 5.30
Equity securities.............. 1,262 4.08 -- -- -- -- -- -- 1,262 4.08
Trust preferred securities..... -- -- -- -- -- -- 4,601 5.21 4,601 5.21
------- ---- ------- ---- ------ ---- ------- ---- ------- ----
Total...................... $18,925 3.51% $33,251 5.28% $6,004 5.43% $39,245 6.89% $97,425 5.60%
======= ==== ======= ==== ====== ==== ======= ==== ======= ====
Held-to-Maturity:
U.S. government and agency..... $ -- --% $ 8,180 4.48% $4,632 5.14% $ 989 6.67% $13,801 4.85%
Municipal obligations.......... -- -- -- -- 1,257 6.74 16,132 7.35 17,389 7.31
Corporate obligations.......... 1,000 6.48 5,255 6.32 1,753 6.37 -- -- 8,008 6.36
------- ---- ------- ---- ------ ---- ------- ---- ------- ----
Total...................... $ 1,000 6.48% $13,435 5.20% $7,642 5.69% $17,121 7.31% $39,198 6.25%
======= ==== ======= ==== ====== ==== ======= ==== ======= ====
- ------------------
(1) Consists of investment in the Asset Management Fund ARM Fund and Legg Mason
Value Trust Fund.
17
Information regarding the contractual maturities and weighted average
yield of the Bank's mortgage-backed securities portfolio at September 30, 2002
is presented below.
Amounts at September 30, 2002 Which Mature In
----------------------------------------------------------------
After After
One Year One to Five Five to 10 Over 10
or Less Years Years Years Total
---------- ----------- ---------- -------- --------
(Dollars in thousands)
Mortgage-backed securities
held-to-maturity:
GinnieMae......................... $ -- $ 5 $ -- $ 2,045 $ 2,050
FannieMae......................... -- 215 1,378 11,565 13,158
FreddieMac........................ -- 562 3,467 8,489 12,518
GinnieMae Remic................... -- -- -- 678 678
FannieMae Remic................... -- -- -- -- --
FreddieMac Remic.................. -- -- 1,547 5,414 6,961
Collateralized Mortgage
obligations.................... -- -- -- 7,038 7,038
------- ---- ------ ------- -------
Total........................ $ -- $782 $6,392 $35,229 $42,403
======= === ====== ======= =======
Weighted average yield.............. --% 6.15% 6.19% 4.96% 5.17%
======= ==== ==== ==== ====
Mortgage-backed securities
available-for-sale:
GinnieMae......................... $ -- $ -- $ -- $10,450 $10,450
FannieMae......................... -- -- -- 18,757 18,757
FreddieMac........................ -- -- -- 11,326 11,326
GinnieMae Remic................... -- -- -- 1,236 1,236
FannieMae Remic................... -- -- -- 3,102 3,102
FreddieMac Remic.................. -- -- -- 17,729 17,729
Collateralized mortgage
obligations.................. -- -- 1,241 6,430 7,671
------- ---- ------ ------ -------
Total........................ $ -- $ -- $1,241 $69,030 $70,271
======= ==== ====== ====== =======
Weighted average yield.............. --% --% 6.28% 5.39% 5.41%
======= ==== ==== ==== ====
Sources of Funds
General. Savings deposits obtained through the home office and branch
offices have traditionally been the principal source of the Bank's funds for use
in lending and for other general business purposes. The Bank also derives funds
from scheduled amortizations and prepayments of outstanding loans and
mortgage-backed securities and sales of investments available-for-sale. The Bank
also may borrow funds from the FHLB of Pittsburgh and other sources. Borrowings
generally may be used on a short-term basis to compensate for seasonal or other
reductions in savings deposits or other inflows at less than projected levels,
as well as on a longer-term basis to support expanded lending activities.
18
Savings Deposits. The Bank's current savings deposit products include
passbook savings accounts, demand deposit accounts, NOW accounts, money market
deposit accounts and certificates of deposit ranging in terms from three months
to ten years. Included among these savings deposit products are Individual
Retirement Account ("IRA") certificates and Keogh Plan retirement certificates
(collectively "retirement accounts"). The Bank offers preferred rates for
certificates of deposit in denominations of $100,000 or more at terms ranging
from one month to five years and, at September 30, 2002, such certificates
accounted for 1.7% total savings deposits.
The Bank's savings deposits are obtained primarily from residents of
Allegheny and Butler Counties. The principal methods used by the Bank to attract
savings deposit accounts include the offering of a wide variety of services and
accounts, competitive interest rates and convenient office locations and service
hours. The Bank does not currently pay, nor has it in the past paid, fees to
brokers to obtain its savings deposits.
The following table shows the distribution of, and certain other
information relating to the Bank's savings deposits by type as of the dates
indicated.
At September 30,
--------------------------------------------------------
2002 2001 2000
------------------ ------------------ -----------------
Average Average Average
Balance Rate Balance Rate Balance Rate
--------- ------- -------- -------- -------- --------
(Dollars in thousands)
Passbook and club accounts....... $ 68,825 2.10% $ 52,571 2.54% $ 52,289 2.55%
Checking accounts................ 65,561 .45 54,565 .91 51,700 .94
Money market accounts............ 17,189 1.78 16,022 2.83 14,755 3.00
Certificate accounts............. 199,831 4.08 190,343 5.53 171,887 5.94
-------- ---- -------- ---- -------- ----
Total................... $351,406 2.90% $313,501 4.09% $290,631 4.30 %
======== ==== ======== ==== ======== ====
In recent years, the Bank has been required by market conditions to
rely increasingly on newly-authorized types of short-term certificate accounts
and other savings deposit alternatives that are more responsive to market
interest rates than passbook accounts and regulated fixed-rate, fixed-term
certificates that were historically the Bank's primary source of savings
deposits. As a result of deregulation and consumer preference for shorter term,
market-rate sensitive accounts, the Bank has, like most financial institutions,
experienced a significant shift in savings deposits towards relatively
short-term, market-rate accounts. In recent years, the Bank has been successful
in attracting retirement accounts which have provided the Bank with a relatively
stable source of funds. As of September 30, 2002, the Bank's total retirement
funds were $42.3 million or 12.0% of its total savings deposits.
The Bank attempts to control the flow of savings deposits by pricing
its accounts to remain generally competitive with other financial institutions
in its market area, but does not necessarily seek to match the highest rates
paid by competing institutions. In this regard, the senior officers of the Bank
meet weekly to determine the interest rates which the Bank will offer to the
general public.
Rates established by the Bank are also affected by the amount of funds
needed by the Bank on both a short-term and long-term basis, alternative sources
of funds and the projected level of interest rates in
19
the future. The ability of the Bank to attract and maintain savings deposits and
the Bank's cost of funds have been, and will continue to be, significantly
affected by economic and competitive conditions.
Certificates of Deposits. Maturities of certificates of deposit of
$100,000 or more that were outstanding as of September 30, 2002 are summarized
as follows:
(In thousands)
3 months or less.......................................... $2,200
Over 3 months through 6 months............................ 2,784
Over 6 months through 12 months........................... 214
Over 12 months............................................ 892
------
Total............................................ $6,090
======
Borrowings. The Bank is eligible to obtain advances from the FHLB of
Pittsburgh upon the security of the common stock it owns in that bank,
securities owned by the Bank and held in safekeeping by the FHLB and certain of
its residential mortgages, provided certain standards related to credit
worthiness have been met. Such advances are made pursuant to several different
credit programs, each of which has its own interest rate and range of
maturities. FHLB advances are generally available to meet seasonal and other
withdrawals of deposit accounts and to expand lending, as well as to aid the
effort of members to establish better asset and liability management through the
extension of maturities of liabilities. At September 30, 2002, the Bank had
$189.8 million of advances outstanding.
The Bank also, from time to time, enters into sales of securities under
agreements to repurchase ("reverse repurchase agreements"). Such reverse
repurchase agreements are treated as financings, and the obligations to
repurchase securities sold are reflected as liabilities in the statement of
financial condition. At September 30, 2002, the Bank had $5.8 million reverse
repurchase agreements outstanding.
20
The following table sets forth certain information regarding the
short-term borrowings (due within one year or less) of the Bank at the dates or
for the periods indicated.
At or for the Year Ended September 30,
----------------------------------------------
2002 2001 2000
------- ------- --------
(Dollars in thousands)
FHLB advances:
Average balance outstanding........................ $41,169 $22,941 $ 154
Maximum amount outstanding at any
month-end during the period...................... 56,047 40,930 1,000
Weighted average interest rate
during the period............................. 6.48% 6.02% 5.35%
Balance outstanding at end of period............... 51,031 40,000 --
Weighted average interest rate
at end of period.............................. 6.47% 6.55% 5.35%
Reverse repurchase agreements:
Average balance outstanding........................ 5,782 5,400 3,805
Maximum amount outstanding at any
month-end during the period...................... 7,014 6,708 4,980
Weighted average interest rate
during the period............................. 1.43% 4.48% 5.12%
Balance outstanding at end of period............... 5,849 4,599 4,980
Weighted average interest rate
at end of period.............................. 1.09% 2.83% 5.85%
FHLB Repoplus Advances:
Average balance outstanding........................ 3,969 17,631 60,863
Maximum amount outstanding at any
month-end during the period...................... 18,640 42,120 82,350
Weighted average interest rate
during the period............................. 2.28% 6.10% 6.17%
Balance outstanding at end of period............... -- 5,000 48,770
Weighted average interest rate
at end of period.............................. --% 3.89% 6.66%
Total average short-term borrowings.................. 50,920 45,972 64,822
Average interest rate of total
short-term borrowings.............................. 5.91% 5.94% 6.59%
Employees
At September 30, 2002, the Bank had 119 full-time and 26 part-time
employees. None of these employees are represented by a collective bargaining
agent, and the Bank believes that it enjoys good relations with its personnel.
21
Average Balance Sheet and Analysis of Net Interest Earnings
The following table presents for the periods indicated the total dollar
amount of interest from average interest-earning assets and the resultant
yields, as well as the interest expense on average interest-bearing liabilities,
expressed both in dollars and rates, and the net interest margin. The average
balance of loans receivable includes non-accrual loans. Interest income on tax
free investments has been adjusted for federal income tax purposes using a rate
of 34%.
Year Ended September 30,
--------------------------------------------------------------------------------------
2002 2001 2000
-------------------------- ---------------------------- ----------------------------
Average Average Average
Average Yield/ Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost Balance Interest Cost
------- -------- ------- ------- -------- -------- ------- -------- ---------
(Dollars in Thousands)
Interest-earning assets:
Loans receivable....................... $322,283 $24,177 7.50% $336,813 $26,548 7.88% $307,702 $24,241 7.88%
Mortgage-backed securities............. 103,712 5,709 5.50 84,422 5,407 6.40 90,186 6,078 6.74
Investment securities and FHLB stock... 132,111 7,783 5.89 108,555 7,495 6.90 96,424 6,999 7.26
Interest-earning deposits.............. 2,831 48 1.70 1,707 76 4.45 664 44 6.63
-------- ------- ------- -------- ------- ------ -------- ------- ------
Total interest-earning assets....... 560,937 37,717 6.73 531,497 39,526 7.44 494,976 37,362 7.55
-------- ------- ------- -------- ------- ------ -------- ------- ------
Non-interest-earning assets............. 24,270 21,796 21,513
-------- -------- --------
Total assets.......................... $585,207 $553,293 $516,489
======== ======== ========
Interest-bearing liabilities:
Deposits............................... $332,270 $10,592 3.19 $304,194 $12,941 4.25 $276,439 $10,949 3.96
Borrowed funds......................... 211,319 12,491 5.91 212,626 13,718 6.45 210,606 12,983 6.16
-------- ------- ------- -------- ------- ------ -------- ------- ------
Total interest-bearing liabilities... 543,589 23,083 4.25 516,820 26,659 5.16 487,045 23,932 4.91
-------- ------- ------- -------- ------- ------ -------- ------- ------
Non-interest bearing liabilities........ 3,474 3,143 3,129
-------- -------- --------
Total liabilities...................... 547,063 519,963 490,174
Stockholders' equity.................... 38,144 33,330 26,315
-------- -------- --------
Total liabilities and
stockholders' equity................. $585,207 $553,293 $516,489
======== ======== ========
Net interest income..................... $14,634 $12,867 $13,430
======= ======= =======
Interest rate spread(1)................. 2.48% 2.28% 2.64%
====== ====== ======
Net interest margin(2).................. 2.61% 2.42% 2.71%
====== ====== ======
Ratio of average interest-earning assets
to average interest-bearing liabilities 103.19% 102.84% 101.63%
====== ====== ======
(1) Interest rate spread is the average yield on total interest-earning assets
less the average cost of total interest-bearing liabilities.
(2) Net interest margin is net interest income divided by average
interest-earning assets.
22
Rate/Volume Analysis
The following table presents certain information regarding changes in
interest income and interest expense of the Bank for the periods indicated. For
each category of interest-earning assets and interest-bearing liabilities,
information is provided with respect to changes attributable to (1) changes in
volume (change in volume multiplied by old rate), (2) changes in rate (change in
rate multiplied by old volume), and (3) changes in rate/volume (change in rate
multiplied by change in volume). Interest income on tax free investments has
been adjusted for federal income tax purposes using a rate of 34%.
Year Ended September 30,
--------------------------------------------------------------------------------------
2002 vs. 2001 2001 vs. 2000
----------------------------------------- ----------------------------------------
Increase (Decrease) Increase (Decrease)
Due to Due to
----------------------------------------- ----------------------------------------
Rate/ Rate/
Volume Rate Volume Net Volume Rate Volume Net
------- ------- ------- ------- ------- ------- ------- -------
(Dollars in thousands)
Interest income on
interest-earning assets:
Mortgage loans .......................... $ (995) $ (421) $ 24 $(1,392) $ 1,355 $ 193 $ 15 $ 1,563
Mortgage-backed securities .............. 1,946 (1,470) (174) 302 (400) (290) 19 (671)
Installment loans ....................... (405) (350) 25 (730) 586 (75) (7) 504
Commercial business
and lease loans ....................... 226 (432) (42) (248) 401 (145) (16) 240
Investment securities
and other investments ................. 983 (457) (267) 259 1,079 (487) (64) 528
------- ------- ------- ------- ------- ------- ------- -------
Total interest-earning assets ....... 1,755 (3,130) (434) (1,809) 3,021 (804) (53) 2,164
------- ------- ------- ------- ------- ------- ------- -------
Interest expense on
interest-bearing liabilities:
Deposits ................................ 1,042 (3,092) (299) (2,349) 1,054 856 82 1,992
Borrowed funds .......................... (131) (1,114) 11 (1,234) 120 608 7 735
Trust preferred securities .............. 130 (118) (5) 7 -- -- -- --
------- ------- ------- ------- ------- ------- ------- -------
Total interest-bearing liabilities ...... 1,041 (4,324) (293) (3,576) 1,174 1,464 89 2,727
------- ------- ------- ------- ------- ------- ------- -------
Net change in net interest income ... $ 714 $ 1,194 $ (141) $ 1,767 $ 1,847 $(2,268) $ (142) $ (563)
======= ======= ======= ======= ======= ======= ======= =======
23
Certain Ratios
Year Ended September 30,
-------------------------------
2002 2001 2000
------------ -------- --------
Average equity to assets ratio.............. 6.52% 6.02% 5.10%
Dividend payout ratio ...................... 23.29% 22.97% 18.45%
Regulation of the Company
Set forth below is a brief description of certain laws which related to
the regulation of the Company and the Bank. The description does not purport to
be complete and is qualified in its entirety by reference to applicable laws and
regulations.
General. The Company, as a bank holding company under the Bank Holding
Company Act of 1956, as amended, is subject to regulation, supervision and
examination by the Board of Governors of the Federal Reserve System and by the
Pennsylvania Department of Banking. The Company is also required to file
annually a report of its operations with the Federal Reserve and the
Pennsylvania Department of Banking. This regulation and oversight is generally
intended to ensure that the Company limits its activities to those allowed by
law and that it operates in a safe and sound manner without endangering the
financial health of the Bank.
Under the Bank Holding Company Act, the Company must obtain the prior
approval of the Federal Reserve before it may acquire control of another bank or
bank holding company, merge or consolidate with another bank holding company,
acquire all or substantially all of the assets of another bank or bank holding
company, or acquire direct or indirect ownership or control of any voting shares
of any bank or bank holding company if, after such acquisition, the Company
would directly or indirectly own or control more than 5% of such shares.
Federal statutes impose restrictions on the ability of a bank holding
company and its nonbank subsidiaries to obtain extensions of credit from its
subsidiary bank, on the subsidiary bank's investments in the stock or securities
of the holding company, and on the subsidiary bank's taking of the holding
company's stock or securities as collateral for loans to any borrower. A bank
holding company and its subsidiaries are also prevented from engaging in certain
tie-in arrangements in connection with any extension of credit, lease or sale of
property, or furnishing of services by the subsidiary bank.
A bank holding company is required to serve as a source of financial
and managerial strength to its subsidiary banks and may not conduct its
operations in an unsafe or unsound manner. In addition, it is the Federal
Reserve policy that a bank holding company should stand ready to use available
resources to provide adequate capital to its subsidiary banks during periods of
financial stress or adversity and should maintain the financial flexibility and
capital-raising capacity to obtain additional resources for assisting its
subsidiary banks. A bank holding company's failure to meet its obligations to
serve as a source of strength to its subsidiary banks will generally be
considered by the Federal Reserve to be an unsafe and unsound banking practice
or a violation of the Federal Reserve regulations, or both.
Non-Banking Activities. The business activities of the Company, as a
bank holding company, are restricted by the Bank Holding Company Act. Under the
Bank Holding Company Act and the Federal Reserve's bank holding company
regulations, the Company may only engage in, or acquire or control
24
voting securities or assets of a company engaged in, (1) banking or managing or
controlling banks and other subsidiaries authorized under the Bank Holding
Company Act and (2) any non-banking activity the Federal Reserve has determined
to be so closely related to banking or managing or controlling banks to be a
proper incident thereto. These include any incidental activities necessary to
carry on those activities, as well as a lengthy list of activities that the
Federal Reserve has determined to be so closely related to the business of
banking as to be a proper incident thereto.
Financial Modernization. The Gramm-Leach-Bliley Act, which became
effective in March 2000, permits greater affiliation among banks, securities
firms, insurance companies, and other companies under a new type of financial
services company known as a "financial holding company." A financial holding
company essentially is a bank holding company with significantly expanded
powers. Financial holding companies are authorized by statute to engage in a
number of financial activities previously impermissible for bank holding
companies, including securities underwriting, dealing and market making;
sponsoring mutual funds and investment companies; insurance underwriting and
agency; and merchant banking activities. The act also permits the Federal
Reserve and the Treasury Department to authorize additional activities for
financial holding companies if they are "financial in nature" or "incidental" to
financial activities. A bank holding company may become a financial holding
company if each of its subsidiary banks is well capitalized, well managed, and
has at least a "satisfactory" CRA rating. A financial holding company must
provide notice to the Federal Reserve within 30 days after commencing activities
previously determined by statute or by the Federal Reserve and Department of the
Treasury to be permissible. The Company has not submitted notice to the Federal
Reserve of our intent to be deemed a financial holding company.
Regulatory Capital Requirements. The Federal Reserve has adopted
capital adequacy guidelines under which it assesses the adequacy of capital in
examining and supervising a bank holding company and in analyzing applications
to it under the Bank Holding Company Act. The Federal Reserve's capital adequacy
guidelines are similar to those imposed on the Bank by the Federal Deposit
Insurance Corporation. See "Regulation of the Bank - Regulatory Capital
Requirements."
Restrictions on Dividends. The Pennsylvania Banking Code states, in
part, that dividends may be declared and paid only out of accumulated net
earnings and may not be declared or paid unless surplus (retained earnings) is
at least equal to contributed capital. The Bank has not declared or paid any
dividends that have caused its retained earnings to be reduced below the amount
required. Finally, dividends may not be declared or paid if the Bank is in
default in payment of any assessment due the Federal Deposit Insurance
Corporation.
The Federal Reserve has issued a policy statement on the payment of
cash dividends by bank holding companies, which expresses the Federal Reserve's
view that a bank holding company should pay cash dividends only to the extent
that the holding company's net income for the past year is sufficient to cover
both the cash dividends and a rate of earnings retention that is consistent with
the holding company's capital needs, asset quality and overall financial
condition. The Federal Reserve also indicated that it would be inappropriate for
a company experiencing serious financial problems to borrow funds to pay
dividends. Furthermore, under the federal prompt corrective action regulations,
the Federal Reserve may prohibit a bank holding company from paying any
dividends if the holding company's bank subsidiary is classified as
"undercapitalized."
25
Regulation of the Bank
General. As a Pennsylvania chartered savings bank with deposits insured
by the Savings Association Insurance Fund of the Federal Deposit Insurance
Corporation, the Bank is subject to extensive regulation and examination by the
Pennsylvania Department of Banking and by the Federal Deposit Insurance
Corporation, which insures its deposits to the maximum extent permitted by law.
The federal and state laws and regulations applicable to banks regulate, among
other things, the scope of their business, their investments, the reserves
required to be kept against deposits, the timing of the availability of
deposited funds and the nature and amount of and collateral for certain loans.
The laws and regulations governing the Bank generally have been promulgated to
protect depositors and not for the purpose of protecting stockholders. This
regulatory structure also gives the federal and state banking agencies extensive
discretion in connection with their supervisory and enforcement activities and
examination policies, including policies with respect to the classification of
assets and the establishment of adequate loan loss reserves for regulatory
purposes. Any change in such regulation, whether by the Pennsylvania Department
of Banking, the Federal Deposit Insurance Corporation or the United States
Congress, could have a material impact on us and our operations.
Federal law provides the federal banking regulators, including the
Federal Deposit Insurance Corporation and the Federal Reserve, with substantial
enforcement powers. This enforcement authority includes, among other things, the
ability to assess civil money penalties, to issue cease-and-desist or removal
orders, and to initiate injunctive actions against banking organizations and
institution-affiliated parties, as defined. In general, these enforcement
actions may be initiated for violations of laws and regulations and unsafe or
unsound practices. Other actions or inactions may provide the basis for
enforcement action, including misleading or untimely reports filed with
regulatory authorities.
Pennsylvania Savings Bank Law. The Pennsylvania Banking Code contains
detailed provisions governing the organization, location of offices, rights and
responsibilities of trustees, officers, and employees, as well as corporate
powers, savings and investment operations and other aspects of the Bank and its
affairs. The code delegates extensive rule-making power and administrative
discretion to the Pennsylvania Department of Banking so that the supervision and
regulation of state chartered savings banks may be flexible and readily
responsive to changes in economic conditions and in savings and lending
practices.
The code also provides state-chartered savings banks with all of the
powers enjoyed by federal savings and loan associations, subject to regulation
by the Pennsylvania Department of Banking. The Federal Deposit Insurance
Corporation Act, however, prohibits a state-chartered bank from making new
investments, loans, or becoming involved in activities as principal and equity
investments which are not permitted for national banks unless (1) the Federal
Deposit Insurance Corporation determines the activity or investment does not
pose a significant risk of loss to the Savings Association Insurance Fund and
(2) the bank meets all applicable capital requirements. Accordingly, the
additional operating authority provided to us by the code is significantly
restricted by the Federal Deposit Insurance Act.
Federal Deposit Insurance. The Federal Deposit Insurance Corporation is
an independent federal agency that insures the deposits, up to prescribed
statutory limits, of federally insured banks and savings institutions and
safeguards the safety and soundness of the banking and savings industries. The
Federal Deposit Insurance Corporation administers two separate insurance funds,
the Bank Insurance Fund, which generally insures commercial bank and state
savings bank deposits, and the Savings Association Insurance Fund, which
generally insures savings association deposits. The Bank, which was previously a
state
26
savings association, remains a member of the Savings Association Insurance Fund
and its deposit accounts are insured by the Federal Deposit Insurance
Corporation, up to prescribed limits.
The Federal Deposit Insurance Corporation is authorized to establish
separate annual deposit insurance assessment rates for members of the Bank
Insurance Fund and the Savings Association Insurance Fund, and to increase
assessment rates if it determines such increases are appropriate to maintain the
reserves of either insurance fund. In addition, the Federal Deposit Insurance
Corporation is authorized to levy emergency special assessments on Bank
Insurance Fund and Savings Association Insurance Fund members. The Federal
Deposit Insurance Corporation's deposit insurance premiums are assessed through
a risk-based 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, with the assessment rate for most
institutions set at 0%.
In addition, all institutions with deposits insured by the Federal
Deposit Insurance Corporation are required to pay assessments to fund interest
payments on bonds issued by the Financing Corporation, an agency of the Federal
government established to recapitalize the predecessor to the Savings
Association Insurance Fund. The assessment rate for 2002 is approximately .0175%
of insured deposits. These assessments will continue until the Financing
Corporation bonds mature in 2017.
Regulatory Capital Requirements. The Federal Deposit Insurance
Corporation has promulgated capital adequacy requirements for state-chartered
banks that, like us, are not members of the Federal Reserve System. At September
30, 2002, the Bank exceeded all regulatory capital requirements and was
classified as "well capitalized."
The Federal Deposit Insurance Corporation's capital regulations
establish a minimum 3% Tier 1 leverage capital requirement for the most highly
rated state-chartered, non-member banks, with an additional cushion of at least
100 to 200 basis points for all other state-chartered, non-member banks, which
effectively increases the minimum Tier 1 leverage ratio for such other banks to
4% to 5% or more. Under the Federal Deposit Insurance Corporation's regulation,
the highest-rated banks are those that the Federal Deposit Insurance Corporation
determines are not anticipating or experiencing significant growth and have well
diversified risk, including no undue interest rate risk exposure, excellent
asset quality, high liquidity, good earnings and, in general, which are
considered a strong banking organization, rated composite 1 under the Uniform
Financial Institutions Rating System. Tier 1 or core capital is defined as the
sum of common stockholders' equity (including retained earnings), noncumulative
perpetual preferred stock and related surplus, and minority interests in
consolidated subsidiaries, minus all intangible assets other than certain
mortgage and non-mortgage servicing assets and purchased credit card
relationships.
The Federal Deposit Insurance Corporation's regulations also require
that state-chartered, non- member banks meet a risk-based capital standard. The
risk-based capital standard requires the maintenance of total capital (which is
defined as Tier 1 capital and supplementary (Tier 2) capital) to risk weighted
assets of 8%. In determining the amount of risk-weighted assets, all assets,
plus certain off balance sheet assets, are multiplied by a risk-weight of 0% to
100%, based on the risks the Federal Deposit Insurance Corporation believes are
inherent in the type of asset or item. The components of Tier 1 capital for the
risk-based standards are the same as those for the leverage capital requirement.
The components of supplementary (Tier 2) capital include cumulative perpetual
preferred stock, mandatory subordinated debt, perpetual subordinated debt,
intermediate-term preferred stock, up to 45% of unrealized gains on equity
securities and a bank's allowance for loan and lease losses. Allowance for loan
and lease losses includable in supplementary capital is limited to a maximum of
1.25% of risk-weighted assets. Overall,
27
the amount of supplementary capital that may be included in total capital is
limited to 100% of Tier 1 capital.
A bank that has less than the minimum leverage capital requirement is
subject to various capital plan and activities restriction requirements. The
Federal Deposit Insurance Corporation's regulations also provide that any
insured depository institution with a ratio of Tier 1 capital to total assets
that is less than 2.0% is deemed to be operating in an unsafe or unsound
condition pursuant to Section 8(a) of the Federal Deposit Insurance Act and
could be subject to termination of deposit insurance.
The Bank is also subject to minimum capital requirements imposed by the
Pennsylvania Department of Banking on Pennsylvania-chartered depository
institutions. Under the Pennsylvania Department of Banking's capital
regulations, a Pennsylvania bank or savings bank must maintain a minimum
leverage ratio of Tier 1 capital (as defined under the Federal Deposit Insurance
Corporation's capital regulations) to total assets of 4%. In addition, the
Pennsylvania Department of Banking has the supervisory discretion to require a
higher leverage ratio for any institutions based on the institution's
substandard performance in any of a number of areas. The Bank was in compliance
with both the Federal Deposit Insurance Corporation and the Pennsylvania
Department of Banking capital requirements as of September 30, 2002.
Affiliate Transaction Restrictions. Federal laws strictly limit the
ability of banks to engage in transactions with their affiliates, including
their bank holding companies. Such transactions between a subsidiary bank and
its parent company or the nonbank subsidiaries of the bank holding company are
limited to 10% of a bank subsidiary's capital and surplus and, with respect to
such parent company and all such nonbank subsidiaries, to an aggregate of 20% of
the bank subsidiary's capital and surplus. Further, loans and extensions of
credit generally are required to be secured by eligible collateral in specified
amounts. Federal law also requires that all transactions between a bank and its
affiliates be on terms as favorable to the bank as transactions with
non-affiliates.
Federal Home Loan Bank System. The Bank is a member of the Federal Home
Loan Bank of Pittsburgh, which is one of 12 regional Federal Home Loan Banks.
Each Federal Home Loan Bank serves as a reserve or central bank for its members
within its assigned region. It is funded primarily from funds deposited by
member institutions and proceeds from the sale of consolidated obligations of
the Federal Home Loan Bank system. It makes loans to members (i.e., advances) in
accordance with policies and procedures established by the board of trustees of
the Federal Home Loan Bank.
As a member, it is required to purchase and maintain stock in the
Federal Home Loan Bank of Pittsburgh in an amount equal to the greater of 1% of
its aggregate unpaid residential mortgage loans, home purchase contracts or
similar obligations at the beginning of each year or 5% of its outstanding
advances from the Federal Home Loan Bank. At September 30, 2002, the Bank was in
compliance with this requirement.
Federal Reserve System. The Federal Reserve requires all depository
institutions to maintain non-interest bearing reserves at specified levels
against their transaction accounts (primarily checking and NOW accounts) and
non-personal time deposits. The balances maintained to meet the reserve
requirements imposed by the Federal Reserve may be used to satisfy the liquidity
requirements that are imposed by the Department. At September 30, 2002, the Bank
met its reserve requirements.
28
Loans to One Borrower. Under Pennsylvania and federal law, savings
banks have, subject to certain exemptions, lending limits to one borrower in an
amount equal to 15% of the institution's capital accounts. An institution's
capital account includes the aggregate of all capital, surplus, undivided
profits, capital securities and general reserves for loan losses. As of
September 30, 2002, the Bank's loans-to-one borrower limitation was $6.9 million
and was in compliance with such limitation.
Item 2. Properties
At September 30, 2002, the Bank conducted its business from its main
office in Pittsburgh, Pennsylvania and ten full-service branch offices located
in Allegheny and Butler counties.
The following table sets forth certain information with respect to the
offices of the Bank as of September 30, 2002.
Location
- ---------------------------------------------------
Lease Expiration
Date including
County Address Lease or Own Options
- ------------ ---------------------------- --------------------
Allegheny 3300 Brighton Road
Pittsburgh, PA 15212 Own
Allegheny 1009 Perry Highway
Pittsburgh, PA 15237 Own
Butler 251 South Main Street
Zelienople, PA 16063 Own
Allegheny 312 Beverly Road
Pittsburgh, PA 15216 Lease 7/31/08
Allegheny 6000 Babcock Blvd.
Pittsburgh, PA 15237 Lease 11/30/02
Allegheny 1701 Duncan Avenue
Allison Park, PA 15101 Lease 01/31/05
Allegheny 4710 Liberty Avenue
Pittsburgh, PA 15224 Own
Allegheny 728 Washington Road
Pittsburgh, PA 15228 Own
Allegheny 2034 Penn Avenue
Pittsburgh, PA 15222 Own
Allegheny 683 Lincoln Avenue
Bellevue, PA 15202 Own
Allegheny 17 West Mall Plaza
Carnegie, PA 15106 Own
Allegheny Loan Center
1014 Perry Highway
Pittsburgh, PA 15237 Lease 9/30/07
Allegheny Data Processing and
Checking Department
1015 Perry Highway
Pittsburgh, PA 15237 Own
29
Item 3. Legal Proceedings
- ------- -----------------
The Company is not involved in any legal proceedings other than legal
proceedings occurring in the ordinary course of business, of which none are
expected to have a material adverse effect on the Company. In the opinion of
management, the aggregate amount involved in such proceedings is not material to
the financial condition or results of operations of the Bank.
Items 4. Submission of Matters to a Vote of Securities Holders
- -------- -----------------------------------------------------
Not applicable.
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder
- ------- -----------------------------------------------------------------------
Matters
-------
The information contained under the section captioned "Stock
Information" in the Company's Annual Report to Stockholders for the fiscal year
ended September 30, 2002 (the "Annual Report") is incorporated herein by
reference.
Item 6. Selected Financial Data
- ------- -----------------------
The information contained in the table captioned "Financial Highlights"
in the Annual Report is incorporated herein by reference.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
- ------- ------------------------------------------------------------------------
of Operations
-------------
The information contained in the section captioned "Management's
Discussion and Analysis of Financial Condition and Results of Operations" in the
Annual Report is incorporated herein by reference.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
- -------- ----------------------------------------------------------
The information contained in the section captioned "Asset and Liability
Management" in the Annual Report is incorporated herein by reference.
Item 8. Financial Statements and Supplementary Data
- ------- -------------------------------------------
The Registrant's financial statements listed in Item 14 herein are
incorporated herein by reference.
Item 9. Changes in and Disagreements with Accountants on Accounting and
- ------- -----------------------------------------------------------------------
Financial Disclosure
--------------------
None.
30
Part III
Item 10. Directors and Executive Officers of the Registrant
- -------- --------------------------------------------------
The information contained under the sections captioned "Section 16(a)
Beneficial Ownership Reporting Compliance" and "I - Information with Respect to
Nominees for Director, Directors Continuing in Office, and Executive Officers -
Election of Directors" and "- Biographical Information" in the Proxy Statement
for the 2003 Annual Meeting are incorporated herein by reference.
Item 11. Executive Compensation
- -------- ----------------------
The information contained under the section captioned "Proposal I --
Election of Directors - Executive Compensation" in the Proxy Statement is
incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
- -------- --------------------------------------------------------------
(a) Security Ownership of Certain Beneficial Owners
Information required by this item is incorporated herein by
reference to the Section captioned "Principal Holders" of the
Proxy Statement.
(b) Security Ownership of Management
Information required by this item is incorporated herein by
reference to the section captioned "Proposal I -- Election of
Directors" of the Proxy Statement.
(c) Management of the Company knows of no arrangements, including
any pledge by any person of securities of the Company, the
operation of which may at a subsequent date result in a change
in control of the registrant.
(d) Securities Authorized for Issuance Under Equity Compensation
Plans
Set forth below is information as of September 30, 2002 with respect to
compensation plans under which equity securities of the Registrant are
authorized for issuance.
31
EQUITY COMPENSATION PLAN INFORMATION
(a) (b) (c)
Number of securities
Number of securities Weighted-average remaining available for
to be issued upon exercise price of future issuance under
exercise of outstanding equity compensation plans
outstanding options, options, warrants (excluding securities
warrants and rights and rights reflected in column (a))
-------------------- ----------- ------------------------
Equity compensation plans approved by shareholders:
Employees Stock
Compensation Programs
and Directors Stock Option
Plan........................... 238,599 $12.74 94,867
Equity compensation plans
not approved by shareholders:
Directors Stock
Compensation
Program/Plans................... 41,414 12.71 11,935
-------- ------ -------
TOTAL......................... 280,013 $12.74 106,802
======= ====== =======
Item 13. Certain Relationships and Related Transactions
- -------- ----------------------------------------------
The information required by this item is incorporated herein by
reference to the section captioned "Proposal I -- Election of Directors" and
"Principal Holders" of the Proxy Statement.
Item 14. Controls and Procedures
- -------- -----------------------
(a) Evaluation of disclosure controls and procedures. Based on their
--------------------------------------------------
evaluation as of a date within 90 days of the filing date of this Annual Report
on Form 10-K, the Registrant's principal executive officer and principal
financial officer have concluded that the Registrant's disclosure controls and
procedures (as defined in Rules 13a-14(c) and 15d-14(c) under the Securities
Exchange Act of 1934 (the "Exchange Act")) are effective to ensure that
information required to be disclosed by the Company in reports that it files or
submits under the Exchange Act is recorded, processed, summarized and reported
within the time periods specified in Securities and Exchange Commission rules
and forms.
(b) Changes in internal controls. There were no significant changes in
----------------------------
the Registrant's internal controls or in other factors that could significantly
affect these controls subsequent to the date of their evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Part IV
Item 15. Exhibits, List and Reports on Form 8-K
- -------- --------------------------------------
(a) Listed below are all financial statements and exhibits filed as
part of this report, and are incorporated by reference.
32
1. The consolidated statements of financial condition of
Fidelity Bancorp, Inc. and subsidiaries as of
September 30, 2002 and 2001, and the related
consolidated statements of income, stockholders'
equity and cash flows for each of the years in the
three-year period ended September 30, 2002, together
with the related notes and the independent auditors'
report of KPMG LLP, independent accountants.
2. Schedules omitted as they are not applicable.
3. Exhibits
2.0 Plan of Merger Conversion*
2.1 Amended and Restated Agreement and Plan of Merger Conversion**
3.1 Articles of Incorporation (1)
3.2 Amended Bylaws (2)
4 Common Stock Certificate (1)
10.1 Employee Stock Ownership Plan, as amended (1)
10.2 1988 Employee Stock Compensation Program (1)
10.3 1993 Employee Stock Compensation Program (3)
10.4 1997 Employee Stock Compensation Program (4)
10.5 1993 Directors' Stock Option Plan (3)
10.6 Employment Agreement between the Company, the Bank and William L.
Windisch (1)
10.7 1998 Group Term Replacement Plan (5)
10.8 1998 Salary Continuation Plan Agreement by and between W.L. Windisch,
the Company and the Bank (5)
10.9 1998 Salary Continuation Plan Agreement by and between R.G. Spencer,
the Company and the Bank (5)
10.10 1998 Salary Continuation Plan Agreement by and between M.A. Mooney,
the Company and the Bank (5)
10.11 1998 Stock Compensation Plan (6)
10.12 2000 Stock Compensation Plan (7)
13 Portions of the 2002 Annual Report to Stockholders
20.1 Dividend Reinvestment Plan (8)
21 Subsidiaries (see Item 1. Description of Business)
23 Consent of Accountants
99 Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
- -----------------
(1) Incorporated by reference from the exhibits attached to the Prospectus and
Proxy Statement of the Company included in its Registration Statement on
Form S-4 (registration No. 33-55384) filed with the SEC on December 3, 1992
(the "Registration Statement").
(2) Incorporated by reference to an identically numbered exhibit on Form 10-Q
filed with the SEC on August 14, 2002.
(3) Incorporated by reference from an exhibit in Form S-8 filed with the SEC on
May 2, 1997.
(4) Incorporated by reference from an exhibit in Form S-8 filed with the SEC on
March 12, 1998.
33
(5) Incorporated by reference to an identically numbered exhibit on Form 10-Q
filed with the SEC on December 29, 1998.
(6) Incorporated by reference from an exhibit in Form S-8 filed with the SEC on
January 25, 1999.
(7) Incorporated by reference to Exhibit 4.1 to the Form S-8 filed with the SEC
on January 19, 2001.
(8) Incorporated by reference to an identically numbered exhibit on Form 10-Q
filed with the SEC on February 14, 2000.
* Incorporated by reference to an identically numbered exhibit on Form S-1
Amendment No. 1 filed with the SEC (3330-100303).
** Incorporated by reference to Form 424B3 filed on November 22, 2002 with the
SEC (333-100303).
(b) Reports on Form 8-K
None.
34
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange
Act of 1934, the Company has duly caused this report to be signed on its behalf
by the undersigned, thereunto only authorized.
FIDELITY BANCORP, INC.
December 27, 2002 /s/William L. Windisch
-------------------------------------------------
William L. Windisch
Chief Executive Officer
(Duly Authorized Representative)
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Company and in the capacities and on December 27, 2002.
/s/William L. Windisch /s/Richard G. Spencer
- ------------------------------------------------- -------------------------------------
William L. Windisch Richard G. Spencer
Chairman of the Board and Chief Executive Officer President and Chief Operating Officer
(Principal Executive Officer)
/s/John R. Gales /s/Robert F. Kastelic
- ------------------------------------------------- -------------------------------------
John R. Gales Robert F. Kastelic
Director Director
/s/Oliver D. Keefer /s/Charles E. Nettrour
- ------------------------------------------------- -------------------------------------
Oliver D. Keefer Charles E. Nettrour
Director Director
/s/Joanne Ross Wilder /s/Lisa L. Griffith
- ------------------------------------------------- -------------------------------------
Joanne Ross Wilder Lisa L. Griffith
Director Vice President and Chief Financial Officer
(Principal Accounting Officer)
SECTION 302 CERTIFICATION
I, William L. Windisch, Chief Executive Officer, certify that:
1. I have reviewed this annual report on Form 10-K of Fidelity Bancorp, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report
is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and
(c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
(a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
(b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
annual report whether there were significant changes in internal controls
or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Date: December 27, 2002 /s/William L. Windisch
-----------------------------
William L. Windisch
Chief Executive Officer
SECTION 302 CERTIFICATION
I, Lisa L. Griffith, Chief Financial Officer, certify that:
1. I have reviewed this annual report on Form 10-K of Fidelity Bancorp, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report
is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and
(c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
(a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
(b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
annual report whether there were significant changes in internal controls
or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Date: December 27, 2002 /s/Lisa L. Griffith
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Lisa L. Griffith
Chief Financial Officer