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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended September 30, 2003
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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)
Preferred Share Purchase Rights
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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. [X] Yes [ ] 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]
Indicate by check mark whether the Registrant is an accelerated filer
(as defined in Rule 12b-2 of the Act) [ ] Yes [X] No
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 March 31, 2003 was $32.3
million. Solely for purposes of this calculation, the term "affiliate" includes
all directors and executive officers of the Registrant and all beneficial owners
of more than 5% of the Registrant's voting securities.
As of December 26, 2003, the Registrant had outstanding 2,435,108
shares of Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
1. Portions of the Registrant's Annual Report to Stockholders for the fiscal
year ended September 30, 2003. (Parts II and IV)
2. Portions of the Registrant's definitive Proxy Statement for the 2004 Annual
Meeting of Stockholders. (Part III)
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INDEX
PAGE
PART I
Item 1. Business...................................................................................1
Item 2. Properties................................................................................30
Item 3. Legal Proceedings.........................................................................31
Item 4. Submission of Matters to a Vote of Security Holders.......................................31
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.....................31
Item 6. Selected Financial Data...................................................................31
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations.............................................................31
Item 7A. Quantitative and Qualitative Disclosures About Market Risk................................31
Item 8. Financial Statements and Supplementary Data...............................................31
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure..................................................................31
Item 9A. Controls and Procedures...................................................................32
PART III
Item 10. Directors and Executive Officers of the Registrant........................................32
Item 11. Executive Compensation....................................................................32
Item 12. Security Ownership of Certain Beneficial Owners and Management............................32
Item 13. Certain Relationships and Related Transactions............................................33
Item 14. Principal Accounting Fees and Services....................................................33
PART IV
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K..........................34
SIGNATURES ..........................................................................................38
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. 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. The Company conducts no significant business or operations
of its own other than holding all the outstanding stock of the Bank and the
Trusts. 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 December 31, 2002, the Company completed the acquisition of First
Pennsylvania Savings Association ("First Pennsylvania") in a merger conversion.
First Pennsylvania operated from one office in Pittsburgh, Pennsylvania and had
approximately $26.8 million in assets. Pursuant to the agreement and plan of
merger conversion, First Pennsylvania converted from a Pennsylvania-chartered
mutual savings association to a stock savings association and simultaneously
merged with the Bank. In connection with the merger conversion, the Company sold
approximately $1.3 million in common stock to First Pennsylvania depositors, the
Bank's employee stock ownership plan, the Company's stockholders and members of
the local community.
1
On February 22, 2002, the Company completed the acquisition of Carnegie
Financial Corporation and its wholly owned subsidiary, Carnegie Savings Bank
("Carnegie Savings"). Carnegie Savings operated from a single office in
Carnegie, Pennsylvania and had $29.5 million in assets.
The Bank is a Pennsylvania-chartered stock savings bank which is
headquartered in Pittsburgh, Pennsylvania. Deposits in the Bank are insured by
the Savings Association Insurance Fund ("SAIF") of the Federal Deposit Insurance
Corporation ("FDIC"). The Bank, incorporated in 1927, conducts business from
thirteen 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, 2003 amounted to $80.2 million.
The Company's executive offices are located at 1009 Perry Highway,
Pittsburgh 15237 and its telephone number is (442) 367-3300. The Company
maintains a website at www.fidelitybancorp-pa.com.
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. Based on data
compiled by the FDIC, the Bank had a 0.67% share of all FDIC-insured deposits in
the Pittsburgh Metropolitan Statistical area as of June 30, 2003, the latest
date for such data as available, ranking it 18th among FDIC-insured
institutions.
2
Lending Activities. The following table sets forth the composition of
the Company's loan portfolio in dollar amounts and in percentages of the
respective portfolios at the dates indicated.
At September 30,
------------------------------------------------------------------------------------------
2003 2002 2001 2000 1999
---------------- --------------- -------------- ---------------- ---------------
$ % $ % $ % $ % $ %
-------- ---- -------- ---- -------- ---- -------- ---- -------- ----
(Dollars in thousands)
Real estate loans:
Residential:
Single-family (1-4 units).......... $107,122 38.6% $169,849 51.5% $189,626 57.5% $207,853 59.6% $156,112 53.0%
Multi-family (over 4 units)........ 5,299 1.9 7,217 2.2 6,400 2.0 5,282 1.5 4,007 1.4
Construction:
Residential........................ 10,669 3.9 11,372 3.4 4,577 1.4 3,972 1.1 13,053 4.4
Commercial......................... 4,539 1.6 8,205 2.5 4,706 1.4 6,928 2.0 9,636 3.3
Commercial........................... 46,757 16.8 29,036 8.8 23,775 7.2 22,706 6.5 26,513 9.0
-------- ---- -------- ---- -------- ---- -------- ---- -------- ----
Total real estate loans......... 174,386 62.8 225,679 68.4 229,084 69.5 246,741 70.7 209,321 71.1
Installment loans...................... 67,332 24.2 61,872 18.8 67,725 20.5 68,614 19.7 57,869 19.6
Commercial business and lease loans.... 35,975 13.0 42,258 12.8 32,834 10.0 33,584 9.6 27,394 9.3
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Total loans receivable.......... 277,693 100.0% 329,809 100.0% 329,643 100.0% 348,939 100.0% 294,584 100.0%
===== ===== ===== ===== =====
Less:
Loans in process..................... (9,499) (9,065) (6,341) (6,558) (14,696)
Unamortized premiums,
discounts and deferred loan fees... (691) (1,368) (1,831) (2,033) (1,453)
Allowance for possible loan losses... (3,091) (3,056) (2,871) (2,910) (2,477)
-------- -------- -------- -------- --------
Net loans receivable............ $264,412 $316,320 $318,600 $337,438 $275,958
======== ======== ======== ======== ========
3
Loan Portfolio Sensitivity. The following table sets forth the
estimated maturity of the Company's loan portfolio at September 30, 2003. The
table does not include prepayments or scheduled principal repayments.
Prepayments and scheduled principal repayments on loans totaled $203.4 million
for the year ended September 30, 2003. All loans are shown as maturing based on
contractual maturities. Demand loans and loans which have no stated maturity are
shown as due in one year or less.
Due Due after Due
within 1 through after
1 year 5 years 5 years Total
------- ------- -------- --------
(In thousands)
Real estate loans:
Residential ........................ $ 197 $ 4,642 $107,582 $112,421
Commercial ......................... 169 2,705 43,883 46,757
Construction........................ 1,172 2,673 11,364 15,209
Installment loans...................... 15,900 11,332 40,099 67,331
Commercial business and lease loans.... 9,979 14,630 11,366 35,975
------- ------- -------- --------
Total........................ $27,417 $35,982 $214,294 $277,693
======= ======= ======== ========
The following table sets forth the dollar amount of all loans at
September 30, 2003, due after September 30, 2004, which have fixed interest
rates and floating or adjustable interest rates.
Fixed Floating or
Rates Adjustable Rates Total
----- ---------------- -----
(In thousands)
Real estate loans:
Residential ............................ $ 88,981 $23,243 $112,224
Commercial ............................. 9,503 37,085 46,588
Construction............................ 9,627 4,410 14,037
Installment loans.......................... 44,602 6,830 51,432
Commercial business and lease loans........ 21,204 4,791 25,995
-------- ------- --------
Total............................. $173,917 $76,359 $250,276
======== ======= ========
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, 2003, real estate lending included
$112.4 million of residential
4
loans, $10.7 million of residential construction loans, $46.8 million of
commercial real estate loans, and $4.5 million of commercial construction loans.
The Bank originates single-family residential loans and residential
construction 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 two
percentage point cap or limit on any increase or decrease in the interest rate
per year with a five or six percentage point 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, 2003 approximately $66.1 million or 37.9% 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, single-family 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, 2003, approximately $108.3
million or 62.1% 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 $322,700 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 $322,700. 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, 2003,
$46.8 million consisted of commercial real estate, $5.3 million consisted of
multi-family residential real estate loans, and $4.5 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, 2003,
home equity loans amounted to $63.8 million or 94.7% 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, 2003, these loans
amounted to $980,000, which represented 1.5% of the Bank's total installment
loan portfolio. At September 30, 2003, motor vehicle loans amounted to $379,000
and unsecured loans and loans secured by property other than real estate
amounted to $601,000.
The Bank also makes other types of installment loans such as savings
account loans, credit card loans, personal lines of credit and overdraft loans.
At September 30, 2003, these loans amounted to $2.6 million or 3.8% of the total
installment loan portfolio. That total consisted of $827,000 of savings account
loans, $1.7 million of personal lines of credit and $20,000 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, 2003, these
loans amounted to $33.8 million or 12.8% of the total net 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,
2003, commercial leases amounted to $2.2 million or 0.8% of the total net 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, 2003. As of September 30, 2003, loans serviced for others totaled
$4,000.
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, 2003, the Bank sold $27.6 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 mortgages
on single-family residences, commercial first mortgages, home equity, secured
consumer, unsecured consumer and commercial loans up to the FNMA conforming loan
limit plus $200,000 (currently $533,700), $500,000, $300,000, $75,000, $50,000,
and $400,000, respectively. Any loan in excess of those amounts must be approved
by the Board of Directors. The Board of Directors has further delegated
authority to the Bank's President to approve first mortgages on single-family
residences, commercial first mortgages, home equity, secured consumer, unsecured
7
consumer and commercial loans up to the FNMA conforming loan limit (currently
$333,700), $200,000, $150,000, $75,000, $50,000, and $150,000, respectively. The
terms of the delegation also permit the President to delegate authority to any
other Bank officer under the same or more limited terms. Pursuant to this
authority, the President 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
$75,000, $75,000, and $50,000, respectively; to approve first mortgage
one-to-four family loans up to the FNMA conforming loan limit (currently
$333,700); to approve home equity loans up to $150,000 if the amount of the loan
plus prior indebtedness is not in excess of a 80% loan-to-value ratio; to
approve commercial loans up to $150,000; 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 examiners require insured depository
institutions to use a classification system for monitoring their problem assets.
Under this classification system, problem assets 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 Company 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 depository 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 nonperforming loans at September 30, 2003 are 15
single-family residential real estate loans totaling $795,000, three commercial
real estate loans totaling $367,000, 30 home equity and installment loans
totaling $615,000, and 12 commercial business loans totaling $1.2 million.
Certain other loans, while performing as of September 30, 2003, were classified
as substandard, doubtful or loss. Performing loans which were classified as of
September 30, 2003, included one single-family residential real estate loan
totaling $91,000; two commercial real estate loans totaling $727,000; and
thirteen commercial business loans totaling $2.1 million. While these loans are
currently performing, they have been classified for one of the following
reasons: other loans to the borrower are non-performing; the loan was previously
nonperforming but will retain its classification status until the loan continues
to perform for at least a six-month period; or the loan is past its contractual
maturity date and pending renewal (commercial time notes and commercial lines of
credit). See "-- Nonperforming Loans and Foreclosed Real Estate."
8
At September 30, 2002, non-accrual loans consisted of 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, doubtful and loss classified
assets. See "-- Nonperforming Loans and Foreclosed Real Estate."
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, 29 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 "--
Nonperforming Loans and Foreclosed Real Estate."
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, 60 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 "-- Nonperforming
Loans and Foreclosed Real Estate."
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 "-- Nonperforming Loans and
Foreclosed Real Estate."
The following table sets forth the Company's classified assets in
accordance with its classification system.
At September 30,
--------------------------------------------------
2003 2002 2001 2000 1999
------ ------ ------ ------ ------
(In thousands)
Special Mention ......... $ 709 $ 768 $ 559 $ 872 $ --
Substandard ............. 5,862 2,609 2,176 1,871 2,357
Doubtful ................ 6 45 142 72 --
Loss .................... 23 3 30 18 28
------ ------ ------ ------ ------
$6,600 $3,425 $2,907 $2,833 $2,385
====== ====== ====== ====== ======
Nonperforming Loans and Foreclosed Real Estate. 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.
9
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 nonaccrual 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 nonaccrual status, previously accrued
but unpaid interest is deducted from interest income. The President, Chief
Lending Officer, Chief Financial Officer, Compliance Officer and the Collection
Manager meet monthly to review non-performing assets and any other assets that
may require classification or special consideration. Adjustments to the carrying
values of such assets are made as needed and a detailed report is submitted to
the Board of Directors on a monthly basis.
Foreclosed real estate is 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.
10
The following table sets forth information regarding the Company's
nonaccrual loans and foreclosed real estate at the dates indicated. The Company
had no loans categorized as troubled debt restructurings within the meaning of
the Statement of Financial Accounting Standards ("SFAS") 15 at the dates
indicated. The Company had accruing commercial business loans past due 90 days
or more of $1.9 million and $2.7 million at September 30, 2003 and 2002,
respectively. Such loans consisted of commercial lines of credit which were
outstanding past their contractual maturity dates. In each case, such loans were
otherwise current in accordance with their terms and the Company does not
consider them nonperforming. The recorded investment in loans that are
considered to be impaired under SFAS 114, as amended by SFAS 118, was $2.1
million at September 30, 2003, for which the related allowance for credit losses
was $38,000. Interest income that would have been recorded and collected on
loans accounted for on a nonaccrual basis under the original terms of such loans
was $165,000 for the year ended September 30, 2003. During the year ended
September 30, 2003, $63,000 in interest income was recorded on such loans.
At September 30,
----------------------------------------------
2003 2002 2001 2000 1999
------ ------ ------ ------ ------
(Dollars in thousands)
Nonaccrual residential real
estate loans (1-4 family) ....... $ 795 $ 515 $ 110 $ 520 $ 250
Nonaccrual construction, multi-
family residential and
commercial real estate .......... 367 408 814 624 1,362
Nonaccrual installment loans ...... 615 273 242 762 220
Nonaccrual commercial business
loans ........................... 1,151 1,461 1,182 55 553
------ ------ ------ ------ ------
Total nonperforming loans ......... $2,928 $2,657 $2,348 $1,961 $2,385
====== ====== ====== ====== ======
Total nonperforming loans as a
percent of total loans receivable 1.05% 0.81% 0.71% 0.56% 0.81%
====== ====== ====== ====== ======
Total foreclosed real estate, net . $ 675 $ 658 $ 314 $ 181 $ 107
====== ====== ====== ====== ======
Total nonperforming loans and
foreclosed real estate as a
percent of total assets ......... 0.58% 0.54% 0.48% 0.39% 0.52%
====== ====== ====== ====== ======
At September 30, 2003, the Company had no loans not reflected in the
above table where known information about possible credit problems of borrowers
caused management to have serious doubts about the ability of such borrowers to
comply with present repayment terms.
11
The following table sets forth an analysis of the Bank's allowance for
loan losses.
Year Ended September 30,
-------------------------------------------------------
2003 2002 2001 2000 1999
------- ------- ------- ------- -------
(Dollars in thousands)
Balance at beginning of period ... $ 3,056 $ 2,871 $ 2,910 $ 2,477 $ 2,243
Allowance for loan losses
of Pennwood Bancorp, Inc. ...... -- -- -- 358 --
Allowance for loan losses of
Carnegie Financial Corporation . -- 204 -- -- --
Allowance for loan losses of First
Pennsylvania Savings Association 40 -- -- -- --
Provision for loan losses ........ 555 400 475 470 520
Charge-offs:
Residential real estate ........ (15) (32) (14) (12) --
Commercial real estate ......... -- (81) (95) (165) (183)
Installment .................... (125) (130) (428) (181) (89)
Commercial ..................... (484) (277) (108) (67) (54)
------- ------- ------- ------- -------
Total ...................... (624) (520) (645) (425) (326)
Recoveries:
Residential real estate ........ 3 4 -- -- 10
Commercial real estate ......... -- 10 96 -- --
Installment .................... 10 26 25 15 10
Commercial ..................... 51 61 10 15 20
------- ------- ------- ------- -------
Total ...................... 64 101 131 30 40
Net charge-offs .................. (560) (419) (514) (395) (286)
------- ------- ------- ------- -------
Balance at end of period ......... $ 3,091 $ 3,056 $ 2,871 $ 2,910 $ 2,477
======= ======= ======= ======= =======
Ratio of net charge-offs during
the period to average loans
outstanding during the period .. 0.19% 0.13% 0.15% 0.13% 0.12%
======= ======= ======= ======= =======
12
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,
------------------------------------------------------------------------------------
2003 2002 2001 2000 1999
--------------- -------------- -------------- -------------- ---------------
$ % $ % $ % $ % $ %
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
(Dollars in thousands)
Residential real estate loans... $ 659 40.5% $ 917 53.7% $1,176 59.5% $ 986 61.1% $ 720 48.3%
Commercial real estate loans.... 905 16.8 624 8.8 246 7.2 219 6.5 102 8.6
Construction loans.............. 149 5.5 146 5.9 60 2.8 50 3.1 202 14.2
Installment loans............... 461 24.2 488 18.8 483 20.5 706 19.7 534 19.6
Commercial business loans....... 917 13.0 881 12.8 906 10.0 949 9.6 919 9.3
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
Total.................... $3,091 100.0% $3,056 100.0% $2,871 100.0% $2,910 100.0% $2,477 100.0%
====== ===== ====== ===== ====== ===== ====== ===== ====== =====
13
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 ("FDIC") during its
regular examinations. The FDIC, 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. 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 securities
(including mortgage backed securities) require us to categorize securities as
"held to maturity," "available for sale" or "trading." At September 30, 2003,
the Bank had securities classified as "held to maturity" and "available for
sale" in the amount of $120.0 million and $192.4 million, respectively and had
no securities classified as "trading." Securities classified as "available for
sale" are reported for financial reporting purposes at fair 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, 2003,
the Registrant's securities available for sale had an amortized cost of $189.4
million and fair value of $192.4 million. The changes in fair 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 fair 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, 2003, 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 and collateralized mortgage
obligations, (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.
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
14
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.
15
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,
-------------------------------------
2003 2002 2001
------- ------- -------
(In thousands)
Available-for-sale:
U.S. government and agency.......... $46,479 $22,030 $17,762
Municipal obligations............... 30,451 36,039 39,670
Corporate obligations............... 18,259 17,321 13,557
Asset-backed securities............. -- -- 5,327
Mutual funds(1)..................... 9,646 4,533 4,240
FreddieMac preferred stock.......... 1,409 1,519 1,420
FannieMae preferred stock........... -- -- 250
Equity securities................... 1,228 1,262 1,341
Trust preferred securities.......... 11,212 4,601 3,104
------- ------- -------
Total............................ $118,684 $87,305 $86,671
======== ======= =======
Held-to-maturity:
U.S. government and agency.......... $ 33,040 $13,801 $ 966
Municipal obligations............... 21,153 17,389 12,662
Corporate obligations............... 7,000 8,008 6,207
------- ------- -------
Total............................ $ 61,193 $39,198 $19,835
========= ======= =======
- --------------
(1) Consists of investment in the Asset Management Fund ARM Fund and Legg Mason
Value Trust Fund.
At September 30, 2003, non-U.S. Government and U.S. Government agency
securities that exceeded ten percent of stockholders' equity are as follows. The
Asset Management Fund ARM Fund invests solely in mortgage-backed securities
issued or guaranteed by U.S. government agencies or government-sponsored
enterprises or which are rated in the two highest investment grades. The Asset
Management Fund ARM Fund is rated AAA by Standard & Poor's.
Issuer Book Value Market Value
------ ---------- ------------
(In thousands)
The Asset Management Fund ARM Fund $9,552 $9,492
====== ======
16
Mortgage-Backed Securities
At September 30,
------------------------------
2003 2002 2001
------- ------- -------
(In thousands)
Available-for-sale:
GinnieMae............................... $ 8,525 $10,450 $15,525
FannieMae............................... 31,159 18,756 13,841
FreddieMac.............................. 9,623 11,326 5,373
GinnieMae Remic......................... 1,480 1,236 1,844
FannieMae Remic......................... 8,018 3,102 4,860
FreddieMac Remic........................ 9,252 17,729 9,726
Collateralized mortgage obligations..... 2,641 7,672 10,765
------- ------- -------
Total............................. $70,698 $70,271 $61,934
======= ======= =======
Held-to-maturity:
GinnieMae............................... $ 2,485 $ 2,050 $3,397
FannieMae............................... 13,459 13,158 5,581
FreddieMac.............................. 10,586 12,518 11,148
GinnieMae Remic......................... 36 678 1,978
FannieMae Remic......................... 10,744 -- 3,346
FreddieMac Remic........................ 7,396 6,961 4,232
Collateralized mortgage obligations..... 14,063 7,038 993
------- ------- -------
Total............................. $58,769 $42,403 $30,675
======= ======= =======
17
The following tables set forth the amount of each category of
investment securities of the Bank at September 30, 2003 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
------------------ ------------------ ----------------- ---------------- -------------------
Weighted Weighted Weighted Weighted Weighted
Average Average Average Average Average
Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield
------ ------ ------ ------ ------ ------- ------ ------ ------ -----
(Dollars in thousands)
Available-for-sale:
U.S. government and agency.... $ -- --% $21,661 3.48% $20,609 3.34% $ 4,209 3.92% $46,479 3.46%
Municipal obligations......... -- -- 2,230 5.41 2,035 6.08 26,186 7.14 30,451 6.94
Corporate obligations......... 5,958 5.47 10,241 5.78 1,050 6.58 1,010 3.93 18,259 5.62
Mutual funds(1)............... 9,646 2.04 -- -- -- -- -- -- 9,646 2.04
FreddieMac preferred stock.... 1,409 4.19 -- -- -- -- -- -- 1,409 4.19
Equity securities............. 1,228 4.02 -- -- -- -- -- -- 1,228 4.02
Trust preferred securities.... -- -- -- -- -- -- 11,212 3.21 11,212 3.21
------- ------ ------- ---- ------- ---- ------ --- ------- ---
Total..................... $18,241 3.46% $34,132 4.30% $23,694 3.72% $42,617 5.71% $118,684 4.56%
====== ===== ======= ==== ====== ==== ======= ==== ======== ====
Held-to-Maturity:
U.S. government and agency.... $ -- --% $10,030 3.72% $16,017 3.72% $ 6,993 2.71% $33,040 3.51%
Municipal obligations......... -- -- 964 4.17 3,721 6.68 16,468 7.32 21,153 7.06
Corporate obligations......... -- -- 6,750 6.24 250 7.01 -- -- 7,000 6.27
------- ----- ------- ---- ------- ---- ------- ---- -------- ----
Total..................... $ -- --% $17,744 4.70% $19,988 4.31% $23,461 5.95% $61,193 5.05%
======= ===== ======= ==== ======= ==== ======= ==== ======= ====
(1) Consists of investment in the Asset Management Fund ARM Fund and Legg Mason
Value Trust Fund.
18
Information regarding the contractual maturities and weighted average
yield of the Bank's mortgage-backed securities portfolio at September 30, 2003
is presented below.
Amounts at September 30, 2003 Which Mature In
----------------------------------------------------------------------------
After After
One Year One to Five Five to 10 Over 10
or Less Years Years Years Total
------- ------ ------ ------- -------
(Dollars in thousands)
Available-for-sale:
GinnieMae......................... $ -- $ -- $ -- $ 8,525 $ 8,525
FannieMae......................... -- -- 4,558 26,601 31,159
FreddieMac........................ -- -- -- 9,623 9,623
GinnieMae Remic................... -- -- -- 1,480 1,480
FannieMae Remic................... -- -- 2,088 5,930 8,018
FreddieMac Remic.................. -- -- 1,954 7,298 9,252
Collateralized mortgage
obligations.................. -- -- 176 2,465 2,641
------- ------ ------ ------- -------
Total........................ $ -- $ -- $8,776 $61,922 $70,698
======= ====== ====== ======= =======
Weighted average yield.............. --% --% 3.52% 3.68% 3.66%
======= ====== ====== ======= =======
Held-to-maturity:
GinnieMae......................... $ -- $ 3 $ -- $ 2,482 $ 2,485
FannieMae......................... -- -- 686 12,773 13,459
FreddieMac........................ -- 1,786 5,121 3,679 10,586
GinnieMae Remic................... -- -- -- 36 36
FannieMae Remic................... -- -- -- 10,744 10,744
FreddieMac Remic.................. -- -- 14 7,382 7,396
Collateralized mortgage
obligations.................... -- -- -- 14,063 14,063
------- ------ ------ ------- -------
Total........................ $ -- $1,789 $5,821 $51,159 $58,769
======= ====== ====== ======= =======
Weighted average yield.............. --% 6.45% 4.31% 3.52% 3.69%
======= ====== ====== ======= =======
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 securities 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.
19
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. Terms on interest-bearing deposit accounts
range 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, 2003, such
certificates accounted for 8.4% total deposits.
The Bank's deposits are obtained primarily from residents of Allegheny
and Butler Counties. The principal methods used by the Bank to attract 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 deposits by type as of the dates indicated.
At September 30,
------------------------------------------------------------------
2003 2002 2001
--------------------- --------------------- --------------------
Average Average Average
Balance Rate Balance Rate Balance Rate
------- ---- ------- ---- ------- ----
(Dollars in thousands)
Checking accounts:
Non-interest-bearing.......... $ 27,406 -% $ 26,548 -% $ 21,501 -%
Interest-bearing.............. 43,327 0.71 39,013 0.75 33,064 1.50
Passbook and club accounts....... 89,197 1.17 68,825 2.10 52,571 2.54
Money market accounts............ 17,117 0.82 17,189 1.78 16,022 2.83
Certificate accounts............. 189,079 3.60 199,831 4.08 190,343 5.53
-------- ---- -------- ---- -------- ----
Total................... $366,126 2.26% $351,406 2.90% $313,501 4.09%
======== ==== ======== ==== ======== ====
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, 2003, the Bank's total retirement
funds were $47.6 million or 13.0% of its total 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.
20
Rates established by the Bank are also affected by the amount of funds
needed by the Bank on both a short-term and long-term basis, alternative sources
of funds and the projected level of interest rates in the future. The ability of
the Bank to attract and maintain savings deposits and the Bank's cost of funds
have been, and will continue to be, significantly affected by economic and
competitive conditions.
Certificates of Deposits. Maturities of certificates of deposit of
$100,000 or more that were outstanding as of September 30, 2003 are summarized
as follows:
Maturity Amount
- -------- ------
(In thousands)
3 months or less.................................. $2,808
Over 3 months through 6 months.................... 9,781
Over 6 months through 12 months................... 9,366
Over 12 months.................................... 8,852
-------
Total.................................... $30,807
=======
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, 2003, the Bank had
$190.7 million of advances outstanding, including $152.7 million in long-term
advances and $38.0 million in short-term borrowings original maturities of
long-term debt range from three to ten years. Short-term borrowings represent
overnight advances.
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, 2003, the Bank had $5.9 million in reverse
repurchase agreements outstanding.
21
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,
--------------------------------------
2003 2002 2001
-------- -------- --------
(Dollars in thousands)
Reverse repurchase agreements:
Average balance outstanding.................. $ 5,946 $ 5,782 $ 5,400
Maximum amount outstanding at any
month-end during the period................ 7,994 7,014 6,708
Weighted average interest rate
during the period....................... 0.64% 1.43% 4.48%
Balance outstanding at end of period......... $ 5,943 $ 5,849 $ 4,599
Weighted average interest rate
at end of period........................ 0.37% 1.09% 2.83%
FHLB Repoplus Advances:
Average balance outstanding.................. $ 9,112 $ 3,969 $17,631
Maximum amount outstanding at any
month-end during the period................ 38,000 18,640 42,120
Weighted average interest rate
during the period....................... 1.24% 2.28% 6.10%
Balance outstanding at end of period......... $38,000 $ -- $ 5,000
Weighted average interest rate
at end of period........................ 1.23% --% 3.89%
Total average short-term borrowings............ $15,058 $ 9,751 $23,031
Average interest rate of total
short-term borrowings........................ 1.11% 1.09% 3.38%
Employees
At September 30, 2003, the Company had 125 full-time and 28 part-time
employees. None of these employees are represented by a collective bargaining
agent, and the Company believes that it enjoys good relations with its
personnel.
22
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,
---------------------------------------------------------------------------------------
2003 2002 2001
------------------------------ --------------------------- ---------------------------
Average Average Average Average Average Average
Balance Interest Yield/Cost Balance Interest Yield/Cost Balance Interest Yield/Cost
------- -------- ---------- ------- -------- ---------- ------- -------- ----------
(Dollars in thousands)
Interest-earning assets:
Loans receivable....................... $292,482 $20,605 7.04% $322,283 $24,177 7.50% $336,813 $26,548 7.88%
Mortgage-backed securities............. 125,936 4,780 3.80 103,712 5,709 5.50 84,422 5,407 6.40
Investment securities and FHLB stock:
Taxable.............................. 113,423 4,553 4.01 80,762 4,094 5.07 66,310 4,414 6.64
Non-taxable.......................... 50,661 3,537 6.98 51,349 3,689 7.18 42,045 3,076 7.32
Interest-earning deposits.............. 6,346 85 1.34 2,831 48 1.70 1,707 76 4.45
-------- ------- ---- -------- ------- ---- -------- ------- ----
Total interest-earning assets....... 588,848 33,560 5.70 560,937 37,717 6.73 531,497 39,526 7.44
-------- ------- ---- -------- ------- ---- -------- ------- ----
Non-interest-earning assets............. 27,871 24,270 21,796
-------- -------- --------
Total assets.......................... $616,719 $585,207 $553,293
======= ======= =======
Interest-bearing liabilities:
Deposits............................... $362,037 $ 9,078 2.51 $332,270 $10,592 3.19 $304,194 $12,941 4.25
Short-term borrowings.................. 7,282 181 2.49 3,969 202 5.09 26,157 1,356 5.18
Long-term debt......................... 188,169 9,746 5.18 196,331 11,258 5.73 176,219 11,338 6.43
Guaranteed preferred beneficial
interest in Company's debentures..... 11,577 1,190 10.28 11,019 1,031 9.36 10,250 1,024 9.99
-------- ------- ---- -------- ------- ---- -------- ------- ----
Total interest-bearing liabilities... 569,065 20,195 3.55 543,589 23,083 4.25 516,820 26,659 5.16
-------- ------- ---- -------- ------- ---- -------- ------- ----
Non-interest bearing liabilities........ 4,745 3,474 3,143
-------- -------- --------
Total liabilities...................... 573,810 547,063 519,963
Stockholders' equity.................... 42,909 38,144 33,330
-------- -------- --------
Total liabilities and
stockholders' equity................. $616,719 $585,207 $553,293
======== ======== ========
Net interest income..................... $13,365 $14,634 $12,867
======= ======= =======
Interest rate spread(1)................. 2.15% 2.48% 2.28%
====== ====== ======
Net interest margin(2).................. 2.27% 2.61% 2.42%
====== ====== ======
Ratio of average interest-earning assets
to average interest-bearing liabilities 103.48% 103.19% 102.84%
====== ====== ======
(1) Interest rate spread is the difference between the average yield on total
interest-earning assets and the average cost of total interest-bearing
liabilities.
(2) Net interest margin is net interest income divided by average
interest-earning assets.
23
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), and (2) changes in rate
(change in rate multiplied by old volume). Changes in rate/volume (change in
rate multiplied by change in volume) have been allocated between changes in rate
and changes in volume based on the absolute values of each. Interest income on
tax free investments has been adjusted for federal income tax purposes using a
rate of 34%.
Year Ended September 30,
-----------------------------------------------------------------
2003 vs. 2002 2002 vs. 2001
-------------------------------- ------------------------------
Increase (Decrease) Increase (Decrease)
Due to Due to
Volume Rate Net Volume Rate Net
------ ---- --- ------ ---- ---
(In thousands)
Interest income on interest-earning assets:
Mortgage loans .................................. $(2,320) $ (409) $(2,729) $ (978) $ (414) $(1,392)
Mortgage-backed securities ...................... 585 (1,515) (930) 1,847 (1,545) 302
Installment loans ............................... (143) (505) (648) (392) (338) (730)
Commercial business and lease loans ............. 186 (383) (197) 212 (460) (248)
Investment securities and other investments ..... 2,722 (2,377) 345 801 (542) 259
------- ------- ------- ------- ------- -------
Total interest-earning assets ............... 1,030 (5,189) (4,159) 1,490 (3,299) (1,809)
------- ------- ------- ------- ------- -------
Interest expense on interest-bearing liabilities:
Deposits ........................................ 766 (2,280) (1,514) 967 (3,316) (2,349)
Borrowed funds .................................. (277) (1,256) (1,533) (130) (1,104) (1,234)
Trust preferred securities ...................... 53 106 159 127 (120) 7
------- ------- ------- ------- ------- -------
Total interest-bearing liabilities .......... 542 (3,430) (2,888) 964 (4,540) (3,576)
------- ------- ------- ------- ------- -------
Net change in net interest income ........... $ 488 $(1,759) $(1,271) $ 526 $ 1,241 $ 1,767
======= ======= ======= ======= ======= =======
24
Certain Ratios
Year Ended September 30,
------------------------------
2003 2002 2001
---- ---- ----
Return on average assets................. 0.66% 0.76% 0.65%
Return on average equity................. 9.45% 11.60% 10.84%
Average equity to assets ratio........... 6.96% 6.52% 6.02%
Dividend payout ratio ................... 30.53% 23.29% 22.97%
SUPERVISION AND REGULATION
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.
25
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 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."
26
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
27
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 2003 is approximately
0.0152% 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, 2003, 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,
28
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, 2003.
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 not less than 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, if any, plus 0.7% of its unused borrowing capacity,
whichever is greater. At September 30, 2003, 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, 2003, the Bank
met its reserve requirements.
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
29
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, 2003, the Bank's loans-to-one borrower
limitation was $7.3 million and was in compliance with such limitation.
Item 2. Properties.
- -------------------
At September 30, 2003, the Bank conducted its business from its main
office in Pittsburgh, Pennsylvania and twelve 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, 2003.
Lease Expiration
Location Date including
County Address Lease or Own Options
- ----------------------- ------------------------------ --------------------
Allegheny 3300 Brighton Road Own
Pittsburgh, PA 15212
Allegheny 1009 Perry Highway Own
Pittsburgh, PA 15237
Butler 251 South Main Street Own
Zelienople, PA 16063
Allegheny 312 Beverly Road Lease 7/31/08
Pittsburgh, PA 15216
Allegheny 6000 Babcock Blvd. Lease 11/30/02
Pittsburgh, PA 15237
Allegheny 1701 Duncan Avenue Lease 01/31/05
Allison Park, PA 15101
Allegheny 4710 Liberty Avenue Own
Pittsburgh, PA 15224
Allegheny 728 Washington Road Own
Pittsburgh, PA 15228
Allegheny 2034 Penn Avenue Own
Pittsburgh, PA 15222
Allegheny 683 Lincoln Avenue Own
Bellevue, PA 15202
Allegheny 17 West Mall Plaza Own
Carnegie, PA 15106
Allegheny 1729 Lowrie Street Own
Pittsburgh, PA 15212
Butler 1339 Freedom Road Lease 2/28/13
Cranberry Township, PA 16066
Allegheny Loan Center Lease 9/30/07
1014 Perry Highway
Pittsburgh, PA 15237
Allegheny Data Processing and Checking Department Own
1015 Perry Highway
Pittsburgh, PA 15237
30
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 Security 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, 2003 filed as Exhibit 13 hereto (the "Annual Report") is
incorporated herein by reference.
Item 6. Selected Financial Data.
- --------------------------------
The information contained in the table captioned "Selected Financial
Data" 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 Company's financial statements listed in Item 15 herein are
incorporated herein by reference from the Annual Report.
Item 9. Changes in and Disagreements with Accountants on Accounting and
- --------------------------------------------------------------------------------
Financial Disclosure.
---------------------
The information contained in the section captioned "Change in
Auditors", in the Annual Report is incorporated herein by reference.
31
Item 9A. Controls and Procedures.
- ---------------------------------
The Company's management evaluated, with the participation of the
Company's Chief Executive Officer and Chief Financial Officer, the effectiveness
of the Company's disclosure controls and procedures, as of the end of the period
covered by this report. Based on that evaluation, the Chief Executive Officer
and Chief Financial Officer concluded that the Company's disclosure controls and
procedures are effective to ensure that information required to be disclosed by
the Company in the reports that it files or submits under the Securities
Exchange Act of 1934 is recorded, processed, summarized and reported within the
time periods specified in the Securities and Exchange Commission's rules and
forms.
There were no changes in the Company's internal control over financial
reporting that occurred during the Company's last fiscal quarter that have
materially affected, or are reasonably likely to materially affect, the
Company's internal control over financial reporting.
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 "Proposal I -- Election of
Directors" in the Company's definitive Proxy Statement for the 2004 Annual
Meeting of Stockholders are incorporated herein by reference.
The Company has adopted a Code of Ethics that applies to its principal
executive officer, principal financial officer, principal accounting officer or
controller or persons performing similar functions. The Company's Code of Ethics
is filed as Exhibit 14 to this Annual Report on Form 10-K.
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) Changes in Control
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.
32
(d) Securities Authorized for Issuance Under Equity Compensation
Plans
Set forth below is information as of September 30, 2003 with respect to
compensation plans under which equity securities of the Registrant are
authorized for issuance.
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 security holders:
Employees Stock
Compensation Programs
and Directors Stock Option
Plan............................ 300,274 $12.63 70,149
Equity compensation plans
not approved by security
holders:
Directors Stock
Compensation
Program/Plans (1)............... 35,963 16.36 11,250
------- ------ ------
TOTAL......................... 336,237 $13.03 81,399
======= ====== ======
- ---------------
(1) Pursuant to the 2002 Stock Compensation Plan and 2001 Stock Compensation
Plan, the shares are reserved for issuance pursuant to options granted to
eligible persons. The plans provide for automatic grants of options to
directors on December 31 of each year in specified amounts.
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 --
Certain Relationships and Related Transactions" of the Proxy Statement.
Item 14. Principal Accounting Fees and Services.
- ------------------------------------------------
The information called for by this item as incorporated herein by
reference to the section entitled "Independent Public Accountants" in the Proxy
Statement.
33
Part IV
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
- --------------------------------------------------------------------------
(a) The following documents are filed as part of this Annual Report on
Form 10-K.
1. Financial Statements
The following financial statements are incorporated
by reference from the Company's Annual Report to Stockholders
for the fiscal year ended September 30, 2003 which is filed as
Exhibit 13 hereto:
Independent Auditor's Report
Consolidated Statements of Financial Condition as of September 30, 2003 and 2002
Consolidated Statements of Income for the fiscal years ended September 30, 2003,
2002 and 2001
Consolidated Statements of Stockholders' Equity for
the fiscal years ended September 30, 2003, 2002
and 2001
Consolidated Statements of Cash Flows for the fiscal
years ended September 30, 2003, 2002 and 2001
Notes to Consolidated Financial Statements
2. Financial Statement Schedules
The Company is filing herewith the Report of its
Independent Auditor on its Consolidated Financial Statements
for the fiscal year ended September 30, 2002 which has been
excluded from its Annual Report to Stockholders for the fiscal
year ended September 30, 2003 in accordance with Note 1 to
Rule 14a-3(b)(1).
3. Exhibits
The following exhibits are filed with this Annual
Report on Form 10-K or incorporated by reference herein:
3.1 Articles of Incorporation (1)
3.2 Amended and Restated Bylaws
4.1 Common Stock Certificate (1)
4.2 Rights Agreement, dated as of March 31, 2003, by and between Fidelity
Bancorp, Inc. and Registrar and Transfer Company (2)
4.3* Indenture, dated as of September 26, 2002, between Fidelity Bancorp, Inc.
and State Street Bank and Trust Company of Connecticut, National
Association
4.4* Amended and Restated Declaration of Trust, dated as of September 26,
2002, by and among State Street Bank and Trust Company, national
Association, as Institutional Trustee, Fidelity Bancorp, Inc., as Sponsor
and William L. Windisch, Richard G. Spencer and Lisa L. Griffith, as
Administrators
34
4.5* Guarantee Agreement, as dated as of September 26, 2002, by and between
Fidelity Bancorp, Inc. and State Street Bank and Trust Company of
Connecticut, National Association
10.1** Employee Stock Ownership Plan, as amended (1)
10.2** 1988 Employee Stock Compensation Program (1)
10.3** 1993 Employee Stock Compensation Program (4)
10.4** 1997 Employee Stock Compensation Program (5)
10.5** 1993 Directors' Stock Option Plan (4)
10.6** 1998 Group Term Replacement Plan (6)
10.7** 1998 Salary Continuation Plan Agreement by and between W.L. Windisch,
the Company and the Bank (6)
10.8** 1998 Salary Continuation Plan Agreement by and between R.G. Spencer,
the Company and the Bank (6)
10.9** 1998 Salary Continuation Plan Agreement by and between M.A. Mooney,
the Company and the Bank (6)
10.10** Salary Continuation Agreement with Lisa L. Griffith
10.11** 1998 Stock Compensation Plan (7)
10.12** 2000 Stock Compensation Plan (8)
10.13** 2001 Stock Compensation Plan (9)
10.14** 2002 Stock Compensation Plan (10)
13 Annual Report to Stockholders for the fiscal year ended September 30,
2003
14 Code of Ethics
16.1 Letter re Change in Certifying Accountant (11)
20.1 Dividend Reinvestment Plan (12)
21 Subsidiaries
23.1 Consent of Beard Miller Company LLP
23.2 Consent of KPMG LLP
31.1 Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer
31.2 Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer
32 Section 1350 Certification
- ---------------
* Not filed in accordance with the provisions of Item 601(b)(4)(iii) of
Regulation S-K. The Company agrees to provide a copy of these documents
to the Commission upon request.
** Management contract or compensatory plan or arrangement.
(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 (SEC File No. 33-55384) filed with the SEC on
December 3, 1992 (the "Registration Statement").
(2) Incorporated by reference from Exhibit 1 to the Company's Registration
Statement on Form 8-A filed March 31, 2003.
(3) Incorporated by reference to an identically numbered exhibit to Form
10-Q filed with the SEC on August 14, 2002.
(4) Incorporated by reference from an exhibit to the Registration Statement
on Form S-8 (SEC File No. 333-26383) filed with the SEC on May 2, 1997.
(5) Incorporated by reference from an exhibit to the Registration Statement
on Form S-8 (SEC File No. 333-47841) filed with the SEC on March 12,
1998.
(6) Incorporated by reference to an identically numbered exhibit to Form
10-Q filed with the SEC on December 29, 1998.
(7) Incorporated by reference from Exhibit 4.1 to the Registration
Statement on Form S-8 (SEC File No. 333-71145) filed with the SEC on
January 25, 1999.
35
(8) Incorporated by reference to Exhibit 4.1 to the Registration Statement
on Form S-8 (SEC File No. 333-53934) filed with the SEC on January 29,
2001.
(9) Incorporated by reference from Exhibit 4.1 to the Registration
Statement on Form S-8 (SEC File No. 333-81572) filed with the SEC on
January 29, 2002.
(10) Incorporated by reference from Exhibit 4.1 to Registration Statement on
Form S-8 (SEC File No. 333-103448) filed with the SEC on February 26,
2003.
(11) Incorporated by reference to an identically numbered exhibit to the
Form 8-K filed with the SEC on June 4, 2003.
(12) Incorporated by reference to an identically numbered exhibit to Form
10-Q filed with the SEC on February 14, 2000.
(b) Reports on Form 8-K
A Report on Form 8-K was filed on July 2, 2003 reporting under
Item 4 the engagement of Beard Miller Company LLP as its
independent auditors.
A Report on Form 8-K was filed on July 17, 2003 reporting
under Item 9 the Company earnings release for the quarter
ended June 30, 2003 and to report a quarterly cash dividend.
A Report on Form 8-K was filed on July 28, 2003 reporting
under Item 5 the completion of the Company's stock repurchase
program originally announced in May 2003, and announcing the
approval of a new stock repurchase program to repurchase up to
5% or approximately 127,000 shares.
No financial statements were filed with the above reports.
36
Independent Auditors' Report
The Board of Directors and Stockholders
Fidelity Bancorp, Inc. and Subsidiaries
We have audited the accompanying consolidated statement of financial condition
of Fidelity Bancorp, Inc. and subsidiaries as of September 30, 2002 and the
related consolidated statements of income, stockholders' equity, and cash flows
for each of the years in the two-year period ended September 30, 2002. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Fidelity Bancorp,
Inc. and subsidiaries as of September 30, 2002 and the results of their
operations and their cash flows for each of the years in the two-year period
ended September 30, 2002, in conformity with accounting principles generally
accepted in the United States of America.
/s/KPMG LLP
November 8, 2002
SIGNATURES
Pursuant to the requirements of Section 13 and 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
FIDELITY BANCORP, INC.
Date: December 29, 2003 By: /s/Richard G. Spencer
-------------------------------------
Richard G. Spencer
President and Chief Executive Officer
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
Registrant and in the capacities and on the date indicated
By: /s/William L. Windisch By: /s/Richard G. Spencer
-------------------------------------------- ----------------------------------------------
William L. Windisch Richard G. Spencer
Chairman of the Board and Director President, Chief Executive Officer and
Director
(Principal Executive Officer)
Date: December 29, 2003 Date: December 29, 2003
By: /s/J. Robert Gales By: /s/Robert F. Kastelic
-------------------------------------------- ----------------------------------------------
J. Robert Gales Robert F. Kastelic
Director Director
Date: December 29, 2003 Date: December 29, 2003
By: /s/Oliver D. Keefer By: /s/Charles E. Nettrour
-------------------------------------------- ----------------------------------------------
Oliver D. Keefer Charles E. Nettrour
Director Director
Date: December 29, 2003 Date: December 29, 2003
By: /s/Joanne Ross Wilder By: /s/Lisa L. Griffith
-------------------------------------------- ----------------------------------------------
Joanne Ross Wilder Lisa L. Griffith
Director Senior Vice President and Chief
Financial Officer (Principal Financial
Date: December 29, 2003 and Accounting Officer)
Date: December 29, 2003