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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended SEPTEMBER 30, 2004
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or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______________ to _____________
Commission File Number: 0-22288
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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, 2004 was $42.8
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 21, 2004, the Registrant had outstanding 2,640,390 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, 2004. (Part II)
2. Portions of the Registrant's definitive Proxy Statement for the 2005 Annual
Meeting of Stockholders. (Part III)
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FIDELITY BANCORP, INC.
ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2004
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, Related Stockholder
Matters and Issuer Purchases of Equity Securities.............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.......32
Item 8. Financial Statements and Supplementary Data......................32
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.....................................32
Item 9A. Controls and Procedures..........................................32
Item 9B. Other Information................................................32
PART III
Item 10. Directors and Executive Officers of the Registrant...............32
Item 11. Executive Compensation...........................................33
Item 12. Security Ownership of Certain Beneficial Owners and Management...33
Item 13. Certain Relationships and Related Transactions...................33
Item 14. Principal Accounting Fees and Services...........................33
PART IV
Item 15. Exhibits, Financial Statement Schedules..........................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 conducts no
significant business or operations of its own other than holding all the
outstanding stock of the Bank. 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 to
applicable limits by the Savings Association Insurance Fund ("SAIF") of the
Federal Deposit Insurance Corporation ("FDIC"). The Bank is a member of the
Federal Home Loan Bank ("FHLB") of Pittsburgh. 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, 2004 amounted to
$83.0 million.
The Company's executive offices are located at 1009 Perry Highway,
Pittsburgh, Pennsylvania 15237 and its telephone number is (412) 367-3300. The
Company maintains a website at www.fidelitybancorp-pa.com.
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COMPETITION
The Bank is one of many financial institutions serving its market area. The
competition for deposit products and loan originations comes from other insured
financial institutions such as commercial banks, thrift institutions and credit
unions in the Bank's market area. Competition for deposits also includes
insurance products sold by local agents and investment products such as mutual
funds and other securities sold by local and regional brokers. Based on data
compiled by the FDIC, the Bank had a 0.70% share of all FDIC-insured deposits in
the Pittsburgh Metropolitan Statistical Area as of June 30, 2004, the latest
date for such data as available, ranking it 16th among 64 FDIC-insured
institutions. This data does not reflect deposits held by credit unions with
which the Bank also competes.
2
LENDING ACTIVITIES. The following table sets forth the composition of the
Company's loan portfolio in dollar amounts and in percentages of the respective
portfolios at the dates indicated.
AT SEPTEMBER 30,
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2004 2003 2002
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$ % $ % $ %
-------- ----- -------- ----- -------- -----
(DOLLARS IN THOUSANDS)
Real estate loans:
Residential:
Single-family (1-4 units).............. $109,991 34.7% $107,122 38.6% $169,849 51.5%
Multi-family (over 4 units)............. 12,191 3.8 5,299 1.9 7,217 2.2
Construction:
Residential............................. 23,968 7.6 10,669 3.9 11,372 3.4
Commercial.............................. 12,463 3.9 4,539 1.6 8,205 2.5
Commercial................................ 50,334 15.9 46,757 16.8 29,036 8.8
Total real estate loans.............. 208,947 65.9 174,386 62.8 225,679 68.4
Installment loans........................... 75,990 24.0 67,332 24.2 61,872 18.8
Commercial business loans and leases........ 32,082 10.1 35,975 13.0 42,258 12.8
-------- ----- -------- ----- -------- -----
Total loans receivable............... 317,019 100.0% 277,693 100.0% 329,809 100.0%
===== ===== =====
Less:
Loans in process.......................... (23,409) (9,499) (9,065)
Unamortized discounts and fees............ (612) (691) (1,368)
Allowance for loan losses................. (2,609) (3,091) (3,056)
-------- -------- --------
Net loans receivable................. $290,389 $264,412 $316,320
======== ======== ========
AT SEPTEMBER 30,
------------------------------------------
2001 2000
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$ % $ %
-------- ----- -------- -----
(DOLLARS IN THOUSANDS)
Real estate loans:
Residential:
Single-family (1-4 units).............. $189,626 57.5% $207,853 59.6%
Multi-family (over 4 units)............. 6,400 2.0 5,282 1.5
Construction:
Residential............................. 4,577 1.4 3,972 1.1
Commercial.............................. 4,706 1.4 6,928 2.0
Commercial................................ 23,775 7.2 22,706 6.5
Total real estate loans.............. 229,084 69.5 246,741 70.7
Installment loans........................... 67,725 20.5 68,614 19.7
Commercial business loans and leases........ 32,834 10.0 33,584 9.6
-------- ----- -------- -----
Total loans receivable............... 329,643 100.0% 348,939 100.0%
===== =====
Less:
Loans in process.......................... (6,341) (6,558)
Unamortized discounts and fees............ (1,831) (2,033)
Allowance for loan losses................. (2,871) (2,910)
-------- --------
Net loans receivable................. $318,600 $337,438
======== ========
3
LOAN PORTFOLIO SENSITIVITY. The following table sets forth the estimated
maturity of the Company's loan portfolio at September 30, 2004. The table does
not include prepayments or scheduled principal repayments. Prepayments and
scheduled principal repayments on loans totaled $96.0 million for the year ended
September 30, 2004. 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
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(IN THOUSANDS)
Real estate loans:
Residential ................................... $ 318 $ 3,081 $118,783 $122,182
Commercial .................................... 361 6,785 43,188 50,334
Construction................................... 1,729 4,703 29,999 36,431
Installment loans................................. 16,772 9,550 49,668 75,990
Commercial business loans and leases.............. 9,863 14,708 7,511 32,082
------- ------- -------- --------
Total................................... $29,043 $38,827 $249,149 $317,019
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The following table sets forth the dollar amount of all loans at September
30, 2004, due after September 30, 2005, which have fixed interest rates and
floating or adjustable interest rates.
FIXED FLOATING OR
RATES ADJUSTABLE RATES TOTAL
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(IN THOUSANDS)
Real estate loans:
Residential ...................................... $ 72,973 $ 48,891 $121,864
Commercial ....................................... 10,569 39,404 49,973
Construction...................................... 7,474 27,228 34,702
Installment loans.................................... 52,181 7,037 59,218
Commercial business loans and leases................. 10,895 11,324 22,219
-------- -------- --------
Total....................................... $154,092 $133,884 $287,976
======== ======== ========
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.
RESIDENTIAL 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
4
on existing single-family residences. At September 30, 2004, real estate lending
included $122.2 million of residential loans, $24.0 million of residential
construction loans, $50.3 million of commercial real estate loans, and $12.5
million of commercial construction loans.
The Bank originates single-family residential loans and residential
construction loans which provide for periodic 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 one, three,
five or ten years generally in accordance with the index of average yield on
U.S. Treasury Securities adjusted to a constant maturity of the applicable time
period. 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, 2004 approximately $117.6 million or
56.3% 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 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, 2004, approximately $91.3 million or 43.7% 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 $333,700 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 $333,700. 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 these 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.
COMMERCIAL AND MULTI-FAMILY REAL ESTATE LENDING. 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, 2004, the Bank's portfolio included
$50.3 million of commercial real estate, and $12.2 million of multi-family
residential real estate 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.
Commercial and multi-family mortgage loans generally are considered to
entail significantly greater risk than one- to four-family real estate lending.
The repayment of these loans typically is dependent on the successful operations
and income stream of the borrower and the real estate securing the loan as
collateral. These risks can be significantly affected by economic conditions. In
addition, non-residential real estate lending generally requires substantially
greater evaluation and oversight efforts compared to residential real estate
lending.
CONSTRUCTION LENDING. 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.
Construction lending is generally considered to involve a higher degree of
credit risk than long-term permanent financing of residential properties. If the
estimate of construction cost proves to be inaccurate, the Bank may be compelled
to advance additional funds to complete the construction with repayment
dependent, in part, on the success of the ultimate project rather than the
ability of a borrower or guarantor to repay the loan. If the Bank is forced to
foreclose on a project prior to completion, there is no assurance that it will
be able to recover all of the unpaid portion of the loan. In addition, the Bank
may be required to fund additional amounts to complete a project and may have to
hold the property for an indeterminate period of time.
INSTALLMENT LENDING. The Bank offers a wide variety of installment loans,
including home equity loans and consumer loans. At September 30, 2004, home
equity loans amounted to $71.5 million or 94.2% 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, 2004, these loans
amounted to $1.7 million, which
6
represented 2.3% of the Bank's total installment loan portfolio. At September
30, 2004, motor vehicle loans amounted to $146,000 and unsecured loans and loans
secured by property other than real estate amounted to $1.6 million.
The Bank also makes other types of installment loans such as savings
account loans, personal lines of credit and overdraft loans. At September 30,
2004, these loans amounted to $2.7 million or 3.5% of the total installment loan
portfolio. That total consisted of $842,000 of savings account loans, $1.8
million of personal lines of credit and $26,000 of overdraft loans.
Consumer and overdraft loans and, to a lesser extent, home equity loans may
involve a greater risk of nonpayment than traditional first mortgage loans on
single-family residential dwellings. However, such loans generally provide a
greater rate of return, and the Bank underwrites the loans in conformity to
standards adopted by its Board of Directors.
COMMERCIAL BUSINESS LOANS AND LEASES. Commercial business loans of both a
secured and unsecured nature are made by the Bank for business purposes to
incorporated and unincorporated businesses. Typically, these are loans made for
the purchase of equipment, to finance accounts receivable and to finance
inventory, as well as other business purposes. At September 30, 2004, these
loans amounted to $30.9 million or 10.6% 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,
2004, commercial leases amounted to $1.2 million or 0.4% 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 $550 for the year ended
September 30, 2004. As of September 30, 2004, loans serviced for others totaled
$2,000.
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 one 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 half to one point 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, 2004, the Bank sold $2.2 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
7
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 of up to $750,000,
commercial first mortgages of up to $750,000, home equity of up to $300,000,
secured consumer of up to $75,000, unsecured consumer of up to $50,000 and
commercial loans up to $500,000. 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
consumer and commercial loans up to the FNMA conforming loan limit (currently
$333,700), $200,000, $200,000, $75,000, $50,000, and $200,000, 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 $200,000 if the amount of the loan
plus prior indebtedness is not in excess of a 80% loan-to-value ratio; to
approve home equity loans up to $100,000 if the amount of the loan plus prior
indebtedness is in excess of 80%; to approve commercial loans up to $200,000; 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 FDIC which
may order the establishment of additional loss allowances.
Included in nonperforming loans at September 30, 2004 are nine
single-family residential real estate loans totaling $777,000, three commercial
real estate loans totaling $269,000, 31 home equity and installment loans
totaling $530,000, and 20 commercial business loans totaling $2.1 million.
Certain other
8
loans, while performing as of September 30, 2004, were classified as
substandard, doubtful or loss. Performing loans which were classified as of
September 30, 2004, included one single-family residential real estate loan
totaling $41,000; one commercial real estate loan totaling $75,000; four equity
loans totaling $142,000 and four commercial business loans totaling $402,000.
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."
At September 30, 2003 non-accrual loans consisted of 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. Such non-performing loans consisted of all
substandard, doubtful and loss classified assets. See "-- Nonperforming Loans
and Foreclosed Real Estate."
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 one-to-four
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 $1.2 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 one-to-four
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."
9
The following table sets forth the Company's classified assets in
accordance with its classification system.
AT SEPTEMBER 30,
----------------------------------------------------------------
2004 2003 2002 2001 2000
------ ------ ------ ------ ------
(IN THOUSANDS)
Special Mention.............. $3,269 $ 709 $ 768 $ 559 $ 872
Substandard.................. 4,270 5,862 2,609 2,176 1,871
Doubtful..................... 14 6 45 142 72
Loss......................... 23 23 3 30 18
------ ------ ------ ------ ------
$7,576 $6,600 $3,425 $2,907 $2,833
====== ====== ====== ====== ======
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.
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
10
are expensed as incurred. Additional write downs are charged to income, and the
carrying value of the property reduced, when the carrying value exceeds fair
value less estimated cost to sell.
The following table sets forth information regarding 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") No. 15 at the dates
indicated. The Company had accruing loans past due 90 days or more of $481,000,
$1.9 million and $2.7 million at September 30, 2004, 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 $2.4
million at September 30, 2004, for which the related allowance for credit losses
was $43,000. 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 $184,000 for the year ended September 30, 2004. During the year ended
September 30, 2004, $75,000 in interest income was recorded on such loans.
AT SEPTEMBER 30,
------------------------------------------------------------------
2004 2003 2002 2001 2000
------ ------ ------ ------ ------
(DOLLARS IN THOUSANDS)
Nonaccrual residential real
estate loans (1-4 family)................ $ 777 $ 795 $ 515 $ 110 $ 520
Nonaccrual construction, multi-
family residential and
commercial real estate................... 269 367 408 814 624
Nonaccrual installment loans............... 530 615 273 242 762
Nonaccrual commercial business
loans and leases......................... 2,070 1,151 1,461 1,182 55
------ ------ ------ ------ ------
Total nonperforming loans.................. $3,646 $2,928 $2,657 $2,348 $1,961
====== ====== ====== ====== ======
Total nonperforming loans as a
percent of total loans receivable........ 1.15% 1.05% 0.81% 0.71% 0.56%
====== ====== ====== ====== ======
Total foreclosed real estate, net.......... $1,517 $ 675 $ 658 $ 314 $ 181
====== ====== ====== ====== ======
Total nonperforming loans and
foreclosed real estate as a
percent of total assets.................. 0.82% 0.58% 0.54% 0.48% 0.39%
====== ====== ====== ====== ======
At September 30, 2004, 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,
-----------------------------------------------------------------
2004 2003 2002 2001 2000
------ ------ ------ ------ -------
(DOLLARS IN THOUSANDS)
Balance at beginning of period.................. $3,091 $3,056 $2,871 $2,910 $2,477
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....................... 275 555 400 475 470
Charge-offs:
Residential real estate....................... (70) (15) (32) (14) (12)
Commercial real estate........................ (334) -- (81) (95) (165)
Installment................................... (222) (125) (130) (428) (181)
Commercial.................................... (193) (484) (277) (108) (67)
------ ------ ------ ------ -------
Total..................................... (819) (624) (520) (645) (425)
Recoveries:
Residential real estate....................... -- 3 4 -- --
Commercial real estate........................ -- -- 10 96 --
Installment................................... 30 10 26 25 15
Commercial.................................... 32 51 61 10 15
------ ------ ------ ------ -------
Total..................................... 62 64 101 131 30
Net charge-offs................................. (757) (560) (419) (514) (395)
------ ------ ------ ------ -------
Balance at end of period........................ $2,609 $3,091 $3,056 $2,871 $2,910
====== ====== ====== ====== ======
Ratio of net charge-offs during
the period to average loans
outstanding during the period................. 0.27% 0.19% 0.13% 0.15% 0.13%
====== ====== ====== ====== ======
12
ALLOCATION 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,
-------------------------------------------------------------------------------
2004 2003 2002
-------------------- --------------------- --------------------
$ % $ % $ %
------ ----- ------ ----- ------ -----
(DOLLARS IN THOUSANDS)
Residential real estate loans........... $ 395 36.2% $ 659 40.5% $ 917 53.7%
Commercial real estate loans............ 714 18.2 905 16.8 624 8.8
Construction loans...................... 234 11.5 149 5.5 146 5.9
Installment loans....................... 389 24.0 461 24.2 488 18.8
Commercial business loans and
leases............................... 877 10.1 917 13.0 881 12.8
------ ----- ------ ----- ------ -----
Total............................ $2,609 100.0% $3,091 100.0% $3,056 100.0%
====== ===== ====== ===== ====== =====
AT SEPTEMBER 30,
---------------------------------------------------
2001 2000
--------------------- ---------------------
$ % $ %
------ ----- ------ -----
(DOLLARS IN THOUSANDS)
Residential real estate loans........... $1,176 59.5% $ 986 61.1%
Commercial real estate loans............ 246 7.2 219 6.5
Construction loans...................... 60 2.8 50 3.1
Installment loans....................... 483 20.5 706 19.7
Commercial business loans and
leases............................... 906 10.0 949 9.6
------ ----- ------ -----
Total............................ $2,871 100.0% $2,910 100.0%
====== ===== ====== =====
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 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, 2004,
the Bank had securities classified as "held to maturity" and "available for
sale" in the amount of $109.3 million and $186.1 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, 2004,
the Company's securities available for sale had an amortized cost of $184.3
million and fair value of $186.1 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, 2004, 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,
--------------------------------------
2004 2003 2002
-------- -------- -------
(IN THOUSANDS)
Available-for-sale:
U.S. government and agency................................ $ 42,282 $46,479 $22,030
Municipal obligations..................................... 16,772 30,451 36,039
Corporate obligations..................................... 12,237 18,259 17,321
Mutual funds(1)........................................... 10,364 9,646 4,533
FreddieMac preferred stock................................ 1,409 1,409 1,519
Equity securities......................................... 3,118 1,228 1,262
Trust preferred securities................................ 23,910 11,212 4,601
-------- -------- -------
Total.................................................. $110,092 $118,684 $87,305
======== ======== =======
Held-to-maturity:
U.S. government and agency................................ $ 22,973 $ 33,040 $13,801
Municipal obligations..................................... 23,070 21,153 17,389
Corporate obligations..................................... 6,739 7,000 8,008
-------- -------- -------
Total.................................................. $ 52,782 $ 61,193 $39,198
======== ======== =======
_________
(1) Consists of investment in the Asset Management Fund ARM Fund, Access
Capital Fund, and Legg Mason Value Trust Fund.
At September 30, 2004, 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 $9,766 $9,649
====== ======
16
MORTGAGE-BACKED SECURITIES
AT SEPTEMBER 30,
-----------------------------------------
2004 2003 2002
------- ------- -------
(IN THOUSANDS)
Available-for-sale:
GinnieMae................................... $ 4,811 $ 8,525 $10,450
FannieMae..................................... 35,152 31,159 18,756
FreddieMac.................................... 15,337 9,623 11,326
GinnieMae Remic............................... -- 1,480 1,236
FannieMae Remic............................... 3,559 8,018 3,102
FreddieMac Remic............................. 9,426 9,252 17,729
Collateralized mortgage obligations........... 5,924 2,641 7,672
------- ------- -------
Total................................... $74,209 $70,698 $70,271
======= ======= =======
Held-to-maturity:
GinnieMae..................................... $ 1,578 $ 2,485 $ 2,050
FannieMae..................................... 19,506 13,459 13,158
FreddieMac.................................... 14,240 10,586 12,518
GinnieMae Remic............................... -- 36 678
FannieMae Remic............................... 5,095 10,744 --
FreddieMac Remic.............................. 8,823 7,396 6,961
Collateralized mortgage obligations........... 7,310 14,063 7,038
------- ------- -------
Total................................... $56,552 $58,769 $42,403
======= ======= =======
17
The following tables set forth the amount of each category of investment
securities of the Bank at September 30, 2004 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
--------------------- ----------------------- ------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD
------ -------- ------ -------- ------ --------
(DOLLARS IN THOUSANDS)
Available-for-sale:
U.S. government and agency............. $2,000 4.07% $26,563 3.41% $ 9,566 4.06%
Municipal obligations.................. -- -- 1,286 3.35 2,955 4.30
Corporate obligations.................. 5,642 5.54 5,058 5.84 529 6.87
Mutual funds(1)........................ 10,364 2.42 -- -- -- --
FreddieMac preferred stock............. 1,409 5.44 -- -- -- --
Equity securities...................... 3,118 4.18 -- -- -- --
Trust preferred securities............. -- -- -- -- 3,000 4.77
------- ---- ------- ---- ------- ----
Total.............................. $22,533 3.78% $32,907 3.78% $16,050 4.33%
======= ==== ======= ==== ======= ====
Held-to-Maturity:
U.S. government and agency............. $ 991 7.08% $ 9,025 3.27% $10,964 3.97%
Municipal obligations.................. -- -- 964 3.02 4,217 4.67
Corporate obligations.................. 2,011 5.16 4,728 6.66 -- --
------- ---- ------- ---- ------- ----
Total.............................. $ 3,002 5.79% $14,717 4.34% $15,181 4.16%
======= ==== ======= ==== ======= ====
AFTER TEN YEARS TOTAL
----------------------- -----------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
AMOUNT YIELD AMOUNT YIELD
------ ------- ------ --------
(DOLLARS IN THOUSANDS)
Available-for-sale:
U.S. government and agency............. $ 4,153 3.75% $ 42,282 3.62%
Municipal obligations.................. 12,530 4.91 16,771 4.68
Corporate obligations.................. 1,008 4.60 12,237 5.64
Mutual funds(1)........................ -- -- 10,364 2.42
FreddieMac preferred stock............. -- -- 1,409 5.44
Equity securities...................... -- -- 3,118 4.18
Trust preferred securities............. 20,911 4.09 23,911 4.18
------- ---- -------- ----
Total.............................. $38,602 4.33% $110,092 4.05%
======= ==== ======== ====
Held-to-Maturity:
U.S. government and agency............. $ 1,994 4.09% $ 22,973 3.84%
Municipal obligations.................. 17,889 4.85 23,070 4.74
Corporate obligations.................. -- -- 6,739 6.21
------- ---- -------- ----
Total.............................. $19,883 4.77% $ 52,782 4.54%
======= ==== ======== ====
(1) Consists of investment in the Asset Management Fund ARM Fund, Access
Capital 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, 2004 is
presented below.
AMOUNTS AT SEPTEMBER 30, 2004 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......................... $ -- $ -- $ -- $ 4,811 $ 4,811
FannieMae......................... -- -- 6,266 28,886 35,152
FreddieMac........................ -- -- 2,727 12,610 15,337
FannieMae Remic................... -- -- -- 3,559 3,559
FreddieMac Remic.................. -- -- 1,114 8,312 9,426
Collateralized mortgage
obligations.................. -- -- -- 5,924 5,924
-------- ------ ------- ------- -------
Total........................ $ -- $ -- $10,107 $64,102 $74,209
======== ====== ======= ======= =======
Weighted average yield.............. --% --% 3.51% 4.06% 3.98%
======== ====== ======= ======= =======
Held-to-maturity:
GinnieMae......................... $ -- $ 1 $ -- $ 1,577 $ 1,578
FannieMae......................... -- -- 5,840 13,666 19,506
FreddieMac........................ -- 1,319 8,054 4,867 14,240
FannieMae Remic................... -- -- -- 5,095 5,095
FreddieMac Remic.................. -- -- -- 8,823 8,823
Collateralized mortgage
obligations.................... -- -- -- 7,310 7,310
-------- ------ ------- ------- -------
Total........................ $ -- $1,320 $13,894 $41,338 $56,552
======== ====== ======= ======= =======
Weighted average yield.............. --% 4.97% 4.05% 3.97% 4.01%
======== ====== ======= ======= =======
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.
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").
19
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.
YEAR ENDED SEPTEMBER 30,
--------------------------------------------------------------------------------
2004 2003 2002
------------------------ ---------------------- ----------------------
AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE RATE BALANCE RATE BALANCE RATE
-------- ---- ------- ---- -------- ----
(DOLLARS IN THOUSANDS)
Checking accounts:
Non-interest-bearing.......... $ 28,756 -- % $ 26,977 --% $ 24,025 --%
Interest-bearing.............. 45,018 0.60 36,142 1.18 36,782 1.19
Passbook and club accounts....... 94,489 1.16 86,663 1.48 62,640 2.12
Money market accounts............ 16,158 0.79 17,153 1.09 16,606 1.90
Certificate accounts............. 181,244 3.39 195,102 3.68 192,217 4.43
-------- ---- -------- ---- -------- ----
Total................... $365,665 2.09% $362,037 2.51% $332,270 3.19%
======== ==== ======== ==== ======== ====
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, 2004, the Bank's total retirement
funds were $48.0 million or 13.3% 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.
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.
20
CERTIFICATES OF DEPOSITS. Maturities of certificates of deposit of $100,000
or more that were outstanding as of September 30, 2004 are summarized as
follows:
MATURITY AMOUNT
- -------- ------
(IN THOUSANDS)
3 months or less.......................................... $ 2,422
Over 3 months through 6 months............................ 4,108
Over 6 months through 12 months........................... 8,352
Over 12 months............................................ 14,963
-------
Total............................................ $29,845
=======
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, 2004, the Bank had
$206.2 million of advances outstanding, including $142.3 million in long-term
advances and $63.9 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, 2004, the Bank had $5.1 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,
--------------------------------------------
2004 2003 2002
------ ------- ------
(DOLLARS IN THOUSANDS)
Reverse repurchase agreements:
Average balance outstanding........................ $5,672 $ 5,946 $ 5,782
Maximum amount outstanding at any
month-end during the period...................... 7,391 7,994 7,014
Weighted average interest rate
during the period............................. 0.45% 0.64% 1.43%
Balance outstanding at end of period............... $5,118 $ 5,943 $ 5,849
Weighted average interest rate
at end of period.............................. 0.45% 0.37% 1.09%
FHLB Repoplus Advances:
Average balance outstanding........................ $44,601 $ 9,112 $ 3,969
Maximum amount outstanding at any
month-end during the period...................... 63,910 38,000 18,640
Weighted average interest rate
during the period............................. 1.91% 1.24% 2.28%
Balance outstanding at end of period............... $63,910 $38,000 $ --
Weighted average interest rate
at end of period.............................. 1.91% 1.23% --%
Total average short-term borrowings.................. $50,273 $15,058 $ 9,751
Average interest rate of total
short-term borrowings.............................. 1.80% 1.11% 1.09%
EMPLOYEES
At September 30, 2004, the Company had 103 full-time and 54 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 INCOME
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,
-------------------------------------------------------------------------------
2004 2003
----------------------------------- ------------------------------------
AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE INTEREST YIELD/COST BALANCE INTEREST YIELD/COST
-------- ------- ----------- -------- -------- ----------
(DOLLARS IN THOUSANDS)
Interest-earning assets:
Loans receivable....................... $280,676 $17,401 6.20% $292,482 $20,605 7.04%
Mortgage-backed securities............. 125,940 4,440 3.53 125,936 4,780 3.80
Investment securities and FHLB stock:
Taxable............................. 146,037 5,296 3.63 113,423 4,553 4.01
Non-taxable......................... 46,183 3,177 6.88 50,661 3,537 6.98
Interest-earning deposits.............. 654 3 0.49 6,346 85 1.34
-------- ------- ---- -------- ------- ----
Total interest-earning assets....... 599,490 30,317 5.06 588,848 33,560 5.70
-------- ------- ---- -------- ------- ----
Non-interest-earning assets............. 27,928 27,871
-------- --------
Total assets.......................... $627,418 $616,719
======== ========
Interest-bearing liabilities:
Deposits............................... $365,665 $ 7,635 2.09% $362,037 $ 9,078 2.51
Short-term borrowings.................. 50,429 789 1.57 7,282 181 2.49
Long-term debt........................ 157,114 7,081 4.51 188,169 9,746 5.18
Guaranteed preferred beneficial
interest in Company's debentures.... 10,310 500 4.85 11,577 1,208 10.28
-------- ------- ---- -------- ------- ----
Total interest-bearing liabilities... 583,518 16,005 2.75 569,065 20,213 3.55
-------- ------- ---- -------- ------- ----
Non-interest bearing liabilities........ 3,203 4,745
-------- --------
Total liabilities...................... 586,721 573,810
Stockholders' equity.................... 40,697 42,909
-------- --------
Total liabilities and
stockholders' equity................. $627,418 $616,719
======== ========
Net interest income..................... $14,312 $13,347
======= =======
Interest rate spread(1)................. 2.31% 2.15%
====== ======
Net interest margin(2).................. 2.39% 2.27%
====== ======
Ratio of average interest-earning assets
to average interest-bearing liabilities 102.74% 103.48%
====== ======
YEAR ENDED SEPTEMBER 30,
---------------------------------------
2002
--------------------------------------
AVERAGE AVERAGE
BALANCE INTEREST YIELD/COST
-------- ------- ----------
(DOLLARS IN THOUSANDS)
Interest-earning assets:
Loans receivable....................... $322,283 $24,177 7.50%
Mortgage-backed securities............. 103,712 5,709 5.50
Investment securities and FHLB stock:
Taxable............................. 80,762 4,093 5.07
Non-taxable......................... 51,349 3,689 7.18
Interest-earning deposits.............. 2,831 48 1.70
-------- ------- ----
Total interest-earning assets....... 560,937 37,716 6.73
-------- ------- ----
Non-interest-earning assets............. 24,270
--------
Total assets.......................... $585,207
========
Interest-bearing liabilities:
Deposits............................... $332,270 $10,592 3.19
Short-term borrowings.................. 3,969 202 5.09
Long-term debt........................ 196,331 11,258 5.73
Guaranteed preferred beneficial
interest in Company's debentures.... 11,019 1,062 9.36
-------- ------- ----
Total interest-bearing liabilities... 543,589 23,114 4.25
-------- ------- ----
Non-interest bearing liabilities........ 3,474
--------
Total liabilities...................... 547,063
Stockholders' equity.................... 38,144
--------
Total liabilities and
stockholders' equity................. $585,207
========
Net interest income..................... $14,602
=======
Interest rate spread(1)................. 2.48%
======
Net interest margin(2).................. 2.61%
======
Ratio of average interest-earning assets
to average interest-bearing liabilities 103.19%
======
(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,
----------------------------------------------------------------------------
2004 VS. 2003 2003 VS. 2002
------------------------------------- ----------------------------------
INCREASE (DECREASE) INCREASE (DECREASE)
DUE TO DUE TO
------------------------------------- ----------------------------------
VOLUME RATE NET VOLUME RATE NET
------ ------- ------- ------- -------- -------
(IN THOUSANDS)
Interest income on interest-earning assets:
Mortgage loans................................... $(1,158) $(1,507) $(2,665) $(2,320) $ (409) $(2,729)
Mortgage-backed securities....................... -- (340) (340) 585 (1,514) (929)
Installment loans................................ 1,891 (1,846) 45 (143) (505) (648)
Commercial business loans and leases............. (362) (222) (584) 186 (383) (197)
Investment securities and other investments...... 1,055 (754) 301 2,722 (2,377) 345
Total interest-earning assets................ 1,426 (4,669) (3,243) 1,030 (5,188) (4,158)
Interest expense on interest-bearing liabilities:
Deposits......................................... 89 (1,532) (1,443) 766 (2,280) (1,514)
Borrowed funds................................... 539 (2,596) (2,057) (277) (1,256) (1,533)
Trust preferred securities....................... (132) (576) (708) 54 92 146
Total interest-bearing liabilities........... 496 (4,704) (4,208) 543 (3,444) (2,901)
------ ------- ------- ------- -------- -------
Net change in net interest income............ $ 930 $ 35 $ 965 $ 487 $ (1,744) $(1,257)
====== ======= ======= ======= ======== =======
CERTAIN RATIOS
YEAR ENDED SEPTEMBER 30,
--------------------------------
2004 2003 2002
------- ------ --------
Return on average assets ................... 0.69% 0.66% 0.76%
Return on average equity ................... 10.62% 9.45% 11.60%
Average equity to assets ratio ............. 6.49% 6.96% 6.52%
Dividend payout ratio ...................... 29.75% 30.53% 23.29%
24
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. In
addition, the Company must obtain the prior approval of the Pennsylvania
Department of Banking in order to acquire control of another bank located in
Pennsylvania.
Federal statutes impose restrictions on the ability of a bank holding
company and its nonbank subsidiaries to obtain extensions of credit from its
subsidiary bank, on the subsidiary bank's investments in the stock or securities
of the holding company, and on the subsidiary bank's taking of the holding
company's stock or securities as collateral for loans to any borrower. A bank
holding company and its subsidiaries are also prevented from engaging in certain
tie-in arrangements in connection with any extension of credit, lease or sale of
property, or furnishing of services by the subsidiary bank.
A bank holding company is required to serve as a source of financial and
managerial strength to its subsidiary banks and may not conduct its operations
in an unsafe or unsound manner. In addition, it is the Federal Reserve policy
that a bank holding company should stand ready to use available resources to
provide adequate capital to its subsidiary banks during periods of financial
stress or adversity and should maintain the financial flexibility and
capital-raising capacity to obtain additional resources for assisting its
subsidiary banks. A bank holding company's failure to meet its obligations to
serve as a source of strength to its subsidiary banks will generally be
considered by the Federal Reserve to be an unsafe and unsound banking practice
or a violation of the Federal Reserve regulations, or both.
NON-BANKING ACTIVITIES. The business activities of the Company, as a bank
holding company, are restricted by the Bank Holding Company Act. Under the Bank
Holding Company Act and the Federal Reserve's bank holding company regulations,
the Company may only engage in, or acquire or control 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.
25
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 FDIC. 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 FDIC, the Bank is subject to extensive regulation and examination by the
Pennsylvania Department of Banking and by the FDIC, 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 FDIC or the United States Congress,
could have a material impact on us and our operations.
Federal law provides the federal banking regulators, including the FDIC 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 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 FDIC 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 FDIC 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 FDIC 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 savings association, remains a member of the Savings Association Insurance
Fund and its deposit accounts are insured by the FDIC, up to prescribed limits.
27
The FDIC 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 FDIC is authorized to levy emergency special assessments
on Bank Insurance Fund and Savings Association Insurance Fund members. The
FDIC'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 FDIC 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 2004 is approximately 0.0146% of insured deposits. These
assessments will continue until the Financing Corporation bonds mature in 2017.
REGULATORY CAPITAL REQUIREMENTS. The FDIC has promulgated capital adequacy
requirements for state-chartered banks that, like us, are not members of the
Federal Reserve System. At September 30, 2004, the Bank exceeded all regulatory
capital requirements and was classified as "well capitalized."
The FDIC'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 FDIC's
regulation, the highest- rated banks are those that the FDIC determines are not
anticipating or experiencing significant growth and have well diversified risk,
including no undue interest rate risk exposure, excellent asset quality, high
liquidity, good earnings and, in general, which are considered a strong banking
organization, 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 FDIC'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
FDIC 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, 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
FDIC'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.
28
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, 2004.
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 FHLB of
Pittsburgh, which is one of 12 regional Federal Home Loan Banks. Each FHLB
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 FHLB system. It makes loans to
members (i.e., advances) in accordance with policies and procedures established
by the board of trustees of the FHLB.
As a member, it is required to purchase and maintain stock in the FHLB 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 FHLB, if any, plus 0.7%
of its unused borrowing capacity, whichever is greater. At September 30, 2004,
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, 2004, the Bank
met its reserve requirements.
LOANS TO ONE BORROWER. Under Pennsylvania and federal law, Pennsylvania
savings banks have, subject to certain exemptions, lending limits to one
borrower in an amount equal to 15% of the institution's capital accounts. An
institution's capital account includes the aggregate of all capital, surplus,
undivided profits, capital securities and general reserves for loan losses. As
of September 30, 2004, the Bank's loans-to-one borrower limitation was $7.6
million and it was in compliance with such limitation.
29
ITEM 2. PROPERTIES.
- --------------------
At September 30, 2004, 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, 2004.
LOCATION LEASE EXPIRATION
- ---------------------------------------------------- DATE INCLUDING
COUNTY ADDRESS LEASE OR OWN OPTIONS
------ -------- --------------------
MAIN OFFICE
Allegheny 1009 Perry Highway Own
Pittsburgh, PA 15237
BRANCH OFFICES:
Allegheny 3300 Brighton Road Own
Pittsburgh, PA 15212
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 11/30/04
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
ADMINISTRATIVE OFFICES:
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 AND ISSUER PURCHASES OF EQUITY SECURITIES.
- --------------------------------------------------------------------------------
(a) MARKET FOR COMMON EQUITY. The information contained under the section
captioned "Stock Information" in the Company's Annual Report to Stockholders for
the fiscal year ended September 30, 2004 filed as Exhibit 13 hereto (the "Annual
Report") is incorporated herein by reference.
(b) USE OF PROCEEDS. Not applicable.
(c) ISSUER PURCHASES OF EQUITY SECURITIES.
(C) TOTAL NUMBER (D) MAXIMUM NUMBER
OF SHARES (OR UNITS) (OR APPROXIMATE DOLLAR
(B) PURCHASED AS PART VALUE) OF SHARES (OR
(A) TOTAL NUMBER AVERAGE PRICE OF PUBLICLY UNITS) THAT MAY YET BE
OF SHARES (OR PAID PER SHARE ANNOUNCED PLANS PURCHASED UNDER THE
PERIOD UNITS) PURCHASED (OR UNIT) OR PROGRAMS* PLANS OR PROGRAMS
- ------ ---------------- -------------- ------------------------ ----------------------
July 1 through 31, 2004 -- $ - -- 73,689
August 1 through 31, 2004 -- -- -- 73,689
September 1 through 30, 2004 731 21.83 731 72,958
Total 731 $ 21.83 731 72,958
* On October 23, 2003, the Registrant announced a stock repurchase plan for
up to 5% of shares outstanding or 133,000 shares.
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.
31
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.
ITEM 9A. CONTROLS AND PROCEDURES.
- ---------------------------------
EVALUATION OF DISCLOSURE 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.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING. 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.
ITEM 9B. OTHER INFORMATION.
- ---------------------------
Not applicable.
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 2005 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.
32
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
The information required by this item is incorporated herein by
reference to the Section captioned "Principal Holders" in the Proxy
Statement.
(B) SECURITY OWNERSHIP OF MANAGEMENT
The information required by this item is incorporated herein by
reference to the section captioned "Proposal I -- Election of
Directors" in 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.
(D) SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS
The information required by this item is incorporated herein by
reference to the section captioned "Equity Compensation Plan
Information" in the Proxy Statement.
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 Registered Public Accounting Firm" in the
Proxy Statement.
33
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES.
- -------------------------------------------------
(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, 2004 which is filed as Exhibit 13 hereto:
Report of Independent Registered Public Accounting Firm
Consolidated Statements of Financial Condition as of September
30, 2004 and 2003
Consolidated Statements of Income for the fiscal years ended
September 30, 2004, 2003 and 2002
Consolidated Statements of Stockholders' Equity for the fiscal
years ended September 30, 2004, 2003 and 2002
Consolidated Statements of Cash Flows for the fiscal years
ended September 30, 2004, 2003 and 2002
Notes to Consolidated Financial Statements
2. Financial Statement Schedules
The Company is filing herewith the Report of its Independent
Registered Public Accounting Firm 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, 2004 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 (2)
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 (3)
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 (5)
10.4** 1997 Employee Stock Compensation Program (6)
10.5** 1993 Directors' Stock Option Plan (5)
10.6** 1998 Group Term Replacement Plan (7)
10.7** 1998 Salary Continuation Plan Agreement by and between W.L.
Windisch, the Company and the Bank (7)
10.8** 1998 Salary Continuation Plan Agreement by and between R.G.
Spencer, the Company and the Bank (7)
10.9** 1998 Salary Continuation Plan Agreement by and between M.A.
Mooney, the Company and the Bank (7)
10.10** Salary Continuation Agreement with Lisa L. Griffith (2)
10.11** 1998 Stock Compensation Plan (8)
10.12** 2000 Stock Compensation Plan (9)
10.13** 2001 Stock Compensation Plan (10)
10.14** 2002 Stock Compensation Plan (11)
13 Annual Report to Stockholders for the fiscal year ended September 30, 2004
14 Code of Ethics (2)
16.1 Letter re Change in Certifying Accountant (12)
20.1 Dividend Reinvestment Plan (13)
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 the identically numbered exhibit to the
Company's Annual Report on Form 10-K for the fiscal year ended September
30, 2003.
(3) Incorporated by reference from Exhibit 1 to the Company's Registration
Statement on Form 8-A filed March 31, 2003.
(4) Incorporated by reference to an identically numbered exhibit to the
Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2002
filed with the SEC on August 14, 2002.
(5) 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.
(6) Incorporated by reference from an exhibit to the Registration Statement on
Form S-8 for the year ended September 30, 1998 (SEC File No. 333-47841)
filed with the SEC on March 12, 1998.
35
(7) Incorporated by reference to an identically numbered exhibit to the
Company's Annual Report on Form 10-K for the fiscal year ended
September 30, 1998 filed with the SEC on December 29, 1998.
(8) 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.
(9) 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 19,
2001.
(10) 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.
(11) 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.
(12) Incorporated by reference to an identically numbered exhibit to the
Form 8-K filed with the SEC on June 4, 2003.
(13) Incorporated by reference to an identically numbered exhibit to the
Company's Quarterly Report on Form 10-Q for the quarter ended December
31, 1999 filed with the SEC on February 14, 2000.
36
[LOGO] KPMG LLP
Suite 2500 Telephone 412 391 9710
One Mellon Center Fax 412 391 8963
Pittsburgh, PA 15219 Internet www.us kpmg.com
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
Fidelity Bancorp, Inc. and Subsidiaries:
We have audited the accompanying consolidated statements of income,
stockholder's equity, and cash flows of Fidelity Bancorp, Inc. and subsidiaries
for the 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
audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). 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 audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the results of operations and cash flows of
Fidelity Bancorp, Inc. and subsidiaries for the period ended September 30, 2002
in conformity with accounting principles generally accepted in the United States
of America.
/s/KPMG LLP
November 8, 2002
KPMG LLP, a U.S. limited liability partnership, is the U.S.
member firm of KPMG International, a Swiss cooperative
37
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
FIDELITY BANCORP, INC.
Date: December 29, 2004 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 dates indicated
By: 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: Date: December 29, 2004
By: /s/ J. Robert Gales By:
----------------------------------- -----------------------------------------------
J. Robert Gales Robert F. Kastelic
Director Director
Date: December 29, 2004 Date:
By: By: /s/ Charles K. Nettrour
----------------------------------- -----------------------------------------------
Oliver D. Keefer Charles E. Nettrour
Director Director
Date: Date: December 29, 2004
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, 2004 and Accounting Officer)
Date: December 29, 2004