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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, 1998
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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
FIDELITY BANCORP, INC.
- --------------------------------------------------------------------------------
(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
-------------------------------------------- -----
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (412) 367-3300
--------------
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [ X ] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates
of the Registrant, based on the closing sales price of the Registrant's Common
Stock as quoted on the National Market of The Nasdaq Stock Market on December
11, 1998 was $28.8 million.
As of December 11, 1998, the Registrant had outstanding 1,980,590
shares of Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
1. Parts II and IV -- Portions of the Registrant's Annual Report to
Stockholders for fiscal year ended September 30, 1998.
2. Part III -- Portions of the Registrant's Proxy Statement for a meeting
to be held on February 2, 1999.
Part I
Fidelity Bancorp, Inc. (the "Company") may from time to time make
written or oral "forward-looking statements", including statements contained in
the Company's filings with the Securities and Exchange Commission (including
this Annual Report on Form 10-K and the exhibits thereto), in its reports to
stockholders and in other communications by the Company, which are made in good
faith by the Company pursuant to the "safe harbor" provisions of the Private
Securities Litigation Reform Act of 1995.
These forward-looking statements involve risks and uncertainties, such
as statements of the Company's plans, objectives, expectations, estimates and
intentions, that are subject to change based on various important factors (some
of which are beyond the Company's control). The following factors, among others,
could cause the Company's financial performance to differ materially from the
plans, objectives, expectations, estimates and intentions expressed in such
forward-looking statements: the strength of the United States economy in general
and the strength of the local economies in which the Company conducts
operations; the effects of, and changes in, trade, monetary and fiscal policies
and laws, including interest rate policies of the board of governors of the
federal reserve system, inflation, interest rates, market and monetary
fluctuations; the timely development of and acceptance of new products and
services of the Company and the perceived overall value of these products and
services by users, including the features, pricing and quality compared to
competitors' products and services; the willingness of users to substitute
competitors' products and services for the Company's products and services; the
success of the Company in gaining regulatory approval of its products and
services, when required; the impact of changes in financial services' laws and
regulations (including laws concerning taxes, banking, securities and
insurance); technological changes, acquisitions; changes in consumer spending
and saving habits; and the success of the Company at managing the risks
resulting from these factors.
The Company cautions that the listed factors are not exclusive. The
Company does not undertake to update any forward-looking statement, whether
written or oral, that may be made from time to time by or on behalf of the
Company.
Item 1. Description of Business
On August 19, 1993, Fidelity Bank, PaSB ("Fidelity" or the "Bank")
consummated its reorganization into a bank holding company form of organization
(the "Reorganization") and thereby became a wholly owned subsidiary of the
Company. The Company's other subsidiary, FB Capital Trust (the "Trust"), was
created in May 1997 solely to facilitate the issuance of preferred securities
and the sale of the Company's junior subordinated debentures. However, since the
primary activities of the Company are those of the Bank, much of the discussion
herein pertains to the Bank, even though comparisons to total assets,
liabilities, etc. are based on the Company's consolidated numbers.
The Bank is a Pennsylvania-chartered stock savings bank which is
headquartered in Pittsburgh, Pennsylvania. Deposits in the Bank are insured by
the Savings Association Insurance Fund ("SAIF") of the Federal Deposit Insurance
Corporation ("FDIC"). The Bank, incorporated in 1927, conducts business from
eight full-service offices located in Allegheny and Butler counties, two of five
Pennsylvania counties which comprise the metropolitan and suburban areas of
greater Pittsburgh.
At September 30, 1998, the Company had total assets of $406.0 million,
savings deposits of $261.7 million and stockholders' equity of $29.0 million.
The Bank's principal business consists of attracting deposits from the general
public through its home office and branch offices and investing such
deposits primarily in single-family (one-to-four family) residential loans,
mortgage-backed securities and, to a lesser extent, commercial real estate loans
in the Bank's primary market area. In recent years, the Bank has also been an
active originator of home equity and consumer loans and has originated loans to
small businesses in its immediate market area.
The Bank's earnings have historically depended primarily on its level
of net interest income, which is determined by the difference between the yield
earned on its loans, investment and mortgage-backed securities and other
interest-earning assets and the rate paid on its deposits and borrowings. In
recent years, the Bank has sought to improve profitability by (i) emphasizing
the origination and purchase of interest-rate sensitive assets and assets with
short-term maturities; and (ii) developing a long-range asset and liability
management strategy to reduce the imbalance between the Bank's interest-earning
assets and its interest-bearing liabilities with short-term maturities. The Bank
has emphasized the origination of adjustable-rate mortgage loans and home
equity, consumer and commercial business loans, because such loans traditionally
have shorter terms to maturity. The Bank's Board of Directors has also adopted
written management and investment policies, formulated with the cooperation of
its senior officers, to implement portions of the Bank's assets and liability
management strategy.
As a result of the Bank's actions, the amount by which the Bank's
interest-earning that mature or reprice within one year exceed its
interest-bearing liabilities with similar characteristics equaled $4.1 million
or 1.0% of total assets at September 30, 1998. Adjustable-rate mortgage loans
amounted to 29.3%, 31.3% and 20.7% of the Bank's originations of mortgage loans
in fiscal 1998, 1997, and 1996 respectively. The origination of adjustable-rate
mortgage loans has been emphasized in recent years. The Bank also is emphasizing
the origination of home equity loans (loans secured by the equity in the
borrower's residence but not necessarily for the purpose of property
improvement). In recent years, the Bank has also been an active originator of
consumer loans and has increased its commercial business lending. These home
equity, consumer and commercial business loans generally have shorter maturities
and higher interest rates than residential mortgage loans. The Bank continues to
offer long-term, fixed-rate residential mortgage loans, but generally only under
terms, conditions, and documentation which permit the sale of a portion of such
loans in the secondary market.
Customer savings deposits with the Bank are insured by the SAIF to the
maximum extent provided by law and the Bank is now, following its charter
conversion, subject to examination and comprehensive regulation by the FDIC and
the Pennsylvania Department of Banking ("Department"). The Bank is also a member
of the Federal Home Loan Bank of Pittsburgh ("FHLB of Pittsburgh" or "FHLB"),
which is one of the 12 regional banks comprising the FHLB System. The Bank is
further subject to regulations of the Board of Governors of the Federal Reserve
System ("Federal Reserve Board") governing reserves required to be maintained
against deposits and certain other matters.
The Bank conducts its main business through its executive office
located at 1009 Perry Highway, Pittsburgh, Pennsylvania 15237, and eight (8)
branch offices located in Allegheny and Butler Counties in Pennsylvania. The
Bank's primary market area is in these counties in western Pennsylvania, and is
one of many financial institutions serving this market area. The competition for
deposit products and loan originations comes from other insured financial
institutions such as commercial banks, thrift institutions and credit unions in
the Bank's market area. Deposit competition also includes a number of insurance
products sold by local agents and investment products such as mutual funds and
other securities sold by local and regional brokers. The Bank's main office
telephone number is (412) 367-3300.
2
Lending Activities
The following table sets forth information concerning the Bank's loan portfolio
by type at the dates indicated.
As of September 30,
1998 1997 1996
---------------------- -------------------- --------------------
$ % $ % $ %
-------- ------- -------- ------ --------- ------
(Dollars in Thousands)
Real estate loans:
Residential:
Single-family (1-4 units).............. $115,559 49.1% $ 97,698 51.6% $ 80,186 50.8%
Multi-family (over 4 units)............ 4,262 1.8 4,165 2.2 4,435 2.8
Construction............................. 21,212 9.0 7,614 4.0 7,645 4.8
Commercial............................... 21,881 9.3 19,976 10.5 19,112 12.1
-------- ----- -------- ----- -------- -----
Total real estate loans............. 162,914 69.2 29,453 68.3 111,378 70.5
Installment loans.......................... 49,122 20.9 43,081 22.8 35,782 22.7
Commercial business and lease loans........ 23,157 9.9 16,873 8.9 10,702 6.8
-------- ----- -------- ----- -------- -----
Total loans receivable.............. 235,193 100.0% 189,407 100.0% 157,862 100.0%
===== ===== =====
Less:
Loans in process......................... (12,916) (3,695) (4,109)
Unamortized premiums,
discounts and deferred loan fees....... ( 1,142) (912) (960)
Allowance for possible loan losses....... ( 2,243) (1,931) (1,530)
-------- -------- --------
Net loans receivable................ $218,892 $182,869 $151,263
======== ======== ========
1995 1994
--------------------- --------------------
$ % $ %
--------- ------ --------- ----
Real estate loans:
Residential:
Single-family (1-4 units).............. $ 60,160 47.4% $61,570 52.7%
Multi-family (over 4 units)............ 5,156 4.1 5,664 4.9
Construction............................. 6,911 5.4 5,595 4.8
Commercial............................... 20,102 15.8 17,032 14.6
-------- ----- ------- -----
Total real estate loans............. 92,329 72.7 89,861 77.0
Installment loans.......................... 28,421 22.4 22,992 19.7
Commercial business and lease loans........ 6,186 4.9 3,918 3.3
Total loans receivable.............. 126,936 100.0% 116,771 100.0%
===== =====
Less:
Loans in process......................... (3,664) (1,843)
Unamortized premiums,
discounts and deferred loan fees....... (939) (947)
Allowance for possible loan losses....... (1,429) (1,334)
-------- --------
Net loans receivable................ $120,904 $112,647
======== ========
3
Contractual Maturities. The following table sets forth contractual
maturities of the total loans receivable of the Bank as of September 30, 1998 by
categories of loans.
Contractual Maturities Due
in Year(s) Ended September 30,
--------------------------------------
1999- After
1999 2003 2003
-------- -------- --------
Real estate loans:
Residential ..................... $ 868 $ 4,323 $114,630
Commercial ...................... 2,279 4,156 15,446
Construction .................... 2,684 1,799 16,729
Installment loans ................. 796 16,169 32,157
Commercial business and lease
loans ............................. 3,968 9,928 9,261
-------- -------- --------
Total(1) ................... $ 10,595 $ 36,375 $188,223
======== ======== ========
(1) Of the $224.6 million of principal repayments contractually due after
September 30, 1999, $178.6 million have fixed rates of interest and $46
million have adjustable or floating rates of interest.
Contractual principal repayments of loans do not necessarily reflect
the actual term of the Bank's loan portfolio. The average life of mortgage loans
is substantially less than their average contractual maturities because of loan
payments and prepayments and because of enforcement of due-on-sale clauses,
which generally give the Bank the right to declare a loan immediately due and
payable in the event, among other things, that the borrower sells the real
property subject to the mortgage and the loan is not repaid. The average life of
mortgage loans tends to increase, however, when current mortgage loan rates are
substantially higher than rates on existing mortgage loans and, conversely,
decrease when current mortgage loan rates are substantially lower than rates on
existing mortgage loans.
Origination, Purchase and Sale of Loans. As a Pennsylvania-chartered
savings institution, the Bank has general authority to originate and purchase
loans secured by real estate located throughout the United States.
Notwithstanding this nationwide authority, it has been the Bank's policy to
concentrate its lending activities in its immediate market area. As a result,
over 95% of the mortgage loans originated by the Bank are secured by real estate
located in Allegheny County and adjacent Pennsylvania counties. Generally, the
Bank has departed from this policy to purchase loans only when overall demand is
low in its immediate market area or when it has needed to supplement its
adjustable-rate mortgage ("ARM") loan portfolio. The Bank reviews all such loans
to ensure each meets the same underwriting standards that the Bank applies to
loans it originates. The Bank did not purchase any loans during fiscal 1998,
1997, or 1996.
Applications for all types of loans are taken at the Bank's home office
and branch offices by branch managers and loan originators and forwarded to the
administrative office for processing. In most cases, an interview with the
applicant is conducted at the branch office by a branch manager. Residential and
commercial real estate loan originations are primarily attributable to walk-in
and existing customers, real estate brokers and mortgage loan brokers.
Installment loans are primarily obtained through existing and walk-in customers.
The Board of Directors has delegated authority to the Loan Committee, consisting
of the President, Executive Vice President and Chief Financial Officer and
Executive Vice President and Chief Lending Officer, to approve first mortgage,
home equity, secured consumer, unsecured consumer
4
and commercial loans up to $500,000, $200,000, $75,000, $50,000, and $400,000,
respectively. Any loan in excess of those amounts must be approved by the Board
of Directors. The Board of Directors has further delegated authority to the
Bank's President to approve first mortgage, home equity, secured consumer,
unsecured consumer and commercial loans up to $175,000, $100,000, $75,000,
$50,000, and $125,000, respectively. The terms of the delegation also permit the
President to delegate authority to any other Bank officer under the same or more
limited terms. Pursuant to this authority, the President of the Bank has
delegated to the Executive Vice President and Chief Lending Officer, subject to
certain conditions, the authority to approve motor vehicle loans, secured
personal loans and unsecured personal loans up to $50,000, $50,000, and $15,000,
respectively; to approve first mortgage one-to-four family loans up to $175,000,
with a loan-to-value of 65% or less; to approve home equity loans up to $100,000
if the amount of the loan is not in excess of 80% of the equity; to approve
commercial loans up to $100,000; to approve education loans up to levels
approved by the Pennsylvania Higher Education Assistance Agency; and to approve
credit cards and checking account overdraft protection loans that conform to the
parameters of the program.
Generally, the Bank originated mortgage loans for inclusion in its loan
portfolio and not for sale in the secondary market. Although the Bank may sell
fixed-rate mortgage loans to FNMA, they prefer instead to retain the loans in
its portfolio as part of its effort to increase the overall size of the loan
portfolio.
Real Estate Lending. The Bank concentrates its lending activities on
the origination of loans and purchase of loan participations secured primarily
by first mortgage liens on existing single-family residences. At September 30,
1998, $127.5 million or 54.2% of the Bank's total loan portfolio consisted of
such loans (including $11.9 million of residential construction loans).
In response to a concern for more effective asset and liability
management, in recent years the Bank has been emphasizing single-family
residential loans which provide for annual interest rate adjustments. The
adjustable-rate residential mortgage loans offered by the Bank in recent years
have 10, 15 or 30-year terms and interest rates which adjust every year
generally in accordance with the index of average yield on U.S. Treasury
Securities adjusted to a constant maturity of one year. There is generally a 2%
cap or limit on any increase or decrease in the interest rate per year with a 5%
or 6% limit on the amount by which the interest can increase over the life of
the loan. The Bank has not engaged in the practice of using a cap on the
payments that could allow the loan balance to increase rather than decrease,
resulting in negative amortization.
Adjustable-rate mortgage loans comprised approximately 29.3%, 31.3% and
20.7% of the total originations of mortgage loans by the Bank in fiscal 1998,
1997, and 1996, respectively, and amounted to approximately $42.8 million or
26.2% of the Bank's portfolio of mortgage loans at September 30, 1998.
The Bank continues to originate fixed-rate loans with terms of 10, 15,
20 or 30 years in order to provide a full range of products to its customers,
but generally only under terms, conditions and documentation which permit the
sale of a portion of these loans in the secondary market. The Bank also offers a
10-year balloon loan with payments based on 30-year amortization. At September
30, 1998, approximately $120.2 million or 73.8% 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"
5
clauses contained in most of its fixed-rate, conventional mortgage loans, which
generally permit the Bank to require payment of the outstanding loan balance if
the mortgaged property is sold or transferred and, thus, contributes to
shortening the average life of such loans.
The Bank will lend generally up to 80% of the appraised value of the
property securing the loan (referred to as the loan-to-value ratio) up to a
maximum amount of $227,150 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 $227,150. The Bank will generally lend up to 80% of the
appraised value of the property securing such loans. These loans may have terms
of up to 30 years, but frequently have terms of 10 or 15 years or are 10-year
balloon loans with payments based on 15-year to 30-year amortization. Generally,
such loans will not exceed a maximum loan amount of $1.0 million, although the
Bank may consider loans above that limit on a case-by-case basis.
The Bank also, in recent years, has developed single-family residential
mortgage loan programs targeted to the economically disadvantaged and minorities
in the Bank's primary lending area. Under the programs, the Bank will lend up to
97% of the appraised value of the property securing the loan as well as reducing
the closing costs the borrower is normally required to pay. The Bank does not
believe that these loans pose a significantly greater risk of non-performance
than similar single-family residential mortgage loans underwritten using the
Bank's normal criteria.
The Bank requires the properties securing mortgage loans it originates
and purchases to be appraised by independent appraisers who are approved by or
who meet certain prescribed standards established by the Board of Directors. The
Bank also requires title, hazard and (where applicable) flood insurance in order
to protect the properties securing its residential and other mortgage loans.
Borrowers are subject to employment verification and credit evaluation reports,
and must meet established underwriting criteria with respect to their ability to
make monthly mortgage payments.
In addition to loans secured by single-family residential real estate,
the Bank also originates, to a lesser extent, loans secured by commercial real
estate and multi-family residential real estate. Over 95% of this type of
lending is done within the Bank's primary market area. At September 30, 1998,
$35.5 million or 15.1% of the Bank's total loan portfolio consisted of
commercial real estate and multi-family residential real estate loans (including
$9.3 million of commercial construction loans).
Although terms vary, commercial and multi-family residential real
estate loans are generally made for terms of up to 10 years with a longer period
for amortization and in amounts of up to 80% of the lesser of appraised value or
sales price. These loans are usually made with adjustable rates of interest, but
the Bank occasionally will make fixed-rate commercial or multi-family real
estate loans on a 10 or 7 year payment basis, with the period of amortization
negotiated on a case-by-case basis.
The Bank, to a limited extent, 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 Bank personnel and are based on stages of completion.
Applications for construction loans primarily are received from former borrowers
and builders who have worked with the Bank in the past. At September 30, 1998,
the Bank had 52 construction projects of this type in process. In addition, the
6
Bank also engages in loans to finance the construction of commercial properties.
At September 30, 1998, the Bank had seven construction projects of this type in
process.
Loans to finance commercial and multi-family residential real estate
and for the financing of construction generally provide a greater rate of return
but are considered to have a greater risk of loss than loans to finance the
purchase of single-family, owner-occupied dwellings. However, the Bank has
adopted underwriting guidelines to ensure that the loans involve only a minimal
amount of additional risk.
Installment Lending. The Bank offers a wide variety of installment
loans, including home equity loans and consumer loans.
Home equity loans amounted to $42.3 million or 86.1% of the Bank's
total installment loan portfolio at September 30, 1998. 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, 1998, these loans
amounted to $2.4 million, which represented 4.8% of the Bank's total installment
loan portfolio. At September 30, 1998, motor vehicle loans amounted to $1.4
million and unsecured loans and loans secured by property other than real estate
amounted to $1.0 million.
The Bank also makes other types of installment loans such as savings
account loans, education loans, credit card loans and overdraft loans. At
September 30, 1998, these loans amounted to $4.5 million or 9.1% of the total
installment loan portfolio. That total consisted of $1.2 million of education
loans, $630,000 of savings account loans, $2.3 million of credit card loans and
$360,000 of overdraft loans.
Consumer, credit card and overdraft loans and, to a lesser extent, home
equity loans may involve a greater risk of nonpayment than traditional first
mortgage loans on single-family residential dwellings. However, such loans
generally provide a greater rate of return, and the Bank underwrites the loans
in conformity to standards adopted by its Board of Directors.
Commercial Business Loans and Leases: Commercial business loans of both
a secured and unsecured nature are made by the Bank for business purposes to
incorporated and unincorporated businesses. Typically, these are loans made for
the purchase of equipment, to finance accounts receivable and to finance
inventory, as well as other business purposes. At September 30, 1998, these
loans amounted to $19.5 million or 8.3% of the total loan portfolio. In
addition, the Bank makes commercial leases to businesses, typically for the
purchase of equipment. All leases are funded as capital leases and the Bank does
not assume any residual risk at the end of the lease term. At September 30,
1998, commercial leases amounted to $3.7 million or 1.6% of the total loan
portfolio.
Loans-to-One Borrower Limitations
The Federal law generally does not permit loans-to-one borrower to
exceed 15% of unimpaired capital and surplus. Loans in an amount equal to an
additional 10% of unimpaired capital and surplus also may be made to a borrower
if the loans are fully secured by readily marketable securities. At September
7
30, 1998, the Bank's limit on loans-to-one borrower was $4.0 million, and the
Bank's largest loan or group of loans-to-one borrower, including related
entities, aggregated $2.2 million. This represents three commercial mortgage
loans, secured by four apartment buildings located in Allegheny county, and a
residential mortgage loan secured by a single family residence in Allegheny
county. The combined appraised value of the properties is $3.2 million. The
loans are current and performing at September 30, 1998.
Loan Fee and Servicing Income. In addition to interest earned on loans,
the Bank receives income through the servicing of loans and loan fees charged in
connection with loan originations and modifications, late payments, changes of
property ownership and for miscellaneous services related to its loans. Income
from these activities varies from period to period with the volume and type of
loans made.
The Bank charges loan origination fees which are calculated as a
percentage of the amount loaned. The fees received in connection with the
origination of conventional, single-family, residential real estate loans have
generally amounted to two to three points (one point being equivalent to 1% of
the principal amount of the loan). In addition, the Bank typically receives fees
of one or two points in connection with the origination of conventional,
multi-family residential loans and commercial real estate loans. Loan fees and
certain direct costs are deferred, and the net fee or cost is amortized into
income using the interest method over the expected life of the loan.
The Bank also receives income from servicing loans which are owned by
others. The amount of loans serviced by the Bank for others has decreased from
$6.5 million at September 30, 1996 to $6.1 million at September 30, 1998.
Non-performing Loans and Real Estate Owned. When a borrower fails to
make a required payment on a loan, the Bank attempts to cause the default to be
cured by contacting the borrower. In general, contacts are made after a payment
is more than 15 days past due, and a late charge is assessed at that time. In
most cases, defaults are cured promptly. If the delinquency on a mortgage loan
exceeds 90 days and is not cured through the Bank's normal collection procedures
or an acceptable arrangement is not worked out with the borrower, the Bank will
normally institute measures to remedy the default, including commencing a
foreclosure action or, in special circumstances, accepting from the mortgagor a
voluntary deed of the secured property in lieu of foreclosure.
The remedies available to a lender in the event of a default or
delinquency with respect to residential mortgage loans, and the procedures by
which such remedies may be exercised, are subject to Pennsylvania laws and
regulations. Under Pennsylvania law, a lender is prohibited from accelerating
the maturity of a residential mortgage loan, commencing any legal action
(including foreclosure proceedings) to collect on such loan, or taking
possession of any loan collateral until the lender has first provided the
delinquent borrower with at least 30 days' prior written notice specifying the
nature of the delinquency and the borrower's right to correct such delinquency.
In addition, the Homeowner's Emergency Assistance Act of 1983 further restricts
the ability of a lender to exercise any remedies it may have with respect to
loans for one- and two-family principal residences located in Pennsylvania
(including the lender's right to foreclose on such property) until the lender
has provided the delinquent borrower with written notice detailing the
borrower's rights under such Act to seek consumer credit counseling and state
financial assistance and until the borrower has exhausted or failed to pursue
such rights.
8
If foreclosure is effected, the property is sold at a public auction in
which the Bank may participate as a bidder. If the Bank is the successful
bidder, the acquired real estate is then included in the Bank "real estate
owned" account until it is sold. Although the Bank is permitted to finance sales
of real estate owned by "loans to facilitate," which may involve more favorable
interest rates and terms than generally would be granted under the Bank's
underwriting guidelines, it is the policy of the Bank to provide such loans only
in rare circumstances.
Loans are placed on non-accrual status when, in the judgment of
management, the probability of collection of interest is deemed to be
insufficient to warrant further accrual, generally when a loan is ninety days or
more delinquent. When a loan is placed on non-accrual status, previously accrued
but unpaid interest is deducted from interest income.
Real estate owned consists of properties acquired through foreclosure
and are recorded at the lower of cost (principal balance of the former mortgage
loan plus costs of obtaining title and possession) or fair value less estimated
cost to sell. Costs relating to development and improvement of the property are
capitalized, whereas costs of holding such real estate are expensed as incurred.
Additional write downs are charged to income, and the carrying value of the
property reduced, when the carrying value exceeds fair value less estimated cost
to sell.
9
The following tables sets forth information regarding nonaccrual loans
and real estate owned by the Bank at the dates indicated. The Bank did not have
any accruing loans which were 90 days or more overdue or any loans which were
classified as troubled debt restructurings at the dates presented.
1998 1997 1996 1995 1994
-------- -------- -------- ------- -------
(Dollars in thousands)
Nonaccrual residential real
estate loans (1-4 family)................ $ 224 $ 94 $ 567 $ 227 $ 574
Nonaccrual construction, multi-
family residential and
commercial real estate................... 199 751 134 -- 621
Nonaccrual installment and
commercial business loans............... 129 271 457 85 87
-------- ------ ------ ------- ------
Total non-performing loans................. $ 552 $1,116 $1,158 $ 312 $1,282
======== ====== ====== ======= ======
Total nonperforming loans as a
percent of total loans receivable........ .23% .59% .73% .25% 1.10%
======== ====== ====== ======= ======
Total real estate owned, net of
related reserves......................... $ 21 $ -- $ 370 $ 1,062 $ 455
======== ====== ====== ======= ======
Total nonperforming loans and real
estate owned as a percent of
total assets............................. .14% .29% .48% .49% .63%
======== ======= ======= ======= ======
At September 30, 1998, non-accrual loans consisted of six 1-4 family
residential real estate loans totaling $224,000, one commercial real estate loan
totaling $199,000, seven installment loans totaling $28,000, and four commercial
business loan totaling $101,000.
The Bank currently has one property in real estate owned which is a
single-family residence valued at $21,000.
10
The following table sets forth an analysis of the Bank's allowance for
loan losses.
Year Ended September 30,
------------------------------------------------------
1998 1997 1996 1995 1994
(Dollars in thousands)
Balance at beginning of period $1,931 $1,530 $1,429 $1,334 $1,122
Provision charged to operations 405 500 270 230 360
------ ------ ------ ------ ------
Charge-offs:
Residential real estate ..... 3 49 149 230 116
Installment ................. 97 71 44 29 40
Commercial .................. 10 3 78 116 3
Recoveries:
Residential real estate ..... -- -- 55 120 --
Installment ................. 11 8 10 11 6
Commercial .................. 6 16 37 109 5
------ ------ ------ ------ ------
Net charge-offs ............... 93 99 169 135 148
------ ------ ------ ------ ------
Balance at end of period ...... $2,243 $1,931 $1,530 $1,429 $1,334
====== ====== ====== ====== ======
Ratio of net charge-offs during
the period to average loans
outstanding during the period .05% .06% .12% .11% .14%
====== ====== ====== ====== ======
11
The following table shows the amount of the Bank's allowance for loan losses
attributable to each category of loan indicated and the percent of loans in each
category to total loans, at each of the dates indicated.
At September 30,
1998 1997 1996
--------------------- --------------------- ---------------------
$ % $ % $ %
------- ----- ----- ----- ------ ------
(Dollars in thousands)
Residential real estate loans............. $ 719 49.1% $ 707 53.8% $ 443 53.6%
Commercial real estate loans.............. 162 11.1 139 4.0 225 12.1
Construction loans........................ 131 9.0 53 10.5 60 4.8
Installment loans......................... 478 20.9 445 22.8 358 22.7
Commercial business loans................. 753 9.9 587 8.9 444 6.8
------ ----- ------ ----- ------ -----
Total.............................. $2,243 100.0% $1,931 100.0% $1,530 100.0%
====== ===== ====== ===== ====== =====
1995 1994
---------------------- --------------------
$ % $ %
------- ------ ------ ------
Residential real estate loans............. $ 385 51.5% $ 354 57.6%
Commercial real estate loans.............. 256 15.8 245 14.6
Construction loans........................ 61 5.4 58 4.8
Installment loans......................... 332 22.4 340 19.7
Commercial business loans................. 395 4.9 337 3.3
------ ----- ------ -----
Total.............................. $1,429 100.0% $1,334 100.0%
====== ===== ====== =====
12
Management establishes both allowances for estimated losses on
delinquent loans when it determines that losses are anticipated to be incurred
and general loan loss allowances for losses management believes are inherent in
the portfolio. In determining the appropriate level of allowances for possible
losses, consideration is given to general economic conditions, diversification
of loan portfolios, historical loss experience, identified credit problems,
delinquency levels and adequacy of collateral. For the year ended September 30,
1998, the Bank recorded provisions for loan losses of $405,000. At September 30,
1998, the Bank had an allowance for possible loan losses of $2.2 million or
1.02% of net loans receivable. The allowance for possible loan losses was 406.3%
of total non-performing loans at that date.
Management also establishes specific allowances for estimated losses on
real estate owned when it determines that losses are anticipated to be incurred
on the underlying properties. At September 30, 1998, the Bank had no allowances
for estimated losses on real estate owned recorded.
The Bank's management believes that its present allowances are adequate
and that the carrying value of its real estate owned approximates the net
realizable value of the properties. However, while management uses the best
information available to make such determinations, future adjustments to
reserves may become necessary, based on changes in economic conditions, or as a
result of examinations by various regulatory agencies, who review the allowance
as a part of their examination procedures.
The Chief Lending Officer, Chief Financial Officer and the Collection
Manager meet monthly to review non-performing assets and any other assets that
may require classification or special consideration. Adjustments to the carrying
values of such assets are made as needed and a detailed report is submitted to
the Board of Directors on a monthly basis.
Investment Activities
Mortgage-Backed Securities. Mortgage-backed securities (which also are
known as mortgage participation certificates or pass-through certificates)
typically represent a participation interest in a pool of single-family or
multi-family mortgages, the principal and interest payments on which are passed
from the mortgage originators, through intermediaries (generally U.S. Government
agencies and government sponsored enterprises such as the Federal National
Mortgage Association ("FNMA"), the Federal Home Loan Mortgage Corporation
("FHLMC") and Government National Mortgage Association ("GNMA")) that pool and
repackage the participation interests in the form of securities, to investors
such as the Bank.
Mortgage-backed securities typically are issued with stated principal
amounts, and the securities are backed by pools of mortgages that have loans
with interest rates that are within a range and have varying maturities. The
underlying pool of mortgages, i.e., fixed rate or adjustable rate, as well as
the prepayment risk, are passed on to the certificate holders. Accordingly, the
life of a mortgage-backed pass-through security approximates the life of the
underlying mortgages.
The actual maturity of a mortgage-backed security may be less than its
stated maturity due to prepayments of the underlying mortgages. Prepayments that
are faster than anticipated may shorten the life of the security and adversely
affect its yield to maturity. The yield is based upon the interest income and
the amortization of any premium or discount related to the mortgage-backed
security. In accordance with generally accepted accounting principals, premiums
and discounts are amortized over the estimated lives of the loans, which
decrease and increase interest income, respectively. The prepayment assumptions
used to determine the amortization period for premiums and discounts can
significantly affect the yield of the mortgage-backed security, and these
assumptions are reviewed periodically to reflect actual
13
prepayments. Although prepayments of underlying mortgages depend on many
factors, including the type of mortgages, the coupon rate, the age of mortgages,
the geographical location of the underlying real estate collateralizing the
mortgages and general levels of market interest rates, the difference between
the interest rates on the underlying mortgages and the prevailing mortgage
interest rates generally is the most significant determinant of the rate of
prepayments. During periods of falling mortgage interest rates, if the coupon
rate of the underlying mortgages exceeds the prevailing market interest rates
offered for mortgage loans, refinancing generally increases and accelerates the
prepayment of the underlying mortgages and the related security. Under such
circumstances, the Bank may be subject to reinvestment risk because to the
extent that the Bank's mortgage-backed securities amortize or prepay faster than
anticipated, the Bank may not be able to reinvest the proceeds of such
repayments and prepayments at a comparable rate. Mortgage-backed securities
held-to-maturity decreased $14.2 million or 41.5% to $19.9 million at September
30, 1998 from $34.1 million at September 30, 1997. The Bank did not sell or
purchase any mortgage-backed securities held-to-maturity in fiscal 1998.
On November 15, 1995, the FASB issued "A Guide to Implementation of
Statement 115 on Accounting for Certain Investments in Debt and Equity
Securities" ("Guide"). The Guide permitted a one-time reclassification of
securities without calling into question the propriety of a company's stated
intent in prior or subsequent periods. The reclassification had to occur between
November 15, 1995 and December 31, 1995. The Bank utilized this opportunity to
reclassify approximately $55.0 million of mortgage-backed securities as
available-for-sale.
Mortgage-backed securities available-for-sale were $83.0 and $93.9
million at September 30, 1998 and 1997, respectively. These securities may be
held for indefinite periods of time and are generally used as part of the Bank's
asset/liability management strategy. These securities may be sold in response to
changes in interest rates, prepayment rates or to meet liquidity needs. During
fiscal 1998, the Bank purchased $52.6 million of these securities and sold $43.8
million. Sales of these securities in fiscal 1998 resulted in a pretax loss of
$125,000.
14
The following table sets forth the composition and amortized cost of
the Bank's mortgage-backed securities at the dates indicated.
September 30,
-------------------------------------
1998 1997 1996
------- ------- -------
(In thousands)
Mortgage-backed securities
held-to-maturity:
GNMA ............................ $ 28 $ 42 $ 55
FNMA ............................ 7,249 9,167 10,556
FHLMC ........................... 11,099 13,977 16,734
FNMA Remic ...................... -- -- --
FHLMC Remic ..................... 82 8,125 248
Other ........................... 1,455 2,754 3,682
------- ------- -------
Total ..................... $19,913 $34,065 $31,275
======= ======= =======
Mortgage-backed securities
available-for-sale:
GNMA ............................ $22,823 $26,954 $ 7,011
FNMA ............................ 8,615 18,165 25,072
FHLMC ........................... 7,101 10,751 11,608
FNMA Remic ...................... 11,841 18,958 15,264
FHLMC Remic ..................... 23,453 17,582 5,059
Other ........................... 8,895 1,680 --
------- ------- -------
Total ..................... $82,728 $94,090 $64,104
======= ======= =======
15
Information regarding the contractual maturities and weighted average
yield of the Bank's mortgage-backed securities portfolio at September 30, 1998
is presented below.
Amounts at September 30, 1998 Which Mature In
-----------------------------------------------------------------
After After
One Year One to Five Five to 10 Over 10
or Less Years Years Years Total
---------- ----------- ------- ------- -------
(Dollars in thousands)
Mortgage-backed securities
held-to-maturity:
GNMA ................... $ -- $ 28 $ -- $ -- $ 28
FNMA ................... -- -- 2,396 4,853 7,249
FHLMC .................. -- 339 7,551 3,209 11,099
FHLMC Remic ............ -- 82 -- -- 82
Other .................. -- -- -- 1,455 1,455
---------- ----------- ------- ------- -------
Total ............. $ -- $ 449 $ 9,947 $ 9,517 $19,913
========== =========== ======= ======= =======
Weighted average yield ... --% 6.91% 6.62% 6.50% 6.57%
========== =========== ======= ======= =======
Mortgage-backed securities
available-for-sale:
GNMA ................... $ -- $ -- $ -- $22,823 $22,823
FNMA ................... -- -- 4,541 4,074 8,615
FHLMC .................. -- -- -- 7,101 7,101
FNMA Remic ............. -- -- 3,169 8,672 11,841
FHLMC Remic ............ -- -- -- 23,453 23,453
Other .................. -- -- 2,039 6,856 8,895
----------- ----------- ------- ------- -------
Total ............. $ -- $ -- $ 9,749 $72,979 $82,728
========== =========== ======= ======= =======
Weighted average yield ... --% --% 6.06% 6.69% 6.62%
========== =========== ======= ======= =======
16
As of September 30, 1998, non-U.S. Government and U.S. Government
agency mortgage-backed securities that exceeded ten percent of stockholders'
equity are as follows:
Issuer Book Value Market Value
------ ---------- ------------
(Dollars in thousands)
Paine Webber Mortgage Acceptance Corporation $3,112 $3,122
The above securities are fixed rate collateralized mortgage obligations that are
rated AAA by Moody's.
Investments
At September 30, 1998, the Bank's investments amounted to $69.3
million, which includes $57.6 million available-for-sale, which represented
17.1% of total assets. Pursuant to the Bank's investment policy, the Bank's
investments include obligations issued or fully guaranteed by the United States
government, certain federal agency obligations, FHLB stock and other specified
investments.
It is the Bank's policy that investments are to be made with a primary
consideration for safety and liquidity. Pursuant to this policy, the Bank
invests only in government and government-guaranteed securities, federal funds,
banker acceptances, A-rated commercial paper and corporate obligations, money
market accounts, mutual funds, repurchase agreements, certain collateralized
investments and FHLMC preferred stock. The Company, in addition to being able to
invest in the same investments as the Bank, can also invest in equity
securities.
The method of calculating the carrying value of the Bank's investments
differs by type of security. Investment account securities held to maturity are
carried at cost, adjusted for amortization of premium and accretion of
discounts, if any, over the term of the security. Management has the intent and
ability to hold these securities to maturity. Gains or losses on the sale of
investment securities are recognized upon realization using the specific
identification method.
The Bank has identified those securities which may be sold prior to
maturity. These assets are classified as available-for-sale and are recorded at
fair value. Unrealized gains or losses are reported as a separate component of
equity. Gains or losses on the sale of available-for-sale securities are
recognized using the specific identification method.
17
The following tables set forth the Bank's investment portfolio at
carrying value at the dates indicated.
As of September 30,
-------------------------------
1998 1997 1996
------- ------- -------
Available-for-sale
Investment securities:
U.S. government and agency .................... $23,749 $26,366 $24,288
Obligations of state and political subdivisions 29,708 15,874 24,676
Mutual funds(1) ............................... 1,793 1,628 1,520
FHLB stock .................................... 5,050 4,885 2,826
FHLMC preferred stock ......................... 531 518 381
Equity securities ............................. 1,321 187 64
Trust preferred securities .................... 488 -- --
------- ------- -------
Total ................................... $62,640 $49,458 $53,755
======= ======= =======
Held-to-maturity
Investment securities:
U.S. government and agency .................... $ 5,000 $ 5,998 $ 3,997
Obligations of state and political subdivisions 1,625 1,625 --
Asset-backed securities ....................... -- 918 1,404
------- ------- -------
Total ................................... $ 6,625 $ 8,541 $ 5,401
======= ======= =======
- -------------
(1) Consists of investment in the Federated Investors ARM Fund and Legg Mason
Value Trust Fund.
At September 30, 1998, the Bank holds no securities of any issuer, the
aggregate value of which exceeds ten percent of stockholders equity, other than
U.S. Government and U.S. Government agency securities.
18
The following tables set forth the amount of each category of
investment securities of the Bank at September 30, 1998 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. At September 30, 1998, the Bank held no securities of any
issuer, the aggregate value of which exceeds ten percent of stockholders equity,
other than U.S. Government and U.S. Government agency securities.
As of September 30,
After One Year
One Year of Less Through Five Years
-------------------------- -------------------------
Weighted Weighted
Average Average
Amount Yield Amount Yield
-------- ----- ------ -------
Available-for-sale
U.S. government and agency............ $ 6,499 5.80% $4,507 5.83%
Obligations of state and
political subdivisions.............. -- -- -- --
Mutual funds(1)....................... 1,847 4.96 -- --
FHLB stock............................ 5,050 6.50 -- --
FHLMC preferred stock................. 500 6.12 -- --
Equity securities..................... 1,580 2.09 -- --
Trust preferred securities............ 500 8.73 -- --
-------- ---- ------ ----
Total............................. $ 15,976 5.66% $ 4,507 5.83%
======== ===== ======= =====
Held-to-Maturity:
U.S. government and agency............ $ 5,000 6.84% $ -- --%
Obligations of state and
political subdivisions.............. -- -- -- --
Asset-backed securities............... -- -- -- --
-------- ---- ------- ----
Total............................. $ 5,000 6.84% $ -- --%
======== ===== ======= =====
(1) Consists of investment in the Federated Investors ARM Fund and Legg Mason
Value Trust Fund.
After Five Years
Through Ten Years After Ten Years
------------------------ -----------------------
Weighted Weighted
Average Average
Amount Yield Amount Yield
------ ------- ------ ------
Available-for-sale
U.S. government and agency............ $ 8,504 6.95% $ 3,999 6.78%
Obligations of state and
political subdivisions.............. -- -- 28,814 7.36
Mutual funds(1)....................... -- -- -- --
FHLB stock............................ -- -- -- --
FHLMC preferred stock................. -- -- -- --
Equity securities..................... -- -- -- --
Trust preferred securities............ -- -- -- --
------- ------ ------- ----
Total............................. $ 8,504 6.95% $32,813 7.29%
======= ===== ======= ====
Held-to-Maturity:
U.S. government and agency............ $ -- --% $ -- --%
Obligations of state and
political subdivisions.............. -- -- 1,625 8.06
Asset-backed securities............... -- -- -- --
------- ----- ------- -----
Total............................. $ -- --% $ 1,625 8.06%
======= ===== ======= =====
(1) Consists of investment in the Federated Investors ARM Fund and Legg
Mason Value Trust Fund.
19
Sources of Funds
General. Savings deposits obtained through the home office and branch
offices have traditionally been the principal source of the Bank's funds for use
in lending and for other general business purposes. The Bank also derives funds
from scheduled amortizations and prepayments of outstanding loans and
mortgage-backed securities and sales of investments available-for-sale. The Bank
also may borrow funds from the FHLB of Pittsburgh and other sources. Borrowings
generally may be used on a short-term basis to compensate for seasonal or other
reductions in savings deposits or other inflows at less than projected levels,
as well as on a longer-term basis to support expanded lending activities.
Savings Deposits. The Bank's current savings deposit products include
passbook savings accounts, demand deposit accounts, NOW accounts, money market
deposit accounts and certificates of deposit ranging in terms from three months
to ten years. Included among these savings deposit products are Individual
Retirement Account ("IRA") certificates and Keogh Plan retirement certificates
(collectively "retirement accounts"). The Bank offers preferred rates for
certificates of deposit in denominations of $99,000 or more at terms ranging
from one month to five years and, at September 30, 1998, such certificates
accounted for 1.6% of total savings deposits.
The Bank's savings deposits are obtained primarily from residents of
Allegheny and Butler Counties. The principal methods used by the Bank to attract
savings deposit accounts include the offering of a wide variety of services and
accounts, competitive interest rates and convenient office locations and service
hours. The Bank does not currently pay, nor has it in the past paid, fees to
brokers to obtain its savings deposits.
The following table shows the distribution of, and certain other
information relating to the Bank's savings deposits by type as of the dates
indicated.
September 30,
-------------------------------------------------------------------------------------------
1998 1997 1996
------------------------ -------------------------- ---------------------------
Average Average Average
Balance Rate Balance Rate Balance Rate
(Dollars in thousands)
Passbook and club accounts....... $ 47,423 2.53% $ 47,514 2.78% $ 50,445 2.62%
Checking accounts................ 36,846 1.09 33,841 1.18 30,944 1.10
Money market accounts............ 14,949 2.98 15,417 2.94 17,437 2.72
Certificate accounts............. 162,517 5.70 147,420 5.76 135,450 5.59
-------- ---- -------- ---- -------- ----
Total................... $261,735 4.32% $244,192 4.37% $234,276 4.17%
======== ==== ======== ==== ======== ====
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
20
which have provided the Bank with a relatively stable source of funds. As of
September 30, 1998, the Bank's total retirement funds were $35.3 million or
13.5% of its total savings deposits.
The Bank attempts to control the flow of savings deposits by pricing
its accounts to remain generally competitive with other financial institutions
in its market area, but does not necessarily seek to match the highest rates
paid by competing institutions. In this regard, the senior officers of the Bank
meet weekly to determine the interest rates which the Bank will offer to the
general public.
Rates established by the Bank are also affected by the amount of funds
needed by the Bank on both a short-term and long-term basis, alternative sources
of funds and the projected level of interest rates in the future. The ability of
the Bank to attract and maintain savings deposits and the Bank's cost of funds
have been, and will continue to be, significantly affected by economic and
competitive conditions.
The following table presents by various interest rate categories the
amounts of certificate accounts at the date indicated and the amounts of
certificate accounts at such date which mature during the periods indicated.
At Within After
September 30, One Two Three Three
1998 Year Years Years Years
-------- -------- -------- -------- --------
(In thousands)
Certificate accounts:
Under 4.01% ............ $ 56 $ 56 $ -- $ -- $ --
4.01% to 6.00% ......... 146,262 103,526 22,352 8,866 11,518
6.01% to 8.00% ......... 16,089 2,442 4,607 978 8,062
8.01% to 10.00% ........ 110 91 -- 3 16
-------- -------- -------- -------- --------
Total certificate accounts $162,517 $106,115 $ 26,959 $ 9,847 $ 19,596
======== ======== ======== ======== ========
Maturities of certificates of deposit of $100,000 or more that were
outstanding as of September 30, 1998 are summarized as follows:
(In thousands)
3 months or less ........................................... $1,367
Over 3 months through 6 months ............................. 1,892
Over 6 months through 12 months ............................ 440
Over 12 months ............................................. 384
------
Total ............................................. $4,083
======
Borrowings. The Bank is eligible to obtain advances from the FHLB of
Pittsburgh upon the security of the common stock it owns in that bank,
securities owned by the Bank and held in safekeeping by the FHLB and certain of
its residential mortgages, provided certain standards related to credit
worthiness have been met. See "Regulation of the Bank - Federal Home Loan Bank
System." Such advances are made pursuant to several different credit programs,
each of which has its own interest rate 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
21
and liability management through the extension of maturities of liabilities. At
September 30, 1998, the Bank had $100.2 million of advances outstanding.
The Bank also, from time to time, enters into sales of securities under
agreements to repurchase ("reverse repurchase agreements"). Such reverse
repurchase agreements are treated as financings, and the obligations to
repurchase securities sold are reflected as liabilities in the statement of
financial condition. At September 30, 1998, the Bank had $1.9 million reverse
repurchase agreements outstanding.
On May 13, 1997, the Trust, a statutory business trust created under
Delaware law that is a subsidiary of the Company, issued $10.25 million, 9.75%
Preferred Securities ("Preferred Securities") with a stated value and
liquidation preference of $10 per share. The Trust's obligations under the
Preferred Securities issued are fully and unconditionally guaranteed by the
Company. The proceeds from the sale of the Preferred Securities of the Trust, as
well as proceeds from the issuance of common securities to the Company, were
utilized by the Trust to invest in $10.57 million of 9.75% Junior Subordinated
Debentures (the "Debentures") of the Company. The Debentures are unsecured and
rank subordinate and junior in right of payment to all indebtedness, liabilities
and obligations of the Company. The Debentures represent the sole assets of the
Trust. Interest on the Preferred Securities is cumulative and payable quarterly
in arrears. The Company has the right to optionally redeem the Debentures prior
to the maturity date of July 15, 2027, on or after July 15, 2002, at 100% of the
stated liquidation amount, plus accrued and unpaid distributions, if any, to the
redemption date. Under the occurrence of certain events, specifically, a Tax
Event, Investment Company Event or Capital Treatment Event as more fully defined
in the FB Capital Trust Prospectus dated May 8, 1997, the Company may redeem in
whole, but not in part, the Debentures prior to July 15, 2002. Proceeds from any
redemption of the Debentures would cause a mandatory redemption of the Preferred
Securities and the common securities having an aggregate liquidation amount
equal to the principal amount of the Debentures redeemed.
22
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,
-----------------------------------------------
1998 1997 1996
------ ------- -------
(Dollars in thousands)
FHLB advances:
Average balance outstanding........................ $1,177 $ 4,069 $ 5,627
Maximum amount outstanding at any
month-end during the period...................... 3,300 5,300 8,550
Average interest rate during the period............ 5.09% 4.90% 5.03%
Balance outstanding at end of period............... - 3,300 5,300
Weighted average interest rate..................... 5.13% 5.10% 5.11%
Reverse repurchase agreements:
Average balance outstanding........................ 1,807 874 1,216
Maximum amount outstanding at any
month-end during the period...................... 2,370 1,528 4,565
Average interest rate during the period............ 4.50% 4.50% 4.75%
Balance outstanding at end of period............... 1,870 1,183 493
Weighted average interest rate..................... 4.50% 4.50% 4.50%
Lines of credit:
Average balance outstanding........................ -- -- --
Maximum amount outstanding at any
month-end during the period...................... -- -- --
Average interest rate during the period............ -- -- --
Balance outstanding at end of period............... -- -- --
Weighted average interest rate..................... -- -- --
FHLB Repoplus Advances:
Average balance outstanding........................ 18,058 39,208 25,078
Maximum amount outstanding at any
month-end during the period...................... 34,050 52,350 51,350
Average interest rate during the period............ 5.71% 5.55% 5.43%
Balance outstanding at end of period............... 5,200 43,400 51,350
Weighted average interest rate..................... 5.75% 5.53% 5.46%
Total average short-term borrowings.................. 21,042 44,151 30,504
Average interest rate of total
short-term borrowings.............................. 5.42% 5.47% 5.42%
Subsidiaries
Pennsylvania law permits a Pennsylvania-chartered savings institution
to invest up to 3% of its assets in the capital stock, securities or other
obligations of subsidiary corporations or service corporations. The Department
is empowered to authorize Pennsylvania-chartered savings institutions,
23
upon specific application, to invest a greater percentage of assets in
subsidiaries. As a result of FIRREA, the types of activities and the magnitude
of the Bank's activities in its investments in service corporations are
restricted (with certain exceptions) to the levels and magnitude of investments
permitted state-chartered savings institutions. The Company's only subsidiaries
at September 30, 1998 were the Bank and FB Capital Trust. The Bank had no
subsidiaries at September 30, 1998.
Employees
At September 30, 1998, the Bank had 105 full-time and 28 part-time
employees. None of these employees are represented by a collective bargaining
agent, and the Bank believes that it enjoys good relations with its personnel.
Competition
Federal legislation in recent years has given savings institutions the
opportunity to compete on a more equal footing in many of the areas previously
reserved for other types of financial intermediaries, mainly commercial banks.
As a result, the competitive pressures among savings institutions, commercial
banks and other financial institutions have increased significantly and are
expected to continue to do so.
The Bank faces significant competition in attracting savings deposits.
Its most direct competition for savings deposits has historically come from
commercial banks, savings banks and other financial institutions located in its
market area, however, in recent years significant competition has also come from
mutual funds. Particularly in times of high interest rates, the Bank faces
additional significant competition for investors' funds from short-term money
market mutual funds and issuers of corporate and government securities. The Bank
competes for savings deposits principally by offering depositors a variety of
deposit programs, convenient branch locations and hours, and other services. The
Bank does not rely upon any individual group or entity for a material portion of
its savings deposits.
The Bank's competition for real estate loans comes principally from
mortgage banking companies, commercial banks, savings banks and other financial
institutions. The Bank competes for loan originations primarily through the
interest rates and loan fees it charges, and the efficiency and quality of
services it provides borrowers and real estate brokers. Factors which affect
competition include the general and local economic conditions, current interest
rate levels and volatility in the mortgage markets.
Market Area
The Bank now conducts business from eight full-service offices located
in its primary market area, Allegheny and Butler counties, which are two of the
five Pennsylvania counties which comprise the metropolitan and suburban areas of
greater Pittsburgh. Approximately 1.5 million people live in the market area
served by the Bank. Substantially all of the Bank's deposits and loans are
received from residents and businesses located in its primary market area. In
addition, the Bank participates in the MACTM and PLUSTM automatic teller machine
networks which provide locations throughout the Bank's primary market area, as
well as the rest of Pennsylvania and most other states.
The area's economy is reasonably diversified, including manufacturing,
transportation, utilities, banks, hospitals and educational services segments.
The population in Allegheny County, the Bank's largest market area, is aging and
population growth is minimal. Areas to the north and south of Allegheny County
are, however, experiencing growth both in population and in the real estate
market. The area,
24
like the nation as a whole, continues to experience low unemployment and the
labor market remains tight. The region's unemployment rate has dropped to
approximately 4.3%, down from approximately 4.9% one year ago. Construction
activity remains strong, with residential construction up approximately 6.5%
over the year ago period. The Bank believes the diversity of the area's industry
will continue to help provide for a stable economy for the foreseeable future;
however, a general national economic slowdown may curtail the slow but steady
growth the area has experienced in recent years.
25
Average Balance Sheet and Analysis of Net Interest Earnings
The following table presents for the periods indicated the total dollar
amount of interest from average interest-earning assets and the resultant
yields, as well as the interest expense on average interest-bearing liabilities,
expressed both in dollars and rates, and the net interest margin. The average
balance of loans receivable includes non-accrual loans. Interest income on tax
free investments has been adjusted for federal income tax purposes using a rate
of 34%.
Year Ended September 30,
-------------------------------------------------------------------------------------
1998 1997
--------------------------------------- ----------------------------------------
Average Average Average Average
Balance Interest Yield/Cost Balance Interest Yield/Cost
-------- -------- ------ -------- ------- ------
(Dollars in Thousands)
Interest-earning assets:
Loans receivable(1).................... $201,036 $ 16,597 8.26% $165,170 $13,634 8.25%
Mortgage-backed securities............. 117,791 7,595 6.45 109,251 6,964 6.37
Investment securities and FHLB stock... 61,838 4,301 6.96 53,956 3,646 6.76
Interest-earning deposits.............. 1,127 74 6.57 158 11 6.96
-------- -------- ------ -------- ------- ------
Total interest-earning assets....... 381,792 28,567 7.48 328,535 24,255 7.39
------- ------- ------ ------- ------ ------
Non-interest-earning assets............. 14,294 11,362
------- -------
Total assets.......................... $396,086 $339,897
======== =======
Interest-bearing liabilities:
Deposits............................... $258,013 $10,940 4.24 $235,984 $9,566 4.05
Borrowed funds......................... 108,238 6,424 5.94 79,686 4,316 5.42
------- ------ ------ ------- ------ ------
Total interest-bearing liabilities... 366,251 17,364 4.74 315,670 13,882 4.40
------- ------ ------- ------- ------ ------
Non-interest bearing liabilities........ 814 410
------- -------
Total liabilities...................... 367,065 316,080
Stockholders' equity.................... 29,021 23,817
-------- -------
Total liabilities and $396,086 $339,897
======= =======
stockholders' equity.................
Net interest income..................... $11,203 $10,373
====== ======
Interest rate spread.................... 2.74% 2.99%
===== ======
Net interest margin(1) 2.93% 3.16%
===== ======
Ratio of average interest-earning assets
to average interest-bearing liabilities 104.24% 104.08%
====== ======
1996
----------------------------------------
Average Average
Balance Interest Yield/Cost
Interest-earning assets:
Loans receivable(1).................... $135,945 $11,482 8.45%
Mortgage-backed securities............. 97,340 6,120 6.29
Investment securities and FHLB stock... 54,242 3,816 7.04
Interest-earning deposits.............. 769 24 3.12
------- ------- ------
Total interest-earning assets....... 288,296 21,442 7.44
------ ------
Non-interest-earning assets............. 11,433
-------
Total assets.......................... $299,729
=======
Interest-bearing liabilities:
Deposits............................... $241,258 $10,071 4.17
Borrowed funds......................... 35,544 1,761 4.95
------- ------ ------
Total interest-bearing liabilities... 276,802 11,832 4.27
------- ------ ----
Non-interest bearing liabilities........ 832
-------
Total liabilities...................... 277,634
Stockholders' equity.................... 22,095
-------
Total liabilities and $299,729
=======
stockholders' equity.................
Net interest income..................... $ 9,610
======
Interest rate spread.................... 3.17%
======
Net interest margin(1) 3.33%
======
Ratio of average interest-earning assets
to average interest-bearing liabilities 104.22%
======
(1) Net interest margin is net interest income divided by average
interest-earning assets.
26
Rate/Volume Analysis
The following table presents certain information regarding changes in
interest income and interest expense of the Bank for the periods indicated. For
each category of interest-earning assets and interest-bearing liabilities,
information is provided with respect to changes attributable to (1) changes in
volume (change in volume multiplied by old rate), (2) changes in rate (change in
rate multiplied by old volume), and (3) changes in rate/volume (change in rate
multiplied by change in volume).
Year Ended September 30,
---------------------------------------------
1998 vs. 1997
Increase (Decrease)
Due to
---------------------------------------------
Rate/
Volume Rate Volume Net
------- ------- ------- -------
(Dollars in Thousands)
Interest income on interest-earning assets:
Mortgage loans ................................. $ 1,823 $ (68) $ (11) $ 1,744
Mortgage-backed securities ..................... 539 88 6 633
Installment loans .............................. 623 29 5 657
Commercial business loans ...................... 575 (11) (4) 560
Investment securities and other investments .... 664 61 (7) 718
------- ------- ------- -------
Total interest-earning assets .............. 4,224 99 (11) 4,312
------- ------- ------- -------
Interest expense on interest-bearing liabilities:
Deposits ........................................ 866 467 41 1,374
Borrowed funds .................................. 1,719 313 76 2,108
------- ------- ------- -------
Total interest-bearing liabilities .............. 2,585 780 117 3,482
------- ------- ------- -------
Net change in net interest income .............. $ 1,639 $ (681) $ (128) $ 830
======= ======= ======= =======
Year Ended September 30,
1997 vs. 1996
Increase (Decrease)
Due to
----------------------------------------------
Rate/
Volume Rate Volume Net
------- ------ ------- -------
Interest income on interest-earning assets:
Mortgage loans ................................. $ 1,534 $ (377) $ (56) $ 1,101
Mortgage-backed securities ..................... 740 94 10 844
Installment loans .............................. 562 (11) (2) 549
Commercial business loans ...................... 494 6 2 502
Investment securities and other investments .... (5) (156) (22) (183)
------- ------ ------- -------
Total interest-earning assets .............. 3,325 (444) (68) 2,813
------- ------ ------- -------
Interest expense on interest-bearing liabilities:
Deposits ........................................ (223) (288) 6 (505)
Borrowed funds .................................. 2,012 339 204 2,555
------- ------ ------- -------
Total interest-bearing liabilities .............. 1,789 51 210 2,050
------- ------ ------- -------
Net change in net interest income .............. $ 1,536 $ (495) $ (278) $ 763
======= ====== ======== =======
27
Certain Ratios
The following table presents certain information regarding the return
on average assets and average equity, and the ratio of average equity to assets
of the Bank and the dividend payout ratio for the periods indicated.
Year Ended September 30,
------------------------------------
1998 1997 1996
----- ---- ----
Return on average assets.............. .74% .80% .44%
Return on average equity.............. 10.64 11.42 5.96
Average equity to assets ratio........ 6.94 7.01 7.37
Dividend payout ratio ................ 21.77 19.01 31.06
Asset and Liability Management
The Bank in fiscal 1998 continued to utilize strategies designed to
decrease the Bank's vulnerability to significant and prolonged increases in
interest rates. This process involves monitoring the imbalance between the
generally long-term, fixed rate nature of the Bank's interest-earning assets and
its generally short or medium-term, interest-bearing liabilities on a regular
basis and implementing actions designed to reduce this imbalance. Although
management of the Bank believes that the steps it has taken, as discussed in
Management's Discussion and Analysis of Financial Condition and Results of
Operations - Asset and Liability Management" in the Company's 1998 Annual Report
to Stockholders, have reduced the Bank's overall vulnerability to increases in
interest rates, the Bank continues to remain vulnerable to significant and
prolonged increases in interest rates because its interest rate sensitive
liabilities exceed its interest rate sensitive assets with short-term
maturities.
The following table summaries the anticipated repayments of the Bank's
interest-earning assets and interest-bearing liabilities as of September 30,
1998. Adjustable and floating-rate assets are included in the period in which
interest rates are next scheduled to adjust and fixed-rate loans,
mortgage-backed securities held-for-investment and investment securities are
included in the periods in which they are anticipated to be repaid based on
scheduled maturities and certain assumptions that estimate the projected
repayments of loans, mortgage-backed securities and investments with specified
characteristics. The Bank has assumed that passbook, money market and NOW
accounts, which generally are subject to immediate withdrawal, are withdrawn at
various rates applied to the cumulative declining balances based on certain
assumptions for passbook, money market and NOW accounts.
28
September 30, 1998
----------------------------------------------------------------
Over Three
Months After One
Three Through Year After
Months Twelve Through Five Five
or Less Months Years Years Total
-------- -------- -------- -------- --------
(Dollars in thousands)
Interest-earning assets:
Mortgage loans ............................ $ 11,817 $ 23,899 $ 81,175 $ 46,023 $162,914
Mortgage-backed securities ................ 32,860 20,139 36,586 13,056 102,641
Installment loans ......................... 11,287 9,900 27,935 -- 49,122
Commercial business loans ................. 9,356 2,226 11,085 490 23,157
Investment securities and other investments 13,009 8,999 14,403 32,627 69,038
-------- -------- -------- -------- --------
Total interest-earning assets ...... 78,329 65,163 171,184 92,196 406,872
-------- -------- -------- -------- --------
Interest-bearing liabilities:
Passbook and club accounts ................ 2,371 7,113 11,856 26,083 47,423
Checking accounts ......................... 9,211 -- 16,581 11,054 36,846
Money market accounts ..................... 7,474 -- 7,475 -- 14,949
Certificate accounts ...................... 27,242 78,918 50,789 5,568 162,517
Borrowed funds ............................ 7,069 -- 75,000 31,376 113,445
-------- -------- -------- -------- --------
Total interest-bearing liabilities . 53,367 86,031 161,701 74,081 375,180
-------- -------- -------- -------- --------
Interest sensitivity ........................ $ 24,962 $(20,868) $ 9,483 $ 18,115 $ 31,692
======== ======== ======== ======== ========
Cumulative interest sensitivity ............. $ 24,962 $ 4,094 $ 13,577 $ 31,692 $ 31,692
======== ======== ======== ======== ========
Cumulative ratio as a percent of assets ..... 6.15% 1.01% 3.34% 7.81% 7.81%
======== ======== ======== ======== ========
Regulation of the Company
Bank Holding Company Act ("BHCA") - General. The Company, as a bank
holding company, is subject to regulation and supervision by the Federal Reserve
Board. Under the BHCA, a bank holding company is required to file annually with
the Federal Reserve Board a report of its operations and, with its subsidiaries,
is subject to examination by the Federal Reserve Board.
BHCA - Activities and Other Limitations. The BHCA prohibits a bank
holding company from acquiring direct or indirect ownership or control of more
than 5% of the voting shares of any bank, or increasing such ownership or
control of any bank, without prior approval of the Federal Reserve Board. The
BHCA also generally prohibits a bank holding company from acquiring any bank
located outside of the state in which the existing bank subsidiaries of the bank
holding company are located unless specifically authorized by applicable state
law. Pennsylvania banking law permits the interstate acquisition of banking
institutions by bank holding companies on a regional and reciprocal basis. No
approval under the BHCA is required, however, for a bank holding company already
owning or controlling 50% of the voting shares of a bank to acquire additional
shares of such bank.
The BHCA also prohibits a bank holding company, with certain
exceptions, from acquiring more than 5% of the voting shares of any company that
is not a bank and from engaging in any business other than banking or managing
or controlling banks. Under the BHCA, the Federal Reserve Board is authorized to
approve the ownership of shares by a bank holding company in any company, the
activities
29
of which the Federal Reserve Board has determined to be so closely related to
banking or to managing or controlling banks as to be a proper incident thereto.
In making such determinations, the Federal Reserve Board is required to weigh
the expected benefit to the public, such as greater convenience, increased
competition or gains in efficiency, against the possible adverse effects, such
as undue concentration of resources, decreased or unfair competition, conflicts
of interest or unsound banking practices.
The Federal Reserve Board has by regulation determined that certain
activities are closely related to banking within the meaning of the BHCA. These
activities include providing services for internal operations for itself and its
subsidiaries and operating a mortgage company, finance company, credit card
company, factoring company, trust company or savings association; performing
certain data processing operations; providing limited securities brokerage
services; acting as an investment or financial advisor; acting as an insurance
agent for certain types of credit-related insurance; leasing personal property
on a full-payout, non-operating basis; providing tax planning and preparation
services; operating a collection agency; providing certain courier services;
providing management consulting services to depository institutions; issuing and
selling money orders, travelers checks and savings bonds; performing real estate
and personal property appraisals; arranging commercial real estate equity
financing; underwriting and dealing in government obligations and money market
instruments; providing foreign exchange advisory and transactional services;
acting as a futures commission merchant; providing check guaranty services; and
operating a credit bureau. The Federal Rreserve Board also has determined that
certain other activities, including real estate brokerage and syndication, land
development, property management and underwriting of life insurance not related
to credit transactions, are not closely related to banking and a proper incident
thereto.
Capital Requirements (Consolidated). The Federal Reserve Board measures
capital adequacy for bank holding companies on the basis of a risk-based capital
framework and a leverage ratio. The guidelines include the concept of Tier 1
capital and total capital. Tier 1 capital is essentially common equity,
excluding net unrealized gain (loss) on equity securities available-for-sale and
goodwill, plus certain types of preferred stock, including the Preferred
Securities issued by the Trust in 1997. The Preferred Securities may comprise up
to 25% of the Company's Tier 1 capital. Total capital includes Tier 1 capital
and other forms of capital such as the allowance for loan losses, subject to
limitations, and subordinated debt. The guidelines establish a minimum standard
risk-based target ratio of 8%, of which at least 4% must be in the form of Tier
1 capital. At September 30, 1998, the company had Tier 1 capital as a percentage
of risk-weighted assets of 16.17% and total risk-based capital as a percentage
of risk-weighted assets of 17.52%.
In addition, the Federal Reserve Board has established minimum leverage
ratio guidelines for bank holding companies. These guidelines currently provide
for a minimum ratio of Tier 1 capital as a
30
percentage of average assets (the "Leverage Ratio") of 3% for bank holding
companies that meet certain criteria, including that they maintain a Leverage
Ratio of at least 100 to 200 basis points above the minimum. At September 30,
1998, the Company has a Leverage Ratio of 9.35%.
Limitations on Acquisitions of Voting Stock. The Federal Change in Bank
Control Act prohibits a person or group of persons from acquiring "control" of a
bank holding company unless the Federal Reserve Board has been given 60 days'
prior written notice of such proposed acquisition and within that time period
the Federal Reserve Board has not issued a notice disapproving the propo