United States Securities and Exchange Commission
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PUSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 2003
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[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from to
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Commission file number 0-22288
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Fidelity Bancorp, Inc.
----------------------
(Exact name of registrant as specified in its charter)
Pennsylvania 25-1705405
- ------------------------------- ---------------------------------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization
1009 Perry Highway, Pittsburgh, Pennsylvania, 15237
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(Address of principal executive offices)
412-367-3300
----------------------------------------------------
(Registrant's telephone number, including area code)
Not Applicable
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the issuer: (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 whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act). Yes No X
--- ---
APPLICABLE ONLY TO CORPORATE ISSUERS
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date: 2,530,255 shares,
par value $0.01, at July 31, 2003 -----------------
- ---------------------------------
FIDELITY BANCORP, INC. AND SUBSIDIARIES
Index
Part I - Financial Information Page
- ------------------------------ ----
Item 1. Financial Statements (Unaudited)
Consolidated Statements of Financial Condition as of June 30, 2003 and 1
September 30, 2002
Consolidated Statements of Income for the Three and Nine Months Ended 2
June 30, 2003 and 2002
Consolidated Statements of Cash Flows for the Nine Months Ended 3-4
June 30, 2003 and 2002
Consolidated Statements of Changes in Stockholders' Equity for the Nine Months
Ended June 30, 2003 and 2002 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 14
Item 3. Quantitative and Qualitative Disclosures About Market Risk 23
Item 4. Controls and Procedures 24
Part II - Other Information
- ---------------------------
Item l. Legal Proceedings 24
Item 2. Changes in Securities and Use of Proceeds 24
Item 3. Defaults Upon Senior Securities 24
Item 4. Submission of Matters to a Vote of Security Holders 24
Item 5. Other Information 24
Item 6. Exhibits and Reports on Form 8-K 25-26
Signatures 27
Part I - Financial Information
Item 1. Financial Statements
FIDELITY BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Financial Condition (Unaudited)
----------------------------------------------------------
(in thousands except share data)
June 30, September 30,
Assets 2003 2002
------ --------- ---------
Cash and amounts due from depository institutions $ 15,394 $ 9,318
Interest-earning demand deposits with other institutions 587 14,516
Investment securities held-to-maturity
(fair value of $58,001 and $41,060) 55,736 39,198
Investment securities available-for-sale 114,324 90,729
Mortgage-backed securities held-to-maturity
(fair value of $57,667 and $43,019) 57,156 42,403
Mortgage-backed securities available-for-sale 75,306 71,656
Loans receivable, net (Notes 6 and 7) 275,800 316,320
Loans held for sale 1,556 1,869
Foreclosed real estate 475 658
Federal Home Loan Bank stock - at cost 10,297 10,120
Accrued interest receivable 3,161 3,711
Office premises and equipment, net 5,995 5,696
Deferred tax asset 662 531
Goodwill 3,093 2,557
Core deposit intangibles 270 154
Prepaid income taxes - 320
Prepaid expenses and other assets 7,369 6,049
--------- ---------
Total Assets $ 627,181 $ 615,805
========= =========
Liabilities and Stockholders' Equity
------------------------------------
Liabilities:
Savings and time deposits $ 365,816 $ 351,406
Federal Home Loan Bank advances and
other borrowings 185,716 190,834
Guaranteed preferred beneficial interest in
Company's debentures 10,000 20,250
Securities sold under agreement to repurchase 6,231 5,849
Advance deposits by borrowers for
taxes and insurance 3,249 1,238
Accrued interest payable 1,416 1,923
Securities purchased, but not settled 9,757 -
Other accrued expenses and liabilities 2,207 1,725
--------- ---------
Total Liabilities 584,392 573,225
--------- ---------
Stockholders' equity (Notes 4 and 5):
Common stock, $0.01 par value per share,
10,000,000 shares authorized; 2,786,523
and 2,755,020 shares issued, respectively 28 25
Additional paid-in capital 28,615 22,564
Treasury stock, at cost - 252,692 and 201,616 shares (4,330) (2,358)
Retained earnings 15,481 19,176
Accumulated other comprehensive income,
net of tax 2,995 3,173
--------- ---------
Total Stockholders' Equity 42,789 42,580
--------- ---------
Total Liabilities and Stockholders' Equity $ 627,181 $ 615,805
========= =========
See accompanying notes to unaudited consolidated financial statements.
-1-
FIDELITY BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Income (Unaudited)
---------------------------------------------
(in thousands, except per share data)
Three Months Ended Nine Months Ended
June 30, June 30,
-------- --------
2003 2002 2003 2002
------- ------- ------- -------
Interest income:
Loans $ 5,037 $ 5,991 $16,089 $18,148
Mortgage-backed securities 1,162 1,484 3,789 4,242
Investment securities - taxable 1,138 1,034 3,302 3,013
Investment securities - tax-exempt 592 637 1,859 1,953
Deposits with other institutions 11 7 80 30
------- ------- ------- -------
Total interest income 7,940 9,153 25,119 27,386
------- ------- ------- -------
Interest expense:
Savings deposits 2,219 2,478 6,982 8,058
Guaranteed preferred beneficial interest
in Company's debentures 122 256 1,074 768
Borrowed funds 2,493 2,875 7,796 8,677
------- ------- ------- -------
Total interest expense 4,834 5,609 15,852 17,503
------- ------- ------- -------
Net interest income before provision
for loan losses 3,106 3,544 9,267 9,883
Provision for loan losses 75 100 480 300
------- ------- ------- -------
Net interest income after provision
for loan losses 3,031 3,444 8,787 9,583
------- ------- ------- -------
Other income:
Loan service charges and fees 160 93 394 294
Gain (loss) on sale of investment and
mortgage-backed securities, net 117 (29) 505 61
Gain on sale of loans 145 37 343 233
Deposit service charges and fees 305 273 904 628
Other operating income 249 255 783 768
------- ------- ------- -------
Total other income 976 629 2,929 1,984
------- ------- ------- -------
Operating expenses:
Compensation and employee benefits 1,646 1,513 4,942 4,507
Occupancy and equipment expense 263 229 724 645
Depreciation and amortization 195 153 539 454
Federal insurance premiums 9 17 38 46
Loss on real estate owned, net 7 12 12 47
Goodwill amortization -- 27 -- 108
Core deposit intangible amortization 14 6 36 6
Other operating expenses 584 561 1,755 1,674
------- ------- ------- -------
Total operating expenses 2,718 2,518 8,046 7,487
------- ------- ------- -------
Income before income tax provision 1,289 1,555 3,670 4,080
Income tax provision 290 342 822 808
------- ------- ------- -------
Net income $ 999 $ 1,213 $ 2,848 $ 3,272
======= ======= ======= =======
Basic earnings per common share (Note 4) $ .38 $ .48 $ 1.09 $ 1.33
======= ======= ======= =======
Diluted earnings per common share (Note 4) $ .36 $ .46 $ 1.05 $ 1.29
======= ======= ======= =======
Dividends per common share $ .12 $ .109 $ .36 $ .327
======= ======= ======= =======
See accompanying notes to unaudited consolidated financial statements.
-2-
FIDELITY BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows (Unaudited)
-------------------------------------------------
(in thousands)
Nine Months Ended June 30,
2003 2002
-------- --------
Operating Activities:
- --------------------
Net income $ 2,848 $ 3,272
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan losses 480 300
(Gain) loss on real estate owned 12 47
Depreciation of premises and equipment 539 454
Deferred loan fee amortization (538) (226)
Amortization of investment and mortgage-backed securities
discounts/premiums, net 1,177 254
Amortization of intangibles 36 114
Net (gain) loss on sale of investment securities (505) (89)
Net (gain) loss on sale of mortgage-backed securities - 28
Net (gain) loss on sale of loans (343) (233)
Origination of loans held-for-sale (17,874) (14,593)
Proceeds from sale of loans held-for-sale 18,515 14,094
(Increase) decrease in interest receivable 550 (45)
Increase (decrease) in prepaid income taxes 320 67
Increase (decrease) in interest payable (507) (112)
Write-off of unamortized debt issuance costs 599 -
Other changes, net (1,868) (1,292)
-------- --------
Net cash provided by (used in) operating activities 3,441 2,040
-------- --------
Investing Activities:
- --------------------
Proceeds from sales of investment securities available-for-sale 11,126 12,626
Proceeds from maturities and principal repayments of
investment securities available-for-sale 13,323 9,990
Purchases of investment securities available-for-sale (47,232) (22,546)
Proceeds from sales of mortgage-backed securities available-for-sale - 2,691
Proceeds from maturities and principal repayments of mortgage-
backed securities available-for-sale 49,861 14,927
Purchases of mortgage-backed securities available-for-sale (54,982) (31,897)
Purchases of investment securities held-to-maturity (28,727) (17,538)
Proceeds from maturities and principal repayments of
investment securities held-to-maturity 18,895 1,000
Purchases of mortgage-backed securities held-to-maturity (42,629) (22,189)
Recission of purchase of mortgage-backed securities held-to-maturity (Note 5) - 2,516
Proceeds from principal repayments of mortgage-backed
securities held-to-maturity 30,533 11,959
Net Cash Acquired in the acquisition of Carnegie Financial Corporation - 140
Net (increase) decrease in loans 40,528 19,797
Proceeds from sale of other loans 51 733
Net (purchases) redemptions of FHLB stock (177) 3
Additions to office premises and equipment (838) (620)
-------- --------
Net cash provided by (used in) investing activities (10,268) (18,408)
-------- --------
Continued on page 4.
-3-
FIDELITY BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows (Unaudited) (Cont'd.)
-------------------------------------------------
(in thousands)
Nine Months Ended June 30,
2003 2002
-------- --------
Financing Activities:
- ---------------------
Net increase (decrease) in savings and time deposits 14,410 5,851
Increase (decrease) in reverse repurchase agreements 382 2,329
Net increase (decrease) in short-term borrowings 21,986 3,947
Gross increase in long-term borrowings 13,912 25,182
Repayments of long-term borrowings (41,016) (20,000)
Trust preferred securities retired (10,250) -
Proceeds from sale of stock in conjunction with the First PA merger 1,304 -
Increase in advance payments by borrowers for taxes and insurance 2,011 2,087
Cash dividends paid and cash paid in lieu of fractional shares (893) (754)
Stock options exercised 218 326
Proceeds from sale of stock through Dividend Reinvestment Plan 69 54
Purchase of treasury stock (3,159) (233)
-------- --------
Net cash provided by (used in) financing activities (1,026) 18,789
-------- --------
Increase (decrease) in cash and cash equivalents (7,853) 2,421
Cash and cash equivalents at beginning of period 23,834 8,031
-------- --------
Cash and cash equivalents at end of period $ 15,981 $ 10,452
======== ========
Supplemental Disclosure of Cash Flow Information
- ------------------------------------------------
Cash paid during the period for:
Interest on deposits and other borrowings $ 15,760 $ 17,510
Income taxes $ 610 $ 625
-------- --------
Transfer of loans to foreclosed real estate $ - $ 777
-------- --------
Securities purchased, but not settled $ 9,757 $ -
-------- --------
The Company acquired First Pennsylvania Savings Association for
$687,000. In conjunction with the acquisition, the assets acquired and
liabilities assumed were as follows:
Fair value of assets acquired $ 26,240 $ -
Fair value of liabilities assumed $(26,927) $ -
-------- --------
Liabilities assumed in excess of assets acquired $ (687) $ -
-------- --------
The Company purchased all of the common stock of Carnegie
Financial Corporation for $3.2 million. In conjunction with
the acquisition, the assets acquired and liabilities assumed were as follows:
Fair value of assets acquired $ - $ 29,486
Fair value of liabilities assumed $ - $(27,265)
Common stock issued in exchange for Carnegie
Financial Corporation stock $ - $ (1,666)
Cash paid for Carnegie Financial Corporation stock $ - $ (1,567)
-------- --------
Liabilities assumed in excess of assets acquired $ - $ (1,012)
-------- --------
See accompanying notes to unaudited consolidated financial statements
-4-
FIDELITY BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Changes in Stockholders' Equity (Unaudited)
----------------------------------------------------------------------
(in thousands)
Accumulated
Other
Additional Comprehensive
Common Paid-in Treasury Retained Income
Stock Capital Stock Earnings Net of Tax Total
====================================================================================================================
Balance at September 30, 2001 $ 22 $ 17,402 $ (3,872) $ 20,274 $ 1,460 $ 35,286
Comprehensive income:
Net income 3,272 3,272
Other comprehensive income,
net of tax of $194 377 377
Reclassification adjustment,
net of tax of ($20) (41) (41)
----- -------- -------- -------- ------- -------
Total comprehensive income -- -- -- 3,272 336 3,608
Acquisition of Carnegie 105 1,561 1,666
10% stock dividend distributed 2 4,491 (4,497) (4)
Cash dividends declared (750) (750)
Treasury stock purchased - 15,000 shares (233) (233)
Contribution of stock to ESOP -
12,000 shares 9 186 195
Sale of stock through Dividend
Reinvestment Plan 54 54
Stock options exercised 1 325 326
----- -------- -------- -------- ------- --------
Balance at June 30, 2002 $ 25 $ 22,386 $ (2,358) $ 18,299 $ 1,796 $ 40,148
===== ======== ======== ======== ======= ========
Balance at September 30, 2002 $ 25 $ 22,564 $ (2,358) $ 19,176 $ 3,173 $ 42,580
Comprehensive income:
Net income 2,848 2,848
Other comprehensive income,
net of tax of $80 155 155
Reclassification adjustment,
net of tax of ($172) (333) (333)
----- -------- -------- -------- ------- --------
Total comprehensive income -- -- -- 2,848 (178) 2,670
Proceeds from issuance of common stock 96 1,208 1,304
10% stock dividend distributed 3 5,647 (5,653) (3)
Cash dividends declared (890) (890)
Treasury stock purchased - 146,106 shares (3,159) (3,159)
Sale of stock through Dividend
Reinvestment Plan 69 69
Stock options exercised 239 (21) 218
----- -------- -------- -------- ------- --------
Balance at June 30, 2003 $ 28 $ 28,615 $ (4,330) $ 15,481 $ 2,995 $ 42,789
===== ======== ======== ======== ======== ========
See accompanying notes to unaudited consolidated financial statements.
-5-
FIDELITY BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - (Unaudited)
June 30, 2003
(1) Consolidation
-------------
The consolidated financial statements contained herein for Fidelity Bancorp,
Inc. (the "Company") include the accounts of Fidelity Bancorp, Inc. and its
wholly-owned subsidiaries, Fidelity Bank, PaSB (the "Bank"), FB Capital Trust
and FB Statutory Capital Trust II (collectively, the "Trusts"). All
inter-company balances and transactions have been eliminated.
(2) Basis of Presentation
---------------------
The accompanying consolidated financial statements were prepared in accordance
with instructions to Form 10-Q, and therefore, do not include information or
footnotes necessary for a complete presentation of financial position, results
of operations and cash flows in conformity with generally accepted accounting
principles. However, all normal recurring adjustments, which, in the opinion of
management, are necessary for a fair presentation of the financial statements,
have been included. These financial statements should be read in conjunction
with the audited financial statements and the accompanying notes thereto
included in the Company's Annual Report for the fiscal year ended September 30,
2002. The results for the three and nine month periods ended June 30, 2003 are
not necessarily indicative of the results that may be expected for the fiscal
year ending September 30, 2003 or any future interim period.
(3) New Accounting Standards
------------------------
In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets", which addresses financial accounting and
reporting for the impairment or disposal of long-lived assets. SFAS No. 144
supersedes SFAS No. 121, "Accounting for Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of," however, it retains many of the
fundamental provisions of that Statement. SFAS No. 144 is effective for fiscal
years beginning after December 15, 2001. The Company adopted SFAS No. 144 as of
October 1, 2002 and it did not have a material effect on the financial condition
or results of operations of the Company.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No.
4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections."
The provisions of this statement related to the rescission of SFAS No. 4 are
effective for fiscal years beginning after May 15, 2002. Certain provisions of
the statement relating to SFAS no. 13 are effective for transactions occurring
after May 15, 2002. All other provisions of the statement are effective for
financial statements issued on or after May 15, 2002. The Company adopted
Statement No. 145 as of October 1, 2002. In November 2002, the Company reported
the write-off of $599,000 of unamortized debt issuance costs as a component of
interest expense, whereas this write-off would have been reported as an
extraordinary loss under SFAS No. 4. In issuing SFAS No. 145, the FASB concluded
that the rescission of SFAS No. 4 would improve financial reporting by
eliminating a requirement to classify a normal and important part of many
entities' ongoing activities to manage interest rate risk as an extraordinary
item. (See "Interest Expense" section of the Management's Discussion and
Analysis of Financial Condition and Results of Operation.)
In October 2002, the FASB issued SFAS No. 147, "Acquisitions of Certain
Financial Institutions - an amendment of FASB Statements No. 72 and 144 and FASB
Interpretation No. 9, " which provides interpretative guidance on the
application of the purchase method to acquisitions of financial institutions.
The provisions of SFAS No. 147 are effective October 1, 2002. Adoption of SFAS
No. 147 had no impact on the Company's financial statements.
-6-
In November 2002, the FASB issued Interpretation No. 45, ("FIN 45"),"Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others." This interpretation elaborates on the
existing disclosures to be made by a guarantor in its interim and annual
financial statements about its obligations under certain guarantees that it has
issued ("disclosure requirements"). This interpretation also clarifies that a
guarantor is required to recognize, at inception of a guarantee, a liability for
the fair value of the obligation undertaken in issuing the guarantee
("recognition and measurement provisions"). The initial recognition and initial
measurement provisions of FIN 45 are applicable on a prospective basis to
guarantees issued or modified after December 31, 2002. The disclosure
requirements in FIN 45 are effective for financial statements of interim and
annual periods ending after December 15, 2002. The adoption of FIN 45 did not
have a material effect on the financial position, results of operations, or
liquidity of the Company.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure, an amendment of FASB Statement No.
123". This Statement amends FASB Statement No. 123 to provide alternative
methods of transition for voluntary change to the fair value based method of
accounting for stock-based employee compensation. This Statement also amends the
disclosure requirements of Statement 123 to require prominent disclosure on both
annual and interim financial statements about the method of accounting for
stock-based compensation and the effect of the method used on reported results.
The transition alternatives of SFAS 148 are available for fiscal years beginning
after December 15, 2003 and, if the fair value provisions of SFAS 123 are
adopted, the effect on the Company's financial statements is contingent on the
transition provision elected.
At June 30, 2003, the Company had several stock-based employee and director
compensation plans, which are described in Footnote 18 in the Company's 2002
Annual Report. All options granted under these plans have an exercise price
equal to the market value of the underlying common stock on the date of grant.
The Company applies APB Opinion No. 25, "Accounting for Stock Issued to
Employees," and related interpretations. Accordingly, no compensation expense
has been recognized for its stock option plans. However, as required to be
disclosed by SFAS No. 148, the following table illustrates the pro forma effect
on income and earnings per share if the fair value based method had been applied
to the Company's stock option plans.
For the three months For the nine months
ended June 30, ended June 30,
-------------------- ---------------------
2003 2002 2003 2002
-------- --------- --------- ---------
Net income, as reported $ 999 $ 1,213 $ 2,848 $ 3,272
Add: Stock-based compensation expense included in
reported net income, net of tax - - - -
Deduct: Compensation expense from stock options,
determined under fair value based method, net of tax (10) (6) (132) (113)
-------- --------- --------- ---------
Pro forma net income $ 989 $ 1,207 $ 2,716 $ 3,159
======== ========= ========= =========
Earnings per share:
Basic - as reported $ .38 $ .48 $ 1.09 $ 1.33
Basic - pro forma $ .38 $ .48 $ 1.04 $ 1.28
Diluted - as reported $ .36 $ .46 $ 1.05 $ 1.29
Diluted - pro forma $ .36 $ .46 $ 1.00 $ 1.25
The Black-Scholes option pricing model requires the use of subjective
assumptions which can materially affect fair value estimates. Therefore, this
model does not necessarily provide a reliable single measure of the fair value
of the Company's stock options.
-7-
In January 2003, the Financial Accounting Standards Board issued FASB
Interpretation No. 46, "Consolidation of Variable Interest Entities, an
Interpretation of ARB No. 51". This interpretation provides new guidance for the
consolidation of variable interest entities (VIEs) and requires such entities to
be consolidated by their primary beneficiaries if the entities do not
effectively disperse risk among parties involved. The interpretation also adds
disclosure requirements for investors that are involved with unconsolidated
VIEs. The disclosure requirements apply to all financial statements issued after
January 31, 2003. The consolidation requirements apply immediately to VIEs
created after January 31, 2003 and are effective for the first fiscal year or
interim period beginning after June 15, 2003 for VIEs acquired before February
1, 2003. The adoption of this interpretation did not have any impact on the
Company's financial condition or results of operations.
In April 2003, the Financial Accounting Standards Board issued Statement No.
149, "Amendment of Statement No. 133, Accounting for Derivative Instruments and
Hedging Activities". This statement clarifies the definition of a derivative and
incorporates certain decisions made by the Board as part of the Derivatives
Implementation Group process. This statement is effective for contracts entered
into or modified, and for hedging relationships designated after June 30, 2003
and should be applied prospectively. The provisions of the Statement that relate
to implementation issues addressed by the Derivatives Implementation Group that
have been effective should continue to be applied in accordance with their
respective effective dates. Adoption of this standard is not expected to have a
significant impact on the Company's financial condition or results of
operations.
In May 2003, the Financial Accounting Standards Board issued Statement No. 150,
"Accounting for Certain Financial Instruments with Characteristics of both
Liabilities and Equity." This Statement requires that an issuer classify a
financial instrument that is within its scope as a liability. Many of these
instruments were previously classified as equity. This Statement was effective
for financial instruments entered into or modified after May 31, 2003 and
otherwise was effective beginning July 1, 2003. The adoption of this standard
did not have any impact on the Company's financial condition or results of
operations.
-8-
(4) Earnings Per Share
------------------
Basic earnings per share (EPS) excludes dilution and is computed by dividing
income available to common stockholders by the weighted average number of common
shares outstanding for the period. Diluted EPS reflects the potential dilution
that could occur if securities or other contracts to issue common stock were
exercised or converted into common stock or resulted in the issuance of common
stock that then shared in the earnings of the Company. All weighted average
share and per share amounts reflect the 10% stock dividends paid on May 28, 2002
and May 28, 2003. The following table sets forth the computation of basic and
diluted earnings per share (amounts in thousands, except per share data):
Three Months Ended Nine Months Ended
June 30, June 30,
2003 2002 2003 2002
-------- -------- -------- --------
Numerator:
Net Income $ 999 $ 1,213 $ 2,848 $ 3,272
-------- -------- -------- --------
Numerator for basic and diluted
earnings per share $ 999 $ 1,213 $ 2,848 $ 3,272
-------- -------- -------- --------
Denominator:
Denominator for basic earnings per
share - weighted average shares 2,628 2,534 2,620 2,461
Effect of dilutive securities:
Employee stock options 124 96 102 82
-------- -------- -------- --------
Denominator for diluted earnings per
share - weighted average
shares and assumed conversions 2,752 2,630 2,722 2,543
-------- -------- -------- --------
Basic earnings per share $ .38 $ .48 $ 1.09 $ 1.33
-------- -------- -------- --------
Diluted earnings per share $ .36 $ .46 $ 1.05 $ 1.29
-------- -------- -------- --------
(5) Securities
----------
The Company accounts for investments in debt and equity securities in accordance
with SFAS No. 115, which requires that investments be classified as either: (1)
Securities Held-to-Maturity - reported at amortized cost, (2) Trading Securities
- - reported at fair value, or (3) Securities Available-for-Sale - reported at
fair value. Unrealized gains and losses on securities available-for-sale are
reported as accumulated other comprehensive income (loss) in stockholders'
equity. Unrealized gains of $3.0 million, net of tax, on investments classified
as available-for-sale are recorded at June 30, 2003. The Company had no
securities classified as trading as of June 30, 2003 and September 30, 2002.
During the quarter ended December 31, 2001, $2.5 million of mortgage-backed
securities classified by the Company as held-to-maturity were repurchased by the
selling dealer due to misrepresentations by the selling dealer as to the risk
characteristics and structure of the securities. The Company did not anticipate
this event and believes this was an isolated, nonrecurring, and unusual
circumstance. The securities were repurchased by the dealer at the Company's
original cost, thus no gain or loss was recorded.
-9-
(6) Loans Receivable
----------------
Loans receivable are comprised of the following (dollar amounts in
thousands):
June 30, September 30,
2003 2002
--------- ---------
First mortgage loans:
Conventional:
1-4 family dwellings $ 116,176 $ 169,849
Multi-family dwellings 6,062 7,217
Commercial 47,224 29,036
Construction:
Residential 12,164 11,372
Commercial 5,033 8,205
--------- ---------
186,658 225,679
--------- ---------
Less:
Loans in process (11,496) (9,065)
Unearned discounts and fees (814) (1,368)
--------- ---------
174,348 215,246
--------- ---------
Installment loans:
Home equity 58,981 58,549
Consumer loans 1,115 1,286
Other 2,461 2,037
--------- ---------
62,556 61,872
--------- ---------
Commercial business loans and leases:
Commercial business loans 39,553 38,287
Commercial leases 2,387 3,971
--------- ---------
41,941 42,258
--------- ---------
Less: Allowance for loan losses (3,044) (3,056)
--------- ---------
Loans receivable, net $ 275,800 $ 316,320
--------- ---------
(7) Allowance for Loan Losses
-------------------------
Changes in the allowance for loan losses for the nine months ended June 30, 2003
and the fiscal year ended September 30, 2002 are as follows (dollar amounts in
thousands):
June 30, September 30,
2003 2002
------- -----------
Balance at beginning of period $ 3,056 $ 2,871
Allowance for loan losses of Carnegie Savings Bank -- 204
Allowance for loan losses of First Pennsylvania Savings 40 --
Provision for loan losses 480 400
Charge-offs (561) (520)
Recoveries 29 101
------- -------
Balance at end of period $ 3,044 $ 3,056
------- -------
-10-
The provision for loan losses charged to expense is based upon past loan loss
experience and an evaluation of probable losses in the current loan portfolio,
including the evaluation of impaired loans under SFAS Nos. 114 and 118. A loan
is considered to be impaired when, based upon current information and events, it
is probable that the Bank will be unable to collect all amounts due according to
the contractual terms of the loan. An insignificant shortfall in payments does
not necessarily result in a loan being identified as impaired. For this purpose,
delays less than 90 days are considered to be insignificant.
Impairment losses are included in the provision for loan losses. SFAS Nos. 114
and 118 do not apply to large groups of smaller balance, homogeneous loans that
are collectively evaluated for impairment, except for those loans restructured
under a troubled debt restructuring. Loans collectively evaluated for impairment
include consumer loans and residential real estate loans, and are not included
in the following data.
At June 30, 2003, the recorded investment in loans that are considered to be
impaired under SFAS No. 114 was $3.0 million compared to $1.3 million at June
30, 2002. Included in the current amount is $1.3 million of impaired loans for
which the related allowance for loan losses is $62,000, and $1.7 million of
impaired loans that as a result of applying impairment tests prescribed under
SFAS No. 114, do not have an allowance for loan losses. The average recorded
investment in impaired loans during the nine months ended June 30, 2003 was $2.0
million compared to $1.7 million for the same period in the prior year. For the
nine months ended June 30, 2003, as well as June 30, 2002, the Company
recognized no interest income on those impaired loans using the cash basis of
income recognition.
(8) Comprehensive Income
--------------------
Total comprehensive income amounted to the following for the three and nine
months ended June 30 (dollar amounts in thousands):
Three Months Ended Nine Months Ended
June 30, June 30,
2003 2002 2003 2002
------- ------- ------- -------
Net Income $ 999 $ 1,213 $ 2,848 $ 3,272
Change in unrealized gains (losses) on investment
securities and mortgage-backed securities available
for sale, net of taxes $ 489 $ 1,923 $ (178) $ 336
------- ------- ------- -------
Comprehensive income $ 1,488 $ 3,136 $ 2,670 $ 3,608
======= ======= ======= =======
-11-
(9) Acquisition
-----------
On July 12, 2002, the Company and First Pennsylvania Savings Association ("First
Pennsylvania) jointly announced the signing of an Agreement and Plan of Merger
Conversion, whereby it was agreed that First Pennsylvania would merge with and
into the Bank. On September 30, 2002, the agreement was amended to require an
offering of stock of the Company to certain members of First Pennsylvania.
Pursuant to the amended agreement, First Pennsylvania converted to a
Pennsylvania-chartered stock savings institution and simultaneously merged with
and into the Bank on December 31, 2002 and the Bank acquired all of the assets
and assumed all of the liabilities of First Pennsylvania for no additional
consideration. Liabilities assumed exceeded assets acquired by $687,000.
Additionally, in connection with the merger, the Company sold approximately
89,600 shares at $17.52 per share of its common stock to certain members of
First Pennsylvania and the Company's employee stock ownership plan in a
subscription offering and to the Company's stockholders and certain members of
the community in a stockholder and community offering.
The acquisition was accounted for under the purchase method of accounting and,
accordingly, the results of operations of First Pennsylvania have been included
in the Company's consolidated financial statements from December 31, 2002. The
Company acquired loans with a fair value of approximately $6.8 million,
investment and mortgage-backed securities with a fair value of $11.8 million,
deposits with a fair value of approximately $12.3 million and Federal Home Loan
Bank advances with a fair value of approximately $13.9 million in the
transaction. Goodwill and core deposit intangibles arising from the transaction
were approximately $687,000.
-12-
(10) Goodwill and Other Intangible Assets - Adoption of Statement 142
----------------------------------------------------------------
In July 2001, the Financial Accounting Standards Board issued Statement No. 141,
"Business Combinations", and Statement No. 142, "Goodwill and Other Intangible
Assets". Statement No. 141 requires that the purchase method of accounting be
used for all business combinations initiated after June 30, 2001 as well as all
purchase method business combinations completed after June 30, 2001. Statement
No. 141 also specifies certain criteria that intangible assets acquired in a
purchase method business combination must meet to be recognized and reported
apart from goodwill, noting that any purchase price allocable to an assembled
workforce may not be accounted for separately. Statement No. 142 requires that
goodwill and intangible assets with indefinite useful lives no longer need to be
amortized, but instead tested for impairment at least annually in accordance
with the provisions of Statement No. 142. Statement No. 142 also requires that
intangible assets with definite useful lives be amortized over their respective
estimated useful lives to their estimated residual value, and reviewed for
impairment in accordance with SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets." The Company adopted Statement No. 142 as of
October 1, 2002 and, as a result, no longer amortizes goodwill, but will test
goodwill for impairment on an annual basis. The Company performed the initial
goodwill impairment test during the quarter ended March 31, 2003 and it was
determined that no adjustments were required. The following table sets forth net
income and earnings per share for the three and nine-month periods ended June
30, 2003 and 2002 excluding the effects of goodwill amortization.
Three months ended Nine months ended
June 30, June 30,
2003 2002 2003 2002
-------- --------- --------- ---------
Reported net income $ 999 $ 1,213 $ 2,848 $ 3,272
Add back: Goodwill amortization -- 27 -- 108
-------- --------- --------- ---------
Adjusted net income $ 999 $ 1,240 $ 2,848 $ 3,380
-------- --------- --------- ---------
Basic earnings per share:
Reported net income $ .38 $ .48 $ 1.09 $ 1.33
Goodwill amortization -- .01 -- .04
-------- --------- --------- ---------
Adjusted net income $ .38 $ .49 $ 1.09 $ 1.37
-------- --------- --------- ---------
Diluted earnings per share:
Reported net income $ .36 $ .46 $ 1.05 $ 1.29
Goodwill amortization -- .01 -- .04
-------- --------- --------- ---------
Adjusted net income $ .36 $ .47 $ 1.05 $ 1.33
-------- --------- --------- ---------
(11) Stockholders' Equity
--------------------
Certain reclassifications have been made to the components of stockholders'
equity as of September 30, 2001 and 2002. The reclassifications reflect the
recording of stock dividends at fair market value instead of par value as
previously recorded. The net cumulative effect of the reclassification was to
increase additional paid-in capital and to decrease retained earnings by $2.6
million at September 30, 2001 and by $7.1 million at September 30, 2002.
-13-
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
FIDELITY BANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The Private Securities Litigation Reform Act of 1995 contains safe harbor
provisions regarding forward-looking statements. When used in this discussion,
the words "believes," "anticipates," "contemplates," "expects," and similar
expressions are intended to identify forward-looking statements. Such statements
are subject to certain risks and uncertainties which could cause actual results
to differ materially from those projected. Those risks and uncertainties include
changes in interest rates, risks associated with the effect of integrating newly
acquired businesses, the ability to control costs and expenses, and general
economic conditions.
Fidelity Bancorp, Inc.'s ("Fidelity" or the "Company") business is conducted
principally through Fidelity Bank (the "Bank"). All references to the Company
refer collectively to the Company and the Bank, unless the context indicates
otherwise.
Overview
- --------
On December 31, 2002, the Company completed its acquisition of First
Pennsylvania Savings Association ("First Pennsylvania"). The acquisition was
accounted for under the purchase method of accounting and, accordingly, the
results of operations of First Pennsylvania have been included in the Company's
consolidated financial statements from December 31, 2002. The Company acquired
loans with a fair value of approximately $6.8 million, investment and
mortgage-backed securities with a fair value of $11.8 million, deposits with a
fair value of approximately $12.3 million and Federal Home Loan Bank advances
with a fair value of approximately $13.9 million in the transaction. Goodwill
and other core deposit intangibles arising from the transaction were
approximately $687,000. In connection with the merger, the Company raised $1.6
million in proceeds from the issuance of stock to certain members of First
Pennsylvania and Fidelity's employee stock ownership plan in a subscription
offering and the Fidelity's stockholders and certain members of the community in
a stockholder and community offering.
Critical Accounting Policies
- ----------------------------
Note 1 on pages 12 through 15 of the Company's Annual Report to Shareholders
lists significant accounting policies used in the development and presentation
of its financial statements. This discussion and analysis, the significant
accounting policies, and other financial statement disclosures identify and
address key variables and other qualitative and quantitative factors that are
necessary for an understanding and evaluation of the Company and its results of
operations.
The most significant estimates in the preparation of the Company's financial
statements are for the allowance for loan losses and accounting for stock
options. Please refer to the discussion of the allowance for loan losses in
footnote 7 "Allowance for Loan Losses" on page 10 above. In addition, further
discussion of the estimates used in determining the allowance for loan losses is
contained in the discussion on "Provision for Loan Losses" on page 17 herein and
page 44 of the Company's 2002 Annual Report to Shareholders. The Company
accounts for its stock option plans under the recognition and measurement
principles of APB Opinion No. 25, "Accounting for Stock Issued to Employees,"
and related Interpretations. No stock-based employee compensation is reflected
in net income, as all options granted had an exercise price equal to the market
value of the underlying common stock on the grant date. Refer also to footnote
18 "Stock Option Plans" on page 28 of the Company's 2002 Annual Report to
Shareholders. The Company currently has no intentions of adopting the expense
recognition provisions of SFAS No. 123, "Accounting for Stock-Based
Compensation", as well as the amendments to this statement contained in SFAS
148, "Accounting for Stock-Based Compensation - Transition and Disclosure, an
Amendment of FASB Statement No. 123."
-14-
Comparison of Financial Condition
- ---------------------------------
Total assets of the Company increased $11.4 million, or 1.9%, to $627.2 million
at June 30, 2003 from $615.8 million at September 30, 2002. Significant changes
in individual categories include an increase in investment securities
available-for-sale of $23.6 million, an increase in investment securities
held-to-maturity of $16.5 million, an increase in mortgage-backed securities
available-for-sale of $3.7 million, an increase in mortgage-backed securities
held-to-maturity of $14.8 million, a decrease in interest-earning demand
deposits of $13.9 million, and a decrease in net loans of $40.5 million. The
Company continued to experience increased levels of loan and mortgage-backed
security prepayment and loan refinancing activity. The decrease in net loans
reflects $149.0 million of prepayments, partially offset by $6.8 million in
loans acquired from First Pennsylvania and $121.6 million in new loan
originations.
Total liabilities of the Company increased $11.2 million, or 2.0%, to $584.4
million at June 30, 2003 from $573.2 million at September 30, 2002. Significant
changes include an increase in savings and time deposits of $14.4 million, an
increase in securities purchased but not settled of $9.8 million, and a decrease
in guaranteed preferred beneficial interest in Company's debentures ("trust
preferred securities") of $10.3 million. Deposits with a fair value of
approximately $12.3 million and Federal Home Loan Bank advances with a fair
value of approximately $13.9 million were assumed in connection with the
acquisition of First Pennsylvania.
Stockholders' equity increased $209,000, or .49% to $42.8 million at June 30,
2003, compared to $42.6 million at September 30, 2002. This result reflects net
income for the nine month period ended June 30, 2003 of $2.8 million, $1.3
million of stock issued during the acquisition of First Pennsylvania, stock
options exercised of $218,000, and stock issued under the Dividend Reinvestment
Plan of $69,000. Offsetting these increases were common stock cash dividends
paid of $893,000, treasury stock purchased of $3.2 million, and a decrease of
accumulated other comprehensive income of $178,000. Accumulated other
comprehensive income decreased from September 30, 2002 as a result of changes in
the net unrealized gains on the available-for-sale securities due to the
fluctuations in interest rates during the current period. Because of interest
rate volatility, the Company's accumulated other comprehensive income (loss)
could materially fluctuate for each interim and year-end period. Approximately
$3.4 million of the balances in retained earnings as of June 30, 2003 and
September 30, 2002 represent base year bad debt deductions for tax purposes
only, as they are considered restricted accumulated earnings.
-15-
Non-Performing Assets
- ---------------------
The following table sets forth information regarding non-accrual loans and
foreclosed real estate by the Company at the dates indicated. The Company did
not have any accruing loans which were 90 days or more overdue or any loans
which were classified as troubled debt restructuring at the dates presented
(dollar amounts in thousands).
June 30, September 30,
2003 2002
------ ------
Non-accrual residential real estate loans
(one-to-four family) $ 846 $ 515
Non-accrual construction, multi family
residential and commercial real estate loans 165 408
Non-accrual installment loans 422 273
Non-accrual commercial business loans 1,258 1,461
------ ------
Total non-performing loans $2,692 $2,657
====== ======
Total non-performing loans as a percent of
net loans receivable .98% .84%
====== ======
Total foreclosed real estate $ 475 $ 658
====== ======
Total non-performing loans and foreclosed real estate as a
percent of total assets .50% .54%
====== ======
Included in non-performing loans at June 30, 2003 are 19 single-family
residential real estate loans totaling $846,000, one commercial real estate loan
totaling $165,000, 26 home equity and installment loans totaling $422,000, 15
commercial business loans totaling $1.3 million, and one commercial business
lease totaling $12,000.
Non-accrual residential real estate loans totaled $846,000 at June 30, 2003,
compared to $515,000 at September 30, 2002, an increase of $331,000. The
increase reflects $118,000 of non-accrual residential real estate loans acquired
from First Pennsylvania.
At June 30, 2003, the Company had an allowance for loan losses of $3.0 million
or 1.10% of net loans receivable, as compared to an allowance of $3.1 million or
..97% of net loans receivable at September 30, 2002. The allowance for loan
losses equals 113.1% of non-performing loans at June 30, 2003 compared to 115.0%
at September 30, 2002.
Management has evaluated its entire loan portfolio, including these
non-performing loans, and the overall allowance for loan losses and is satisfied
that the allowance for losses on loans at June 30, 2003 is adequate. See also
"Provision for Loan Losses." However, there can be no assurance that the
allowance for loan losses is sufficient to cover possible future loan losses.
-16-
The Company recognizes that it must maintain an Allowance for Loan and Lease
Losses ("ALLL") at a level that is adequate to absorb estimated credit losses
associated with the loan and lease portfolio. The Company's Board of Directors
has adopted an ALLL policy designed to provide management with a systematic
methodology for determining and documenting the ALLL each reporting period. This
methodology was developed to provide a consistent process and review procedure
to ensure that the ALLL is in conformity with the Company's policies and
procedures and other supervisory and regulatory guidelines.
The Company's ALLL methodology incorporates management's current judgments about
the credit quality of the loan portfolio. The following factors are considered
when analyzing the appropriateness of the allowance: historical loss experience;
volume; type of lending conducted by the Bank; industry standards; the level and
status of past due and non-performing loans; the general economic conditions in
the Bank's lending area; and other factors affecting the collectibility of the
loans in its portfolio. The primary elements of the Bank's methodology include
portfolio segmentation and impairment measurement. Management acknowledges that
this is a dynamic process and consists of factors, many of which are external
and out of management's control, that can change often, rapidly and
substantially. The adequacy of the ALLL is based upon estimates considering all
the aforementioned factors as well as current and known circumstances and
events. There is no assurance that actual portfolio losses will not be
substantially different than those that were estimated.
-17-
Comparison of Results of Operations
-----------------------------------
for the Three and Nine Months Ended June 30, 2003 and 2002
----------------------------------------------------------
Net Income
- ----------
Net income for the three months ended June 30, 2003 was $999,000 ($.36 per
diluted share) compared to $1.21 million ($.46 per diluted share) for the same
period in 2002, a decrease of $214,000 or 17.6 %. The decrease reflects a
decrease in net interest income of $438,000 or 12.4% and an increase in other
operating expenses of $200,000 or 7.9%. Partially offsetting these factors was a
decrease in the provision for loan losses of $25,000, an increase in other
income of $347,000, or 55.2%, and a decrease in the provision for income taxes
of $52,000 or 15.2%.
Net income for the nine months ended June 30, 2003 was $2.85 million ($1.05 per
diluted share) compared to $3.27 million ($1.29 per diluted share) for the same
period in 2002, a decrease of $424,000 or 13.0 %. The decrease reflects a
decrease in net interest income of $616,000 or 6.2%, an increase in the
provision for loan losses of $180,000 or 60.0%, an increase in operating
expenses of $559,000 or 7.5%, and an increase in the provision for income taxes
of $14,000 or 1.7%. Partially offsetting these factors was an increase in other
income of $945,000, or 47.6%.
Interest Rate Spread
- --------------------
The Company's interest rate spread, the difference between yields calculated on
a tax-equivalent basis on interest-earning assets and the cost of funds,
decreased to 2.14% in the three months ended June 30, 2003 from 2.54% in the
same period in fiscal 2002 as a result of the average yield on total interest
earning assets decreasing more than the average rate paid on interest-bearing
liabilities. The following table shows the average yields earned on the Bank's
interest-earning assets and the average rates paid on its interest-bearing
liabilities for the periods indicated, the resulting interest rate spreads, and
the net yields on interest-earning assets.
Three Months Ended
June 30,
2003 2002
---- ----
Average yield on:
Mortgage loans 7.26% 7.32%
Mortgage-backed securities 3.48 5.44
Installment loans 6.79 7.61
Commercial business loans and leases 6.67 7.32
Interest-earning deposits with other
institutions, investment securities, and
FHLB stock (1) 4.60 5.68
---- ----
Total interest-earning assets 5.54 6.60
---- ----
Average rates paid on:
Savings deposits 2.43 2.93
Borrowed funds 5.11 5.60
---- ----
Total interest-bearing liabilities 3.39 4.06
---- ----
Average interest rate spread 2.14% 2.54%
==== ====
Net yield on interest-earning assets 2.27% 2.67%
==== ====
(1) Interest income on tax-free investments has been adjusted for federal
income tax purposes using a rate of 34%.
-18-
The Bank's tax-equivalent interest rate spread decreased to 2.12% in the nine
months ended June 30, 2003 from 2.43% in the same period in fiscal 2002 as the
average yield on interest-earning assets declined to a greater degree than the
decline in average rates paid. The following table shows the average yields
earned on the Bank's interest-earning assets and the average rates paid on its
interest-bearing liabilities for the periods indicated, the resulting interest
rate spreads, and the net yields on interest-earning assets.
Nine Months Ended June 30,
2003 2002
---- ----
Average yield on:
Mortgage loans 7.33% 7.42%
Mortgage-backed securities 4.00 5.61
Installment loans 7.01 7.70
Commercial business loans and leases 6.57 7.64
Interest-earning deposits with other
institutions, investment securities, and
FHLB stock (1) 4.88 5.91
---- ----
Total interest-earning assets 5.85 6.78
---- ----
Average rates paid on:
Savings deposits 2.59 3.30
Borrowed funds 5.29 5.78
---- ----
Total interest-bearing liabilities 3.73 4.35
---- ----
Average interest rate spread 2.12% 2.43%
==== ====
Net yield on interest-earning assets 2.27% 2.58%
==== ====
(1) Interest income on tax-free investments has been adjusted for federal
income tax purposes using a rate of 34%.
Interest Income
- ---------------
Interest on loans decreased $954,000 or 15.9% to $5.0 million for the three
months ended June 30, 2003, compared to the same period in fiscal 2002. The
decrease reflects a decrease in the average loan balance outstanding during 2003
as well as a decrease in the net yield earned on the loan portfolio. Interest on
loans decreased $2.1 million or 11.3% to $16.1 million for the nine months ended
June 30, 2003, compared to the same period in fiscal 2002. The decrease reflects
a decrease in the average loan balance outstanding during fiscal 2003 as well as
a decrease in the net yield earned on the loan portfolio. The Company acquired
$6.8 million in net loans upon the acquisition of First Pennsylvania and the
Company originated $121.6 million in new loans; however, these increases in
loans were offset by $149.0 million of loan prepayments and $18.2 million in
loan sales, thus accounting for the decrease in the average loan balance
outstanding for the fiscal 2003 period. Higher levels of principal repayments
have been experienced due to the lower interest rate environment during the
current fiscal period.
Interest on mortgage-backed securities decreased $322,000 or 21.7% to $1.16
million and $453,000 or 10.7% to $3.79 million for the three and nine month
periods ended June 30, 2003, respectively, as compared to the same periods in
fiscal 2002. The decrease for both the three and nine month periods ended June
30, 2003, reflects a decrease in the average yield earned on the portfolio,
partially offset by an increase in the average balance of mortgage-backed
securities owned in the period. The fair value of mortgage-backed securities
acquired from First Pennsylvania on December 31, 2002 was approximately $4.9
million.
-19-
Interest on interest-earning deposits with other institutions and investment
securities increased $63,000 or 3.8%, and increased $245,000 or 4.9%, for the
three and nine month periods ended June 30, 2003, respectively, as compared to
the same periods in fiscal 2002. The increase in both periods reflects an
increase in the average balance in the portfolio partially offset by a decrease
in the yield earned on these investments. Interest-earning deposits of $7.1
million and investment securities of $6.9 million were acquired with the
purchase of First Pennsylvania on December 31, 2002.
Interest Expense
- ----------------
Interest on savings and time deposits decreased $259,000 or 10.5% to $2.2
million, and decreased $1.1 million or 13.4% to $7.0 million, for the three and
nine month periods ended June 30, 2003, respectively, as compared to the same
periods in fiscal 2002. The decrease in both periods reflects a decrease in the
average cost of the deposits, partially offset by an increase in the average
balance of savings deposits. The increase in the average balance of deposits
also reflects the approximately $12.3 million of deposits assumed with the
acquisition of First Pennsylvania.
Interest on guaranteed preferred beneficial interest in subordinated debt
decreased $134,000 or 52.3% for the three months ended June 30, 2003. Interest
on guaranteed preferred beneficial interest in subordinated debt increased
$306,000 or 39.8% for the nine months ended June 30, 2003. During the first
quarter of fiscal 2003, the Company wrote-off $599,000 in unamortized issuance
costs related to $10.25 million of 9.75% trust preferred securities that were
called by the Company on November 4, 2002. The write-off of these costs was
reported as a component of interest expense. The 9.75% trust preferred
securities that were called were replaced in September 2002 with $10.0 million
of floating rate trust preferred securities that bore an initial rate of 5.22%
through December 26, 2002, and which adjust quarterly thereafter at a rate of
3-month LIBOR plus 3.40%. The floating rate trust preferred securities' current
rate is 4.41%. The 9.75% trust preferred securities were called by the Company
and replaced by the floating rate trust preferred securities primarily to take
advantage of the current low interest rate environment.
Interest on Federal Home Loan Bank ("FHLB") advances and other borrowings
decreased $382,000 or 13.3% to $2.5 million for the three-month period ended
June 30, 2003, as compared to the same period in fiscal 2002. The decrease
reflects a decrease in the cost of FHLB advances and reverse repurchase
agreements, while the average balance of advances and repurchase agreements
outstanding decreased slightly. Interest on Federal Home Loan Bank ("FHLB")
advances and other borrowings decreased $881,000 or 10.2% to $7.8 million for
the nine-month period ended June 30, 2003, as compared to the same period in
fiscal 2002. The decrease reflects a decrease in the cost of FHLB advances and
reverse repurchase agreements, while the average balance of advances and
repurchase agreements outstanding was relatively unchanged. The Company
continues to rely on these advances and repurchase agreements as cost effective
wholesale funding sources.
Net Interest Income Before Provision for Loan Losses
- ----------------------------------------------------
The Company's net interest income before provision for loan losses decreased
$438,000 or 12.4% to $3.1 million, and decreased $566,000 or 5.7% to $9.3
million for the three and nine month periods ended June 30, 2003, respectively,
as compared to the same periods in fiscal 2002. The decrease in both fiscal 2003
periods is attributable to a decreased interest rate spread, partially offset by
an increase in net interest-earning assets.
-20-
Provision for Loan Losses
- -------------------------
The provision for loan losses decreased $25,000 to $75,000, for the three month
period ended June 30, 2003, as compared to the same period in fiscal 2002 and
increased $180,000 to $480,000 for the nine month period ended June 30, 2003, as
compared to the same period in fiscal 2002. At June 30, 2003, the allowance for
loan losses decreased $12,000 to $3.04 million from $3.06 million at September
30, 2002. Net loan charge-offs were $32,000 and $46,000 for the three months
ended June 30, 2003 and 2002, respectively. Net loan charge-offs were $532,000
and $241,000 for the nine months ended June 30, 2003 and 2002, respectively. A
$300,000 commercial business loan was charged-off during the three-month period
ending December 31, 2002.
The provision for loan losses is charged to operations to bring the total
allowance for loan losses to a level that represents management's best estimates
of the losses inherent in the portfolio based on a monthly review by management
of factors such as historical experience, volume, type of lending conducted by
the Bank, industry standards, the level and status of past due and
non-performing loans, the general economic conditions in the Bank's lending
area, and other factors affecting the collectibility of the loans in its
portfolio.
The allowance for loan losses is maintained at a level that represents
management's best estimates of losses in the loan portfolio at the balance sheet
date. However, there can be no assurance that the allowance for losses will be
adequate to cover losses which may be realized in the future and that additional
provisions for losses will not be required.
Other Income
- ------------
Total non-interest or other income increased $347,000 or 55.2% to $976,000, and
increased $945,000 or 47.6% for the three and nine month periods ended June 30,
2003, respectively, as compared to the same periods in fiscal 2002. Increases in
other income primarily relate to increased gains on the sale of investment and
mortgage-backed securities, increased gains on the sale of loans, as well as
increased loan and deposit account service charges.
Loan service charges and fees, which includes late charges on loans and other
miscellaneous loan fees, increased $67,000 or 72.0% to $160,000, and increased
$100,000 or 34.0%, for the three and nine month periods ended June 30, 2003,
respectively, as compared to the same periods in fiscal 2002. The increase is
primarily attributed to an increase in the collection of title insurance fees on
mortgages originated and an increase in late charges on loans.
Gain on the sale of investment and mortgage-backed securities was $117,000 and
$505,000 for the three and nine month periods ended June 30, 2003, respectively,
as compared to a loss of $29,000 and a gain of $61,000 in the same periods in
fiscal 2002. Such sales were made from the available-for-sale portfolio as part
of management's asset/liability management strategies.
Gain on the sale of loans was $145,000 and $343,000 for the three and nine month
periods ended June 30, 2003, respectively, as compared to gains of $37,000 and
$233,000 for the same periods in fiscal 2002. The nine-month period ended June
30, 2003 results include the sale of approximately $18.2 million of fixed rate,
single family mortgage loans, compared to $13.9 million of similar loan sales
during the prior fiscal period.
Deposit service charges and fees increased $32,000 or 11.7% and $276,000 or
43.9%, respectively, for the three and nine month periods ended June 30, 2003,
as compared to the same periods in fiscal 2002. The increase in both periods is
primarily attributed to an increase in the volume of fees collected for returned
checks on deposit accounts.
-21-
Operating Expenses
- ------------------
Total operating expenses for the three-month period ended June 30, 2003 totaled
$2.7 million compared to $2.5 million for the same period in fiscal 2002. Total
operating expenses for the nine-month period ended June 30, 2003 totaled $8.0
million compared to $7.5 million for the same period in fiscal 2002. The
increase in both periods is due primarily to an increase in compensation and
benefits expense. The overall increase in operating expense for the current year
period reflects the operation of the Carnegie branch which was not in operation
for the entire prior fiscal period.
Income Taxes
- ------------
Total income tax expense for the three month period ended June 30, 2003 was
$290,000 compared to $342,000 for the same fiscal 2002 period. The effective tax
rate for the three-month periods ended June 30, 2003 and 2002 was approximately
22.5% and 22.0%, respectively. Total income tax expense for the nine month
period ended June 30, 2003 was $822,000 compared to $808,000 for the same fiscal
2002 period. The effective tax rate for the nine-month periods ended June 30,
2003 and 2002 was approximately 22.4% and 19.8%, respectively. The increase in
the effective tax rate for both periods is attributed to a decrease in
tax-exempt income from the corresponding prior year period. Tax-exempt income
includes income earned on certain municipal investments that qualify for state
and/or federal income tax exemption; income earned by the Bank's Delaware
subsidiary which is not subject to state income tax, and earnings on Bank-owned
life insurance policies which are exempt from federal taxation. State and
federal tax-exempt income for the three-month period ended June 30, 2003 was
$2.0 million and $520,000, respectively. State and federal tax-exempt income for
the nine-month period ended June 30, 2003 was $5.6 million and $1.6 million,
respectively.
Capital Requirements
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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
securities available-for-sale and goodwill, plus certain types of preferred
stock, including the Preferred Securities issued by the Trusts in 1997 and 2002.
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 June 30, 2003, the Company
had Tier 1 capital as a percentage of risk-weighted assets of 13.05% and total
risk-based capital as a percentage of risk-weighted assets of 13.96%.
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 percentage of average total assets (the
"Leverage Ratio") of 3% for bank holding companies that meet certain criteria,
including that they maintain the highest regulatory rating. All other bank
holding companies are required to maintain a Leverage Ratio of at least 4% or be
subject to prompt corrective action by the Federal Reserve. At June 30, 2003,
the Company had a Leverage Ratio of 7.55%.
The FDIC has issued regulations that require insured institutions, such as the
Bank, to maintain minimum levels of capital. In general, current regulations
require a leverage ratio of Tier 1 capital to average total assets of not less
than 3% for the most highly rated institutions and an additional 1% to 2% for
all other institutions. At June 30, 2003, the Bank complied with the minimum
leverage ratio having Tier 1 capital of 7.15% of average total assets, as
defined.
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The Bank is also required to maintain a ratio of qualifying total capital to
risk-weighted assets and off-balance sheet items of a minimum of 8%. At June 30,
2003, the Bank's total capital to risk-weighted assets ratio calculated under
the FDIC capital requirement was 13.29%.
Liquidity
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The Company's primary sources of funds have historically consisted of deposits,
amortization and prepayments of outstanding loans, borrowings from the FHLB of
Pittsburgh and other sources, including sales of securities and, to a limited
extent, loans. At June 30, 2003, the total of approved loan commitments amounted
to $9.5 million. In addition, the Company had $11.5 million of undisbursed loan
funds at that date. The amount of savings certificates which mature during the
next twelve months totals approximately $85.1 million, a substantial portion of
which management believes, on the basis of prior experience as well as its
competitive pricing strategy, will remain in the Company.
Off Balance Sheet Commitments
- -----------------------------
The Bank is party to financial instruments with off-balance sheet risk in the
normal course of business to meet the financing needs of its customers. These
financial instruments include commitments to extend credit and letters of
credit. Those instruments involve, to varying degrees, elements of credit and
interest rate risk in excess of the amount recognized in the balance sheet.
The Bank's exposure to credit loss in the event of nonperformance by the other
party to the financial instrument for commitments to extend credit and letters
of credit is represented by the contractual amount of those instruments. The
Bank uses the same credit policies in making commitments and conditional
obligations as it does for on-balance sheet instruments.
A summary of the contractual amount of the Company's financial instrument
commitments is as follows:
June 30, September 30,
2003 2002
---- ----
(in thousands)
Commitments to grant loans $ 16,875 $ 16,547
Unfunded commitments under lines of credit 26,765 23,281
Financial and performance standby letters of credit 93 122
Item 3. Quantitative and Qualitative Disclosures About Market Risk
There have been no material changes in information regarding
quantitative and qualitative disclosures about market risk at June 30,
2003 from the information presented under the caption, Management's
Discussion and Analysis of Financial Condition and Results of
Operations - Asset and Liability Management, as Exhibit 13 to the Form
10-K for September 30, 2002.
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Item 4. Controls and Procedures
The Company's management evaluated, with the participation of the
Company's Chief Executive Officer and Chief Financial Officer, the
effectiveness of the Company's disclosure controls and procedures, as
of the end of the period covered by this report. Based on that
evaluation, the Chief Executive Officer and Chief Financial Officer
concluded that the Company's disclosure controls and procedures are
effective to ensure that information required to be disclosed by the
Company in the reports that it files or submits under the Securities
Exchange Act of 1934 is recorded, processed, summarized and reported
within the time periods specified in the Securities and Exchange
Commission's rules and forms.
There were no changes in the Company's internal control over financial
reporting that occurred during the Company's last fiscal quarter that
have materially affected, or are reasonably likely to materially
affect, the Company's internal control over financial reporting.
Part II - Other Information
- ---------------------------
Item 1. Legal Proceedings
The Bank is not involved in any pending legal proceedings other than
non-material legal proceedings undertaken in the ordinary course of
business.
Item 2. Changes in Securities
None
Item 3. Defaults Upon Senior Securities
Not Applicable
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
Not Applicable
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Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
The following exhibits are filed as part of this Report.
3.1 Articles of Incorporation (1)
3.2 Amended Bylaws (2)
4.1 Rights Agreement dated March 31, 2003 between Fidelity Bancorp, Inc. and Registrar and
Transfer Company (3)
10.1 Employee Stock Ownership Plan, as amended (1)
10.2 1988 Employee Stock Compensation Program (1)
10.3 1993 Employee Stock Compensation Program (4)
10.4 1997 Employee Stock Compensation Program (5)
10.5 1993 Directors' Stock Option Plan (4)
10.6 Employment Agreement between the Company, the Bank and William L. Windisch (1)
10.7 1998 Group Term Replacement Plan (6)
10.8 1998 Salary Continuation Plan Agreement by and between W.L. Windisch, the
Company and the Bank (6)
10.9 1998 Salary Continuation Plan Agreement by and between R.G. Spencer, the
Company and the Bank (6)
10.10 1998 Salary Continuation Plan Agreement by and between M.A. Mooney, the Company
and the Bank (6)
10.11 1998 Stock Compensation Plan (7)
10.12 2000 Stock Compensation Plan (8)
10.13 2001 Stock Compensation Plan (9)
10.14 2002 Stock Compensation Plan (10)
20.1 Dividend Reinvestment Plan (11)
31.1 Section 302 Certification of Chief Executive Officer
31.2 Section 302 Certification of Chief Financial Officer
32 Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
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(b) Reports on Form 8-K
A Report on Form 8-K was filed on April 17, 2003 reporting under Item
9 the issuance of an earnings release for the quarter ended March 31,
2003 and a press release to report a cash and 10% stock dividend.
A Report on Form 8-K was filed on May 22, 2003 reporting under Item 5
the completion of the Company's stock repurchase program originally
announced in July 2001, and announcing the approval of a new stock
repurchase program to repurchase up to 5% or approximately 133,000
shares.
A Report on Form 8-K was filed on June 4, 2003 reporting under Item 4
the decision to dismiss KPMG LLP as its independent auditors.
A Report on Form 8-K was filed on July 2, 2003 reporting under Item 4
the engagement of Beard Miller Company LLP as its independent
auditors.
A Report on Form 8-K was filed on July 17, 2003 reporting under Item 9
the earnings release for the quarter ended June 30, 2003 and to report
a quarterly cash dividend.
A Report on Form 8-K was filed on July 28, 2003 reporting under Item 5
the completion of the Company's stock repurchase program originally
announced in May 2003, and announcing the approval of a new stock
repurchase program to repurchase up to 5% or approximately 127,000
shares.
No financial statements were filed with the above reports.
(1) Incorporated by reference from the exhibits attached to the Prospectus and
Proxy Statement of the Company included in its Registration Statement on
Form S-4 (registration No. 33-55384) filed with the SEC on December 3, 1992
(the "Registration Statement").
(2) Incorporated by reference to an identically numbered exhibit in Form 10-Q
filed with the SEC on August 14, 2002.
(3) Incorporated by reference from Form 8-A filed March 31, 2003.
(4) Incorporated by reference from an exhibit in Form S-8 filed with the SEC on
May 2, 1997.
(5) Incorporated by reference from an exhibit in Form S-8 filed with the SEC on
March 12, 1998.
(6) Incorporated by reference to an identically numbered exhibit in Form 10-K
filed with the SEC on December 29, 1998.
(7) Incorporated by reference from an exhibit in Form S-8 filed with the SEC on
January 25, 1999.
(8) Incorporated by reference to Exhibit 4.1 to the Form S-8 filed with the SEC
on January 19, 2001.
(9) Incorporated by reference from an exhibit in Form S-8 filed with the SEC on
January 29, 2002.
(10) Incorporated by reference from an exhibit in Form S-8 filed with the SEC on
February 26, 2003.
(11) Incorporated by reference to an identically numbered exhibit in Form 10-Q
filed with the SEC on February 14, 2000.
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Pursuant to the requirements 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: August 15, 2003 By: /s/ Richard G. Spencer
-------------------------------------------
Richard G. Spencer
President and Chief Executive Officer
Date: August 15, 2003 By: /s/ Lisa L. Griffith
------------------------------
Lisa L. Griffith
Sr. Vice President and Chief Financial Officer
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