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 March 31, 2004
--------------
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
- -------------------------------- ---------------------------------
(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
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(Registrant's telephone number, including area code)
Not Applicable
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(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:
2,423,643 shares, par value $0.01, at April 30, 2004
- ----------------------------------------------------
FIDELITY BANCORP, INC. AND SUBSIDIARIES
INDEX
Part I - Financial Information Page
- ------------------------------ ----
Item 1. Financial Statements (Unaudited)
Consolidated Statements of Financial Condition as
of March 31, 2004 and September 30, 2003 1
Consolidated Statements of Income for the Three and
Six Months Ended March 31, 2004 and 2003 2
Consolidated Statements of Cash Flows for the Six
Months Ended March 31, 2004 and 2003 3-4
Consolidated Statements of Changes in Stockholders'
Equity for the Six Months Ended March 31, 2004 and 2003 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 12
Item 3. Quantitative and Qualitative Disclosures About Market Risk 22
Item 4. Controls and Procedures 23
Part II - Other Information
- ---------------------------
Item l. Legal Proceedings 23
Item 2. Changes in Securities, Use of Proceeds and Issuer
Purchases of Equity Securities 23
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 24-25
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)
March 31, September 30,
Assets 2004 2003
------ ---- ----
Cash and due from banks $ 8,664 $ 7,662
Interest-bearing demand deposits with other institutions 515 330
--------- ---------
Cash and Cash Equivalents 9,179 7,992
Securities available-for-sale 190,218 192,429
(book value of $186,271 and $189,382)
Securities held-to-maturity 122,597 119,962
(fair value of $125,118 and $121,652)
Loans held for sale 241 286
Loans receivable, net of allowance of $2,967 and $3,091 275,275 264,412
Foreclosed real estate, net 876 675
Restricted investments in bank stock, at cost 10,827 10,447
Office premises and equipment, net 5,482 5,834
Accrued interest receivable 3,345 3,408
Other assets 11,313 12,333
--------- ---------
Total Assets $ 629,353 $ 617,778
========= =========
Liabilities and Stockholders' Equity
Liabilities:
Deposits:
Non-interest bearing $ 27,918 $ 27,406
Interest bearing 335,705 338,720
--------- ---------
Total Deposits 363,623 366,126
Short-term borrowings 60,030 38,101
Subordinated Notes Payable 10,310 10,310
Securities sold under agreement to repurchase 5,302 5,943
Advance payments by borrowers for taxes and insurance 2,216 1,179
Other liabilities 3,330 3,216
Long-term debt 142,508 152,708
--------- ---------
Total Liabilities 587,319 577,583
--------- ---------
Stockholders' equity:
Common stock, $0.01 par value per share,
10,000,000 shares authorized; 2,843,042
and 2,805,291 shares issued, respectively 28 28
Paid-in capital 29,378 28,960
Retained earnings 17,969 16,388
Accumulated other comprehensive income 2,605 2,011
Treasury stock, at cost - 411,492 and 381,492
shares (7,946) (7,192)
--------- ---------
Total Stockholders' Equity 42,034 40,195
--------- ---------
Total Liabilities and Stockholders' Equity $ 629,353 $ 617,778
========= =========
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 Six Months Ended
March 31, March 31,
------------------- -----------------
2004 2003 2003 2004
---- ---- ---- ----
Interest income:
Loans $ 4,340 $ 5,298 $ 8,671 $ 11,052
Mortgage-backed securities 1,172 1,254 2,098 2,627
Investment securities - taxable 1,368 1,122 2,677 2,164
Investment securities - tax-exempt 578 635 1,192 1,267
Other
-- 19 1 69
-------- -------- -------- --------
Total interest income 7,458 8,328 14,639 17,179
-------- -------- -------- --------
Interest expense:
Deposits 1,910 2,336 3,951 4,763
Short-term borrowings 187 27 345 54
Long-term debt 1,756 2,565 3,576 5,249
Subordinated debt 122 126 244 963
-------- -------- -------- --------
Total interest expense 3,975 5,054 8,116 11,029
-------- -------- -------- --------
Net interest income 3,483 3,274 6,523 6,150
Provision for loan losses 75 75 125 405
-------- -------- -------- --------
Net interest income after provision for loan losses 3,408 3,199 6,398 5,745
-------- -------- -------- --------
Other income:
Loan service charges and fees 73 103 170 235
Realized gain on sales of investment securities, net 419 161 508 388
Gain on sales of loans 11 91 28 198
Deposit service charges and fees 316 276 671 599
Other 347 273 658 544
-------- -------- -------- --------
Total other income 1,166 904 2,035 1,964
-------- -------- -------- --------
Operating expenses:
Compensation and benefits 1,757 1,635 3,522 3,297
Office occupancy and equipment expense 275 269 508 460
Depreciation and amortization 190 174 387 344
Net loss on foreclosed real estate 111 (3) 113 5
Amortization of intangible assets 13 14 27 22
Other 650 626 1,226 1,200
-------- -------- -------- --------
Total operating expenses 2,996 2,715 5,783 5,328
-------- -------- -------- --------
Income before income tax provision 1,578 1,388 2,650 2,381
Income tax provision 264 314 484 532
-------- -------- -------- --------
Net income $ 1,314 $ 1,074 $ 2,166 $ 1,849
======== ======== ======== ========
Basic earnings per common share $ .54 $ .40 $ .89 $ .70
======== ======== ======== ========
Diluted earnings per common share $ .51 $ .39 $ .84 $ .68
======== ======== ======== ========
Dividends per common share $ .12 $ .109 $ .24 $ .218
======== ======== ======== ========
See accompanying notes to unaudited consolidated financial statements
-2-
FIDELITY BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
-------------------------------------------------
(in thousands)
Six Months Ended
March 31,
2004 2003
-------- --------
Operating Activities:
- --------------------
Net income $ 2,166 $ 1,849
Adjustments to reconcile net income to net cash provided by
operating activities:
Provision for loan losses 125 405
Loss on foreclosed real estate 113 5
Depreciation of premises and equipment 387 344
Deferred loan fee amortization (110) (339)
Amortization of investment and mortgage-backed securities
discounts/premiums, net 787 680
Amortization of intangibles 27 22
Net gain on sale of securities (508) (388)
Net gain on sale of loans (28) (198)
Origination of loans held-for-sale (1,167) (11,114)
Proceeds from sale of loans held-for-sale 1,240 11,300
Decrease in interest receivable 63 334
Increase in prepaid income taxes 24 203
Decrease in interest payable (192) (434)
Write-off of unamortized debt issuance costs -- 599
Increase in cash surrender value of life insurance policies (105) (103)
Other changes, net 1,369 (1,015)
-------- --------
Net cash provided by operating activities 4,191 2,150
-------- --------
Investing Activities:
- --------------------
Proceeds from sales of investment securities available-for-sale 1,431 9,003
Proceeds from maturities and principal repayments of
investment securities available-for-sale 4,212 7,030
Purchases of investment securities available-for-sale (15,049) (19,901)
Proceeds from sales of mortgage-backed securities available-for-sale 9,668 --
Proceeds from maturities and principal repayments of mortgage-
backed securities available-for-sale 18,331 32,208
Purchases of mortgage-backed securities available-for-sale (15,515) (41,549)
Purchases of investment securities held-to-maturity (13,902) (16,564)
Proceeds from maturities and principal repayments of
investment securities held-to-maturity 13,250 10,695
Purchases of mortgage-backed securities held-to-maturity (13,753) (36,503)
Proceeds from principal repayments of mortgage-backed
securities held-to-maturity 11,524 20,687
Net (increase) decrease in loans (11,420) 36,293
Proceeds from sale of other loans -- 51
Proceeds from sale of foreclosed real estate 39 --
Net purchases of FHLB stock (380) (41)
Proceeds from sale of office premises and equipment 30 --
Additions to office premises and equipment (54) (420)
Net cash received in acquisition of First Pennsylvania Savings -- 7,154
-------- --------
Net cash provided by (used in) investing activities (11,588) 8,143
-------- --------
Continued on page 4.
-3-
FIDELITY BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (CONT'D.)
------------------------------------------------
(in thousands)
Six Months Ended
March 31,
2004 2003
---- ----
Financing Activities:
- --------------------
Net increase (decrease) in deposits (2,503) 6,812
Decrease in reverse repurchase agreements (641) (333)
Net increase (decrease) in short-term borrowings 21,929 (871)
Repayments of long-term borrowings (10,200) (14,990)
Trust preferred securities retired -- (10,250)
Proceeds from sale of stock in conjunction with the First PA merger -- 1,303
Increase in advance payments by borrowers for taxes and insurance 1,037 1,460
Cash dividends paid (585) (571)
Stock options exercised 353 163
Proceeds from sale of stock through Dividend Reinvestment Plan 71 44
Purchase of treasury stock (877) (86)
Net cash provided by (used in) financing activities 8,584 (17,319)
Increase (decrease) in cash and cash equivalents 1,187 (7,026)
Cash and cash equivalents at beginning of period 7,992 23,834
Cash and cash equivalents at end of period
$ 9,179 $ 16,808
======== ========
Supplemental Disclosure of Cash Flow Information
- ------------------------------------------------
Cash paid during the period for:
Interest on deposits and other borrowings $ 8,308 $ 10,864
Income taxes $ 340 $ 524
-------- --------
Supplemental Schedule of Noncash Investing and Financing Activities
- -------------------------------------------------------------------
Transfer of loans to foreclosed real estate $ 542 $ --
-------- --------
Securities purchased, but not settled $ -- $ 3,820
-------- --------
The Company acquired First Pennsylvania Savings Association for $161,000. In
conjunction with the acquisition, the assets acquired and Liabilities assumed
were as follows:
Fair value of assets acquired $ -- $ 26,767
-------- --------
Fair value of liabilities assumed $ -- $(26,928)
-------- --------
Liabilities assumed in excess of assets acquired $ -- $ (161)
-------- --------
See accompanying notes to unaudited consolidated financial statements.
-4-
FIDELITY BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (UNAUDITED)
(in thousands, except per share data)
Accumulated
Other
Additional Comprehensive
Common Paid-in Treasury Retained Income
Stock Capital Stock Earnings Net of Tax Total
====================================================================================================================
Balance at September 30, 2002 $ 25 $ 22,564 $ (2,358) $ 19,176 $ 3,173 $ 42,580
Comprehensive income:
Net income 1,849 1,849
Other comprehensive income,
net of tax of ($212) (411) (411)
Reclassification adjustment,
net of tax of ($132) (256) (256)
----- -------- -------- -------- ------- --------
Total comprehensive income -- -- -- 1,849 (667) 1,182
Issuance of stock in connection with
acquisition of First Pennsylvania 95 1,208 1,303
Cash divdiends declared (571) (571)
Treasury stock purchase - 3,300 shares (65) (65)
Sale of stock through Dividend
Reinvestment Plan 44 44
Stock options exercised -- 184 (21) 163
----- -------- -------- -------- ------- --------
Balance at March 31, 2003 $ 25 $ 22,887 $ (1,236) $ 20,454 $ 2,506 $ 44,636
===== ======== ======== ======== ======== ========
Balance at September 30, 2003 $ 28 $ 28,960 $ (7,192) $ 16,388 $ 2,011 $ 40,195
Comprehensive income:
Net income 2,166 2,166
Other comprehensive income,
net of tax of $479 929 929
Reclassification adjustment,
net of tax of ($173) (335) (335)
----- -------- -------- -------- ------- --------
Total comprehensive income -- -- -- 2,166 594 2,760
Cash divdiends declared (585) (585)
Treasury stock purchased -
35,0000 shares (877) (877)
Contributions of stock to ESOP
(5,000 shares) (6) 123 117
Sale of stock through Dividend
Reinvestment Plan 71 71
Stock options exercised 353 -- 353
----- -------- -------- -------- ------- --------
Balance at March 31, 2004 $ 28 $ 29,378 $ (7,946) $ 17,969 $ 2,605 $ 42,034
===== ======== ======== ======== ======== ========
See accompanying notes to unaudited consolidated financial statements.
-5-
FIDELITY BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (UNAUDITED)
MARCH 31, 2004
(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 subsidiary, Fidelity Bank, PaSB (the "Bank"). 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,
2003. The results for the three and six month periods ended March 31, 2004 are
not necessarily indicative of the results that may be expected for the fiscal
year ending September 30, 2004 or any future interim period.
(3) New Accounting Standards
------------------------
In January 2003, the Financial Accounting Standards Board issued FASB
Interpretation No. 46, "Consolidation of Variable Interest Entities, an
Interpretation of ARB No. 51". FIN 46 was revised in December 2003. 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 December 31, 2003. The consolidation
requirements apply to companies that have interests in special-purpose entities
for periods ending after December 15, 2003. Consolidation of other types of VIEs
is required in financial statements for periods ending after March 15, 2004.
FIN 46 requires Fidelity Bancorp, Inc. to deconsolidate its investment in FB
Statutory Trust II (the Trust) on the March 15, 2004, effective date. As a
result, the Company's Consolidated Statements of Financial Condition include
junior subordinated debt ("Subordinated Notes Payable") and the related interest
expense is included as a component of interest expense on Fidelity's
Consolidated Statements of Income. Prior to the adoption of FIN 46, the
Company's Consolidated Statements of Financial Condition reported the
"Guaranteed Preferred Beneficial Interest in Company's Debentures" in it's
Statement of Condition, which represented the trust preferred securities issued
by the Trust.
The deconsolidation of subsidiary trusts of bank holding companies formed in
connection with the issuance of trust preferred securities, like the Trust,
appears to be an unintended consequence of FIN 46. It is currently unknown if,
or when, the FASB will address this issue. In July 2003, the Board of Governors
of the Federal Reserve System issued a supervisory letter instructing bank
holding companies to continue to include the trust preferred securities in their
Tier 1 capital for regulatory capital purposes until notice is given to the
contrary. The Federal Reserve recently proposed regulations that would allow
bank holding companies such as the Corporation to continue to count trust
preferred securities towards up to 25% of Tier 1 capital. The Corporation will
continue to meet its regulatory capital requirements if the proposal is adopted
in its current form.
-6-
(4) Stock Based Compensation
------------------------
At March 31, 2004, the Company had several stock-based employee and director
compensation plans, which are described in Note 13 in the Company's 2003 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 (amounts in thousands, except per share data).
For the three months For the six months
ended March 31, ended March 31,
-------------------- -------------------
2004 2003 2004 2003
---- ---- ---- ----
Net income, as reported $ 1,314 $ 1,074 $ 2,166 $ 1,849
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 (136) (116) (144) (122)
Pro forma net income $ 1,178 $ 958 $ 2,022 $ 1,727
======= ======= ======= =======
Earnings per share:
Basic - as reported $ .54 $ .40 $ .89 $ .70
Basic - pro forma $ .48 $ .36 $ .83 $ .65
Diluted - as reported $ .51 $ .39 $ .84 $ .68
Diluted - pro forma $ .46 $ .35 $ .78 $ .63
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-
(5) 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 dividend paid on 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 Six Months Ended
March 31, March 31,
------------------- ------------------
2004 2003 2004 2003
------ ------ ------ ------
Numerator:
Net Income $1,314 $1,074 $2,166 $1,849
------ ------ ------ ------
Denominator:
Denominator for basic earnings per
share - weighted average shares 2,441 2,670 2,434 2,624
Effect of dilutive securities:
Employee stock options 145 95 143 91
------ ------ ------ ------
Denominator for diluted earnings per share -
weighted average
Shares and assumed conversions 2,586 2,765 2,577 2,715
------ ------ ------ ------
Basic earnings per share $ .54 $ .40 $ .89 $ .70
------ ------ ------ ------
Diluted earnings per share $ .51 $ .39 $ .84 $ .68
------ ------ ------ ------
(6) 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 $2.6 million, net of tax, on investments classified
as available-for-sale are recorded at March 31, 2004. The Company had no
securities classified as trading as of March 31, 2004 and September 30, 2003.
-8-
(7) Loans Receivable
----------------
Loans receivable are comprised of the following (dollar amounts in
thousands):
March 31, September 30,
2004 2003
--------- ---------
First mortgage loans:
Conventional:
1-4 family dwellings $ 101,324 $ 107,122
Multi-family dwellings 11,905 5,299
Commercial 55,743 46,757
Construction:
Residential 9,906 10,669
Commercial 6,620 4,539
--------- ---------
185,498 174,386
--------- ---------
Less:
Loans in process (12,307) (9,499)
Unearned discounts and fees (667) (691)
--------- ---------
172,524 164,196
--------- ---------
Installment loans:
Home equity 67,821 63,777
Consumer loans 874 980
Other 2,772 2,575
--------- ---------
71,467 67,332
--------- ---------
Commercial business loans and leases:
Commercial business loans 32,605 33,776
Commercial leases 1,646 2,199
--------- ---------
34,251 35,975
--------- ---------
Less: Allowance for loan losses (2,967) (3,091)
--------- ---------
Loans receivable, net $ 275,275 $ 264,412
--------- ---------
-9-
(8) Allowance for Loan Losses
-------------------------
Changes in the allowance for loan losses for the six months ended March 31, 2004
and the fiscal year ended September 30, 2003 are as follows (dollar amounts in
thousands):
March 31, September 30,
2004 2003
---- ----
Balance at beginning of period $ 3,091 $ 3,056
Allowance for loan losses of First Pennsylvania Savings -- 40
Provision for loan losses 125 555
Charge-offs (283) (624)
Recoveries 34 64
------- -------
Balance at end of period $ 2,967 $ 3,091
------- -------
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 March 31, 2004, the recorded investment in loans that are considered to be
impaired under SFAS No. 114 was $2.4 million compared to $1.8 million at March
31, 2003. Included in the 2004 amount is $720,000 of impaired loans for which
the related allowance for loan losses is $40,000, 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 six months ended March 31, 2004 was $2.3 million
compared to $1.7 million for the same period in the prior year. For the six
months ended March 31, 2004, the Company recognized $36,000 of interest income
on impaired loans using the cash basis of income recognition. The Company
recognized no interest income on impaired loans during the six month period
ended March 31, 2003.
(9) Comprehensive Income
--------------------
Total comprehensive income amounted to the following for the three and six month
periods ended March 31 (dollar amounts in thousands):
Three Months Ended Six Months Ended
March 31, March 31,
2004 2003 2004 2003
------ ------ ------ -------
Net Income $ 1,314 $1,074 $ 2,166 $ 1,849
Change in unrealized gains (losses) on investment
securities available for sale, net of taxes
$ 688 $(195) $ 594 $ (667)
------- ------ ------- -------
Comprehensive income $ 2,002 $ 879 $ 2,760 $ 1,182
======= ====== ======= =======
-10-
(10) 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 $161,000.
Additionally, in connection with the merger, the Company sold approximately
98,560 shares at $15.93 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 $161,000.
(11) Goodwill and Other Intangible Assets
------------------------------------
The Company performed its annual goodwill impairment test during the quarter
ended March 31, 2004 and it was determined that no adjustments were required.
-11-
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.
Acquisition
- -----------
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 $161,000. 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 10 through 18 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 note
7 "Allowance for Loan Losses" on page 9 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 19 herein and page 52
of the Company's 2003 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 note 13 "Stock
Option Plans" on page 32 of the Company's 2003 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."
-12-
Comparison of Financial Condition
- ---------------------------------
Total assets of the Company increased $11.6 million, or 1.9%, to $629.4 million
at March 31, 2004 from $617.8 million at September 30, 2003. Significant changes
in individual categories include an increase in cash and due from banks of $1.0
million, an increase in securities held-to-maturity of $2.6 million, an increase
in net loans of $10.7 million, and a decrease in securities available-for-sale
of $2.2 million.
Total liabilities of the Company increased $9.7 million, or 1.7%, to $587.3
million at March 31, 2004 from $577.6 million at September 30, 2003. Significant
changes include an increase in short-term borrowings of $21.9 million, an
increase in advance payments by borrowers for taxes and insurance of $1.0
million, a decrease in deposits of $2.5 million, and a decrease in long-term
debt of $10.2 million.
Stockholders' equity increased $1.8 million, or 4.6% to $42.0 million at March
31, 2004, compared to $40.2 million at September 30, 2003. This result reflects
net income for the six month period ended March 31, 2004 of $2.2 million, stock
options exercised of $353,000, stock contributed to the Company's Employee Stock
Ownership Plan of $117,000, stock issued under the Dividend Reinvestment Plan of
$71,000, and an increase in accumulated other comprehensive income of $594,000.
Offsetting these increases were common stock cash dividends paid of $585,000 and
treasury stock purchased of $877,000. Accumulated other comprehensive income
increased from September 30, 2003 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 March 31, 2004 and September 30, 2003
represent base year bad debt deductions for tax purposes only, as they are
considered restricted accumulated earnings.
-13-
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 loans which were classified as troubled debt restructuring at the
dates presented (dollar amounts in thousands).
March 31, September 30,
2004 2003
---- ----
Non-accrual residential real estate loans
(one-to-four family) $ 527 $ 795
Non-accrual construction, multi family
residential and commercial real estate loans 202 367
Non-accrual installment loans 632 615
Non-accrual commercial business loans 1,676 1,151
------ ------
Total non-performing loans $3,037 $2,928
====== ======
Total non-performing loans as a percent of
net loans receivable 1.10% 1.11%
====== ======
Total foreclosed real estate $ 876 $ 675
====== ======
Total non-performing loans and foreclosed real estate as a
percent of total assets .62% .58%
====== ======
Included in non-performing loans at March 31, 2004 are 6 single-family
residential real estate loans totaling $527,000, two commercial real estate
loans totaling $202,000, 33 home equity and installment loans totaling $632,000,
and 15 commercial business loans totaling $1.7 million.
At March 31, 2004, the Company had an allowance for loan losses of $3.0 million
or 1.08% of net loans receivable, as compared to an allowance of $3.1 million or
1.17% of net loans receivable at September 30, 2003. The allowance for loan
losses equals 97.7% of non-performing loans at March 31, 2004 compared to 105.6%
at September 30, 2003.
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 March 31, 2004 is reasonable. 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.
-14-
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.
-15-
Comparison of Results of Operations
-----------------------------------
for the Three and Six Months Ended March 31, 2004 and 2003
----------------------------------------------------------
Net Income
- ----------
Net income for the three months ended March 31, 2004 was $1.31 million ($.51 per
diluted share) compared to $1.07 million ($.39 per diluted share) for the same
period in 2003, an increase of $240,000 or 22.4 %. The increase reflects an
increase in net interest income of $209,000 or 6.4%, an increase in other income
of $262,000 or 29.0%, and a decrease in the provision for income taxes of
$50,000, or 15.9%. Partially offsetting these factors was an increase in other
operating expenses of $281,000 or 10.3%.
Net income for the six months ended March 31, 2004 was $2.17 million ($.84 per
diluted share) compared to $1.85 million ($.68 per diluted share) for the same
period in 2003, an increase of $317,000 or 17.1%. The increase reflects an
increase in net interest income of $373,000 or 6.1%, a decrease in the provision
for loan losses of $280,000 or 69.1%, an increase in other income of $71,000 or
3.6%, and a decrease in the provision for income taxes of $48,000 or 9.0%.
Partially offsetting these factors was an increase in other operating expenses
of $455,000 or 8.5%. March 31, 2003 results included, as a component of interest
expense, the write-off of $599,000 in unamortized issuance costs related to
$10,250,000 of 9.75% trust preferred securities that were called by the Company
on November 4, 2002. The 9.75% trust preferred securities were redeemed with the
proceeds from a September 2002 offering of $10,000,000 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 4.51%. 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 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,
increased to 2.40% in the three months ended March 31, 2004 from 2.19% in the
same period in 2003 as a result of the average yield on total interest earning
assets decreasing less 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
March 31,
2004 2003
---- ----
Average yield on:
Mortgage loans 6.47% 7.22%
Mortgage-backed securities 3.82 3.81
Installment loans 6.00 6.91
Commercial business loans and leases 5.83 6.38
Interest -earning deposits with other institutions,
investment securities, and FHLB stock (1) 4.39 4.95
---- ----
Total interest-earning assets 5.14 5.75
---- ----
Average rates paid on:
Savings deposits 2.11 2.60
Borrowed funds 3.80 5.25
---- ----
Total interest-bearing liabilities 2.74 3.56
---- ----
Average interest rate spread 2.40% 2.19%
==== ====
Net yield on interest-earning assets 2.49% 2.38%
==== ====
(1) Interest income on tax-free investments has been adjusted for federal
income tax purposes using a rate of 34%.
-16-
The Bank's tax-equivalent interest rate spread increased to 2.29% in the six
months ended March 31, 2004 from 2.10% in the same period in fiscal 2003 as a
result of the average yield on total interest earning assets decreasing less
than the average rate paid on interest-bearing liabilities. Furthermore, 2003
results include, as a component of interest expense, the write-off of $599,000
in unamortized issuance costs related to $10.25 million of trust preferred
securities that were called by the Company on November 4, 2002 (see "Interest
Expense" discussion on page 18 herein). This write-off reduced the interest rate
spread by 22 basis points from 2.32%, and reduced the net interest margin by 21
basis points from 2.47% for the six months ended March 31, 2003. 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.
Six Months Ended
March 31,
2004 2003
---- ----
Average yield on:
Mortgage loans 6.50% 7.34%
Mortgage-backed securities 3.39 4.24
Installment loans 6.09 7.14
Commercial business loans and leases 5.99 6.56
Interest -earning deposits with other institutions,
investment securities, and FHLB stock (1) 4.43 5.03
---- ----
Total interest-earning assets 5.09 5.99
---- ----
Average rates paid on:
Savings deposits 2.16 2.66
Borrowed funds 3.87 5.38
---- ----
Total interest-bearing liabilities 2.80 3.89
---- ----
Average interest rate spread 2.29% 2.10%
===== =====
Net yield on interest-earning assets 2.37% 2.26%
===== =====
(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 $957,000 or 18.1% to $4.3 million for the three
months ended March 31, 2004, compared to the same period in 2003. Interest on
loans decreased $2.4 million or 21.5% to $8.7 million for the six months ended
March 31, 2004. The decrease for both periods reflects a decrease in the average
loan balance outstanding during 2004 as well as a decrease in the net yield
earned on the loan portfolio. Loans with a fair value of approximately $6.8
million were assumed with the acquisition of First Pennsylvania on December 31,
2002. Higher levels of principal repayments have been experienced due to the
lower interest rate environment; thus, accounting for the decrease in the
average loan balance during 2004.
Interest on mortgage-backed securities decreased $82,000 or 6.5% to $1.2 million
for the three months ended March 31, 2004, compared to the same period in 2003.
The decrease reflects a decrease in the average balance of mortgage-backed
securities owned in the period, while the average yield earned on the portfolio
was relatively unchanged. Interest on mortgage-backed securities decreased
$529,000 or 20.1% to $2.1 million for the six months ended March 31, 2004. The
decrease reflects a slight decrease in the average balance of mortgage-backed
securities owned in the period as well as a decrease in the average yield earned
on the portfolio. The fair value of mortgage-backed securities acquired from
First Pennsylvania on December 31, 2002 was approximately $4.9 million.
-17-
Interest on interest-earning deposits with other institutions and investment
securities increased $170,000 or 9.6% to $1.9 million for the three months ended
March 31, 2004, as compared to the same period in 2003. Interest on
interest-earning deposits with other institutions and investment securities
increased $370,000 or 10.6% to $3.9 million for the six months ended March 31,
2004, as compared to the same period in 2003. The increase for 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 deposits decreased $425,000 or 18.2% to $1.9 million for the
three month period ended March 31, 2004, as compared to the same period in 2003.
The decrease reflects a decrease in the average cost of the deposits, while the
average balance of deposits remained relatively unchanged. Interest on deposits
decreased $812,000 or 17.1% to $4.0 million for the six month period ended March
31, 2004, as compared to the same period in 2003. The decrease reflects a
decrease in the average cost of the deposits, partially offset by an increase in
the average balance of deposits. Deposits of $12.3 million were assumed with the
acquisition of First Pennsylvania on December 31, 2002.
Interest on subordinated debt decreased $4,000 for the three months ended March
31, 2004, as compared to the same period in 2003. Interest on subordinated debt
decreased $719,000 for the six months ended March 31, 2004. 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 4.51%. 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 short-term borrowings, including Federal Home Loan Bank ("FHLB")
"RepoPlus" advances, securities sold under agreement to repurchase, and
treasury, tax and loan notes, increased $160,000 to $187,000 for the three month
period ended March 31, 2004, as compared to the same period in fiscal 2003.
Interest on short-term borrowings increase $291,000 to $345,000 for the six
month period ended March 31, 2004. The increase for both periods reflects an
increase in the average balance of these borrowings, partially offset by a
decrease in the average cost of these borrowings.
Interest on long-term debt, including FHLB fixed rate advances and "Convertible
Select" advances, decreased $809,000, or 31.5%, to $1.8 million for the three
months ended March 31, 2004 as compared to the same period in fiscal 2003.
Interest on long-term debt decreased $1.7 million, or 31.9%, to $3.6 million for
the six months ended March 31, 2004 as compared to the same period in fiscal
2003. The decrease for both periods reflects a decrease in the average balance
of the debt, as well as a decrease in the average cost of the debt. FHLB
advances with a fair value of approximately $13.9 million were assumed in the
First Pennsylvania acquisition on December 31, 2002.
The Company continues to rely on FHLB advances as cost effective wholesale
funding sources.
-18-
Net Interest Income Before Provision for Loan Losses
- ----------------------------------------------------
The Company's net interest income before provision for loan losses increased
$210,000 or 6.4% to $3.5 million, and increased $373,000 or 6.1% to $6.5 million
for the three and six month periods ended March 31, 2004, respectively, as
compared to the same periods in fiscal 2003. The increase in both fiscal 2004
periods is attributable to an increased interest rate spread, partially offset
by a decrease in net interest-earning assets.
Provision for Loan Losses
- -------------------------
The provision for loan losses was $75,000 for the three month period ended March
31, 2004 and the three month period ended March 31, 2003. At March 31, 2004, the
allowance for loan losses decreased $124,000 to $2.97 million from $3.09 million
at September 30, 2003. Net loan charge-offs were $222,000 and $133,000 for the
three months ended March 31, 2004 and 2003, respectively. Net loan charge-offs
were $249,000 and $500,000 for the six months ended March 31, 2004 and 2003,
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 loan 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 $262,000 or 29.0% to $1.2 million,
and increased $71,000 or 3.6% for the three and six month periods ended March
31, 2004, as compared to the same periods in 2003. Increases in other income
primarily relate to increased gains on the sales of securities, increased
deposit service charges and fees, and increased other operating income,
including fees on retail investment sales.
Loan service charges and fees, which includes late charges on loans and other
miscellaneous loan fees, decreased $30,000 or 29.1% to $73,000, and decreased
$65,000 or 27.7% to $170,000 for the three and six month periods ended March 31,
2004, as compared to the same periods in 2003. The decrease is primarily
attributed to a decrease in late charges on loans and a decrease in the
collection of title insurance fees on mortgages originated, resulting from a
decrease in the volume of mortgage loans originated during the applicable
periods.
Net gains on the sales of investment and mortgage-backed securities was $419,000
and $508,000 for the three and six month periods ended March 31, 2004, as
compared to gains of $161,000 and $388,000 in the same periods in fiscal 2003.
Such sales were made from the available-for-sale portfolio as part of
management's asset/liability management strategies.
-19-
Gain on the sale of loans was $11,000 and $28,000 for the three and six month
periods ended March 31, 2004, as compared to gains of $91,000 and $198,000 for
the same periods in fiscal 2003. The six month period ended March 31, 2004
results include the sale of approximately $1.2 million of fixed rate,
single-family mortgage loans, compared to $11.1 million of similar loan sales
during the prior fiscal period.
Deposit service charges and fees increased $40,000 or 14.5% and $72,000 or 12.0%
for the three and six month periods ended March 31, 2004, respectively, as
compared to the same periods in fiscal 2003. The increase in both periods is
primarily attributed to an increase in the volume of fees collected for returned
checks on deposit accounts, partially offset by a decrease in the service
charges assessed on checking accounts.
Operating Expenses
- ------------------
Total operating expenses for the three month period ended March 31, 2004 totaled
$3.0 million compared to $2.7 million for the same period in 2003. Total
operating expenses for the six month period ended March 31, 2004 totaled $5.8
million compared to $5.3 million for the same period in fiscal 2003. The
increase for both periods is due primarily to an increase in compensation and
benefits expense and an increase in net losses on foreclosed real estate. The
overall increase in operating expenses for the current periods also reflects the
operation of the Troy Hill branch, which was acquired on December 31, 2002, and
the Cranberry branch, which was opened in April 2003. These branches were not in
operation for the entire prior fiscal periods.
Income Taxes
- ------------
Total income tax expense for the three month period ended March 31, 2004 was
$264,000 compared to $314,000 for the same 2003 period. The effective tax rates
for the three month periods ended March 31, 2004 and 2003 were approximately
16.7% and 22.6%, respectively. Total income tax expense for the six month period
ended March 31, 2004 was $484,000 compared to $532,000 for the same fiscal 2003
period. The effective tax rates for the six month periods ended March 31, 2004
were approximately 18.3% and 22.3%, respectively. The decrease in the effective
tax rate for both periods is attributed to an increase in state tax-exempt
income from the corresponding prior year period, partially offset by a decrease
in federal tax-exempt income. 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 March 31, 2004 was $2.4 million and $519,000,
respectively, compared to $2.0 million and $563,000, respectively, for the
three month period ended March 31, 2003. State and federal tax-exempt income for
the six month period ended March 31, 2004 was $4.3 million and $1.06 million,
respectively, compared to $3.6 million and $1.12 million, respectively, for the
six month period ended March 31, 2003.
-20-
Capital Requirements
- --------------------
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 FB Statutory Trust II in
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 March 31, 2004, the
Company had Tier 1 capital as a percentage of risk-weighted assets of 13.44% and
total risk-based capital as a percentage of risk-weighted assets of 14.39%.
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 March 31, 2004,
the Company had a Leverage Ratio of 7.49%.
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 March 31, 2004, the Bank complied with the minimum
leverage ratio having Tier 1 capital of 7.43% of average total assets, as
defined.
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 March
31, 2004, the Bank's total capital to risk-weighted assets ratio calculated
under the FDIC capital requirement was 13.37%.
Liquidity
- ---------
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 March 31, 2004, the total of approved loan commitments
amounted to $12.2 million. In addition, the Company had $12.3 million of
undisbursed loan funds at that date. The amount of savings certificates which
mature during the next twelve months totals approximately $67.8 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.
-21-
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:
March 31, September 30,
2004 2003
---- ----
(in thousands)
Commitments to grant loans $ 12,248 $ 5,595
Unfunded commitments under lines of credit 32,851 31,832
Financial and performance standby letters of credit 161 93
The Company does not issue any guarantees that would require liability
recognition or disclosure, other than its standby letters of credit. Standby
letters of credit written are conditional commitments issued by the Company to
guarantee the performance of a customer to a third party. Generally, all letters
of credit, when issued have expiration dates within one year. The credit risk
involved in issuing letters of credit is essentially the same as that involved
in extending other loan commitments. The Bank requires collateral supporting
these letters of credit as deemed necessary. Management believes that the
proceeds obtained through a liquidation of such collateral would be sufficient
to cover the maximum potential amount of future payments required under the
corresponding guarantees. The current amount of liability as of March 31, 2004
for guarantees under standby letters of credit issued is not material.
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 March
31, 2004 from the information presented under the caption,
Management's Discussion and Analysis of Financial Condition and
Results of Operations - Asset and Liability Management, filed as
Exhibit 13 to the Form 10-K for September 30, 2003.
-22-
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, Use of Proceeds and Issuer Purchases of Equity
Securities
ISSUER PURCHASES OF EQUITY SECURITIES
Total Number of Maximum Number (or
Total Shares (or Units) Approximate Dollar Value
Number of Averfage Purchased as Part of Shares (or Units that
Shares (or) Price Paid of Publicly May Yet Be Purchased
Units) per Share Announced Plans Under the Plans
Period Purchased (or Units) or Programs or Programs
- --------------------------------------------------------------------------------------------------
January __ __ __ __
1-31, 2004
February __ __ __ __
1-29, 2004
March
1-31, 2004 25,000 $25.25 25,000 86,190
Total 25,000 $25.25 25,000 86,190
-23-
Item 3. Defaults Upon Senior Securities
Not Applicable
Item 4. Submission of Matters to a Vote of Security Holders
On February 10, 2004, the Company held its annual meeting of
stockholders and the following items were presented:
Election of Director Robert F. Kastelic and Director Oliver D. Keefer
for a term of 3 years to expire in 2007. Director Kastelic received
1,801,638 votes in favor and 258,498 votes withheld; and Director
Keefer received 1,801,638 votes in favor and 258,498 votes withheld.
There were no abstentions or broker non-votes.
The terms of the office continued after the meeting: J. Robert Gales,
Charles E. Nettrour, Richard G. Spencer, Joanne Ross Wilder, and
William L. Windisch.
Item 5. Other Information
Not Applicable
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)
4.3 * Indenture, dated as of September 26, 2002, between Fidelity
Bancorp, Inc. and State Street Bank and Trust Company of
Connecticut, National Association
4.4 * Amended and Restated Declaration of Trust, dated as of
September 26, 2002, by and among State Street Bank and Trust
Company, National Association, as Institutional Trustee,
Fidelity Bancorp, Inc., as Sponsor and William L. Windisch,
Richard G. Spencer and Lisa L. Griffith, as Administrators.
4.5 * Guarantee Agreement, as dated as of September 26, 2002, by
and between Fidelity Bancorp, Inc. and State Street Bank
and Trust Company of Connecticut, National Association.
10.1 Employee Stock Ownership Plan, as amended (1)
10.2 1988 Employee Stock Compensation Program (1)
10.3 1993 Employee Stock Compensation Program (4)
10.4 1997 Employee Stock Compensation Program (5)
10.5 1993 Directors' Stock Option Plan (4)
10.6 1998 Group Term Replacement Plan (6)
10.7 1998 Salary Continuation Plan Agreement by and between W.L.
Windisch, the Company and the Bank (6)
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10.8 1998 Salary Continuation Plan Agreement by and between R.G.
Spencer, the Company and the Bank (6)
10.9 1998 Salary Continuation Plan Agreement by and between M.A.
Mooney, the Company and the Bank (6)
10.10 Salary Continuation Plan Agreement with Lisa L. Griffith
10.11 1998 Stock Compensation Plan (7)
10.12 2000 Stock Compensation Plan (8)
10.13 2001 Stock Compensation Plan (9)
10.14 2002 Stock Compensation Plan (10)
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
(b) Reports on Form 8-K
A Report on Form 8-K was filed on January 21, 2004 reporting under
Item 12 the earnings release for the quarter ended December 31, 2003
and to report a quarterly cash dividend.
No financial statements were filed with the above report.
* Not filed in accordance with the provisions of Item 601(b)(4)(iii) of
Regulation S-K. The Company agrees to provide a copy of these documents to
the Commission upon request.
(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: May 17, 2004 By: /s/ Richard G. Spencer
---------------------------------------------
Richard G. Spencer
President and Chief Executive Officer
Date: May 17, 2004 By: /s/ Lisa L. Griffith
----------------------------------------------
Lisa L. Griffith
Sr. Vice President and Chief Financial Officer
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