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, 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
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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:
2,668,412 shares, par value $0.01, at July 31, 2004
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FIDELITY BANCORP, INC. AND SUBSIDIARIES
Index
Page
----
Part I - Financial Information
- ------------------------------
Item 1. Financial Statements (Unaudited)
Consolidated Statements of Financial Condition as of June 30, 2004 and
September 30, 2003 1
Consolidated Statements of Income for the Three and Nine Months Ended
June 30, 2004 and 2003 2
Consolidated Statements of Cash Flows for the Nine Months Ended
June 30, 2004 and 2003 3-4
Consolidated Statements of Changes in Stockholders' Equity for the Nine Months
Ended June 30, 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)
June 30, September 30,
2004 2003
---- ----
Assets
------
Cash and due from banks $ 9,820 $ 7,662
Interest bearing demand deposits with other institutions 466 330
--------- ---------
Cash and Cash Equivalents 10,286 7,992
Securities available-for-sale
(book value of $186,320 and $189,382) 186,276 192,429
Securities held-to-maturity
(fair value of $121,510 and $121,652) 122,048 119,962
Loans held for sale - 286
Loans receivable, net of allowance of $2,910 and $3,091 283,588 264,412
Foreclosed real estate, net 864 675
Restricted investments in bank stock, at cost 11,156 10,447
Office premises and equipment, net 5,353 5,834
Accrued interest receivable 3,297 3,408
Other assets 12,879 12,333
--------- ---------
Total Assets $ 635,747 $ 617,778
========= =========
Liabilities and Stockholders' Equity
------------------------------------
Liabilities:
Deposits:
Non-interest bearing $ 29,771 $ 27,406
Interest bearing 337,240 338,720
--------- ---------
Total Deposits 367,011 366,126
Short-term borrowings 61,994 38,101
Subordinated Notes Payable 10,310 10,310
Securities sold under agreement to repurchase 7,391 5,943
Advance payments by borrowers for taxes and insurance 2,883 1,179
Other liabilities 3,893 3,216
Long-term debt 142,408 152,708
--------- ---------
Total Liabilities 595,890 577,583
--------- ---------
Stockholders' equity:
Common stock, $0.01 par value per share,
10,000,000 shares authorized; 3,147,266
and 2,805,291 shares issued, respectively 31 28
Paid-in capital 35,506 28,960
Retained earnings 12,875 16,388
Accumulated other comprehensive income (loss) (28) 2,011
Treasury stock, at cost - 479,564 and 381,492 shares (8,527) (7,192)
--------- ---------
Total Stockholders' Equity 39,857 40,195
--------- ---------
Total Liabilities and Stockholders' Equity $ 635,747 $ 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 Nine Months Ended
June 30, June 30,
-------- --------
2004 2003 2004 2003
---- ---- ---- ----
Interest income:
Loans $ 4,325 $ 5,037 $12,996 $16,089
Mortgage-backed securities 1,121 1,162 3,219 3,789
Investment securities - taxable 1,346 1,138 4,023 3,302
Investment securities - tax-exempt 520 592 1,712 1,859
Other 1 11 2 80
------- ------- ------- -------
Total interest income 7,313 7,940 21,952 25,119
------- ------- ------- -------
Interest expense:
Deposits 1,848 2,219 5,800 6,982
Short-term borrowings 204 36 549 90
Long-term debt 1,757 2,457 5,331 7,706
Subordinated debt 121 126 365 1,089
------- ------- ------- -------
Total interest expense 3,930 4,838 12,045 15,867
------- ------- ------- -------
Net interest income 3,383 3,102 9,907 9,252
Provision for loan losses 75 75 200 480
------- ------- ------- -------
Net interest income after provision for loan losses 3,308 3,027 9,707 8,772
------- ------- ------- -------
Other income:
Loan service charges and fees 113 160 283 394
Realized gain on sales of investment securities, net 67 117 576 505
Gain on sales of loans 13 145 41 343
Deposit service charges and fees 352 305 1,022 904
Other 355 253 1,013 798
------- ------- ------- -------
Total other income 900 980 2,935 2,944
------- ------- ------- -------
Operating expenses:
Compensation and benefits 1,812 1,646 5,334 4,942
Office occupancy and equipment expense 251 263 759 724
Depreciation and amortization 186 195 573 539
Net loss on foreclosed real estate 33 7 146 12
Amortization of intangible assets 13 14 39 36
Other 581 593 1,808 1,793
------- ------- ------- -------
Total operating expenses 2,876 2,718 8,659 8,046
------- ------- ------- -------
Income before income tax provision 1,332 1,289 3,983 3,670
Income tax provision 218 290 702 822
------- ------- ------- -------
Net income $ 1,114 $ 999 $ 3,281 $ 2,848
======= ======= ======= =======
Basic earnings per common share $ .42 $ .35 $ 1.23 $ .99
======= ======= ======= =======
Diluted earnings per common share $ .40 $ .33 $ 1.17 $ .96
======= ======= ======= =======
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,
2004 2003
-------- --------
Operating Activities:
- ---------------------
Net income $ 3,281 $ 2,848
Adjustments to reconcile net income to net cash provided by
operating activities:
Provision for loan losses 200 480
Loss on foreclosed real estate 146 12
Depreciation of premises and equipment 573 539
Deferred loan fee amortization (201) (538)
Amortization of investment and mortgage-backed securities
discounts/premiums, net 1,150 1,177
Amortization of intangibles 39 36
Net gain on sale of securities (576) (505)
Net gain on sale of loans (41) (343)
Origination of loans held-for-sale (1,539) (17,874)
Proceeds from sale of loans held-for-sale 1,864 18,515
Decrease in interest receivable 111 698
Increase in prepaid income taxes 18 320
Decrease in interest payable (211) (564)
Write-off of unamortized debt issuance costs - 599
Increase in cash surrender value of life insurance policies (151) (155)
Increase (decrease) in accounts payable 1,022 (1)
Other changes, net 104 267
-------- --------
Net cash provided by operating activities 5,789 5,511
-------- --------
Investing Activities:
- ---------------------
Proceeds from sales of securities available-for-sale 11,336 11,126
Proceeds from maturities and principal repayments of
securities available-for-sale 36,020 63,184
Purchases of securities available-for-sale (43,849) (90,984)
Purchases of securities held-to-maturity (35,640) (71,356)
Proceeds from maturities and principal repayments of
securities held-to-maturity 33,174 49,428
Purchases of bank-owned life insurance policies - (788)
Net (increase) decrease in loans (19,715) 47,364
Proceeds from sale of other loans - 51
Proceeds from sale of foreclosed real estate 36 -
Net (purchases) redemptions of FHLB stock (709) 429
Proceeds from sale of office premises and equipment 30 -
Additions to office premises and equipment (111) (576)
Net cash received in acquisition of First Pennsylvania Savings - 7,154
-------- --------
Net cash (used in) provided by investing activities (19,428) 13,854
-------- --------
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,
2004 2003
-------- --------
Financing Activities:
- ---------------------
Net increase in deposits 885 2,151
Increase in reverse repurchase agreements 1,448 382
Net increase in short-term borrowings 23,893 21,986
Repayments of long-term borrowings (10,300) (41,019)
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 1,704 1,994
Cash dividends paid (909) (893)
Stock options exercised 563 218
Proceeds from sale of stock through Dividend Reinvestment Plan 107 69
Purchase of treasury stock (1,458) (3,159)
-------- --------
Net cash provided by (used in) financing activities 15,933 (27,218)
-------- --------
Increase (decrease) in cash and cash equivalents 2,294 (7,853)
Cash and cash equivalents at beginning of period 7,992 23,834
-------- --------
Cash and cash equivalents at end of period
$ 10,286 $ 15,981
======== ========
Supplemental Disclosure of Cash Flow Information
- ------------------------------------------------
Cash paid during the period for:
Interest on deposits and other borrowings $ 12,256 $ 15,760
-------- --------
Income taxes $ 600 $ 610
-------- --------
Supplemental Schedule of Noncash Investing and Financing Activities
- -------------------------------------------------------------------
Transfer of loans to foreclosed real estate $ 542 $ -
-------- --------
Securities purchased, but not settled $ - $ 9,757
-------- --------
The Company acquired First Pennsylvania Savings Association for $161.
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 share data)
Accumulated
Additional Other
Common Paid-in Treasury Retained Comprehensive
Stock Capital Stock Earnings Income (Loss) Total
============================================================================================================
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
Issuance of stock in connection with 95 1,208 1,303
acquisition of First Pennsylvania
10% Stock dividend distribution 3 5,647 (5,650) -
Cash dividends declared (893) (893)
Treasury stock purchased - 146,106 (3,159) (3,159)
shares
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
===== ======== ========= ======== ======== =======
Balance at September 30, 2003 $ 28 $ 28,960 $ (7,192) $ 16,388 $ 2,011 $40,195
Comprehensive income:
Net income 3,281 3,281
Other comprehensive income,
net of tax of $479 (1,659) (1,659)
Reclassification adjustment,
net of tax of ($196) (380) (380)
----- -------- -------- -------- ------- -------
Total comprehensive income -- -- -- 3,281 (2,039) 1,242
Cash dividends declared (909) (909)
Treasury stock purchased -
59,620 shares (1,458) (1,458)
10% Stock dividend distribution 3 5,882 (5,885) -
Contribution of stock to ESOP
(5,000 shares) (6) 123 117
Sale of stock through Dividend
Reinvestment Plan 107 107
Stock options exercised 563 - 563
----- -------- -------- -------- ------- -------
Balance at June 30, 2004 $ 31 $ 35,506 $ (8,527) $ 12,875 $ (28) $39,857
===== ======== ========= ======== ======= =======
See accompanying notes to unaudited consolidated financial statements.
-5-
FIDELITY BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - (Unaudited)
June 30, 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 in the United States. 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 nine month
periods ended June 30, 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 required 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 its
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 Company to continue to count trust preferred
securities towards up to 25% of Tier 1 capital. The Company will continue to
meet its regulatory capital requirements if the proposal is adopted in its
current form.
-6-
(4) Stock Based Compensation
------------------------
At June 30, 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 net 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 nine months
ended June 30, ended June 30,
-------------------- -----------------
2004 2003 2004 2003
--------- ------ ------- -------
Net income, as reported $ 1,114 $ 999 $ 3,281 $ 2,848
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 (16) (10) (161) (132)
--------- ------ ------- -------
Pro forma net income $ 1,098 $ 989 $ 3,120 $ 2,716
========= ====== ======= =======
Earnings per share:
Basic - as reported $ .42 $ .35 $ 1.23 $ .99
Basic - pro forma $ .41 $ .35 $ 1.17 $ .94
Diluted - as reported $ .40 $ .33 $ 1.17 $ .96
Diluted - pro forma $ .39 $ .33 $ 1.11 $ .92
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 dividends distributed on May
26, 2004 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,
2004 2003 2004 2003
------ ------ ------ ------
Numerator:
Net Income $1,114 $ 999 $3,281 $2,848
------ ------ ------ ------
Denominator:
Denominator for basic earnings per
share - weighted average shares 2,669 2,891 2,674 2,883
Effect of dilutive securities:
Employee stock options 134 136 141 112
------ ------ ------ ------
Denominator for diluted earnings per share -
weighted average
Shares and assumed conversions 2,803 3,027 2,815 2,995
------ ------ ------ ------
Basic earnings per share $ .42 $ .35 $ 1.23 $ .99
------ ------ ------ ------
Diluted earnings per share $ .40 $ .33 $ 1.17 $ .96
------ ------ ------ ------
(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 losses of $28,000, net of tax, on investments classified as
available-for-sale are recorded at June 30, 2004. The Company had no securities
classified as trading as of June 30, 2004 and September 30, 2003.
-8-
(7) Loans Receivable
----------------
Loans receivable are comprised of the following (dollar amounts in
thousands):
June 30, September 30,
2004 2003
--------- ---------
First mortgage loans:
Conventional:
1-4 family dwellings $ 103,119 $ 107,122
Multi-family dwellings 12,561 5,299
Commercial 54,947 46,757
Construction:
Residential 21,479 10,669
Commercial 5,756 4,539
--------- ---------
197,862 174,386
--------- ---------
Less:
Loans in process (20,349) (9,499)
Unearned discounts and fees (639) (691)
--------- ---------
176,874 164,196
--------- ---------
Installment loans:
Home equity 69,747 63,777
Consumer loans 1,510 980
Other 2,964 2,575
--------- ---------
74,221 67,332
--------- ---------
Commercial business loans and leases:
Commercial business loans 33,898 33,776
Commercial leases 1,506 2,199
--------- ---------
35,404 35,975
--------- ---------
Less: Allowance for loan losses (2,910) (3,091)
--------- ---------
Loans receivable, net $ 283,588 $ 264,412
--------- ---------
-9-
(8) Allowance for Loan Losses
-------------------------
Changes in the allowance for loan losses for the nine months ended June 30, 2004
and the fiscal year ended September 30, 2003 are as follows (dollar amounts in
thousands):
June 30, 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 200 555
Charge-offs (439) (624)
Recoveries 58 64
------ -----
Balance at end of period $2,910 $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.
The recorded investment in loans that are considered to be impaired under SFAS
No. 114 was $3.0 million at June 30, 2004 and at June 30, 2003. Included in the
2004 amount is $363,000 of impaired loans for which the related allowance for
loan losses is $22,000, and $2.6 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, 2004 was $2.5 million compared to $2.0
million for the same period in the prior year. For the nine months ended June
30, 2004, the Company recognized $72,000 of interest income on impaired loans
using the cash basis of income recognition. For the nine months ended June 30,
2003, the Company recognized $98,000 of interest income on impaired loans using
the cash basis of income recognition.
(9) Comprehensive Income
--------------------
Total comprehensive income amounted to the following for the three and nine
month periods ended June 30 (dollar amounts in thousands):
Three Months Ended Nine Months Ended
June 30, June 30,
2004 2003 2004 2003
------- ------- ------- -------
Net Income $ 1,114 $ 999 $ 3,281 $ 2,848
Change in unrealized gains (losses) on investment
securities available for sale, net of taxes $(2,633) $ 489 $(2,039) $ (178)
------- ------- ------- -------
Comprehensive income (loss) $(1,519) $ 1,488 $ 1,242 $ 2,670
======= ======= ======= =======
-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.
(12) Guarantees
----------
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 June 30, 2004
for guarantees under standby letters of credit issued is not material.
-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
8 "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 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 $18.0 million, or 2.9%, to $635.7 million
at June 30, 2004 from $617.8 million at September 30, 2003. Significant changes
in individual categories include an increase in cash and due from banks of $2.2
million, an increase in securities held-to-maturity of $2.1 million, an increase
in net loans of $19.2 million, and a decrease in securities available-for-sale
of $6.2 million.
Total liabilities of the Company increased $18.3 million, or 3.2%, to $595.9
million at June 30, 2004 from $577.6 million at September 30, 2003. Significant
changes include an increase in short-term borrowings of $23.9 million, an
increase in advance payments by borrowers for taxes and insurance of $1.7
million, an increase in securities sold under agreement to repurchase of $1.4
million, and a decrease in long-term debt of $10.3 million.
Stockholders' equity decreased $338,000, or .8% to $39.9 million at June 30,
2004, compared to $40.2 million at September 30, 2003. This result reflects net
income for the nine month period ended June 30, 2004 of $3.3 million, stock
options exercised of $564,000, stock contributed to the Company's Employee Stock
Ownership Plan of $117,000, and stock issued under the Dividend Reinvestment
Plan of $108,000. Offsetting these increases were a decrease in accumulated
other comprehensive income(loss) of $2.0 million, common stock cash dividends
paid of $909,000, and treasury stock purchased of $1.5 million. Accumulated
other comprehensive income decreased 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. Management does
not consider the unrealized losses at June 30, 2004, to be other than temporary.
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, 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).
June 30, September 30,
2004 2003
---- ----
Non-accrual residential real estate loans
(one-to-four family) $ 813 $ 795
Non-accrual construction, multi family
residential and commercial real estate loans 1,168 367
Non-accrual installment loans 512 615
Non-accrual commercial business loans 1,734 1,151
------ ------
Total non-performing loans $4,227 $2,928
====== ======
Total non-performing loans as a percent of
net loans receivable 1.49% 1.11%
====== ======
Total foreclosed real estate $ 864 $ 675
====== ======
Total non-performing loans and foreclosed real estate as a
percent of total assets .80% .58%
====== ======
Included in non-performing loans at June 30, 2004 are 11 single-family
residential real estate loans totaling $813,000, 8 commercial real estate loans
totaling $1.2 million, 28 home equity and installment loans totaling $512,000,
and 15 commercial business loans totaling $1.7 million.
At June 30, 2004, the Company had an allowance for loan losses of $2.9 million
or 1.03% 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 68.9% of non-performing loans at June 30, 2004 compared to 105.6%
at September 30, 2003. While the allowance for loan losses has decreased,
management believes the balance is adequate based on its analysis of
quantitative and qualitative factors as of June 30, 2004. 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, 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 June 30, 2004 and 2003
---------------------------------------------------------
Net Income
- ----------
Net income for the three months ended June 30, 2004 was $1.11 million ($.40 per
diluted share) compared to $999,000 ($.33 per diluted share) for the same period
in 2003, an increase of $115,000 or 11.5 %. The increase reflects an increase in
net interest income of $281,000 or 9.1%,and a decrease in the provision for
income taxes of $72,000, or 24.8%. Partially offsetting these factors was a
decrease in other income of $80,000 or 8.2%, and an increase in other operating
expenses of $158,000 or 5.8%.
Net income for the nine months ended June 30, 2004 was $3.28 million ($1.17 per
diluted share) compared to $2.85 million ($.96 per diluted share) for the same
period in 2003, an increase of $433,000 or 15.2%. The increase reflects an
increase in net interest income of $655,000 or 7.1%, a decrease in the provision
for loan losses of $280,000 or 58.3%, and a decrease in the provision for income
taxes of $120,000 or 14.6%. Partially offsetting these factors was a decrease in
other income of $9,000 or .3%, and an increase in other operating expenses of
$613,000 or 7.6%. June 30, 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 4.99%. 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 2.31% in the three months ended June 30, 2004 from 2.14% 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
June 30,
2004 2003
---- ----
Average yield on:
Mortgage loans 6.31% 7.26%
Mortgage-backed securities 3.51 3.48
Installment loans 5.82 6.79
Commercial business loans and leases 5.73 6.67
Interest-earning deposits with other institutions,
investment securities, and FHLB stock (1) 4.31 4.60
---- ----
Total interest-earning assets 4.99 5.54
---- ----
Average rates paid on:
Savings deposits 2.03 2.43
Borrowed funds 3.72 5.11
---- ----
Total interest-bearing liabilities 2.67 3.39
---- ----
Average interest rate spread 2.31% 2.14%
===== =====
Net yield on interest-earning assets 2.39% 2.27%
===== =====
(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 2.30% in the nine
months ended June 30, 2004 from 2.12% 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 14 basis points from 2.26%, and reduced the net interest margin by 14
basis points from 2.41% for the nine months ended June 30, 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.
Nine Months Ended
June 30,
2004 2003
---- ----
Average yield on:
Mortgage loans 6.44% 7.33%
Mortgage-backed securities 3.44 4.00
Installment loans 6.00 7.01
Commercial business loans and leases 5.88 6.57
Interest -earning deposits with other institutions,
investment securities, and FHLB stock (1) 4.39 4.88
---- ----
Total interest-earning assets 5.05 5.85
---- ----
Average rates paid on:
Savings deposits 2.12 2.59
Borrowed funds 3.82 5.29
---- ----
Total interest-bearing liabilities 2.75 3.73
---- ----
Average interest rate spread 2.30% 2.12%
===== =====
Net yield on interest-earning assets 2.37% 2.27%
===== =====
(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 $712,000 or 14.1% to $4.3 million for the three
months ended June 30, 2004, compared to the same period in 2003. Interest on
loans decreased $3.1 million or 19.2% to $13.0 million for the nine months ended
June 30, 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 $41,000 or 3.5% to $1.12
million for the three months ended June 30, 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
$570,000 or 15.0% to $3.2 million for the nine months ended June 30, 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 $126,000 or 7.2% to $1.9 million for the three months ended
June 30, 2004, as compared to the same period in 2003. Interest on
interest-earning deposits with other institutions and investment securities
increased $496,000 or 9.5% to $5.7 million for the nine months ended June 30,
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 $371,000 or 16.7% to $1.8 million for the
three-month period ended June 30, 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 $1.2 million or 16.9% to $5.8 million for the nine-month period ended
June 30, 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 $5,000 for the three months ended June
30, 2004, as compared to the same period in 2003. Interest on subordinated debt
decreased $724,000 for the nine months ended June 30, 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 4.99%. 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 $168,000 to $204,000 for the three-month
period ended June 30, 2004, as compared to the same period in fiscal 2003.
Interest on short-term borrowings increased $459,000 to $549,000 for the nine
month period ended June 30, 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 $700,000, or 28.5%, to $1.8 million for the three
months ended June 30, 2004 as compared to the same period in fiscal 2003.
Interest on long-term debt decreased $2.4 million, or 30.8%, to $5.3 million for
the nine months ended June 30, 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
- -------------------
The Company's net interest income increased $281,000 or 9.1% to $3.4 million,
and increased $655,000 or 7.1% to $9.9 million for the three and nine month
periods ended June 30, 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 June
30, 2004 and the three month period ended June 30, 2003. At June 30, 2004, the
allowance for loan losses decreased $181,000 to $2.91 million from $3.09 million
at September 30, 2003. Net loan charge-offs were $132,000 and $32,000 for the
three months ended June 30, 2004 and 2003, respectively. Net loan charge-offs
were $381,000 and $532,000 for the nine months ended June 30, 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 decreased $80,000 or 8.2% to $900,000, and
decreased $9,000 or .3% to $2.9 million for the three and nine month periods
ended June 30, 2004, respectively, as compared to the same periods in 2003.
Decreases in other income for the three month periods primarily relate to
decreased loan origination fees and service charges, decreased gains on the
sales of securities, and decreased gains on the sales of loans; partially offset
by increases in deposit service charges and fees, and increased other operating
income, including fees on retail investment sales. Total other income for the
nine month periods remained relatively unchanged, however fluctuations within
other income categories include decreased loan origination fees and service
charges, decreased gains on the sales of loans, 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 $47,000 or 29.4% to $113,000, and decreased
$111,000 or 28.2% to $283,000 for the three and nine month periods ended June
30, 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.
-19-
Net gains on the sales of investment and mortgage-backed securities was $67,000
and $576,000 for the three and nine month periods ended June 30, 2004, as
compared to gains of $117,000 and $505,000 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.
Gain on the sale of loans was $13,000 and $41,000 for the three and nine month
periods ended June 30, 2004, as compared to gains of $145,000 and $343,000 for
the same periods in fiscal 2003. The nine-month period ended June 30, 2004
results include the sale of approximately $1.8 million of fixed rate,
single-family mortgage loans, compared to $18.2 million of similar loan sales
during the prior fiscal period.
Deposit service charges and fees increased $47,000 or 15.4% and $118,000 or
13.1% for the three and nine month periods ended June 30, 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.
Operating Expenses
- ------------------
Total operating expenses for the three-month period ended June 30, 2004 totaled
$2.9 million compared to $2.7 million for the same period in 2003. Total
operating expenses for the nine month period ended June 30, 2004 totaled $8.7
million compared to $8.0 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 June 30, 2004 was
$218,000 compared to $290,000 for the same 2003 period. The effective tax rates
for the three-month periods ended June 30, 2004 and 2003 were approximately
16.4% and 22.5%, respectively. Total income tax expense for the nine-month
period ended June 30, 2004 was $702,000 compared to $822,000 for the same fiscal
2003 period. The effective tax rates for the nine-month periods ended June 30,
2004 and 2003 were approximately 17.6% and 22.4%, respectively. The decrease in
the effective tax rate for the nine month period is primarily attributed to an
increase in state tax-exempt income, 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 June 30, 2004 was $1.9 million and $463,000, respectively, compared to
$2.0 million and $520,000, respectively, for the three-month period ended June
30, 2003. State and federal tax-exempt income for the nine-month period ended
June 30, 2004 was $6.3 million and $1.5 million, respectively, compared to $5.6
million and $1.6 million, respectively, for the nine-month period ended June 30,
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 June 30, 2004, the
Company had Tier 1 capital as a percentage of risk-weighted assets of 13.19% and
total risk-based capital as a percentage of risk-weighted assets of 14.05%.
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, 2004,
the Company had a Leverage Ratio of 7.52%.
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, 2004, the Bank complied with the minimum
leverage ratio having Tier 1 capital of 7.57% 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 June 30,
2004, the Bank's total capital to risk-weighted assets ratio calculated under
the FDIC capital requirement was 13.02%.
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 June 30, 2004, the total of approved loan commitments amounted
to $7.4 million. In addition, the Company had $20.3 million of undisbursed loan
funds at that date. The amount of savings certificates which mature during the
next twelve months totals approximately $84.4 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:
June 30, September 30,
2004 2003
---- ----
(in thousands)
Commitments to grant loans $ 7,443 $ 5,595
Unfunded commitments under lines of credit 34,399 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 June 30, 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 June 30,
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 Average Purchased as Part of Shares (or Units) that
Shares (or Price Paid of Publicly May Yet Be Purchased
Units) Per Share Announced Plans or Under the Plans or
Period Purchased (or Unit) Programs Programs
- --------------- ---------------- --------------- ------------------------- ----------------------------------
April 13,085 $23.56 13,085 73,105
1-30,
2004
- --------------- ---------------- --------------- ------------------------- ----------------------------------
May 9,957 $24.07 9,957 63,148
1-31,
2004
- --------------- ---------------- --------------- ------------------------- ----------------------------------
June 1,578 $21.05 1,578 61,570
1-30,
2004
- --------------- ---------------- --------------- ------------------------- ----------------------------------
Total 24,620 $23.61 24,620 61,570
- --------------- ---------------- --------------- ------------------------- ----------------------------------
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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
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 June 30, 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)
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 (2)
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)
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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 April 22, 2004 reporting under Item
12 the earnings release for the quarter ended March 31, 2004 and to
report under Item 5 a 10% stock dividend and 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-K
filed with the SEC on December 29, 2003.
(3) Incorporated by reference from Form 8-A filed June 30, 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 13, 2004 By: /s/ Richard G. Spencer
----------------------------------------------
Richard G. Spencer
President and Chief Executive Officer
Date: August 13, 2004 By: /s/ Lisa L. Griffith
----------------------------------------------
Lisa L. Griffith
Sr. Vice President and Chief Financial Officer
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