United States Securities and Exchange Commission
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2003
--------------
[ ] TRANSITION REPORT UNDER 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
---------------------------------------------------
(Address of principal executive offices)
412-367-3300
------------
(Issuer's telephone number)
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the issuer: (1) 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 issuer 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 equity, as of the latest practicable date: 2,411,313 shares, par value
---------------------------
$0.01, at April 30, 2003
- ------------------------
FIDELITY BANCORP, INC. AND SUBSIDIARIES
Index
Part I - Financial Information Page
- ------------------------------ ----
Item 1. Financial Statements (Unaudited)
Consolidated Statements of Financial Condition 1
as of March 31, 2003 and September 30, 2002
Consolidated Statements of Income for the Three 2
and Six Months Ended March 31, 2003 and 2002
Consolidated Statements of Cash Flows for the 3-4
Six Months Ended March 31, 2003 and 2002
Consolidated Statements of Changes in Stockholders' 5
Equity for the Six Months Ended March 31, 2003 and 2002
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial 13
Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About 22
Market Risk
Item 4. Controls and Procedures 22
Part II - Other Information
Item l. Legal Proceedings 23
Item 2. Changes in Securities and Use of Proceeds 23
Item 3. Defaults Upon Senior Securities 23
Item 4. Submission of Matters to a Vote of Security Holders 23
Item 5. Other Information 23
Item 6. Exhibits and Reports on Form 8-K 24
Signatures 25
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 2003 2002
------ ---------- ------------
Cash and amounts due from depository institutions $ 9,912 $ 9,318
Interest-earning demand deposits with other institutions 6,896 14,516
Investment securities held-to-maturity
(market value of $50,591 and $41,060) 48,859 39,198
Investment securities available-for-sale 105,623 90,729
Mortgage-backed securities held-to-maturity
(market value of $58,672 and $43,019) 57,982 42,403
Mortgage-backed securities available-for-sale 80,160 71,656
Loans receivable, net (Notes 6 and 7) 286,747 316,320
Loans held for sale 1,868 1,869
Real estate owned, net 509 658
Federal Home Loan Bank stock - at cost 10,767 10,120
Accrued interest receivable 3,525 3,711
Office premises and equipment, net 6,034 5,696
Deferred tax asset 877 531
Goodwill 3,093 2,557
Core deposit intangibles 284 154
Prepaid income taxes 117 320
Prepaid expenses and other assets 6,265 6,049
--------- ---------
Total Assets $ 629,518 $ 615,805
========= =========
Liabilities and Stockholders' Equity
------------------------------------
Liabilities:
Savings and time deposits $ 370,477 $ 351,406
Federal Home Loan Bank advances and
other borrowings 188,896 190,834
Guaranteed preferred beneficial interest in
Company's debentures 10,000 20,250
Securities sold under agreement to repurchase 5,516 5,849
Advance deposits by borrowers for
taxes and insurance 2,715 1,238
Accrued interest payable 1,552 1,923
Securities purchased, but not settled 3,820 --
Other accrued expenses and liabilities 1,906 1,725
--------- ---------
Total Liabilities 584,882 573,225
--------- ---------
Stockholders' equity (Notes 4 and 5):
Common stock, $0.01 par value per share,
10,000,000 shares authorized; 2,527,333
and 2,504,563 shares issued, respectively 25 25
Additional paid-in capital 15,781 15,458
Treasury stock, at cost - 98,079 and 183,287 shares (1,236) (2,358)
Retained earnings - substantially restricted 27,560 26,282
Accumulated other comprehensive income,
net of tax 2,506 3,173
--------- ---------
Total Stockholders' Equity 44,636 42,580
--------- ---------
Total Liabilities and Stockholders' Equity $ 629,518 $ 615,805
========= =========
See accompanying notes to unaudited consolidated financial statements.
-1-
FIDELITY BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Income (Unaudited)
---------------------------------------------
(in thousands, except per share data)
Three Months Ended Six Months Ended
March 31, March 31,
----------------------- -----------------------
2003 2002 2003 2002
-------- -------- -------- --------
Interest income:
Loans $ 5,298 $ 5,972 $ 11,052 $ 12,157
Mortgage-backed securities 1,254 1,376 2,627 2,758
Investment securities 1,757 1,611 3,431 3,295
Deposits with other institutions 19 19 69 23
-------- ------- -------- --------
Total interest income 8,328 8,978 17,179 18,233
-------- ------- -------- --------
Interest expense:
Savings deposits 2,336 2,575 4,763 5,581
Guaranteed preferred beneficial interest
in Company's debentures 123 256 952 512
Borrowed funds 2,592 2,797 5,303 5,801
-------- ------- -------- --------
Total interest expense 5,051 5,628 11,018 11,894
-------- ------- -------- --------
Net interest income before provision
for loan losses 3,277 3,350 6,161 6,339
Provision for loan losses 75 100 405 200
-------- ------- -------- --------
Net interest income after provision
for loan losses 3,202 3,250 5,756 6,139
-------- ------- -------- --------
Other income:
Loan service charges and fees 103 92 235 202
Gain (loss) on sale of investment and
mortgage-backed securities, net 161 (14) 388 90
Gain on sale of loans 91 113 198 196
Deposit service charges and fees 276 167 599 355
Other operating income 270 266 533 513
-------- ------- -------- --------
Total other income 901 624 1,953 1,356
-------- ------- -------- --------
Operating expenses:
Compensation and employee benefits 1,635 1,482 3,297 2,994
Occupancy and equipment expense 269 214 460 416
Depreciation and amortization 174 142 344 301
Federal insurance premiums 15 15 29 29
Loss on real estate owned, net (3) 22 5 35
Goodwill amortization -- 44 -- 72
Core deposit intangible amortization 14 -- 22 9
Other operating expenses 611 585 1,171 1,114
-------- ------- -------- --------
Total operating expenses 2,715 2,504 5,328 4,970
-------- ------- -------- --------
Income before income tax provision 1,388 1,370 2,381 2,525
Income tax provision 314 268 532 466
-------- ------- -------- --------
Net income $ 1,074 $ 1,102 $ 1,849 $ 2,059
======== ======== ======== ========
Basic earnings per common share (Note 4) $ .44 $ .49 $ .78 $ .93
======== ======== ======== ========
Diluted earnings per common share (Note 4) $ .43 $ .47 $ .75 $ .90
======== ======== ======== ========
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,
2003 2002
-------- --------
Operating Activities:
- ---------------------
Net income $ 1,849 $ 2,059
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan losses 405 200
(Gain) loss on real estate owned 5 35
Depreciation of premises and equipment 344 301
Deferred loan fee amortization (339) (174)
Amortization of investment and mortgage-backed securities
discounts/premiums, net 680 138
Amortization of intangibles 22 81
Net (gain) loss on sale of investment securities (388) (139)
Net (gain) loss on sale of mortgage-backed securities -- 49
Net (gain) loss on sale of loans (198) (196)
Origination of loans held-for-sale (11,114) (12,139)
Proceeds from sale of loans held-for-sale 11,300 11,776
(Increase) decrease in interest receivable 186 (107)
Increase (decrease) in prepaid income taxes 203 (28)
Increase (decrease) in interest payable (371) (150)
Write-off of unamortized debt issuance costs 599 --
Other changes, net (1,433) (742)
-------- --------
Net cash provided by (used in) operating activities 1,750 964
-------- --------
Investing Activities:
- ---------------------
Proceeds from sales of investment securities available-for-sale 9,003 9,315
Proceeds from maturities and principal repayments of
Investment securities available-for-sale 7,030 9,990
Purchases of investment securities available-for-sale (31,130) (15,897)
Proceeds from sales of mortgage-backed securities available-for-sale -- 2,669
Proceeds from maturities and principal repayments of mortgage-
backed securities available-for-sale 32,208 10,596
Purchases of mortgage-backed securities available-for-sale (41,549) (17,226)
Purchases of investment securities held-to-maturity (16,564) (12,474)
Proceeds from maturities and principal repayments of
Investment securities held-to-maturity 10,695 --
Purchases of mortgage-backed securities held-to-maturity (36,503) (16,984)
Recission of purchase of mortgage-backed securities held-to-maturity (Note 5) -- 2,516
Proceeds from principal repayments of mortgage-backed
securities held-to-maturity 20,687 8,115
Net Cash Acquired in the acquisition of Carnegie Financial Corporation, net -- 140
Net (increase) decrease in loans 29,457 16,846
Proceeds from sale of other loans 51 601
Net (purchases) redemptions of FHLB stock (647) 518
Additions to office premises and equipment (682) (290)
-------- --------
Net cash provided by (used in) investing activities (17,944) (1,565)
-------- --------
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,
2003 2002
-------- --------
Financing Activities:
- ---------------------
Net increase (decrease) in savings and time deposits 19,071 5,653
Increase (decrease) in reverse repurchase agreements (333) 1,008
Net increase (decrease) in FHLB advances and other borrowings (1,938) 438
Trust preferred securities retired (10,250) --
Proceeds from sale of stock in conjunction with the First PA merger 1,570 --
Increase in advance payments by borrowers for taxes and insurance 1,477 2,001
Cash dividends paid (571) (472)
Contribution of stock to ESOP -- 195
Stock options exercised 184 135
Proceeds from sale of stock through Dividend Reinvestment Plan 44 34
Purchase of treasury stock (86) (233)
-------- --------
Net cash provided by (used in) financing activities 9,168 8,759
-------- --------
Increase (decrease) in cash and cash equivalents (7,026) 8,158
Cash and cash equivalents at beginning of period 23,834 8,031
-------- --------
Cash and cash equivalents at end of period $ 16,808 $ 16,189
======== ========
Supplemental Disclosure of Cash Flow Information
- ------------------------------------------------
Cash paid during the period for:
Interest on deposits and other borrowings $ 11,389 $ 11,938
Income taxes $ 524 $ 400
-------- --------
Transfer of loans to real estate owned $ -- $ 313
-------- --------
Securities purchased, but not settled $ 3,820 $ --
-------- --------
The Company acquired First Pennsylvania Savings Association. In conjunction with
the acquisition, the assets acquired and liabilities assumed were as follows:
Fair value of assets acquired $ 26,239 $ --
Fair value of liabilities assumed $(26,927) $ --
-------- --------
Liabilities assumed in excess of assets acquired $ (688) $ --
-------- --------
The Company purchased all of the common stock of Carnegie Financial Corporation
for $3.2 million. In conjunction with the acquisition, the assets acquired and
liabilities assumed were as follows:
Fair value of assets acquired $ -- $ 29,486
Fair value of liabilities assumed $ -- $(27,265)
Common stock issued in exchange for Carnegie
Financial Corporation stock $ -- $ (1,666)
Cash paid for Carnegie Financial Corporation stock $ -- $ (1,567)
-------- --------
Liabilities assumed in excess of assets acquired $ -- $ (1,012)
-------- --------
See accompanying notes to unaudited consolidated financial statements.
-4-
FIDELITY BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Changes in Stockholders' Equity (Unaudited)
(in thousands)
Accumulated
Other
Additional Comprehensive
Common Paid-in Treasury Retained Income (Loss)
Stock Capital Stock Earnings Net of Tax Total
====================================================================================================================
Balance at September 30, 2001 $ 22 $ 14,789 $ (3,872) $ 22,887 $ 1,460 $35,286
Comprehensive income:
Net income 2,059 2,059
Other comprehensive loss,
net of tax of ($787) (1,528) (1,528)
Reclassification adjustment,
Net of tax of ($31) (59) (59)
------ -------- -------- -------- ------- -------
Total comprehensive income(loss) -- -- -- 2,059 (1,587) 472
Acquisition of Carnegie 105 1,561 1,666
Cash dividends paid (472) (472)
Treasury stock purchased -
15,000 shares (233) (233)
Contribution of stock to ESOP - 9 186 195
12,000 shares
Sale of stock through Dividend
Reinvestment Plan 34 34
Stock options exercised 1 134 135
------ -------- -------- -------- ------- -------
Balance at March 31, 2002 $ 23 $ 15,071 $ (2,358) $ 24,474 $ (127) $37,083
====== ======== ======== ======== ======= =======
Balance at September 30, 2002 $ 25 $ 15,458 $ (2,358) $ 26,282 $ 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
Acquisition of First Pennsylvania 95 1,208 1,303
Cash dividends paid (571) (571)
Treasury stock purchased -
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 $ 15,781 $ (1,236) $ 27,560 $ 2,506 $44,636
====== ======== ======== ======== ======= =======
See accompanying notes to unaudited consolidated financial statements.
-5-
FIDELITY BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - (Unaudited)
March 31, 2003
(1) Consolidation
-------------
The consolidated financial statements contained herein for Fidelity Bancorp,
Inc. (the "Company") include the accounts of Fidelity Bancorp, Inc. and its
wholly-owned subsidiaries, Fidelity Bank, PaSB (the "Bank"), FB Capital Trust
and FB Statutory Capital Trust II (collectively, the "Trusts"). All
inter-company balances and transactions have been eliminated.
(2) Basis of Presentation
---------------------
The accompanying consolidated financial statements were prepared in accordance
with instructions to Form 10-Q, and therefore, do not include information or
footnotes necessary for a complete presentation of financial position, results
of operations and cash flows in conformity with generally accepted accounting
principles. However, all normal recurring adjustments, which, in the opinion of
management, are necessary for a fair presentation of the financial statements,
have been included. These financial statements should be read in conjunction
with the audited financial statements and the accompanying notes thereto
included in the Company's Annual Report for the fiscal year ended September 30,
2002. The results for the three and six month periods ended March 31, 2003 are
not necessarily indicative of the results that may be expected for the fiscal
year ending September 30, 2003 or any future interim period.
(3) New Accounting Standards
------------------------
In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets", which addresses financial accounting and
reporting for the impairment or disposal of long-lived assets. SFAS No. 144
supersedes SFAS No. 121, "Accounting for Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of," however, it retains many of the
fundamental provisions of that Statement. SFAS No. 144 is effective for fiscal
years beginning after December 15, 2001. The Company adopted SFAS No. 144 as of
October 1, 2002 and it did not have a material effect on the financial condition
or results of operations of the Company.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No.
4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections."
The provisions of this statement related to the rescission of SFAS No. 4 are
effective for fiscal years beginning after May 15, 2002. Certain provisions of
the statement relating to SFAS no. 13 are effective for transactions occurring
after May 15, 2002. All other provisions of the statement are effective for
financial statements issued on or after May 15, 2002. The Company adopted
Statement No. 145 as of October 1, 2002. In November 2002, the Company reported
the write-off of $599,000 of unamortized debt issuance costs as a component of
interest expense, whereas this write-off would have been reported as an
extraordinary loss under SFAS No. 4. In issuing SFAS No. 145, the FASB concluded
that the rescission of SFAS No. 4 would improve financial reporting by
eliminating a requirement to classify a normal and important part of many
entities' ongoing activities to manage interest rate risk as an extraordinary
item. (See "Interest Expense" section of the Management's Discussion and
Analysis of Financial Condition and Results of Operation.)
In October 2002, the FASB issued SFAS No. 147, "Acquisitions of Certain
Financial Institutions - an amendment of FASB Statements No. 72 and 144 and FASB
Interpretation No. 9, " which provides interpretative guidance on the
application of the purchase method to acquisitions of financial institutions.
The provisions of SFAS No. 147 are effective October 1, 2002. Adoption of SFAS
No. 147 had no impact on the Company's financial statements.
-6-
In November 2002, the FASB issued Interpretation No. 45, ("FIN 45") "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others." This interpretation elaborates on the
existing disclosures to be made by a guarantor in its interim and annual
financial statements about its obligations under certain guarantees that it has
issued ("disclosure requirements"). This interpretation also clarifies that a
guarantor is required to recognize, at inception of a guarantee, a liability for
the fair value of the obligation undertaken in issuing the guarantee
("recognition and measurement provisions"). The initial recognition and initial
measurement provisions of FIN 45 are applicable on a prospective basis to
guarantees issued or modified after December 31, 2002. The disclosure
requirements in FIN 45 are effective for financial statements of interim and
annual periods ending after December 15, 2002. The adoption of FIN 45 did not
have a material effect on the financial position, results of operations, or
liquidity of the Company.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure, an amendment of FASB Statement No.
123". This Statement amends FASB Statement No. 123 to provide alternative
methods of transition for voluntary change to the fair value based method of
accounting for stock-based employee compensation. This Statement also amends the
disclosure requirements of Statement 123 to require prominent disclosure on both
annual and interim financial statements about the method of accounting for
stock-based compensation and the effect of the method used on reported results.
The transition alternatives of SFAS 148 are available for fiscal years beginning
after December 15, 2003 and, if the fair value provisions of SFAS 123 are
adopted, the effect on the Company's financial statements is contingent on the
transition provision elected.
At March 31, 2003, the Company has several stock-based employee and director
compensation plans, which are described in Footnote 18 in the Company's 2002
Annual Report. All options granted under these plans have an exercise price
equal to the market value of the underlying common stock on the date of grant.
The Company applies APB Opinion No. 25, "Accounting for Stock Issued to
Employees," and related interpretations. Accordingly, no compensation expense
has been recognized for its stock option plans. However, as required to be
disclosed by SFAS No. 148, the following table illustrates the pro forma effect
on income and earnings per share if the fair value based method had been applied
to the Company's stock option plans.
For the three months For the six months
ended March 31, ended March 31,
--------------------- ---------------------
2003 2002 2003 2002
-------- -------- -------- --------
Net income, as reported $ 1,074 $ 1,102 $ 1,849 $ 2,059
Add: Stock-based compensation expense included in
reported net income, net of related tax effects -- -- -- --
Deduct: Compensation expense from stock options,
determined under fair value based method,
net of related tax effects (116) (101) (122) (108)
------- ------- ------- -------
Pro forma net income $ 958 $ 1,001 $ 1,727 $ 1,951
======= ==+==== ======= =======
Earnings per share:
Basic - as reported $ .44 $ .49 $ .78 $ .93
Basic - pro forma $ .39 $ .45 $ .73 $ .88
Diluted - as reported $ .43 $ .47 $ .75 $ .90
Diluted - pro forma $ .38 $ .43 $ .70 $ .85
The Black-Scholes option pricing model requires the use of subjective
assumptions which can materially affect fair value estimates. Therefore, this
model does not necessarily provide a reliable single measure of the fair value
of the Company's stock options.
-7-
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities." This Statement amends and
clarifies financial accounting and reporting for derivative instruments,
including certain derivative instruments embedded in other contracts and for
hedging activities under FASB Statement No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This Statement is generally effective for
contracts entered into or modified after June 30, 2003 and hedging relationships
designated after June 30, 2003. The adoption of SFAS 149 is not expected to have
a material effect on the financial position, results of operations, or liquidity
of the Company.
(4) Earnings Per Share
------------------
Basic earnings per share (EPS) excludes dilution and is computed by dividing
income available to common stockholders by the weighted average number of common
shares outstanding for the period. Diluted EPS reflects the potential dilution
that could occur if securities or other contracts to issue common stock were
exercised or converted into common stock or resulted in the issuance of common
stock that then shared in the earnings of the Company. All weighted average
share and per share amounts reflect the 10% stock dividend paid on May 28, 2002.
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,
2003 2002 2003 2002
------------------ ------------------
Numerator:
Net Income $1,074 $1,102 $1,849 $2,059
------ ------ ------ ------
Numerator for basic and diluted
earnings per share $1,074 $1,102 $1,849 $2,059
------ ------ ------ ------
Denominator:
Denominator for basic earnings per
share - weighted average shares 2,427 2,242 2,385 2,208
Effect of dilutive securities:
Employee stock options 86 63 83 61
------ ------ ------ ------
Denominator for diluted earnings per share -
weighted average
Shares and assumed conversions 2,513 2,305 2,468 2,269
------ ------ ------ ------
Basic earnings per share $ .44 $ .49 $ .78 $ .93
------ ------ ------ ------
Diluted earnings per share $ .43 $ .47 $ .75 $ .90
------ ------ ------ ------
(5) Securities
----------
The Company accounts for investments in debt and equity securities in accordance
with SFAS No. 115, which requires that investments be classified as either: (1)
Securities Held-to-Maturity - reported at amortized cost, (2) Trading Securities
- - reported at fair value, or (3) Securities Available-for-Sale - reported at
fair value. Unrealized gains and losses for securities available-for-sale are
reported as accumulated other comprehensive income (loss) in stockholders'
equity. Unrealized gains of $2.5 million, net of tax, on investments classified
as available-for-sale are recorded at March 31, 2003. The Company had no
securities classified as trading as of March 31, 2003 and September 30, 2002.
During the quarter ended December 31, 2001, $2.5 million of mortgage-backed
securities classified by the Company as held-to-maturity were repurchased by the
selling dealer due to misrepresentations by the selling dealer as to the risk
characteristics and structure of the securities. The Company did not anticipate
this event and believes this was an isolated, nonrecurring, and unusual
circumstance. The securities were repurchased by the dealer at the Company's
original cost, thus no gain or loss was recorded.
-8-
(6) Loans Receivable
----------------
Loans receivable are comprised of the following (dollar amounts in
thousands):
March 31, September 30,
2003 2002
------------------------------
First mortgage loans:
Conventional:
1-4 family dwellings $137,445 $169,849
Multi-family dwellings 6,744 7,217
Commercial 39,719 29,036
Construction:
Residential 11,405 11,372
Commercial 7,305 8,205
-------- --------
202,618 225,679
-------- --------
Less:
Loans in process (10,342) (9,065)
Unearned discounts and fees (898) (1,368)
-------- --------
191,378 215,246
-------- --------
Installment loans:
Home equity 55,551 58,549
Consumer loans 1,141 1,286
Other 2,452 2,037
-------- --------
59,144 61,872
-------- --------
Commercial business loans and leases:
Commercial business loans 36,306 38,287
Commercial leases 2,920 3,971
-------- --------
39,226 42,258
-------- --------
Less: Allowance for loan losses (3,001) (3,056)
-------- --------
Loans receivable, net $286,747 $316,320
-------- --------
(7) Allowance for Loan Losses
-------------------------
Changes in the allowance for loan losses for the six months ended March 31, 2003
and the fiscal year ended September 30, 2002 are as follows (dollar amounts in
thousands):
March 31, September 30,
2003 2002
-------- ------------
Balance at beginning of period $ 3,056 $ 2,871
Allowance for loan losses of Carnegie Savings Bank -- 204
Allowance for loan losses of First Pennsylvania Savings 40 --
Provision for loan losses 405 400
Charge-offs (510) (520)
Recoveries 10 101
------- -------
Balance at end of period $ 3,001 $ 3,056
------- -------
-9-
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, 2003, the recorded investment in loans that are considered to be
impaired under SFAS No. 114 was $1.8 million compared to $1.9 million at March
31, 2002. Included in the current amount is $512,000 of impaired loans for which
the related allowance for loan losses is $34,000, and $1.3 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, 2003 was $1.7 million
compared to $1.9 million for the same period in the prior year. For the six
months ended March 31, 2003, as well as March 31, 2002, the Company recognized
no interest income on those impaired loans using the cash basis of income
recognition.
(8) Comprehensive Income
--------------------
Total comprehensive income amounted to the following for the three and six
months ended March 31 (dollar amounts in thousands):
Three Months Ended Six Months Ended
March 31, March 31,
2003 2002 2003 2002
------------------ ------------------
Net Income $ 1,074 $ 1,102 $ 1,849 $ 2,059
Change in unrealized gains (losses) on investment
securities and mortgage-backed securities available
for sale, net of taxes
$ (195) $ (586) $ (667) $(1,587)
------- ------- ------- -------
Comprehensive income $ 879 $ 516 $ 1,182 $ 472
======= ======= ======= =======
-10-
(9) Acquisition
-----------
On July 12, 2002, the Company and First Pennsylvania Savings Association ("First
Pennsylvania) jointly announced the signing of an Agreement and Plan of Merger
Conversion, whereby it was agreed that First Pennsylvania would merge with and
into the Bank. On September 30, 2002, the agreement was amended to require an
offering of stock of the Company to certain members of First Pennsylvania.
Pursuant to the amended agreement, First Pennsylvania converted to a
Pennsylvania-chartered stock savings institution and simultaneously merged with
and into the Bank on December 31, 2002 and the Bank acquired all of the assets
and assumed all of the liabilities of First Pennsylvania. Additionally, in
connection with the merger, the Company sold approximately 89,600 shares at
$17.52 per share of its common stock to certain members of First Pennsylvania
and the Company's employee stock ownership plan in a subscription offering and
to the Company's stockholders and certain members of the community in a
stockholder and community offering.
The acquisition was accounted for under the purchase method of accounting and,
accordingly, the results of operations of First Pennsylvania have been included
in the Company's consolidated financial statements from December 31, 2002. The
Company acquired loans with a fair value of approximately $6.8 million,
investment and mortgage-backed securities with a fair value of $11.8 million,
deposits with a fair value of approximately $12.3 million and Federal Home Loan
Bank advances with a fair value of approximately $13.9 million in the
transaction. Goodwill and core deposit intangibles arising from the transaction
were approximately $688,000.
-11-
(10) Goodwill and Other Intangible Assets - Adoption of Statement 142
----------------------------------------------------------------
In July 2001, the Financial Accounting Standards Board issued Statement No. 141,
"Business Combinations", and Statement No. 142, "Goodwill and Other Intangible
Assets". Statement No. 141 requires that the purchase method of accounting be
used for all business combinations initiated after June 30, 2001 as well as all
purchase method business combinations completed after June 30, 2001. Statement
No. 141 also specifies certain criteria intangible assets acquired in a purchase
method business combination must meet to be recognized and reported apart from
goodwill, noting that any purchase price allocable to an assembled workforce may
not be accounted for separately. Statement No. 142 requires that goodwill and
intangible assets with indefinite useful lives no longer need to be amortized,
but instead tested for impairment at least annually in accordance with the
provisions of Statement No. 142. Statement No. 142 also requires that intangible
assets with definite useful lives be amortized over their respective estimated
useful lives to their estimated residual value, and reviewed for impairment in
accordance with SFAS No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets." The Company adopted Statement No. 142 as of October 1, 2002
and, as a result, no longer amortizes goodwill, but will test goodwill for
impairment on an annual basis. The Company performed the initial goodwill
impairment test during the current fiscal quarter ended March 31, 2003 and it
was determined that no adjustments were required. The following table sets forth
net income and earnings per share for the three and six-month periods ended
March 31, 2003 and 2002 excluding the effects of goodwill amortization.
Three months ended Six months ended
March 31, March 31,
2003 2002 2003 2002
--------------------- ---------------------
Reported net income $1,074 $1,102 $1,849 $2,059
Add back: Goodwill amortization -- 44 -- 81
------ ------ ------ ------
Adjusted net income $1,074 $1,146 $1,849 $2,140
------ ------ ------ ------
Basic earnings per share:
Reported net income $ .44 $ .49 $ .78 $ .93
Goodwill amortization -- $ .02 $ -- $ .04
------ ------ ------ ------
Adjusted net income $ .44 $ .51 $ .78 $ .97
------ ------ ------ ------
Diluted earnings per share:
Reported net income $ .43 $ .47 $ .75 $ .90
Goodwill amortization -- $ .02 $ -- $ .03
------ ------ ------ ------
Adjusted net income $ .43 $ .49 $ .75 $ .93
------ ------ ------ ------
-12-
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 (the "Company") business is conducted principally
through Fidelity Bank (the "Bank"). All references to the Company refer
collectively to the Company and the Bank, unless the context indicates
otherwise.
Overview
- --------
Recent Legislation to Curtail Corporate Accounting Irregularities. On July 30,
- ------------------------------------------------------------------
2002, President Bush signed into law the Sarbanes-Oxley Act of 2002 (the "Act").
The Securities and Exchange Commission (the "SEC") has promulgated certain
regulations pursuant to the Act and will continue to propose additional
implementing or clarifying regulations as necessary in furtherance of the Act.
The passage of the Act and the regulations implemented by the SEC subject
publicly-traded companies to additional and more cumbersome reporting
regulations and disclosure. Compliance with the Act and corresponding
regulations may increase the Company's expenses.
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 $688,000. 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.
-13-
Comparison of Financial Condition
- ---------------------------------
Total assets of the Company increased $13.7 million, or 2.2%, to $629.5 million
at March 31, 2003 from $615.8 million at September 30, 2002. Significant changes
in individual categories include an increase in investment securities
available-for-sale of $14.9 million, an increase in investment securities
held-to-maturity of $9.7 million, an increase in mortgage-backed securities
available-for-sale of $8.5 million, an increase in mortgage-backed securities
held-to-maturity of $15.6 million, a decrease in interest-earning demand
deposits of $7.6 million, and a decrease in net loans of $29.6 million. The
Company continued to experience increased levels of loan and mortgage-backed
security prepayment and loan refinancing activity. The decrease in net loans
reflects $95.0 million of prepayments, partially offset by $6.8 million in loans
acquired from First Pennsylvania and $59.7 million in new loan originations.
Total liabilities of the Company increased $11.7 million, or 2.0%, to $584.9
million at March 31, 2003 from $573.2 million at September 30, 2002. Significant
changes include an increase in savings and time deposits of $19.1 million, an
increase in securities purchased but not settled of $3.8 million, and a decrease
in guaranteed preferred beneficial interest in Company's debentures ("trust
preferred securities") of $10.3 million. Deposits with a fair value of
approximately $12.3 million and Federal Home Loan Bank advances with a fair
value of approximately $13.9 million were assumed in connection with the
acquisition of First Pennsylvania.
Stockholders' equity increased $2.1 million or 4.8% to $44.6 million at March
31, 2003, compared to $42.6 million at September 30, 2002. This result reflects
net income for the six month period ended March 31, 2003 of $1.8 million, $1.6
million of stock issued during the acquisition of First Pennsylvania, stock
options exercised of $184,000, and stock issued under the Dividend Reinvestment
Plan of $44,000. Offsetting these increases were common stock cash dividends
paid of $571,000, treasury stock purchased of $86,000, and a decrease of
accumulated other comprehensive income of $667,000. Accumulated other
comprehensive income decreased from September 30, 2002 as a result of changes in
the net unrealized gains on the available-for-sale securities due to the
fluctuations in interest rates during the current period. Because of interest
rate volatility, the Company's accumulated other comprehensive income (loss)
could materially fluctuate for each interim and year-end period. Approximately
$3.4 million of the balances in retained income as of March 31, 2003 and
September 30, 2002 represent base year bad debt deductions for tax purposes
only, as they are considered restricted accumulated earnings.
-14-
Non-Performing Assets
- ---------------------
The following table sets forth information regarding non-accrual loans and real
estate owned by the Company at the dates indicated. The Company did not have any
accruing loans which were 90 days or more overdue or any loans which were
classified as troubled debt restructuring at the dates presented (dollar amounts
in thousands).
March 31, September 30,
2003 2002
--------- -------------
Non-accrual residential real estate loans
(one-to-four family) $1,085 $ 515
Non-accrual construction, multi family
residential and commercial real estate loans 341 408
Non-accrual installment loans 235 273
Non-accrual commercial business loans 1,476 1,461
------ ------
Total non-performing loans $3,137 $2,657
====== ======
Total non-performing loans as a percent of
net loans receivable 1.09% .84%
====== ======
Total real estate owned $ 509 $ 658
====== ======
Total non-performing loans and real estate
owned as a percent of total assets .58% .54%
====== ======
Included in non-performing loans at March 31, 2003 are 21 single-family
residential real estate loans totaling $1.1 million, three commercial real
estate loans totaling $341,000, 22 home equity and installment loans totaling
$235,000, twelve commercial business loans totaling $1.5 million, and two
commercial business leases totaling $20,000.
Non-accrual residential real estate loans totaled $1.1 million at March 31,
2003, compared to $515,000 at September 30, 2002, an increase of $570,000. The
increase reflects $267,000 of non-accrual residential real estate loans acquired
from First Pennsylvania.
At March 31, 2003, the Company had an allowance for loan losses of $3.0 million
or 1.05% of net loans receivable, as compared to an allowance of $3.1 million or
..97% of net loans receivable at September 30, 2002. The allowance for loan
losses equals 95.7% of non-performing loans at March 31, 2003 compared to 115.0%
at September 30, 2002.
Management has evaluated its entire loan portfolio, including these
non-performing loans, and the overall allowance for loan losses and is satisfied
that the allowance for losses on loans at March 31, 2003 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.
-15-
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.
-16-
Comparison of Results of Operations
-----------------------------------
for the Three and Six Months Ended March 31, 2003 and 2002
----------------------------------------------------------
Net Income
- ----------
Net income for the three months ended March 31, 2003 was $1.07 million ($.43 per
diluted share) compared to $1.10 million ($.47 per diluted share) for the same
period in 2002, a decrease of $28,000 or 2.5 %. The decrease reflects a decrease
in net interest income of $73,000 or 2.2%, an increase in other operating
expenses of $212,000 or 8.5%, and an increase in the provision for income taxes
of $46,000 or 17.2%. Partially offsetting these factors was a decrease in the
provision for loan losses of $25,000 and an increase in other income of
$277,000, or 44.4%.
Net income for the six months ended March 31, 2003 was $1.85 million ($.75 per
diluted share) compared to $2.06 million ($.90 per diluted share) for the same
period in 2002, a decrease of $210,000 or 10.2 %. The decrease reflects a
decrease in net interest income of $178,000 or 2.8%, an increase in the
provision for loan losses of $205,000 or 102.5%, an increase in operating
expenses of $358,000 or 7.2%, and an increase in the provision for income taxes
of $66,000 or 14.2%. Partially offsetting these factors was an increase in other
income of $597,000, or 44.0%.
Interest Rate Spread
- --------------------
The Company's interest rate spread, the difference between yields calculated on
a tax-equivalent basis on interest-earning assets and the cost of funds,
decreased to 2.19% in the three months ended March 31, 2003 from 2.45% in the
same period in fiscal 2002 as a result of the average yield on total interest
earning assets decreasing more than the average rate paid on interest-bearing
liabilities. The following table shows the average yields earned on the Bank's
interest-earning assets and the average rates paid on its interest-bearing
liabilities for the periods indicated, the resulting interest rate spreads, and
the net yields on interest-earning assets.
Three Months Ended
March 31,
2003 2002
---- ----
Average yield on:
Mortgage loans 7.22% 7.38%
Mortgage-backed securities 3.81 5.63
Installment loans 6.91 7.59
Commercial business loans and leases 6.38 7.49
Interest -earning deposits with other
institutions, investment securities, and
FHLB stock (1) 4.95 5.82
---- ----
Total interest-earning assets 5.75 6.73
---- ----
Average rates paid on:
Savings deposits 2.60 3.20
Borrowed funds 5.25 5.77
---- ----
Total interest-bearing liabilities 3.56 4.28
---- ----
Average interest rate spread 2.19% 2.45%
==== ====
Net yield on interest-earning assets 2.38% 2.64%
==== ====
(1) Interest income on tax-free investments has been adjusted for federal
income tax purposes using a rate of 34%.
-17-
The Bank's tax-equivalent interest rate spread decreased to 2.10% in the six
months ended March 31, 2003 from 2.37% in the same period in fiscal 2002 as the
average yield on interest-earning assets declined to a greater degree than the
decline in average rates paid. The following table shows the average yields
earned on the Bank's interest-earning assets and the average rates paid on its
interest-bearing liabilities for the periods indicated, the resulting interest
rate spreads, and the net yields on interest-earning assets.
Six Months Ended March 31,
2003 2002
---- ----
Average yield on:
Mortgage loans 7.34% 7.46%
Mortgage-backed securities 4.24 5.73
Installment loans 7.14 7.74
Commercial business loans and leases 6.56 7.81
Interest -earning deposits with other
institutions, investment securities, and
FHLB stock (1) 5.03 6.02
---- ----
Total interest-earning assets 5.99 6.87
---- ----
Average rates paid on:
Savings deposits 2.66 3.48
Borrowed funds 5.38 5.89
---- ----
Total interest-bearing liabilities 3.89 4.50
---- ----
Average interest rate spread 2.10% 2.37%
==== ====
Net yield on interest-earning assets 2.26% 2.52%
==== ====
(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 $674,000 or 11.3% to $5.3 million for the three
months ended March 31, 2003, compared to the same period in fiscal 2002. The
decrease reflects a decrease in the average loan balance outstanding during 2003
as well as a decrease in the net yield earned on the loan portfolio. Interest on
loans decreased $1.1 million or 9.1% to $11.1 million for the six months ended
March 31, 2003, compared to the same period in fiscal 2002. The decrease
reflects a decrease in the average loan balance outstanding during fiscal 2003
as well as a decrease in the net yield earned on the loan portfolio. The Company
acquired $6.8 million in net loans upon the acquisition of First Pennsylvania
and the Company originated $70.8 million in new loans; however, these increases
in loans were offset by $95.0 million of loan prepayments and $11.3 million in
loan sales, thus accounting for the decrease in the average loan balance
outstanding for the fiscal 2003 period. Higher levels of principal repayments
have been experienced due to the lower interest rate environment during the
current fiscal period.
Interest on mortgage-backed securities decreased $122,000 or 8.9% to $1.25
million and $131,000 or 4.8% to $2.63 million for the three and six month
periods ended March 31, 2003, respectively, as compared to the same periods in
fiscal 2002. The decrease for both the three and six month periods ended March
31, 2003, reflects a decrease in the average yield earned on the portfolio,
partially offset by an increase in the average balance of mortgage-backed
securities owned in the period. The fair value of mortgage-backed securities
acquired from First Pennsylvania on December 31, 2002 was approximately $4.9
million.
-18-
Interest on interest-earning deposits with other institutions and investment
securities increased $146,000 or 9.0%, and increased $182,000 or 5.5%, for the
three and six month periods ended March 31, 2003, respectively, as compared to
the same periods in fiscal 2002. The increase in both periods reflects an
increase in the average balance in the portfolio partially offset by a decrease
in the yield earned on these investments. Interest-earning deposits of $7.1
million and investment securities of $6.9 million were acquired with the
purchase of First Pennsylvania on December 31, 2002.
Interest Expense
- ----------------
Interest on savings and time deposits decreased $239,000 or 9.3% to $2.3
million, and decreased $818,000 or 14.7% to $4.8 million, for the three and six
month periods ended March 31, 2003, respectively, as compared to the same
periods in fiscal 2002. The decrease in both periods reflects a decrease in the
average cost of the deposits, partially offset by an increase in the average
balance of savings deposits. The increase in the average balance of deposits
also reflects the approximately $12.3 million of deposits assumed with the
acquisition of First Pennsylvania.
Interest on guaranteed preferred beneficial interest in subordinated debt
decreased $133,000 or 52.0% for the three months ended March 31, 2003. Interest
on guaranteed preferred beneficial interest in subordinated debt increased
$440,000 or 85.9% for the six months ended March 31, 2003. During the first
quarter of fiscal 2003, the Company wrote-off $599,000 in unamortized issuance
costs related to $10.25 million of 9.75% trust preferred securities that were
called by the Company on November 4, 2002. The write-off of these costs was
reported as a component of interest expense. The 9.75% trust preferred
securities that were called were replaced in September 2002 with $10.0 million
of floating rate trust preferred securities that bore an initial rate of 5.22%
through December 26, 2002, and which adjust quarterly thereafter at a rate of
3-month LIBOR plus 3.40%. The floating rate trust preferred securities current
rate is 4.69%. The 9.75% trust preferred securities were called by the Company
and replaced by the floating rate trust preferred securities primarily to take
advantage of the current low interest rate environment.
Interest on Federal Home Loan Bank ("FHLB") advances and other borrowings
decreased $205,000 or 7.3% to $2.6 million for the three-month period ended
March 31, 2003, as compared to the same period in fiscal 2002. The decrease
reflects a decrease in the cost of FHLB advances and reverse repurchase
agreements, while the average balance of advances and repurchase agreements
outstanding increased slightly. Interest on Federal Home Loan Bank ("FHLB")
advances and other borrowings decreased $498,000 or 8.6% to $5.3 million for the
six-month period ended March 31, 2003, as compared to the same period in fiscal
2002. The decrease reflects a decrease in the cost of FHLB advances and reverse
repurchase agreements, while the average balance of advances and repurchase
agreements outstanding was relatively unchanged. The Company continues to rely
on these advances and repurchase agreements as cost effective wholesale funding
sources.
Net Interest Income Before Provision for Loan Losses
- ----------------------------------------------------
The Company's net interest income before provision for loan losses decreased
$73,000 or 2.2% to $3.3 million, and decreased $178,000 or 2.8% to $6.2 million
for the three and six month periods ended March 31, 2003, respectively, as
compared to the same periods in fiscal 2002. The decrease in both fiscal 2003
periods is attributable to a decreased interest rate spread, partially offset by
an increase in net interest-earning assets.
-19-
Provision for Loan Losses
- -------------------------
The provision for loan losses decreased $25,000 to $75,000, for the three month
period ended March 31, 2003, as compared to the same period in fiscal 2002 and
increased $205,000 to $405,000 for the six month period ended March 31, 2003, as
compared to the same period in fiscal 2003. At March 31, 2003, the allowance for
loan losses decreased $55,000 to $3.001 million from $3.056 million at September
30, 2002. Net loan charge-offs were $133,000 and $85,000 for the three months
ended March 31, 2003 and 2002, respectively. Net loan charge-offs were $500,000
and $195,000 for the six months ended March 31, 2003 and 2002, respectively. A
$300,000 commercial business loan was charged-off during the three-month period
ending December 31, 2002.
The provision for loan losses is charged to operations to bring the total
allowance for loan losses to a level that represents management's best estimates
of the losses inherent in the portfolio based on a monthly review by management
of factors such as historical experience, volume, type of lending conducted by
the Bank, industry standards, the level and status of past due and
non-performing loans, the general economic conditions in the Bank's lending
area, and other factors affecting the collectibility of the loans in its
portfolio.
The allowance for loan losses is maintained at a level that represents
management's best estimates of losses in the loan portfolio at the balance sheet
date. However, there can be no assurance that the allowance for losses will be
adequate to cover losses which may be realized in the future and that additional
provisions for losses will not be required.
Other Income
- ------------
Total non-interest or other income increased $277,000 or 44.4% to $901,000, and
increased $597,000 or 44.0% for the three and six month periods ended March 31,
2003, respectively, as compared to the same periods in fiscal 2002. Increases in
other income primarily relate to increased gains on the sale of investment and
mortgage-backed securities, as well as increased loan and deposit account
service charges.
Loan service charges and fees, which includes late charges on loans and other
miscellaneous loan fees, increased $11,000 or 12.0% to $103,000, and increased
$33,000 or 16.3%, for the three and six month periods ended March 31, 2003,
respectively, as compared to the same periods in fiscal 2002. The increase is
primarily attributed to an increase in the collection of title insurance fees on
mortgages originated, partially offset by a decrease in late charges on loans.
Gain on the sale of investment and mortgage-backed securities was $161,000 and
$388,000 for the three and six month periods ended March 31, 2003, respectively,
as compared to a loss of $14,000 and a gain of $90,000 in the same periods in
fiscal 2002. Such sales were made from the available-for-sale portfolio as part
of management's asset/liability management strategies.
Gain on the sale of loans was $91,000 and $198,000 for the three and six month
periods ended March 31, 2003, respectively, as compared to gains of $113,000 and
$196,000 for the same periods in fiscal 2002. The six-month period ended March
31, 2003 results include the sale of approximately $11.3 million of fixed rate,
single family mortgage loans, compared to $11.8 of similar loan sales during the
prior fiscal period.
Deposit service charges and fees increased $109,000 or 65.2% and $244,000 or
68.7%, respectively, for the three and six month periods ended March 31, 2003,
as compared to the same periods in fiscal 2002. The increase in both periods is
primarily attributed to an increase in the volume of fees collected for returned
checks on deposit accounts.
-20-
Operating Expenses
- ------------------
Total operating expenses for the three-month period ended March 31, 2003 totaled
$2.7 million compared to $2.5 million for the same period in fiscal 2002. Total
operating expenses for the six-month period ended March 31, 2003 totaled $5.3
million compared to $5.0 million for the same period in fiscal 2002. The
increase in both periods is due primarily to an increase in compensation and
benefits expense. The overall increase in operating expense for the current year
period reflects the operation of the Carnegie branch which was not in operation
for the entire prior fiscal period.
Income Taxes
- ------------
Total income tax expense for the three month period ended March 31, 2003 was
$314,000 compared to $268,000 for the same fiscal 2002 period. The effective tax
rate for the three-month periods ended March 31, 2002 and 2001 was approximately
22.6% and 19.6%, respectively. Total income tax expense for the six month period
ended March 31, 2003 was $532,000 compared to $466,000 for the same fiscal 2002
period. The effective tax rate for the six-month periods ended March 31, 2003
and 2002 was approximately 22.3% and 18.5%, respectively. The increase in the
effective tax rate for both periods is attributed to a decrease in tax-exempt
income from the corresponding prior year period. Tax-exempt income includes
income earned on certain municipal investments that qualify for state and/or
federal income tax exemption; income earned by the Bank's Delaware subsidiary
which is not subject to state income tax, and earnings on Bank-owned life
insurance policies which are exempt from federal taxation. State and federal
tax-exempt income for the three-month periods ended March 31, 2003 and 2002 was
$2.0 million and $560,000, respectively. State and federal tax-exempt income for
the six-month periods ended March 31, 2003 and 2002 was $3.6 million and $1.1
million, respectively.
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 the Trusts in 1997 and 2002.
The Preferred Securities may comprise up to 25% of the Company's Tier 1 capital.
Total capital includes Tier 1 capital and other forms of capital such as the
allowance for loan losses, subject to limitations, and subordinated debt. The
guidelines establish a minimum standard risk-based target ratio of 8%, of which
at least 4% must be in the form of Tier 1 capital. At March 31, 2003, the
Company had Tier 1 capital as a percentage of risk-weighted assets of 13.69% and
total risk-based capital as a percentage of risk-weighted assets of 14.54%.
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, 2003,
the Company had a Leverage Ratio of 7.93%.
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, 2003, the Bank complied with the minimum
leverage ratio having Tier 1 capital of 7.03% of average total assets, as
defined.
-21-
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, 2003, the Bank's total capital to risk-weighted assets ratio calculated
under the FDIC capital requirement was 13.28%.
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, 2003, the total of approved loan commitments
amounted to $13.7 million. In addition, the Company had $10.3 million of
undisbursed loan funds at that date. The amount of savings certificates which
mature during the next twelve months totals approximately $94.3 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.
Critical Accounting Policies
- ----------------------------
Certain critical accounting policies affect the more significant judgments and
estimates used in the preparation of the consolidated financial statements. The
Company's single most critical accounting policy relates to the Company's
allowance for loan losses, which reflects the estimated losses resulting from
the inability of the Company's borrowers to make required loan payments. If the
financial condition of the Company's borrowers were to deteriorate, resulting in
an impairment of their ability to make payments, the Company's estimates would
be updated, and additional provisions for loan losses may be required. 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 16 herein and
page 44 of the Company's 2002 Annual Report to Shareholders.
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, 2003 from the information presented under the caption,
Management's Discussion and Analysis of Financial Condition and
Results of Operations - Asset and Liability Management, as Exhibit 13
to the Form 10-K for September 30, 2002.
Item 4. Controls and Procedures
(a) Evaluation of disclosure controls and procedures. Based on their
-------------------------------------------------
evaluation as of a date within 90 days of the filing date of this
Quarterly Report on Form 10-Q, the Registrant's principal executive
officer and principal financial officer have concluded that the
Registrant's disclosure controls and procedures (as defined in Rules
13a-14(c) and 15d-14(c) under the Securities Exchange Act of 1934 (the
"Exchange Act")) are effective to ensure that information required to
be disclosed by the Company in reports that it files or submits under
the Exchange Act is recorded, processed, summarized and reported
within the time periods specified in Securities and Exchange
Commission rules and forms.
(b) Changes in internal controls. There were no significant changes in
----------------------------
the Registrant's internal controls or in other factors that could
significantly affect these controls subsequent to the date of their
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
-22-
Part II - Other Information
- ---------------------------
Item 1. Legal Proceedings
The Bank is not involved in any pending legal proceedings other than
non-material legal proceedings undertaken in the ordinary course of
business.
Item 2. Changes in Securities
None
Item 3. Defaults Upon Senior Securities
Not Applicable
Item 4. Submission of Matters to a Vote of Security Holders
On February 11, 2003, the Company held its annual meeting of
stockholders and the following items were presented:
Election of Director J. Robert Gales for a term of two years to expire
in 2005. Director Gales received 1,867,363 votes in favor and 118,319
votes withheld.
Election of Director Richard G. Spencer and Director Joanne Ross
Wilder for a term of three years to expire in 2006. Director Spencer
received 1,838,717 votes in favor and 146,965 votes withheld; and
Director Wilder received 1,867,328 votes in favor and 118,354 votes
withheld.
There were no abstentions or broker non-votes.
The terms of office of the following directors continued after the
meeting: Robert R. Kastelic, Oliver D. Keefer, Charles E. Nettrour and
William L. Windisch.
Item 5. Other Information
Not Applicable
-23-
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
The following exhibits are filed as part of this Report.
3.1 Articles of Incorporation (1)
3.2 Amended Bylaws (2)
4.1 Rights Agreement dated March 31, 2003 between Fidelity
Bancorp, Inc. and Registrar and Transfer Company (3)
10.1 Employee Stock Ownership Plan, as amended (1)
10.2 1988 Employee Stock Compensation Program (1)
10.3 1993 Employee Stock Compensation Program (4)
10.4 1997 Employee Stock Compensation Program (5)
10.5 1993 Directors' Stock Option Plan (4)
10.6 Employment Agreement between the company, the Bank and
William L. Windisch (1)
10.7 1998 Group Term Replacement Plan (6)
10.8 1998 Salary Continuation Plan Agreement by and between W.L.
Windisch, the Company and the Bank (6)
10.9 1998 Salary Continuation Plan Agreement by and between R.G.
Spencer, the Company and the Bank (6)
10.10 1998 Salary Continuation Plan Agreement by and between M.A.
Mooney, the Company and the Bank (6)
10.11 1998 Stock Compensation Plan (7)
10.12 2000 Stock Compensation Plan (8)
10.13 2001 Stock Compensation Plan (9)
10.14 2002 Stock Compensation Plan (10)
20.1 Dividend Reinvestment Plan (11)
99 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 March 19, 2003 reporting under
Item 5 the declaration of Preferred Stock Purchase Right Dividend
pursuant to a Shareholder Rights Plan.
(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 on 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 on Form
10-Q 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 from an Exhibit in Form 10-Q filed with the
SEC on February 14, 2000.
-24-
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 15, 2003 By: /s/ Richard G. Spencer
----------------------------------------------
Richard G. Spencer
President and Chief Executive Officer
Date: May 15, 2003 By: /s/ Lisa L. Griffith
----------------------------------------------
Lisa L. Griffith
Sr. Vice President and Chief Financial Officer
-25-
SECTION 302 CERTIFICATION
I, Richard G. Spencer, Chief Executive Officer, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Fidelity Bancorp,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
(a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
(b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: May 15, 2003 /s/ Richard G. Spencer
--------------------------------------
Richard G. Spencer
Chief Executive Officer
SECTION 302 CERTIFICATION
I, Lisa L. Griffith, Chief Financial Officer, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Fidelity Bancorp,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
(a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
(b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: May 15, 2003 /s/ Lisa L. Griffith
----------------------------------
Lisa L. Griffith
Chief Financial Officer