U.S. Securities and Exchange Commission
WASHINGTON, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 1997
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from ____________________ to ____________________
Commission file number 0-22288
Fidelity Bancorp, Inc.
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(Exact name of small business issuer as specified in its charter)
Pennsylvania 25-1705405
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(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) (Zip code)
412-367-3300
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(Issuer's telephone number)
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Former name, former address and former fiscal year, if changed since last report
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 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 [ ]
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS
Check whether the registrant filed all documents and reports required to be
filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution of
securities under a plan confirmed by a court. Yes [ ] No [ ]
Check whether the registrant filed all documents and reports required to be
filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution of
securities under a plan confirmed by a court. Yes [ ] No [ ]
<PAGE>
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: 1,564,757 shares, par value $0.01, at
January 31, 1998
Transitional Small Business Disclosure Format (Check one):
Yes [ ] No [ X ]
<PAGE>
FIDELITY BANCORP, INC. AND SUBSIDIARIES
Index
Part I - Financial Information
Item 1. Financial Statements
Statements of Financial Condition as of September 30, 1997
and December 31, 1997 (Unaudited)
Statements of Income (Unaudited) for the Three Month Periods
Ended December 31, 1996 and 1997
Statements of Cash Flows (Unaudited) for the Three Months Ended
December 31, 1996 and 1997
Statement of Changes in Stockholders' Equity (Unaudited) for the Three
Months Ended December 31, 1996 and 1997
Notes to Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Part II - Other Information
Item 1. Legal Proceedings
Item 2. Changes in Securities
Item 3. Defaults Upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
Signatures
<PAGE>
Part I - Financial Information
<TABLE>
<CAPTION>
FIDELITY BANCORP, INC. AND SUBSIDIARIES
Statements of Financial Condition
December 31, September 30,
1997 1997
------------ ------------
<S> <C> <C>
Assets (Unaudited)
Cash and amounts due from
depository institutions ........................ $ 4,915,650 $ 3,731,344
Interest-earning demand deposits with
other institutions .............................. 288,498 243,361
Investment securities held-to-maturity ........... 7,470,021 8,541,067
Investment securities available-for-sale ......... 47,198,319 44,572,994
Loans receivable, net (Notes 6 and 7) ............ 191,392,805 182,869,072
Mortgage-backed securities held-to-maturity ...... 32,602,553 34,064,540
Mortgage-backed securities available-for-sale .... 92,587,497 93,850,692
Real estate owned, net ........................... 20,989 --
Federal Home Loan Bank stock - at cost .......... 4,912,500 4,885,000
Accrued interest receivable, net:
Loans ........................................ 982,888 932,107
Mortgage-backed securities ................... 744,191 758,407
Investments .................................. 829,329 724,037
Office premises and equipment, net ............... 3,441,313 3,467,058
Deferred tax asset ............................... 1,027,952 852,209
Prepaid expenses and sundry assets ............... 4,661,660 1,471,749
------------ ------------
Total Assets ....................... $393,076,165 $380,963,637
============ ============
Liabilities and Net Worth
Liabilities:
Savings deposits ............................. $252,867,967 $244,192,275
Federal Home Loan Bank advances .............. 97,050,000 96,700,000
Reverse repurchase agreements ................ 1,487,168 1,182,792
Advance deposits by borrowers for
taxes and insurance ........................ 2,179,417 1,097,244
Accrued interest on savings and
other deposits ............................. 15,919 159,333
Accrued interest on trust preferred securities 210,979 210,979
Accrued income taxes payable ................. 730,109 204,227
Other accrued expenses and sundry liabilities 1,403,478 1,085,576
Guaranteed preferred beneficial interest in
Company's debentures (Note 8) .............. 10,250,000 10,250,000
------------ ------------
Total Liabilities .................... 366,195,037 355,082,426
------------ ------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
FIDELITY BANCORP, INC. AND SUBSIDIARIES
Statements of Financial Condition
December 31, September 30,
1997 1997
------------ ------------
<S> <C> <C>
Stockholders' equity (Notes 4 and 5):
Common stock, $0.01 par value per share;
10,000,000 shares authorized; 1,561,677
and 1,554,775 shares issued and outstanding,
respectively ............................... 15,617 15,548
Additional paid-in capital ................... 13,887,632 13,810,691
Retained earnings - substantially restricted . 12,349,925 11,822,079
Unrealized gain (loss) on securities
available-for-sale ......................... 627,954 232,893
------------ ------------
Total stockholders' equity ................... 26,881,128 25,881,211
------------ ------------
Total Liabilities and Stockholders' Equity ....... $393,076,165 $380,963,637
============ ============
</TABLE>
See accompanying notes to financial statements.
<PAGE>
<TABLE>
<CAPTION>
FIDELITY BANCORP, INC. AND SUBSIDIARIES
Statements of Income (Unaudited)
Three Months Ended
December 31,
---------------------------
1997 1996
----------- -----------
<S> <C> <C>
Interest Income:
Loans ........................................... $ 4,000,372 $ 3,185,792
Mortgage-backed securities ...................... 2,068,452 1,554,579
Investment securities ........................... 923,243 859,840
Deposits with other institutions ................ 4,526 2,654
----------- -----------
Total interest income ....................... 6,996,593 5,602,865
----------- -----------
Interest Expense:
Savings deposits ................................ 2,671,008 2,363,252
Guaranteed preferred beneficial interest
in Company's debentures (Note 8) ......... 256,279 --
Borrowed funds ................................. 1,383,974 788,800
----------- -----------
Total interest expense ................... 4,311,261 3,152,052
----------- -----------
Net interest income before provision for loan losses . 2,685,332 2,450,813
Provision for loan losses ............................ 115,000 115,000
----------- -----------
Net interest income after provision for loan losses .. 2,570,332 2,335,813
----------- -----------
Other income:
Service fee income .............................. 34,049 19,091
Gain (loss) on sale of investment and
mortgage-backed securities, net ............. 9,391 (1,641)
Gain on sale of loans ........................... 2,119 1,901
Other operating income .......................... 172,814 165,070
----------- -----------
Total other income .......................... 218,373 184,421
----------- -----------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
FIDELITY BANCORP, INC. AND SUBSIDIARIES
Statements of Income (Unaudited)
Three Months Ended
December 31,
---------------------------
1997 1996
----------- -----------
<S> <C> <C>
Operating expenses:
Compensation and employee benefits .............. 1,043,570 909,753
Occupancy and equipment expense ................. 138,468 144,930
Depreciation and amortization ................... 123,084 112,535
Federal insurance premiums ...................... 37,625 --
Loss on real estate owned, net .................. 8,511 6,660
Amortization of intangibles ..................... -- 44,015
Other operating expenses ........................ 410,526 372,068
----------- -----------
Total operating expenses .................... 1,761,784 1,589,961
----------- -----------
Income before income tax provision ................... 1,026,921 930,273
Income tax provision ................................. 359,000 307,500
----------- -----------
Net income ........................................... $ 667,921 $ 622,773
=========== -----------
Basic earnings per common share (Notes 3 & 4) ........ $ 0.43 $ 0.41
Diluted earnings per common share (Notes 3 & 4) ...... $ 0.41 $ 0.40
Dividends per common share (Note 4) .................. $ 0.09 $ 0.073
</TABLE>
See accompanying notes to financial statements
<PAGE>
<TABLE>
<CAPTION>
FIDELITY BANCORP, INC. AND SUBSIDIARIES
Statements of Cash Flows (Unaudited)
Three Months
Ended December 31,
------------------------------
1997 1996
------------ ------------
<S> <C> <C>
Operating Activities:
Net income ......................................................... $ 667,921 $ 622,773
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan losses ...................................... 115,000 115,000
Loss on real estate owned ...................................... 8,511 6,660
Depreciation and amortization .................................. 123,084 112,535
Deferred loan fee amortization ................................. (31,089) (57,839)
Amortization of investment and mortgage-backed securities
discounts/premiums, net ....................................... 95,410 78,689
Amortization of intangibles .................................... -- 44,015
Net (gain) loss on sale of investment securities ............... (3,754) 1,205
Net (gain) loss on sale of mortgage-backed securities .......... (5,636) 436
Net (gain) loss on sale of loans .............................. (2,119) (1,901)
Origination of loans held-for-sale ............................. -- (66,500)
Proceeds from sale of loans held-for-sale ...................... -- 67,352
(Increase) decrease in interest receivable ..................... (141,857) (75,621)
(Increase) decrease in deferred tax asset ...................... (175,743) 298,508
Increase (decrease) in accrued income taxes .................... 525,882 286,999
Increase (decrease) in interest payable ........................ (143,414) (162,904)
SAIF assessment ................................................ -- (1,530,357)
Other changes, net ............................................. (649,793) (766,144)
------------- -------------
Net cash provided (used) by operating activities ................ 382,403 (1,027,094)
------------- -------------
Investing Activities:
Proceeds from sales of investment securities available-for-sale .... 2,999,453 6,735,624
Proceeds from maturities and principal repayments of
investment securities available-for-sale ........................ 4,850 1,000,000
Proceeds from sales of mortgage-backed securities available-for-sale 9,984,072 --
Proceeds from maturities and principal repayments of mortgage-
backed securities available-for-sale ............................ 3,497,372 2,560,620
Purchases of investment securities available-for-sale .............. (5,429,743) (1,522,023)
Purchases of mortgage-backed securities available-for-sale ......... (11,855,534) (8,006,214)
Proceeds from maturities and principal repayments of investment
securities held-to-maturity ..................................... 1,071,633 129,434
Purchases of mortgage-backed securities held-to-maturity ........... -- (2,007,500)
Proceeds from mortgage-backed securities held-to-maturity
principal repayments ............................................. 1,414,968 1,365,216
Principal repayments on first mortgage loans ....................... 4,780,881 5,360,310
Principal repayments on other loans ................................ 7,024,227 4,204,947
First mortgage loans originated and disbursed ...................... (11,306,500) (6,141,300)
Proceeds from sale of other loans .................................. 150,234 136,538
Other loans originated ............................................. (10,614,088) (5,884,974)
Additions to office premises and equipment ......................... (114,288) (336,412)
Net purchases of FHLB Stock ........................................... (27,500) (226,200)
------------- -------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
FIDELITY BANCORP, INC. AND SUBSIDIARIES
Statements of Cash Flows (Unaudited)
(continued)
Three Months
Ended December 31,
------------------------------
1997 1996
------------ ------------
<S> <C> <C>
Net cash provided (used) by investing activities ...................... (8,419,963) (2,631,934)
------------- -------------
Financing Activities:
Net increase (decrease) in savings deposits ............................. 8,675,692 (633,881)
Increase (decrease) in reverse repurchase agreements .................... 304,376 11,381
FHLB advance repayments ................................................. (287,830,000) (461,825,000)
FHLB advances ........................................................... 288,180,000 465,475,000
Cash dividends paid ..................................................... (140,075) (110,063)
Stock options exercised ................................................. 50,252 43,788
Proceeds from sale of stock ............................................. 26,758 15,526
------------- -------------
Net cash provided (used) by financing activities ........................ 9,267,003 2,976,751
------------- -------------
Increase (decrease) in cash and cash equivalents ........................ 1,229,443 (682,277)
Cash and cash equivalents at beginning of period ........................ 3,974,705 4,762,098
------------- -------------
Cash and cash equivalents at end of period .............................. $ 5,204,148 $ 4,079,821
============= =============
Supplemental Disclosure of Cash Flow Information
Cash paid during the period for:
Interest on deposits and other borrowings ............................. $ 4,149,544 $ 3,312,415
Income taxes .......................................................... $ 214,938 $ 20,000
Transfer of loans to real estate owned .................................. $ 20,989 $ --
</TABLE>
See accompanying notes to financial statements.
<PAGE>
<TABLE>
<CAPTION>
FIDELITY BANCORP, INC. AND SUBSIDIARIES
Statement of Changes in Stockholders' Equity
Additional Unrealized Gain/
Common Paid-in Retained (Loss) on Securities
Stock Capital Earnings Available-for-Sale Total
----------- ------------ ------------ ------------ -----------
<S> <C> <C> <C> <C> <C>
Balance at September 30, 1996 .............. $ 13,732 $ 10,437,133 $ 12,522,830 $ (1,195,600) $21,778,095
Net income ............................. 622,773 622,773
Cash dividends paid at
$.073 per share (4)..................... (110,063) (110,063)
Net change in unrealized gain
(loss) on securities available-
for-sale, net of taxes ........... 785,056 785,056
Sale of stock ......................... 8 15,518 15,526
Stock options exercised................ 70 43,718 43,788
----------- ------------ ------------ ------------ -----------
Balance at December 31, 1996 ............... $ 13,810 $ 10,496,369 $ 13,035,540 $ (410,544) $23,135,175
============ ============ ============ ============ ===========
Balance at September 30, 1997 .............. $ 15,548 $ 13,810,691 $ 11,822,079 $ 232,893 $25,881,211
Net income ............................. 667,921 667,921
Cash dividends paid at
$.09 per share ......................... (140,075) (140,075)
Net change in unrealized gain
(loss) on securities available-
for-sale, net of taxes ........... 395,061 395,061
Sale of stock ......................... 59 50,193 50,252
Stock options exercised ............... 10 26,748 $ 26,758
----------- ------------ ------------ ------------ -----------
Balance at December 31, 1997 ............... $ 15,617 $ 13,887,632 $ 12,349,925 $ 627,954 $26,881,128
=========== ============ ============ ============ ===========
</TABLE>
<PAGE>
FIDELITY BANCORP, INC. AND SUBSIDIARIES
Notes to Financial Statements
(Unaudited)
September 30, 1997 and December 31, 1997
(1) Consolidation
The audited and unaudited 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") and FB
Capital Trust (the "Trust"). All significant 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-QSB, 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 period ended September 30, 1997.
The results for the three month period ended December 31, 1997 are not
necessarily indicative of the results that may be expected for the fiscal year
ending September 30, 1998.
(3) Earnings Per Share
In February 1997, the Financial Accounting Standards Board ("FASB") issued FAS
No. 128, "Earnings per Share". FAS No. 128 provides revised reporting standards
for earnings per share ("EPS") and is effective for financial statement periods
ending after December 15, 1997. FAS No. 128 eliminates primary and fully diluted
EPS disclosures and adds new disclosures of basic and diluted EPS. Basic 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.
For the basic EPS computation, the weighted average number of common shares
outstanding for the three months ended December 31, 1996 and 1997, were
1,514,289 and 1,557,305, respectively. For the diluted EPS computation, the
effect of outstanding stock options calculated under the treasury stock method
was 39,746 and 70,423, respectively, for the three months ended December 31,
1996 and 1997. The average number of shares for the 1996 period has been
restated to reflect the 10% stock dividend discussed in Note 4.
(4) Per share amounts have been restated to give retroactive effect to the 10%
common stock dividend declared by the Company's Board of Directors and paid on
May 28, 1997.
(5) Securities
The Company accounts for investments in debt and equity securities in accordance
with FAS 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.
<PAGE>
Unrealized gains and losses for trading securities are reported in earnings
while unrealized gains and losses for securities available-for-sale are reported
as a separate component of equity. Unrealized gains of $628,000, net of tax, on
investments classified as available-for-sale are recorded as a separate
component of equity at December 31, 1997.
(6) Loans Receivable
Loans receivable are comprised of the following (dollar amounts in thousands):
<TABLE>
<CAPTION>
December 31, September 30,
1997 1997
--------- ---------
<S> <C> <C>
First mortgage loans:
Conventional:
1-4 family dwellings ....... $ 101,457 $ 97,698
Multi-family dwellings ..... 4,197 4,165
Commercial .......................... 21,760 19,976
Construction ........................ 8,568 7,614
--------- ---------
135,982 129,453
Less:
Loans in process .................... (5,007) (3,695)
Unearned discounts and fees ......... (958) (912)
--------- ---------
130,017 124,846
Installment loans:
Home equity ......................... 39,201 37,271
Mobile home loans ................... 56 68
Consumer loans ...................... 2,465 2,579
Other ............................... 3,728 3,163
--------- ---------
45,450 43,081
--------- ---------
Commercial business loans .................... 17,946 16,873
--------- ---------
Less: Allowance for possible loan losses ..... (2,020) (1,931)
--------- ---------
Loans receivable, net ............... $ 191,393 $ 182,869
========= =========
</TABLE>
<PAGE>
(7) Changes in the allowance for loan losses for the three months ended December
31, 1997 and 1996 are as follows (dollar amounts in thousands):
<TABLE>
<CAPTION>
1977 1996
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<S> <C> <C>
Balance at beginning of the fiscal year ........ $ 1,931 $ 1,530
Provision for loan losses ...................... 115 115
Charge-offs .................................... (27) (22)
Recoveries ..................................... 1 9
------- -------
Balance at December 31, ........................ $ 2,020 $ 1,632
======= =======
</TABLE>
The provision for loan losses charged to expense is based upon past loan and
loss experience and an evaluation of potential losses in the current loan
portfolio, including the evaluation of impaired loans under FAS 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. FAS 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 December 31, 1997, there are no loans that are considered to be impaired
under FAS No. 114. The average recorded investment in impaired loans during the
three months ended December 31, 1997, was zero. For the three months ended
December 31, 1997, the Company recognized no interest income on those impaired
loans, using the cash basis of income recognition.
(8) On May 13, 1997, the Trust, a statutory business trust created under
Delaware law that is a subsidiary of the Company, issued $10.25 million, 9.75%
Preferred Securities ("Preferred Securities") with a stated value and
liquidation preference of $10 per share. The Trust's obligations under the
Preferred Securities issued are fully and unconditionally guaranteed by the
Company. The proceeds from the sale of the Preferred Securities of the Trust
were utilized by the Trust to invest in $10.25 million of 9.75% Junior
Subordinated Debentures (the "Debentures") of the Company. The Debentures are
unsecured and rank subordinate and junior in right of payment to all
indebtedness, liabilities and obligations of the Company. The Debentures
represent the sole asset of the Trust. Interest on the Preferred Securities is
cumulative and payable quarterly in arrears. The Company has the right to
optionally redeem the Debentures prior to the maturity date of July 15, 2027, on
or after July 15, 2002, at 100% of the stated liquidation amount, plus accrued
and unpaid distributions, if any, to the redemption date. Under the occurrence
of certain events, the Company may redeem in whole, but not in part, the
Debentures prior to July 15, 2002. Proceeds from any redemption of the
Debentures would cause a mandatory redemption of the Preferred Securities and
the common securities having an aggregate liquidation amount equal to the
principal amount of the Debentures redeemed.
<PAGE>
FIDELITY BANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Comparison of Financial Condition at September 30, 1997 and December 31, 1997
Total assets of the Bank increased $12.1 million or 3.2% to $393.1 million at
December 31, 1997 from $381.0 million at September 30, 1997. Significant changes
in individual categories were increases in loans receivable of $8.5 million and
investment securities available-for-sale of $2.6 million, and decreases in
mortgage-backed securities held-to-maturity and available-for-sale of $1.5
million and $1.3 million, respectively.
Total liabilities of the Bank increased by $11.1 million or 3.1% to $366.2
million at December 31, 1997 from $355.1 million at September 30, 1997. The
increase primarily reflects a $8.7 million increase in savings deposits and a
$1.1 million increase in advance payments by borrowers for taxes and insurance.
Stockholders' equity increased $1.0 million or 3.9% to $26.9 million at December
31, 1997, compared to September 30, 1997. The increase reflects net income for
the three month period ended December 31, 1997 of $668,000, an increase in
unrealized holding gains on securities available-for-sale of $395,000, stock
options exercised of $27,000 and stock issued under the Dividend Reinvestment
Plan of $50,000. Partially offsetting these increases were common stock cash
dividends paid of $140,000.
Non-Performing Assets
The following table sets forth information regarding non-accrual loans and real
estate owned by the Bank at the dates indicated. The Bank did not have any
accruing loans which were 90 days or more overdue or any loans which were
classified as troubled debt restructurings during the periods presented.
<TABLE>
<CAPTION>
September 30, December 31,
1997 1997
---------- ----------
<S> <C> <C>
Non-accrual residential real
estate loans (one-to-four-family) ............ $ 94,000 $ 169,000
Non-accrual construction, multi-family
residential and commercial real estate loans . 751,000 --
Non-accrual installment and
commercial business loans .................... 271,000 388,000
---------- ----------
Total non-performing loans ..................... $1,116,000 $ 557,000
========== ==========
Total non-performing loans as
a percent of net loans receivable ............ .61% .29%
========== ==========
Total real estate owned,
net of related reserves ...................... $ -- $ 21,000
========== ==========
Total non-performing loans and real estate
owned as a percent of total assets ........... .29% .15%
========== ==========
</TABLE>
<PAGE>
Included in non-performing loans at December 31, 1997 are 5 single-family
residential real estate loans totaling $169,000, 31 installment loans totaling
$115,000, and three commercial business loans totaling $273,000. Of the 5
non-performing single-family residential real estate loans, the largest amounted
to $77,000.
The 31 installment loans total $115,000 and consist of various secured and
unsecured consumer loans and credit card loans. The largest loan is for $38,000.
Of the three commercial loans, two of the loans, totaling $30,000, are to one
entity that has recently declared bankruptcy. The loans are, however, partially
secured. The other commercial loan is for $243,000 to a dental apparatus
business that is in the process of reorganizing its operations. The loan is both
personally guaranteed by the borrower and is partially secured by real estate,
which is currently for sale.
At December 31, 1997, the Bank had an allowance for possible loan losses of $2.0
million or 1.06% of net loans receivable, as compared to an allowance of $1.9
million or 1.06% of net loans receivable at September 30, 1997. The allowance
for possible loan losses equals 363% of non-performing loans at December 31,
1997.
Management has evaluated these non-performing loans and the overall allowance
for possible loan losses and is satisfied that the allowance for possible losses
on loans at December 31, 1997 is adequate. In that regard, consideration was
given to the increase in the level of the allowance from September 30, 1997 to
December 30, 1997, as well as the coverage of non-performing loans the allowance
provides at December 31, 1997.
Real estate owned at December 31, 1997 consists of one single-family residential
property located in Pittsburgh, Pennsylvania totaling $21,000. The property is
currently for sale and management believes that the carrying value of the
property at December 31, 1997 approximates the net realizable value of the
property. However, while management uses the best information available to make
such determinations, future adjustments may become necessary.
Comparison of Results of Operations
for the Three Months Ended December 31, 1997 and 1996
Net Income
Net income for the three months ended December 31, 1997 was $668,000 compared to
$623,000 for the same period in 1996, an increase of $45,000 or 7.2%. The
increase reflects an increase in net interest income of $235,000 or 9.6%, an
increase in other income of $34,000 or 18.4% and an increase in operating
expenses of $172,000 or 10.8%. Additionally, there was an increase in the
provision for income taxes of $52,000 or 16.8%.
Interest Rate Spread
The Bank'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 2.81% in the three months ended December 31, 1997 from 3.18% in the same
period in 1996. The following table shows the average tax-equivalent 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.
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended December 31,
1997 1996
----- -----
<S> <C> <C>
Average yield on:
Mortgage loans .................................. 8.25% 8.06%
Mortgage-backed securities ...................... 6.51 6.31
Installment loans ............................... 8.41 8.35
Commercial business loans ....................... 10.59 10.11
Interest-earning deposits with other
institutions, investment securities,
and FHLB stock (1) ............................ 7.02 7.10
----- -----
Total interest-earning assets ................... 7.59 7.44
----- -----
Average rates paid on:
Savings deposits ................................ 4.25 4.01
Borrowed funds .................................. 5.99 5.22
----- -----
Total interest-bearing liabilities .............. 4.78 4.26
----- -----
Average interest rate spread ....................... 2.81% 3.18%
===== =====
Net yield on interest-earning assets ............... 2.98% 3.34%
===== =====
</TABLE>
(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 increased $815,000 or 25.6% to $4.0 million for the three
months ended December 31, 1997, compared to the same period in 1996. The
increase is attributable to an increase in the average loan portfolio balance
outstanding during the 1997 period, as well as an increase in the average yield
earned on these assets in the 1997 period, as compared to the same period in
1996. The increase in the average balance of the loan portfolio reflects
management's continued strategy of emphasizing and increasing loan originations.
Interest on mortgage-backed securities increased $514,000 or 33.1% to $2.1
million for the three months ended December 31, 1997, as compared to the same
period in 1996. The increase is attributable to an increase in the average
portfolio balance outstanding during the 1997 period, as well as an increase in
the average yield earned on these assets in the 1997 period, as compared to the
same period in 1996.
Interest on investment securities increased $63,000 or 7.4% to $923,000 for the
three months ended December 31, 1997, as compared to the same period in 1996.
The increase is attributable to an increase in the average balance of
investments securities held during the 1997 period, as compared to the same
period in 1996, partially offset by a decrease in yield.
<PAGE>
Interest Expense
Interest on savings deposits increased $308,000 or 13.0% to $2.7 million for the
three month period ended December 31, 1997, as compared to the same period in
1996. The increase reflects both an increase in the average balance of savings
deposits for the 1997 period compared to 1996, as well as an increase in the
average cost of deposits.
Interest on borrowed funds increased $595,000 or 75.4% to $1.4 million for the
three month period ended December 31, 1997, as compared to the same period in
1996. The increase reflects primarily an increase in the Federal Home Loan Bank
("FHLB") advances outstanding during the 1997 period, as well as an increase in
the average cost of borrowing during the 1997 period, as compared to 1996. The
Bank continued to rely more on these wholesale funding sources in 1997 to fund
growth.
Interest on guaranteed preferred beneficial interest in subordinated debt was
$256,000 for the three month period ended December 31, 1997. As discussed more
fully in Note 8, the Preferred Securities were issued in May 1997.
Net Interest Income Before Provision for Loan Losses
The Bank's net interest income before provision for loan losses increased
$235,000 or 9.6% to $2.7 million for the three months ended December 31, 1997,
as compared to the same period in 1996. This increase is attributable to an
increase in net interest earning assets, partially offset by a decrease in the
interest rate spread, from 3.18% for the three month period ended December 31,
1996, to 2.81% for the same period in 1997.
Provision for Loan Losses
The provision for loan losses remained constant at $115,000 for both the three
month periods ended December 31, 1997 and 1996. The provision for both periods
reflects management's evaluation of economic conditions and other factors
described below. The allowance for possible loan losses has increased from $1.6
million at December 31, 1996 to $2.0 million at December 31, 1997.
A monthly review is conducted by management to determine that the allowance for
possible loan losses is adequate to absorb estimated loan losses. In determining
the level of allowances for possible loan losses, consideration is given to
general economic conditions, the size of the loan portfolio, the diversification
of the loan portfolio, historical loss experience, identified credit problems,
delinquency levels and the adequacy of collateral. Although management believes
that the current allowance for loan losses is adequate, future additions to the
reserve may be necessary due to changes in economic conditions. In addition,
various regulatory agencies review the adequacy of the allowance for loan losses
as part of their examination process and may require additions to the allowance
based on their judgment.
Other Income
Total non-interest or other income increased $34,000 or 18.4% to $218,000 for
the three months ended December 31, 1997, as compared to the same period in
1996.
<PAGE>
Service fee income, which includes late charges on loans and fees for loans
serviced for others, increased $15,000 or 78.4% to $34,000 for the period ended
December 31, 1997, as compared to the same period in 1996. The results primarily
reflect an increase in late charges on loans and the collection of a fee related
to a program whereby customers could skip their regular loan payment over the
Christmas holidays.
Gain on the sale of investment and mortgage-backed securities was $9,000 for the
period ended December 31, 1997, as compared to a loss of $2,000 for the same
period in 1996. Sales in both periods were made from the available-for-sale
category and represented a partial repositioning of the portfolio based upon
current market conditions.
Gain on sale of loans was $2,000 for both the three month periods ended December
31, 1997 and 1996. The Bank sells education loans to the Student Loan Marketing
Association ("SLMA"). Such sales generally result in some gain or loss being
realized and are being done to reduce the Bank's position in these loans, which
are generally lower yielding and subject to extensive and costly government
regulation. The Bank does not intend to originate additional loans for its
portfolio, except those that will be serviced by SLMA. Sales to SLMA increased
slightly in the period ended December 31, 1997, as compared to 1996, however the
net gains recorded in 1997 and 1996 reflect the timing of the sales.
Other operating income includes miscellaneous sources of income which consist
primarily of various fees related to checking accounts, fees from the sale of
cashiers checks and money orders, and safe deposit box rental income. Other
operating income increased $8,000 or 4.5% to $173,000 for the three month period
ended December 31, 1997, as compared to the same period in 1996. The increase
primarily reflects fees earned on a debit card product introduced by the Bank in
1996 and increased non-sufficient funds fees charged to checking account
customers, partially offset by decreased fees earned on credit and life
insurance sales on loans.
Other Expenses
Total operating expenses increased $172,000 or 10.8% to $1.8 million for the
three months ended December 31, 1997, compared to the same period in 1996.
Compensation, payroll taxes and fringe benefits, the largest component of
operating expenses, increased $134,000 or 14.7% to $1.0 million for the three
month period ended December 31, 1997, compared to the same period in 1996.
Factors contributing to the increase were normal salary increases, higher
bonuses awarded in the 1997 period, an increase in the number of employees on
the payroll, particularly professionals employed in the lending area, and an
increase in retirement expenses.
Office occupancy and equipment expense decreased $6,000 or 4.5% to $138,000 for
the three months ended December 31, 1997, compared to the same period in 1996.
The decrease primarily reflects decreased equipment maintenance expenditures.
Depreciation and amortization increased $11,000 or 9.4% to $123,000 for the 1997
period as compared to 1996. The increase primarily reflects the purchase of new
computer equipment, as well as an automatic teller machine for the Washington
Road branch.
Federal insurance premiums were $38,000 for the 1997 period and zero for the
1996 period. As a result of the Deposit Insurance Funds Act of 1996 and the
resulting payment of a one-time special assessment in 1996, the Savings
<PAGE>
Association Insurance Fund was fully capitalized to the level required by law.
The FDIC then determined that, for the quarter ended December 31, 1996, no
deposit insurance premiums would be due from many institutions, including the
Bank. Thus there was no deposit insurance expense for the three months ended
December 31, 1996. For subsequent periods, the amount of the premium is based on
the average amount of deposits outstanding. The premium for the quarter ended
December 31,1997 is 6.32 basis points.
Net loss on real estate owned was $8,000 in the 1997 period, as compared to a
net loss of $7,000 for the three months ended December 31, 1996. There were no
individually significant transactions included in the results.
Amortization of intangibles was $44,000 for the three month period ended
December 31, 1996, compared to zero for the comparable period in 1997. The
intangibles generated by the three branch acquisitions that occurred in November
1991 were being amortized on a straight-line basis over five years. These
intangibles were fully amortized in November 1996.
Other operating expenses, which consists of check processing costs, consulting
fees, legal and audit fees, advertising, bank charges and other administrative
expenses, amounted to $411,000 and $372,000 for the three month periods ended
December 31, 1997 and 1996, respectively, an increase of $38,000 or 10.3%.
Significant variations between periods include increases in advertising,
stationary and supplies, and telephone expenses, partially offset by reductions
in legal expenses and consulting fees.
Income Taxes
Income taxes increased $52,000 or 16.8% to $359,000 for the three month period
ended December 31, 1997, compared to the same period in 1996. The increase in
taxes results from an increase in taxable income, as well as an increase in the
effective tax rate to approximately 35.0% in 1997 from approximately 33.0% in
the same period in 1996.
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 Trust in 1997. The
Preferred Securities may comprise up to 25% of the Company's Tier 1 capital.
Total capital includes Tier 1 capital and other forms of capital such as the
allowance for loan losses, subject to limitations, and subordinated debt. The
guidelines establish a minimum standard risk-based target ratio of 8%, of which
at least 4% must be in the form of Tier 1 capital. At December 31, 1997, the
Company had Tier 1 capital as a percentage of risk-weighted assets of 17.2% and
total risk-based capital as a percentage of risk-weighted assets of 19.0%.
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 total average 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 100 to
200 basis points above the minimum. At December 31, 1997, the Company had a
Leverage Ratio of 9.1%.
<PAGE>
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 December 31, 1997, the Bank complied with the minimum
leverage ratio having Tier 1 capital of 8.6% 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 December
31, 1997, the Bank's total capital to risk-weighted assets ratio calculated
under the FDIC capital requirement was 17.5%.
A reconciliation of Stockholders' Equity for the Bank to Regulatory Capital is
as follows:
<TABLE>
<CAPTION>
<S> <C>
Stockholder's equity at December 31, 1997 (1) $33,575,352
Less: Unrealized securities gains 588,994
-----------
Tier 1 Capital at December 31, 1997 32,986,358
Plus: Qualifying loan loss allowance 2,019,638
-----------
Total capital at December 31, 1997 $35,005,996
===========
</TABLE>
(1) Represents equity capital of the Bank as reported to the FDIC and the
Pennsylvania Department of Banking on Form 032.
Liquidity
The Bank'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 December 31, 1997, the total of approved loan commitments
amounted to $4.3 million. In addition, the Bank had $5.0 million of undisbursed
loan funds at that date. The amount of savings certificates which mature during
the next twelve months totals approximately $80.6 million, a substantial portion
of which management believes, on the basis of prior experience, will remain in
the Bank.
<PAGE>
Part II - Other Information
Item. 1 Legal Proceedings
The Bank is not involved in any pending legal proceedings other than
non-material legal proceedings undertaken in the ordinary course of
business.
Item 2. Changes in Securities
None
Item 3. Defaults Upon Senior Securities
Not Applicable
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
None
<PAGE>
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.
SIGNATURES
FIDELITY BANK
Date: February 9, 1998 By: /s/ William L. Windisch
-----------------------
William L. Windisch
President and Chief Executive Officer
Date: February 9, 1998 By: /s/ Richard G. Spencer
---------------------
Richard G. Spencer
Vice President and Chief Financial
Officer
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-END> DEC-31-1998
<CASH> 4,915,650
<INT-BEARING-DEPOSITS> 288,498
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 139,785,816
<INVESTMENTS-CARRYING> 40,072,574
<INVESTMENTS-MARKET> 40,190,273
<LOANS> 193,412,444
<ALLOWANCE> 2,019,638
<TOTAL-ASSETS> 393,076,165
<DEPOSITS> 252,867,967
<SHORT-TERM> 78,537,168
<LIABILITIES-OTHER> 4,539,902
<LONG-TERM> 30,250,000
0
0
<COMMON> 15,617
<OTHER-SE> 26,865,511
<TOTAL-LIABILITIES-AND-EQUITY> 393,076,165
<INTEREST-LOAN> 4,000,372
<INTEREST-INVEST> 2,991,695
<INTEREST-OTHER> 4,526
<INTEREST-TOTAL> 6,996,593
<INTEREST-DEPOSIT> 2,671,008
<INTEREST-EXPENSE> 4,311,261
<INTEREST-INCOME-NET> 2,685,332
<LOAN-LOSSES> 115,000
<SECURITIES-GAINS> 9,391
<EXPENSE-OTHER> 1,761,784
<INCOME-PRETAX> 1,026,921
<INCOME-PRE-EXTRAORDINARY> 1,026,921
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 667,921
<EPS-PRIMARY> .43
<EPS-DILUTED> .41
<YIELD-ACTUAL> 3.00
<LOANS-NON> 557,000
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,930,603
<CHARGE-OFFS> 27,419
<RECOVERIES> 1,455
<ALLOWANCE-CLOSE> 2,019,639
<ALLOWANCE-DOMESTIC> 2,019,639
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
