U.S. 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 December 31, 1998
[ ] 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.
----------------------
(Exact name of small business issuer 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) (Zip code)
412-367-3300
------------
(Issuer's telephone number)
- --------------------------------------------------------------------------------
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 [ ]
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: 1,984,485 shares, par value
$0.01, at February 1, 1999
<PAGE>
FIDELITY BANCORP, INC. AND SUBSIDIARIES
Index
Part I - Financial Information
Item 1. Financial Statements
Statements of Financial Condition as of September 30, 1998
and December 31, 1998 (Unaudited)
Statements of Income (Unaudited) for the Three Months Ended
December 31, 1997 and 1998
Statements of Cash Flows (Unaudited) for the Three Months Ended
December 31, 1997 and 1998
Statement of Changes in Stockholders' Equity (Unaudited) for the Three
Months Ended December 31, 1997 and 1998
Notes to Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
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
(in thousands)
December 31, September 30,
Assets 1998 1998
------ -------- --------
(Unaudited)
<S> <C> <C>
Cash and amounts due from
depository institutions ........................... $ 5,609 $ 2,539
Interest-earning demand deposits with
other institutions ................................ 1,352 613
Investment securities held-to-maturity ............... 6,625 6,625
Investment securities available-for-sale ............. 64,975 57,590
Loans receivable, net (Notes 5 and 6) ................ 229,692 218,892
Mortgage-backed securities, held-to-maturity ......... 17,531 19,913
Mortgage-backed securities available-for-sale ........ 94,043 82,957
Real estate owned, net ............................... 49 21
Federal Home Loan Bank stock - at cost ............... 6,183 5,050
Accrued interest receivable, net ..................... 2,769 2,573
Office premises and equipment, net ................... 3,781 3,446
Deferred tax asset ................................... 831 700
Prepaid expenses and sundry assets ................... 4,742 5,125
-------- --------
Total Assets .................................. $438,182 $406,044
======== ========
Liabilities and Stockholders' Equity
Liabilities:
Savings deposits .................................. $272,876 $261,735
Federal Home Loan Bank advances ................... 118,550 100,200
Reverse repurchase agreements ..................... 2,357 1,870
Advance deposits by borrowers for
taxes and insurance ............................ 2,347 1,126
Accrued interest on savings and other deposits .... 17 92
Accrued income taxes payable ...................... 393 171
Other accrued expenses and sundry liabilities ..... 2,081 1,579
Guaranteed preferred beneficial interest in
Company's debentures .......................... 10,250 10,250
-------- --------
Total Liabilities ............................. 408,871 377,023
-------- --------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
FIDELITY BANCORP, INC. AND SUBSIDIARIES
Statements of Financial Condition
(in thousands)
(continued)
December 31, September 30,
1998 1998
-------- --------
(Unaudited)
<S> <C> <C>
Stockholders' equity (Notes 3 and 4):
Common Stock, $0.01 par value per share,
10,000,000 shares authorized; 1,980,590
and 1,978,543 shares issued and outstanding,
respectively ..................................... 20 20
Additional paid-in capital ........................ 14,199 14,168
Retained earnings - substantially restricted ...... 14,631 14,106
Accumulated Other Comprehensive
Income, Net of Tax ............................. 461 727
-------- --------
Total Stockholders' Equity .................... 29,311 29,021
-------- --------
Total Liabilities and Stockholders' Equity .... $438,182 $406,044
======== ========
</TABLE>
See accompanying notes to financial statements.
<PAGE>
<TABLE>
<CAPTION>
FIDELITY BANCORP, INC. AND SUBSIDIARIES
Statements of Income (Unaudited)
(in thousands)
Three Months Ended
December 31,
-----------------------
1998 1997
------- -------
<S> <C> <C>
Interest income:
Loans ................................................ $ 4,679 $ 4,000
Mortgage-backed securities ........................... 1,641 2,068
Investment securities:
Taxable .......................................... 647 673
Tax-exempt ....................................... 416 250
Deposits with other institutions ..................... 13 5
------- -------
Total interest income ............................. 7,396 6,996
------- -------
Interest expense:
Savings deposits ..................................... 2,827 2,671
Guaranteed preferred beneficial interest
in subordinated debt .............................. 256 256
Borrowed funds ....................................... 1,543 1,384
------- -------
Total interest expense ............................ 4,626 4,311
------- -------
Net interest income before provision
for loan losses ...................................... 2,770 2,685
Provision for loan losses ............................... 105 115
------- -------
Net interest income after provision
for loan losses ...................................... 2,665 2,570
------- -------
Other income:
Service fee income ................................... 45 34
Gain (loss) on sale of investment
and mortgage-backed securities, net ............... -- 9
Gain (loss) on sale of loans ......................... 4 2
Other operating income ............................... 276 173
------- -------
Total other income ................................ 325 218
------- -------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
FIDELITY BANCORP, INC. AND SUBSIDIARIES
Statements of Income (Unaudited)
(in thousands)
(Cont'd)
Three Months Ended
December 31,
-----------------------
1998 1997
------- -------
<S> <C> <C>
Operating expenses:
Compensation and employee benefits ................... 1,192 1,044
Occupancy and equipment expense ...................... 210 138
Depreciation and amortization ........................ 147 123
Federal insurance premiums ........................... 38 38
(Gain) loss on real estate owned, net ................ (45) 8
Other operating expenses ............................. 445 410
------- -------
Total operating expenses .......................... 1,987 1,761
------- -------
Income before income tax provision ...................... 1,003 1,027
Income tax provision .................................... 301 359
------- -------
Net income .............................................. $ 702 $ 668
======= =======
Basic earnings per common share (Note 3) ................ $ 0.35 $ 0.34
======= =======
Diluted earnings per common share (Note 3) .............. $ 0.35 $ 0.33
======= =======
Dividends per common share (Note 3) ..................... $ .09 $ .072
======= =======
</TABLE>
See accompanying notes to financial statements.
<PAGE>
<TABLE>
<CAPTION>
FIDELITY BANCORP, INC. AND SUBSIDIARIES
Statements of Cash Flows (Unaudited)
(in thousands)
Three Months Ended December 31,
-------------------------------
1998 1997
-------- --------
<S> <C> <C>
Operating Activities:
Net income ................................................................ $ 702 $ 668
Adjustments to reconcile net income to net cash provided by operating
activities:
Provision for loan losses ............................................. 105 115
(Gain) Loss on real estate owned ...................................... (45) 8
Depreciation of premises and equipment ................................ 147 123
Deferred loan fee amortization ........................................ (91) (31)
Amortization of investment and mortgage-backed securities
discounts/premiums, net .............................................. 104 95
Net (gain) loss on sale of investment securities ...................... -- (4)
Net (gain) loss on sale of mortgage-backed securities ................. -- (5)
Net (gain) loss on sale of loans ..................................... (4) (2)
Origination of loans held-for-sale ................................... (477) --
Proceeds from sale of loans held-for-sale ............................ 479 --
(Increase) decrease in interest receivable ............................ (197) (142)
(Increase) decrease in deferred tax asset ............................. (131) (176)
Increase (decrease) in accrued income taxes ........................... 221 526
Increase (decrease) in interest payable ............................... (76) (143)
Other changes, net .................................................... 1,088 (3,044)
-------- --------
Net cash provided (used) by operating activities ....................... 1,825 (2,012)
-------- --------
Investing Activities:
Proceeds from sales of investment securities available-for-sale ........... -- 2,999
Proceeds from maturities and principal repayments of
investment securities available-for-sale ............................... 4,508 5
Purchases of investment securities available-for-sale ..................... (11,832) (5,430)
Proceeds from sales of mortgage-backed securities available-for-sale ...... -- 9,984
Proceeds from maturities and principal repayments of mortgage-
backed securities available-for-sale ................................... 7,387 3,497
Purchases of mortgage-backed securities available-for-sale ................ (19,023) (11,856)
Proceeds from maturities and principal repayments of investment
securities held-to-maturity ............................................ -- 1,072
Proceeds from principal repayments of mortgage-backed
securities held-to-maturity ............................................. 2,356 1,415
Net (increase) decrease in loans .......................................... (10,991) (8,803)
Proceeds from sale of other loans ......................................... 141 150
Additions to office premises and equipment ................................ (483) (114)
Net purchases of FHLB Stock ............................................... (1,133) (27)
-------- --------
Net cash provided (used) by investing activities ............................. (29,070) (7,108)
-------- --------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
FIDELITY BANCORP, INC. AND SUBSIDIARIES
Statements of Cash Flows (Unaudited) (Cont'd.)
(in thousands)
Three Months Ended December 31,
-------------------------------
1998 1997
-------- --------
<S> <C> <C>
Financing Activities:
Net increase (decrease) in savings deposits ........ 11,141 8,676
Increase (decrease) in reverse repurchase agreements 488 304
Net increase (decrease) in FHLB advances ........... 18,350 350
Increase in Advance Payments by Borrowers for
Taxes and Insurance .............................. 1,221 1,082
Cash dividends paid ................................ (177) (140)
Stock options exercised ............................ 6 50
Proceeds from sale of stock ........................ 25 27
-------- --------
Net cash provided (used) by financing activities ... 31,054 10,349
-------- --------
Increase (decrease) in cash and cash equivalents ... 3,809 1,229
Cash and cash equivalents at beginning of period ... 3,152 3,975
-------- --------
Cash and cash equivalents at end of period ......... $ 6,961 $ 5,204
======== ========
Supplemental Disclosure of Cash Flow Information
Cash paid during the period for:
Interest on deposits and other borrowings ........ $ 4,624 $ 4,150
Income taxes ..................................... $ 65 $ 215
-------- --------
Transfer of loan to REO ............................ $ 28 $ 21
-------- --------
</TABLE>
See accompanying notes to financial statements.
<PAGE>
<TABLE>
<CAPTION>
FIDELITY BANCORP, INC. AND SUBSIDIARIES
Statement of Changes in Stockholders' Equity
(in thousands)
Additional Accumulated Other
Common Paid-in Retained Comprehensive
Stock Capital Earnings Income Net of Tax Total
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Balance at September 30, 1997 ..... $ 16 $ 13,810 $ 11,822 $ 233 $ 25,881
Net income ........................ 668 668
Cash dividends paid (Note 3) .... (140) (140)
Net change in unrealized gain
(loss) on securities available-
for-sale, net of taxes ........ 395 395
Sale of stock through Dividend
Reinvestment Plan ............. 50 50
Stock options exercised ......... 27 27
-------- -------- -------- -------- --------
Balance at December 31, 1997 ...... $ 16 $ 13,887 $ 12,350 $ 628 $ 26,881
======== ======== ======== ======== ========
Balance at September 30, 1998 ..... $ 20 $ 14,168 $ 14,106 $ 727 $ 29,021
Net income ........................ 702 702
Cash dividends paid (Note 3) .... (177) (177)
Net change in unrealized gain
(loss) on securities available-
for-sale, net of taxes ........ (266) (266)
Sale of stock through Dividend
Reinvestment Plan ............. 25 25
Stock options exercised ......... 6 6
-------- -------- -------- -------- --------
Balance at December 31, 1998 ...... $ 20 $ 14,199 $ 14,631 $ 461 $ 29,311
======== ======== ======== ======== ========
</TABLE>
<PAGE>
FIDELITY BANCORP, INC. AND SUBSIDIARIES
Notes to Financial Statements - (Unaudited)
September 30, 1998 and December 31, 1998
(1) Consolidation
The 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-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 period ended September 30, 1998.
The results for the three month period ended December 31, 1998 are not
necessarily indicative of the results that may be expected for the fiscal year
ending September 30, 1999.
(3) Earnings Per Share
In February 1997, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 128, "Earnings per Share". SFAS No. 128 provides revised reporting standards
for earnings per share ("EPS") and is effective for financial statement periods
ending after December 15, 1997. SFAS 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. The Company adopted SFAS No. 128 as of December
31, 1997. The following table sets forth the computation of basic and diluted
earnings per share (amounts in thousands, except per share data):
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended
December 31,
1998 1997
------ ------
<S> <C> <C>
Numerator:
Net income ...................................... $ 702 $ 668
------ ------
Numerator for basic and
diluted earnings per share .................. $ 702 $ 668
------ ------
Denominator:
Denominator for basic earnings
per share - weighted average shares .......... 1,980 1,947
Effect of dilutive securities:
Employee stock options ....................... 51 69
------ ------
Denominator for diluted earnings
per share - weighted average
shares and assumed conversions ............... 2,031 2,016
====== ======
Basic earnings per share ........................ $ .35 $ .34
====== ======
Diluted earnings per share ...................... $ .35 $ .33
====== ======
</TABLE>
Per share amounts have been restated to give retroactive effect to the 25%
common stock split declared by the Company's Board of Directors and paid on
March 31, 1998.
(4) 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 other comprehensive income in stockholder's equity. Unrealized gains
of $461,000, net of tax, on investments classified as available-for-sale are
recorded at December 31, 1998.
<PAGE>
(5) Loans Receivable
Loans receivable are comprised of the following (dollar amounts in
thousands):
<TABLE>
<CAPTION>
December 31, September 30,
1998 1998
--------- ---------
<S> <C> <C>
First mortgage loans:
Conventional:
1-4 family dwellings ....... $ 117,520 $ 115,559
Multi-family dwellings ..... 3,661 4,262
Commercial .......................... 26,925 21,881
Construction ........................ 20,382 21,212
--------- ---------
168,488 162,914
--------- ---------
Less:
Loans in process .................... (12,223) (12,916)
Unearned discounts and fees ......... (1,147) (1,142)
--------- ---------
155,118 148,856
--------- ---------
Installment loans:
Home equity ......................... 43,633 42,290
Mobile home loans ................... 7 13
Consumer loans ...................... 2,199 2,359
Other ............................... 4,859 4,460
--------- ---------
50,698 49,122
--------- ---------
Commercial business loans and leases:
Commercial business loans ........... 21,815 19,509
Commercial leases ................... 4,351 3,648
--------- ---------
26,166 23,157
--------- ---------
Less: Allowance for possible loan losses ..... (2,290) (2,243)
--------- ---------
Loans receivable, net ............... $ 229,692 $ 218,892
========= =========
</TABLE>
(6) Allowance for Loan Losses
Changes in the allowance for loan losses for the three months ended December 31,
1998 and 1997 are as follows (dollar amounts in thousands):
<PAGE>
<TABLE>
<CAPTION>
1998 1997
------- -------
<S> <C> <C>
Balance at beginning of the fiscal year ........ $ 2,243 $ 1,931
Provision for loan losses ...................... 105 115
Charge-offs .................................... (59) (27)
Recoveries ..................................... 1 1
------- -------
Balance at December 31, ........................ $ 2,290 $ 2,020
======= =======
</TABLE>
The provision for loan losses charged to expense is based upon past loan loss
experience and an evaluation of 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 December 31, 1998, the recorded investment in loans that are considered to be
impaired under SFAS No. 114 was $221,000. The average recorded investment in
impaired loans during the three months ended December 31, 1998 was $248,000. For
the three months ended December 31, 1998, the Company recognized no interest
income on those impaired loans, using the cash basis of income recognition.
(7) Comprehensive Income
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income ."
SFAS No. 130 establishes standards for reporting and display of comprehensive
income and its components (revenue, expenses, gains, and losses) in a full set
of general purpose financial statements. SFAS No. 130 requires that all items
that are required to be recognized under accounting standards as components of
comprehensive income be reported in an annual financial statement that is
displayed with the same prominence as other financial statements. SFAS No. 130
requires that an enterprise (a) classify items of other comprehensive income by
their nature in a financial statement and (b) display the accumulated balance of
other comprehensive income separately from retained earnings and additional
paid-in capital in the equity section of a statement of financial position. For
the three months ended December 31, 1998 and 1997, the Company's total
comprehensive income was $436,000 and $1.1 million, respectively. Total
comprehensive income is comprised of net income of $702,000 and $668,000 and
other comprehensive income of ($266,000) and $395,000, net of tax, respectively.
Other comprehensive income consists of unrealized gains and losses on investment
securities and mortgage-backed securities available-for-sale.
(8) Branch Opening
On October 1, 1998, the Bank opened its ninth full service branch office at
2034 Penn Avenue in Pittsburgh's Strip District. The building in which the
branch is located is leased from an independent third party.
<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, 1998 and December 31, 1998
Total assets of the Bank increased $32.2 million or 7.9% to $438.2 million at
December 31, 1998 from $406.0 million at September 30, 1998. Significant changes
in individual categories were increases in loans receivable of $10.8 million,
investment securities available-for-sale of $7.4 million, and mortgage-backed
securities available-for-sale of $11.1 million and a decrease in mortgage-backed
securities held-to-maturity of $2.4 million.
Total liabilities of the Bank increased by $31.9 million or 8.5% to $408.9
million at December 31, 1998 from $377.0 million at September 30, 1998. The
increase primarily reflects a $11.1 million increase in savings deposits, an
increase in borrowings of $18.8 million and a $1.2 million increase in advance
payments by borrowers for taxes and insurance.
Stockholders' equity increased $290,000 or 1.0% to $29.3 million at December 31,
1998, compared to September 30, 1998. The increase reflects net income for the
three month period ended December 31, 1998 of $702,000, stock options exercised
of $6,000 and stock issued under the Dividend Reinvestment Plan of $25,000.
Partially offsetting these increases were common stock cash dividends paid of
$177,000 and a decrease in unrealized holding gains on securities
available-for-sale of $266,000.
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, 1998 December 31, 1998
------------------ -----------------
(in thousands)
<S> <C> <C>
Non-accrual residential real
estate loans (one-to-four-family) .................... $224 $265
Non-accrual construction, multi-family
residential and commercial real estate loans ......... 199 199
Non-accrual installment and
commercial business loans ............................ 129 210
---- ----
Total non-performing loans ............................. $552 $674
==== ====
Total non-performing loans as
a percent of net loans receivable .................... .25% .29%
==== ====
Total real estate owned,
net of related reserves .............................. $ 21 $ 49
==== ====
Total non-performing loans and real estate
owned as a percent of total assets ................... .14% .16%
==== ====
</TABLE>
<PAGE>
Included in non-performing loans at December 31, 1998 are 4 single-family
residential real estate loans totaling $265,000, one commercial real estate loan
totaling $199,000, 10 installment loans totaling $52,000, three commercial
business loans totaling $101,000 and three commercial business leases totaling
$57,000. The commercial real estate loan is on a retail building that is
currently leased. The Bank has begun foreclosure proceedings on the loan.
The 10 installment loans total $52,000 and consist of various secured and
unsecured consumer loans and credit card loans. The largest loan is for $14,000.
Of the three commercial loans, two were to entities that have declared
bankruptcy; however, one of the loans is SBA guaranteed. The three commercial
business leases were for leased equipment to three different borrowers.
At December 31, 1998, the Bank had an allowance for possible loan losses of $2.3
million or 1.00% of net loans receivable, as compared to an allowance of $2.2
million or 1.02% of net loans receivable at September 30, 1998. The allowance
for possible loan losses equals 317% of non-performing loans at December 31,
1998.
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, 1998 is appropriate.
Real estate owned at December 31, 1998 consists of two single-family residential
properties located in Pittsburgh, Pennsylvania totaling $49,000. The properties
are currently for sale and management believes that the carrying value of the
properties at December 31, 1998 approximates the net realizable value of the
properties. 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, 1998 and 1997
Net Income
Net income for the three months ended December 31, 1998 was $702,000 compared to
$668,000 for the same period in 1997, an increase of $34,000 or 5.2%. The
increase reflects an increase in net interest income of $85,000 or 3.2%, a
decrease in the provision for loan losses of $10,000 or 8.7%, an increase in
other income of $107,000 or 48.8% and an increase in operating expenses of
$226,000 or 12.8%. Additionally, there was a decrease in the provision for
income taxes of $58,000 or 16.2%.
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 2.70% in the three months ended December 31, 1998 from 2.81% in the same
period in 1997. 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,
1998 1997
---- -----
<S> <C> <C>
Average yield on:
Mortgage loans ................................. 8.08% 8.25%
Mortgage-backed securities ..................... 6.06 6.51
Installment loans .............................. 8.34 8.41
Commercial business loans ...................... 9.26 10.59
Interest-earning deposits with other
institutions, investment securities,
and FHLB stock (1) ........................... 6.63 7.02
---- -----
Total interest-earning assets .................. 7.38 7.59
---- -----
Average rates paid on:
Savings deposits ............................... 4.19 4.25
Borrowed funds ................................. 5.74 5.99
---- -----
Total interest-bearing liabilities ............. 4.68 4.78
---- -----
Average interest rate spread ...................... 2.70% 2.81%
==== =====
Net yield on interest-earning assets .............. 2.87% 2.98%
==== =====
</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 $679,000 or 17.0% to $4.7 million for the three
months ended December 31, 1998, compared to the same period in 1997. The
increase is attributable to an increase in the average loan portfolio balance
outstanding during the 1998 period, partially offset by a decrease in the
average yield earned on these assets in the 1998 period, as compared to the same
period in 1997. 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 decreased $427,000 or 20.6% to $1.6
million for the three months ended December 31, 1998, as compared to the same
period in 1997. The decrease is attributable to a decrease in the average
portfolio balance outstanding during the 1998 period, as well as a decrease in
the average yield earned on these assets in the 1998 period, as compared to the
same period in 1997.
Interest on investment securities increased $140,000 or 15.2% to $1.1 million
for the three months ended December 31, 1998, as compared to the same period in
1997. The increase is attributable to an increase in the average balance of
investments securities held during the 1998 period, as compared to the same
period in 1997, partially offset by a decrease in yield.
<PAGE>
Interest Expense
Interest on savings deposits increased $156,000 or 5.9% to $2.8 million for the
three month period ended December 31, 1998, as compared to the same period in
1997. The increase reflects an increase in the average balance of savings
deposits for the 1998 period compared to 1997, partially offset by a decrease in
the average cost of deposits.
Interest on borrowed funds increased $159,000 or 11.5% to $1.5 million for the
three month period ended December 31, 1998, as compared to the same period in
1997. The increase reflects primarily an increase in the Federal Home Loan Bank
("FHLB") advances outstanding during the 1998 period, partially offset by a
decrease in the average cost of borrowing during the 1998 period, as compared to
1997. The Bank continued to rely on these wholesale funding sources in 1998 to
fund growth.
Interest on guaranteed preferred beneficial interest in subordinated debt was
$256,000 for the three month periods ended December 31, 1998 and 1997. The
Company's debentures 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
$85,000 or 3.2% to $2.8 million for the three months ended December 31, 1998, as
compared to the same period in 1997. This increase is attributable to an
increase in net interest earning assets, partially offset by a decrease in the
interest rate spread, from 2.81% for the three month period ended December 31,
1997, to 2.70% for the same period in 1998.
Provision for Loan Losses
The provision for loan losses decreased $10,000 or 8.7% to $105,000 for the
three month period ended December 31, 1998, as compared to the same period in
the prior year. 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 $2.0 million at December 31, 1997 to
$2.3 million at December 31, 1998.
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 $107,000 or 48.8% to $325,000 for
the three months ended December 31, 1998, as compared to the same period in
1997.
<PAGE>
Service fee income, which includes late charges on loans and fees for loans
serviced for others, increased $11,000 or 31.4% to $45,000 for the period ended
December 31, 1998, as compared to the same period in 1997. The results primarily
reflect an increase in late charges on loans.
Gain on the sale of investment and mortgage-backed securities was zero for the
period ended December 31, 1998, as compared to a gain of $9,000 for the same
period in 1997. There were no sales of securities in the fiscal 1998 period.
Sales in the 1997 period 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 $4,000 and $2,000 for the three month periods ended
December 31, 1998 and 1997, respectively. 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 sold to and serviced by SLMA.
Sales to SLMA increased slightly in the period ended December 31, 1998, as
compared to 1997.
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 $103,000 or 59.7% to $276,000 for the three month
period ended December 31, 1998, as compared to the same period in fiscal 1997.
The increase is primarily due to increased non-sufficient funds fees, the
imposition of a surcharge beginning on April 1, 1998 on nonbank customers for
the use of the Bank's automated teller machines and earnings on the cash
surrender value of life insurance policies on certain executive officers. In
addition, in July 1998 the Bank introduced a program to sell non-insured
investment products such as mutual funds and annuities to both Bank and nonbank
customers. Fiscal 1998 results include fees earned on this activity.
Other Expenses
Total operating expenses increased $226,000 or 12.8% to $2.0 million for the
three months ended December 31, 1998, compared to the same period in 1997.
Compensation, payroll taxes and fringe benefits, the largest component of
operating expenses, increased $148,000 or 14.2% to $1.2 million for the three
month period ended December 31, 1998, compared to the same period in 1997.
Factors contributing to the increase were normal salary increases, higher
bonuses awarded in the 1998 period, an increase in the number of employees on
the payroll, and an increase in retirement and health care expenses. The
increase in the number of employees reflects staffing additions for the new
branch office opened in Pittsburgh's Strip District in October 1998, as well as
staffing for the Bank's new brokerage services program.
Office occupancy and equipment expense increased $72,000 or 51.6% to $210,000
for the three months ended December 31, 1998, compared to the same period in
1997. The increase partially reflects costs associated with renovating and
opening the Bank's new Strip District branch in October 1998, which is a leased
facility. Additionally, the increase reflects increased equipment maintenance
costs, a portion of which was incurred dealing with the Year 2000 problem.
<PAGE>
Depreciation and amortization increased $24,000 or 19.3% to $147,000 for the
1998 period as compared to 1997. The increase reflects additional depreciation
on equipment added or updated during the last year, as well as depreciation
incurred on renovations completed at the Bank's data processing and back office
location.
Federal insurance premiums were $38,000 for both the 1998 and 1997 periods.
Net gain on real estate owned was $45,000 in the 1998 period, as compared to a
net loss of $8,000 for the three months ended December 31, 1997. The gain in the
1998 period reflected the sale of a residential building lot obtained in a
foreclosure that had previously been written off due to an inability to get
required building permits from the local municipality. Once the appropriate
permits were issued, the lot was sold. There were no individually significant
transactions included in the 1997 results.
Other operating expenses, which consists of check processing costs, consulting
fees, legal and audit fees, advertising, bank charges and other administrative
expenses, amounted to $445,000 and $410,000 for the three month periods ended
December 31, 1998 and 1997, respectively, an increase of $35,000 or 8.4%.
Significant variations between periods include increases in consulting fees,
telephone expenses, and expenses relating to credit cards issue by the Bank.
Income Taxes
Income taxes decreased $58,000 or 16.2% to $301,000 for the three month period
ended December 31, 1998, compared to the same period in 1997. The decrease in
taxes results from a decrease in taxable income. The decrease in taxable income
is primarily attributable to an increase in tax-exempt investments generating
non-taxable income. The effective tax rate decreased to approximately 30.0% in
1998 from approximately 35.0% in the same period in 1997.
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, 1998, the
Company had Tier 1 capital as a percentage of risk-weighted assets of 15.43% and
total risk-based capital as a percentage of risk-weighted assets of 16.60%.
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 100 to
200 basis points above the minimum. At December 31, 1998, the Company had a
Leverage Ratio of 9.09%.
<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, 1998, the Bank complied with the minimum
leverage ratio having Tier 1 capital of 6.79% 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, 1998, the Bank's total capital to risk-weighted assets ratio calculated
under the FDIC capital requirement was 12.42%.
A reconciliation of Stockholders' Equity for the Bank to Regulatory Capital is
as follows:
Stockholder's equity at December 31, 1998 (1) $28,489,206
Less: Unrealized securities gains 439,332
-----------
Tier 1 Capital at December 31, 1998 28,049,874
Plus: Qualifying loan loss allowance 2,289,557
-----------
Total capital at December 31, 1998 $30,339,431
===========
(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, 1998, the total of approved loan commitments
amounted to $2.8 million. In addition, the Bank had $12.2 million of undisbursed
loan funds at that date. The amount of savings certificates which mature during
the next twelve months totals approximately $117.4 million, a substantial
portion of which management believes, on the basis of prior experience, will
remain in the Bank.
Year 2000
The Year 2000 problem exists because many computer systems use only the last two
digits to refer to a year. This convention could affect date-sensitive
calculations that treat "00" as the year 1900, rather than 2000. An additional
issue is that 1900 was not a leap year, whereas the year 2000 is. Therefore,
some programs may not properly provide for February 29, 2000. This anomaly could
result in miscalculations when processing critical date-sensitive information
after December 31, 1999.
The following discussion of the implications of the Year 2000 problem for the
Company contains numerous forward looking statements based on inherently
uncertain information. The cost of the project and the date on which the Company
plans to complete Year 2000 modifications are based on management's best
estimates, which are derived utilizing a number of assumptions of future events
<PAGE>
including the continued availability of internal and external resources, third
party modifications and other factors. However, there can be no guarantee that
these statements will be achieved and actual results could differ. Moreover,
although management believes it will be able to make the necessary modifications
in advance, there can be no guarantee that failure to modify the systems would
not have a material adverse impact on the Company.
In May 1997 the Company established a Year 2000 Compliance Committee (the
"Committee") and subsequently developed a Year 2000 Compliance Plan (the
"Plan"). The objectives of the Plan and the Committee are to prepare the Company
for the new millennium. The Plan encompasses the following phases: Awareness,
Assessment, Renovation, Validation and Implementation. These phases will enable
the Company to identify risks, develop an action plan, perform adequate testing
and complete affirmation that its processing systems will be Year 2000 ready.
Execution of the Plan is currently on target. The Company is currently in Phases
3 and 4, Renovation and Validation, which involves replacement and/or testing of
changes to hardware and software accompanied by monitoring and testing with
vendors. Concurrently, the Company is also addressing some issues related to the
Implementation Phase. Prioritization of the most critical software applications
and hardware configurations have been addressed, along with contract and service
agreements. A significant portion of the Company's data processing software is
provided by third party vendors. The Company has maintained ongoing contact with
these vendors so that modification of the software for Year 2000 readiness is a
top priority. The Company, in coordination with these vendors, has substantially
completed testing all significant applications, and is expected to complete the
remaining portion of the testing, though there is no assurance, by March 31,
1999. In addition, all significant hardware that required replacement or upgrade
has been purchased or the upgrade completed. Testing of this equipment has been
substantially completed and installation of the equipment is expected to be
completed, though there is no assurance, by March 31, 1999. The Company has
contacted all other material vendors and suppliers regarding their Year 2000
state of readiness. Each of these third parties has delivered written assurance
to the Company that they expect to be Year 2000 compliant prior to the Year
2000. The Company has completed contacting all material customers and
non-information technology suppliers (i.e., utility systems, telephone systems
and security systems) regarding their Year 2000 state of readiness. The
Validation phase is targeted for completion by March 31, 1999. The
Implementation Phase is to certify that systems are Year 2000 ready, along with
assurances that any new systems are compliant on a going-forward basis. The
Implementation Phase is targeted for completion by June 30, 1999.
Monitoring and managing the Year 2000 project will result in additional direct
and indirect costs to the Company. Direct costs include potential charges by
third party software vendors for product enhancements, the replacement of
computer hardware and related equipment that was not Year 2000 ready with
equipment that is, costs involved in testing software and hardware products for
Year 2000 compliance, and any resulting costs for developing and implementing
contingency plans for critical software and hardware products which are not
enhanced. Indirect costs will principally consist of the time devoted by
existing employees in managing vendor progress, testing enhanced software and
hardware products and implementing any necessary contingency plans. Total direct
costs are estimated not to exceed $500,000, but are not expected to be material
to the Company's results of operations in any one quarter or fiscal year. This
estimate includes the cost, and resulting depreciation, of accelerating the
replacement of computer equipment that is currently fully depreciated, or would
have been by the Year 2000, and that would have been replaced in the ordinary
course of business over the next two years. Year 2000 remediation costs are not
<PAGE>
expected to have a material adverse impact on the long-term results of
operations, liquidity or consolidated financial position of the Company. The
company does not separately track the internal costs incurred for the Year 2000
project; such costs are principally the related payroll costs for its
information systems group and other employees involved in the project.
The Company is developing remediation contingency plans and business resumption
plans specific to the Year 2000. Remediation contingency plans address the
actions to be taken if the current approach to remediating a system is falling
behind schedule or otherwise appears to be in jeopardy of failing to deliver a
year 2000 ready system when needed. Business resumption contingency plans
address the actions that would be taken if critical business functions cannot be
carried out in the normal manner upon entering the next century due to system or
supplier failure.
Despite the best efforts of management to address this issue, the vast number of
external entities that have direct and indirect business relationships with the
Company, such as customers, vendors, payment system providers and other
financial institutions makes it impossible to assure that failure to achieve
compliance by one or more of these entities would not have material adverse
impact on the operations of the Company.
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 from the
information presented as of September 30, 1998 (in the Company's Form
10-K) to December 31, 1998.
<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.
FIDELITY BANCORP, INC.
Date: February 11, 1999 By: /s/ William L. Windisch
--------------
William L. Windisch
President and Chief Executive
Officer
Date: February 11, 1999 By: /s/ Richard G. Spencer
--------------
Richard G. Spencer
Vice President and Chief
Financial Officer
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