EXHIBIT 13
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CORPORATE PROFILE AND FINANCIAL HIGHLIGHTS
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Corporate Profile
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Fidelity Bancorp, Inc. (the Company) is a bank holding company organized
underthe Pennsylvania Business Corporation Law. It was organized to operate
principally as a holding company for its wholly owned subsidiary, Fidelity
Bank (the Bank). The Bank is a Pennsylvania-chartered, FDIC-insured stock
savings bank conducting business through ten offices located in Allegheny
and Butler counties.
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<CAPTION>
Financial Highlights
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At or For the
Fiscal Years Ended September 30,
(in thousands, except per share data and percentages) 2000 1999
-------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Total assets $543,209 $482,543
Total savings and time deposits 290,631 269,118
Total loans receivable, net 337,438 275,958
Total stockholders' equity 29,587 26,046
-----------------------------------
Net interest income $12,545 $11,746
Provision for loan losses 470 520
Net income 4,132 3,379
-----------------------------------
Diluted earnings per share1 $1.95 $1.53
Book value per share1 14.12 12.24
Average interest rate spread 2.64% 2.73%
Return on average assets 80% 74%
Return on average stockholders' equity 15.70% 11.98%
-----------------------------------
Common shares outstanding1 2,095,104 2,127,739
===================================================================================================================
</TABLE>
1 Per share amounts and common shares outstanding were restated to reflect
the 10% stock dividend paid on November 28, 2000.
-----------Fidelity Bancorp, Inc. and Subsidiaries / Annual Report 2000 1
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SELECTED FINANCIAL DATA
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FINANCIAL CONDITION DATA
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September 30,
(in thousands) 2000 1999 1998 1997 1996
-------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Total assets $543,209 $482,543 $406,044 $380,964 $317,874
Loans, net 337,438 275,958 218,892 182,869 151,263
Mortgage-backed securities1 84,050 96,250 102,870 127,916 93,738
Investment securities and
other earning assets2 95,834 90,521 69,878 58,242 59,302
Savings and time deposits 290,631 269,118 261,735 244,192 234,276
Advances from FHLB
and other borrowings 218,511 183,891 112,320 108,133 57,143
Stockholders' equity
-substantially restricted 29,587 26,046 29,021 25,881 21,778
Number of full service offices 10 9 8 8 8
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</TABLE>
<TABLE>
<CAPTION>
OPERATIONS DATA
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Fiscal Years Ended September 30,
2000 1999 1998 1997 1996
-------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Interest income $36,477 $30,975 $28,047 $23,963 $20,986
Interest expense 23,932 19,229 17,364 13,882 11,832
---------------------------------------------------------------
Net interest income 12,545 11,746 10,683 10,081 9,154
Provision for loan losses 470 520 405 500 270
---------------------------------------------------------------
Net interest income after
provision for loan losses 12,075 11,226 10,278 9,581 8,884
Gain (loss) on sale of investments and
mortgage-backed securities, net (3) 64 84 53 27
Gain on sale of loans 210 17 11 28 17
Service fees and other income 1,667 1,442 1,071 801 688
Operating expenses 8,333 8,153 7,315 6,488 8,073 3
---------------------------------------------------------------
Income before income tax provision 5,616 4,596 4,129 3,975 1,543
Income tax provision 1,484 1,217 1,204 1,256 226
---------------------------------------------------------------
Net income $4,132 $3,379 $2,925 $2,719 $ 1,317 3
---------------------------------------------------------------
Diluted earnings per share4 $1.95 $1.53 $1.31 $1.25 $ .61 3
Cash dividends per share4 $.364 $.345 $.295 $.236 $ .197
===================================================================================================================
</TABLE>
1 Consists of mortgage-backed securities classified as investments
held-to-maturity and available-for-sale.
2 Consists of interest-bearing deposits, investment securities classified as
investments held-to-maturity and available-for-sale, and Federal Home Loan
Bank stock.
3 Fiscal 1996 operating results include the effect of a one-time pre-tax
payment to recapitalize the Savings Association Insurance Fund of$1.5
million. Exclusive of the special assessment, net income would have been
$2,189, operating expenses would have been $6,536, and diluted earnings per
share would have been $1.02 per share.
4 Per share amounts were restated to reflect the 25% stock split paid in
March 1998 and the 10% stock dividend paid in November 2000,May 1997 and
May 1996.
-----------Fidelity Bancorp, Inc. and Subsidiaries / Annual Report 2000 5
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Independent Auditors' Report
----------------------------
The Board of Directors and Stockholders
Fidelity Bancorp, Inc. and Subsidiaries:
We have audited the accompanying consolidated statements of financial condition
of Fidelity Bancorp, Inc. and subsidiaries as of September 30, 2000 and 1999,
and the related consolidated statements of income, stockholders' equity, and
cash flows for each of the years in the three-year period ended September 30,
2000. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards
generally accepted in the United States of America. Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects,the financial position of Fidelity Bancorp,
Inc. and subsidiaries as of September 30, 2000 and 1999, and the results of
their operations an d their cash flows for each of the years in the three-year
period ended September 30, 2000, in conformity with accounting principles
generally accepted in the United States of America.
/s/ KPMG
Pittsburgh, Pennsylvania
October 20, 2000
6 Fidelity Bancorp, Inc. and Subsidiaries / Annual Report 2000--------
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<CAPTION>
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Consolidated Statements of Financial Condition
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September 30,
(in thousands, except per share data) 2000 1999
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Assets
<S> <C> <C>
Cash and amounts due from depository institutions $7,119 $4,304
Interest-earning demand deposits with other institutions 1,072 364
Investment securities held-to-maturity (market value of $9,930 and $3,509)
(Notes 2, 11, 12, 14 and 21) 9,936 3,625
Investment securities available-for-sale
(cost of $77,154 and $81,446) (Notes 3, 12, 14 and 21) 74,062 77,737
Mortgage-backed securities held-to maturity
(market value of $12,305 and $13,288) (Notes 4, 12, 14 and 21) 12,449 13,400
Mortgage-backed securities available-for-sale (cost of $73,638 and $85,296)
(Notes 5, 12, 14 and 21) 71,601 82,850
Loans receivable, net of the allowance of $2,910 and $2,477
(Notes 6, 8, 9, 12 and 21) 337,438 275,958
Real estate owned, net 181 107
Federal Home Loan Bank stock, at cost (Notes 9 and 12) 10,764 8,795
Accrued interest receivable:
Loans 1,605 1,271
Mortgage-backed securities 502 552
Investments and interest-earning deposits 1,036 1,063
Office premises and equipment, net (Note 10) 5,576 4,700
Goodwill and other intangible assets (Note 24) 1,710 --
Deferred tax assets (Note 16) 3,444 3,155
Prepaid income taxes (Note 16) 35 --
Prepaid expenses and sundry assets 4,679 4,662
----------------------------------
$543,209 $482,543
==================================================================================================================
Liabilities and Stockholders' Equity
Liabilities:
Savings and time deposits (Notes 11 and 21) $290,631 $269,118
Federal Home Loan Bank advances (Notes 12 and 21) 202,885 170,600
Other borrowings 396 --
Guaranteed preferred beneficial interest in Company's debentures (Note 13) 10,250 10,250
Reverse repurchase agreements (Notes 14 and 21) 4,980 3,041
Advance payments by borrowers for taxes and insurance 1,427 1,298
Accrued interest payable 2,050 1,153
Accrued income taxes (Note 16) -- 199
Other accrued expenses and sundry liabilities 1,003 838
----------------------------------
513,622 456,497
----------------------------------
Stockholders' Equity (Notes 1, 16, 17, 18 and 25):
Common stock, $0.01 par value per share;
10,000,000 shares authorized; 2,212,336 and
2,188,871 shares issued 22 20
Treasury stock, at cost - 117,232 and 61,132 shares (1,680) (953)
Additional paid-in capital 14,524 14,305
Retained earnings-- substantially restricted 20,106 16,736
Accumulated other comprehensive income (loss), net of tax (3,385) (4,062)
----------------------------------
29,587 26,046
----------------------------------
$543,209 $482,543
==================================================================================================================
</TABLE>
See Accompanying Notes to Consolidated Financial Statements.
-----------Fidelity Bancorp, Inc. and Subsidiaries / Annual Report 2000 7
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<CAPTION>
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Consolidated Statements of Income
---------------------------------
For the fiscal years ended September 30, 2000, 1999 and 1998
(in thousands, except per share data) 2000 1999 1998
-------------------------------------------------------------------------------------------------------------------
Interest income:
<S> <C> <C> <C>
Loans $24,241 $19,410 $16,597
Mortgage-backed securities 6,078 6,738 7,597
Investment securities 6,114 4,796 3,779
Deposits with other institutions 44 31 74
-----------------------------------------
Total interest income 36,477 30,975 28,047
-----------------------------------------
Interest expense:
Savings and time deposits (Note 11) 10,949 10,545 10,940
Borrowed funds 11,959 7,660 5,400
Guaranteed preferred beneficial interest
in Company's debentures (Note 13) 1,024 1,024 1,024
-----------------------------------------
Total interest expense 23,932 19,229 17,364
-----------------------------------------
Net interest income before provision for loan losses 12,545 11,746 10,683
Provision for loan losses (Note 8) 470 520 405
-----------------------------------------
Net interest income after provision for loan losses 12,075 11,226 10,278
-----------------------------------------
Other income:
Loan service charges and fees 211 161 130
Gain (loss) on sale of investment and
mortgage-backed securities, net (3) 64 84
Gain on sale of loans 210 17 11
Deposit service charges and fees 643 566 413
Other operating income 813 715 528
-----------------------------------------
Total other income 1,874 1,523 1,166
-----------------------------------------
Operating expenses:
Compensation, payroll taxes and fringe benefits (Notes 18 and 19) 4,943 4,805 4,291
Office occupancy and equipment expense 748 811 669
Depreciation and amortization 587 582 516
Federal insurance premiums 85 156 155
(Gain) loss on real estate owned, net 32 (36) 12
Intangible amortization 21 -- --
Other operating expenses 1,917 1,835 1,672
-----------------------------------------
Total operating expenses 8,333 8,153 7,315
-----------------------------------------
Income before income tax provision 5,616 4,596 4,129
Income tax provision (Note 16) 1,484 1,217 1,204
-----------------------------------------
Net income $4,132 $3,379 $2,925
=========================================
Basic earnings per share (Note 1) $1.97 $1.56 $1.35
Diluted earnings per share (Note 1) $1.95 $1.53 $1.31
==================================================================================================================
</TABLE>
See Accompanying Notes to Consolidated Financial Statements.
8 Fidelity Bancorp, Inc. and Subsidiaries / Annual Report 2000---------
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<CAPTION>
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CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
-----------------------------------------------
For the fiscal years ended September 30, 2000, 1999 and 1998
Accumulated
Other Total
Additional Comprehensive Stock-
Common Paid-In Treasury Retained Income (Loss) holders'
(in thousands) Stock Capital Stock Earnings Net of Tax Equity
-------------- ----- ------- ----- -------- ---------- ------
<S> <C> <C> <C> <C> <C> <C>
Balance at September 30, 1997 $15 $13,811 $-- $11,822 $233 $25,881
Comprehensive income:
Net income -- -- -- 2,925 -- 2,925
Other comprehensive income,
net of tax of $227 -- -- -- -- 494 494
----------------------------------------------------------------------------------------------------------------------
Total comprehensive income -- -- -- 2,925 494 3,419
Stock options exercised, including
tax benefit of $71 (Note 18) 1 251 -- -- -- 252
Stock split paid (Note 1) 4 (4) -- -- -- --
Cash dividends paid -- -- -- (641) -- (641)
Sale of stock through Dividend
Reinvestment Plan -- 110 -- -- -- 110
======================================================================================================================
Balance at September 30, 1998 20 14,168 -- 14,106 727 29,021
Comprehensive income:
Net income -- -- -- 3,379 -- 3,379
Other comprehensive loss,
net of tax of ($2,410) -- -- -- -- (4,740) (4,740)
Reclassification adjustment,
net of tax of ($25) -- -- -- -- (49) (49)
----------------------------------------------------------------------------------------------------------------------
Total comprehensive income (loss): -- -- -- 3,379 (4,789) (1,410)
Stock options exercised -- 39 -- -- -- 39
Cash dividends paid -- -- -- (749) -- (749)
Treasury stock purchased
(61,132 shares) -- -- (953) -- -- (953)
Sale of stock through Dividend
Reinvestment Plan -- 98 -- -- -- 98
======================================================================================================================
Balance at September 30, 1999 20 14,305 (953) 16,736 (4,062) 26,046
Comprehensive income:
Net income -- -- -- 4,132 -- 4,132
Other comprehensive income,
net of tax of $346 -- -- -- -- 671 671
Reclassification adjustment,
net of tax of $2 -- -- -- -- 6 6
----------------------------------------------------------------------------------------------------------------------
Total comprehensive income: -- -- -- 4,132 677 4,809
Stock dividend paid (Note 1) 2 (2) -- -- -- --
Stock options exercised -- 149 -- -- -- 149
Cash dividends paid -- -- -- (762) -- (762)
Treasury stock purchased
(56,100 shares) -- -- (727) -- -- (727)
Sale of stock through Dividend
Reinvestment Plan -- 72 -- -- -- 72
======================================================================================================================
Balance at September 30, 2000 $22 $14,524 $(1,680) $20,106 $(3,385) $29,587
======================================================================================================================
</TABLE>
See Accompanying Notes to Consolidated Financial Statements.
-----------Fidelity Bancorp, Inc. and Subsidiaries / Annual Report 2000 9
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Consolidated Statements of Cash Flows
-------------------------------------
For the fiscal years ended September 30, 2000, 1999 and 1998
(in thousands) 2000 1999 1998
-----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating Activities:
Net income $ 4,132 $ 3,379 $ 2,925
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 470 520 405
(Gain) loss on real estate owned 32 (36) 12
Depreciation of premises and equipment 587 582 516
Deferred loan fee amortization (178) (260) (175)
Amortization of investment and mortgage-backed
securities discounts/premiums, net 147 341 397
Deferred income tax provision 492 21 75
Amortization of intangibles 21 -- --
Net gain on sale of investments (7) (191) (209)
Net loss on sale of mortgage-backed securities 10 127 125
Loans held-for-sale originated (1,221) (973) (372)
Sale of loans held-for-sale 1,230 978 374
Net gain on sale of loans (210) (17) (11)
Increase in interest receivable (257) (313) (158)
Increase in interest payable 897 422 42
Increase (decrease) in accrued taxes (234) 28 (47)
Tax benefit relating to stock benefit plan -- -- 71
Other changes-- net (962) 572 (3,178)
---------------------------------
Net cash provided by operating activities 4,949 5,180 792
---------------------------------
Investing Activities:
Proceeds from sales of investments available-for-sale 12,350 3,424 17,345
Proceeds from sales of mortgage-backed securities available-for-sale 1,353 8,577 43,760
Proceeds from maturities and principal repayments
of investment securities available-for-sale 4,202 12,508 5,255
Proceeds from maturities and principal repayments
of mortgage-backed securities available-for-sale 11,062 26,963 19,812
Purchases of investment securities available-for-sale (9,350) (40,400) (35,168)
Purchases of mortgage-backed securities available-for-sale -- (38,532) (52,578)
Proceeds from maturities and principal repayments
of investment securities held-to-maturity -- 5,000 14,921
Purchases of investment securities held-to-maturity (6,302) (2,004) (12,997)
Proceeds from maturities and principal repayments
of mortgage-backed securities held-to-maturity 2,884 6,436 13,987
Purchases of mortgage-backed securities held-to-maturity (1,974) -- --
Net increase in loans (34,909) (58,701) (37,327)
Sale of other loans 3,063 1,266 709
Additions to office premises and equipment (413) (1,845) (512)
Net purchases of FHLB stock (1,969) (3,745) (165)
Acquisition of Pennwood Bancorp, Inc., net (5,411) -- --
Sale of loans obtained in Pennwood acquisition 16,274 -- --
Sale of branches and deposits (14,639) -- --
---------------------------------
Net cash used by investing activities $(23,779) $(81,053) $(22,958)
---------------------------------
(continued)
</TABLE>
10 Fidelity Bancorp, Inc. and Subsidiaries / Annual Report 2000---------
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<CAPTION>
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CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
-------------------------------------------------
For the fiscal years ended September 30, 2000, 1999 and 1998
(in thousands) 2000 1999 1998
-------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Financing Activities:
Net increase in savings and time deposits $7,001 $7,383 $17,543
Increase in reverse repurchase agreements and other borrowings 2,335 1,171 687
Net increase in FHLB advances 14,285 70,400 3,500
Cash dividends paid (762) (749) (641)
Stock options exercised 149 39 181
Proceeds from sale of stock 72 98 110
Acquisition of treasury stock (727) (953) --
Debt issuance costs -- -- (36)
-----------------------------------------
Net cash provided by financing activities 22,353 77,389 21,344
-----------------------------------------
Increase (decrease) in cash and cash equivalents 3,523 1,516 (822)
Cash and cash equivalents at beginning of year 4,668 3,152 3,974
-----------------------------------------
Cash and cash equivalents at end of year $8,191 $4,668 $3,152
====================================================================================================================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
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For the fiscal years ended September 30, 2000, 1999 and 1998
(in thousands) 2000 1999 1998
-------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash paid during the year for:
Interest on deposits and other borrowings $ 23,035 $18,807 $17,322
Income taxes 1,563 1,210 1,225
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCIAL ACTIVIITES
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Transfer of loans to real estate owned $ 330 $ 134 $ 21
====================================================================================================================
The Company purchased all of the common stock
of Pennwood Bancorp, Inc. for $7.3 million
In conjunction with the acquisition, the assets acquired
and liabilities assumed were as follows:
Fair value of assets acquired $ 56,049 $ -- $ --
Fair value of liabilities assumed (50,501) -- --
Cash paid for Pennwood Bancorp, Inc. stock (7,278) -- --
-----------------------------------------
Excess liabilities assumed over assets acquired $ (1,730) $ -- $ --
====================================================================================================================
The Company sold the two branch offices, and the related
deposits, of Pennwood Savings Bank located in
Kittanning, Pennsylvania. In conjunction with the sale:
Assets sold $ 769 $ -- $ --
Deposits and liabilities sold $ 17,611 $ -- $ --
====================================================================================================================
</TABLE>
See Accompanying Notes to Consolidated Financial Statements.
-----------Fidelity Bancorp, Inc. and Subsidiaries / Annual Report 2000 11
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
(1) Summary of Significant Accounting Policies
Nature of Operations and Use of Estimates
Fidelity Bancorp, Inc. is a bank holding company organized under the
Pennsylvania Business Corporation Law. It operates principally as a holding
company for its wholly-owned subsidiaries, Fidelity Bank, PaSB, a
Pennsylvania-chartered, FDIC-insured state savings bank and FBCapital Trust, a
statutory business trust incorporated in Delaware. The Bank conducts business
through ten offices in Allegheny and Butler counties.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of certain assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of related revenue and expense during the reporting period.
Actual results could differ from those estimates.
Consolidation
The consolidated financial statements include the accounts of Fidelity Bancorp,
Inc. (the Company) and its wholly-owned subsidiaries Fidelity Bank, PaSB (the
Bank) and FB Capital Trust (the Trust). Intercompany balances and transactions
have been eliminated in consolidation.
Cash and Cash Equivalents
Cash and cash equivalents include cash and amounts due from depository
institutions and the demand deposits portion of interest-earning deposits with
other institutions.
Investment and Mortgage-backed Securities
The Company classifies investment securities as either: (1) Securities
Held-to-Maturity -- debt securities that the Company has the positive intent and
ability to hold to maturity and which are reported at amortized cost; (2)
Trading Securities -- debt and equity securities bought and held principally for
the purpose of selling them in the near term and which are reported at fair
value, with unrealized gains and losses included in the current period earnings;
or (3) Securities Available-for-Sale -- debt and equity securities not
classified as either Securities Held-to-Maturity or Trading Securities and which
are reported at fair value, with unrealized gains and losses, net of taxes,
included as a separate component of accumulated other comprehensive income. The
cost of securities sold is determined on a specific identification basis.
Loans
Loans receivable are stated at unpaid principal balances net of the allowance
for loan losses, net deferred loan fees and discounts. Loans are considered
impaired when, based on current information and events, it is probable that all
principal and interest will not be collected in accordance with the contractual
terms of the loans. Management determines the impairment of loans based on
knowledge of the borrower's ability to repay the loan according to the
contractual agreement, the borrower's repayment history and the fair value of
collateral for certain collateral dependent loans. Management
(Note continued)
12 Fidelity Bancorp, Inc. and Subsidiaries / Annual Report 2000---------
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
------------------------------------------------------
does not consider an insignificant delay or insignificant shortfall to impair a
loan. Management has determined that a delay less than 90 days will be
considered an insignificant delay and that an amount less than $5,000 will be
considered an insignificant shortfall. The Bank identifies and evaluates
impaired loans on a loan by loan basis. All loans are charged off when
management determines that principal and interest are not collectible. Any
excess of the Bank's recorded investment in impaired loans over the measured
value of the loans are provided for in the allowance for loan losses. The Bank
considers all one-to-four family residential mortgage loans and all installment
loans (as presented in Note 6) to be smaller homogeneous loans, which are
evaluated collectively for impairment. The Bank reviews its loans for impairment
on a quarterly basis.
The accrual of interest on all loans is discontinued when, in management's
opinion, the borrower may be unable to meet payments as they become due or when
the loan becomes 90 days past due, whichever occurs first. When interest accrual
is discontinued, all unpaid accrued interest is reversed. Such interest
ultimately collected is credited to income in the period of recovery or applied
to reduce principal if there is sufficient doubt about the collectibility of
principal.
The Bank is a party to financial instruments with off-balance sheet risk
(commitments to extend credit) in the normal course of business to meet the
financing needs of its customers. Commitments to extend credit are agreements to
lend to a customer as long as there is no violation of any condition established
in the commitment. Commitments generally have fixed expiration dates or other
termination clauses and may require payment of a fee. Since some of the
commitments are expected to expire without being drawn upon, the total
commitment amount does not necessarily represent future cash requirements. The
Bank evaluates each customer's credit worthiness on a case-by-case basis using
the same credit policies in making commitments and conditional obligations as it
does for on-balance sheet instruments. The amount of collateral obtained, if
deemed necessary by the Bank upon extension of credit, is based on management's
credit evaluation of the counter-party.
Real Estate Owned
Real estate owned consists of properties acquired through foreclosure and are
recorded at the lower of cost (principal balance of the former mortgage loan
plus costs of obtaining title and possession) or fair value less estimated cost
to sell. Costs relating to development and improvement of the property are
capitalized, whereas costs of holding such real estate are expensed as incurred.
Additional write-downs are charged to income, and the carrying value of the
property reduced, when the carrying value exceeds fair value less estimated cost
to sell.
Provisions for Losses
Provisions for estimated losses on loans and real estate owned are charged to
earnings in an amount that results in an allowance appropriate, in management's
judgment, to cover probable losses based on management's evaluation of portfolio
risk, past and expected loss experience and economic conditions.
Office Premises and Equipment
Office premises and equipment are stated at cost less accumulated depreciation
and amortization. Depreciation is calculated on a straight-line basis over the
estimated useful lives of the related assets.
Amortization of leasehold improvements is computed using the straight-line
method over the term of the related lease.
Intangible Assets
Intangible assets arising from purchase business combinations are amortized to
expense over the periods estimated to be benefitted, which is, on a weighted
average basis, 15 years.
(Note continued)
-----------Fidelity Bancorp, Inc. and Subsidiaries / Annual Report 2000 13
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
------------------------------------------------------
(dollar amounts in thousands, except per share data)
Interest on Savings and Other Deposits
Interest on savings deposits and certain deposits by borrowers for taxes and
insurance is accrued monthly. Such interest is paid or credited in accordance
with the terms of the respective accounts.
Income Taxes
The Company accounts for income taxes by use of the asset and liability method.
Under the asset and liability method, deferred tax assets and liabilities are
recognized for the future tax consequences attributable to differences between
the financial carrying amounts of existing assets and liabilities and their
respective tax bases and operating loss and tax credit carryforwards. Deferred
tax assets and liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which those temporary differences are
expected to be recovered or settled. The effect on deferred tax assets and
liabilities of a change in the tax rates is recognized in income in the period
that includes the enacted date.
Earnings per Share
Basic earnings per share (EPS) is computed by dividing income available to
common stockholders by the weighted average number of common shares outstanding
for the period. Diluted EPS reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or converted
into common stock or resulted in the issuance of common stock that then shared
in the earnings of the Company. All weighted average share and per share amounts
reflect the 10% stock dividend paid on November 28, 2000, and the 25% stock
split paid on March 31, 1998. The following table sets forth the computation of
basic and diluted earnings per share:
<TABLE>
<CAPTION>
September 30,
2000 1999 1998
---------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Basic earnings per share:
Net income $4,132 $3,379 $2,925
Weighted average shares outstanding 2,095,631 2,165,847 2,159,117
Earnings per share $1.97 $1.56 $1.35
Diluted earnings per share:
Net income $4,132 $3,379 $2,925
Weighted average shares outstanding 2,095,631 2,165,847 2,159,117
Dilutive effect of employee stock options 27,060 48,672 72,919
Total diluted weighted average shares outstanding 2,122,691 2,214,519 2,232,036
Earnings per share $1.95 $1.53 $1.31
---------------------------------------------------------------------------------------------
</TABLE>
Options to purchase 100,623 shares of common stock at prices from $13.22 to
$21.09, 78,742 shares at prices from $15.68 to $21.09, and 79,543 shares at
prices from $13.22 to $21.09 were outstanding during 2000, 1999 and 1998,
respectively, but were not included in the computation of diluted EPS because to
do so would have been anti-dilutive.
(Note continued)
14 Fidelity Bancorp, Inc. and Subsidiaries / Annual Report 2000---------
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
------------------------------------------------------
(dollar amounts in thousands, except per share data)
Comprehensive Income
The Company reports comprehensive income in accordance with 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 a 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 fiscal years ended
September 30, 2000, 1999 and 1998, the Company's total comprehensive income
(loss) was $4,809, $(1,410) and $3,419, respectively. Total comprehensive income
is comprised of net income of $4,132, $3,379 and $2,925, respectively, and other
comprehensive income (loss) of $677, $(4,789) and $494, net of tax,
respectively. Other comprehensive income consists of unrealized gains and losses
on investment securities and mortgage-backed securities available-for-sale.
(2) Investment Securities Held-to-Maturity
Investment securities held-to-maturity at September 30, 2000 and 1999 are as
follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Market
At September 30, 2000 Cost Gains Losses Value
--------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. government and agency obligations:
Due beyond one year, but within five years $ 958 $ 7 $ -- $ 965
Due beyond five years, but within ten years 2,000 -- (142) 1,858
Municipal obligations:
Due beyond ten years 5,347 78 -- 5,425
Corporate obligations:
Due beyond one year, but within five years 500 15 -- 515
Due beyond five years, but within ten years 1,131 36 -- 1,167
-------------------------------------------
$9,936 $136 $(142) $9,930
==================================================================================================
</TABLE>
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Market
At September 30, 1999 Cost Gains Losses Value
--------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. government and agency obligations:
Due beyond ten years $2,000 $ -- $ (119) $1,881
Municipal obligations:
Due beyond ten years 1,625 3 -- 1,628
-------------------------------------------
$3,625 $ 3 $ (119) $3,509
==================================================================================================
</TABLE>
At September 30, 2000, the Bank had outstanding commitments to purchase $704 of
investment securities held-to-maturity. Non-taxable interest income was $295,
$91, and $91 in fiscal 2000, 1999 and 1998, respectively. There were no sales of
investment securities held-to-maturity in 2000, 1999 or 1998.
---------Fidelity Bancorp, Inc. and Subsidiaries / Annual Report 2000 15
<PAGE>
================================================================================
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
------------------------------------------------------
(dollar amounts in thousands, except per share data)
(3) Investment Securities Available-for-Sale
Investment securities available-for-sale at September 30, 2000 and 1999 are as
follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Market
At September 30, 2000 Cost Gains Losses Value
------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. government and agency obligations:
Due beyond one year, but within five years $ 1,998 $ 10 $ (4) $ 2,004
Due beyond five years, but within ten years 11,872 9 (281) 11,600
Due beyond ten years 9,719 -- (854) 8,865
Asset-backed securities:
Due beyond five years, but within ten years 1,965 31 -- 1,996
Due beyond ten years 3,329 153 -- 3,482
Municipal obligations:
Due beyond five years, but within ten years 1,387 -- (32) 1,355
Due beyond ten years 36,644 131 (1,956) 34,819
Corporate obligations:
Due beyond one year, but within five years 4,453 27 (44) 4,436
Equity securities 1,304 96 (202) 1,198
Mutual funds 2,063 23 (71) 2,015
Trust preferred securities:
Due beyond ten years 1,250 5 (111) 1,144
Federal Home Loan Mortgage Corp.
Preferred Stock 920 5 (24) 901
Federal National Mortgage Assoc
Preferred Stock 250 -- (3) 247
---------------------------------------------
$ 77,154 $ 490 $(3,582) $74,062
=================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Market
At September 30, 1999 Cost Gains Losses Value
------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. government and agency obligations:
Due within one year $ 1,500 $ 2 $ -- $ 1,502
Due beyond one year, but within five years 4,499 -- (16) 4,483
Due beyond five years, but within ten years 12,436 -- (376) 12,060
Due beyond ten years 8,986 -- (718) 8,268
Asset-backed securities:
Due beyond ten years 5,263 108 -- 5,371
Municipal obligations:
Due beyond five years, but within ten years 1,388 -- (48) 1,340
Due beyond ten years 40,624 88 (2,489) 38,223
Corporate obligations:
Due within one year 494 6 -- 500
Due beyond one year, but within five years 1,480 -- (11) 1,469
Equity securities 1,580 -- (169) 1,411
Mutual funds 1,945 14 (64) 1,895
Trust preferred securities:
Due beyond ten years 750 -- (49) 701
Federal Home Loan Mortgage Corp.
Preferred Stock 501 13 -- 514
-----------------------------------------------
$81,446 $ 231 $(3,940) $77,737
==================================================================================================================
</TABLE>
At September 30, 2000, the Bank had no outstanding commitments to purchase
investment securities available-for-sale. Non-taxable interest income was
$1,781, $1,770 and $1,138 in fiscal 2000, 1999 and 1998, respectively. Proceeds
from sales of investment securities available-for-sale were $12.3 million, $3.4
million and $17.3 million in 2000, 1999 and 1998, respectively. Gross gains of
$154, $191, and $218 and gross losses of $147, $0, and $9 were realized on these
sales in 2000, 1999 and 1998, respectively.
16 Fidelity Bancorp, Inc. and Subsidiaries / Annual Report 2000-----------
<PAGE>
================================================================================
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
------------------------------------------------------
(dollar amounts in thousands, except per share data)
(4) Mortgage-Backed Securities Held-to-Maturity
Mortgage-backed securities held-to-maturity were comprised of the following:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Market
At September 30, 2000 Cost Gains Losses Value
------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Government National Mortgage Association:
Contractually due beyond one year, but within five years $ 10 $ -- $ -- $ 10
Federal Home Loan Mortgage Corporation:
Contractually due within one year 32 -- -- 32
Contractually due beyond one year, but within five years 66 -- -- 66
Contractually due beyond five years, but within ten years 4,505 7 (52) 4,460
Contractually due beyond ten years 1,968 3 (42) 1,929
Federal National Mortgage Association:
Contractually due beyond one year, but within five years 1,029 -- (18) 1,011
Contractually due beyond five years, but within ten years 743 1 (3) 741
Contractually due beyond ten years 2,395 6 (26) 2,375
Collateralized Mortgage Obligations:
Contractually due beyond ten years 1,701 -- (20) 1,681
---------------------------------------------
$12,449 $ 17 $ (161) $12,305
==================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Market
At September 30, 1999 Cost Gains Losses Value
------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Government National Mortgage Association:
Contractually due beyond one year, but within five years $ 19 $ -- $ -- $ 19
Federal Home Loan Mortgage Corporation:
Contractually due beyond one year, but within five years 148 -- -- 148
Contractually due beyond five years, but within ten years 5,730 40 (54) 5,716
Contractually due beyond ten years 2,226 4 (52) 2,178
Federal National Mortgage Association:
Contractually due beyond one year, but within five years 1,505 -- (28) 1,477
Contractually due beyond five years, but within ten years 73 3 -- 76
Contractually due beyond ten years 3,692 12 (38) 3,666
Collateralized Mortgage Obligations:
Contractually due within one year 7 1 -- 8
----------------------------------------------
$ 13,400 $ 60 $ (172) $13,288
==================================================================================================================
</TABLE>
At September 30, 2000, the Bank had no outstanding commitments to purchase
mortgage-backed securities held-to-maturity. There were no sales of
mortgage-backed securities classified as held-to-maturity during 2000, 1999, or
1998.
---------Fidelity Bancorp, Inc. and Subsidiaries / Annual Report 2000 17
<PAGE>
================================================================================
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
------------------------------------------------------
(dollar amounts in thousands, except per share data)
(5) Mortgage-Backed Securities Available-For-Sale
Mortgage-backed securities available-for-sale are as follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Market
At September 30, 2000 Cost Gains Losses Value
------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Government National Mortgage Association:
Contractually due beyond ten years $20,438 $ -- $ (498) $19,940
Federal Home Loan Mortgage Corporation:
Contractually due beyond ten years 5,813 -- (157) 5,656
Federal National Mortgage Association:
Contractually due beyond one year, but within five years 2,185 -- (65) 2,120
Contractually due beyond ten years 11,178 -- (463) 10,715
Collateralized Mortgage Obligations:
Contractually due beyond five years, but within ten years 2,643 8 (73) 2,578
Contractually due beyond ten years 31,381 81 (870) 30,592
------------------------------------------------
$73,638 $ 89 $(2,126) $71,601
===================================================================================================================
</TABLE>
Mortgage-backed securities available-for-sale are as follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Market
At September 30, 1999 Cost Gains Losses Value
--------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Government National Mortgage Association:
Contractually due beyond ten years $ 23,016 $ -- $ (605) $ 22,411
Federal Home Loan Mortgage Corporation:
Contractually due beyond ten years 6,601 -- (182) 6,419
Federal National Mortgage Association:
Contractually due beyond one year, but within five years 3,144 -- (72) 3,072
Contractually due beyond ten years 12,722 -- (550) 12,172
Collateralized Mortgage Obligations:
Contractually due beyond five years, but within ten years 3,116 1 (48) 3,069
Contractually due beyond ten years 36,697 79 (1,069) 35,707
-------------------------------------------------
$ 85,296 $ 80 $ (2,526) $ 82,850
====================================================================================================================
</TABLE>
At September 30, 2000, the Bank had no outstanding commitments to purchase
mortgage-backed securities available-for-sale. Proceeds from sales of
mortgage-backed securities available-for-sale during 2000, 1999 and 1998
were$1.4 million, $8.6 million and $43.8 million, respectively. Gross gains of
$0, $0, and $160, and gross losses of $10, $127, and $285 were realized on these
sales in 2000, 1999 and 1998, respectively.
18 Fidelity Bancorp, Inc. and Subsidiaries / Annual Report 2000-----------
<PAGE>
================================================================================
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
------------------------------------------------------
(dollar amounts in thousands, except per share data)
(6) Loans Receivable
Loans receivable, net are summarized as follows:
September 30,
2000 1999
--------------------------------------------------------------------------------
First mortgage loans:
Conventional:
1-4 family dwellings $207,853 $156,112
Multi-family dwellings 5,282 4,007
Commercial 22,706 26,513
Construction 10,900 22,689
---------------------------
246,741 209,321
---------------------------
Less:
Loans in process (6,558) (14,696)
Unearned discounts and fees (2,033) (1,453)
---------------------------
238,150 193,172
---------------------------
Installment loans:
Home equity 64,215 51,316
Consumer loans 2,314 1,802
Credit cards 26 2,859
Other 2,059 1,892
---------------------------
68,614 57,869
---------------------------
Commercial business loans and leases:
Commercial business loans 27,461 22,072
Commercial leases 6,123 5,322
---------------------------
33,584 27,394
---------------------------
Less: Allowance for loan losses (2,910) (2,477)
---------------------------
Loans receivable, net $337,438 $275,958
================================================================================
Commitments to originate loans at September 30, 2000 were approximately as
follows:
Rate Amount
--------------------------------------------------------------------------------
First mortgage loans:
Fixed-rate 7.25% to 9.50% $ 865
Other loans:
Fixed-rate 7.62% to 13.00% 585
Adjustable-rate 8.12% to 14.25% 771
------------------------------
$2,221
================================================================================
The Bank conducts its business through ten offices located in the greater
Pittsburgh metropolitan area. At September 30, 2000, the majority of the Bank's
net loan portfolio was secured by properties located in this region. The Bank
does not believe it has significant concentrations of credit risk to any one
group of borrowers given its underwriting and collateral requirements.
---------Fidelity Bancorp, Inc. and Subsidiaries / Annual Report 2000 19
<PAGE>
================================================================================
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
------------------------------------------------------
(dollar amounts in thousands, except per share data)
(7) Loan Servicing Portfolio
The amount of loans serviced for others, which are not reflected in the
accompanying consolidated financial statements, was $441, $4,532, and $6,119 at
September 30, 2000, 1999 and 1998, respectively.
(8) Allowance for Losses on Loans .
Changes in the allowance for loan losses are as follows:
Total
--------------------------------------------------------------------------------
Balance at September 30, 1997 $1,931
Provision for loan losses 405
Charge-offs (110)
Recoveries 17
--------------------------------------------------------------------------------
Balance at September 30, 1998 2,243
Provision for loan losses 520
Charge-offs (326)
Recoveries 40
--------------------------------------------------------------------------------
Balance at September 30, 1999 2,477
Allowance for loan losses of Pennwood Bancorp, Inc 358
Provision for loan losses 470
Charge-offs (425)
Recoveries 30
--------------------------------------------------------------------------------
Balance at September 30, 2000 $2,910
================================================================================
Non-accrual loans were approximately $2.0 million, $2.4 million and $.6 million
at September 30, 2000, 1999 and 1998, respectively. The foregone interest on
those loans for the periods ended September 30, 2000, 1999 and 1998, was $67,
$165 and $25, respectively. The amount of interest income on such loans actually
included in income in the periods ending September 30, 2000, 1999 and 1998 was
$28, $63 and $30, respectively. There are no commitments to lend additional
funds to debtors in non-accrual status.
The recorded investment in loans that are considered to be impaired under SFAS
No. 114 was $560 and $304 atSeptember 30, 2000 and 1999, respectively. Included
in the 2000 amount is $560 of impaired loans for which the related allowance for
credit losses was $175 and no impaired loans that as a result of write-downs do
not have an allowance for credit losses. Included in the 1999 amount is $304 of
impaired loans for which the related allowance for credit losses was $50 and no
impaired loans that as a result of write-downs did not have an allowance for
credit losses. The average recorded investment in impaired loans during the
fiscal years ended September 30, 2000, 1999 and 1998 was approximately $235,
$326, and $205, respectively. For the fiscal years ended September 30, 2000,
1999 and 1998, the Company recognized interest income on those impaired loans of
$0, $6, and $17, respectively, using the cash basis of income recognition.
Management believes that the allowance for losses on loans is appropriate. While
management uses available information to recognize losses on loans, future
additions to the allowance may be necessary based on changes in economic
conditions. In addition, various regulatory agencies, as an integral part of
their examination process, periodically review the Bank's allowance for losses
on loans. Such agencies may require the Bank to recognize additions to the
allowance based on their judgments using information available to them at the
time of examination.
20 Fidelity Bancorp, Inc. and Subsidiaries / Annual Report 2000----------
<PAGE>
================================================================================
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
------------------------------------------------------
(dollar amounts in thousands, except per share data)
(9) Investments Required by Law
The Bank is a member of the Federal Home Loan Bank System and, as a member,
maintains an investment in the capital stock of the Federal Home Loan Bank of
Pittsburgh (FHLB), at cost, in an amount not less than 1% of its outstanding
home loans or 5% of its outstanding notes payable, if any, to the FHLB,
whichever is greater.
(10) Office Premises and Equipment
Office premises and equipment at September 30, 2000 and 1999 are summarized as
follows:
2000 1999
--------------------------------------------------------------------------------
Land $ 540 $ 509
Office buildings 4,801 3,780
Furniture, fixtures and equipment 3,297 2,904
Leasehold improvements 500 500
-----------------------
9,138 7,693
-----------------------
Less accumulated depreciation and amortization (3,562) (2,993)
-----------------------
Office premises and equipment, net $ 5,576 $ 4,700
================================================================================
The Bank has operating leases with respect to three branch offices and the
Bank's Loan Center, which expire on various dates through fiscal 2008. Lease
expense amounted to $169, $226, and $157 in fiscal years 2000, 1999 and 1998,
respectively. Minimum annual lease commitments are approximately as follows:
Years Ended September 30 Amount
--------------------------------------------
2001 172
2002 157
2003 154
2004 154
2005 114
Thereafter 213
----------Fidelity Bancorp, Inc. and Subsidiaries / Annual Report 2000 21
<PAGE>
================================================================================
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
------------------------------------------------------
(dollar amounts in thousands, except per share data)
(11) Savings and Time Deposits .
Savings and time deposit balances at September 30, 2000 and 1999 are summarized
as follows:
September 30,
Stated Rates 2000 1999
--------------------------------------------------------------------------------
Balance by type:
Savings Deposits:
Demand deposits noninterest-bearing $ 19,115 $13,144
NOW accounts 1.50% in 2000 and 1.50% in 1999 32,585 29,757
Passbooks 2.50% in 2000 and 2.50% in 1999 52,289 48,473
Money market
deposit accounts 2.97% in 2000 and 3.00% in 1999 14,755 17,539
-------------------
118,744 108,913
--------------------------------------------------------------------------------
Time Deposits:
Fixed-rate 1.00% to 2.99% 231 1
3.00% to 4.99% 25,558 79,657
5.00% to 6.99% 140,227 72,218
7.00% to 8.99% 3,563 5,266
9.00% to 10.99% 15 16
Negotiated-rate 4.01% to 7.10% 2,293 3,047
-------------------
171,887 160,205
-------------------
$290,631 269,118
================================================================================
The weighted-average interest rate for all deposits was 4.21% and 3.81% at
September 30, 2000 and 1999, respectively. Time deposits with balances of $100
or more totalled $2.2 million at September 30, 2000.
At September 30, 2000, investment securities with a carrying value of $2.0
million were pledged as required to secure deposits of public funds.
The maturities of time deposits at September 30, 2000 and 1999 are summarized as
follows:
<TABLE>
<CAPTION>
September 30,
2000 1999
--------------------------------------------------------------------------------------------
<S> <C> <C>
Within one year $ 85,176 $106,501
Beyond one year but within two years 66,596 26,006
Beyond two years but within three years 7,762 13,501
Beyond three years but within four years 3,969 3,991
Beyond four years but within five years 4,910 5,525
Beyond five years 3,474 4,681
----------------------------------
$171,887 $160,205
===========================================================================================
</TABLE>
<TABLE>
<CAPTION>
Interest expense by deposit category is as follows: Years Ended September 30,
2000 1999 1998
-------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NOW accounts $ 465 $ 427 $ 380
Passbooks 1,270 1,233 1,193
Money market deposit accounts 449 423 419
Time deposits 8,765 8,462 8,948
----------------------------------
$10,949 $10,545 $10,940
===========================================================================================
</TABLE>
22 Fidelity Bancorp, Inc. and Subsidiaries / Annual Report 2000--------
<PAGE>
================================================================================
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
------------------------------------------------------
(dollar amounts in thousands, except per share data)
(12) Federal Home Loan Bank Advances
Federal Home Loan Bank advances are as follows:
September 30,
Interest Rate 2000 1999
--------------------------------------------------------------------------------
Due Date
RepoPlus Advances 6.66% $48,770 $47,600
Fixed Rate Advances:
October 30, 2000 4.68% 3,000 3,000
August 28, 2001 5.61% 930 --
October 29, 2001 4.80% 5,000 5,000
January 14, 2002 6.95% 20,000 --
July 14, 2003 7.12% 10,000 --
August 30, 2004 6.88% 10,000 --
Convertible Select Advances:
June 21, 2001 5.25% -- 10,000
February 14, 2002 5.48% -- 10,000
March 19, 2002 6.08% -- 10,000
June 6, 2002 6.13% -- 5,000
June 20, 2002 6.20% -- 5,000
July 1, 2002 6.60% 15,000 --
July 11, 2002 5.60% -- 10,000
October 3, 2002 5.42% -- 10,000
November 18, 2002 5.32% -- 10,000
January 6, 2003 5.58% -- 10,000
May 12, 2003 6.72% 10,000 --
June 16, 2003 6.46% 15,000 --
September 15, 2003 4.78% -- 5,000
April 25, 2005 5.55% -- 5,000
February 20, 2008 5.48% 10,000 10,000
June 2, 2008 5.17% -- 5,000
October 7, 2008 4.69% 14,185 --
December 18, 2008 5.15% 10,000 10,000
October 22, 2009 5.52% 1,000 --
March 17, 2010 6.05% 20,000 --
August 30, 2010 5.93% 10,000 --
================================================================================
Total FHLB Advances $202,885 $170,600
================================================================================
Under a blanket collateral pledge agreement, the Bank has pledged, as collateral
for advances from the FHLB of Pittsburgh, all stock in the Federal Home Loan
Bank and certain other qualifying collateral, such as investment securities,
mortgage-backed securities and loans, with market values equal to at least 110%
of the unpaid amount of outstanding advances. The remaining maximum borrowing
capacity with the FHLB of Pittsburgh at September 30, 2000 is $32.5 million.
FHLB "RepoPlus" Advances are short-term borrowings maturing within one day to
one year, bear a fixed interest rate and are subject to prepayment penalty.
Although no specific collateral is required to be pledged for these borrowings,
"RepoPlus" Advances are secured under the blanket collateral pledge agreement.
The Bank utilized "RepoPlus" Advances during fiscal 2000 and 1999, ranging
individually from $50 to $36,130, and from $50 to $34,900, respectively. The
daily average balance
(Note continued)
-----------Fidelity Bancorp, Inc. and Subsidiaries / Annual Report 2000 23
<PAGE>
================================================================================
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
------------------------------------------------------
(dollar amounts in thousands, except per share data)
during 2000 and 1999 was $60.9 and $24.7 million, respectively, and the daily
average interest rate was 6.17% and 5.14%, respectively, with an average
interest rate at fiscal year-end 2000 of 6.66% and fiscal year-end 1999 of
5.48%. The maximum amount outstanding at any month-end during 2000 and 1999 was
$82.4 and $48.9 million, respectively.
FHLB "Convertible Select" Advances are long-term borrowings with terms of up to
ten years, and which have a fixed rate for the first three months to five years
of the term. After the fixed rate term expires, and quarterly thereafter, the
FHLB may convert the advance to an adjustable-rate advance at their option. If
the advance is converted to an adjustable-rate advance, the Bank has the option
at the conversion date, and quarterly thereafter, to prepay the advance with no
prepayment fee. The Bank utilized "Convertible Select" Advances during fiscal
2000 and 1999, with individual advances ranging from $1 to $20 million each
year. The daily average balance during 2000 and 1999 was $123.0 million and
$105.6 million, respectively. The daily average interest rate during 2000 and
1999 was 5.70% and 5.53%, respectively. The average interest rate at fiscal year
end 2000 and 1999 was 5.72% and 5.51%, respectively. The maximum amount
outstanding at any month end during 2000 and 1999 was $134 million and $115
million, respectively.
(13) Guaranteed Preferred Beneficial Interest in Company's Debentures
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% Trust
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, as
well as proceeds from the issuance of common securities to the Company, were
utilized by the Trust to invest in $10.57 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 assets 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, specifically, a Tax
Event, Investment Company Event or Capital Treatment Event as more fully defined
in the FBCapital Trust Prospectus dated May 8, 1997, 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.
On July 17, 1997, on behalf of the Trust, the Company requested relief from the
Office of Chief Counsel of the Division of Corporation Finance of the Securities
and Exchange Commission, exempting the Trust from the reporting requirements of
the Securities Exchange Act of 1934. The Trust is a wholly-owned subsidiary of
the Company, has no independent operations and issued securities that contain a
full and unconditional guarantee of its parent, the Company. On January 29,
1998,the Company received notif ication from the Division exempting the Trust
from the reporting requirements.
(14) Securities Sold Under Agreement to Repurchase
The Bank enters into sales of securities under agreements to repurchase. Such
repurchase agreements are treated as financings and the obligations to
repurchase securities sold are reflected as a liability in the consolidated
statement of financial condition. The dollar amount of securities underlying the
agreements remains in the asset accounts. The securities sold under agreement to
repurchase are collateralized by various securities that are either held in
safekeeping by the Federal Home Loan Bank of Pittsburgh or delivered to the
dealer who arranged the transaction. The market value of such securities exceeds
the value of the securities sold under agreements to repurchase.
24 Fidelity Bancorp, Inc. and Subsidiaries / Annual Report 2000--------
<PAGE>
================================================================================
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
------------------------------------------------------
(dollar amounts in thousands, except per share data)
At September 30, 2000, these agreements had a weighted-average interest rate of
5.85% and mature within one month. Short-term borrowings under repurchase
agreements averaged $3.8 million and $2.8 million during 2000 and 1999,
respectively. The maximum amount outstanding at any month-end was $5.0 million
and $3.8 million during 2000 and 1999, respectively. At September 30, 2000,
short-term borrowings under agreements to repurchase securities sold are
summarized as follows:
Collateral
------------------------------
U.S. Government &
Weighted Federal Agency Obligations
Repurchase Average ------------------------------
Liability Interest Rate Book Value Market Value
--------------------------------------------------------------------------------
Within 30 days $4,980 5.85% $7,340 $7,042
================================================================================
(15) Financial Instruments with Off-Balance Sheet Risk
At September 30, 2000 and 1999, respectively, the Bank had outstanding
commitments to originate loans of $2.2 million and $3.1 million.
The Bank's customers have available lines of credit as follows: consumer, both
secured and unsecured, and commercial, generally unsecured. The amount available
at September 30, 2000 and 1999 was $9.5 million and $18.1 million, respectively,
for consumer lines of credit and $12.5 million and $10.8 million, respectively,
for commercial lines of credit. The interest rate for the consumer lines of
credit range from 9.25% to 18.00%, the majority of which is at variable rates.
The interest rates for the commercial lines of credit are generally variable and
based on prevailing market conditions at the time of funding. The Bank's
customers also have available letters of credit. The amount available under
these letters of credit at September 30, 2000 and 1999 was $125 and $134,
respectively. The interest rates are generally variable and based on prevailing
market conditions at the time of funding.
Letters of credit are conditional commitments issued by the Bank to guarantee
the performance of a customer to a third party. The credit risk involved in
issuing letters of credit is essentially the same as that in extending loans to
customers. The Bank minimizes this risk by adhering to its written credit
policies and by requiring security and debt covenants similar to those contained
in loan agreements.
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the commitment.
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. The Bank evaluates each customer's credit
worthiness on a case-by-case basis. The amount of collateral obtained, if deemed
necessary by the Bank upon extension of credit, is based on management's credit
evaluation of the borrower. The collateral consists primarily of residential
real estate and personal property.
The Bank does not have any off-balance sheet risk at September 30, 2000, except
for the commitments referenced above.
(16) Income Taxes
The provision for (benefit from) income taxes in the Consolidated Statements of
Income consists of the following:
Fiscal Years Ended September 30,
2000 1999 1998
-------------------------------------------------------------------------
Current
Federal $1,623 $ 928 $ 984
State 353 310 295
--------------------------------------
Total current 1,976 1,238 1,279
--------------------------------------
Deferred federal (492) (21) (75)
--------------------------------------
Total $1,484 $1,217 $1,204
=========================================================================
(Note continued)
----------Fidelity Bancorp, Inc. and Subsidiaries / Annual Report 2000 25
<PAGE>
================================================================================
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
------------------------------------------------------
(dollar amounts in thousands, except per share data)
Total income tax provision for the years ended September 30, 2000, 1999 and 1998
was allocated as follows:
<TABLE>
<CAPTION>
2000 1999 1998
-----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Income $1,484 $1,217 $1,204
Stockholders' equity:
Accumulated other comprehensive income (loss) 348 (2,435) 227
Compensation expense for tax purposes in excess of amounts
recognized for financial statement purposes -- -- (71)
-----------------------------------------------------------------------------------------------------------------
</TABLE>
The difference between the expected and actual tax provision expressed as
percentages of income before tax are as follows:
<TABLE>
<CAPTION>
Fiscal Years Ended September 30,
2000 1999 1998
--------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Expected federal tax rate 34.0% 34.0% 34.0%
Tax free interest (10.5) (11.4) (8.6)
State income tax, net of federal tax benefit 4.1 4.5 4.7
Other items, net (1.2) (0.6) (0.9)
-----------------------------------------
Actual tax rate incurred 26.4% 26.5% .29.2%
====================================================================================================================
</TABLE>
The tax effect of temporary differences that gave rise to significant portions
of the deferred tax assets and deferred tax liabilities at September 30, 2000
and 1999 are presented below:
<TABLE>
<CAPTION>
1999 1998
--------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets (liabilities):
Deferred loan fees $ -- $ 53
Fixed assets 300 (23)
Loan loss reserves 944 784
Intangible assets 182 185
Investment securities 1,744 2,092
Other (net) 274 64
-----------------------
$3,444 $3,155
====================================================================================================================
</TABLE>
The Bank has determined that it is not required to establish a valuation
allowance for deferred tax assets since it is more likely than not that the
deferred tax assets will be realized through carryback to taxable income in
prior years, future reversals of existing temporary differences and, to a lesser
extent, future taxable income.
Tax basis bad debt reserves established after 1987 are treated as temporary
differences on which deferred income taxes have been provided. Deferred taxes
are not required to be provided on tax bad debt reserves recorded in 1987 and
prior years (base year bad debt reserves). Approximately $3,404 of the balances
in retained income at September 30, 2000, represent base year bad debt
deductions for tax purposes only. No provision for federal income tax has been
made for such amount. Should amounts previously claimed as a bad debt deduction
be used for any purpose other than to absorb bad debts (which is not
anticipated), tax liabilities will be incurred at the rate then in effect.
26 Fidelity Bancorp, Inc. and Subsidiaries / Annual Report 2000---------
<PAGE>
================================================================================
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
------------------------------------------------------
(dollar amounts in thousands, except per share data)
(17) Stockholders'Equity
The Bank is subject to various regulatory capital requirements administered by
the federal banking agencies. Failure to meet minimum capital requirements can
initiate certain mandatory -- and possibly additional discretionary -- actions
by regulators, that, if undertaken, could have a direct material effect on the
Bank's financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Bank must meet specific
capital guidelines that involve quantitative measures of the Bank's assets,
liabilities, and certain off-balance-sheet items as calculated under regulatory
accounting practices. The Bank's capital amounts and classification are also
subject to qualitative judgments by the regulators about components, risk
weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in the table
below) of total and Tier I capital (as defined in the regulations) to
risk-weighted assets (as defined) and of Tier I capital (as defined) to average
assets (as defined). Management believes, as of September 30, 2000, that the
Bank meets all capital adequacy requirements to which it is subject.
As of September 30, 2000, the most recent notification from the Federal Deposit
Insurance Corporation categorized the Bank as well capitalized under the
regulatory framework for prompt corrective action. To be categorized as well
capitalized the Bank must maintain minimum total risk-based, Tier I risk-based,
and Tier I leverage ratios as set forth in the table. There are no conditions or
events since that notification that management believes have changed the
institution's category.
The Federal Reserve Board (FRB) measures capital adequacy for bank holding
companies on the basis of a risk-based capital framework and a leverage ratio.
The minimum ratio of total risk-based capital to risk-weighted assets is 8%. At
least half of the total capital must be common stockholders' equity (not
inclusive of net unrealized gains and losses on available-for-sale debt
securities and net unrealized gains on available-for-sale equity securities) and
perpetual preferred stock, less goodwill and other nonqualifying intangible
assets ("Tier I Capital"). The remainder (i.e., the "Tier II risk-based
capital") may consist of hybrid capital instruments, perpetual debt, term
subordinated debt, other preferred stock and a limited amount of the allowance
for loan losses. At September 30, 2000, the Company had Tier I capital as a
percentage of risk-weighted assets of 12.70% and total risk-based capital as a
percentage of risk-weighted assets of 13.59%.4
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 I 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. The minimum leverage
ratio for all other bank holding companies is 4%. At September 30, 2000, the
Company had a Leverage Ratio of 8.00%.4
A reconciliation of Stockholders' Equity to Regulatory Capital is as follows:
Total Stockholders' equity at September 30, 20001 $29,587
Plus: Unrealized securities losses (net) 3,198
Qualifying preferred securities2 10,250
Less: Goodwill and intangible assets (1,710)
--------
Tier I Capital at September 30, 2000 41,325
Plus: Qualifying loan loss allowance3 2,910
--------
Total capital at September 30, 2000 $44,235
====================================================================
1 Represents consolidated equity capital of the Company as reported to the
FRB on form FR Y-9C for the quarter ended September 30, 2000.
2 Amount included in Tier I capital is limited to 25% of total Tier I
capital; the remaining balance is allowable as Tier II capital.
3 Limited to 1.25% of risk adjusted assets.
4 The leverage ratio is Tier I capital as a percentage of adjusted total
assets of $516,489 at September 30, 2000. Tier I and Tier II risk-based
capital is calculated as a percentage of risk-weighted assets of $325,428
as of September 30, 2000. (Note continued)
-----------Fidelity Bancorp, Inc. and Subsidiaries / Annual Report 2000 27
<PAGE>
================================================================================
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
------------------------------------------------------
(dollar amounts in thousands, except per share data)
The following table sets forth certain information concerning the Bank's
regulatory capital at September 30, 2000 and 1999.
<TABLE>
<CAPTION>
September 30, 2000 September 30, 1999
Tier I Tier II Tier I Tier II
Tier I Risk- Risk- Tier I Risk- Risk-
Core Based Based Core Based Based
Capital Capital Capital Capital Capital Capital
--------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Equity Capital1 $33,980 $33,980 $33,980 $28,288 $28,288 $28,288
Unrealized securities (gains) losses 3,127 3,127 3,127 3,833 3,833 3,833
Less goodwill and intangible assets (1,710) (1,710) (1,710) -- -- --
Plus general valuation allowances2 -- -- 2,910 -- -- 2,477
--------------------------------------------------------------------
Total regulatory capital 35,397 35,397 38,307 32,121 32,121 34,598
Minimum required capital 21,092 12,951 25,902 17,833 11,271 22,542
--------------------------------------------------------------------
Excess regulatory capital 14,305 22,446 12,405 14,288 20,850 12,056
--------------------------------------------------------------------
Minimum required capital to be
well capitalized under Prompt
Corrective Action Provisions $26,366 $19,427 $32,378 $22,291 $16,906 $28,177
===================================================================================================================
Regulatory capital as a percentage3 6.71% 10.93% 11.83% 7.20% 11.40% 12.28%
Minimum required capital percentage 4.00% 4.00% 8.00% 4.00% 4.00% 8.00%
--------------------------------------------------------------------
Excess regulatory capital percentage 2.71% 6.93% 3.83% 3.20% 7.40% 4.28%
--------------------------------------------------------------------
Minimum required capital percentage
to be well capitalized under
Prompt Corrective Action Provisions 5.00% 6.00% 10.00% 5.00% 6.00% 10.00%
===================================================================================================================
</TABLE>
1 Represents equity capital of the Bank as reported to the FDIC and the
Pennsylvania Department of Banking on Form 032 for the quarter ended
September 30, 2000.
2 Limited to 1.25% of risk adjusted assets.
3 Tier I capital is calculated as a percentage of adjusted total average
assets of $527,311 and $445,816 at September 30, 2000 and 1999,
respectively. Tier I and Tier II risk-based capital are calculated as a
percentage of adjusted risk-weighted assets of $323,777 and $281,773 at
September 30, 2000 and 1999, respectively.
(18) Employee Stock Compensation Program
In fiscal 1988, the Bank adopted an Employee Stock Compensation Program (the
Program) under which shares of common stock can be issued. The Program provides
for the grant of both incentive stock options and compensatory stock options.
Further, the Program provides that the incentive stock option price to purchase
common stock is not less than the fair market value at the date of grant and the
compensatory stock option price is equal to or less than the fair market value
of the shares at date of grant, that all options terminate no later than ten
years from date of grant, and that options become exercisable on a cumulative
basis at 50% each year, commencing one year from date of grant. At September 30,
2000, there were no remaining shares available for granting as determined by the
Program Administrators.
(Note continued)
28 Fidelity Bancorp, Inc. and Subsidiaries / Annual Report 2000---------
<PAGE>
================================================================================
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
------------------------------------------------------
(dollar amounts in thousands, except per share data)
The Company has also adopted the 1993 Employee Stock Compensation Program ("1993
Employee Program"), the 1997 Employee Stock Compensation Program ("1997 Employee
Program"), the 1993 Directors' Stock Option Plan ("Directors' Plan") and the
1998 Stock Compensation Program ("1998 Stock Plan"). Under the 1993 Employee
Program, the 1997 Employee Program, and the 1998 Stock Plan, each eligible
participant may be granted options to purchase common stock at an amount equal
to or less than the fair market value of the shares at the time of the grant of
the option. Under the 1993 Directors' Plan, each person who serves as a
non-employee director of the Company shall be granted each year an option to
purchase 1,890 shares of common stock exercisable at a price equal to the fair
market value on the date of the grant. Options granted under the 1993 Employee
Program, 1997 Employee Program, 1998 Stock Plan, and Directors' Plan will expire
no later than 10, 10, 10, and 7 years, respectively, from the date on which the
option was or is granted. For the periods presented, options granted for all
Plans were granted at the fair market value at the date of grant. Option
information presented reflects the 10% stock dividend paid in November 2000 and
the 25% stock split paid in March 1998.
<TABLE>
<CAPTION>
Average 1993 Average 1993 Average 1997 Average 1998 Average
1988 Exercise Employee Exercise Directors' Exercise Employee Exercise Stock Exercise
Program Price Program Price Plan Price Program Price Plan Price
-----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
September 30, 1997 40,080 $6.41 67,468 $10.48 25,594 $10.59 -- $-- -- $ --
Granted -- -- -- -- 7,560 21.09 22,820 21.09 -- --
Exercised (18,730) 3.90 (7,255) 9.56 (100) 13.22 -- -- -- --
Forfeited -- -- (2,873) 11.83 -- -- (1,179) 21.09 -- --
25% stock split 6,551 7.66 15,539 10.45 8,263 12.99 5,622 21.09 -- --
----------------------------------------------------------------------------------------------------
September 30, 1998 27,901 8.38 72,879 10.51 41,317 12.99 27,263 21.09 -- --
Granted -- -- -- -- 9,450 16.36 26,870 15.68 -- --
Exercised (3,993) 4.73 (1,583) 9.33 (100) 13.22 -- -- -- --
Forfeited -- -- (13) 13.22 -- -- (1,449) 16.61 -- --
----------------------------------------------------------------------------------------------------
September 30, 1999 23,908 9.007 1,283 10.54 50,667 13.62 52,684 18.45 -- --
Granted -- -- -- -- -- -- 26,690 12.05 9,450 12.05
Exercised (6,568) 7.55 (7,400) 9.09 (1,890) 10.22 -- -- -- --
Forfeited -- -- (5,112) 13.21 -- -- (13,338) 16.99 -- --
10% stock dividend 1,721 9.56 5,841 10.48 4,877 13.75 6,587 16.15 945 12.05
----------------------------------------------------------------------------------------------------
September 30, 2000 19,061 $9.54 64,612 $10.49 53,654 $13.75 72,623 $16.16 10,395 $12.05
----------------------------------------------------------------------------------------------------
Average contractual
life remaining in years 3.05 5.20 3.01 8.29 9.26
Option price
per share $2.80 - $10.22 $8.42 - $13.22 $8.42 - $21.09 $12.05 - $21.09 $12.05
Options available
for granting at
September 30, 2000 -- -- -- 140,485 6,754
=============================================================================================================================
</TABLE>
At September 30, 2000, 1999 and 1998, 209,142, 199,673 and 163,416 shares were
immediately exercisable at average prices of $13.12, $12.86 and $11.52,
respectively.
(Note continued)
-----------Fidelity Bancorp, Inc. and Subsidiaries / Annual Report 2000 29
<PAGE>
================================================================================
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
------------------------------------------------------
(dollar amounts in thousands, except per share data)
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------------------ -----------------------------------
Number Weighted-average Number
Range of Outstanding Remaining Weighted-average Exercisable Weighted-average
Exercise Prices at 9/30/00 Contractual Life Exercise Price at 9/30/00 Exercise Price
-------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$2.80 to $6.56 3,250 2.07 years $ 6.26 3,250 $ 6.26
$8.42 to $13.22 149,576 5.26 10.86 143,229 10.81
$15.68 to $21.09 67,519 6.82 18.53 62,663 18.75
-------------------------------------------------------------------------------------------------------------
220,345 5.69 $13.14 209,142 $13.12
=============================================================================================================
</TABLE>
In October 1995, the FASB issued Statement of Financial Accounting Standard No.
123, "Accounting for Stock-Based Compensation"("SFASNo. 123"). SFAS No. 123
establishes a fair value based method of accounting for stock-based compensation
plans. Effective for fiscal years beginning after December 15, 1995, SFAS No.
123 allows financial institutions to expense an estimated fair value of stock
options or to continue to measure compensation expense for stock option plans
using the intrinsic value method prescribed by Accounting Principles Board
Opinion No. 25 ("APBNo. 25"). Entities that elect to continue to measure
compensation expense based on APBNo. 25 must provide pro forma disclosures of
net income and earnings per share as if the fair value method of accounting has
been applied. The Company has elected to continue to measure compensation cost
using the intrinsic value method prescribed by APBNo. 25. Had the Company used
the fair value method, net income and earnings per share would have been as
follows:
September 30,
2000 1999 1998
--------------------------------------------------------------------------------
Net income
As reported $4,132 $3,379 $2,925
Pro Forma 4,053 3,261 2,751
-------------------------------------
Basic earnings per share
As reported $1.97 $1.56 $1.35
Pro Forma 1.93 1.51 1.27
Diluted earnings per share
As reported 1.95 1.53 1.31
Pro Forma 1.91 1.47 1.23
--------------------------------------------------------------------------------
Using a Black-Scholes option valuation model, the weighted-average fair value of
options granted during fiscal 2000, 1999, and 1998 under the 1997 Employee
Program was $2.73, $3.66 and $7.55, respectively. The fair value of options
granted under the 1998 Stock Plan during fiscal 2000 was $2.73. The fair value
of options granted under the 1993 Directors' Plan during fiscal 1999 and 1998
was $3.85 and $7.37, respectively.
(Note continued)
30 Fidelity Bancorp, Inc. and Subsidiaries / Annual Report 2000---------
<PAGE>
================================================================================
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
------------------------------------------------------
The fair value for these options was estimated at the date of grant using a
Black-Scholes Option Valuation Model with the following weighted-average
assumptions for 2000, 1999 and 1998, respectively, for the 1997 Employee
Program: risk-free interest rate of 6.38%, 4.58% and 5.72%; dividend yield of
4.11%, 3.15% and 2.30%; volatility factor of the expected market price of the
Company's common stock of 24.1%, 24.9% and 23.8%; and a weighted-average
expected life of the options of 7 years. The following weighted-average
assumptions for 2000 for the 1998 Stock Plan were used: risk-free interest rate
of 6.38%; dividend yield of 4.11%; volatility factor of the expected market
price of the Company's common stock of 24.1%; and a weighted-average expected
life of the options of 7 years. The following weighted-average assumptions for
1999 and 1998, respectively, for the 1993 Directors' Plan were used: risk-free
interest rates of 4.37% and 5.71%; dividend yields of 2.71% and 2.04%;
volatility factors of the e xpected market price of the Company's common stock
of 24.8% and 23.4%; and a weighted-average expected life of the options of 6.2
and 6.2 years.
In management's opinion, existing stock option valuation models do not provide a
reliable single measure of the fair value of employee and director stock options
that have vesting provisions and are not transferable. In addition, option
valuation models require input of highly subjective assumptions including the
expected stock price volatility. Because the Company's stock options have
characteristics significantly different from those of traded options, and
because changes in the subjective input assumptions can materially affect the
fair value estimate, in management's opinion, the existing models do not
necessarily provide a reliable single measure of the fair value of its stock
options.
(19) Employee Benefit Plans
Post-Retirement Benefits Plan
During 1998, the Bank established a non-qualified Salary Continuation Plan
covering certain officers of the Bank. The Plan is unfunded and provides
benefits to participants based upon amounts stipulated in the Plan agreements
for a period of 15 years from normal retirement, as defined in the respective
Plan agreements. Participants vest in benefits based upon years of service from
Plan initiation to normal retirement age. Expense is being accrued based on the
present value of future benefits which the participant is vested in. Expense
recognized under the Plan for 2000, 1999 and 1998 was approximately $113,000,
$107,000 and $78,000, respectively.
The Bank has entered into life insurance policies designed to offset the Bank's
contractual obligation to pay preretirement death benefits and to recover the
cost of providing benefits. Participants in the Plan are the insured under the
policy, and the Bank is the owner and beneficiary.
Group Term Replacement Plan
The Bank has purchased life insurance policies on the lives of certain officers
of the Bank. By way of separate split dollar agreements, the policy interest is
divided between the Bank and the officer. The Bank owns the policy cash
surrender value, including accumulated policy earnings, and the policy death
benefits over and above the cash surrender value are endorsed to the employee
and beneficiary. Death benefit payments are the obligation of the insurance
company. The Bank has no benefit obligation to the officer, accordingly, no
expense is accrued as a result of the Plan. Income recognized in 2000, 1999 and
1998 as a result of increased cash surrender value was approximately $58,000,
$54,000 and $42,000, respectively.
-----------Fidelity Bancorp, Inc. and Subsidiaries / Annual Report 2000 31
<PAGE>
================================================================================
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
------------------------------------------------------
(dollar amounts in thousands, except per share data)
(20) Selected Quarterly Financial Data (Unaudited)
<TABLE>
<CAPTION>
Three Month Periods Ended
Dec. 31 March 31 June 30 Sept. 30
----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Fiscal 2000:
Interest income $8,454 $8,736 $9,050 $10,237
Interest expense 5,233 5,668 5,975 7,056
-------------------------------------------
Net interest income before provision for loan losses 3,221 3,068 3,075 3,181
Provision for loan losses 120 120 120 110
Other income 432 483 436 523
Operating expenses 2,049 2,029 2,018 2,237
-------------------------------------------
Income before income taxes 1,484 1,402 1,373 1,357
Income tax provision 419 389 395 281
-------------------------------------------
Net income $1,065 $1,013 $ 978 $1,076
====================================================================================================
Basic earnings per share $ .50 $ .49 $ .47 $ .51
Diluted earnings per share $ .50 $ .48 $ .46 $ .51
====================================================================================================
Fiscal 1999:
Interest income $7,396 $7,451 $7,844 $8,284
Interest expense 4,626 4,628 4,815 5,160
-------------------------------------------
Net interest income before provision for loan losses 2,770 2,823 3,029 3,124
Provision for loan losses 105 100 155 160
Other income 325 418 372 408
Operating expenses 1,986 2,071 2,030 2,066
-------------------------------------------
Income before income taxes 1,004 1,070 1,216 1,306
Income tax provision 301 286 334 296
-------------------------------------------
Net income $ 703 $ 784 $ 882 $1,010
====================================================================================================
Basic earnings per share $ .32 $ .36 $ .41 $ .47
Diluted earnings per share $ .32 $ .35 $ .40 $ .46
====================================================================================================
</TABLE>
(21) Disclosures About Fair Value of Financial Instruments
Statement of Financial Accounting Standards No. 107, "Disclosure about Fair
Value of Financial Instruments" (SFASNo. 107), requires disclosure of fair value
information about financial instruments, whether or not recognized in the
Consolidated Statement of Financial Condition as of September 30, 2000 and 1999.
SFASNo. 107 excludes certain financial instruments and all non-financial
instruments from its disclosure requirements. Accordingly, the aggregate fair
value amounts presented do not represent the underlying value of Fidelity
Bancorp, Inc. and subsidiaries. The carrying amounts reported in the
Consolidated Statements of Financial Condition approximate fair value for the
following financial instruments:cash, interest-earning deposits with other
institutions, investment securities available-for-sale, mortgage-backed
securities available-for-sale, and all deposits except time deposits.
(Note continued)
32 Fidelity Bancorp, Inc. and Subsidiaries / Annual Report 2000---------
<PAGE>
================================================================================
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
------------------------------------------------------
(dollar amounts in thousands, except per share data)
At September 30, 2000 and 1999, the net carrying value of investment securities
held-to-maturity exceeded the estimated fair value by approximately $6 and $116,
respectively. The net carrying value of mortgage-backed securities
held-to-5maturity at Sept
ember 30, 2000 and 1999, exceeded the estimated fair value by $144 and $112,
respectively. Estimated fair values are based on quoted market prices, dealer
quotes, and prices obtained from independent pricing services. Refer to Notes 2
through 5 of the financial statements for the detail on breakdowns by type of
investment products.
The net carrying value of loans exceeded the estimated fair value at September
30, 2000 by approximately$5.5 million. The estimated fair value of loans
exceeded the net carrying value at September 30, 1999 by approximately $6.6
million. Loans with comp
arable characteristics including collateral and repricing structures were
segregated for valuation purposes. Each loan pool was separately valued
utilizing a discounted cash flow analysis. Projected monthly cash flows were
discounted to present value using a market rate for comparable loans.
Characteristics of comparable loans included remaining term, coupon interest and
estimated prepayment speeds.
The estimated fair market value of loan commitments at both September 30, 2000
and 1999 was equal to the carrying value of the commitments on those dates.
The carrying amounts and estimated fair values of deposits at September 30, 2000
and September 30, 1999 are as follows:
<TABLE>
<CAPTION>
September 30, 2000 September 30, 1999
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Noninterest-bearing:
Demand accounts $ 19,115 $ 19,115 $ 13,144 $ 13,144
Interest-bearing:
NOW and MMDA accounts 47,340 47,340 47,296 47,296
Passbook accounts 52,289 52,289 48,473 48,473
Time deposits 171,887 171,733 160,205 161,320
------------------------------------------------------
Total Deposits $290,631 $290,477 $269,118 $270,233
==================================================================================================================
</TABLE>
The carrying amounts of noninterest-bearing demand accounts,
interest-bearing NOWand MMDA accounts and passbook accounts approximate their
fair values. Fair values for time deposits are estimated using a discounted cash
flow calculation that applies contractual cost currently being offered in the
existing portfolio to current market rates being offered locally for deposits of
similar remaining maturities.
The carrying amounts and estimated fair values of advances and other borrowings
at September 30, 2000 and 1999are as follows:
<TABLE>
<CAPTION>
September 30, 2000 September 30, 1999
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Advances and other borrowings $218,511 $218,013 $183,891 $178,456
==================================================================================================================
</TABLE>
Fair values for advances and other borrowings are estimated using a discounted
cash flow calculation that applies contractual cost of the existing borrowings
to current market rates being offered for borrowings of similar remaining
maturities.
------------Fidelity Bancorp, Inc. and Subsidiaries / Annual Report 2000 33
<PAGE>
================================================================================
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
------------------------------------------------------
(dollar amounts in thousands, except per share data)
(22) Fidelity Bancorp, Inc. Financial Information
(Parent Company Only)
Following are condensed financial statements for the parent company.
Condensed Statements of Financial Condition
<TABLE>
<CAPTION>
September 30,
2000 1999
-----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Cash $ 239 $32,421
Investment in subsidiary bank 33,980 28,288
Investment in subsidiary trust 324 324
Investment securities available-for-sale 4,373 4,167
Mortgage-backed securities available-for-sale 639 767
Other assets 817 867
----------------------
Total Assets $40,372 $36,834
=================================================================================================================
Liabilities
Subordinated debentures $10,567 $10,567
Other liabilities 218 221
----------------------
Total Liabilities 10,785 10,788
-----------------------------------------------------------------------------------------------------------------
Stockholders' Equity
Common stock ($.01 par value, 10,000,000 shares authorized;
2,212,336 and 2,188,871 shares issued)1 22 20
Treasury stock, at cost-- 117,232 and 61,132 shares1 (1,680) (953)
Additional paid-in capital 14,524 14,305
Retained earnings 20,106 16,736
Accumulated other comprehensive income, net of tax (3,385) (4,062)
----------------------
Total Stockholders' Equity 29,587 26,046
----------------------
Total Liabilities and Stockholders' Equity $40,372 $36,834
=================================================================================================================
</TABLE>
1 Common stock outstanding was restated to reflect the 10% stock dividend
paid on November 28, 2000.
Condensed Statements of Income
<TABLE>
<CAPTION>
September 30,
2000 1999 1998
-----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Equity in undistributed earnings of subsidiaries $(2,276) $2,713 $2,117
Dividends received from subsidiary 6,917 1,137 1,167
Interest income 308 475 577
Interest expense (1,055) (1,055) (1,055)
Other income 117 -- 74
Other expenses (78) (76) (32)
Income tax provision (benefit) (199) (185) (77)
------------------------------------
Net Income $4,132 $3,379 $2,925
=================================================================================================================
</TABLE>
(Note continued)
34 Fidelity Bancorp, Inc. and Subsidiaries / Annual Report 2000--------
<PAGE>
================================================================================
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
------------------------------------------------------
(dollar amounts in thousands, except per share data)
Condensed Statements of Cash Flows
<TABLE>
<CAPTION>
September 30,
2000 1999 1998
------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating Activities
Net income $4,132 $3,379 $2,925
Adjustments to reconcile net income to net cash
provided by operating activities:
Equity in undistributed earnings in subsidiary 2,276 (2,713) (2,117)
Gain on sale of investments (117) -- (74)
Increase in interest receivable 57 64 (109)
Other changes, net 12 217 14
-------------------------------------
Net cash provided by operating activities 6,360 947 639
-------------------------------------------------------------------------------------------------------------------
Investing Activities
Purchase of Pennwood Bancorp, Inc. (7,278) (3,000) (1,000)
Purchase of investment securities and
mortgage-backed securities available-for-sale (770) (255) (4,082)
Sale of investment securities available-for-sale 651 -- 2,105
Maturities and principal repayments
of investment securities and mortgage-backed
securities available-for-sale 123 4,620 2,616
Loan receivable from Bank subsidiary, net of repayments -- -- 1,167
-------------------------------------
Net cash provided (used) by investing activities (7,274) 1,365 806
-------------------------------------------------------------------------------------------------------------------
Financing Activities
Stock options exercised 149 39 181
Sale of stock through Dividend Reinvestment Plan 72 98 110
Dividends paid (762) (749) (641)
Stock repurchase (727) (953) --
Debt issuance costs -- -- (36)
-------------------------------------
Net cash (used) by financing activities (1,268) (1,565) (386)
-------------------------------------
Increase (decrease) in cash (2,182) 747 1,059
Cash at Beginning of Year 2,421 1,674 615
-------------------------------------
Cash at End of Year $ 239 $2,421 $1,674
===================================================================================================================
</TABLE>
During fiscal 1998, $9.0 million of investment securities available-for-sale
were transferred to the Company from the Bank representing distributions of
prior years' undistributed earnings. Fidelity Bancorp, Inc. is a bank holding
company organized under the Pennsylvania Business Corporation Law. It was
organized to operate principally as a holding company for its wholly owned
subsidiary, Fidelity Bank. The Company acquired the Bank in a reorganization,
approved by the stockholders of the Bank on January 26, 1993, and completed on
August 19, 1993. On May 13, 1997, FB Capital Trust, a statutory business trust,
was created under Delaware law. The Trust is a wholly-owned subsidiary of the
Company. In conjunction with the acquisition of Pennwood Bancorp, Inc. by the
Company, the net assets acquired were contributed to the Bank subsidiary.
(23) Contingent Liabilities
The Company is subject to a number of asserted and unasserted potential claims
encountered in the normal course of business. In the opinion of management,
after consultation with legal counsel, the resolution of these claims will not
have a material adverse effect on the Company's financial position, liquidity or
results of operations.
------------Fidelity Bancorp, Inc. and Subsidiaries / Annual Report 2000 35
<PAGE>
================================================================================
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
------------------------------------------------------
(24) Acquisition
On February 18, 2000, the Company announced the signing of a Definitive
Agreement and Plan of Merger whereby Fidelity Bancorp, Inc. will acquire all the
outstanding common stock of Pennwood Bancorp, Inc. ("Pennwood"), parent company
of Pennwood Savings Bank, for $13.10 per share in cash or approximately $7.3
million. Subsequently, on May 9, 2000, Fidelity Bank signed an agreement to sell
the real property, furniture, fixtures and equipment and to transfer the related
deposits of the two branch offices of Pennwood Savings Bank located in
Kittanning, Pennsylvania to The Farmers National Bank of Kittanning ("Farmers").
The acquisition of Pennwood and the sale of the Kittanning branches to Farmers
was completed on July 14, 2000.
The acquisition was accounted for under the purchase method of accounting and,
accordingly, the results of operations of Pennwood have been included in the
Company's consolidated financial statements from July 14, 2000. Goodwill arising
from the transaction was $1.7 million. The estimated useful life for the
straight-line amortization of the goodwill is expected to be 15 years.
The following unaudited pro forma financial information presents the combined
results of operations of the Company and Pennwood as if the acquisition had
occurred as of the beginning of fiscal 2000 and fiscal 1999, after giving effect
for certain adjustments, including amortization of goodwill and certain
acquisition and conversion costs and the related income tax effects. The
unaudited pro forma information for the years ended September 30, 2000 and 1999
is intended for informational purposes only and is not necessarily indicative of
the future results of operations of the Company, or results of operations that
would have actually occurred had the acquisition been in effect for the periods
presented.
2000 1999
--------------------------------------------------------------------------------
Interest income $39,449 $34,922
Interest expense 25,704 21,185
-----------------------
Net interest income 13,745 13,737
Provision for loan losses 691 580
-----------------------
Net interest income after provision for loan losses 13,054 13,157
Other income 2,103 1,709
Operating expenses 9,797 9,870
-----------------------
Income before income tax provision 5,360 4,996
Income tax provision 1,514 1,399
-----------------------
Net income $ 3,846 $ 3,597
================================================================================
Diluted net income per share $ 1.81 $ 1.62
================================================================================
(25) Subsequent Event
On October 17, 2000, the Board of Directors of the Company declared a 10% stock
dividend, payable onNovember 28, 2000, on all outstanding shares to stockholders
of record on November 15, 2000. Per share amounts and common shares outstanding
have been restated to reflect this event.
36 Fidelity Bancorp, Inc. and Subsidiaries / Annual Report 2000---------
<PAGE>
================================================================================
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
--------------------------------------------------------------------------------
General
The Company reported record net income of $4.132 million or $1.95 per share on a
diluted basis for fiscal 2000 compared to $3.379 million or $1.53 per share in
fiscal 1999 and $2.925 million or $1.31 per share for 1998.
The Company also reported improved returns on average equity (ROE). ROE was
15.70%, 11.98% and 10.64% for fiscal years 2000, 1999 and 1998, respectively.
Return on average assets (ROA) was .80%, .74% and .74% for fiscal 2000, 1999 and
1998, respectively.
The Company has continued its emphasis on expense control. The ratio of
operating expenses to average assets for fiscal 2000 was 1.61% compared to 1.80%
in fiscal 1999 and 1.85% in fiscal 1998.
On February 18, 2000, the Company announced the signing of a Definitive
Agreement and Plan of Merger whereby Fidelity Bancorp, Inc. would acquire all
the outstanding common stock of Pennwood Bancorp, Inc. ("Pennwood") for $13.10
per share in cash or approximately $7.3 million. Subsequently, on May 9, 2000,
Fidelity Bank signed an agreement to sell the real property, furniture, fixtures
and equipment and to transfer the related deposits of the two branch offices of
Pennwood located in Kittanning, Pennsylvania to The Farmers National Bank of
Kittanning ("Farmers"). The acquisition of Pennwood and the sale of the
Kittanning branches to Farmers was completed on July 14, 2000. The acquisition
was accounted for under the purchase method of accounting and increased the
assets of the Company by approximately $43.5 million.
Loan growth, while still significant, slowed in fiscal 2000 as interest rates
rose. Mortgage loans originated totaled $38.5 million, consumer loans originated
totaled $24.8 million and commercial business and lease loans originated totaled
$14.3 million. While originations slowed, however, the Company continued to lend
primarily in its market area and did not seek to go outside its market area to
originate additional loans. In addition, the Company sold its credit card
portfolio in fiscal 2000, choosing to discontinue being an issuer of credit
cards due to the relatively small balances that had been achieved over the life
of the program.
The operating results of the Company depend primarily upon its net interest
income, which is the difference between the yield earned on its interest-earning
assets and the rates paid on its interest-bearing liabilities (interest-rate
spread) and also the relative amounts of its interest-earning assets and
interest-bearing liabilities. For the fiscal year ended September 30, 2000, the
tax-equivalent interest-rate spread decreased to 2.64%, as compared to 2.73% in
fiscal 1999. The tax-equivalent spread in fiscal 1998 was 2.74%. The ratio of
average interest-earning assets to average interest-bearing liabilities
decreased to 101.6% in fiscal 2000, from 103.2% in fiscal 1999. The ratio was
104.2% in fiscal 1998. The decrease in the spread for fiscal 2000 reflects
several factors, including an increase in the cost of interest-bearing
liabilities, partially offset by an increase in the yield earned on
interest-earning assets. The Company's operating results are also affected to
varying degrees by, among other things, service charges and fees, gains and
losses on sales of securities and loans, provision for loan losses, other
operating income, operating expenses and income taxes.
Asset and Liability Management
The Company's vulnerability to interest rate risk exists to the extent that its
interest-bearing liabilities, consisting of customer deposits and borrowings,
mature or reprice more rapidly or on a different basis than its interest-earning
assets, which consist primarily of intermediate or long-term loans and
investments and mortgage-backed securities.
The principal determinant of the exposure of the Company's earnings to interest
rate risk is the timing difference between the repricing or maturity of the
Company's interest-earning assets and the repricing or maturity of its
interest-bearing liabilities. If the maturities of such assets and liabilities
were perfectly matched, and if the interest rates carried by its assets and
liabilities were equally flexible and moved concurrently, neither of which is
the case, the impact on net interest income of rapid increases or decreases in
interest rates would be minimized.
The objective of interest rate risk management is to control, to the extent
possible, the effects that interest rate fluctuations have on net interest
income and on the net present value of the Company's interest-earning assets and
interest-bearing liabilities. Management and the Board are responsible for
managing interest rate risk and employing risk management policies that monitor
and limit exposure to interest rate risk. Interest rate risk is measured using
net interest margin simulation and asset/liability net present value sensitivity
analyses. These analyses provide a range of potential impacts on net interest
income and portfolio equity caused by interest rate movements.
------------Fidelity Bancorp, Inc. and Subsidiaries / Annual Report 2000 37
<PAGE>
================================================================================
MANAGEMENT'S DISCUSSION AND ANALYSIS - CONTINUED
---------------------------------------------------
The Company uses financial modeling to measure the impact of changes in interest
rates on net interest margin. Assumptions are made regarding loan and
mortgage-backed securities prepayments and amortization rates of passbook, money
market and NOW account withdrawal rates. In addition, certain financial
instruments may provide customers with a degree of "optionality," whereby a
shift in interest rates may result in customers changing to an alternative
financial instrument, such as from a variable to fixed rate loan product. Thus,
the effects of changes in future interest rates on these assumptions may cause
actual results to differ from simulation results.
The Company has established the following guidelines for assuming interest rate
risk:
Net interest margin simulation -- Given a +/- 200 basis point parallel shift in
interest rates, the estimated net interest margin may not change by more than
15% for a one-year period.
Portfolio equity simulation -- Portfolio equity is the net present value of the
Company's existing assets and liabilities. Given a +200 basis point change in
interest rates, portfolio equity may not decrease by more than 50% of total
stockholders' equity. Given a -200 basis point change in interest rates,
portfolio equity may not decrease by more than 20% of total stockholders'
equity.
The following table illustrates the simulated impact of a 100 basis point or 200
basis point upward or downward movement in interest rates on net interest income
and the change in portfolio equity. This analysis was done assuming that
interest-earning asset and interest-bearing liability levels at September 30,
2000 remained constant. The impact of the rate movements was developed by
simulating the effect of rates changing immediately from the September 30, 2000
levels.
Interest Rate Simulation Sensitivity Analysis
Movements in interest rates from September 30, 2000 rates:
Increase Decrease
--------------------------------------------------------------------------------
+100 bp +200 bp -100 bp -200 bp
------------------------------------
Net interest income increase (decrease) (7.0)% (15.1)% 1.9 % (1.2)%
Portfolio equity increase (decrease) (28.6)% (55.6)% 19.9 % 9.5 %
Net present value ratio 6.0 % 3.9 % 9.3 % 8.4 %
Management and the Board recognize that the above measurements of interest rate
risk fall outside the approved parameters and have initiated actions to correct
this over the coming months. Such actions may include, but not be limited to,
asset restructuring, extension of advances, and the purchase or origination of
primarily adjustable-rate investments and loans, to the extent possible.
The matching of assets and liabilities may be analyzed by examining the extent
to which such assets and liabilities are "interest rate sensitive" and by
monitoring an institution's interest rate sensitivity "gap". An asset or
liability is said to be interest rate sensitive within a specific time period if
it will mature or reprice within that time period. The interest rate sensitivity
gap is defined as the difference between interest-earning assets and
interest-bearing liabilities maturing or repricing within a given time period. A
gap is considered positive when the amount of interest rate sensitive assets
exceeds interest rate sensitive liabilities. A gap is considered negative when
the amount of interest rate sensitive liabilities exceeds interest rate
sensitive assets. During a period of rising interest rates, a negative gap would
tend to adversely affect net interest income, while a positive gap would tend to
result in an increase in net interest income. During a period of falling
interest rates, a negative gap would tend to result in an increase in net
interest income, while a positive gap would tend to adversely affect net
interest income. The Company has seen a change in its one year gap from a
negative 8.1% at September 30, 1999 to a negative 13.4% at September 30, 2000.
The Company considers this result at September 30, 2000 to be within its
acceptable target range. As part of its efforts to minimize the impact of
changes in interest rates, the Company continues to emphasize the origination of
loans with adjustable-rate features or which have shorter average lives, the
purchase of adjustable-rate securities, the extension of interest-bearing
liabilities when market conditions permit, and the maintenance of a large
portion of the investment and mortgage-backed securities portfolios in the
available-for-sale category that could be sold in response to interest rate
movements. The table below shows the
38 Fidelity Bancorp, Inc. and Subsidiaries / Annual Report 2000--------
<PAGE>
================================================================================
MANAGEMENT'S DISCUSSION AND ANALYSIS - CONTINUED
---------------------------------------------------
Company's gap position at September 30, 2000 based on certain assumptions as to
prepayments and amortization of loans, investments and deposit withdrawals. The
assumptions used may not be indicative of the actual prepayments and withdrawals
which may be experienced by the Company.
<TABLE>
<CAPTION>
September 30, 2000
------------------
Over Three After
Months One Year
Three Through Through After
Months Twelve Five Five
(dollars in thousands) Or Less Months Years Years
-----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest-earning assets $80,378 $59,652 $160,319 $227,044
Deposits, escrow
liabilities and borrowed funds 93,396 119,659 233,376 44,916
-------------------------------------------------
Interest sensitivity $(13,018) $(60,007) $(73,057) $182,128
=================================================================================================================
Cumulative interest sensitivity $(13,018) $(73,025) $(146,082) $36,046
=================================================================================================================
Cumulative ratio as a percent of total assets (2.4%) (13.4%) (26.9%) 6.6%
=================================================================================================================
</TABLE>
In addition to managing the Company's gap as discussed above, Fidelity has an
Asset Liability Management Committee composed of senior officers which meets
periodically to review the Bank's exposure to interest rate risk resulting from
other factors. Among the areas reviewed are progress on previously determined
strategies, national and local economic conditions, the projected interest rate
outlook, loan and deposit demand, pricing, liquidity position, capital position,
and regulatory developments. Management's evaluation of these factors indicates
the current strategies of emphasizing the origination and purchase of adjustable
rate or shorter-term loan products, while retaining in the portfolio the fixed
rate loans originated, purchasing investments with primarily adjustable rates
and competitively pricing deposits produces an acceptable level of interest rate
risk in the current environment.
Liquidity and Capital Resources
Fidelity's primary sources of funds have historically consisted of deposits,
amortization and prepayments of outstanding loans and mortgage-backed
securities, borrowings from the FHLB of Pittsburgh and other sources, including
repurchase agreements, and sales of investments. During fiscal 2000, the Bank
used its capital resources primarily to meet its ongoing commitments to fund
maturing savings certificates and savings withdrawals, fund existing and
continuing loan commitments and asset growth, to maintain its liquidity and to
fund acquisitions. At September 30, 2000 the total of approved loan commitments
amounted to $2.2 million and the Company had $6.6 million of undisbursed loan
funds. The amount of savings certificates which are scheduled to mature in the
twelve-month period ended September 30, 2001 is $85.2 million. Management
believes that, by evaluation of competitive instruments and pricing in its
market area, it can, in most circumstances, manage and control maturing deposits
so that a substantial amount of such deposits are redeposited in the Bank.
Capital
The Bank currently exceeds all regulatory capital requirements, having a
leverage ratio of Tier 1 capital to total assets of 6.71% and a ratio of
qualifying total capital to risk-weighted assets and off-balance sheet items of
11.83% at September 30, 2000. As a result, regulatory capital requirements
should have no material impact on operations.
Financial Condition
The Company's assets were $543.2 million at September 30, 2000, an increase of
$60.7 million or 12.6% over assets at September 30, 1999. The growth primarily
reflects an increase in loans receivable and investment securities
held-to-maturity, partially offset by a decrease in investment securities and
mortgage-backed securities available-for-sale. The growth was primarily funded
by an increase in advances from the Federal Home Loan Bank of Pittsburgh and
savings deposits. The growth also reflects the acquisition of Pennwood Bancorp,
Inc. in fiscal 2000, which increased assets by approximately $43.5 million.
------------Fidelity Bancorp, Inc. and Subsidiaries / Annual Report 2000 39
<PAGE>
================================================================================
MANAGEMENT'S DISCUSSION AND ANALYSIS - CONTINUED
---------------------------------------------------
Loan Portfolio
Net loans receivable increased $61.5 million or 22.2% to $337.4 million at
September 30, 2000 from $276.0 million at September 30, 1999. Loans originated
totaled $87.9 million in fiscal 2000, including amounts disbursed under lines of
credit, versus $142.6 million in fiscal 1999. The increase also reflects $31.4
in net loans acquired with the purchase of Pennwood Bancorp, Inc.
Mortgage loans originated amounted to $38.5 million and $81.5 million in fiscal
2000 and 1999, respectively. The Bank did not purchase any mortgage loans in
fiscal 1999, but obtained $39.7 million in mortgage loans with the acquisition
of Pennwood in fiscal 2000. The Company subsequently sold $16.3 million of the
fixed-rate loans acquired for asset/liability management purposes. The decrease
in the level of mortgage loan originations in fiscal 2000 primarily reflects the
higher interest rate environment that existed for most of the year. The rise in
rates was sufficient to cause a significant decrease in refinancing and home
purchase activity. The origination of adjustable rate mortgages (ARM's)
decreased to $4.8 million in fiscal 2000 from $11.9 million in fiscal 1999. This
decrease reflected both the continued popularity of fixed rate loans with
customers as well as the general overall decline in originations. Principal
repayments on outstanding mortgage loans also decreased to $26.9 million in
fiscal 2000 as compared to $34.3 million fiscal 1999, reflecting the increasing
interest rate environment. The combination of the above factors resulted in an
overall increase in mortgage loans receivable to $246.7 million at September 30,
2000 from $209.3 million at September 30, 1999.
Other loan originations, including installment loans, commercial business loans
and disbursements under lines of credit, totaled $49.4 million in fiscal 2000
versus $61.1 million in fiscal 1999. During fiscal 2000, the Bank continued to
emphasize other loans, particularly home equity loans, equity lines of credit
and commercial business loans, since they generally have shorter terms than
mortgage loans and would perform better in a rising rate environment. The rise
in interest rates affected this portion of the Company's business as well,
however, as both business customers and consumers were more reluctant to borrow
at higher rates. The Company was successful in growing this portion of the
portfolio, however, and saw the balance of installment loans increase to $68.6
million at September 30, 2000, as compared to $57.9 million at September 30,
1999. The increase in installment loans also reflects the acquisition of $8.0
million in installment loans in the Pennwood transaction, and was partially
offset by the sale of $2.9 million in credit card loans as the bank chose to
discontinue this line of business. Commercial business loans and leases also
experienced an increase, totaling $33.6 million at September 30, 2000 versus
$27.4 million at September 30, 1999.
Non-Performing Assets
The following table sets forth information regarding non-accrual loans and real
estate owned 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 at the dates presented.
<TABLE>
<CAPTION>
September 30,
2000 1999 1998
----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Non-accrual residential real estate loans (one-to-four family) $ 520,000 $ 250,000 $ 246,000
Non-accrual construction, multi-family residential
and commercial real estate loans 624,000 1,362,000 199,000
Non-accrual installment and
commercial business loans 817,000 773,000 107,000
-------------------------------------
Total non-performing loans $1,961,000 $2,385,000 $ 552,000
====================================================================================================
Total non-performing loans as a percent
of net loans receivable .58% .86% .25%
====================================================================================================
Total real estate owned, net of related reserves $ 181,000 $ 107,000 $ 21,000
====================================================================================================
Total non-performing loans and real estate
owned as a percent of total assets .39% .52% .14%
====================================================================================================
</TABLE>
40 Fidelity Bancorp, Inc. and Subsidiaries / Annual Report 2000--------
<PAGE>
================================================================================
MANAGEMENT'S DISCUSSION AND ANALYSIS - CONTINUED
---------------------------------------------------
At September 30, 2000, non-accrual loans consisted of ten 1-4 family residential
real estate loans totaling $520,000, seven commercial real estate loans totaling
$624,000, sixty installment loans totaling $762,000, and seven commercial
business loans totaling $55,000. The largest individual non-accrual loan is a
single-family residential real estate loan for $181,000. Additionally, there are
four loans totaling $398,000, secured by multi-family real estate, that were
made to a single borrower and his related entities. The borrower has declared
bankruptcy and foreclosure action has begun.
Management has evaluated these loans and is satisfied that the allowance for
losses on loans at September 30, 2000 is appropriate. The allowance for possible
losses on loans has increased from $2,243,000 at September 30, 1998 to
$2,477,000 at September 30, 1999 and to $2,910,000 at September 30, 2000. The
balance at September 30, 2000, at .86% of net loans receivable and 148.3% of
non-performing loans, is considered reasonable by management.
Mortgage-Backed Securities Held-to-Maturity
Mortgage-backed securities held-to-maturity decreased $951,000 or 7.1% to $12.5
million at September 30, 2000 from $13.4 million at September 30, 1999.
Purchases of mortgage-backed securities held-to-maturity were $2.0 million in
fiscal 2000. There were no sales of mortgage-backed securities held-to-maturity
in fiscal 2000. The decrease in the balance represents principal payments
received in fiscal 2000.
Mortgage-Backed Securities Available-for-Sale
Mortgage-backed securities available-for-sale decreased $11.2 million to $71.6
million at September 30, 2000 from $82.9 million at September 30, 1999. These
securities may be held for indefinite periods of time and are generally used as
part of the Bank's asset/liability management strategy. These securities may be
sold in response to changes in interest rates, prepayment rates or to meet
liquidity needs. During fiscal 2000, the Bank purchased none of these securities
and sold $1.4 million. Sales of these securities in fiscal 2000 resulted in a
net pretax loss of $10,000.
Investment Securities Held-to-Maturity
Investment securities increased $6.3 million or 174.1% to $9.9 million at
September 30, 2000, compared to $3.6 million at September 30, 1999. These
investments are comprised of U.S. Government and Agency securities, tax-exempt
municipal securities, corporate obligations and asset-backed securities. The
increase in fiscal 2000 reflects the purchase of $6.3 million of these
securities. There were no sales of investment securities held-to-maturity in
fiscal 2000.
Investment Securities Available-for-Sale
Investment securities available-for-sale decreased $3.7 million or 4.7% to $74.1
million at September 30, 2000 as compared to September 30, 1999. These
securities provide an additional source of liquidity for the Bank and the
Company and consist of U.S. Government and Agency securities, tax-free municipal
obligations, mutual funds, Federal Home Loan Mortgage Corporation stock,
corporate obligations and other equity securities. Purchases in fiscal 2000
totaled $9.3 million and sales totaled $12.3 million, resulting in a net pretax
gain of $7,000.
Office Premises and Equipment
Office premises and equipment increased $876,000 or 18.6% to $5.6 million at
September 30, 2000. During fiscal 2000, the Company purchased Pennwood Bancorp,
Inc. which included the building, equipment and fixtures for the Bellevue
branch.
------------Fidelity Bancorp, Inc. and Subsidiaries / Annual Report 2000 41
<PAGE>
================================================================================
MANAGEMENT'S DISCUSSION AND ANALYSIS - CONTINUED
---------------------------------------------------
Savings Deposits
Savings deposits increased $21.5 million during fiscal 2000 to $290.6 million at
September 30, 2000. Deposit increases occurred in demand deposits, NOW accounts,
passbook accounts and time deposits, while balances in money market accounts
decreased. The increase includes $14.5 million in deposits obtained in the
Pennwood Bancorp, Inc. acquisition.
The increase in passbook accounts reflects the continued popularity of this type
of account with some customers. Bank rates on such accounts stayed relatively
constant and some depositors sought the safety and certainty of these products.
Demand deposits and NOW accounts are relatively rate insensitive and the
increased balances in these categories reflects the increased emphasis
management has placed on attracting and retaining such accounts. The increase in
time deposits reflects the Bank's attempt to retain or increase market share by
offering competitive rates on these products. The nature of the Bank's primary
market area for time deposits from other banks and thrifts remains extremely
competitive. In addition, the bank faces competition for these deposits from
alternative sources such as the stock market and mutual funds.
Borrowings
Federal Home Loan Bank advances, reverse repurchase agreements and other
borrowings outstanding increased$34.6 million or 19.9% to $208.3 million at
September 30, 2000, from $173.6 million at September 30, 1999. The Company
continues to utilize FHLB adv
ances, reverse repurchase agreements and other borrowings as both a short-term
funding source and as an effective means to structure borrowings to complement
asset/liability management goals. In fiscal 2000, the Company purchased Pennwood
Bancorp, Inc. as well as experiencing normal growth. The purchase and the growth
were primarily funded by FHLB advances.
Stockholders' Equity
Stockholders' equity increased $3.5 million or 13.6% to $29.6 million at
September 30, 2000 compared to September 30, 1999. This result reflects net
income of $4.1 million, stock options exercised of $149,000, stock issued under
the Dividend Reinvestment Plan of $72,000 and a decrease in accumulated other
comprehensive loss, net of tax, on securities available-for-sale of $677,000.
Offsetting these increases were common stock cash dividends paid of $762,000 and
the purchase of treasury stock at cost for $727,000. Because of interest rate
volatility, accumulated other comprehensive loss and stockholders' equity could
materially fluctuate for each interim period and year-end period.
Results of Operations
Comparison of Fiscal Years Ended September 30, 2000, 1999, and 1998
Net income was $4.1 million for the year ended September 30, 2000 compared to
$3.4 million for fiscal 1999 and $2.9 million for fiscal 1998.
Interest Rate Spread
The Bank's interest rate spread, the difference between yields on
interest-earning assets and the cost of funds, decreased to 2.64% on a
tax-equivalent basis in fiscal 2000 from 2.73% in fiscal 1999. The spread was
2.74% in fiscal 1998. 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.
42 Fidelity Bancorp, Inc. and Subsidiaries / Annual Report 2000--------
<PAGE>
================================================================================
MANAGEMENT'S DISCUSSION AND ANALYSIS - CONTINUED
---------------------------------------------------
<TABLE>
<CAPTION>
Fiscal Years Ended September 30,
2000 1999 1998
---------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Average yield on:
Mortgage loans 7.56% 7.62% 7.96%
Mortgage-backed securities 6.74 6.24 6.45
Installment loans 8.29 8.14 8.45
Commercial business loans 9.29 9.02 9.84
Interest-earning deposits with other
institutions, investment securities,
and FHLB stock1 7.25 6.81 6.95
--------------------------------------
Total interest-earning assets 7.55 7.27 7.48
--------------------------------------
Average rates paid on:
Savings and time deposits 3.96 3.93 4.24
Borrowed funds 6.17 5.62 5.94
--------------------------------------
Total interest-bearing liabilities 4.91 4.54 4.74
--------------------------------------
Average interest rate spread 2.64% 2.73% 2.74%
======================================
Net yield on interest-earning assets 2.71% 2.87% 2.93%
=============================================================================================
</TABLE>
1 Interest income on tax free investments has been adjusted for federal
income tax purposes using a rate of 34%.
Interest Income on Loans
Interest income on loans increased by $4.8 million or 24.9% to $24.2 million in
fiscal 2000 as compared to fiscal 1999. The increase primarily reflects an
increase in the average size of the loan portfolio. The average yield earned on
the loan portfolio was comparable between years. The average size of the loan
portfolio increased from an average balance of $246.3 million in fiscal 1999 to
$307.7 million in fiscal 2000. The increase in the loan portfolio reflects both
the purchase of Pennwood, and its loan portfolio, as well as management's
continued efforts to expand lending and the decision to retain newly originated
mortgage loans in the portfolio, rather than selling them in the secondary
market. Interest income on loans increased by $2.8 million or 16.9% to $19.4
million in fiscal 1999 as compared to fiscal 1998. The increase primarily
reflects an increase in the average size of the loan portfolio, partially offset
by a decrease in the average yield earned on the loan portfolio. The average
size of the loan portfolio increased from an average balance of $201.0 million
in fiscal 1998 to $246.3 million in fiscal 1999.
Interest Income on Mortgage-Backed Securities
Interest income on mortgage-backed securities decreased by $660,000 or 9.8% to
$6.1 million in fiscal 2000 from$6.7 million in fiscal 1999. The average balance
of mortgage-backed securities held, including mortgage-backed securities
available-for-sale, decreased from $108.1 million in fiscal 1999 to $90.2
million in fiscal 2000. The decrease was partially offset by an increase in the
yield earned on these securities in fiscal 2000. The yield earned on
mortgage-backed securities is affected, to some degree, by the repayment rate of
loans underlying the securities. Premiums or discounts on the securities, if
any, are amortized to interest income over the life of the securities using the
level yield method. During periods of falling interest rates, repayments of the
loans underlying the securities generally increase, which shortens the average
life of the securities and accelerates the amortization of the premium or
discount. Falling rates, however, also tend to increase the market value of the
securities. A rising rate environment generally causes a reduced level of loan
repayments and a corresponding decrease in premium/discount amortization rates.
Rising rates generally decrease the market value of the securities.
------------Fidelity Bancorp, Inc. and Subsidiaries / Annual Report 2000 43
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MANAGEMENT'S DISCUSSION AND ANALYSIS - CONTINUED
---------------------------------------------------
Interest income on mortgage-backed securities decreased by $859,000 or 11.3% to
$6.7 million in fiscal 1999 from $7.6 million in fiscal 1998. The average
balance of mortgage-backed securities held, including mortgage-backed securities
available-for-sale, decreased from $117.8 million in fiscal 1998 to $108.1
million in fiscal 1999. The decrease also reflected a decrease in the yield
earned on these securities in fiscal 1999.
Interest Income on Investments
Interest income on investments (including those available-for-sale), which
includes interest-earning deposits with other institutions and FHLB stock,
increased to $6.2 million in fiscal 2000. It was $4.8 million in fiscal 1999.
The fiscal 2000 results reflect an increase in the average balance of such
investments to $97.1 million in fiscal 2000 as compared to $82.4 million in
fiscal 1999, as well as an increase in the average tax-equivalent yield earned
in fiscal 2000 as compared to fiscal 1999.
Interest income on investments increased to $4.8 million in fiscal 1999. It was
$3.9 million in fiscal 1998. The fiscal 1999 results reflect an increase in the
average balance of such investments to $82.4 million in fiscal 1999 as compared
to $63.0 million in fiscal 1998, partially offset by a decrease in the average
tax-equivalent yield earned in fiscal 1999 as compared to fiscal 1998.
Interest Expense on Savings and Time Deposits
Interest on deposits increased $404,000 or 3.8% to $10.9 million in fiscal 2000
from $10.5 million in fiscal 1999. The increase reflects an increase in the
average rate paid on deposits in fiscal 2000, as compared to fiscal 1999, as
well as an increase in the average balance of deposits in fiscal 2000. The
fiscal 2000 balances include the approximately $14.5 in deposits assumed in the
Pennwood acquisition.
Interest on deposits decreased $395,000 or 3.6% to $10.5 million in fiscal 1999
from $10.9 million in fiscal 1998. The decrease reflects a decrease in the
average rate paid on deposits in fiscal 1999, as compared to fiscal 1998,
partially offset by an increase in the average balance of deposits in fiscal
1999. The decrease in rates results primarily from the low interest rate
environment that existed in fiscal 1999.
Interest Expense on Borrowed Funds
Interest expense on borrowed funds increased $4.3 million or 56.1% to $13.0
million in fiscal 2000 compared to fiscal 1999. The increase reflects a higher
level of borrowing in fiscal 2000, as well as an increase in the cost of these
funds. The Company continued to use FHLB advances and repurchase agreements as
cost effective sources of funding in fiscal 2000. In particular, the Company's
purchase of Pennwood was primarily funded by FHLB advances. Interest expense on
borrowed funds increased $2.3 million or 35.2% to $8.7 million in fiscal 1999
compared to fiscal 1998. The increase reflects a higher level of borrowing in
fiscal 1999, partially offset by a decrease in the cost of these funds.
Provision for Loan Losses
The provision for loan losses was $470,000, $520,000 and $405,000 for the fiscal
years ended September 30, 2000, 1999 and 1998, respectively. The provisions
reflect management's evaluation of the loan portfolio, current economic
conditions, and other factors as described below. Based on this evaluation, the
allowance has grown from $2.2 million at September 30, 1998 to $2.9 million at
September 30, 2000, an increase of 29.7%, while the net loan portfolio has
increased 54.2% during the same period. Loan charge-offs, net of recoveries,
were $395,000 in fiscal 2000, compared to $286,000 in fiscal 1999. Net
charge-offs were $93,000 in fiscal 1998.
A monthly review is conducted by management to determine that the allowance for
loan losses is adequate to absorb estimated loan losses. In determining the
level of allowances for loan losses, consideration is given to general economic
conditions, 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 appropriate, future additions to the reserves may be necessary due to
changes in economic conditions. In addition, the 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.
44 Fidelity Bancorp, Inc. and Subsidiaries / Annual Report 2000--------
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MANAGEMENT'S DISCUSSION AND ANALYSIS - CONTINUED
---------------------------------------------------
Other Income
Fidelity's non-interest or total other income increased by $351,000 or 23.0% to
$1.9 million in fiscal 2000 as compared to fiscal 1999. Other income increased
by $357,000 or 30.6% to $1.5 million in fiscal 1999 compared to fiscal 1998.
Included in non-interest income is service fee income on loans and late charges
which increased by $50,000 in fiscal 2000 and increased by $31,000 in fiscal
1999 over the respective prior years. The increase in fiscal 2000 primarily
reflects an increase in late charges on loans, partially offset by a decrease in
service fee income. The increase in fiscal 1999 is primarily attributable to the
collection of title insurance fees related to mortgages originated. The Company
became licensed to collect such fees in fiscal 1999.
Deposit service charges and fee income was $643,000, $566,000 and $413,000 in
fiscal 2000, 1999 and 1998, respectively. The increase in fiscal 2000 reflects
both an increase in accounts that are subject to service charges and continued
emphasis by management on the generation of fee income from these accounts. The
increase in fiscal 1999 primarily reflects fees generated by the new Strip
District branch and the revamping of the Company's service charge structure for
deposit accounts, which resulted in increased fees collected on these accounts.
The Company recorded a net loss of $3,000 and net gains of $64,000 and $84,000
on the sale of investment and mortgage-backed securities in fiscal 2000, 1999,
and 1998, respectively. All sales were made from the available-for-sale category
and reflected normal efforts to reposition portions of the portfolio at various
times during the years to reflect changing economic conditions, changing market
conditions and to carry out asset/liability management strategies.
Gain on sale of loans was $210,000, $17,000 and $11,000 in fiscal years 2000,
1999 and 1998, respectively. In fiscal 2000, the Company sold its credit card
portfolio and recognized a gain on the sale of $202,000. In addition, the
Company sells a portion of the loans originated under low income housing
programs in which it participates in the Pittsburgh area. Also, the Company
sells education loans to the Student Loan Marketing Association ("SLMA"). Such
sales to SLMA generally result in some gain or loss being realized and are being
done to reduce the Company's position in these loans, which are generally lower
yielding and subject to extensive and costly government regulation. The Company
does not intend to originate additional education loans for its portfolio,
except those that will be serviced by SLMA. Gain on sale of loans related to the
low income housing program and to SLMA in fiscal 2000 were $8,000. All gains in
fiscal 1999 and 1998 related to these programs.
Other operating income includes miscellaneous sources of income, which consist
primarily of automated teller machine fees, fees from the sale of cashiers
checks and money orders, and safe deposit box rental income. Such income
amounted to $813,000, $715,000 and $528,000 in fiscal 2000, 1999 and 1998,
respectively. The increase in fiscal 2000 primarily reflects an increase in
automated teller machine fees, interchange income earned from customers' use of
Company issued debit cards, and fees earned on the sale of non-insured
investment products such as mutual funds and annuities. The increase in fiscal
1999 reflects several factors, the most significant of which were an increased
surcharge for non-customers for the use of the Company's automated teller
machines and realized increased earnings on the cash surrender value of life
insurance policies on certain executive officers. Finally, the Company earned
fees from a program, introduced in July 1998, to sell non-insured investment
products such as mutual funds and annuities to both Bank and nonbank customers.
Other Expenses
Operating expenses increased $180,000 or 2.2% to $8.3 million in fiscal 2000 and
increased $838,000 or 11.5% to$8.2 million in fiscal 1999, from $7.3 million in
fiscal 1998.
Compensation, payroll taxes and fringe benefits, the largest component of
operating expenses, increased $138,000 or 2.9% to $4.9 million in fiscal 2000
and $514,000 or 12.0% to $4.8 million in fiscal 1999 over the respective prior
years. Factors contributing to the increase in fiscal 2000 were the addition of
the Bellevue branch in July 2000, which added five employees, normal salary
increases for employees and increases in the cost of health insurance, partially
offset by some personnel vacancies that existed through a portion of the year.
Factors contributing to the increase in fiscal 1999 were normal salary
increases, resulting higher payroll taxes, increases in the number of employees
on the payroll, and an increase in retirement and health care expenses. The
increase in the number of employees primarily reflects staffing additions for
the branch office opened in Pittsburgh's Strip District in October 1998, as well
as staffing for the Company's new brokerage services program.
------------Fidelity Bancorp, Inc. and Subsidiaries / Annual Report 2000 45
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MANAGEMENT'S DISCUSSION AND ANALYSIS - CONTINUED
---------------------------------------------------
Office occupancy and equipment expense decreased $63,000 or 7.8% to $748,000 in
fiscal 2000 and increased $142,000 or 21.2% to $811,000 in fiscal 1999 over the
respective prior years. The decrease in fiscal 2000 primarily reflects a
reduction in lease expense related to the Bank's Strip District branch which was
leased until the Bank purchased the building in June 1999. The increase in
fiscal 1999 primarily reflects costs associated with renovating and opening the
new Strip District branch in October 1998, and lease expenses until the Bank
purchased the building. Additionally, the increase reflects increased equipment
costs, a portion of which was incurred addressing the year 2000 problem.
Depreciation and amortization increased $5,000 or .9% to $587,000 in fiscal 2000
and increased $66,000 or 12.7% to $582,000 in fiscal 1999 over the respective
prior years. The results in fiscal 2000 reflect depreciation on additions to
property being substantially offset by equipment becoming fully depreciated. The
results for fiscal 1999 reflect additional depreciation on equipment added or
updated during the past year, depreciation on renovations completed on the
Bank's data processing and back office location, and amortization and
depreciation on the Bank's new Strip District office.
Premiums for federal deposit insurance were $85,000, $156,000 and $155,000 for
the fiscal years 2000, 1999 and 1998, respectively. The decrease in fiscal 2000
reflects the lowering of the rate paid by SAIF insured institutions to support
the interest payments on the Financing Corporation ("FICO") bonds. The amount of
the premiums is based on the average amount of deposits outstanding.
The Company recorded net losses on real estate owned of $32,000 and $12,000 in
fiscal 2000 and 1998, respectively, compared to a net gain of $36,000 in fiscal
1999. The results reflect the costs associated with the holding and disposition
of properties during the periods. At September 30, 2000, the Bank had four
single family properties and one commercial building classified as real estate
owned.
Intangible amortization was $21,000 in fiscal 2000, which reflects the
amortization of the intangibles generated by the acquisition of Pennwood in July
2000, on a straight-line basis over fifteen years.
Other operating expenses, which consist primarily of check processing costs,
advertising, bank service charges, supervisory examination and assessment fees,
legal and other administrative expenses, amounted to $1.9 million in fiscal
2000, $1.8 million in fiscal 1999 and $1.7 million in fiscal 1998. Significant
variations in fiscal 2000, compared to fiscal 1999, include increases in bank
service charges, legal and audit fees, and a decrease in stationery and supplies
expenses and expenses related to credit cards issued by the Bank. Significant
variations in fiscal 1999, compared to fiscal 1998, include increases in
consulting fees, telephone expenses, legal fees, and expenses related to credit
cards issued by the Bank, partially offset by a decrease in stationery and
supplies expense.
Income Taxes
The company generated taxable income and, as a consequence, recorded tax
provisions of $1.5 million, $1.2 million and $1.2 million for fiscal 2000, 1999
and 1998, respectively. These changes reflect the difference in the Bank's
profitability for the periods as well as differences in the effective tax rate,
which was 26.4%, 26.5% and 29.2% for fiscal 2000, 1999 and 1998, respectively.
The decreased effective tax rate in fiscal 2000 and 1999 primarily results from
the Bank's increased purchases of tax-exempt investments.
Impact of Inflation and Changing Prices
The Consolidated Financial Statements and related notes presented herein have
been prepared in accordance with generally accepted accounting principles which
require the measurement of financial position and operating results in terms of
historical dollars, without considering changes in the relative purchasing power
of money over time due to inflation.
Unlike most industrial companies, substantially all of the assets and
liabilities of the Bank are monetary in nature. As a result, interest rates have
a more significant impact on the Company's performance than the effects of
general levels of inflation. Interest rates do not necessarily move in the same
direction or in the same magnitude as the prices of goods and services, since
such prices are affected by inflation to a larger extent than interest rates. In
the current interest rate environment, liquidity and the maturity structure of
the Company's assets and liabilities are critical to the maintenance of
acceptable performance levels.
46 Fidelity Bancorp, Inc. and Subsidiaries / Annual Report 2000--------
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MANAGEMENT'S DISCUSSION AND ANALYSIS - CONTINUED
---------------------------------------------------
Year 2000
The Company established a Year 2000 Compliance Committee to identify all of its
functions potentially affected by the Year 2000 date change, help ensure the
reprogramming or replacement of all critical systems occurred, and to formulate
contingency plans in the event any of those critical systems failed.
The Company experienced no known disruptions as a result of the Year 2000 date
change and intends to keep monitoring its critical systems at various other date
changes during the year 2000.
Recent Accounting and Legislative Developments
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," as
amended by SFAS No. 137, "Accounting for Derivative Instruments and Hedging
Activities - Deferral of the Effective Date of FASB Statement No. 133," and SFAS
No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging
Activities - An Amendment of FASB Statement No. 133," requires that derivative
instruments be carried at fair value on the balance sheet. The statements
continue to allow derivative instruments to be used to hedge various risks and
set forth specific criteria to be used to determine when hedge accounting can be
used. The statements also provide for offsetting changes in fair value or cash
flows of both the derivative and the hedged asset or liability to be recognized
in earnings in the same period; however, any changes in fair value or cash flow
that represent the ineffective portion of a hedge are required to be recognized
in earnings and cannot be deferred. For derivative instruments not accounted for
as hedges, changes in fair value are required to be recognized in earnings.
The provisions of this statement, as amended, are effective for all fiscal
quarters of fiscal years beginning after June 15, 2000. The company does not
anticipate any material impact on the Company's financial position, results of
operations and cash flow subsequent to the effective date of this statement as
no such instruments are used by the Company.
In September 2000, the FASB issued SFASNo. 140, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities, a replacement
of FASBStatement No. 125." This statement revises the standards for accounting
for securitizations and other transfers of financial assets and collateral and
requires certain disclosures, but it carries over most of Statement 125's
provisions without reconsideration. This statement is effective for transfers
and servicing of financial assets and extinguishments of liabilities occurring
after March 31, 2001. This statement is effective for recognition and
reclassification of collateral and for disclosures relating to securitization
transactions and collateral for fiscal years ending after December 5, 2000.
Disclosures about securitization and collateral accepted need not be reported
for periods ending on or before December 15, 2000, for which financial
statements are presented for comparative purposes. This statement is to be
applied prospectively with certain exceptions. Other than those exceptions,
earlier or retroactive application of its accounting provisions are not
permitted. The Company does not anticipate any material impact on the Company's
financial position, results of operations and cash flow subsequent to the
effective date of this statement.
-----------Fidelity Bancorp, Inc. and Subsidiaries / Annual Report 2000 47
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CAPITAL STOCK INFORMATION
-------------------------
STOCK INFORMATION
--------------------------------------------------------------------------------
The following table sets forth the fiscal 2000, 1999 and 1998 high and low
prices as reported on the NASDAQ National Market System and the dividends
declared per common share. Amounts shown have been adjusted to reflect the 10%
stock dividend paid in November 2000 and the 25% stock split paid in March 1998.
Stock Price Dividends
--------------------------------------------------------------------------------
Quarter Ended: High Low Cash Stock
--------------------------------------------------------------------------------
September 30, 2000 $12.62 10.68 $.091 -
June 30, 2000 11.25 10.56 .091 -
March 31, 2000 12.27 11.14 .091 -
December 31, 1999 14.37 10.00 $.091 -
--------------------------------------------------------------------------------
September 30, 1999 $15.80 $13.41 $.091 -
June 30, 1999 16.36 15.56 .091 -
March 31, 1999 16.47 14.89 .082 -
December 31, 1998 16.59 15.00 .082 -
--------------------------------------------------------------------------------
September 30, 1998 $21.71 $15.91 $.082 -
June 30, 1998 25.45 20.00 .082 25%
March 31, 1998 23.26 19.73 .065 -
December 31, 1997 21.28 16.18 .065 -
--------------------------------------------------------------------------------
As of September 30, 2000, Fidelity Bancorp, Inc. had 2,095,104 shares of stock
outstanding and approximately 750 stockholders, including beneficial owners
whose stock is held in nominee name.
-----------Fidelity Bancorp, Inc. and Subsidiaries / Annual Report 2000 49
