===============================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 2001
Commission file number 1-12753
Fidelity Bancorp, Inc.
(Exact name of registrant as specified in its charter)
Delaware 36-3915246
(State of Incorporation) (I.R.S. Employer Identification No.)
5455 W. Belmont, Chicago, Illinois, 60641
(Address of principal executive offices)
(773) 736-4414
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all the reports to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such report), and (2) has been subject to such filing
requirements for the past 90 days. YES X NO
There were 2,053,867 shares of common stock, par value $.01, outstanding as of
January 15, 2002.
===============================================================================
FIDELITY BANCORP, INC.
FORM 10-Q
INDEX
Part I. FINANCIAL INFORMATION PAGE(S)
Item 1. Financial Statements
Consolidated Statements of Financial Condition
as of December 31, 2001 (unaudited) and September 30, 2001 1
Consolidated Statements of Earnings for the three
months ended December 31, 2001 and 2000 (unaudited) 2
Consolidated Statements of Changes in Stockholders'
Equity for the three months ended December 31, 2001
and 2000 (unaudited) 3
Consolidated Statements of Cash Flows for the three
months Ended December 31, 2001 and 2000 (unaudited) 4-5
Notes to Unaudited Consolidated Financial Statements
(unaudited) 6-7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 7-14
Item 3. Quantitative and Qualitative Disclosures about Market Risks 14-15
Part II. OTHER INFORMATION
Item 1. Legal Proceedings 16
Item 2. Changes in Securities 16
Item 3. Defaults upon Senior Securities 16
Item 4. Submission of Matters to a Vote of Security Holders 16
Item 5. Other Information 16
Item 6. Exhibits and Reports on Form 8-K 16
Signature Page 17
1
FIDELITY BANCORP and SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Dollars in thousands, except per share data)
December 31, September 30,
ASSETS 2001 2001
Cash and due from banks $ 2,595 7,107
Interest-earning deposits 2,257 1,397
Federal funds sold 100 100
------- --------
Cash and cash equivalents 4,952 8,604
FHLB of Chicago stock, at cost 18,230 18,055
Mortgage-backed securities available for sale 152,898 127,685
Securities available for sale 33,079 42,006
Loans held for sale 16,380 41,219
Loans receivable, net of allowance for loan losses of $1,349
at December 31, 2001 and $1,236 at September 30, 2001 432,327 422,980
Accrued interest receivable 3,626 3,650
Premises and equipment 3,798 3,850
Other assets 1,165 657
------- -------
$ 666,455 668,706
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits 418,369 399,619
Borrowed funds 187,930 187,345
Advance payments by borrowers for taxes and insurance 4,244 7,193
Due to broker - 14,918
Other liabilities 7,666 10,247
------- -------
Total liabilities 618,209 619,322
STOCKHOLDERS' EQUITY
Preferred stock, $.01 par value; authorized 2,500,000
shares; none outstanding - -
Common stock, $.01 par value; authorized 8,000,000 shares;
issued 3,782,350 shares; 2,022,867 and 2,020,367 shares
outstanding at December 31, 2001 and September 30, 2001,
respectively 38 38
Additional paid-in capital 38,623 38,636
Retained earnings, substantially restricted 42,628 40,926
Treasury stock, at cost (1,759,483 and 1,761,983 shares at
December 31, 2001 and September 30, 2001, respectively) (31,496) (31,540)
Common stock acquired by Bank Recognition and Retention Plans (176) (178)
Accumulated other comprehensive income (loss) (1,371) 1,502
------- -------
TOTAL STOCKHOLDERS' EQUITY 48,246 49,384
------- -------
$ 666,455 668,706
======= =======
See accompanying notes to unaudited consolidated financial statements.
2
FIDELITY BANCORP and SUBSIDIARY
CONSOLIDATED STATEMENTS OF EARNINGS
(Dollars in thousands, except per share data)
Three months ended December 31, 2001 2000
------ ------
Interest Income:
Loans receivable $ 8,270 10,234
Investment securities 916 1,632
Mortgage-backed securities 2,195 53
Other interest income 10 14
------ ------
11,391 11,933
Interest Expense:
Deposits 3,822 5,015
Borrowed funds 2,535 3,538
------ ------
6,357 8,553
------ ------
Net interest income before provision for loan losses 5,034 3,380
Provision for loan losses 140 70
------ ------
Net interest income after provision for loan losses 4,894 3,310
Non-Interest Income:
Fees and commissions 143 118
Insurance and annuity commissions 220 146
Gain on sale of securities 72 -
Gain on sale of loans 541 -
Other 9 121
------ ------
985 385
Non-Interest Expense:
General and administrative expenses:
Salaries and employee benefits 1,699 1,411
Office occupancy and equipment 370 374
Data processing 132 134
Advertising and promotions 158 155
Other 412 365
------ ------
2,771 2,439
Income before income taxes 3,108 1,256
Income tax expense 1,163 393
------ ------
Net income $ 1,945 863
====== ======
Earnings per share - basic $ 0.96 0.43
====== ======
Earnings per share - diluted $ 0.92 0.41
====== ======
Comprehensive income (loss) $ (928) 1,752
====== ======
See accompanying notes to unaudited consolidated financial statements.
3
FIDELITY BANCORP and SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(Dollars in thousands, except per share data)
Three months ended December 31, 2001 and 2000 Accumulated
Other
Common Common Comprehen-
Additional Stock Stock sive
Common Paid-In Retained Treasury Acquired Acquired Income
Stock Capital Earnings Stock by ESOP by BRRP's (Loss) Total
--- ------ ------- ------- ------ ------ ---- -------
Balance at
September 30, 2000 38 38,780 37,022 (31,391) (189) (191) (1,266) $ 42,803
Net income - - 863 - - - - 863
Change in accumulated other
comprehensive income - - - - - - 889 889
--- ------ ------- ------- ------ ----- ----- -------
Total comprehensive income 1,752
Purchase of treasury stock
(16,000 shares) - - - (290) - - - (290)
Cash dividends ($.12 per
share) - - (243) - - - - (243)
Amortization of award of
BRRP's stock - - - - - 5 - 5
Cost of ESOP shares released - - - - 189 - - 189
Exercise of stock options
and reissuance of treasury
shares (1,700 shares) - (11) - 30 - - - 19
Tax benefit related to
stock options exercised - 4 - - - - - 4
Market adjustment for
committed ESOP shares - 38 - - - - - 38
--- ------ ------- ------- ------ ----- ----- -------
Balance at
December 31, 2000 $ 38 38,811 37,642 (31,651) - (186) (377) $ 44,277
=== ====== ======= ======= ====== ===== ===== =======
Balance at
September 30, 2001 38 38,636 40,926 (31,540) - (178) (1,502) $ 49,384
Net income - - 1,945 - - - - 1,945
Change in accumulated other
comprehensive income - - - - - - (2,873) (2,873)
--- ------ ------- ------- ------ ----- ------- -------
Total comprehensive income (928)
Cash dividends ($.12 per
share) - - (243) - - - - (243)
Amortization of award of
BRRP's stock - - - - - 2 - 2
Exercise of stocks options
reissuance of treasury
shares (2,500 shares) - (20) - 44 - - - 24
Tax benefit related to
stock options exercised - 7 - - - - - 7
--- ------ ------- ------- ------ ----- ------ -------
Balance at
December 31, 2001 $ 38 38,623 42,628 (31,496) - (176) (1,371) $ 48,246
=== ====== ======= ======= ====== ===== ====== =======
See accompanying notes to unaudited consolidated financial statements.
4
FIDELITY BANCORP and SUBSIDIARY
Consolidated Statements of Cash Flows
(Dollars in thousands)
Three months ended December 31, 2001 2000
-------- ------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 1,945 863
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 94 89
Provision for loan losses 140 70
Net amortization and accretion of premiums and discounts 136 (4)
Amortization of cost of stock benefit plans 2 5
ESOP - 227
Deferred loan costs, net of amortization 97 (62)
Stock dividend from FHLB of Chicago (175) (191)
Loans originated for sale (1,740) -
Proceeds from loans originated for sale 1,203 -
Gain on sale of securities and loans (613) -
Amortization of deposit base intangible 1 4
Decrease in accrued interest receivable 24 436
Decrease (increase) in other assets (98) 689
Increase (decrease) in other liabilities (829) 288
-------- ------
Net cash provided by operating activities 187 2,414
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of real estate owned - 4
Proceeds from maturities of securities available for sale 20,000 -
Proceeds from sales of mortgage-backed securities
available for sale 26,894 -
Proceeds from sale of loans 22,468 -
Purchase of mortgage-backed securities available for sale (78,560) -
Purchase of securities available for sale (11,649) -
Purchase of Federal Home Loan Bank of Chicago Stock - (229)
Loans originated for investment (49,166) (33,844)
Purchase of premises and equipment (42) (43)
Principal repayments collected on loans receivable 42,623 26,548
Principal repayments collected on
mortgage-backed securities 7,426 191
-------- ------
Net cash used in investing activities (20,006) (7,373)
(continued)
5
FIDELITY BANCORP and SUBSIDIARY
Consolidated Statements of Cash Flows (continued)
(Dollars in thousands)
Three months ended December 31, 2001 2000
------- ------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits 18,750 4,099
Net increase (decrease) in borrowed funds 585 (2,020)
Net increase (decrease) in advance payments by borrowers
for taxes and insurance (2,949) 3,410
Purchase of treasury stock - (290)
Payment of common stock dividends (243) (243)
Proceeds from exercise of stock options 24 19
-------- ------
Net cash provided by financing activities 16,167 4,975
-------- ------
Net change in cash and cash equivalents (3,652) 16
Cash and cash equivalents at beginning of period 8,604 6,195
-------- ------
Cash and cash equivalents at end of period $ 4,952 6,211
======== ======
CASH PAID DURING THE PERIOD FOR:
Interest $ 6,404 8,414
Income taxes 1,567 190
NON-CASH INVESTING ACTIVITIES-
Loans transferred to real estate in foreclosure 398 11
Due to Broker for securities transactions (14,918) -
======== ======
See accompanying notes to consolidated financial statements.
6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been prepared
in accordance with accounting principles generally accepted in the United
States of America ("GAAP") and conform to general practices within the banking
industry for interim financial information and with the instructions to Form
10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of
the information and notes required by GAAP for complete financial statements.
In the opinion of management, all adjustments (consisting of only normal
recurring accruals) necessary for a fair presentation have been included.
The results of operations and other data for the three months ended December
31, 2001 are not necessarily indicative of results that may be expected for the
entire fiscal year ending September 30, 2002.
The unaudited consolidated financial statements include the accounts of
Fidelity Bancorp, Inc. (the "Company") and its wholly-owned subsidiary,
Fidelity Federal Savings Bank and subsidiaries (the "Bank"). All intercompany
accounts and transactions have been eliminated in consolidation.
(2) EARNINGS PER SHARE
Basic earnings per share for the three months ended December 31, 2001 and 2000
were computed by dividing net income by the weighted average number of shares
of common stock outstanding for the periods, which were 2,022,079 and
2,014,563, respectively. ESOP shares are considered outstanding for the
calculation unless unearned.
Diluted earnings per share for the three months ended December 31, 2001 and
2000 were computed by dividing net income by the weighted average number of
shares of common stock and potential common stock outstanding for the periods,
which were 2,123,049 and 2,096,148 respectively. Diluted earnings per share
include the dilutive effects of additional potential issuable common stock
under stock options.
(3) COMPREHENSIVE INCOME
The Company's comprehensive income includes net income and other comprehensive
income (loss) comprised entirely of unrealized gains or losses on securities
available for sale, net of tax effects, which are also recognized as separate
components of equity.
Three months ended December 31, 2001 2000
---- ----
Net income 1,945 863
Other comprehensive income (loss), net of tax -
Unrealized gain (loss) on securities available
for sale arising during the period (2,873) 889
----- ----
Comprehensive Income (928) 1,752
===== ====
7
(4) COMMITMENTS AND CONTINGENCIES
At December 31, 2001, the Bank had outstanding commitments to originate loans
of $7.8 million, of which $1.6 million were at a fixed rates ranging from
6.125% to 7.75% and $6.1 million were adjustable rate commitments. In addition
to the outstanding commitments there are six construction and development loan
commitments for a total of $17.1 million with floating rates based on prime
plus a margin. Draws on these construction and development loan commitments
totaled $15.7 million through December 31, 2001.
(5) RECLASSIFICATIONS
Certain reclassifications have been made in prior years financial statements to
conform to the current year's presentation.
(6) NEW ACCOUNTING PRONOUNCEMENTS
New accounting guidance was issued that will, beginning in 2002, revise the
accounting for goodwill and intangible assets. Intangible assets with
indefinite lives and goodwill will no longer be amortized, but will
periodically be reviewed for impairment and written down if impaired.
Additional disclosures about intangible assets and goodwill may be required.
The Company does not expect this new guidance to have any effect on the
financial statements.
Beginning October 1, 2002, a new accounting pronouncement addressing the
financial accounting and reporting for obligations associated with the
retirement of tangible long-lived assets and the associated asset retirement
costs will become effective. The Company does not expect this new accounting
pronouncement to have any effect on the financial statements.
Another new accounting pronouncement becomes effective October 1, 2002 which
addresses financial accounting and reporting for the impairment of long-lived
assets and long-lived assets to be disposed of. The Company does not expect
this new accounting pronouncement to have any effect on the financial
statements.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATION
GENERAL
The Company's results of operations are dependent on net interest income which
is the difference between interest earned on its loan and investment
portfolios, and its cost of funds, consisting of interest paid on deposits and
borrowed money. The Company also generates non-interest income such as
transactional fees, loan servicing fees, and fees and commissions from the
sales of insurance products and securities through its subsidiary. Operating
expenses primarily consist of employee compensation, occupancy expenses, data
processing, advertising and promotions and other general and administrative
expenses. The results of operations are also significantly affected by general
economic and competitive conditions, particularly changes in market interest
rates, government policies and actions of regulatory authorities.
The Company's earnings per diluted share increased $0.51 to $0.92 for the first
fiscal quarter ended December 31, 2001, from $0.41 for the same period in 2000.
8
Net income for the quarter was $1.9 million, compared with $863,000 in 2000.
Earnings per share and net income increased primarily due to reduced interest
expense and increased non-interest income.
The Company also announced that its board of directors increased the quarterly
dividend by 8%, from $0.12 to $0.13 per share, payable on February 15, 2002 to
stockholders of record as of January 31, 2002.
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995
This report contains certain forward looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. The Company intends such
forward-looking statements to be covered by the safe harbor provisions for
forward-looking statements contained in the Private Securities Reform Act of
1995, and is including this statement for purposes of these safe harbor
provisions. Forward-looking statements, which are based on certain assumptions
and describe future plans, strategies and expectations of the Company, are
generally identifiable by use of the words "believe," "expect," "intend,"
"anticipate," "estimate," "project" or similar expressions. The Company's
ability to predict results or the actual effect of future plans or strategies
is inherently uncertain. Factors which could have a material adverse affect on
the operations and future prospects of the Company and the subsidiaries
include, but are not limited to, changes in: interest rates, general economic
conditions, legislative/regulatory changes, monetary and fiscal policies of the
U.S. Government, including policies of the U.S. Treasury and the Federal
Reserve Board, the quality or composition of the loan or investment portfolios,
demand for loan products, deposit flows, competition, demand for financial
services in the Company's market area, our implementation of new technologies,
our ability to develop and maintain secure and reliable electronic systems and
accounting principles, policies and guidelines. These risks and uncertainties
should be considered in evaluating forward-looking statements and undue
reliance should not be placed on such statements. Further information
concerning the Company and its business, including additional factors that
could materially affect the Company's financial results, is included in the
Company's filings with the Securities and Exchange Commission.
LIQUIDITY & CAPITAL RESOURCES
Liquidity management for the Bank is both a daily and long-term function of
management's strategy. The Company's primary sources of funds are deposits and
borrowings, proceeds from principal and interest on loans and mortgage-backed
securities. While maturities and scheduled amortization of loan and mortgage
prepayments are predictable sources of funds, deposit flows and mortgage
prepayments are greatly influenced by interest rate cycles and economic
conditions. The Bank generally manages the pricing of its deposits to be
competitive and to increase core deposit relationships. The Bank utilizes
particular sources of funds based on comparative costs and availability.
The Company's most liquid assets are cash and cash equivalents, which include
federal funds and interest-bearing deposits. The level of these assets is
dependent on the Company's operating, financing, lending, and investing
activities during the given period. At December 31, 2001, cash and cash
equivalents totaled $5.0 million.
9
Mortgage-backed securities and securities available for sale represent a
secondary source of liquidity to the Bank and the Company. The market value of
these securities fluctuates with interest rates movements. Net interest income
in the future periods may be adversely impacted to the extent interest rates
increase and these securities are not sold with the proceeds reinvested at
higher market rates. The decision whether to sell the available for sale
mortgage-backed securities and securities available for sale or not, is based
on a number of factors, including projected funding needs, reinvestment
opportunities and the relative cost of alternative liquidity sources.
The Company's cash flows are comprised of three classifications: cash flows
from operating activities, cash flows from investing activities, and cash flows
from financing activities. Cash flows provided by operating activities,
consisting primarily of interest and dividends received less interest paid on
deposits, were $187,000 for the three months ended December 31, 2001. Net cash
used in investing activities was $20.0 million for the three month period ended
December 31, 2001. During the period investing activities consisted of loans
originated for investment and purchases of mortgage-backed securities, largely
offset by principal collections on loans, proceeds from maturities of
securities and proceeds from sales of securities and loans. Cash flows
provided by financing activities amounted to $16.2 million for the three months
ended December 31, 2001. The increase of $18.8 million in deposits during the
first quarter of fiscal 2002 was only partially offset by the decrease in
advance payments from borrowers of $2.9 million.
At December 31, 2001, the Bank had outstanding loan commitments of $7.8
million. Management anticipates that it will have sufficient funds available
to meet its current loan commitments. Certificates of deposit scheduled to
mature in one year or less from December 31, 2001 totaled $192.5 million.
Consistent with historical experience, management believes that a significant
portion of such deposits will remain with the Bank, and that their maturity and
repricing will not have a material adverse impact on the operating results of
the Company.
The Bank is subject to 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 material impact on the Company'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 entity's assets,
liabilities, and certain off-balance sheet items as calculated under regulatory
accounting purposes. 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 of total and Tier 1
capital to risk-weighted assets, and of Tier 1 capital to average assets and of
tangible capital to average assets. As of December 31, 2001, the Company and
the Bank met the capital adequacy requirements to which they are subject. The
Bank's Tangible Equity ratio at December 31, 2001 was 7.74%. The Tier 1
Capital ratio was 7.74%, the Tier 1 Risk-based ratio was 17.94%, and the Total
Risk-Based Capital ratio was 18.40%.
10
The most recent notification from the federal banking agencies categorized the
Company and the Bank as well capitalized under the regulatory framework for
prompt corrective action. To be categorized as well capitalized, the Company
and the Bank must maintain minimum total risk-based, Tier 1 risk-based, and
Tier 1 leverage ratios. There are no conditions or events since that
notification that have changed the Company's or the Bank's category.
CHANGES IN FINANCIAL CONDITION
Total assets at December 31, 2001 were $666.5 million, compared to $668.7
million at September 30, 2001.
Mortgage-backed securities classified as available for sale were $152.9 million
at December 31, 2001. The period purchases were funded from heavy refinance
activity in the Bank's loan portfolio as well as the redeployment of the
proceeds from the sale of mortgage loans from the held for sale category.
Net loans receivable at December 31, 2001 were $432.3 million, up $9.3 million
or 2% from September 30, 2001. Solid demand for higher-yielding loan products
helped offset continued high loan repayments, resulting in loans receivable
growth. New loans closed, including multi-family and commercial mortgages and
loans secured by commercial leases, totaled $49.2 million for the quarter ended
December 31, 2001. Loan repayments totaled $42.6 million for the quarter ended
December 31, 2001, compared with $26.5 million for the same period in 2000.
During the quarter, the Bank recorded two loan sales to FNMA from the held for
sale category. The Bank recorded $22.5 million in proceeds from the sale of
these fixed-rate 30-year mortgages. The sale generated a $531,000 PRE-tax gain
and a $73,000 deferred servicing asset. In addition to these sales, normal
operations originated $1.2 million in loans available for sale. These were
sold on an individual basis to FHLMC and produced a PRE-tax profit of $10,000.
Deposits grew to $418.4 million at December 31, 2001, up 5% from $399.6 million
at September 30, 2001. The quarter's growth brings deposits over $400 million
for the first time. The growth represents an increase of $16.8 million in
transactions accounts. A new high-rate checking product, power-checking,
attracted $10.4 million in its introductory offering period. Other savings
products including Passbook 24, a tiered rate premium priced passbook product
linked to an ATM card to provide 24 hour-banking convenience, which attracted
$11.6 million this quarter. FHLB advances remained fairly stable, increasing
only $585,000 to $187.9 million at December 31, 2001 from September 30, 2001.
Book value per share on December 31, 2001 was $23.85, compared with $24.44 at
September 30, 2001. The decrease in book value per share was attributable to
an unrealized decline in market value in the mortgage-backed securities and
securities available for sale portfolios. Book value per share, excluding
accumulated other comprehensive income or loss, was $24.53 at December 31,
2001, an increase of 3%, compared to $23.70 at September 30, 2001.
INVESTMENT ACTIVITIES
The Company is the holder of certain subordinated notes (the "Notes") issued by
Cole Taylor Financial Group, Inc. The Notes have a par value and cost basis of
$3.0 million. The Notes were acquired by the Company in 1994, when Cole Taylor
was the parent company for both a consumer finance company and a Chicago area
bank. In fiscal 1997, Cole Taylor's bank subsidiary was "spun-off" to certain
11
Cole Taylor shareholders in exchange for stock and certain assets. The Notes
remained as obligations of the surviving company, which is now known as
Reliance Acceptance Group, Inc. ("RAG") and is the parent company for the
consumer finance company.
A detailed summary discussing the Company's write-down of the Notes and various
continuing lawsuits with respect to the Notes is included in the Company's 2001
Form 10-K filed with the Securities and Exchange Commission on December 24,
2001.
In late 2001, the Estate Representative for RAG arrived at a preliminary
settlement with certain parties that would allow RAG to settle or satisfy the
claims of certain of its creditors including the Company. Under the proposed
settlement, certain members of the Taylor family would be required to deliver
to RAG $15 million in cash, $30 million of trust preferred securities and 15%
of the outstanding common stock of Taylor Capital Group, Inc. the parent bank
holding company of Cole Taylor Bank. The proposed settlement is subject to
certain significant conditions and no assurances can be provided that the
settlement will be completed or that the Company will receive any settlement
proceeds. Since the amount of settlement, in any, cannot be quantified until
various legal processes are complete, no estimated recovery has been recorded
in the Company's financial statements as of December 31, 2001.
ASSET QUALITY
As of December 31, 2001, the Company had non-performing assets of $1.8 million.
The non-performing assets at December 31, 2001 included three single-family
homes in real estate in judgment, two multi-unit building, seven single-family
residences, and one consumer loan. There were no assets classified as
doubtful.
The Company's ratio of non-performing loans to net loans receivable remains
below industry standards as well as our national and regional peers. The 0.26%
non-performing assets to total assets, reflects an increase compared to
September 30, 2001 due to an overall weakened economy. A review of the
foreclosed residential properties has established that no specific allowances
were necessary, and management does not expect any material losses from the
non-performing loans.
12
AVERAGE BALANCE SHEET
The following table sets forth certain information relating to the Company's
average balance sheet and reflects the average yield on assets and average cost
of liabilities for the periods indicated. Such yields and costs are derived by
dividing income or expense by the average balance of assets or labilities,
respectively, for the periods shown. Average balances are derived from average
daily balances. The yields and costs include fees, which are considered
adjustments to yields.
Three months ended December 31,
2001 2000
Average
Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost
(dollars in thousands)
Interest-earning assets:
Loans receivable, net $ 454,845 8,270 7.27% $ 538,457 10,234 7.60%
Mortgage-backed securities 144,457 2,195 6.08% 2,924 53 7.25%
Interest-bearing deposits 1,570 7 1.78% 748 12 6.42%
Securities available for sale
and federal funds sold (4) 53,644 919 6.85% 85,241 1,634 7.67%
-------- ----- ----- ------- ----- -----
Total interest-earning assets 654,516 11,391 6.96% 627,370 11,933 7.61%
Non-interest earning assets 15,782 12,632
-------- -------
Total assets $ 670,298 640,002
======== =======
Interest-bearing liabilities:
Deposits:
Passbook & NOW accounts 156,178 1,085 2.78% 138,518 1,353 3.91%
Money market accounts 12,566 99 3.15% 12,079 109 3.61%
Certificate accounts 223,339 2,638 4.72% 200,023 3,553 6.46%
-------- ----- ----- ------- ----- -----
Total deposits 392,083 3,822 3.90% 370,620 5,015 5.41%
Borrowed funds 197,510 2,535 5.13% 208,497 3,538 6.79%
-------- ----- ----- ------- ----- -----
Total interest-bearing
liabilities 589,593 6,357 4.31% 579,117 8,553 5.91%
Non-interest bearing deposits 14,326 6,680
Other liabilities 15,811 10,522
-------- -------
Total liabilities 619,730 596,319
Stockholders' equity 50,568 43,683
-------- -------
Total liabilities and
stockholders' equity $ 670,298 $ 640,002
======== =======
Net interest income/interest
rate spread (1) 5,034 2.65% 3,380 1.70%
===== ===== ===== =====
Net earning assets/net
interest margin (2) $ 64,923 3.08% $ 48,253 2.16%
======== ===== ======= =====
Ratio of interest-earning
assets to interest-bearing
liabilities 1.11x 1.08x
==== ====
13
(1) Interest rate spread represents the difference between the average rate on
interest-earning assets and the average cost of interest bearing
liabilities.
(2) Net interest margin represents net interest income divided by average
interest-earning assets.
(3) Average yields and costs for the three month periods are annualized for
presentation purposes.
(4) Municipal bond yields included in securities available for sale category
above are not tax effected
COMPARISON OF OPERATING RESULTS FOR THE THREE MONTHS ENDED DECEMBER 31, 2001
AND DECEMBER 31, 2000
GENERAL. For the quarter ended December 31, 2001, earnings per diluted share
increased $0.51 to $0.92 from $0.41 for the same period in 2000. Net income
for the quarter was $1.9 million, compared with $863,000 in 2000. Earnings per
share and net income increased due to reduced interest expense and increased
non-interest income. The Company's net interest margin, the primary driver of
its earnings, increased from 2.16% for the quarter ended December 31, 2000 to
3.08% in 2001. Net interest income, before provision for loan losses, was $5.0
million for the quarter ended December 31, 2001, up $1.7 million or 49% from
$3.4 million in 2000. The increase in the Company's net interest income was
primarily the result of a significant decrease in interest expense.
INTEREST INCOME. Income from loans receivable, the chief contributor to
interest income, was $8.3 million for the quarter ended December 31, 2001, down
19% from the prior year. Income from loans receivable fell primarily as a
result of a decline in the quarterly outstanding average balances; $454.8
million for the quarter ended December 31, 2001, compared with $538.5 million
one year earlier. High repayments and loan sales that took place in the latter
half of fiscal 2001 and the first quarter of 2002 adversely affected both
volume and yield. Repayments from the first quarter totaled $42.6 million,
compared to $26.5 for the same quarter 2000.
The average balance of the securities available for sale portfolios, including
mortgage-backed securities increased to $198.1 million for the quarter ended
December 31, 2001, from $88.2 the same quarter last year. Interest generated
from mortgage-backed and investment securities for the quarter ended December
31, 2001 was $3.1 million, an increase of $1.4 million from the quarter ended
December 31, 2000. Changes were made to the mix of the investment portfolio to
include government and agency, mortgage-backed, corporate and municipal
securities. An initiative to maintain earning asset levels resulted in the
purchase of mortgage-backed securities with proceeds from repayments and the
sale of single-family conforming mortgages.
INTEREST EXPENSE. Total interest expense for the quarter ended December 31,
2001 was $6.4 million, down $2.2 million or 26% from $8.6 million one year ago.
Over the past year, the Federal Reserve lowered interest rates 11 times,
resulting in a gradual reduction of interest costs on both borrowed funds and
deposits. For the quarter ended December 31, 2001, interest expense on
deposits was $3.8 million, compared with $5.0 million a year ago, down $1.2
million, or 24%. Despite significant cuts in interest rates, especially on
some promotionally priced certificates of deposit, average deposits increased
$21.5 million, from $370.6 million for the quarter ended December 31, 2000 to
$392.1 million for the 2001 quarter.
14
Interest expense on borrowed funds declined 28%, to $2.5 million for the
quarter ended December 31, 2001, from $3.5 million in 2000. The improvement is
a combination of a smaller average outstanding balance; the average balance
decreased $10.9 million to $197.5 million for the quarter ended December 31,
2001, as well as an improved interest cost. The cost of borrowed funds
decreased 166 basis points in the first quarter of fiscal 2002 compared to the
same period last year.
PROVISION FOR LOAN LOSSES. The Company recorded a provision for loan losses of
$140,000 and $70,000, respectively, for the quarters ended December 31, 2001
and 2000. The increase was primarily a result of the shift in the composition
of the loan portfolio. Commercial and construction loans totaled $22.2 million
at December 31, 2001, compared to $7.8 million one year earlier. The provision
for loan losses reflects management's on-going evaluation of probable losses on
loans and the adequacy of the allowance for loan losses based on all pertinent
considerations, including, but not limited to, the overall economic conditions.
This evaluation is inherently subjective, as it requires estimates that are
susceptible to significant revisions as more information becomes available or
as future events occur. As of December 31, 2001, the allowance for loan losses
was $1.3 million. The ratio of the allowance for loan losses to net loans
receivable was 0.31% at December 31, 2001.
NON-INTEREST INCOME. Non-interest income was up $600,000, to $985,000 for the
quarter ended December 31, 2001, from $385,000 in the year earlier period. The
increase was primarily the result of a $541,000 before tax gain on the sale of
$23.1 million of loans held for sale. In addition, insurance and annuity
commissions totaled $220,000 for the quarter, up $74,000 or 51% from $146,000
in 2000. A reduction in the rate of commissions earned by the Bank was
overcome by an aggressive sales effort.
NON-INTEREST EXPENSE. Non-interest expense increased to $2.8 million for the
quarter ended December 31, 2001, compared with $2.4 million in the same period
in 2000, an increase of 14%. Salaries and employee benefits increased
$288,000. The increase is a result of normal annual salary increases combined
with additional personnel and higher group health insurance premiums.
Management has continued its efforts to control operating expenses.
INCOME TAXES. Income taxes increased $770,000 for the three months ended
December 31, 2001 to $1.2 million compared to $393,000 for the prior year. The
current quarter increase is a result of increased income before taxes combined
with the prior year's utilization of capital loss carry forwards.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
The OTS requires all regulated thrift institutions to calculate the estimated
change in the Bank's net portfolio value (NPV) assuming instantaneous, parallel
shifts in the Treasury yield curve of 100 to 300 basis points either up or down
in 100 basis point increments. The NPV is defined as the present value of
expected cash flows from existing assets less the present value of expected
cash flows from existing liabilities plus the present value of net expected
cash inflows from existing off-balance sheet contracts.
The OTS provides all institutions that file a Consolidated Maturity/Rate
schedule (CMR) as a part of their quarterly Thrift Financial Report with an
interest rate sensitivity report of NPV. The OTS simulation model uses a
discounted cash flow analysis and an option-based pricing approach to measuring
the interest rate sensitivity of NPV. The OTS model estimates the economics
15
value of each type of asset, liability, and off-balance sheet contact under the
assumption that the Treasury yield curve shifts instantaneously and parallel up
and down 100 to 300 basis points in 100 basis point increments. The OTS
provides thrifts the results of their interest rate sensitivity model, which is
based on information provided by the Bank, to estimate the sensitivity of NPV.
The OTS model utilizes an option-based pricing approach to estimate the
sensitivity of mortgage loans. The most significant embedded option in these
types of assets is the prepayment option of the borrowers. The OTS model uses
various price indications and prepayment assumptions to estimate sensitivity of
mortgage loans.
In the OTS model, the value of deposit accounts appears on the asset and
liability side of the NPV analysis. In estimating the value of certificate of
deposit accounts, the liability portion of the CD is represented by the implied
value when comparing the difference between the CD face rate and available
wholesale CD rates. On the asset side of the NPV calculation, the value of the
"customer relationship" due to the rollover of retail CD deposits represents an
intangible asset in the NPV calculation.
Other deposit accounts such as transaction accounts, money market deposit
accounts, passbook accounts, and non-interest bearing accounts also are
included on the asset and liability side of the NPV calculation in the OTS
model. The accounts are valued at 100% of the respective account balances on
the liability side. On the assets side of the analysis, the value of the
"customer relationship" of the various types of deposit accounts is reflected
as a deposit intangible.
The NPV sensitivity of borrowed funds is estimated by the OTS model based on a
discounted cash flow approach. The cash flows are assumed to consist of monthly
interest payments with principal paid at maturity.
The OTS model is based only on the Bank's balance sheet. The assets and
liabilities at the parent company level are short-term in nature, primarily
cash and equivalents, and were not considered in the analysis because they
would not have a material effect on the analysis of NPV sensitivity. The
following table sets forth the Company's most recent interest rate sensitivity
of NPV, as of September 30, 2001.
Net Portfolio Value as a %
Net Portfolio Value of Present Value of Assets
------------------------------ --------------------------
Rates $ Amount $ Change % Change NPV Ratio Change
- ---------- --------- -------- -------- --------- ---------
+ 300 bp 41,324 (39,870) (49)% 6.31% - 522 bp
+ 200 bp 54,777 (26,416) (33)% 8.16% - 337 bp
+ 100 bp 68,370 (12,824) (16)% 9.94% - 159 bp
0 bp 81,194 11.53%
- 100 bp 89,382 8,188 10 % 12.49% + 95 bp
- 200 bp 95,104 13,910 17 % 13.11% + 158 bp
- 300 bp - - - % -% + - bp
- -------------------------------------------------------------------------------
16
PART II - OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
The Company and the Bank are not engaged in any legal proceedings of a
material nature at the present time.
Item 2. CHANGES IN SECURITIES
Not applicable.
Item 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
Item 5. OTHER INFORMATION
None.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
None
(b) Reports on Form 8-K
None
17
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Fidelity Bancorp, Inc.
Dated: January 18, 2002 /s/ RAYMOND S. STOLARCZYK
---------------- --------------------------
Raymond S. Stolarczyk
Chairman and Chief Executive Officer
Dated: January 18, 2002 /s/ ELIZABETH A. DOOLAN
---------------- --------------------------
Elizabeth A. Doolan
Senior Vice President and Chief
Financial Officer