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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 March 31, 2002
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 3,081,490 shares of common stock, par value $.01, outstanding as of
May 3, 2002.
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FIDELITY BANCORP, INC.
FORM 10-Q
INDEX
PART I. FINANCIAL INFORMATION PAGE(S)
Item 1. Financial Statements
Consolidated Statements of Financial Condition
as of March 31, 2002 (unaudited) and September 30, 2001 1
Consolidated Statements of Earnings for the three and six
months ended March 31, 2002 and 2001 (unaudited) 2
Consolidated Statements of Changes in Stockholders' Equity
for the six months ended March 31, 2002 and 2001 (unaudited) 3-4
Consolidated Statements of Cash Flows for the six months
ended March 31, 2002 and 2001 (unaudited) 5-6
Notes to Consolidated Financial Statements (unaudited) 7-8
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 9-18
Item 3. Quantitative and Qualitative Disclosure about Market Risks 19-20
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 21
tem 2. Changes in Securities 21
Item 3. Defaults upon Senior Securities 21
Item 4. Submission of Matters to a Vote of Security Holders 21
Item 5. Other Information 21
Item 6. Exhibits and Reports on Form 8-K 22
SIGNATURE PAGE 23
1
FIDELITY BANCORP and SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (unaudited)
March 31, September 30,
ASSETS 2002 2001
Cash and due from banks $ 4,695 7,107
Interest-earning deposits 858 1,397
Federal funds sold 100 100
------- --------
Cash and cash equivalents 5,653 8,604
FHLB of Chicago stock, at cost 14,194 18,055
Mortgage-backed securities available for sale 179,970 127,685
Securities available for sale 49,872 42,006
Loans held for sale 84 41,219
Loans receivable, net of allowance for loan losses of $1,477
at March 31, 2002 and $1,236 at September 30, 2001 426,811 422,980
Accrued interest receivable 4,076 3,650
Premises and equipment 3,778 3,850
Other assets 1,223 657
------- -------
$ 685,661 668,706
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits 433,953 399,619
Borrowed funds 196,130 187,345
Advance payments by borrowers for taxes and insurance 2,204 7,193
Due to broker - 14,918
Other liabilities 4,992 10,247
------- -------
Total liabilities 637,279 619,322
STOCKHOLDERS' EQUITY
Preferred stock - -
Common stock 57 38
Additional paid-in capital 38,450 38,636
Retained earnings, substantially restricted 44,239 40,926
Treasury stock, at cost (30,932) (31,540)
Common stock acquired by Bank Recognition and Retention Plans (170) (178)
Accumulated other comprehensive income (loss) (3,262) 1,502
------- -------
TOTAL STOCKHOLDERS' EQUITY 48,382 49,384
------- -------
$ 685,661 668,706
======= =======
See accompanying notes to unaudited consolidated financial statements.
2
FIDELITY BANCORP and SUBSIDIARY
Consolidated Statements of Earnings (unaudited)
(Dollars in thousands, except for earnings per share)
Three Months ended Six Months ended
March 31, March 31,
2002 2001 2002 2001
-------------------- -----------------
(unaudited)
Interest Income:
Loans receivable $ 7,794 10,059 16,064 20,293
Securities 1,088 1,527 2,004 3,159
Mortgage-backed securities 1,950 53 4,145 106
Other interest income 8 17 18 31
------ ------ ------ ------
10,840 11,656 22,231 23,589
Interest Expense:
Deposits 3,537 4,962 7,359 9,977
Borrowed funds 2,110 3,121 4,645 6,659
------ ------ ------ ------
5,647 8,083 12,004 16,636
Net interest income before provision
for loan losses 5,193 3,573 10,227 6,953
Provision for loan losses 110 40 250 110
------ ------ ------ ------
Net interest income after provision
for loan losses 5,083 3,533 9,977 6,843
Non-Interest Income:
Fees and commissions 157 115 300 233
Insurance and annuity commissions 210 257 430 403
Gain on sale of securities 223 125 295 125
Gain on sale of loans 125 -- 666 --
Other 11 15 20 136
------ ------ ------ ------
726 512 1,711 897
Non-Interest Expense:
General and administrative expenses:
Salaries and employee benefits 1,576 1,393 3,275 2,804
Office occupancy and equipment 506 379 876 753
Data processing 130 143 262 277
Advertising and promotions 156 49 314 204
Other 444 390 856 755
------ ------ ------ ------
2,812 2,354 5,583 4,793
------ ------ ------ ------
Income before income taxes 2,997 1,691 6,105 2,947
Income tax expense 1,119 642 2,282 1,035
------ ------ ------ ------
Net income $ 1,878 1,049 3,823 1,912
====== ====== ====== ======
Earnings per share - basic (1) $ 0.61 0.35 1.25 0.63
Earnings per share - diluted (1) $ 0.59 0.33 1.20 0.61
====== ====== ====== ======
Comprehensive income $ (13) 1,474 (941) 3,226
====== ====== ====== ======
(1) Adjusted for the February 28, 2002 3-for-2 stock split which was effected
in the form of a stock dividend.
See accompanying notes to unaudited consolidated financial statements.
3
FIDELITY BANCORP and SUBSIDIARY
Consolidated Statements of Changes in Stockholders' Equity (unaudited)
Dollars in thousands (except for earnings per share)
Six months ended March 31, 2002 and 2001
Accumulated
Common Common Other
Additional Stock Stock Comprehensive
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 - - 1,912 - - - - 1,912
Change in accumulated other
comprehensive loss 1,314 1,314
--- ------ ------- ------- ------ ------ ---- -------
Total comprehensive income 3,226
Purchase of treasury stock
(21,000 shares) - - - (394) - - - (394)
Cash dividends ($0.16 per
share) - - (484) - - - - (484)
Amortization of award of
BRRP's stock - - - - - 7 - 7
Cost of ESOP shares released - - - - 189 - - 189
Exercise of stock options
and reissuance of treasury
shares (14,750 shares) - (114) - 244 - - - 130
Tax benefit related to
stock options exercised - 43 - - - - - 43
Market adjustment for
committed ESOP shares - 38 - - - - - 38
--- ------ ------- ------ ------ ----- ---- ------
Balance at March 31, 2001 $38 38,747 38,450 (31,541) - (184) 48 $45,558
=== ====== ======= ====== ====== ===== ==== =======
(continued)
4
FIDELITY BANCORP and SUBSIDIARY
Consolidated Statements of Changes in Stockholders' Equity
(unaudited) (continued)
Dollars in thousands (except for earnings per share)
Six months ended March 31, 2002 and 2001
Accumulated
Common Other
Common Stock Additional Stock Comprehensive
Par Paid-In Retained Treasury Acquired Income
Shares Value Capital Earnings Stock by BRRP's (Loss) Total
--- ------ ------- ------- ------ ------ ---- -------
Balance at
September 30, 2001 3,782,350 $ 38 38,636 40,926 (31,540) (178) 1,502 $ 49,384
Net income - - - 3,823 - - - 3,823
Change in accumulated
other comprehensive
income - - - - - - (4,764) (4,764)
--------- ------ ------- ------ ------ ----- ------ -------
Total comprehensive income (941)
Cash dividends ($0.17 per
share) - - - (510) - - - (510)
Amortization of award of
BRRP's stock - - - - - 8 - 8
Exercise of stock options
and reissuance of treasury
shares (34,000 shares) - - (266) - 608 - - 342
Tax benefit related to
stock options exercised - - 101 - - - - 101
3-for-2 stock split
effected in the form
of a 50% stock dividend
and payment of cash for
fractional shares 1,891,175 19 (21) - - - - (2)
--------- ------ ------- ------ ------ ----- ------ -------
Balance at
March 31, 2002 5,673,525 $ 57 38,450 44,239 (30,932) (170) (3,262) $ 48,382
========= ====== ======= ====== ======= ====== ======= =======
See accompanying notes to unaudited consolidated financial statements.
5
FIDELITY BANCORP and SUBSIDIARY
Consolidated Statements of Cash Flows (unaudited)
(Dollars in thousands)
Six months ended March 31, 2002 2001
------ ------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 3,823 1,912
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 265 185
Provision for loan losses 250 110
Net amortization and accretion of premiums and discounts 296 (67)
Amortization of cost of stock benefit plans 8 7
ESOP -- 227
Deferred loan fees, net of amortization 141 93
Stock dividend from FHLB of Chicago (439) (401)
Loans originated for sale (3,980) --
Proceeds from loans originated for sale 4,042 --
Gain on ales of securities, mortgage-backed
securities and loans (961) (125)
Gain on sale of real estate owned (11) --
Amortization of deposit base intangible 2 7
Decrease (increase) in accrued interest receivable (426) 559
Decrease (increase) in other assets (109) 679
Increase (decrease) in other liabilities (2,266) 1,540
------ ------
Net cash provided by operating activities 635 4,726
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of mortgage-backed securities (167,720) --
Purchase of securities (40,061) (44,030)
Purchase of FHLB of Chicago stock (51,200) (229)
Proceeds from maturities of securities 20,000 20,000
Proceeds from sale of securities and mortgage-backed
securities 90,264 14,125
Proceeds from sale of real estate owned 110 4
Proceeds from redemption of FHLB of Chicago stock 55,500 --
Loans originated for investments (93,755) (49,409)
Proceeds from sale of loans 37,829 --
Purchase of premises and equipment (193) (161)
Principal repayments collected on loans receivable 92,888 62,371
Principal repayments collected on mortgage-backed
securities 14,792 336
------ ------
Net cash used in investing activities (41,546) 3,007
(continued)
6
FIDELITY BANCORP and SUBSIDIARY
Consolidated Statements of Cash Flows (unaudited)
(Dollars in thousands)
Six months ended March 31, 2002 2001
------ ------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits 34,334 6,892
Net (increase) decrease in borrowed funds 8,785 (10,800)
Net increase (decrease) in advance payments
by borrowers for taxes and insurance (4,989) 1,055
Purchase of treasury stock -- (394)
Payment of common stock dividends (510) (484)
Payment of fractional shares for 3-for-2 stock split (2) --
Proceeds from exercise of stock options 342 130
------ ------
Net cash provided by (used in) financing activities 37,960 (3,601)
------ ------
Net change in cash and cash equivalents (2,951) 4,132
Cash and cash equivalents at beginning of period 8,604 6,195
------ ------
Cash and cash equivalents at end of period $ 5,653 10,327
====== ======
CASH PAID DURING THE PERIOD FOR:
Interest $ 12,013 16,548
Income taxes 3,780 648
NON-CASH INVESTING ACTIVITIES -
Loans transferred to real estate in foreclosure 546 11
Due from broker (14,918) 5,000
====== ======
See accompanying notes to unaudited consolidated financial statements.
7
FIDELITY BANCORP, INC.
NOTES TO UNAUDITED 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 six months ended March 31,
2002 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) COMMON STOCK
On January 22, 2002, the Company's Board of Directors approved a 3-for-2 stock
split to be effected in the form of a stock dividend to common stockholders of
record as of February 6, 2002 with a payment date of February 28, 2002.
Earnings and dividends per share for all periods have been restated to reflect
the 3-for-2 stock split.
(3) EARNINGS PER SHARE
Basic earnings per share for the three months ended March 31, 2002 and 2001
were computed by dividing net income by the weighted average number of shares
of common stock outstanding for the periods, which were 3,080,588 and
3,021,844, respectively. Basic earnings per share for the six months ended
March 31, 2002 and 2001 were computed by dividing net income by the weighted
average number of shares of common stock outstanding for the periods, which
were 3,056,853 and 3,021,844, respectively. ESOP shares are considered
outstanding for the calculations unless unearned.
Diluted earnings per share for the three months ended March 31, 2002 and 2001
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 3,207,453 and 3,155,625, respectively. Diluted earnings per share for the
six months ended March 31, 2002 and 2001 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 3,195,652 and 3,155,716,
respectively. Diluted earnings per share include the dilutive effects of
additional potential issuable common stock under stock options.
8
(4) 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.
(5) COMMITMENTS AND CONTINGENCIES
At March 31, 2002, the Bank had outstanding commitments to originate new loans
of $9.2 million, of which $958,000 were fixed rate, with rates ranging from
6.50% to 8.00%, and $8.2 million were adjustable rate commitments.
Additionally, the Bank has ten construction and development loan commitments
for $22.6 million with floating rates based on prime plus a margin. Net draws
on these construction and development loan commitments totaled $14.6 million
through March 31, 2002.
(6) RECLASSIFICATIONS
Certain reclassifications have been made in prior years financial statements to
conform to the current year's presentation.
(7) 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.
9
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
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 reported earnings for the second fiscal quarter ended March 31,
2002 of $1.9 million, compared with $1.0 million for the same quarter a year
ago. Earnings per diluted share for the quarter and six months were $0.59 and
$1.20 per share in 2001, an increase from $0.33 and $0.61 in 2001,
respectively. Earnings per share and net income for the quarter were up from
the previous year's results due to an improved net interest margin and
increased non-interest income.
The Company also announced that its board of directors declared a quarterly
dividend of $0.09 per share, payable May 15, 2002 to shareholders of record as
of April 30, 2002.
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995
This document (including information incorporated by reference) contains, and
future oral and written statements of the Company and its management may
contain, forward-looking statements, within the meaning of such term in the
Private Securities Litigation Reform Act of 1995, with respect to the financial
condition, results of operations, plans, objectives, future performance and
business of the Company. Forward-looking statements, which may be based upon
beliefs, expectations and assumptions of the Company's management and on
information currently available to management, are generally identifiable by
the use of words such as "believe," "expect," "anticipate," "plan," "intend,"
"estimate," "may," "will," "would," "could," "should" or other similar
expressions. Additionally, all statements in this document, including
forward-looking statements, speak only as of the date they are made, and the
Company undertakes no obligation to update any statement in light of new
information or future events.
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 effect on the operations and future prospects of the Company and its
subsidiaries include, but are not limited to, the following:
- - The strength of the United States economy in general and the strength of the
local economies in which the Company conducts its operations which may be less
favorable than expected and may result in, among other things, a deterioration
in the credit quality and value of the Company's assets.
10
- - The economic impact of the terrorist attacks that occurred on September
11th, as well as any future threats and attacks, and the response of the United
States to any such threats and attacks.
- - The effects of, and changes in, federal, state and local laws, regulations
and policies affecting banking, securities, insurance and monetary and
financial matters.
- - The effects of changes in interest rates (including the effects of changes
in the rate of prepayments of the Company's assets) and the policies of the
Board of Governors of the Federal Reserve System.
- - The ability of the Company to compete with other financial institutions as
effectively as the Company currently intends due to increases in competitive
pressures in the financial services sector.
- - The inability of the Company to obtain new customers and to retain existing
customers.
- - The timely development and acceptance of products and services, including
products and services offered through alternative delivery channels such as the
Internet.
- - Technological changes implemented by the Company and by other parties,
including third party vendors, which may be more difficult or more expensive
than anticipated or which may have unforeseen consequences to the Company and
its customers.
- - The ability of the Company to develop and maintain secure and reliable
electronic systems.
- - The ability of the Company to retain key executives and employees and the
difficulty that the Company may experience in replacing key executives and
employees in an effective manner.
- - Consumer spending and saving habits which may change in a manner that
affects the Company's business adversely.
- - Business combinations and the integration of acquired businesses which may
be more difficult or expensive than expected.
- - The costs, effects and outcomes of existing or future litigation.
- - Changes in accounting policies and practices, as may be adopted by state and
federal regulatory agencies and the Financial Accounting Standards Board.
- - The ability of the Company to manage the risks associated with the foregoing
as well as anticipated.
These risks and uncertainties should be considered in evaluating
forward-looking statements and undue reliance should not be placed on such
statements. Additional information concerning the Company and its business,
including other 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.
11
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 March 31, 2002, cash and cash
equivalents totaled $5.7 million.
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 rate movements. Net interest income
in 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 for the six months ended March 31, 2002, were $635,000. Net cash used
$41.5 million in investing activities for the six-month period ended March 31,
2002. During the period investing activities consisted of loans originated for
investment and purchases of mortgage-backed securities and securities, largely
offset by principal collections on loans, proceeds from maturities of
securities and proceeds from sales of securities, mortgage-backed securities
and loans. Cash flows provided by financing activities amounted to $38.0
million for the six months ended March 31, 2002. Growth in deposits of $34.3
millions and a net increase in borrowed funds of $8.8 million was partially
reduced by the payment of real estate taxes for borrowers.
At March 31, 2002, the Bank had outstanding commitments to fund loans of $9.2
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 March 31, 2002 totaled $205.9 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 March 31, 2002, the Company and the
Bank met the capital adequacy requirements to which they are subject. The
Bank's Tangible Equity ratio at March 31, 2002 was 7.62%. The Tier 1 Capital
12
ratio was 7.62%, the Tier 1 Risk-Based ratio was 18.18%, and the Total
Risk-Based Capital ratio was 18.69%.
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 certain minimum total risk-based, Tier 1 risk-based,
and Tier 1 leverage ratios. There are no conditions or events since that
notification that would have the effect of changing the Company's or the Bank's
categorization.
CHANGES IN FINANCIAL CONDITION
Total assets at March 31, 2002 were $685.7 million, compared to $668.7 million
at September 30, 2001.
Mortgage-backed securities classified as available for sale were $180.0 million
at March 31, 2002. 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 and
supplemented by advances from the FHLB of Chicago.
Net loans receivable at March 31, 2002 were $426.8 million, compared with
$423.0 million at September 30, 2001. Solid demand for loan products,
especially higher-yielding multi-family mortgages, led to the loan growth,
despite heavy repayments from refinance activity. The Company plans to
continue its focus on generating multi-family loans and is anticipating
continued strong loan demand. The Company has recently seen a resurgence in
the purchase market after a long period of refinance activity. New loans
closed, including multi-family and commercial mortgages and loans secured by
commercial leases, totaled $93.8 million for the six months ended March 31,
2002. Loan repayments totaled $92.9 million for the six months ended March 31,
2002, compared with $62.4 million for the same period in 2001.
During the first six months, the Bank recorded three loan sales to FNMA from
the held for sale category. The Bank recorded $37.8 million in proceeds from
the sale of these fixed-rate 30-year mortgages. These sales generated $643,800
of pre-tax gains and a $126,700 deferred servicing asset. In addition to these
sales, normal operations originated $4.0 million in loans available for sale.
These were sold on an individual basis to FHLMC and produced a pre-tax profit
of $21,900.
Through deposit retention efforts and the addition of a wholesale jumbo
certificate of deposit program, deposits for the six-month period grew 9% or
$34.3 million to $434.0 million from $399.6 million at September 30, 2001. The
wholesale CD program generated $28.7 million in deposits with terms of between
12 and 24 months that were generally longer in term and lower in rate than
certificates generated from the bank's retail customers. The Bank also added a
new checking product, power-checking, which attracted $13.3 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 $15.6 million during the first half of
fiscal 2002. FHLB advances increased $8.7 million to $196.1 million at March
31, 2002 from September 30, 2001.
13
Book value per share on March 31, 2002 was $15.70, compared with $16.30 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 $16.76 at March 31, 2002,
an increase of 3%, compared to $15.80 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
Cole Taylor shareholders in exchange for stock and certain assets. The Notes
remained as obligations of the surviving company, which became known as
Reliance Acceptance Group, Inc. ("RAG") and was the parent company for only 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 March 31, 2002.
ASSET QUALITY
As of March 31, 2002, the Company had non-performing assets of $1.5 million,
consisting of $1.1 million in non-performing loans and $447,000 of real estate
in foreclosure. The non-performing assets at March 31, 2002 included 9
single-family residences, 4 multi-unit residence, and 2 consumer loans. 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 0.22%
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
resolution of non-performing loans.
14
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 liabilities,
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 March 31, Six Months Ended
2002 2001 March 31, 2002
------------------------ ----------------------- ----------------------
Inter- Average Inter- Average Inter- Average
Average est Yield Average est Yield Average est Yield
(dollars in thousands)
------------------------ ----------------------- ----------------------
Interest-earning assets:
Loans receivable, net $433,168 7,794 7.20% 532,426 10,059 7.56% 444,126 16,064 7.23%
Mortgage-backed securities 133,886 1 950 5.83% 2,931 53 7.23% 140,492 4,145 5.90%
Interest-bearing deposits 1,355 6 1.77% 762 10 5.25% 1,679 13 1.55%
Investment securities and
federal funds 75,141 1,090 5.80% 86,775 1,534 7.07% 62,876 2,009 6.39%
------- ----- ----- ------ ----- ----- ------- ----- -----
Total interest-earning
assets 643,550 10,840 6.74% 622,894 11,656 7.49% 649,173 22,231 6.85%
Non-interest earning
assets 13,415 10,619 14,630
------- ------ -------
Total assets $656,965 633,513 663,803
======= ======= =======
Interest-bearing liabilities:
Deposits:
Passbook & NOW accounts 166,570 991 2.38% 137,743 1,209 3.51% 161,317 2,077 2.58%
Money market account 14,996 102 2.72% 11,520 102 3.54% 13,767 200 2.91%
Certificate accounts 234,799 2,444 4.16% 229,634 3,651 6.36% 229,006 5,082 4.44%
------- ----- ----- ------- ----- ----- ------- ----- -----
Total deposits 416,365 3,537 3.40% 378,897 4,962 5.24% 404,090 7,359 3.64%
Borrowed funds 165,171 2,110 5.11% 191,121 3,121 6.53% 181,701 4,645 5.11%
------- ----- ----- ------- ----- ----- ------- ----- -----
Total interest-bearing
liabilities 581,536 5,647 3.88% 570,018 8,083 5.67% 585,791 12,004 4.10%
Non-interest bearing
deposits 14,382 7,191 14,244
Other liabilities 10,626 11,118 13,273
------- ------- -------
Total liabilities 606,544 588,327 613,308
Stockholders' equity 50,421 45,186 50,495
------- ------- -------
Total liabilities and
stockholders' equity $656,965 633,513 663,803
======= ======= =======
Net interest
income/interest rate
spread (1) 5,193 2.85% 3,573 1.81% 10,227 2.75%
Net earning assets/net
interest margin (2) $ 62,014 3.23% 52,876 2.29% 63,382 3.15%
Ratio of interest-earning
assets to interest-bearing
liabilities 1.11x 1.09x 1.11x
15
(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 and six month periods are annual-
ized for presentation purposes.
16
COMPARISON OF OPERATING RESULTS FOR THE THREE MONTHS ENDED MARCH 31, 2002 AND
MARCH 31, 2001
GENERAL. Earnings per diluted share for the quarter ended March 31, 2002 was
$0.59 up $0.26 per share from $0.33 for the same period in 2001. Net income
for the three months ended March 31, 2002 was $1.9 million, an increase of
$829,000 from the net income of $1.0 million for the three months ended March
31, 2001. Earnings per share and net income for the quarter were up from the
previous year's results due to an improved net interest margin and increased
non-interest income.
INTEREST INCOME. Income from loans receivable, the largest contributor to
interest income, was $7.8 million for the quarter ended March 31, 2002, down
22.5% from the prior year. The decrease reflects a combination of less loan
volume coupled with lower interest rates. The average loans outstanding
decreased $99.3 million, comparing March 31, 2002 to March 31, 2001, due to
loan sales and high repayment volume. The yield on loans decreased 36 basis
points, primarily due to significant refinance activity. Interest income from
mortgage-backed securities and investment portfolio increased $1.4 million.
The increase in investment income was generated by a $118.3 million increase in
the average outstanding investment portfolio, from $89.7 million for the
quarter ended March 31, 2001 to $209.0 million for the quarter ended March 31,
2002. The purchases were funded by the proceeds from heavy refinance activity
as well as the redeployment of the proceeds from the sale of mortgage loans.
Gross interest income totaled $10.8 million for the three months ended March
31, 2002, down 7.0%, or $816,000 from $11.7 million for the quarter ended March
31, 2001.
INTEREST EXPENSE. 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. Interest expense on deposits for the quarter
decreased $1.4 million, from $5.0 million to $3.5 million. The average deposit
balance increased 9.9% from $378.9 million for the quarter ended March 31, 2001
to $416.4 million for the quarter ended March 31, 2002. The average cost of
deposits decreased 184 basis points to 3.40% for the quarter ended March 31,
2002. Interest expense on borrowed funds decreased $1.0 million to $2.1
million for the quarter ended March 31, 2002, from $3.1 million for the prior
year's comparable quarter. The average cost of borrowings has also been
reduced significantly due to the current interest rate scenario. The average
cost of borrowings for the quarter ended March 31, 2002 was 5.11%.
PROVISION FOR LOAN LOSSES. The Company recorded a provision for loan losses of
$110,000 and $40,000 for the quarters ended March 31, 2002 and 2001,
respectively. The increase was primarily the result of a shift in the mix of
the loan portfolio. The current portfolio includes a mix of residential,
commercial properties, acquisition and development loans, commercial loans
secured by leases as well as multi-family. These loans total $32.2 million at
March 31, 2002, compared to $14.6 million one year ago. The provision for loan
losses reflects management's on-going evaluation of losses on loans and the
adequacy of the allowance for loan losses based on all pertinent
considerations, including current market conditions. As of March 31, 2002, the
allowance for loan losses was $1.5 million. The ratio of the allowance for
loan losses to net loans receivable was 0.35% at March 31, 2002.
NON-INTEREST INCOME. Non-interest income increased $214,000 or 41.8% to
$726,000 for the second quarter of fiscal 2002. Excluding gains on the sales
of loans and securities in both the current and prior year, non-interest income
remained stable.
17
NON-INTEREST EXPENSE. Non-interest expense for the three months ended March
31, 2002 increased $458,000 to $2.8 million from the three months ended March
31, 2001 of $2.4 million. Increases were noted in salaries and employee
benefits, equipment and advertising expenses. The increase in salaries and
employee benefits is a result of normal annual salary increases combined with
the costs associated with additional personnel and higher group health
insurance premiums. The increase in equipment is a direct result of
accelerated depreciation of computer equipment that will be obsolete after
December 31, 2002. Management has continued its efforts to control operating
expenses.
INCOME TAXES. Income taxes increased $477,000 for the three months ended March
31, 2002 to $1.1 million compared to $642,000 for the prior year due to
decreased taxable income. The effective tax rate remains stable at 37.3% for
the three month period ended March 31, 2002.
COMPARISON OF OPERATING RESULTS FOR THE SIX MONTHS ENDED MARCH 31, 2002 AND
MARCH 31, 2001
GENERAL. For the first six months of the fiscal year, earnings per diluted
share were $1.20, up $0.59 per share from $0.61 per diluted share in the first
six months of 2001. Net income for the first six months of 2002 was $3.8
million which is double the net income reported for the same period in 2001.
The results reflect continued improvement in the Company's net interest margin.
With the balance sheet initiatives (which included loans and securities sales)
that began six months ago as the Federal Reserve lowered short-term interest
rates, the Company has achieved three things: substantial increases in
non-interest income; stabilized earning asset levels; and laid the groundwork
for future revenue streams.
INTEREST INCOME. Income from loans receivable, the chief contributor to
interest income, was $16.1 million for the six months ended March 31, 2002,
down 20.8% from the prior year. Income from loans receivable fell primarily as
a result of a decline in the six-month outstanding average balances; $444.1
million for the six-month period ended March 31, 2002, compared with $535.5
million one year earlier. High repayments and loan sales that took place in
the latter half of fiscal 2001 and the first half of 2002 adversely affected
both volume and yield. Repayments from the first half of fiscal 2002 totaled
$92.9 million, compared to $62.4 for the same period in 2001.
The average balance of the securities available for sale portfolios, including
mortgage-backed securities increased to $203.4 million for the six-month period
ended March 31, 2002, from $88.9 the same period last year. Interest generated
from mortgage-backed and investment securities for the six month period ended
march 31, 2002 was $6.2 million, an increase of $2.9 million from the six-month
period ended March 31, 2001. 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 six months ended March 31,
2002 was $12.0 million, down $4.6 million, or 27.8%, from $16.6 million in
2001. Interest expense on borrowed funds declined 30.2%, to $4.6 million for
the six months ended March 31, 2002, from $6.7 million in 2001 as high priced
borrowed funds matured. The effect of $25 million in higher cost borrowings
maturing in the third quarter of this fiscal year, the extension of maturities
18
on certain FHLB advances by management, and a moderate improvement in the mix
of core deposits, should produce flat to moderately decreased interest expense
for the remainder of this fiscal year.
For the six months ended March 31, 2002, interest expense on deposits was $7.4
million, down $2.6 million or 26.2% from $10.0 million in 2001. Average
interest-bearing deposits increased $29.4 million, or 7.8%, to $404.1 million
for the six-month period in 2002 compared to $374.7 million in 2001. The
weighted average cost of deposits decreased 169 basis points.
PROVISION FOR LOAN LOSSES. The Company recorded a $250,000 provision for loan
losses in the first six months of fiscal 2002, compared to $110,000 in 2001.
The increase was primarily a result of the shift in the composition of the loan
portfolio. Commercial and construction loans totaled $32.2 million at March
31, 2002, compared to $14.6 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 March 31, 2002, the allowance for loan losses
was $1.5 million.
NON-INTEREST INCOME. Non-interest income was up $814,000 to $1.7 million for
the six month period ended March 31, 2002 from $897,000 in the year earlier
period. The increase was primarily the result of a $961,000 before tax gain on
the sale of loans and securities. Insurance and annuity commissions
contributed $430,000 for the six months, up $27,000 or 6.7% from $403,000 in
2001. However, without the gain on the sale of loans and investments,
non-interest income for the six-month period in 2002 was essentially unchanged
from 2001.
NON-INTEREST EXPENSE. Non-interest expense increased to $5.6 million for the
six months ended March 31, 2002, compared with $4.8 million in the same period
in 2001, up 16.5%. Employee benefits, including higher group health insurance
premiums, accelerated depreciation for obsolescence in the Company's computer
hardware and software and increased advertising expenses contributed to the
increase.
INCOME TAXES. Income taxes increased $1.3 million for the six-months ended
March 31, 2002 to $2.3 million compared to $1.0 million for the prior year.
The Company's effective income tax rate increased to 37.3% from 35.1% for the
six-month period ended March 31, 2001. The lower effective income tax rate in
the prior year was due to the utilization of capital loss carry forwards in
connection with the gain on sale of the Bank's subsidiary's interest in a real
estate investment.
19
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
value of each type of asset, liability, and off-balance sheet contract 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.
20
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 December 31, 2001.
Net Portfolio Value as a %
Net Portfolio Value of Present Value of Assets
------------------------------ --------------------------
Changes in
Rates $ Amount $ Change % Change NPV Ratio Change
- ---------- --------- -------- -------- --------- ---------
+ 300 bp 40,217 (38,917) (49)% 6.20% - 510 bp
+ 200 bp 52,744 (26,391) (33)% 7.93% - 337 bp
+ 100 bp 65,607 (13,527) (17)% 9.62% - 169 bp
0 bp 79,134 11.30%
- 100 bp 87,759 8,624 11 % 12.30% + 100 bp
- 200 bp -- -- -- % 9.98% -- bp
- 300 bp -- -- -- % 10.57% -- bp
- -------------------------------------------------------------------------------
21
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
(a) The Company held its annual meeting of stockholders on
January 23, 2002.
(b) The directors whose terms of office continued after the annual
meeting are as follows:
For Against
Edward J. Burda 1,325,375 289,382
Patrick J. Flynn 1,343,157 271,600
The directors whose terms of office continued after the annual
meeting are as follows:
Thomas E. Bentel
Raymond S. Stolarczyk
Paul J. Bielat
Richard J. Kasten
(c) A brief description of each other matter voted on and the
number of votes cast:
(i) Ratification of Crowe Chizek and Company LLP as
independent auditors for the fiscal year ending
September 30, 2002.
For Against Abstain
1,611,557 1,000 2,200
ITEM 5. OTHER INFORMATION
None
22
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
None.
(b) Reports on Form 8-K
1. Form 8-K dated January 22, 2002. Registrant issued a press
release dated January 22, 2002 regarding a three-for-two
stock split.
2. Form 8-K dated January 23, 2002. Registrant submitted a
script prepared for use on January 23, 2002 by Mr. Raymond
Stolarczyk and Mr. Thomas Bentel, discussing financial
results for the fiscal year ended September 30, 2001, and
financial and strategic goals for fiscal year 2002.
23
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: May 15, 2002 /s/ RAYMOND S. STOLARCZYK
-----------------------------
Raymond S. Stolarczyk
Chairman and Chief Executive Officer
Dated: May 15, 2002 /s/ ELIZABETH A. DOOLAN
-----------------------------
Elizabeth A. DOOLAN
Sr. V. P. and Chief Financial Officer