================================================================= ============== 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 June 30, 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 August 9, 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 June 30, 2002 (unaudited) and September 30, 2001 1 Consolidated Statements of Earnings for the three and nine months ended June 30, 2002 and 2001 (unaudited) 2 Consolidated Statements of Changes in Stockholders' Equity for the nine months ended June 30, 2002 and 2001 (unaudited) 3-4 Consolidated Statements of Cash Flows for the nine months ended June 30, 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 21-22 SIGNATURE PAGE 23 1 FIDELITY BANCORP and SUBSIDIARY CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (unaudited) June 30, September 30, ASSETS 2002 2001 Cash and due from banks $ 6,707 7,107 Interest-earning deposits 3,021 1,397 Federal funds sold 100 100 - ------- -------- Cash and cash equivalents 9,828 8,604 FHLB of Chicago stock, at cost 31,665 18,055 Mortgage-backed securities available for sale 179,264 127,685 Securities available for sale 35,856 42,006 Loans held for sale 83 41,219 Loans receivable, net of allowance for loan losses of $1,678 at June 30, 2002 and $1,236 at September 30, 2001 427,857 422,980 Accrued interest receivable 3,581 3,650 Premises and equipment 3,634 3,850 Other assets 1,211 657 - ------- ------- $ 692,979 668,706 ======= ======= LIABILITIES AND STOCKHOLDERS' EQUITY LIABILITIES Deposits 435,739 399,619 Borrowed funds 157,220 187,345 Advance payments by borrowers for taxes and insurance 4,292 7,193 Due to broker 35,374 14,918 Other liabilities 6,896 10,247 - ------- ------- Total liabilities 639,521 619,322 STOCKHOLDERS' EQUITY Preferred stock - - - Common stock 57 38 Additional paid-in capital 38,450 38,636 Retained earnings, substantially restricted 46,185 40,926 Treasury stock, at cost (30,932) (31,540) Common stock acquired by Bank Recognition and Retention Plans (159) (178) Accumulated other comprehensive income (loss) (143) 1,502 - ------- ------- TOTAL STOCKHOLDERS' EQUITY 53,458 49,384 - ------- ------- $ 692,979 668,706 ======= ======= 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 Nine Months ended June 30, June 30, 2002 2001 2002 2001 -------------------- ----------------- (unaudited) Interest Income: Loans receivable $ 7,665 9,532 23,729 29,825 Securities 995 1,385 2,999 4,544 Mortgage-backed securities 2,524 251 6,669 357 Other interest income 8 17 26 48 ------ ------ ------ ------ 11,192 11,185 33,423 34,774 Interest Expense: Deposits 3,283 4,760 10,642 14,737 Borrowed funds 2,091 2,808 6,736 9,467 ------ ------ ------ ------ 5,374 7,568 17,378 24,204 Net interest income before provision for loan losses 5,818 3,617 16,045 10,570 Provision for loan losses 200 70 450 180 ------ ------ ------ ------ Net interest income after provision for loan losses 5,618 3,547 15,595 10,390 Non-Interest Income: Fees and commissions 195 118 495 351 Insurance and annuity commissions 208 222 638 625 Gain on sale of securities 239 77 534 202 Gain on sale of loans 10 14 676 14 Other 11 13 31 149 ------ ------ ------ ------ 663 444 2,374 1,341 Non-Interest Expense: General and administrative expenses: Salaries and employee benefits 1,569 1,299 4,844 4,103 Office occupancy and equipment 527 392 1,403 1,145 Data processing 109 98 371 375 Advertising and promotions 135 123 449 327 Other 456 345 1,312 1,100 ------ ------ ------ ------ 2,796 2,257 8,379 7,050 ------ ------ ------ ------ Income before income taxes 3,485 1,734 9,590 4,681 Income tax expense 1,262 647 3,544 1,682 ------ ------ ------ ------ Net income $ 2,223 1,087 6,046 2,999 ====== ====== ====== ====== Earnings per share - basic (1) $ 0.72 0.36 1.97 0.99 Earnings per share - diluted (1) $ 0.69 0.34 1.89 0.95 ====== ====== ====== ====== Comprehensive income $ 5,342 855 4,401 4,081 ====== ====== ====== ====== (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) Nine months ended June 30, 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 - - 2,999 - - - - 2,999 Change in accumulated other comprehensive loss 1,082 1,082 --- ------ ------- ------- - ------ ------ ---- ------- Total comprehensive income 4,081 Purchase of treasury stock (43,200 shares) - - - (562) - - - (562) Cash dividends ($0.24 per share) - - (726) - - - - (726) Amortization of award of BRRP's stock - - - - - 10 - 10 Cost of ESOP shares released - - - - 189 - - 189 Exercise of stock options and reissuance of treasury shares (28,275 shares) - (143) - 317 - - - 174 Tax benefit related to stock options exercised - 54 - - - - - 54 Market adjustment for committed ESOP shares - 38 - - - - - 38 --- ------ ------- ------ - ------ ----- ---- ------ Balance at June 30, 2001 $38 38,729 39,295 (31,636) - (181) (184) $46,061 === ====== ======= ====== ====== ===== ==== ======= (continued) 4 FIDELITY BANCORP and SUBSIDIARY Consolidated Statements of Changes in Stockholders' Equity (unaudited) (continued) Dollars in thousands (except for earnings per share) Nine months ended June 30, 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 - - - 6,046 - - - 6,046 Change in accumulated other comprehensive income - - - - - - (1,645) (1,645) --------- ------ ------- ------ - ------ ----- ------ ------- Total comprehensive income 4,401 Cash dividends ($0.26 per share) - - - (787) - - - (787) Amortization of award of BRRP's stock - - - - - 19 - 19 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 June 30, 2002 5,673,525 $ 57 38,450 46,185 (30,932) (159) (143) $ 53,458 ========= ====== ======= ====== ======= ====== ======= ======= See accompanying notes to unaudited consolidated financial statements. 5 FIDELITY BANCORP and SUBSIDIARY Consolidated Statements of Cash Flows (unaudited) (Dollars in thousands) Nine months ended June 30, 2002 2001 - ------ ------ CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 6,046 2,999 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 461 286 Provision for loan losses 450 180 Net amortization and accretion of premiums and discounts 281 (74) Amortization of cost of stock benefit plans 19 10 ESOP - -- 227 Deferred loan fees, net of amortization 106 250 Stock dividend from FHLB of Chicago (910) (585) Loans originated for sale (4,349) -- Proceeds from loans originated for sale 4,422 -- Gain on ales of securities, mortgage-backed securities and loans (1,209) (216) Gain on sale of real estate owned (11) 5 Amortization of deposit base intangible 2 9 Decrease in accrued interest receivable 69 465 Decrease (increase) in other assets (149) 679 Increase (decrease) in other liabilities (2,205) 1,959 - ------ ------ Net cash provided by operating activities 3,023 6,194 CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of mortgage-backed securities (191,603) (30,322) Purchase of securities (53,941) (38,647) Purchase of FHLB of Chicago stock (107,100) (229) Proceeds from maturities of securities 20,000 20,000 Proceeds from sale of securities and mortgage-backed securities 176,548 26,568 Proceeds from sale of real estate owned 110 280 Proceeds from redemption of FHLB of Chicago stock 94,400 -- Loans originated for investments (131,624) (93,752) Proceeds from sale of loans 37,829 1,280 Purchase of premises and equipment (245) (301) Principal repayments collected on loans receivable 129,598 112,242 Principal repayments collected on mortgage-backed securities 21,582 1,185 - ------ ------ Net cash used in investing activities (4,446) (1,696) (continued) 6 FIDELITY BANCORP and SUBSIDIARY Consolidated Statements of Cash Flows (unaudited) (Dollars in thousands) Nine months ended June 30, 2002 2001 - ------ ------ CASH FLOWS FROM FINANCING ACTIVITIES: Net increase in deposits 36,120 7,720 Net decrease in borrowed funds (30,125) (14,890) Net increase (decrease) in advance payments by borrowers for taxes and insurance (2,901) 3,410 Purchase of treasury stock - -- (562) Payment of common stock dividends (787) (726) Payment of fractional shares for 3-for-2 stock split (2) -- Proceeds from exercise of stock options 342 228 - ------ ------ Net cash provided by (used in) financing activities 2,647 (4,820) - ------ ------ Net change in cash and cash equivalents 1,224 (322) Cash and cash equivalents at beginning of period 8,604 6,195 - ------ ------ Cash and cash equivalents at end of period $ 9,828 5,873 ====== ====== CASH PAID DURING THE PERIOD FOR: Interest $ 17,660 24,266 Income taxes 5,055 1,464 NON-CASH INVESTING ACTIVITIES - Loans transferred to real estate in foreclosure 546 277 Due from broker 20,456 -- ====== ====== 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 three and nine months ended June 30, 2002 are not necessarily indicative of results that may be expected for the entire fiscal year ended 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 June 30, 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 3,081,490 and 3,021,982 respectively. Basic earnings per share for the nine months ended June 30, 2002 and 2001 were computed by dividing net income by 3,065,065 and 3,021,951, the weighted average number of shares of common stock outstanding. Diluted earnings per share for the three months ended June 30, 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 that were 3,225,576 and 3,160,629, respectively. Diluted earnings per share for the nine months ended June 30, 2002 and 2001 were computed by dividing net income by 3,205,627 and 3,160,598, the weighted average number of shares of common stock and potential common stock outstanding. Diluted earnings per share include the dilutive effects of additional potential issuable shares 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 June 30, 2002 the Bank had outstanding commitments to originate new loans of $10.4 million, of which $689,000 were fixed rate, with rates ranging from 6.50% to 7.25%, and $9.7 million were adjustable rate commitments. Additionally, the Bank has four construction and development loan commitments currently totaling $12.1 million with floating rates based on prime plus a margin. Net draws on these construction and development loan commitments totaled $9.5 million through June 30, 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 periodically will be reviewed for impairment and will be 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 its 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 its 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 its financial statements. 9 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL Fidelity Bancorp, Inc. (the "Company"), is a savings and loan holding company incorporated under the laws of the State of Delaware and is primarily engaged in the retail banking business through its wholly-owned subsidiary, Fidelity Federal Savings Bank (the "Bank). 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 third fiscal quarter ended June 30, 2002 of $2.2 million, compared with $1.1 million for the same quarter a year ago. Earnings per diluted share for the quarter ended June 30, 2002 were $0.69 per share, up $0.35 per share, from $0.34 per share for the same period in 2001. For the first nine months of the fiscal year, earnings per diluted share were $1.89, up $0.94 per share from $0.95 per share for the nine-month period in 2001. Net income for the first nine months of 2002 was $6.0 million, compared with $3.0 million in 2001. Earnings per share and net income for the quarter were up from the previous year's results primarily 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 August 15, 2002 to shareholders of record as of July 31, 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. 10 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 subsidiary 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. - - 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 <Page> 11 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 June 30, 2002, cash and cash equivalents totaled $9.8 million. Mortgage-backed securities and securities available for sale represent a secondary source of liquidity to 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 of 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. Federal regulations require the Bank to maintain sufficient liquidity to ensure its safe and sound operation. At June 30, 2002, the Bank believes it was in compliance with OTS liquidity requirements. 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 nine months ended June 30, 2002, were $3.0 million. Net cash used in investing activities for the nine-month period ended June 30, 2002 was $4.4 million. 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 $2.6 million for the nine months ended June 30, 2002. Growth in deposits of $36.1 millions was offset by a net decrease in borrowed funds of $30.1 million and the payment of real estate taxes for borrowers. At June 30, 2002, the Bank had outstanding commitments to fund loans of $10.4 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 June 30, 2002 totaled $172.2 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, <Page> 12 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 June 30, 2002, the Company and the Bank met the capital adequacy requirements to which they are subject. The Bank's Tangible Equity ratio at June 30, 2002 was 7.78%. The Tier 1 Capital ratio was 7.78%, the Tier 1 Risk-Based ratio was 18.48% and the Total Risk-Based Capital ratio was 19.06%. The most recent notification from the federal banking agencies categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, the Bank must maintain minimum total risk-based, Tier 1 risk-based, and Tier 1 leverage ratios. There are no conditions or events since that notification that have changed the Bank's category. CHANGES IN FINANCIAL CONDITION Total assets at June 30, 2002 were $693.0 million, compared to $668.7 million at September 30, 2001. The increase is due to increases in mortgage-backed securities available for sale, which were funded by loan repayments and growth in deposits. 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. Loans receivable, net of allowance for loan losses, decreased $36.3 million to $427.9 million at June 30, 2002. While loan demand has remained steady, the low interest rate environment has produced increased repayments. New loans closed, including multi-family and commercial mortgages and loans secured by commercial leases, totaled $131.6 million for the nine months ended June 30, 2002. Loan repayments totaled $129.6 million for the nine months ended June 30, 2002, compared with $112.2 million for the same period in 2001. The Company continues to offer various loan products, and prices them competitively. During the first six months, the Company recorded three loan sales to FNMA from the held for sale category. The Company 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, operations originated $4.4 million in loans available for sale during the nine month period. These were sold on an individual basis to FHLMC and produced a pre-tax profit of $32,600. Through deposit retention efforts and the addition of a wholesale jumbo certificate of deposit program, deposits for the nine-month period grew 9% or $36.1 million to $435.7 million from $399.6 million at September 30, 2001. The wholesale CD program generated $32.1 million in deposits with terms of between 12 and 24 months which in general representtermstht are longer and lower in rates that are lower than certificates generated from the Company's retail customers. The Bank also added a <Page> 13 new checking product, power-checking, which attracted $13.0 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 $16.5 million during the first three quarters of fiscal 2002. FHLB advances decreased $30.1 million to $157.2 million at June 30, 2002 from September 30, 2001. A primary contributor to the decrease in borrowed funds is timing of securities purchased. At June 30, 2002, the Bank has commitments of $35.4 million with brokers. Book value per share on June 30, 2002 was $17.35, compared with $16.30 at September 30, 2001. The increase in book value per share was attributable to earnings retained, offset by an unrealized decline in market value in the mortgage-backed securities and securities available for sale portfolios. 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 Financial Group, Inc. 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 remained 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 prior filings with the Securities and Exchange Commission. On February 14, 2000, the Company filed a class action lawsuit in the Circuit Court of Cook County, Illinois against LaSalle National Bank and affiliates. The trial involving the primary defendants had been rescheduled to begin on June 18, 2001, but has been adjourned without setting a new date. On May 24, 2002, Taylor Capital Group, Inc. ("Taylor Capital") announced that it filed a registration statement with the Securities and Exchange Commission for an initial public offering of its common stock. The registration statement also covers the proposed offering of trust securities by TAYC Capital Trust I. Taylor Capital has announced its intent to fund the settlement of the outstanding litigation with the proceeds from the offerings. ASSET QUALITY As of June 30, 2002, the Company had non-performing loans of $961,000. The Bank's non-performing loans at June 30, 2002 included four multi-unit buildings, three single-family residences and one auto and one consumer loan. There were no assets classified as doubtful. The Company's ratio of non-performing loans to net loans receivable was 0.22% at June 30, 2002. The low ratio is a result of management's ongoing monitoring and follow-up procedures of delinquent customers. A review of the non-performing loans has established that no specific allowances were necessary. 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 June 30, Nine Months Ended 2002 2001 June 30, 2002 ------------------------ - ----------------------- ---------------------- Inter- Average Inter- Average Inter- Average Average est Yield(3) Average est Yield(3) Average est Yield(3) (dollars in thousands) ------------------------ - ----------------------- ---------------------- Interest-earning assets: Loans receivable, net $426,345 7,665 7.19% 511,930 9,532 7.45% 438,199 23,729 7.22% Mortgage-backed securities 168,082 2,524 6.01% 14,863 251 6.76% 470,188 6,669 6.04% Interest-bearing deposits 1,215 5 1.65% 1,458 15 4.12% 1,458 18 1.65% Investment securities and federal funds 64,907 998 6.15% 80,938 1,387 6.85% 66,120 3,007 6.06% ------- ----- ----- ------ - ----- ----- ------- ----- ----- Total interest-earning assets 660,549 11,192 6.78% 609,189 11,185 7.34% 652,965 33,423 6.82% Non-interest earning assets 13,530 13,907 14,274 ------- ------ ------- Total assets $674,079 623,096 667,239 ======= ======= ======= Interest-bearing liabilities: Deposits: Passbook & NOW accounts 166,185 923 2.22% 138,579 1,128 3.26% 162,939 2,999 2.45% Money market account 17,734 113 2.55% 11,642 104 3.57% 15,089 313 2.77% Certificate accounts 233,454 2,247 3.85% 227,689 3,528 6.20% 230,489 7,330 4.24% ------- ----- ----- ------- - ----- ----- ------- ----- ----- Total deposits 417,373 3,283 3.15% 377,910 4,760 5.04% 408,517 10,642 3.47% Borrowed funds 181,531 2,091 4.61% 176,886 2,808 6.35% 181,644 6,736 4.94% ------- ----- ----- ------- - ----- ----- ------- ----- ----- Total interest-bearing liabilities 598,904 5,374 3.59% 554,796 7,568 5.46% 590,161 17,378 3.93% Non-interest bearing deposits 13,192 9,155 13,894 Other liabilities 10,387 12,738 12,311 ------- ------- ------- Total liabilities 622,483 576,689 616,366 Stockholders' equity 51,596 46,407 50,873 ------- ------- ------- Total liabilities and stockholders' equity $674,079 623,096 667,239 ======= ======= ======= Net interest income/interest rate spread (1) 5,818 3.19% 3,617 1.89% 16,045 2.89% Net earning assets/net interest margin (2) $ 61,645 3.52% 54,393 2.37% 62,804 3.28% Ratio of interest-earning assets to interest-bearing liabilities 1.10x 1.10x 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 JUNE 30, 2002 AND JUNE 30, 2001 GENERAL. Earnings per diluted share for the quarter ended June 30, 2002 was $0.69, an increase of $0.35 from $0.34 for the same period in 2001. Net income for the three months ended June 30, 2002 was $2.2 million, an increase of $1.1 million from the net income of $1.1 million for the three months ended June 30, 2001. Earnings per share and net income for the quarter were up from the previous year's results primarily due to an improved net interest margin and increased non-interest income. INTEREST INCOME. Income from loans receivable was $7.7 million for the quarter ended June 30, 2002, down from the previous year of $9.5 million. The decrease reflects a combination of less loan volume coupled with lower interest rates. The average loans outstanding decreased $85.0 million, comparing June 30, 2002 to June 30, 2001, due to loan sales and high repayment volume. The yield on loans decreased 26 basis points, primarily due to significant refinance activity. Interest income from mortgage-backed securities and investment portfolio increased $1.9 million. The increase in investment income was generated by a $137.2 million increase in the average outstanding investment portfolio, from $95.8 million for the quarter ended June 30, 2001 to $233.0 million for the quarter ended June 30, 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 remained at $11.2 million for the three months ended June 30, 2002 and 2001. The Company has been actively managing the loan and investment portfolio in an effort to preserve total interest income in the current interest environment. INTEREST EXPENSE. The Federal Reserves' actions have resulted in the Company gradually reducing interest costs on both borrowed funds and deposits. Total interest expense for the quarter decreased $2.2 million from $7.6 million the previous year to $5.4 million. Interest expense on deposits decreased $1.5 million, from $4.8 million the previous year to $3.3 million. The reduced expense in deposit costs is twofold; the first being the decrease in the overall weighted average of interest bearing accounts. For the quarter ended June 30, 2002, the weighted average rate was 3.15%, a 189 basis point decrease over the prior quarter of 5.04%. This rate decrease combined with the change in the mix of the deposit base, including non-interest bearing accounts, accounts for the cost savings. Average transaction accounts for the quarter ended June 30, 2002 make-up 47.2% of the total deposit base, compared to 42.2% the same quarter a year ago. The Company continued to utilize FHLB advances as a reasonable cost source of funds for lending and investment opportunities when required. The average borrowings for the quarter ended June 30, 2002 increased slightly to $181.5 million from $176.9 million for the quarter ended June 30, 2001. The interest expense on these borrowed funds fell $717,000 due to a 174 basis point drop in the weighted average cost of borrowed funds. PROVISION FOR LOAN LOSSES. The Company recorded a provision for loan losses of $200,000 and $70,000 for the quarters ended June 30, 2002 and 2001, respectively. The increase was primarily the result of the shift in the composition of the loan portfolio to loans with higher risk. Commercial and construction loans totaled approximately $36 million at June 30, 2002, compared to approximately $15 million one year earlier. 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 economic conditions. As of June 30, 2002, the allowance for loan losses was $1.7 million. The quality of the loan portfolio remains good, with a ratio of 0.22% total non-performing loans to total loans. The ratio of the allowance for loan losses to net loans receivable was 0.39% at June 30, 2002. 17 NON-INTEREST INCOME. Non-interest income increased $219,000 or 49.3% to $663,000 for the third quarter of fiscal 2002. The third quarter of 2002 includes gain on sales of loans and investments totaling $249,000, compared to $91,000 the prior year. Also included in non-interest income are commissions from sales of annuity and mutual fund investments that are not FDIC insured, made through INVEST Financial Corporation. These insurance and annuity commissions generated $208,000, a 6.3% decrease compared to the same period in 2001. Fee and other income were up $75,000, due to increased loan servicing and broker fees earned. NON-INTEREST EXPENSE. Non-interest expense for the three months ended June 30, 2002 increased $539,000 to $2.8 million compared to $2.3 million in 2001. 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 $615,000 for the three months ended June 30, 2002 to $1.3 million, compared to $647,000 one-year ago. The increase is due to the income before taxes doubling to $3.5 million for the period June 30, 2002, compared to $1.7 million the quarter ended June 30, 2001. COMPARISON OF OPERATING RESULTS FOR THE NINE MONTHS ENDED JUNE 30, 2002 AND JUNE 30, 2001 GENERAL. For the first nine months of the fiscal year, earnings per diluted share were $1.89, up $0.94 per share from $0.95 per share for the nine-month period in 2001. Net income for the first nine months of 2002 was $6.0 million, compared with $3.0 million in 2001. An improved net interest margin and increased non-interest income were the primary contributors to the increases noted in the current nine-month period. INTEREST INCOME. The Company continues to strive to preserve total interest income in the current fiscal year, in spite of the low interest rate environment and continued high loan turnover. Total interest income was $33.4 million for the nine months ended June 30, 2002, down just $1.4 million or 3.9% from $34.8 million in 2001. Income from loans receivable, the chief contributor to interest income, was $23.7 million for the nine-months ended June 30, 2002, down 20.4% from the prior year. Income from loans receivable fell primarily as a result of a decline in the nine-month outstanding average balances; $438.2 million for the nine-month period ended June 30, 2002, compared with $527.9 million one year earlier. High repayments and loan sales that took place in the latter half of fiscal 2001 and continues into 2002 adversely affected both volume and yield. Repayments from the first three quarters of fiscal 2002 totaled $129.6 million, compared to $112.2 for the same period in 2001. The average balance of the securities available for sale portfolios, including mortgage-backed securities increased to $213.3 million for the nine-month period ended June 30, 2002, from $91.0 the same period last fiscal year. Interest generated from mortgage-backed and investment securities for the nine-month period ended June 30, 2002 was $9.7 million, an increase of $4.8 million from the nine-month period ended June 30, 2001. Changes were made to the mix of the investment portfolio to include government and agency, mortgage-backed, 18 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 nine months ended June 30, 2002 was $17.4 million, down $6.8 million or 28.2% from $24.2 million for the same period in 2001. For the nine-months ended June 30, 2002, interest expense on deposits was $10.7 million, down $4.1 million or 27.8% from $14.7 million in 2001. Average interest-bearing deposits increased $32.7 million, or 8.7%, to $408.5 million for the nine-month period in 2002 compared to $375.8 million in 2001. The weighted average cost of deposits decreased 176 basis points. Deposit interest expense declined as the result of lower interest rates and a greater number of transaction accounts in the deposit mix. Interest expense on borrowed funds declined 28.9% to $6.7 million for the nine months ended June 30, 2002, compared with $9.5 million in 2001. The decline was due to maturing borrowed funds being replaced with funds borrowed at lower rates. PROVISION FOR LOAN LOSSES. The Company recorded a $450,000 provision for loan losses during the first nine months of fiscal 2002, compared to a $180,000 provision in 2001. The increase was the combined result of changes in loan product mix as well as current economic conditions. The adequacy of the loan loss provision is analyzed on a monthly basis. Management considers the changes in the type and volume of the loan portfolio, the specific delinquent loans, the historical loss experience, and the current economic trends, as well as loan growth and other factors deemed appropriate when evaluating the allowance for loan losses. NON-INTEREST INCOME. Non-interest income was up $1.1 million to $2.4 million for the nine-month period ended June 30, 2002 from $1.3 million in 2001. During the first nine months of fiscal 2002, the sale of loans and investments produced a $1.2 million pre-tax gain, compared with a $322,000 pre-tax gain in 2001. Insurance and annuity commissions contributed $638,000 for the nine months, up slightly from $625,000 in 2001. Without the gain on the sale of loans and investments, non-interest income for the nine-month period in 2002 was essentially unchanged from 2001. NON-INTEREST EXPENSE. Non-interest expense increased to $8.4 million for the nine months ended June 30, 2002, compared with $7.1 million in the same period in 2001, up 18.9%. 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 $1.9 million for the nine-months ended June 30, 2002 to $3.5 million compared to $1.7 million for the prior year. The Company's effective income tax rate increased to 37.0% from 35.9% for the nine-month period ended June 30, 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 an 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 March 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 39,292 (43,299) (52)% 5.89% - 555 bp + 200 bp 53,746 (28,846) (35)% 7.85% - 360 bp + 100 bp 68,270 (14,322) (17)% 9.71% - 174 bp 0 bp 82,592 11.44% - 100 bp 92,526 9,934 12 % 12.57% + 113 bp - 200 bp -- -- -- % --% -- bp - 300 bp -- -- -- % --% -- 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 None ITEM 5. OTHER INFORMATION None ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits The following exhibits are either filed as part of this report or are incorporated herein by reference: 3.1 Restated Certificate of Incorporations of Fidelity Bancorp, Inc. (Incorporated herein by reference into this document from the exhibits to Form S-1, Registration statement as amended, originally filed on October 28, 1993, Registration No. 33-68670.) 3.2 Bylaws of Fidelity Bancorp, Inc.. as amended (Incorporated herein by reference into this document from the exhibits to Form S-1, Registration statement as amended, originally filed on October 28, 1993, Registration No. 33-68670.) 4.0 Stock Certificate of Fidelity Bancorp, Inc. (Incorporated herein by reference into this document from the exhibits to Form S-1, Registration statement as amended, originally filed on October 28, 1993, Registration No. 33-68670.) 4.1 Rights Agreement between the Company and Harris Trust and Savings Bank, as trustee (including the related certificate of designations) (Incorporated herein by reference into this document from the exhibits to Form 8-A, filed on February 19, 1997.) 10.1 Form of Employment Agreement, as amended, between the Fidelity Bancorp, Inc. and Raymond S. Stolarczyk and Thomas E. Bentel 10.2 Form of Employment Agreement, as amended, between the Fidelity Federal Savings Bank and Raymond S. Stolarczyk and Thomas E. Bentel 10.3 Form of Special Termination Agreement between the Bank and the Fidelity Bancorp, Inc. and Elizabeth Doolan and various officers 10.4 Form of Special Termination Agreement between the Bank and the Fidelity Federal Savings Bank. and Elizabeth Doolan and various officers 10.5 Form of Special Termination Agreement between the Bank and the Fidelity Bancorp, Inc. and Richard Burns 10.6 Form of Special Termination Agreement between the Bank and the Fidelity Federal Savings Bank. and Richard Burns 22 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits (continued) 10.7 Employee Stock Ownership Plan and Trust (Incorporated herein by reference into this document from the exhibits to Form 10-K filed on December 9, 1994.) 10.8 Fidelity Federal Savings Bank Recognition and Retention Plan and Trust (Incorporated herein by reference into this document from the exhibits to Form S-1, Registration statement as amended, originally filed on October 28, 1993, Registration No. 33-68670.) 10.9 Amendment dated March 18, 2002 to the Fidelity Federal Savings Bank Recognition and Retention Plan. 10.10 Incentive Stock Option Plan . (Incorporated herein by reference into this document from the exhibits to Form S-8, Registration statement filed on April 20,1994, Registration No. 33-78000.) 10.11 Amendment dated March 18, 2002 to the Fidelity Bancorp, Inc., 1993 Incentive Stock Option Plan 10.12 Fidelity Bancorp, Inc. 1993 Stock Option Plan for Outside Directors (Incorporated herein by reference into this document from the exhibits to Form S-8, Registration statement filed on April 20,1994, Registration No. 33-78000.) 10.13 Amendment dated March 18, 2002 to the Fidelity Bancorp, Inc. 1993 Stock Option Plan for Outside Directors 10.14 Fidelity Federal Savings Bank Employee Severance Compensation Plan 99.1 Chief Executive Officer Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 99.2 Chief Financial Officer Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (b) Reports on Form 8-K None. 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: August 14, 2002 /s/ RAYMOND S. STOLARCZYK - ----------------------------- Raymond S. Stolarczyk Chairman and Chief Executive Officer /s/ ELIZABETH A. DOOLAN - ----------------------------- Elizabeth A. DOOLAN Sr. V. P. and Chief Financial Officer