=============================================================================== 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, 1997 Commission file number 0-22826 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 The number of shares outstanding of each of the issuer's classes of common stock, was 2,791,978 shares of common stock, par value $.01, outstanding as of April 24, 1997. =============================================================================== 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, 1997 (unaudited) and September 30, 1996 1 Consolidated Statements of Earnings for the three and six months ended March 31, 1997 and 1996 (unaudited) 2 Consolidated Statements of Changes in Stockholders' Equity for the six months ended March 31, 1997 and 1996 (unaudited) 3 Consolidated Statements of Cash Flows for the six months ended March 31, 1997 and 1996 (unaudited) 4 Notes to Unaudited Consolidated Financial Statements 5 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 6-11 PART II. OTHER INFORMATION Item 1. Legal Proceedings 12 Item 2. Changes in Securities 12 Item 3. Defaults upon Senior Securities 12 Item 4. Submission of Matters to a Vote of Security Holders 12 Item 5. Other Information 12 Item 6. Exhibits and Reports on Form 8-K 12-14 SIGNATURE PAGE 15 FIDELITY BANCORP, INC. CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (Dollars in thousands, except per share data) ASSETS March 31, September 30, 1997 1996 (unaudited) Cash and due from banks $ 1,194 3,848 Interest-bearing deposits 933 225 Federal funds sold 200 200 Investment in dollar-denominated mutual funds, at fair value 3,149 3,146 FHLB of Chicago stock 5,795 5,795 Mortgage-backed securities held to maturity, at amortized cost (approximate fair value of $19,897 at March 31, 1997 and $21,766 at September 30, 1996) 19,891 21,673 Investment securities available for sale, at fair value 75,227 78,104 Loans receivable, net of allowance for loan losses of $843 at March 31, 1997 and $810 at September 30, 1996 371,530 354,255 Accrued interest receivable 3,173 3,199 Real estate in foreclosure - 97 Premises and equipment 3,614 3,780 Deposit base intangible 130 158 Other assets 1,174 1,382 ------- ------- $ 486,010 475,862 ======= ======= LIABILITIES AND STOCKHOLDERS' EQUITY LIABILITIES Deposits 330,383 302,934 Borrowed funds 97,100 115,300 Advance payments by borrowers for taxes and insurance 3,408 1,953 Other liabilities 5,598 6,847 ------- ------- Total liabilities 436,489 427,034 STOCKHOLDERS' EQUITY Preferred stock, $.01 par value; authorized 2,500,000 shares; none outstanding - - Common stock, $.01 par value; authorized 8,000,000 shares; issued 3,782,350 shares; 2,791,978 and 2,866,108 shares outstanding at March 31, 1997 and September 30, 1996 38 38 Additional paid-in capital 37,198 37,079 Retained earnings, substantially restricted 29,291 27,851 Treasury stock, at cost (990,372 and 916,242 shares at March 31, 1997 and September 30, 1996, respectively) (13,897) (12,619) Common stock acquired by Employee Stock Ownership Plan (1,662) (2,078) Common stock acquired by Bank Recognition and Retention Plans (580) (708) Unrealized loss on investment securities available for sale, less applicable taxes (867) (735) ------- ------- TOTAL STOCKHOLDERS' EQUITY 49,521 48,828 Commitments and contingencies $ 486,010 475,862 ======= ======= See accompanying notes to unaudited consolidated financial statements. FIDELITY BANCORP, INC. Consolidated Statements of Earnings (Dollars in thousands, except per share data) Three Months ended Six Months ended March 31, March 31, 1997 1996 1996 1997 -------------------- ----------------- (unaudited) Interest Income: Loans receivable $ 7,064 5,710 14,030 11,183 Investment securities 1,470 1,314 2,975 2,743 Mortgage-backed securities 359 437 735 895 Interest earning deposits 9 18 19 40 Federal funds sold 2 11 5 33 Investment in mutual funds 40 3 82 6 ------ ------ ------ ------ 8,944 7,493 17,846 14,900 Interest Expense: Deposits 3,924 3,532 7,798 6,994 Borrowed funds 1,305 665 2,777 1,431 ------ ------ ------ ------ 5,229 4,197 10,575 8,425 Net interest income before provision for loan losses 3,715 3,296 7,271 6,475 Provision for loan losses - 80 39 80 ------ ------ ------ ------ Net interest income after provision for loan losses 3,715 3,216 7,232 6,395 Non-Interest Income: Fees and commissions 90 100 202 196 Insurance and annuity commissions 189 162 290 296 Other 16 14 28 21 ------ ------ ------ ------ 295 276 520 513 Non-Interest Expense: General and administrative expenses: Salaries and employee benefits 1,394 1,200 2,673 2,419 Office occupancy and equipment 302 296 598 595 Data processing 127 116 241 226 Advertising and promotions 173 108 338 239 Federal deposit insurance premiums 50 168 208 329 Other 335 307 699 590 ------ ------ ------ ----- Total general and administrative expenses 2,381 2,195 4,757 4,398 Amortization of intangible 14 16 28 32 ------ ------ ------ ------ 2,395 2,211 4,785 4,430 ------ ------ ------ ------ Income before income taxes 1,615 1,281 2,967 2,478 Income tax expense 618 497 1,136 962 ------ ------ ------ ------ Net income $ 997 784 1,831 1,516 ====== ====== ====== ====== Earnings per share - primary $ 0.36 0.26 0.66 0.48 Earnings per share - fully diluted $ 0.36 0.26 0.65 0.48 ====== ====== ====== ====== See accompanying notes to unaudited consolidated financial statements. FIDELITY BANCORP, INC. Consolidated Statements of Changes in Stockholders' Equity (Dollars in thousands) Six months ended March 31, 1997 and 1996 Unrealized Loss on Common Common Investment Additional Stock Stock Securities Common Paid-In Retained Treasury Acquired Acquired Available Stock Capital Earnings Stock by ESOP by BRRP's For Sale Total --- ------ ------- ------- ------ ------ ---- ------- Balance at September 30, 1995 $38 36,795 26,449 (5,978) (2,494) (963) (55) $53,792 Net income - - 1,516 - - - - 1,516 Purchase of treasury stock (196,244 shares) - - - (3,060) - - - (3,060) Cash dividends ($.10 per share) - - (381) - - - - (381) Amortization of award of BRRP's stock - - - - - 127 - 127 Cost of ESOP shares released - - - - 416 - - 416 Exercise of stock options and reissuance of treasury shares (2,200 shares) - (6) - 28 - - - 22 Tax benefit related to stock options exercised - 2 - - - - - 2 Market adjustment for committed ESOP shares - 108 - - - - - 108 Change in unrealized loss on investment securities available for sale - - - - - - 380 380 --- ------ ------- ------ ------ ------ ---- ------- Balance at March 31, 1996 $38 36,899 27,584 (9,010) (2,078) (836) (435) $52,162 === ====== ======= ====== ====== ======= ==== ======= Balance at September 30, 1996 38 37,079 27,851 (12,619) (2,078) (708) (735) 48,828 Net income - - 1,831 - - - - 1,831 Purchase of treasury stock (82,030 shares) - - - (1,389) - - - (1,389) Cash dividends ($.14 per share) - - (391) - - - - (391) Amortization of award of BRRP's stock - - - - - 128 - 128 Cost of ESOP shares released - - - - 416 - - 416 Exercise of stock options and reissuance of treasury shares (2,200 shares) - (32) - 111 - - - 79 Tax benefit related to stock options exercised - 13 - - - - - 13 Market adjustment for committed ESOP shares - 138 - - - - - 138 Change in unrealized loss on investment securities available for sale - - - - - - (132) (132) --- ------ ------- ------ ------ ----- ---- ------ Balance at March 31, 1997 $38 37,198 29,291 (13,897) (1,662) (580) (867) $49,521 === ====== ======= ====== ====== ===== ==== ======= See accompanying notes to unaudited consolidated financial statements. FIDELITY BANCORP, INC. Consolidated Statements of Cash Flows (Dollars in thousands) Six months ended March 31, 1997 1996 ------ ------ (unaudited) CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 1,831 1,516 Adjustment to reconcile net income to net cash provided by operating activities: Depreciation 173 190 Deferred income taxes 13 2 Provision for loan losses 39 80 Net amortization and accretion of premiums and discounts 12 200 Amortization of cost of stock benefit plans 128 127 Principal payment on ESOP loan 416 416 Market adjustment for committed ESOP shares 138 108 Deferred loan fees, net of amortization (290) (481) Amortization of deposit base intangible 28 32 Decrease (increase) in accrued interest receivable 26 (156) Decrease in other assets 198 79 Increase (decrease) in other liabilities (1,167) 25 ------ ------ Net cash provided by operating activities 1,545 2,138 CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from maturities of investment securities - 39,000 Purchase of mutual funds (3) 36 Purchase of Federal Home Loan Bank of Chicago stock - (824) Purchase of investment securities available for sale - (45,000) Loans originated for investment (43,682) (62,892) Proceeds from sale of real estate owned 101 - Purchase of premises and equipment (7) (58) Principal repayments collected on loans receivable 26,657 26,105 Principal repayments collected on investment securities 2,667 3,923 Principal repayments collected on mortgage-backed securities 1,773 2,162 ------ ------ Net cash used in investing activities (12,494) (37,548) CASH FLOWS FROM FINANCING ACTIVITIES: Net increase in deposits 27,449 25,522 Proceeds from (repayments of) FHLB advances (18,200) 18,518 Net increase (decrease) in advance payments by borrowers for taxes and insurance 1,455 (2,832) Purchase of treasury stock (1,389) (3,060) Payment of common stock dividends (391) (381) Proceeds from exercise of stock options 79 22 ------ ------ Net cash provided by financing activities 9,003 37,789 ------ ------ Net change in cash and cash equivalents (1,946) 2,379 Cash and cash equivalents at beginning of period 4,273 4,115 ------ ------ Cash and cash equivalents at end of period $ 2,327 6,494 ====== ====== CASH PAID DURING THE PERIOD FOR: Interest $ 10,535 8,345 Income taxes 200 851 NON-CASH INVESTING ACTIVITIES - Loans transferred to real estate in foreclosure - 70 ====== ====== See accompanying notes to unaudited consolidated financial statements. FIDELITY BANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (1) BASIS OF PRESENTATION The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles ("GAAP") 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, 1997 are not necessarily indicative of results that may be expected for the entire fiscal year ended September 30, 1997. 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 material intercompany accounts and transactions have been eliminated in consolidation. (2) EARNINGS PER SHARE Earnings per share of common stock for the three and six months ended March 31, 1997 has been determined by dividing net income by 2,805,859 and 2,811,928, respectively, the weighted average number of shares of common stock and common stock equivalents outstanding. Earnings per share information for the three and six months ended March 31, 1996 were determined by dividing net income by 3,027,001 and 3,075,326, respectively, the weighted average number of shares of common stock and common stock equivalents outstanding. Stock options are regarded as common stock equivalents and are therefore considered in the earnings per share calculations. Common stock equivalents are computed using the treasury stock method. (3) COMMITMENTS AND CONTINGENCIES At March 31, 1997, the Bank had outstanding commitments to originate loans of $7.1 million, of which $282,000 were fixed rate, with rates ranging from 7.50% to 7.625%, and $6.86 million were adjustable rate commitments. 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, federal deposit insurance premiums 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 quarter ended March 31, 1997 of $997,000, compared with $784,000 for the same quarter a year ago, an increase of 27.2%. Earnings per fully diluted share for the quarter were $0.36 per share, up $0.10 per share, or 38.5% from the second quarter of 1996. For the first six months of the fiscal year, the Company reported similar gains in net income and earnings per share. For the six months ended March 31, 1997, Fidelity's net income was $1.8 million, compared with $1.5 million for the first six months of 1996. Earnings per fully diluted share for the first six months were $0.65 per share, up 32.7% from the six-month period one year ago. The Company also announced that its board of directors declared a quarterly dividend of $0.08 per share, payable May 15, 1997 to shareholders of record as of April 30, 1997. SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 This report contains certain forward looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. The Company intends such forward- looking statements to be covered by the safe harbor provisions for forward- looking statements contained in the Private Securities Reform Act of 1995, and is including this statement for purposes of these safe harbor provisions. Forward-looking statements, which are based on certain assumptions and describe future plans, strategies and expectations of the Company, are generally identifiable by use of the words "believe," "expect," "intend," "anticipate," "estimate," "project" or similar expressions. The Company's ability to predict results or the actual effect of future plans or strategies is inherently uncertain. Factors which could have a material adverse affect on the operations and future prospects of the Company and the subsidiaries include, but are not limited to, changes in: interest rates, general economic conditions, legislative/regulatory changes, monetary and fiscal policies of the U.S. Government, including policies of the U.S. Treasury and the Federal Reserve Board, the quality or composition of the loan or investment portfolios, demand for loan products, deposit flows, competition, demand for financial services in the Company's market area and accounting principles, policies and guidelines. These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements. Further information concerning the Company and its business, including additional factors that could materially affect the Company's financial results, is included in the Company's filings with the Securities and Exchange Commission. LIQUIDITY & CAPITAL RESOURCES Liquidity management is both a daily and long-term function of management's strategy. The Company's primary sources of funds are deposits and borrowings, amortization and prepayment of loan principal and mortgage-backed securities, maturities of investment securities and operations. While maturing investments and scheduled loan repayments are relatively predictable, deposit flows and loan prepayments are greatly influenced by interest rates, floors and caps on loan rates, general economic conditions and competition. Management generally manages the pricing of its deposits to be competitive and increase core deposit relationships, but has from time to time decided not to pay deposit rates that are as high as those of its competitors and, when necessary, to supplement deposits with Federal Home Loan Bank ("FHLB") advances. Federal regulations require the Bank to maintain minimum levels of liquid assets. This requirement, which may be varied at the direction of the Office of Thrift Supervision ("OTS") depending upon economic conditions and deposit flows, is based upon a percentage of deposits and short-term borrowings. The current required ratio is 5.0%. The Bank has historically maintained its liquidity ratio for regulatory purposes at levels in excess of those required. At March 31, 1997, the Bank's liquidity ratio was 7.71%. The Bank'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 from operating activities, consisting primarily of interest and dividends received less interest paid on deposits, were $1.7 million for the six months ended March 31, 1997. A one-time special assessment charge of $1.6 million was recorded on September 30, 1996 as the result of legislation regarding the Savings Association Insurance Fund (the "SAIF"). During the six month period ended March 31, 1997, the Company paid the SAIF special assessment, thereby reducing the net cash provided by operating activities. Net cash used in investing activities was $12.6 million for the six months ended March 31, 1997. Investing activities consisted primarily of disbursements for loan originations and principal collected on loans. Net cash provided by financing activities amounted to $9.0 million for the six months ended March 31, 1997. The $27.4 million in increased deposits was offset by net repayments of $18.2 million in FHLB advances. At March 31, 1997, the Bank had outstanding loan commitments of $7.1 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, 1997 totalled $160.9 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's Tangible and Leverage Capital ratio at March 31, 1997 was 8.5%. This exceeded the Tangible Capital requirement of 1.5% of adjusted assets and the Core ("Leverage") Capital requirement of 3% of adjusted assets by $33.8 million and $26.6 million, respectively. The Bank's Risk-based Capital ratio was 18.3% at March 31, 1997 which exceeded the Risk-based Capital requirement of 8% of Risk-weighted assets by $23.3 million. CHANGES IN FINANCIAL CONDITION Total assets at March 31, 1997 were $486.0 million, compared to $475.9 million at September 30, 1996. Loans receivable, net of allowance for loan losses, grew at an annualized growth rate of 9.8% during the first half of fiscal 1997 to $371.5 million at March 31, 1997. The Company continues to offer various loan products, and prices them competitively. Current year multi-family and commercial originations accounted for $8.6 million, or 19.7% of all originations. The Company's total loan originations were $43.7 million for the six months ended March 31, 1997. Deposits grew at an annualized growth rate of 18.1%, ending the first six months at $330.4 million. Growth in deposits for the quarter was the result of the promotion of transaction accounts, including the introduction of a new line of checking accounts. Management continues to utilize FHLB advances when they are a cost effective source to fund loan activity. During the six month period ending March 31, 1997, the Company has repaid a net $18.2 million in FHLB advances. Book value per share on March 31, 1997 was $17.74, compared with $17.04 at September 30, 1996. ASSET QUALITY As of March 31, 1997, the Company had non-performing assets of $3.4 million. Classified loans of $1.4 million were categorized as substandard, consisting of 7 residential mortgage loans, 2 commercial loans, and 2 unsecured lines of credit. In addition to the mortgage and consumer portfolio, the Company classified its investment in commercial leases as substandard. There were no assets classified as doubtful. From October 1994 through January 1995, the Company purchased 454 full-payout commercial equipment leases located in various parts of the country with original aggregate outstanding principal balances of $3.0 million. Since that time normal lease payments had reduced the aggregate outstanding balance to $2.0 million at February 29, 1996. These leases were all originated by, serviced by, and financially guaranteed by Bennett Funding Group of Syracuse, New York ("BFG"). On March 29, 1996 it was reported that BFG was the target of a civil complaint filed by the Securities and Exchange Commission. On that same date, BFG filed a Chapter 11 bankruptcy petition in the Northern District of New York and halted payments on the lease agreements. The Bankruptcy Trustee is currently collecting the lease payments from the lessees and holding them in escrow pending the outcome of the litigation concerning BFG, its creditors, and related issues. This disruption of payment flows from the servicer, BFG, has caused the Company to classify all the leases as substandard, place them on non-accrual status and to categorize them as non- performing and impaired. The Company is vigorously pursuing available legal remedies in an attempt to protect and collect amounts due under the terms of the underlying leases. The substance of the Company's claims center on the assertion that it has a perfected security interest in the leases and the proceeds thereof. The Trustee disagrees. The opinion of the Company's bankruptcy counsel at this time is that the Company's position should ultimately prevail. There can be no assurance, however, of the actual results of this legal process or the extent of the Company's recovery, if any. Management has estimated what is believed to be the realizable value of the leases and established a valuation allowance of $406,000. In the event that the outcome of the litigation is not favorable, i.e. the Company's status is that of an unsecured creditor, the recovery may be substantially smaller. Any recovery by the Company of less than the net book value of the leases will cause additional losses to the Company. STOCK REPURCHASE On November 26, 1996, the Company completed its sixth repurchase program. As a component of its strategy to build shareholder value, the Company has repurchased 1,002,472 shares, at an average cost of $14.03 through March 31, 1997. RECENT REGULATORY DEVELOPMENTS Legislation has been introduced in the Congress that would eliminate the federal thrift charter by requiring each federal thrift to convert to a national bank or to a state bank or state thrift. One of the pending bills would require the conversion to occur by January 1, 1998 while the other would require conversion by June 30, 1998. Under the proposed legislation, state thrift institutions would be regulated for purposes of federal law as state banks. The bills would allow a converting federal thrift to retain nonconforming investments and activities for a period of two years following conversion (subject to extension by the converted bank's primary federal regulator for up to two additional one year periods). The pending legislation would allow savings and loan holding companies that become bank holding companies as a result of a charter conversion pursuant to the legislation to continue to engage in any activity in which they are currently allowed to engage, provided that they remain "qualified bank holding companies." In order to be deemed a qualified bank holding company, each depository institution subsidiary of the holding company that was previously a thrift institution must continue to satisfy the qualified thrift lender test and comply with all investment limitations to which the institution was subject as a thrift institution. Further, the proposed legislation imposes certain restrictions on the ability of a qualified bank holding company to acquire other depository institutions or to be acquired. If a savings and loan holding company failed to remain a qualified bank holding company, the company would become subject to all of the nonbanking activities restrictions generally applicable to bank holding companies. The Congress is also considering legislation that would allow bank holding companies to engage in a wider range of nonbanking activities, including greater authority to engage in securities and insurance activities. While the scope of permissible nonbanking activities and the conditions under which the new powers could be exercised varies among the bills, the expanded powers generally would be available to a bank holding company only if the bank holding company and its bank subsidiaries remain well-capitalized and well-managed. The bills also impose various restrictions on transactions between the depository institution subsidiaries of bank holding companies and their nonbank affiliates. These restrictions are intended to protect the depository institutions from the risks of the new nonbanking activities permitted to such affiliates. At this time, the Company is unable to predict whether any of the pending bills will be enacted and, therefore, is unable to predict the impact such legislation may have on the operations of the Company and the Bank. 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 1997 1996 March 31,1997 ------------------------ ----------------------- ---------------------- Inter- Average Inter- Average Inter- Average Average est Yield Average est Yield Average est Yield (dollars in thousands) ------------------------ ----------------------- ---------------------- Interest-earning assets: Loans receivable, net $366,018 7,064 7.72% 287,881 5,710 7.93% 362,863 14,030 7.73% Mortgage-backed securities 20,458 359 7.02% 25,005 437 6.99% 20,913 735 7.03% Interest-bearing deposits 908 9 3.96% 1,313 18 5.48% 1,086 19 3.50% Investment securities, mutual funds, and federal funds sold 86,100 1,512 7.02% 79,166 1,328 6.71% 86,242 3,062 7.10% ------- ----- ----- ------ --- ----- ------- ----- ----- Total interest-earning assets 473,484 8,944 7.56% 393,365 7,493 7.62% 471,104 17,846 7.68% Non-interest earning assets 10,896 12,149 11,421 ------- ------ ------- Total assets $484,380 405,514 482,525 ======= ======= ======= Interest-bearing liabilities: Deposits: Savings accounts 67,935 502 2.96% 82,017 644 3.14% 68,699 1,025 2.98% Money market account 32,790 258 3.15% 34,308 267 3.11% 32,729 539 3.29% Certificate accounts 224,185 3,164 5.65% 173,749 2,621 6.03% 217,870 6,234 5.72% ------- ----- ----- ------- ----- ----- ------- ----- ----- Total deposits 324,910 3,924 4.83% 290,074 3,532 4.87% 319,298 7,798 4.88% Borrowed funds 93,998 1,305 5.55% 47,678 665 5.58% 98,874 2,777 5.62% ------- ----- ----- ------- ---- ----- ------- ----- ----- Total interest-bearing liabilities 418,908 5,229 4.99% 337,752 4,197 4.97% 418,172 10,575 5.06% Non-interest bearing deposits 4,723 5,686 4,608 Other liabilities 10,363 8,657 9,907 ------- ------ ------- Total liabilities 433,994 352,095 432,687 Stockholders' equity 50,386 53,419 49,838 Total liabilities and stockholders' equity $484,380 405,514 482,525 ======= ======= ======= Net interest income/interest rate spread (1) 3,715 2.56% 3,296 2.65% 7,271 2.52% Net earning assets/net interest margin (2) $ 54,576 3.14% 55,613 3.35% 52,932 3.09% Ratio of interest-earning assets to interest-bearing liabilities 1.13x 1.16x 1.13x (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. COMPARISON OF OPERATING RESULTS FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND MARCH 31, 1996 GENERAL. Net income for the three months ended March 31, 1997 was $997,000, an increase of $213,000 from the net income of $784,000 for the three months ended March 31, 1996. The 27.2% increase in earnings for the quarter was primarily due to greater net interest income. INTEREST INCOME. Income from loans receivable, the chief contributor to interest income, was $7.1 million for the quarter ended March 31, 1997, up 23.7% from the prior year. The average balance of loans increased 27.1% to $366.0 million compared to the average for the second quarter one year ago of $287.9 million. The yield on loans, including non-performing commercial leases of $2.0 million, decreased only 21 basis points. The increase in loan interest income was a result of higher loan volumes. Gross interest income totalled $8.9 million for the three months ended March 31, 1997. INTEREST EXPENSE. The increase in deposits contributed to greater interest expense on deposits for the quarter, which was $3.9 million, compared with $3.5 million the previous year. Savings interest costs remained stable at 4.8%. The Company reduced its FHLB of Chicago advances during the quarter, however the average advances outstanding almost doubled compared to the same quarter one year ago, thus contributing to the 96.2% increase in interest expense on borrowed funds. PROVISION FOR LOAN LOSSES. The Company recorded no provision for loan losses in the 1997 second quarter. 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, 1997, the cumulative allowance for loan losses was $843,000, or 24.7% of non-performing assets. The ratio of the allowance for loan losses to net loans receivable stands at 0.23%. See discussion regarding non-performing assets in the "Asset Quality" section of the Management's Discussion and Analysis of Financial Condition. Management believes that its allowance for loan losses is adequate to provide for potential foreseeable losses. NON-INTEREST INCOME. Non-interest income increased 6.9% to $295,000 for the second quarter. Insurance and annuity commissions produced $189,000, a 16.7% increase compared to the same period in 1996. NON-INTEREST EXPENSE. Non-interest expense for 1997 totalled $2.4 million, an increase of $184,000, or 8.3%, from $2.2 million for the three months ended March 31, 1996. Advertising expenditures have increased 60.2% in a planned effort to introduce new products to the community. The results of this effort are reflected in the increased deposits. Federal deposit insurance premiums have decreased $118,000 or 70.2% as a result of the recently passed legislation. INCOME TAXES. Income taxes increased $121,000 for the three months ended March 31, 1997 to $618,000 compared to $497,000 for the prior year due to increased taxable income. COMPARISON OF OPERATING RESULTS FOR THE SIX MONTHS ENDED MARCH 31, 1997 AND MARCH 31, 1996 GENERAL. Net income for the six months ended March 31, 1997 was $1.8 million, an increase of $315,000 from the net income of $1.5 million for the six months ended March 31, 1996. This 20.8% increase can be attributed to a 12.3% increase in net interest income before provision for loan losses. INTEREST INCOME. Interest income increased $2.9 million, or 19.8%, to $17.8 million in the 1997 period from $14.9 million for the 1996 period. The increase is attributable to a 25.5% increase in loan receivable income. Average loan volume increase of 37.0% more than compensated for the 24 basis point decrease in weighted average loan yields for the six months ended March 31, 1997 compared to the same period ended March 31, 1996. INTEREST EXPENSE. In addition to the increase in interest income, interest expense has also grown along with the increasing deposit base. Interest expense on deposits totalled $7.8 million, a $804,000 increase from the March 31, 1996 expense of $7.0 million. Average interest-bearing deposits increased $34.9 million to $319.3 million for the six month period in 1997 compared to 1996. The weighted average cost of deposits remained stable at 4.9%. Average borrowings nearly doubled, thus increasing interest expense by $1.4 million. PROVISION FOR LOAN LOSSES. The Company recorded a $39,000 provision for loan losses in the first six months of fiscal 1997, compared to a $80,000 provision in 1996. 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. See discussion regarding non-performing assets in the "Asset Quality" section of the Management's Discussion and Analysis of Financial Condition. NON-INTEREST INCOME. Non-interest income remained level at as compared to the same period in the prior year. Included in non-interest income are commissions through INVEST financial corporation, the Company noted a general slow-down of transaction activity through the first quarter, however, activity increased in the second quarter, thus keeping the six month results stable. NON-INTEREST EXPENSE. Non-interest expense for 1997 totalled $4.8 million, an increase of $355,000 or 8.0%, from $4.4 million for the six months ended March 31, 1996. Salaries and employee benefits continued to increase due to additional personnel and market adjustments for the ESOP shares to be released December 31, 1997. In addition to compensation, advertising increased due to the introduction of new products to customers. Legislation passed September 30, 1996 regarding FDIC premiums had a noticeable impact with a $121,000 decrease in insurance premiums. INCOME TAXES. Income taxes increased $174,000 for the six months ended March 31, 1997 to $1.1 million compared to $962,000 for the prior year due to increased taxable income. PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS The Bank is involved in legal proceedings regarding the Bennett Funding Group ("BFG") bankruptcy proceedings, in which the Bank has an investment in commercial leases guaranteed by BFG. The Bankruptcy Trustee has filed an adversary complaint against the Bank for claimed violations of the automatic stay provisions of the bankruptcy code with respect to post-petition collection efforts of the Bank. The monies collected by the Bank, aggregating approximately $60,000, have since been remitted to the Trustee's escrow account after obtaining assurances from the court that the funds would be protected pending the outcome of the litigation. The Trustee's claim for $10 million for sanctions and actual damages based on the Bank's post-petition collection activity is also being vigorously contested. The Trustee has also filed an adversary proceeding against 60 banks, including the Bank, asserting various causes of action. The results of these adversary proceeding are not expected to have a material adverse impact on the Company. 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 29, 1997. (b) The directors elected at the Annual Meeting are as follows: For Withheld Raymond S. Stolarczyk 2,457,435 18,880 Thomas E. Bentel 2,457,435 18,880 The directors whose term of office continued after the Annual Meeting are as follows: Paul Bielat Patrick J. Flynn Raymond J. Horvat Bonnie Stolarczyk (c) A brief description of each other matter voted on and the number votes cast: (i) Ratification of KPMG Peat Marwick LLP as independent auditors for the fiscal year ending September 30, 1997. For Against Abstain 2,450,245 4,180 21,890 ITEM 5. OTHER INFORMATION None. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits None. (b) Reports on Form 8-K On February 21, 1997, the Company announced under Item 5 of Form 8-K that it adopted a Stockholders' Rights Plan and amended its Bylaws. 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: April 24, 1997 /s/ RAYMOND S. STOLARCZYK ----------------------------- Raymond S. Stolarczyk Chairman and Chief Executive Officer Dated: April 24, 1997 /s/ JAMES R. KINNEY ----------------------------- James R. Kinney Sr. V. P. and Chief Financial Officer