=============================================================================== 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, 1999 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 The number of shares outstanding of each of the issuer's classes of common stock, was 2,205,346 shares of common stock, par value $.01, outstanding as of July 20, 1999. =============================================================================== 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, 1999 (unaudited) and September 30, 1998 1 Consolidated Statements of Earnings for the nine and three months ended June 30, 1999 and 1998 (unaudited) 2 Consolidated Statements of Changes in Stockholders' Equity for the nine months ended June 30, 1999 and 1998 (unaudited) 3 Consolidated Statements of Cash Flows for the nine months ended June 30, 1999 and 1998 (unaudited) 4 Notes to Unaudited Consolidated Financial Statements 5-6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 6-13 PART II. OTHER INFORMATION Item 1. Legal Proceedings 14 Item 2. Changes in Securities 14 Item 3. Defaults upon Senior Securities 14 Item 4. Submission of Matters to a Vote of Security Holders 14 Item 5. Other Information 14 Item 6. Exhibits and Reports on Form 8-K 14 SIGNATURE PAGE 15 1 FIDELITY BANCORP, INC. Consolidated Statements of Financial Condition (unaudited) (Dollars in thousands, except per share data) ASSETS June 30, September 30, 1999 1998 (unaudited) Cash and due from banks $ 2,110 1,320 Interest-bearing deposits 837 555 Federal funds sold 100 100 FHLB of Chicago stock 9,185 6,510 Mortgage-backed securities held to maturity, at amortized cost (approximate fair value of $3,882 at June 30, 1999 and $11,513 at September 30, 1998) 3,799 11,177 Investment securities available for sale, at fair value 66,069 58,979 Loans receivable, net of allowance for loan losses of $709 at June 30, 1999 and $591 at September 30, 1998 487,059 425,608 Accrued interest receivable 2,775 3,547 Real estate in foreclosure - 131 Premises and equipment 4,246 4,401 Deposit base intangible 42 66 Other assets 1,144 1,169 ------- ------- $ 577,366 513,563 ======= ======= LIABILITIES AND STOCKHOLDERS' EQUITY LIABILITIES Deposits 341,181 330,670 Borrowed funds 184,400 121,400 Advance payments by borrowers for taxes and insurance 5,427 6,919 Other liabilities 5,513 5,977 ------- ------- Total liabilities 536,521 464,966 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; 2,205,346 and 2,589,784 shares outstanding at June 30, 1999 and September 30, 1998 38 38 Additional paid-in capital 38,435 38,117 Retained earnings, substantially restricted 32,896 30,646 Treasury stock, at cost (1,577,004 and 1,192,566 shares at June 30, 1999 and September 30, 1998, respectively) (28,212) (19,210) Common stock acquired by Employee Stock Ownership Plan (632) (1,092) Common stock acquired by Bank Recognition and Retention Plans (201) (242) Accumulated other comprehensive income (loss) (1,479) 340 ------- ------- TOTAL STOCKHOLDERS' EQUITY 40,845 48,597 Commitments and contingencies $ 577,366 513,563 ======= ======= See accompanying notes to unaudited consolidated financial statements. 2 FIDELITY BANCORP, INC. Consolidated Statements of Earnings (unaudited) (Dollars in thousands, except per share data) Three Months ended Nine Months ended June 30, June 30, 1999 1998 1999 1998 -------------------- ----------------- (unaudited) Interest Income: Loans receivable $ 8,590 7,566 24,639 22,467 Investment securities 1,284 1,137 3,653 3,624 Mortgage-backed securities 90 245 438 806 Interest earning deposits 9 21 36 67 Federal funds sold 1 9 3 21 Investment in mutual funds - - - 17 ------ ------ ------ ------ 9,974 8,978 28,769 27,002 Interest Expense: Deposits 3,732 3,955 11,219 12,042 Borrowed funds 2,254 1,376 6,087 4,161 ------ ------ ------ ------ 5,986 5,331 17,306 16,203 Net interest income before provision for loan losses 3,988 3,647 11,463 10,799 Provision for loan losses 55 90 95 151 ------ ------ ------ ------ Net interest income after provision for loan losses 3,933 3,557 11,368 10,648 Non-Interest Income: Fees and commissions 90 75 280 244 Insurance and annuity commissions 258 181 522 517 Other 12 15 37 44 ------ ------ ------ ------ 360 271 839 805 Non-Interest Expense: General and administrative expenses: Salaries and employee benefits 1,472 1,477 4,333 4,284 Office occupancy and equipment 414 331 1,173 929 Data processing 116 138 359 390 Advertising and promotions 98 47 303 199 Federal deposit insurance premiums 53 55 157 164 Other 357 298 1,037 932 Amortization of deposit base intangible 7 10 24 32 ----- ------ ------ ------ 2,517 2,356 7,386 6,930 ----- ------ ------ ------ Income before income taxes 1,776 1,472 4,821 4,523 Income tax expense 666 538 1,808 1,652 ------ ------ ------ ------ Net income $ 1,110 934 3,013 2,871 ====== ====== ====== ====== Earnings per share - basic $ 0.51 0.34 1.33 1.06 Earnings per share - diluted $ 0.48 0.32 1.26 1.00 ====== ====== ====== ====== See accompanying notes to unaudited consolidated financial statements. 3 FIDELITY BANCORP, INC. Consolidated Statements of Changes in Stockholders' Equity (unaudited) (Dollars in thousands) Nine months ended June 30, 1999 and 1998 Common Common Accumulated Additional Stock Stock Other Common Paid-In Retained Treasury Acquired Acquired Comprehensive Stock Capital Earnings Stock by ESOP by BRRP's Income(loss) Total --- ------ ------- ------- ------ ------ ---- ------- Balance at September 30, 1997 $38 37,494 27,939 (13,855) (1,662) (471) 134 $49,617 Net income - - 2,871 - - - - 2,871 Cash dividends ($.18 per share) - - (790) - - - - (790) Amortization of award of BRRP's stock - - - - - 194 - 194 Cost of ESOP shares released - - - - 570 - - 570 Exercise of stock options and reissuance of treasury shares (7,900 shares) - (184) - 456 - - - 272 Tax benefit related to stock options exercised - 68 - - - - - 68 Market adjustment for committed ESOP shares - 444 - - - - - 444 Change in accumulated other comprehensive income (loss) - - - - - - (72) (72) --- ------ ------- ------ ------ ------ ---- ------- Balance at June 30 1998 $38 37,822 30,020 (13,399) (1,092) (277) 62 $53,174 === ====== ======= ====== ====== ======= ====== ======= Balance at September 30, 1998 38 38,117 30,646 (19,210) (1,092) (242) 340 48,597 Net income - - 3,013 - - - - 3,013 Purchase of treasury stock (402,426 shares) - - - (9,312) - - - (9,312) Cash dividends ($.32 per share) - - (763) - - - - (763) Amortization of award of BRRP's stock - - - - - 41 - 41 Cost of ESOP shares released - - - - 460 - - 460 Exercise of stock options and reissuance of treasury shares (17,998 shares) - (125) - 310 - - - 185 Tax benefit related to stock options exercised - 46 - - - - - 46 Market adjustment for committed ESOP shares - 397 - - - - - 397 Change in accumulated other comprehensive income (loss) - - - - - - (1,819) (1,819) --- ------ ------- ------ ------ ----- ------ ------ Balance at June 30, 1999 $38 38,435 32,896 (28,212) (632) (201) (1,479) $40,845 === ====== ======= ====== ====== ===== ====== ======= See accompanying notes to unaudited consolidated financial statements. 4 FIDELITY BANCORP, INC. Consolidated Statements of Cash Flows (unaudited) (Dollars in thousands) Nine months ended June 30, 1999 1998 ------ ------ (unaudited) CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 3,013 2,871 Adjustment to reconcile net income to net cash provided by operating activities: Depreciation 365 266 Provision for loan losses 95 151 Net amortization and accretion of premiums and discounts 23 (5) Amortization of cost of stock benefit plans 41 194 Principal payment on ESOP loan 460 570 Market adjustment for committed ESOP shares 397 444 Deferred loan fees, net of amortization (436) (284) Amortization of deposit base intangible 24 32 Sale of real estate owned 438 271 Gain on sale of real estate owned (45) (24) Decrease in accrued interest receivable 772 618 Decrease in other assets 49 70 Increase (decrease) in other liabilities 614 (1,037) ------ ------ Net cash provided by operating activities 5,810 4,137 CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from maturities of investment securities 30,000 36,023 Purchase of Federal Home Loan Bank of Chicago stock (2,675) - Purchase of investment securities available for sale (39,951) (29,945) Loans originated for investment (155,919) (104,717) Purchase of premises and equipment (210) (1,051) Principal repayments collected on loans receivable 94,467 83,174 Principal repayments collected on investment securities - 2,579 Principal repayments collected on mortgage-backed securities 7,375 3,800 ------ ------ Net cash used in investing activities (66,913) (9,950) CASH FLOWS FROM FINANCING ACTIVITIES: Net increase in deposits 10,511 4,478 Proceeds from (repayments of) FHLB advances 63,000 (3,600) Net increase (decrease) in advance payments by borrowers for taxes and insurance (1,492) 2,716 Purchase of treasury stock (9,312) - Payment of common stock dividends (763) (790) Proceeds from exercise of stock options, net of tax benefits 231 340 ------ ------ Net cash provided by financing activities 62,175 (3,144) ------ ------ Net change in cash and cash equivalents 1,072 (2 669) Cash and cash equivalents at beginning of period 1,975 6,004 ------ ------ Cash and cash equivalents at end of period $ 3,047 3,335 ====== ====== CASH PAID DURING THE PERIOD FOR: Interest $ 17,033 16,181 Income taxes 1,579 1,290 NON-CASH INVESTING ACTIVITIES - Loans transferred to real estate in foreclosure 262 1,032 ====== ====== See accompanying notes to unaudited consolidated financial statements. 5 FIDELITY BANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (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 nine months ended June 30, 1999 are not necessarily indicative of results that may be expected for the entire fiscal year ended September 30, 1999. 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 In February 1997, the FASB issued Statement 128, "Earnings Per Share." Statement 128 supersedes APB Opinion No. 15, "Earnings Per Share," and specifies the computation, presentation, and disclosure requirements for earnings per share ("EPS") for entities with publicly held common stock or potential common stock. It replaces the presentations of primary EPS with the presentation of basic EPS, and replaces fully diluted EPS with diluted EPS. It also requires dual presentation of basic and diluted EPS on the face of the income statement for all entities with complex capital structures, and requires a reconciliation of the numerator and dominator of the basic EPS computation to the numerator and denominator of the diluted EPS computation. Statement 128 is effective for financial statements for both interim and annual periods ending after December 15, 1997. Earnings per share of common stock for the three and nine months ended June 30, 1999 and 1998 has been calculated according to the guidelines of Statement 128. Diluted earnings per share for the three months ended June 30, 1999 and 1998 are computed by dividing net income by the weighted average number of shares of common stock and potential common stock outstanding for the periods which were 2,291,936 and 2,875,908, respectively. Diluted earnings per share of common stock for the nine months ended June 30, 1999 and 1998 has been determined by dividing net income by 2,382,520 and 2,860,379, the weighted average number of shares of common stock and potential common stock outstanding. Stock options are the only potential common stock and are therefore considered in the diluted earnings per share calculations. Potential common stock are computed using the treasury stock method. (3) COMPREHENSIVE INCOME In fiscal 1999, the Company adopted Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS 130") which establishes standards for reporting and the display of comprehensive income and its components on a full set of general purpose financial statements. SFAS 130 6 requires all items to be recognized under standards as components of comprehensive income be reported in a financial statement that is displayed in equal prominence with other financial statements. The Company is required to classify items of "other comprehensive income" by their nature in the financial statements and display the balance of other comprehensive income separately in the stockholders' equity section of the statement of financial condition. For interim reporting purposes, the disclosure of other comprehensive income may be included in the notes to the interim financial statements. The Company's comprehensive income includes net income and other comprehensive income comprised entirely of unrealized gains or losses on securities available for sale, net of tax. Three Months ended Nine Months ended June 30, June 30, 1999 1998 1999 1998 -------------------- ----------------- Net Income $ 1,110 934 3,013 2,871 Comprehensive income - net of taxes- Unrealized gain (loss) on securities available for sale arising during the period (1,123) 88 (1,819) (72) ------ ----- ------ ------ $ (13) 1,022 1,194 2,799 ====== ===== ====== ====== (4) COMMITMENTS AND CONTINGENCIES At June 30, 1999, the Bank had outstanding commitments to originate loans of $9.9 million, of which $3.5 millions were fixed rate, with rates ranging from 6.50% to 8.625%, and $6.4 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 third fiscal quarter ended June 30, 1999 of $1.1 million, compared with $934,000 for the same quarter a year ago, an increase of 18.8%. Earnings per diluted share for the quarter and nine months ended were $0.48 and $1.26 per share, respectively in 1999, an increase from $0.32 and 7 $1.00 in 1998, respectively. The Company also announced that its board of directors declared a quarterly dividend of $0.11 per share, payable August 13, 1999 to shareholders of record as of July 30, 1999. 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. YEAR 2000 COMPLIANCE The Company's State of Readiness On Sunday, February 7, 1999, the Company conducted its second full-scale test of its transaction processing systems utilizing Year 2000 dates. An extensive set of transactions was tested using production teller terminals and related computer hardware, software, and data communications systems. There were no significant failures or problems during the testing. Concerning non-information technology systems (embedded microcontrollers, etc.) the Company has tested such things as vault doors, alarm systems, etc. and is not aware of any significant problems with such systems. There are three third parties with whom the Company has a material relationship, and thus potential exposure to Year 2000 issues. The FiServ systems, as mentioned above, are already being tested. The Company's main commercial banking relationship is with Harris Bank in Chicago. Harris newsletters indicate substantial progress with Year 2000 readiness. The Company also has a material relationship with the Federal Home Loan Bank of Chicago, whose newsletters also indicate substantial progress with Year 2000 readiness. 8 The three third party utilities on which the Company is dependent are Ameritech (phone service), Commonwealth Edison (electricity) and People's Gas (natural gas for heating). The Company has not identified any practical, long-term alternatives to relying on these companies for basic utility services. THE COSTS TO ADDRESS THE COMPANY'S YEAR 2000 ISSUES The incremental direct costs to address the Company's Year 2000 issues are not expected to exceed $50,000, exclusive of any costs incurred because of the failure of one or more of the utility companies mentioned above. At the present time, no situations that will require material cost expenditures to become fully compliant have been identified. However, the Year 2000 problem is pervasive and complex and can potentially affect any computer process. Accordingly, no assurance can be given that Year 2000 compliance can be achieved without additional unanticipated expenditures and uncertainties that might affect future financial results. It is not possible at this time to quantify the estimated future costs due to possible business disruption caused by vendors, suppliers, customers, or even the possible loss of electric power or phone service; however, such costs could be substantial. THE RISKS OF THE COMPANY'S YEAR 2000 ISSUES The most likely worst case Year 2000 scenario involves a complete failure of the utility companies mentioned above for all five of the Company's operating locations simultaneously. This scenario would severely curtail the Company's ability to conduct its business, including its ability to generate new loans and to develop new deposit account relationships. The effect on existing loans and deposits is not predictable or quantifiable. THE COMPANY'S CONTINGENCY PLANS In the event of a complete utility failure, the Company plans to operate at least two locations on a restricted schedule during daylight hours. A manual bookkeeping system will be employed, and alternative communications systems will be used for communication between operating locations. 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, 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. The Bank 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 of Chicago ("FHLB") advances. Federal regulations require the Bank to maintain minimum levels of liquid assets. The minimum liquidity requirement is 4% of the liquidity base. Liquidity requirements are determined quarterly, and savings associations have the option of calculating their liquidity requirements either on the basis of (i) their liquidity base at the end of the preceding quarter or (ii) the average daily balance of their liquidity base during the preceding quarter. Savings associations must maintain liquidity in excess of the minimum requirement if necessary to insure safe and sound operations. At June 30, 9 1999, the Bank was in compliance with Office of Thrift Supervision ("OTS") liquidity requirements, with a liquidity ratio of 15.21%. The Company's cash flows are comprised of three classifications: cash flows from operating activities, cash flows from investing activities, and cash flows from financing activities. Cash flows provided by operating activities, consisting primarily of interest and dividends received less interest paid on deposits, were $5.8 million for the nine months ended June 30, 1999. The Company used $66.9 million in investing activities for the nine month period ended June 30, 1999. Significant loan originations of $155.9 million accounted for the significant cash usage. Maturing investment securities and principal repayments received from loans and mortgage-backed securities amounted to $131.8 million. Net cash provided by financing activities amounted to $62.2 million for the nine months ended June 30, 1999. The Company increased its borrowings from the FHLB by $63.0 million during the nine months ended June 30, 1999. The Company's financing activities included $9.3 million to repurchase common stock. At June 30, 1999, the Bank had outstanding loan commitments of $9.9 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, 1999 totaled $146.0 million. Consistent with historical experience, management believes that a significant portion of such deposits will remain with the Bank, and that their maturity and repricing will not have a material adverse impact on the operating results of the Company. The Bank is subject to regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional discretionary actions by regulators that, if undertaken, could have a material impact on the Company's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the entity's assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting purposes. The Bank's capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. The most recent notification, July 1998, from the federal banking agencies categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios of tangible equity to tangible assets of 2%, Tier 1 capital (leverage capital) to adjusted total assets of 5%, Tier 1 risk-based capital to risk-weighted assets of 6%, and of Total risk-based capital to risk-weighted assets of 10%. There are no conditions or events since that notification that have changed the Company's or the Bank's category. The Bank's Tangible Equity ratio at June 30, 1999 was 6.96%. The Tier 1 Capital ratio was 6.96%, the Tier 1 Risk-based ratio was 14.61%, and the Total Risk-Based Capital ratio was 14.87%. CHANGES IN FINANCIAL CONDITION Total assets at June 30, 1999 were $577.4 million, compared to $513.6 million at September 30, 1998. Loans receivable, net of allowance for loan losses, grew $61.5 million, primarily as a result of gross loan originations of $155.9 million. The Company continues to offer various loan products, and prices them 10 competitively. The Company's total loan originations for the nine months ended June 30, 1999 increased 48.9% or $51.2 million above the 1998 nine month originations of $104.7 million. Deposits increased to $341.2 million at June 30, 1999, up slightly from $330.7 million at September 30, 1998. FHLB advances increased from $121.4 million at September 30, 1998 to $184.4 million at June 30, 1999. Additional borrowings were used as a cost effective source to fund current new loan growth. Book value per share on June 30, 1999 was $18.52, compared with $18.76 at September 30, 1998. The decrease was the result of the unrealized loss on the securities available for sale combined with the completed stock repurchase plan. ASSET QUALITY The Bank's non-performing assets June 30, 1999 at included six non-performing loans. Classified loans of $370,000 were categorized as substandard, consisting of four residential mortgage loans, one multi-family mortgage loan, and one consumer loan. There were no assets classified as doubtful. The decrease of $592,000 in non-performing assets from September 30, 1998 to June 30, 1999 resulted from management's ongoing monitoring and follow-up procedures of delinquent customers. During the nine month period ended June 30,1999, the Bank's three foreclosed properties were sold for a combined gain of $45,000. Management does not expect any material losses from the non-performing loans. STOCK REPURCHASE As announced on November 18, 1998, the Company adopted a plan to repurchase up to ten percent, or 240,000 shares, of its common stock. This repurchase program, the Company's ninth, was completed on June 4, 1999. The Company repurchased the shares at an average price of $24.10 per share. 11 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 1999 1998 June 30,1999 ------------------------ ----------------------- ---------------------- Inter- Average Inter- Average Inter- Average Average est Yield Average est Yield Average est Yield (dollars in thousands) ------------------------ ----------------------- ---------------------- Interest-earning assets: Loans receivable, net $470,972 8,590 7.30% 394,083 7,566 7.68% 447,080 24,639 7.35% Mortgage-backed securities 5,725 90 6.29% 14,054 245 6.97% 8,489 438 6.88% Interest-bearing deposits 791 9 4.55% 1,536 21 5.47% 963 36 4.98% Investment securities, mutual funds, federal funds sold and FHLB stock 76,438 1,285 6.72% 63,677 1,146 7.20% 73,240 3,656 6.66% ------- ----- ----- ------ ----- ----- ------- ----- ----- Total interest-earning assets 553,926 9,974 7.20% 473,350 8,978 7.59% 529,772 28,769 7.24% Non-interest earning assets 13,187 15,603 14,234 ------- ------- ------- Total assets $567,113 488,953 544,006 ======= ======= ======= Interest-bearing liabilities: Deposits: Savings account 148,170 1,324 3.57% 129,876 1,286 3.96% 148,510 4,118 3.70% Money market accounts 17,784 169 3.80% 17,885 186 4.16% 17,524 514 3.91% Certificate accounts 172,662 2,239 5.19% 174,012 2,483 5.71% 165,234 6,587 5.32% ------- ----- ----- ------ --- ----- ------- ----- ----- Total deposits 338,616 3,732 4.41% 321,773 3,955 4.92% 331,268 11,219 4.52% Borrowed funds 166,741 2,254 5.41% 95,982 1,376 5.73% 149,468 6,087 5.43% ------- ----- ----- ------ --- ----- ------- ----- ----- Total interest-bearing liabilities 505,357 5,986 4.74% 417,755 5,331 5.10% 480,736 17,306 4.80% Non-interest bearing deposits 8,022 6,952 8,078 Other liabilities 10,964 10,872 10,672 ------- ------ ------- Total liabilities 524,343 435,579 499,486 Stockholders' equity 42,770 53,374 44,520 ------- ------ ------- Total liabilities and stockholders' equity $567,113 488,953 544,006 ======= ======= ======= Net interest income/interest rate spread (1) 3,988 2.46% 3,647 2.49% 11,463 2.44% Net earning assets/net interest margin (2) $48,569 2.88% 55,595 3.08% 49,036 2.89% Ratio of interest- earning assets to interest-bearing liabilities 1.10x 1.13x 1.10x (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 nine month periods are annualized for presentation purposes. 12 COMPARISON OF OPERATING RESULTS FOR THE THREE MONTHS ENDED JUNE 30, 1999 AND JUNE 30, 1998 GENERAL. Net income for the three months ended June 30, 1999 was $1.1 million, an increase of $176,000 from the net income of $934,000 for the three months ended June 30, 1998. The 18.8% increase in earnings for the quarter was primarily a result of increased net interest income from a greater volume of loans receivable. INTEREST INCOME. Interest income increased $996,000, from $9.0 million for the quarter ended June 30, 1998 to $10.0 million for the same period in 1999. The average interest-earning assets increased 17.0% to $553.9 million from $473.4 million the prior year. Although the average yield decreased due to significant refinancing activity, the growth in the loan portfolio, an increase of $76.9 million in average loans, more than compensated for the rate decrease. The average investment portfolio increased $12.8 million to $76.4 million, from $63.7 the previous year. INTEREST EXPENSE. Interest expense increased from $5.3 million for the quarter ended June 30, 1998 to $6.0 million for the quarter ended June 30, 1999. Interest expense on deposits decreased $223,000 due to lower average costs. The volume of average deposits increased $16.8 million from $321.8 million to $338.6 million for the quarters ended June 30, 1999 and 1998, respectively. The Company increased its FHLB of Chicago advances during the quarter to fund high loan volume. The average borrowings compared to the same quarter in 1998 increased $70.8 million to $166.7 million for the three month period ended June 30, 1999. The interest effect of increased borrowings was offset by the weighted average cost decreasing 32 basis points, causing the interest expense on borrowed funds to increase $878,000 to $2.3 million. PROVISION FOR LOAN LOSSES. The Company recorded a provision for loan losses in the third quarter of 1999 of $55,000. 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 June 30, 1999, the allowance for loan losses was $709,000. The ratio of the allowance for loan losses to net loans receivable increased slightly to 0.14% at June 30, 1999. NON-INTEREST INCOME. Non-interest income increased 32.9% to $360,000 for the third quarter. Insurance and annuity commissions produced $258,000, a $77,000 increase compared to the same period in 1998 while fees and commissions produced a modest gain from the previous quarter. NON-INTEREST EXPENSE. Non-interest expense for the three months ended June 30, 1999 totaled $2.5 million, a slight increase over the same period one year prior of $2.4 million. The largest increase was depreciation expenses relating to the Bank's new computer hardware and software, which were upgraded in 1998. 13 INCOME TAXES. Income taxes increased $128,000 for the three months ended June 30, 1999 to $666,000 compared to $538,000 for the prior year due to increased taxable income. COMPARISON OF OPERATING RESULTS FOR THE NINE MONTHS ENDED JUNE 30, 1999 AND JUNE 30, 1998 GENERAL. Net income for the nine months ended June 30, 1999 was $3.0 million, an increase of 5.0% from the previous year of $2.9 million. This was due primarily to a 9.7% increase in interest income from loans receivable. INTEREST INCOME. Interest income increased 6.5% to $28.8 million for the nine months ended June 30, 1999, compared to $27.0 million for the nine months ended June 30, 1998. The net increase was attributable primarily to increased interest income from loans receivable. Although the Bank recorded repayments of $94.5 million during this current nine month period, an even higher volume of loan closings accounted for the 14.7% increase in average loans receivable. The $57.2 million increase in average net loans receivable more than compensated for the decrease of 33 basis points in the average yield. Other interest bearing assets slightly declined to an average of $82.7 million, compared to $85.5 million for the nine months ended June 30, 1998. INTEREST EXPENSE. Interest expense increased $1.1 million to $17.3 million. The increase of 6.8% was primarily due to the $1.9 million increase in interest expense on borrowed funds. During the current nine month period, the Bank opted to increase FHLB advances to fund loan originations. The weighted average rate on average advances decreased 28 basis points from 5.7% for the period ended June 30, 1998, compared to 5.4% for the nine month period ended June 30, 1999. Interest expense on deposits decreased 6.8% from the previous year. The weighted average cost of deposits decreased 44 basis points due to the change in the composition of the deposit base. Average certificates of deposit decreased $18.0 million, while transaction accounts increased $25.9 million. PROVISION FOR LOAN LOSSES. The Company recorded a $95,000 provision for loan losses in the nine months of fiscal 1999, compared to a $151,000 provision in 1998. 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 increased $34,000 to $839,000 for the nine months ended June 30, 1999 from $805,000 for the same period in 1998. Included in non-interest income are commissions from INVEST financial corporation, which remained stable. NON-INTEREST EXPENSE. Non-interest expense for 1999 totaled $7.4 million, an increase of $456,000 or 6.6%, from $6.9 million for the nine months ended June 30, 1998. The increase was attributable to slight increases in salaries and employee benefits, office occupancy and equipment, and other expenses. The increase in occupancy and equipment expense represents the increased depreciation of the upgraded computer system. The Company's ratio of operating expenses to average assets reflected continued improvement in fiscal 1999, falling to 1.81%, from 1.89% the previous year. INCOME TAXES. Income taxes increased $156,000 for the nine months ended June 30, 1999 to $1.8 million compared to $1.7 million for the prior year due to increased taxable income. 14 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 27.0 Financial Data Schedule (b) Reports on Form 8-K None. 15 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: July 21, 1999 /s/ RAYMOND S. STOLARCZYK ----------------------------- Raymond S. Stolarczyk Chairman and Chief Executive Officer Dated: July 21, 1999 /s/ JAMES R. KINNEY ----------------------------- James R. Kinney Sr. V. P. and Chief Financial Officer