--------------------------------------------------------------------------------
LETTER TO OUR STOCKHOLDERS
--------------------------------------------------------------------------------
TO OUR STOCKHOLDERS
The Company remained very profitable in fiscal 2005, however the results must be
characterized as disappointing. Net income of $3.88 million was $445,000 under
fiscal 2004 results. The main reasons for this decrease were a loss of
approximately $430,000 resulting from fraudulent transactions by a business
customer, increased provision for loan losses and increased losses on foreclosed
real estate. While we cannot predict the future, the loan loss provision and
loss on foreclosed real estate were historically high for the Company and we
hope that they will return to more normal levels in the coming year. On the
positive side, spread income increased by $521,000, as the Company continued to
grow.
Loan balances increased significantly in fiscal 2005, up $56 million from the
prior year to a total of $346 million. Most of the gain was in residential real
estate loans, as approximately $77 million in new residential mortgage loans
were originated. The Bank has developed significant expertise in real estate
lending, particularly the construction market, and was able to use the expertise
to drive loan growth last year. The increase in deposits was not as significant,
up $7 million over the prior year. Increasing the deposit base will become a
primary focus of management going forward.
SHARE PRICE
[BAR GRAPH SHOWING PRICE PER SHARE AT END OF LAST FIVE FISCAL YEARS]
9/30/05 $19.20
9/30/04 $19.95
9/30/03 $19.59
9/30/02 $13.56
9/30/01 $10.30]
Our stock price showed a slight decrease of 3.8% during the fiscal year. While
this result was not totally acceptable, the stock performed very comparably to
other local community bank stocks. Displaying their continued confidence in the
Company, the Board declared a 10% stock dividend payable in May 2005, the tenth
such stock dividend the Company has paid since going public in 1988. The Company
also increased its quarterly cash dividend from $.12 to $.13 per share,
effectively giving shareholders a 19.2% increase in the cash dividend. We also
completed our sixth stock repurchase program under which an additional 5% could
be repurchased. We continue to believe that these actions provide ongoing
support for the stock in the marketplace.
We also made operational and strategic strides in the past year that will help
us in the future. We have introduced the electronic delivery of checking
statements, rolled out a debit card tied to lines of credit to make it easier
for customers to access their lines, and are in the second year of a new, more
focused marketing strategy, that targets specific-segments of the population
based on demographic and potential growth. All of these initiatives should help
us compete more effectively in the coming years.
We have also announced plans to construct, from the ground up, our first totally
new branch in many years, which will replace the existing Carnegie branch. The
decision to expand our presence in the Carnegie area through this
continued
ANNUAL REPORT 2005 | FIDELITY BANCORP, INC. AND SUBSIDIARY | 1
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
LETTER TO OUR STOCKHOLDERS (CONTINUED)
--------------------------------------------------------------------------------
new branch initiative was made after September 2004 floods damaged the existing
branch. While the branch was repaired, we determined that newer facilities
including drive-through lanes and a drive-up ATM would enable us to gain greater
market share in the Carnegie area and allow the Bank to compete more
effectively. We currently anticipate opening the new branch in the spring of
2006. Unfortunately, the existing Carnegie branch was destroyed by fire in
October 2005 and we are currently serving the Carnegie area out of temporary
facilities.
CASH DIVIDENDS PER SHARE
[BAR GRAPH SHOWING DIVIDENDS PER SHARE FOR PAST FIVE FISCAL YEARS]
2005 $.478
2004 $.416
2003 $.378
2002 $.344
2001 $.267]
Looking forward to 2006, it is likely to continue to be a challenging economic,
environment. Interest rates, which rose throughout fiscal 2005, have continued
to increase in early fiscal 2006, as the Federal Reserve continues to raise the
Fed Funds rate. While these short-term rates were rising, longer-term rates
remained relatively unchanged, which caused a flattening of the yield curve.
This situation results in pressure on our interest rate spread and net interest
income. Since the Federal Reserve is expected to continue to raise rates at
least into early 2006, this will put continued pressure on our interest rate
spread going forward.
ASSETS
[BAR GRAPH SHOWING TOTAL ASSETS IN MILLIONS AT END OF LAST FIVE FISCAL YEARS]
2005 $677.8
2004 $627.7
2003 $617.8
2002 $616.4
2001 $555.4]
Operationally, we expect to continue our strategy of being a full-service
financial organization, continuously monitoring and adjusting our products and
services to meet the changing needs of our customers. To ensure we have the
technical capacity to do this, we are evaluating our current core processing
system and alternative systems and expect to have a decision made early in 2006.
We are also evaluating several new home equity loan products, document imaging
and the functionality of our internet banking capabilities.
In closing, I would like to thank the Board of Directors for their support and
guidance and, of course, our loyal and committed employees, whose hard word,
enthusiasm and dedication forms the foundation for the success of the Company.
Finally, on behalf of the Board of Directors and our employees, I want to thank
you, our stockholders, for your continued support as we work to meet the
challenges facing us in the coming years with confidence and enthusiasm.
/s/ ▇▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇▇
▇▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇▇
President and Chief Executive Officer
2 | FIDELITY BANCORP, INC. AND SUBSIDIARY | ANNUAL REPORT 2005
--------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------------
SELECTED FINANCIAL DATA
---------------------------------------------------------------------------------------------------------------------------
FINANCIAL CONDITION DATA
September 30,
(Dollars in Thousands) 2005 2004 2003 2002 2001
---------------------------------------------------------------------------------------------------------------------------
Total assets $677,779 $627,727 $617,778 $616,432 $555,424
Loans receivable, net 346,076 290,389 264,412 316,320 318,600
Mortgage-backed securities and collateralized
mortgage obligations1 131,132 130,738 129,572 114,059 93,599
Investment securities and other
earning assets2 169,192 176,483 193,596 154,563 118,239
Total liabilities 635,730 585,650 577,583 573,852 520,138
Savings and time deposits 366,812 359,772 366,126 351,406 313,501
Advances from FHLB
and other borrowings 264,160 221,841 207,062 216,933 199,780
Stockholders' equity 42,049 42,077 40,195 42,580 35,286
Number of full service offices 13 13 13 11 10
---------------------------------------------------------------------------------------------------------------------------
OPERATIONS DATA
Years Ended September 30,
(Dollars in Thousands, Except Per Share Data) 2005 2004 2003 2002 2001
---------------------------------------------------------------------------------------------------------------------------
Interest income $31,664 $29,325 $32,460 $36,610 $38,615
Interest expense 17,823 16,005 20,213 23,114 26,659
---------------------------------------------------------------------------------------------------------------------------
Net interest income 13,841 13,320 12,247 13,496 11,956
Provision for loan losses 600 275 555 400 475
---------------------------------------------------------------------------------------------------------------------------
Net interest income after
provision for loan losses 13,241 13,045 11,692 13,096 11,481
Realized gain (loss) on sale of securities, net 609 639 748 234 265
Writedown of investment securities (43) -- (110) (246) (27)
Gain on sale of loans 36 47 512 292 111
Service fees and other income 3,186 3,081 2,865 2,365 1,877
Operating expenses 12,153 11,475 10,711 10,070 9,112
---------------------------------------------------------------------------------------------------------------------------
Income before income tax provision 4,876 5,337 5,014 5,702 4,595
Income tax provision 1,000 1,016 961 1,276 983
---------------------------------------------------------------------------------------------------------------------------
Net income $3,876 $4,321 $4,053 $4,426 $3,612
---------------------------------------------------------------------------------------------------------------------------
Diluted earnings per share 3 $1.27 $1.40 $1.24 $1.43 $1.17
Cash dividends per share 3 .478 .416 .378 .344 .267
Book value per share 3 14.27 14.31 13.70 13.77 12.21
Average interest rate spread 2.26% 2.31% 2.15% 2.48% 2.28%
Return on average assets .59% .69% .66% .76% .65%
Return on average stockholders' equity 9.24% 10.62% 9.45% 11.60% 10.84%
===========================================================================================================================
Common shares outstanding 3 2,945,677 2,940,654 2,932,797 3,089,618 2,891,063
===========================================================================================================================
1 Consists of mortgage-backed securities and collateralized mortgage
obligations classified as held to maturity and available for sale.
2 Consists of interest-bearing deposits, investment securities classified as
held to maturity and available for sale, and Federal Home Loan Bank stock.
3 Per share and common shares outstanding amounts were restated to reflect
the 10% stock dividends paid in May 2002, May 2003, May 2004, and May 2005.
ANNUAL REPORT 2005 | FIDELITY BANCORP, INC. AND SUBSIDIARY | 3
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
--------------------------------------------------------------------------------
To the Board of Directors and Stockholders
Fidelity Bancorp, Inc.
Pittsburgh, Pennsylvania
We have audited the accompanying consolidated statements of financial condition
of Fidelity Bancorp, Inc. and subsidiary as of September 30, 2005 and 2004, and
the related consolidated statements of income, stockholders' equity, and cash
flows for each of the three years in the period ended September 30, 2005. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Fidelity Bancorp,
Inc. and subsidiary as of September 30, 2005 and 2004, and the results of their
operations and their cash flows for each of the three years in the period ended
September 30, 2005, in conformity with accounting principles generally accepted
in the United States of America.
/s/ ▇▇▇▇▇ ▇▇▇▇▇▇ Company LLP
Pittsburgh, Pennsylvania
November 18, 2005
4 | FIDELITY BANCORP, INC. AND SUBSIDIARY | ANNUAL REPORT 2005
--------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
----------------------------------------------------------------------------------------------------------------------------
September 30,
2005 2004
----------------------------------------------------------------------------------------------------------------------------
(Dollars in Thousands,
Except per Share Data)
ASSETS
Cash and due from banks $ 9,234 $ 8,212
Interest bearing demand deposits with other institutions 636 619
----------------------------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents 9,870 8,831
Securities available for sale, cost 2005 $183,542; 2004 $184,301 182,157 186,112
Securities held to maturity, fair value 2005 $104,962; 2004 $110,413 105,316 109,334
Loans held for sale 248 116
Loans receivable, net of allowance 2005 $2,596; 2004 $2,609 346,076 290,389
Foreclosed real estate, net 789 1,517
Restricted investments in bank stock, at cost 12,215 11,156
Office premises and equipment, net 5,126 5,210
Accrued interest receivable 3,113 3,081
Other assets 12,869 11,981
----------------------------------------------------------------------------------------------------------------------------
Total Assets $ 677,779 $ 627,727
============================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits:
Non-interest bearing $ 32,415 $ 30,106
Interest bearing 334,397 329,666
----------------------------------------------------------------------------------------------------------------------------
Total Deposits 366,812 359,772
Short-term borrowings 111,141 64,106
Subordinated debt 10,310 10,310
Securities sold under agreement to repurchase 6,674 5,118
Advance payments by borrowers for taxes and insurance 1,425 1,129
Other liabilities 3,333 2,908
Long-term debt 136,035 142,307
----------------------------------------------------------------------------------------------------------------------------
Total Liabilities 635,730 585,650
============================================================================================================================
STOCKHOLDERS' EQUITY
Common stock, $.01 par value per share; 10,000,000 shares authorized; 35 32
issued 2005 3,533,632 shares; 2004 3,153,617 shares
Paid-in capital 44,250 35,798
Retained earnings 8,486 13,595
Accumulated other comprehensive income(loss), net of tax (914) 1,195
Treasury stock, at cost 2005 587,955 shares; 2004 480,295 shares (9,808) (8,543)
----------------------------------------------------------------------------------------------------------------------------
Total Stockholders' Equity 42,049 42,077
----------------------------------------------------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity $ 677,779 $ 627,727
============================================================================================================================
See notes to consolidated financial statements.
ANNUAL REPORT 2005 | FIDELITY BANCORP, INC. AND SUBSIDIARY | 5
--------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF INCOME
------------------------------------------------------------------------------------------------------------------------------------
Years Ended September 30,
2005 2004 2003
----------------------------------------------------------------------------------------------------------------------------
(In Thousands, Except per Share Data)
INTEREST INCOME
Loans $ 18,859 $ 17,401 $ 20,605
Mortgage-backed securities 5,387 4,440 4,780
Investment securities:
Taxable 5,524 5,296 4,533
Tax exempt 1,886 2,185 2,457
Other 8 3 85
----------------------------------------------------------------------------------------------------------------------------
Total Interest Income 31,664 29,325 32,460
----------------------------------------------------------------------------------------------------------------------------
INTEREST EXPENSE
Deposits 7,710 7,635 9,078
Short-term borrowings 2,638 789 181
Long-term debt 6,816 7,081 9,746
Subordinated debt 659 500 1,208
----------------------------------------------------------------------------------------------------------------------------
Total Interest Expense 17,823 16,005 20,213
----------------------------------------------------------------------------------------------------------------------------
Net Interest Income 13,841 13,320 12,247
----------------------------------------------------------------------------------------------------------------------------
PROVISION FOR LOAN LOSSES 600 275 555
----------------------------------------------------------------------------------------------------------------------------
Net Interest Income after Provision for Loan Losses 13,241 13,045 11,692
----------------------------------------------------------------------------------------------------------------------------
OTHER INCOME
Loan service charges and fees 363 364 583
Realized gain on sales of securities, net 609 639 748
Writedown of securities (43) - (110)
Gain on sales of loans 36 47 512
Deposit service charges and fees 1,401 1,386 1,244
ATM fees 548 491 496
Other 874 840 560
----------------------------------------------------------------------------------------------------------------------------
Total Other Income 3,788 3,767 4,033
----------------------------------------------------------------------------------------------------------------------------
OTHER EXPENSES
Compensation and benefits 7,440 7,116 6,627
Office occupancy and equipment expense 1,075 1,023 978
Depreciation and amortization 726 758 737
Net loss on sales and writedowns of foreclosed real estate 138 112 64
Amortization of intangible assets 46 52 50
Advertising 340 350 286
Professional fees 244 344 250
Customer fraud loss 430 - -
Other 1,714 1,720 1,719
----------------------------------------------------------------------------------------------------------------------------
Total Other Expenses 12,153 11,475 10,711
----------------------------------------------------------------------------------------------------------------------------
Income before Provision for Income Taxes 4,876 5,337 5,014
PROVISION FOR INCOME TAXES 1,000 1,016 961
----------------------------------------------------------------------------------------------------------------------------
Net Income $ 3,876 $ 4,321 $ 4,053
============================================================================================================================
EARNINGS PER SHARE
Basic $ 1.32 $ 1.47 $ 1.29
============================================================================================================================
Diluted $ 1.27 $ 1.40 $ 1.24
============================================================================================================================
See notes to consolidated financial statements.
6 | FIDELITY BANCORP, INC. AND SUBSIDIARY | ANNUAL REPORT 2005
--------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
----------------------------------------------------------------------------------------------------------------------------------
Years Ended September 30, 2005, 2004 and 2003
----------------------------------------------------------------------------------------------------------------------------------
Accumulated
Number of Other
Shares Common Paid-in Retained Comprehensive Treasury
Issued Stock Capital Earnings Income(Loss) Stock Total
----------------------------------------------------------------------------------------------------------------------------------
(In Thousands, Except Shares and per Share Data)
BALANCE - SEPTEMBER 30, 2002 2,504,563 $25 $22,564 $19,176 $3,173 $(2,358) $42,580
----------------------------------------------------------------------------------------------------------------------------------
Comprehensive income:
Net income - - - 4,053 - - 4,053
Net unrealized losses
on available for sale
securities - - - - (1,162) - (1,162)
----------------------------------------------------------------------------------------------------------------------------------
Total Comprehensive Income 2,891
----------------------------------------------------------------------------------------------------------------------------------
10% stock dividend distributed 245,838 3 5,647 (5,650) - - -
Stock options exercised,
including tax benefit of $94 49,981 - 554 - - (21) 533
Cash dividends declared
($.378 per share) - - - (1,191) - - (1,191)
Treasury stock purchased
(274,906 shares) - - - - - (6,021) (6,021)
Issuance of stock in
connection with acquisition
of First Pennsylvania Savings - - 96 - - 1,208 1,304
Sale of stock through Dividend
Reinvestment Plan 4,909 - 99 - - - 99
----------------------------------------------------------------------------------------------------------------------------------
BALANCE - SEPTEMBER 30, 2003 2,805,291 28 28,960 16,388 2,011 (7,192) 40,195
----------------------------------------------------------------------------------------------------------------------------------
Comprehensive income:
Net income - - - 4,321 - - 4,321
Net unrealized losses
on available for sale
securities - - - - (816) - (816)
----------------------------------------------------------------------------------------------------------------------------------
Total Comprehensive Income 3,505
----------------------------------------------------------------------------------------------------------------------------------
10% stock dividend distributed 280,654 3 5,882 (5,885) - - -
Stock options exercised,
including tax benefit of $216 61,423 1 818 - - - 819
Cash dividends declared
($.416 per share) - - - (1,229) - - (1,229)
Treasury stock purchased
(60,351 shares) - - - - - (1,474) (1,474)
Contribution of stock to
Employee Stock Ownership
Plan (5,000 shares) - - (6) - - 123 117
Sale of stock through
Dividend Reinvestment Plan 6,249 - 144 - - - 144
----------------------------------------------------------------------------------------------------------------------------------
BALANCE - SEPTEMBER 30, 2004 3,153,617 32 35,798 13,595 1,195 (8,543) 42,077
----------------------------------------------------------------------------------------------------------------------------------
Comprehensive income:
Net income - - - 3,876 - - 3,876
Net unrealized losses
on available for sale
securities - - - - (2,109) - (2,109)
----------------------------------------------------------------------------------------------------------------------------------
Total Comprehensive Income 1,767
----------------------------------------------------------------------------------------------------------------------------------
10% stock dividend distributed 319,161 3 7,577 (7,580) - - -
Stock options exercised,
including tax benefit of $160 53,745 - 722 - - - 722
Cash dividends declared
($.478 per share) - - - (1,405) - - (1,405)
Treasury stock purchased
(54,210 shares) - - - - - (1,265) (1,265)
Sale of stock through
Dividend Reinvestment Plan 7,109 - 153 - - - 153
----------------------------------------------------------------------------------------------------------------------------------
BALANCE - SEPTEMBER 30, 2005 3,533,632 $35 $44,250 $8,486 $(914) $(9,808) $42,049
==================================================================================================================================
See notes to consolidated financial statements.
ANNUAL REPORT 2005 | FIDELITY BANCORP, INC. AND SUBSIDIARY | 7
--------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
----------------------------------------------------------------------------------------------------------------------------
Years Ended September 30,
2005 2004 2003
----------------------------------------------------------------------------------------------------------------------------
(In Thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 3,876 $ 4,321 $ 4,053
Adjustments to reconcile net income to net cash provided by
operating activities:
Provision for loan losses 600 275 555
Loss on foreclosed real estate, net 138 112 64
Provision for depreciation and amortization 726 758 737
Deferred loan fee amortization (196) (269) (723)
Amortization of investment and mortgage-backed securities
(discounts) premiums, net 719 1,402 1,664
Deferred income tax provision 37 308 25
Amortization of intangibles 46 52 50
Net realized gains on sales of investments (609) (639) (748)
Writedown of investment securities 43 - 110
Loans originated for sale (2,668) (2,006) (25,552)
Sales of loans held for sale 2,571 2,222 27,630
Net gains on sales of loans (36) (47) (512)
Increase in cash surrender value of life insurance policies (198) (209) (204)
(Increase) decrease in interest receivable (15) 327 450
Increase (decrease) in interest payable 89 (204) (678)
Increase (decrease) in accrued taxes 103 (253) 320
Contribution to ESOP (235) (103) (100)
Write-off of unamortized debt issuance costs - - 599
Other changes, net 927 847 (1,319)
----------------------------------------------------------------------------------------------------------------------------
Net Cash Provided by Operating Activities 5,918 6,894 6,421
----------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sales of securities available for sale 24,185 26,029 11,742
Proceeds from maturities and principal repayments of
securities available for sale 41,733 47,972 82,038
Purchases of securities available for sale (65,098) (68,349) (114,853)
Proceeds from maturities and principal repayments of
securities held to maturity 20,473 45,822 63,794
Purchases of securities held to maturity (16,671) (35,640) (102,683)
Purchases of bank-owned life insurance policies - - (796)
Net (increase) decrease in loans (56,314) (27,554) 58,558
Sales of other loans - - 51
Proceeds from sales of foreclosed real estate 813 78 154
Additions to office premises and equipment (641) (154) (613)
Proceeds from sales of office premises and equipment - 31 -
Net (purchases) redemption of FHLB stock (1,059) (709) 279
Net cash received in acquisition of
First Pennsylvania Savings Association - - 7,154
Proceeds from FB Capital Trust - - 317
----------------------------------------------------------------------------------------------------------------------------
Net Cash Provided by (Used in) Investing Activities $(52,579) $(12,474) $ 5,142
----------------------------------------------------------------------------------------------------------------------------
See notes to consolidated financial statements.
8 | FIDELITY BANCORP, INC. AND SUBSIDIARY | ANNUAL REPORT 2005
--------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
----------------------------------------------------------------------------------------------------------------------------
Years Ended September 30,
2005 2004 2003
----------------------------------------------------------------------------------------------------------------------------
(In Thousands)
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in deposits $ 7,040 $ (6,354) $ 2,461
Increase (decrease) in reverse repurchase agreements 1,556 (825) 94
Net increase in short-term borrowings 47,331 25,955 37,034
Proceeds from long-term debt 20,000 10,000 -
Repayments of long-term debt (26,272) (20,401) (51,057)
Subordinated debt retired - - (10,567)
Cash dividends paid (1,405) (1,229) (1,191)
Stock options exercised 562 603 439
Proceeds from sale of stock through Dividend Reinvestment Plan 153 144 99
Proceeds from sale of stock in connection with acquisition of
First Pennsylvania Savings Association - - 1,304
Acquisition of treasury stock (1,265) (1,474) (6,021)
----------------------------------------------------------------------------------------------------------------------------
Net Cash Provided by (Used in) Financing Activities 47,700 6,419 (27,405)
----------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Cash and Cash Equivalents 1,039 839 (15,842)
CASH AND CASH EQUIVALENTS - BEGINNING 8,831 7,992 23,834
----------------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS - ENDING $ 9,870 $ 8,831 $ 7,992
============================================================================================================================
SUPPLEMENTARY CASH FLOW INFORMATION
Interest paid on deposits and borrowings $ 17,734 $ 16,209 $ 20,211
============================================================================================================================
Income taxes paid $ 350 $ 795 $ 845
============================================================================================================================
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES
Transfer of loans to foreclosed real estate $ 223 $ 1,032 $ 235
============================================================================================================================
The Company acquired First Pennsylvania Savings Association
for $161,000. In conjunction with the acquisition,
the assets acquired and liabilities assumed were as follows:
Fair value of assets acquired $ - $ - $ 26,767
Fair value of liabilities assumed - - (26,928)
----------------------------------------------------------------------------------------------------------------------------
Liabilities Assumed in Excess of Assets Acquired $ - $ - $ (161)
============================================================================================================================
See notes to consolidated financial statements.
ANNUAL REPORT 2005 | FIDELITY BANCORP, INC. AND SUBSIDIARY | 9
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations
Fidelity Bancorp, Inc. is a bank holding company organized under the
Pennsylvania Business Corporation Law. It operates principally as a holding
company for its wholly-owned subsidiary, Fidelity Bank, PaSB, a
Pennsylvania-chartered, FDIC-insured state savings bank. The Bank conducts
full banking services through thirteen offices in Allegheny and ▇▇▇▇▇▇
counties.
Basis of Presentation
The consolidated financial statements include the accounts of Fidelity
Bancorp, Inc. (the "Company") and its wholly-owned subsidiary Fidelity
Bank, PaSB (the "Bank"). Intercompany balances and transactions have been
eliminated in consolidation.
Estimates
The financial statements are prepared in conformity with accounting
principles generally accepted in the United States of America. These
principles require management to make estimates and assumptions that affect
reported amounts of assets and liabilities and require disclosure of
contingent assets and liabilities. In the opinion of management, all
adjustments considered necessary for a fair presentation have been included
and are of a normal, recurring nature. Actual results could differ from
those estimates. Material estimates that are particularly susceptible to
significant change in the near term relate to the determination of the
allowance for loan losses, and the valuation of deferred tax assets.
Significant Group Concentrations of Credit Risk
Most of the Company's activities are with customers located in the greater
Pittsburgh metropolitan area. Note 2 discusses the types of securities that
the Company invests in. Note 3 discusses the types of lending that the
Company engages in. The Company does not have any significant
concentrations to any one industry or customer.
Cash and Cash Equivalents
Cash and cash equivalents include cash and amounts due from depository
institutions and the demand deposits portion of interest earning deposits
with other institutions.
Securities
The Company classifies securities as either: (1) Securities Held to
Maturity - debt securities that the Company has the positive intent and
ability to hold to maturity and which are reported at cost, adjusted for
amortization of premium and accretion of discount on a level yield basis;
(2) Trading Securities - debt and equity securities bought and held
principally for the purpose of selling them in the near term and which are
reported at fair value, with unrealized gains and losses included in the
current period earnings; or (3) Securities Available for Sale - debt and
equity securities not classified as either securities held to maturity or
trading securities and which are reported at fair value, with unrealized
gains and losses, net of taxes, included as a separate component of
accumulated other comprehensive income. Declines in the fair value of held
to maturity and available for sale securities below their cost that are
deemed to be other than temporary are reflected in earnings as realized
losses. In estimating other than temporary impairment losses, management
considers (1) the length of time and the extent to which the fair value has
been less than cost, (2) the financial condition and near-term prospects of
the issuer, and (3) the intent and ability of the Company to retain its
investment in the issuer for a period of time sufficient to allow for any
anticipated recovery in fair value. Gains and losses on the sale of
securities are recorded on the trade date and are determined using the
specific identification method.
Management determines the appropriate classification of debt securities at
the time of purchase and re-evaluates such designation as of each balance
sheet date.
(Note Continued)
--------------------------------------------------------------------------------
10 | FIDELITY BANCORP, INC. AND SUBSIDIARY | ANNUAL REPORT 2005
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
Loans Receivable
Loans receivable that management has the intent and ability to hold for the
foreseeable future or until maturity or payoff are stated at their outstanding
unpaid principal balances, net of an allowance for loan losses and any deferred
fees or costs. Interest income is accrued on the unpaid principal balance. Loan
origination fees and costs are deferred and recognized as an adjustment of the
yield (interest income) of the related loans. The Bank is generally amortizing
these amounts over the contractual life of the loan.
The accrual of interest is generally discontinued when the contractual payment
of principal or interest has become 90 days past due or management has serious
doubts about further collectibility of principal or interest, even though the
loan is currently performing. A loan may remain on accrual status if it is in
the process of collection and is either guaranteed or well secured. When a loan
is placed on nonaccrual status, unpaid interest credited to income in the
current year is reversed. Interest received on nonaccrual loans generally is
either applied against principal or reported as interest income, according to
management's judgment as to the collectibility of principal. Interest accrual
resumes when the loan is no longer 90 or more days past due and the borrower, in
management's opinion, is able to meet payments as they become due.
Allowance for Loan Losses
The allowance for loan losses is established through provisions for loan losses
charged against income. Loans deemed to be uncollectible are charged against the
allowance for loan losses, and subsequent recoveries, if any, are credited to
the allowance.
The allowance for loan losses is maintained at a level considered adequate to
provide for losses that can be reasonably anticipated. Management's periodic
evaluation of the adequacy of the allowance is based on the Bank's past loan
loss experience, known and inherent risks in the portfolio, adverse situations
that may affect the borrower's ability to repay, the estimated value of any
underlying collateral, composition of the loan portfolio, current economic
conditions and other relevant factors. This evaluation is inherently subjective
as it requires material estimates that may be susceptible to significant change,
including the amounts and timing of future cash flows expected to be received on
impaired loans.
The allowance consists of specific and general components. The specific
component relates to loans that are classified as either doubtful, substandard
or special mention. For such loans that are also classified as impaired, an
allowance is established when the discounted cash flows (or collateral value or
observable market price) of the impaired loan is lower than the carrying value
of that loan. The general component covers non-classified loans and is based on
historical loss experience adjusted for qualitative factors.
A loan is considered impaired when, based on current information and events, it
is probable that the Bank will be unable to collect the scheduled payments of
principal or interest when due according to the contractual terms of the loan
agreement. Factors considered by management in determining impairment include
payment status, collateral value and the probability of collecting scheduled
principal and interest payments when due. Loans that experience insignificant
payment delays and payment shortfalls generally are not classified as impaired.
Management determines the significance of payment delays and payment shortfalls
on a case-by-case basis, taking into consideration all of the circumstances
surrounding the loan and the borrower, including the length of the delay, the
reasons for the delay, the borrower's prior payment record and the amount of the
shortfall in relation to the principal and interest owed. Impairment is measured
on a loan by loan basis for commercial and construction loans by either the
present value of expected future cash flows discounted at the loan's effective
interest rate, the loan's obtainable market price or the fair value of the
collateral if the loan is collateral dependent.
Large groups of smaller balance homogeneous loans are collectively evaluated for
impairment. Accordingly, the Bank does not separately identify individual
consumer and residential loans for impairment disclosures, unless such loans are
the subject of a restructuring agreement.
(Note Continued)
ANNUAL REPORT 2005 | FIDELITY BANCORP, INC. AND SUBSIDIARY | 11
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
Foreclosed Real Estate
Foreclosed real estate is comprised of property acquired through a foreclosure
proceeding or acceptance of a deed in lieu of foreclosure and loans classified
as in-substance foreclosure. A loan is classified as in-substance foreclosure
when the Bank has taken possession of the collateral regardless of whether
formal foreclosure proceedings take place.
Foreclosed assets initially are recorded at fair value, net of estimated selling
costs, at the date of foreclosure establishing a new cost basis. After
foreclosure, valuations are periodically performed by management and the assets
are carried at the lower of cost or fair value minus estimated costs to sell.
Revenues and expenses from operations and changes in the valuation allowance are
included in other expenses.
Loans Held for Sale
Loans originated and intended for sale in the secondary market are carried at
the lower of cost or estimated fair value in the aggregate. Net unrealized
losses, if any, are recognized through a valuation allowance by charges to
income. All sales are made without recourse.
Office Premises and Equipment
Office premises and equipment are stated at cost less accumulated depreciation
and amortization. Depreciation is calculated on a straight-line basis over the
estimated useful lives of the related assets. Office buildings are depreciated
over their estimated useful life of 40 years; furniture, fixtures and equipment
are depreciated over their estimated useful lives which vary between three and
ten years; and land improvements are depreciated over their estimated useful
life of twenty years.
Transfer of Financial Assets
Transfers of financial assets are accounted for as sales, when control over the
assets has been surrendered. Control over transferred assets is deemed to be
surrendered when (1) the assets have been isolated from the Company, (2) the
transferee obtains the right (free of conditions that constrain it from taking
advantage of the right) to pledge or exchange the transferred assets, and (3)
the Company does not maintain effective control over the transferred assets
through an agreement to repurchase them before their maturity.
Goodwill and Intangible Assets
Effective October 1, 2002, the Company adopted SFAS No. 142, "Goodwill and Other
Intangible Assets." SFAS No. 142 revised the accounting for purchased intangible
assets and, in general, requires that goodwill no longer be amortized, but
rather that it be tested for impairment on an annual basis at the reporting unit
level, which is either at the same level or one level below an operating
segment. Other acquired intangible assets with finite lives, such as purchased
customer accounts, are required to be amortized over their estimated lives.
Prior to October 1, 2002, substantially all of the Company's goodwill was
amortized using the straight-line method over 15 years. Other intangible assets
are amortized using an accelerated method over estimated weighted average useful
lives of ten years. The Company periodically assesses whether events or changes
in circumstances indicate that the carrying amounts of goodwill and other
intangible assets may be impaired.
There were no changes in the carrying amount of goodwill for the years ended
September 30, 2005 and 2004. Goodwill amounted to $2.65 million at September 30,
2005 and September 30, 2004.
(Note Continued)
12 | FIDELITY BANCORP, INC. AND SUBSIDIARY | ANNUAL REPORT 2005
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
In accordance with the provisions of SFAS No. 142, the Company continues to
amortize other intangible assets over the estimated remaining life of each
respective asset. Amortizable intangible assets were composed of the following:
September 30,
--------------------------
2005 2004
----------------------------------------------------------------------------------------------------------
Gross Carrying
Amount Accumulated Amortization
----------------------------------------------------------------------------------------------------------
(Dollars in Thousands)
Amortizable intangible assets,
acquisition of deposit accounts $ 325 $ 167 $ 121
==========================================================================================================
Aggregate amortization expense:
For the year ended September 30, 2005 $ 46
Estimated amortization expense:
For the year ending September 30, 2006 40
For the year ending September 30, 2007 34
For the year ending September 30, 2008 28
For the year ending September 30, 2009 22
For the year ending September 30, 2010 17
Other Assets
Financing costs related to the Company's issuance of subordinated debt are being
amortized over the life of the debentures and are included in other assets.
Advertising Costs
The Company follows the policy of charging the costs of advertising to expenses
as incurred.
Income Taxes
Deferred income taxes are provided on the liability method whereby deferred tax
assets are recognized for deductible temporary differences and deferred tax
liabilities are recognized for taxable temporary differences. Temporary
differences are the differences between the reported amounts of assets and
liabilities and their tax basis. Deferred tax assets and liabilities are
adjusted through the provision for income taxes for the effects of changes in
tax laws and rates on the date of enactment.
Treasury Stock
The acquisition of treasury stock is recorded under the cost method. At the date
of subsequent reissue, the treasury stock is reduced by the cost of such stock
on the average cost basis.
(Note Continued)
ANNUAL REPORT 2005 | FIDELITY BANCORP, INC. AND SUBSIDIARY | 13
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
Stock Option Plans
The Company has adopted the disclosure-only provisions of SFAS No. 123
"Accounting for Stock-Based Compensation." Accordingly, no compensation expense
has been recognized for its stock option plans. Had compensation expense for the
Company's stock option plans been determined based upon the fair value at grant
date for awards under these plans, net income and diluted earnings per share
would have been reduced by approximately $125,000, or $0.04 per share in 2005;
$141,000, or $0.05 per share in 2004; and $121,000, or $0.04 per share in 2003.
Years Ended September 30,
2005 2004 2003
----------------------------------------------------------------------------------------------------------
(Dollars in Thousands, Except per Share Data)
Net income, as reported $3,876 $4,321 $4,053
Deduct total stock-based compensation expense
determined under fair value based method
for all awards, net of related tax effects (125) (141) (121)
----------------------------------------------------------------------------------------------------------
Pro forma net income $3,751 $4,180 $3,932
==========================================================================================================
Basic earnings per share:
As reported $ 1.32 $ 1.47 $ 1.29
Pro forma 1.28 1.42 1.25
Diluted earnings per share:
As reported 1.27 1.40 1.24
Pro forma 1.23 1.35 1.20
Earnings per Share
Basic earnings per share (EPS) is computed by dividing net income by the
weighted average number of common shares outstanding for the period. Diluted EPS
reflects the potential dilution that could occur if securities or other
contracts to issue common stock were exercised or converted into common stock or
resulted in the issuance of common stock that then shared in the earnings of the
Company. All weighted average share and per share amounts reflect the 10% stock
dividends distributed on May 27, 2005, May 26, 2004 and May 28, 2003. The
following table sets forth the computation of basic and diluted earnings per
share:
Years Ended September 30,
2005 2004 2003
----------------------------------------------------------------------------------------------------------
(Dollars in Thousands, Except per Share Data)
Basic earnings per share:
Net income $ 3,876 $ 4,321 $ 4,053
Weighted average shares outstanding 2,929,304 2,941,085 3,131,412
Earnings per share $1.32 $1.47 $1.29
Diluted earnings per share:
Net income $ 3,876 $ 4,321 $ 4,053
Weighted average shares outstanding 2,929,304 2,941,085 3,131,412
Dilutive effect of employee stock options 127,039 149,702 130,077
----------------------------------------------------------------------------------------------------------
Total diluted weighted average shares outstanding 3,056,343 3,090,847 3,261,489
Earnings per share $1.27 $1.40 $1.24
(Note Continued)
14 | FIDELITY BANCORP, INC. AND SUBSIDIARY | ANNUAL REPORT 2005
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
Options to purchase 2,200 shares of common stock at $21.05 per share, 32,301
shares at $22.91 per share, 52,301 shares at $21.35 per share, and 13,200 shares
at $20.93 per share were outstanding during 2005, but were not included in the
computation of diluted EPS because to do so would have been anti-dilutive.
Similarly 55,723 shares of common stock at $21.35 per share were outstanding
during 2004 but were not included in the computation of diluted EPS because to
do so would have been anti-dilutive. There were no options outstanding during
2003 that would have had an anti-dilutive effect.
Comprehensive Income
Accounting principles generally require that recognized revenue, expenses, gains
and losses be included in net income. Although certain changes in assets and
liabilities, such as unrealized gains and losses on available for sale
securities, are reported as a separate component of the equity section of the
balance sheet, such items, along with net income are components of comprehensive
income.
The only other comprehensive income item that the Company presently has is
unrealized gains (losses) on securities available for sale.
Years Ended September 30,
2005 2004 2003
--------------------------------------------------------------------------------------------------------------------
(In Thousands)
Unrealized holding losses arising during the year $ (2,630) $ (597) $(1,122)
Less reclassification adjustment for gains included in net income (566) (639) (638)
--------------------------------------------------------------------------------------------------------------------
Net Unrealized Losses (3,196) (1,236) (1,760)
Tax benefit 1,087 420 598
--------------------------------------------------------------------------------------------------------------------
Net of Tax Amount $ (2,109) $ (816) $(1,162)
====================================================================================================================
Off-Balance Sheet Financial Instruments
In the ordinary course of business, the Company has entered into off-balance
sheet financial instruments consisting of commitments to extend credit,
commercial letters of credit and standby letters of credit. Such financial
instruments are recorded on the balance sheet when they become payable by the
borrower to the Company.
New Accounting Standards
In January 2003, the FASB's Emerging Issues Task Force (EITF) issued EITF Issue
No. 03-1, "The Meaning of Other-Than-Temporary Impairment and Its Application to
Certain Investors" ("EITF 03-1"), and in March 2004, the EITF issued an update.
EITF 03-1 addresses the meaning of other-than-temporary impairment and its
application to certain debt and equity securities. EITF 03-1 aids in the
determination of impairment of an investment and gives guidance as to the
measurement of impairment loss and the recognition and disclosures of
other-than-temporary investments. EITF 03-1 also provides a model to determine
other-than-temporary impairment using evidence-based judgment about the recovery
of the fair value up to the cost of the investment by considering the severity
and duration of the impairment in relation to the forecasted recovery of the
fair value. In July 2005, FASB adopted the recommendation of its staff to
nullify key parts of EITF 03-1. The staff's recommendations were to nullify the
guidance on the determination of whether an investment is impaired as set forth
in paragraphs 10-18 of Issue 03-1 and not to provide additional guidance on the
meaning of other-than-temporary impairment. Instead, the staff recommends
entities recognize other-than-temporary impairments by applying existing
accounting literature such as paragraph 16 of SFAS 115. The implementation of
this guidance had no material impact on the Company's consolidated financial
statements.
(Note Continued)
ANNUAL REPORT 2005 | FIDELITY BANCORP, INC. AND SUBSIDIARY | 15
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
In December 2004, the FASB issued Statement No. 123R, "Share-Based Payment."
Statement No. 123R revised Statement No. 123, "Accounting for Stock-Based
Compensation," and supersedes APB Opinion No. 25, "Accounting for Stock Issued
to Employees," and its related implementation guidance. Statement No. 123R will
require compensation costs related to share-based payment transactions to be
recognized in the financial statements (with limited exceptions). The amount of
compensation cost will be measured based on the grant-date fair value of the
equity or liability instruments issued. Compensation cost will be recognized
over the period that an employee provides service in exchange for the award.
In March 2005, the SEC issued Staff Accounting Bulletin No. 107 ("SAB No. 107"),
"Share-Based Payment", providing guidance on option valuation methods, the
accounting for income tax effects of share-based payment arrangements upon
adoption of SFAS No. 123R, and the disclosures in MD&A subsequent to the
adoption. The Company will provide SAB No. 107 required disclosures upon
adoption of SFAS No. 123R on October 1, 2005.
On April 14, 2005, the Securities and Exchange Commission ("SEC") adopted a new
rule that amends the compliance dates for Statement No. 123R. Under the new
rule, the Company is required to adopt SFAS No. 123R in the first annual period
beginning after June 15, 2005. The Company adopted SFAS 123R as of October 1,
2005. The estimated compensation expense is not expected to be material to the
Company's consolidated financial statements.
Segment Reporting
The Company acts as an independent community financial services provider, and
offers traditional banking and related financial services to individual,
business and government customers. Through its branches, the Company offers a
full array of commercial and retail financial services.
Management does not separately allocate expenses, including the cost of funding
loan demand, between the commercial and retail operations of the Company. As
such, discrete financial information is not available and segment reporting
would not be meaningful.
Restrictions on Cash and Due from Bank Accounts
The Bank is required to maintain average reserve balances with the Federal
Reserve Bank. The average amount of those reserve balances maintained for 2005
and 2004 was approximately $1.3 million and $2.0 million, respectively.
Investments Required by Law
The Bank is a member of the Federal Home Loan Bank System and, as a member,
maintains an investment in the capital stock of the Federal Home Loan Bank of
Pittsburgh (FHLB), at cost, in an amount not less than 1% of its outstanding
home loans or 5% of its outstanding notes payable, if any, to the FHLB plus 0.7%
of its unused borrowing capacity, whichever is greater.
Reclassifications
Certain amounts in the 2004 and 2003 financial statements have been reclassified
to conform with the 2005 presentation format. These reclassifications had no
effect on net income.
16 | FIDELITY BANCORP, INC. AND SUBSIDIARY | ANNUAL REPORT 2005
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
NOTE 2 - SECURITIES
The amortized cost and fair value of securities are as follows:
September 30, 2005
----------------------------------------------------------------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
----------------------------------------------------------------------------------------------------------------------------
(In Thousands)
SECURITIES AVAILABLE FOR SALE:
U.S. government and agency obligations $ 27,001 $ - $ 587 $ 26,414
Municipal obligations 20,721 322 130 20,913
Corporate obligations 10,120 123 101 10,142
Equity securities 4,304 379 201 4,482
Mutual funds 12,247 58 282 12,023
Trust preferred securities 25,434 243 110 25,567
Federal Home Loan Mortgage Corp.
preferred stock 1,409 40 - 1,449
Mortgage-backed securities and
collateralized mortgage obligations 82,306 156 1,295 81,167
----------------------------------------------------------------------------------------------------------------------------
$ 183,542 $ 1,321 $ 2,706 $ 182,157
============================================================================================================================
SECURITIES HELD TO MATURITY:
U.S. government and agency obligations $ 25,972 $ 23 $ 454 $ 25,541
Municipal obligations 22,662 970 21 23,611
Corporate obligations 6,717 117 30 6,804
Mortgaged-backed securities and
collateralized mortgage obligations 49,965 74 1,033 49,006
----------------------------------------------------------------------------------------------------------------------------
$ 105,316 $ 1,184 $ 1,538 $ 104,962
============================================================================================================================
September 30, 2004
----------------------------------------------------------------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
----------------------------------------------------------------------------------------------------------------------------
(In Thousands)
SECURITIES AVAILABLE FOR SALE:
U.S. government and agency obligations $ 42,282 $ 326 $ 242 $ 42,366
Municipal obligations 16,772 433 - 17,205
Corporate obligations 12,237 415 5 12,647
Equity securities 3,118 897 33 3,982
Mutual funds 10,364 39 120 10,283
Trust preferred securities 23,910 196 62 24,044
Federal Home Loan Mortgage Corp.
preferred stock 1,409 30 40 1,399
Mortgage-backed securities and
collateralized mortgage obligations 74,209 424 447 74,186
----------------------------------------------------------------------------------------------------------------------------
$184,301 $2,760 $ 949 $186,112
============================================================================================================================
SECURITIES HELD TO MATURITY:
U.S. government and agency obligations $ 22,973 $ 140 $ 169 $ 22,944
Municipal obligations 23,070 998 44 24,024
Corporate obligations 6,739 393 - 7,132
Mortgaged-backed securities and
collateralized mortgage obligations 56,552 203 442 56,313
----------------------------------------------------------------------------------------------------------------------------
$109,334 $1,734 $ 655 $110,413
============================================================================================================================
(Note Continued)
ANNUAL REPORT 2005 | FIDELITY BANCORP, INC. AND SUBSIDIARY | 17
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
The amortized cost and fair value of debt securities at September 30, 2005, by
contractual maturity, are shown in the following table. Expected maturities will
differ from contractual maturities because borrowers have the right to call or
prepay obligations with or without call or prepayment penalties.
Securities Available for Sale Securities Held to Maturity
----------------------------------------------------------------------------------------------------------------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
----------------------------------------------------------------------------------------------------------------------------
(In Thousands)
Due in one year or less $ 3,001 $ 3,017 $ 499 $ 501
Due after one year through five years 26,885 26,420 24,280 24,129
Due after five years through ten years 41,023 40,694 22,630 22,239
Due after ten years 94,673 94,072 57,907 58,093
Equity securities and mutual funds 17,960 17,954 - -
----------------------------------------------------------------------------------------------------------------------------
$ 183,542 $ 182,157 $ 105,316 $ 104,962
============================================================================================================================
Gross gains of $866,000, $906,000 and $749,000 and gross losses of $257,000,
$267,000 and $1,000 were realized on sales in 2005, 2004 and 2003, respectively.
In addition, losses of $43,000 and $110,000 resulting from the writedown of
investments in equity securities that are considered other than temporary were
realized in 2005 and 2003, respectively. There were no writedowns of equity
securities during fiscal 2004.
(Note Continued)
18 | FIDELITY BANCORP, INC. AND SUBSIDIARY | ANNUAL REPORT 2005
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
The following table shows the Company's investments' gross unrealized losses and
fair value, aggregated by investment category and length of time that individual
securities have been in a continuous unrealized loss position, at September 30,
2005:
Less than 12 Months 12 Months or More Total
--------------------------------------------------------------------------------------------------------------------------
Fair Unrealized Fair Unrealized Fair Unrealized
Value Losses Value Losses Value Losses
--------------------------------------------------------------------------------------------------------------------------
(In Thousands)
Securities Available for Sale:
U.S. government and agency
obligations $ 20,641 $ 372 $ 5,773 $ 215 $ 26,414 $ 587
Municipal obligations 10,312 130 - - 10,312 130
Corporate obligations 3,458 101 - - 3,458 101
Equity securities 2,303 201 - - 2,303 201
Mutual funds 1,011 17 10,859 265 11,870 282
Trust preferred securities 10,419 110 - - 10,419 110
Mortgage-backed securities
and collateralized
mortgage obligations 58,553 894 15,893 401 74,446 1,295
Securities Held to Maturity:
U.S. government and
agency obligations 16,787 196 7,732 258 24,519 454
Municipal obligations 3,452 11 563 10 4,015 21
Corporate obligations 1,951 30 - - 1,951 30
Mortgage-backed securities
and collateralized
mortgage obligations 20,418 373 24,059 660 44,477 1,033
--------------------------------------------------------------------------------------------------------------------------
Total Temporarily Impaired
Securities $149,305 $ 2,435 $ 64,879 $ 1,809 $214,184 $ 4,244
==========================================================================================================================
Management evaluates securities for other than temporary impairment at least on
a quarterly basis, and more frequently when economic or market concerns warrant
such evaluation. Consideration is given to (1) the length of time and the extent
to which the fair value has been less than cost, (2) the financial condition and
near-term prospects of the issuer, and (3) the intent and ability of the Company
to retain its investment in the issuer for a period of time sufficient to allow
for any anticipated recovery in fair value.
Unrealized losses detailed above relate primarily to U.S. Government agency,
mortgage-backed securities and collateralized mortgage obligations. The Company
has 132 securities in an unrealized loss position. In management's opinion, the
decline in fair value is due only to interest rate fluctuations. The Company has
the intent and ability to hold such investments until maturity or market price
recovery. None of the individual unrealized losses are significant.
ANNUAL REPORT 2005 | FIDELITY BANCORP, INC. AND SUBSIDIARY | 19
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
NOTE 3 - LOANS RECEIVABLE
Loans receivable, net are summarized as follows:
September 30,
2005 2004
----------------------------------------------------------------------------------------------------------
(In Thousands)
First mortgage loans:
Conventional:
1-4 family dwellings $163,584 $109,991
Multi-family dwellings 10,584 12,191
Commercial 49,985 50,334
Construction 36,124 36,431
----------------------------------------------------------------------------------------------------------
260,277 208,947
Less:
Loans in process (23,070) (23,409)
Unearned discounts and fees (343) (612)
----------------------------------------------------------------------------------------------------------
236,864 184,926
----------------------------------------------------------------------------------------------------------
Installment loans:
Home equity 76,045 71,547
Consumer loans 993 1,749
Other 2,742 2,694
----------------------------------------------------------------------------------------------------------
79,780 75,990
----------------------------------------------------------------------------------------------------------
Commercial business loans and leases:
Commercial business loans 31,577 30,872
Commercial leases 451 1,210
----------------------------------------------------------------------------------------------------------
32,028 32,082
----------------------------------------------------------------------------------------------------------
Less allowance for loan losses (2,596) (2,609)
----------------------------------------------------------------------------------------------------------
Loans Receivable, Net $346,076 $290,389
==========================================================================================================
(Note Continued)
20 | FIDELITY BANCORP, INC. AND SUBSIDIARY | ANNUAL REPORT 2005
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
Commitments to originate loans at September 30, 2005 were approximately as
follows:
Rate Amount
--------------------------------------------------------------------------------------------------------
(Dollars in Thousands)
First mortgage loans:
Fixed rate 4.875% to 5.875% $ 907
Other loans:
Fixed rate 5.365% to 5.44% 56
Adjustable rate 7.25% to 9.50% 406
--------------------------------------------------------------------------------------------------------
$ 1,369
========================================================================================================
The Bank conducts its business through thirteen offices located in the greater
Pittsburgh metropolitan area. At September 30, 2005, the majority of the Bank's
loan portfolio was secured by properties located in this region. The Bank does
not believe it has significant concentrations of credit risk to any one group of
borrowers given its underwriting and collateral requirements.
NOTE 4 - ALLOWANCE FOR LOAN LOSSES
Changes in the allowance for loan losses are as follows:
Years Ended September 30,
2005 2004 2003
--------------------------------------------------------------------------------------------------------
(In Thousands)
Balance, beginning $2,609 $3,091 $3,056
Allowance for loan losses from acquisitions -- -- 40
Provision for loan losses 600 275 555
Loans charged off (670) (819) (624)
Recoveries 57 62 64
--------------------------------------------------------------------------------------------------------
Balance, ending $2,596 $2,609 $3,091
========================================================================================================
Non-accrual loans were approximately $2,319,000, $3,647,000 and $2,928,000 at
September 30, 2005, 2004 and 2003, respectively. The foregone interest on those
loans for the years ended September 30, 2005, 2004 and 2003 was $176,000,
$184,000 and $165,000, respectively. The amount of interest income on such loans
actually included in income in the years ended September 30, 2005, 2004 and 2003
was $18,000, $93,000 and $77,000, respectively. There are no commitments to lend
additional funds to debtors in non-accrual status. Loan balances past due 90
days or more and still accruing interest, but which management expects will
eventually be paid in full, amounted to $53,000 and $481,000 at September 30,
2005 and 2004, respectively.
The recorded investment in loans that are considered to be impaired under SFAS
No. 114 was $1,669,000 and $2,414,000 at September 30, 2005 and 2004,
respectively. Included in the 2005 amount is $859,000 of impaired loans for
which the related allowance for credit losses was $197,000 and $810,000 of
impaired loans for which there is no allowance for credit losses. Included in
the 2004 amount is $717,000 of impaired loans for which the related allowance
for credit losses was $43,000 and $1,697,000 of impaired loans for which there
is no allowance for credit losses. The average recorded investment in impaired
loans during the fiscal years ended September 30, 2005, 2004 and 2003 was
approximately $2,182,000, $2,449,000 and $2,515,000, respectively. For the
fiscal years ended September 30, 2005, 2004 and 2003, the Company recognized
interest income on those impaired loans of $45,000, $75,000 and $63,000,
respectively, using the cash basis of income recognition.
(Note Continued)
ANNUAL REPORT 2005 | FIDELITY BANCORP, INC. AND SUBSIDIARY | 21
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
Management believes that the allowance for losses on loans is reasonable. While
management uses available information to recognize losses on loans, future
additions to the allowance may be necessary based on changes in economic
conditions. In addition, various regulatory agencies, as an integral part of
their examination process, periodically review the Bank's allowance for losses
on loans. Such agencies may require the Bank to recognize additions to the
allowance based on their judgments using information available to them at the
time of examination.
NOTE 5 - OFFICE PREMISES AND EQUIPMENT
Office premises and equipment are summarized as follows:
September 30,
2005 2004
--------------------------------------------------------------------------------------------------------
(In Thousands)
Land $ 847 $ 534
Office buildings 5,199 4,852
Furniture, fixtures and equipment 2,963 2,893
Leasehold improvements 322 443
--------------------------------------------------------------------------------------------------------
9,331 8,722
Accumulated depreciation and amortization (4,205) (3,512)
--------------------------------------------------------------------------------------------------------
$ 5,126 $ 5,210
========================================================================================================
The Bank has operating leases with respect to four branch offices, the Bank's
Loan Center, two automated teller machine locations, and a non-deposit
investment office which expire on various dates through fiscal 2013. Lease
expense amounted to $237,000, $235,000 and $224,000 in fiscal years 2005, 2004
and 2003, respectively. Minimum annual lease commitments are approximately as
follows (in thousands):
2006 $217
2007 214
2008 145
2009 118
2010 76
Thereafter 133
--------------------------------------------------------------------------------
$903
================================================================================
22 | FIDELITY BANCORP, INC. AND SUBSIDIARY | ANNUAL REPORT 2005
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
NOTE 6 - DEPOSITS
Deposit balances are summarized as follows:
September 30,
Weighted Average Rates 2005 2004
-------------------------------------------------------------------------------------------------------------
(In Thousands)
Demand deposits Noninterest bearing $ 32,415 $ 30,106
Savings deposits:
NOW accounts .47% in 2005 and 2004 43,039 44,654
Passbooks 1.15% in 2005 and 1.17% in 2004 78,997 95,684
Money market deposit accounts 2.95% in 2005 and 0.83% in 2004 44,742 15,198
-------------------------------------------------------------------------------------------------------------
199,193 185,642
-------------------------------------------------------------------------------------------------------------
Time deposits:
Fixed rate 1.00% to 2.99% 40,604 65,642
3.00% to 4.99% 115,870 86,764
5.00% to 6.99% 11,130 21,296
7.00% to 8.99% 15 428
-------------------------------------------------------------------------------------------------------------
167,619 174,130
-------------------------------------------------------------------------------------------------------------
$366,812 $359,772
=============================================================================================================
The weighted average interest rate for all deposits was 2.35% and 2.08% at
September 30, 2005 and 2004, respectively. Time deposits with balances of
$100,000 or more totaled $28,605,000 and $29,845,000 at September 30, 2005 and
2004, respectively.
At September 30, 2005, no investment securities were required to be pledged to
secure deposits of public funds.
The maturities of time deposits at September 30, 2005 are summarized as follows
(in thousands):
Within one year $ 66,018
Beyond one year but within two years 45,847
Beyond two years but within three years 15,439
Beyond three years but within four years 27,356
Beyond four years but within five years 9,182
Beyond five years 3,777
--------------------------------------------------------------------------------
$167,619
================================================================================
(Note Continued)
ANNUAL REPORT 2005 | FIDELITY BANCORP, INC. AND SUBSIDIARY | 23
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
Interest expense by deposit category is as follows:
Years Ended September 30,
2005 2004 2003
--------------------------------------------------------------------------------------------------------
(In Thousands)
NOW accounts $ 209 $ 270 $ 428
Passbooks 1,037 1,099 1,280
Money market deposit accounts 622 128 187
Time deposits 5,842 6,138 7,183
--------------------------------------------------------------------------------------------------------
$7,710 $7,635 $9,078
========================================================================================================
NOTE 7 - BORROWINGS
FHLB "RepoPlus" advances are short-term borrowings maturing within one day to
one year, bear a fixed interest rate and are subject to prepayment penalty.
Although no specific collateral is required to be pledged for these borrowings,
"RepoPlus" advances are secured under the blanket collateral pledge agreement.
The Bank utilized "RepoPlus" advances during fiscal 2005 and 2004, ranging
individually from $50,000 to $104,500,000 and from $325,000 to $64,700,000,
respectively. The daily average balance during 2005 and 2004 was $79,860,000 and
$44,601,000, respectively, and the daily average interest rate was 2.88% and
1.32%, respectively. The maximum amount outstanding at any month-end during 2005
and 2004 was $110,800,000 and $63,910,000, respectively. At September 30, 2005,
"RepoPlus" advances outstanding were $110,800,000 at an interest rate of 3.84%.
There were $63,910,000 "RepoPlus" advances outstanding at an interest rate of
1.91% at September 30, 2004.
Also included in short-term borrowings are treasury, tax and loan balances of
$341,000 and $196,000 at September 30, 2005 and 2004, respectively.
(Note Continued)
24 | FIDELITY BANCORP, INC. AND SUBSIDIARY | ANNUAL REPORT 2005
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
Long-term debt consisted of the following:
Interest September 30,
Rate 2005 2004
---------------------------------------------------------------------------------------------------------
Fixed Rate Advances:
October 12, 2004 3.80% $ - $ 5,000
January 14, 2005 3.88 - 10,000
June 23, 2005 2.20 - 414
July 1, 2005 3.91 - 7,500
January 17, 2006 4.43 10,000 10,000
July 3, 2006 4.31 7,500 7,500
August 30, 2007 3.89 10,000 10,000
October 12, 2007 3.90 10,000 -
January 14, 2008 3.79 10,000 -
June 23, 2010 3.24 248 295
Convertible Select Advances:
April 21, 2005 2.01 - 511
May 18, 2005 2.18 - 516
July 5, 2005 2.28 - 2,073
December 22, 2005 4.05 1,000 1,005
December 22, 2005 2.28 504 519
February 20, 2008 5.48 10,000 10,000
October 7, 2008 6.44 15,000 15,000
October 23, 2008 2.95 529 538
December 18, 2008 5.15 10,000 10,000
January 22, 2009 5.26 1,984 1,979
January 10, 2010 3.24 773 788
January 21, 2010 3.23 1,662 1,697
February 8, 2010 3.26 1,103 1,135
March 1, 2010 3.24 1,110 1,135
March 17, 2010 6.05 20,000 20,000
March 17, 2010 3.15 891 911
April 21, 2010 3.12 554 565
May 19, 2010 5.39 1,052 1,063
June 23, 2010 3.50 228 233
August 18, 2010 3.39 560 570
August 30, 2010 5.93 10,000 10,000
September 22, 2010 3.42 564 574
September 22, 2010 3.35 333 339
October 20, 2010 3.33 440 447
January 19, 2011 4.57 5,000 5,000
November 2, 2011 4.40 5,000 5,000
---------------------------------------------------------------------------------------------------------
Total Long-Term Debt $136,035 $142,307
========================================================================================================
(Note Continued)
ANNUAL REPORT 2005 | FIDELITY BANCORP, INC. AND SUBSIDIARY | 25
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
Contractual maturities of long-term debt at September 30, 2005 were as follows
(in thousands):
2006 $ 19,004
2007 10,000
2008 30,000
2009 27,512
2010 39,079
Thereafter 10,440
--------------------------------------------------------------------------------
$136,035
================================================================================
Under a blanket collateral pledge agreement, the Bank has pledged, as collateral
for advances from the FHLB of Pittsburgh, all stock in the Federal Home Loan
Bank and certain other qualifying collateral, such as investment securities,
mortgage-backed securities and loans, with market values equal to at least 110%
of the unpaid amount of outstanding advances. The remaining maximum borrowing
capacity with the FHLB of Pittsburgh at September 30, 2005 was approximately
$84,370,000.
FHLB "Convertible Select" advances are long-term borrowings with terms of up to
ten years, and which have a fixed rate for the first three months to five years
of the term. After the fixed rate term expires, and quarterly thereafter, the
FHLB may convert the advance to an adjustable rate advance at their option. If
the advance is converted to an adjustable rate advance, the Bank has the option
at the conversion date, and quarterly thereafter, to prepay the advance with no
prepayment fee.
NOTE 8 - SUBORDINATED DEBT
Subordinated debt was $10,310,000 at September 30, 2005 and 2004. The
Subordinated Debt represents obligations of the wholly-owned statutory business
trust subsidiary (the "Trust"), which is not consolidated for financial
statement purposes. The Trust was formed with initial capitalization in common
stock of $310,000 and for the exclusive purpose of issuing $10,000,000 of
Preferred Securities and using the total proceeds to acquire Junior Subordinated
Debt Securities ("Debt Securities") issued by the Company. The Debt Securities
are unsecured and rank subordinate and junior in right of payment to all
indebtedness, liabilities and obligations of the Company. The Debt Securities
are due concurrently with the Preferred Securities and bear the same rate of
interest as the Preferred Securities. The Preferred Securities qualify as Tier 1
capital for regulatory capital purposes. The costs associated with these
issuances have been capitalized and are being amortized to maturity using the
straight-line method.
The $10,000,000 7.36% Floating Rate Preferred Securities are callable in whole
or in part at par on September 26, 2007 and quarterly thereafter, except in
certain circumstances. These securities mature on September 26, 2032. These
securities bear a current interest rate of 7.36% through December 25, 2005, and
adjust quarterly at a rate equal to the three-month LIBOR plus 3.40%. Prior to
September 26, 2007, the rate may not exceed 11.90%.
26 | FIDELITY BANCORP, INC. AND SUBSIDIARY | ANNUAL REPORT 2005
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
NOTE 9 - SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
The Bank enters into sales of securities under agreements to repurchase. Such
repurchase agreements are treated as financings and the obligations to
repurchase securities sold are reflected as a liability in the consolidated
statements of financial condition. The secured borrowings generally mature
within one to four days. The dollar amount of securities underlying the
agreements remains in the asset accounts. The securities sold under agreements
to repurchase are collateralized by various securities that are either held in
safekeeping by the FHLB or delivered to the dealer who arranged the transaction.
The fair value of such securities exceeds the value of the securities sold under
agreements to repurchase.
Short-term borrowings under agreements to repurchase securities sold are
summarized as follows:
September 30,
2005 2004
--------------------------------------------------------------------------------------------------------
(Dollars in Thousands)
Balance outstanding at September 30 $6,674 $5,118
Weighted average interest rate at the end of the year 3.49% 0.45%
Average daily balance during the year $6,715 $5,672
Weighted average interest rate during the year 2.33% 0.45%
Maximum month-end balance during the year $8,811 $7,391
NOTE 10 - FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
The Bank is party to financial instruments with off-balance sheet risk in the
normal course of business to meet the financing needs of its customers. These
financial instruments include commitments to extend credit and letters of
credit. Those instruments involve, to varying degrees, elements of credit and
interest rate risk in excess of the amount recognized in the consolidated
statements of financial condition.
The Bank's exposure to credit loss in the event of nonperformance by the other
party to the financial instrument for commitments to extend credit and letters
of credit is represented by the contractual amount of those instruments. The
Bank uses the same credit policies in making commitments and conditional
obligations as it does for on-balance sheet instruments.
A summary of the contractual amount of the Bank's financial instrument
commitments is as follows:
September 30,
2005 2004
--------------------------------------------------------------------------------------------------------
(In Thousands)
Commitments to grant loans $1,369 $13,133
Unfunded commitments under lines of credit 39,414 36,092
Financial and performance standby letters of credit 295 175
The Bank's customers have available lines of credit as follows: consumer, both
secured and unsecured, and commercial, generally secured. The amount available
at September 30, 2005 and 2004 was $18,586,000 and $19,811,000, respectively,
for consumer lines of credit and $20,828,000 and $16,281,000, respectively, for
commercial lines of credit. The interest rate for the consumer lines of credit
range from 3.99% to 10.50%, the majority of which is at variable rates. The
interest rates for the commercial lines of credit are generally variable and
based on prevailing market conditions at the time of funding. The Bank's
customers also have available letters of credit. The amount available under
these letters of credit at September 30, 2005 and 2004 was $295,000 and
$175,000, respectively. The interest rates are generally variable and based on
prevailing market conditions at the time of funding.
(Note Continued)
ANNUAL REPORT 2005 | FIDELITY BANCORP, INC. AND SUBSIDIARY | 27
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
The Company does not issue any guarantees that would require liability
recognition or disclosure, other than its standby letters of credit. Standby
letters of credit written are conditional commitments issued by the Company to
guarantee the performance of a customer to a third party. Generally, all letters
of credit, when issued have expiration dates within one year. The credit risk
involved in issuing letters of credit is essentially the same as that involved
in extending other loan commitments. The Bank requires collateral supporting
these letters of credit as deemed necessary. Management believes that the
proceeds obtained through a liquidation of such collateral would be sufficient
to cover the maximum potential amount of future payments required under the
corresponding guarantees. The current amount of liability as of September 30,
2005 for guarantees under standby letters of credit issued is not material.
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the commitment.
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. The Bank evaluates each customer's credit
worthiness on a case-by-case basis. The amount of collateral obtained, if deemed
necessary by the Bank upon extension of credit, is based on management's credit
evaluation of the borrower. The collateral consists primarily of residential
real estate and personal property.
The Company does not have any off-balance sheet risk at September 30, 2005,
except for the commitments referenced above.
NOTE 11 - INCOME TAXES
The provision for income taxes in the consolidated statements of income consists
of the following:
Years Ended September 30,
2005 2004 2003
------------------------------------------------------------------------------------------------------------------
(In Thousands)
Current:
Federal $ 933 $ 697 $838
State 30 11 98
------------------------------------------------------------------------------------------------------------------
963 708 936
Deferred, federal 37 308 25
------------------------------------------------------------------------------------------------------------------
$1,000 $1,016 $961
==================================================================================================================
The differences between the expected and actual tax provision expressed as
percentages of income before tax are as follows:
Years Ended September 30,
2005 2004 2003
-------------------------------------------------------------------------------------------------------------------
Expected federal tax rate 34.0 % 34.0 % 34.0 %
Tax-exempt interest (11.4) (12.4) (14.6)
State income tax, net of federal tax benefit .1 .2 1.1
Other items, net (2.2) (2.8) (1.3)
-------------------------------------------------------------------------------------------------------------------
Actual Tax Rate 20.5 % 19.0 % 19.2 %
===================================================================================================================
(Note Continued)
28 | FIDELITY BANCORP, INC. AND SUBSIDIARY | ANNUAL REPORT 2005
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
Net deferred tax assets consisted of the following components:
September 30,
2005 2004
--------------------------------------------------------------------------------------------------------
(In Thousands)
Net deferred tax assets:
Office premises and equipment $ 418 $ 334
Allowance for loan losses 886 891
Deferred compensation 381 358
Net operating losses 116 140
Intangible assets 244 357
Unrealized losses on securities available for sale 471 -
Other 338 340
--------------------------------------------------------------------------------------------------------
Total Deferred Tax Assets 2,854 2,420
Unrealized gains on securities available for sale - (616)
--------------------------------------------------------------------------------------------------------
Net Deferred Tax Assets $2,854 $1,804
========================================================================================================
Net operating loss carryforwards in the amount of $73,000, obtained from
acquisitions, were utilized in fiscal 2005. The federal net operating loss
carryforward of $340,000 is available to offset future taxable income through
2022.
The Company has determined that it is not required to establish a valuation
allowance for deferred tax assets since it is more likely than not that the
deferred tax assets will be realized through carryback to taxable income in
prior years, future reversals of existing temporary differences and, to a lesser
extent, future taxable income.
Tax basis bad debt reserves established after 1987 are treated as temporary
differences on which deferred income taxes have been provided. Deferred taxes
are not required to be provided on tax bad debt reserves recorded in 1987 and
prior years (base year bad debt reserves). Approximately $3,404,000 of the
balance in retained earnings at September 30, 2005, represent base year bad debt
deductions for tax purposes only. No provision for federal income tax has been
made for such amount. Should amounts previously claimed as a bad debt deduction
be used for any purpose other than to absorb bad debts (which is not
anticipated), tax liabilities will be incurred at the rate then in effect.
NOTE 12 - STOCKHOLDERS' EQUITY
The Bank is subject to various 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 direct material effect on the
Bank'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 Bank's assets,
liabilities and certain off-balance-sheet items as calculated under regulatory
accounting practices. 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 (set forth in the table
below) of total and Tier 1 capital (as defined in the regulations) to
risk-weighted assets (as defined) and of Tier 1 capital (as defined) to average
assets (as defined). Management believes, as of September 30, 2005, that the
Bank meets all capital adequacy requirements to which it is subject.
(Note Continued)
ANNUAL REPORT 2005 | FIDELITY BANCORP, INC. AND SUBSIDIARY | 29
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
As of September 30, 2005, the most recent notification from the Federal Deposit
Insurance Corporation 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 as set forth in the table. There are no conditions or
events since that notification that management believes have changed the
Bank's category.
The Federal Reserve Board (FRB) measures capital adequacy for bank holding
companies on the basis of a risk-based capital framework and a leverage ratio.
The minimum ratio of total risk-based capital to risk-weighted assets is 8%. At
least half of the total capital must be common stockholders' equity (not
inclusive of net unrealized gains and losses on available for sale debt
securities and net unrealized gains on available for sale equity securities) and
perpetual preferred stock, less goodwill and other nonqualifying intangible
assets (Tier 1 capital). The remainder (i.e., the Tier 2 risk-based capital) may
consist of hybrid capital instruments, perpetual debt, term subordinated debt,
other preferred stock and a limited amount of the allowance for loan losses. At
September 30, 2005, the Company had Tier I capital as a percentage of
risk-weighted assets of 12.6% and total risk-based capital as a percentage of
risk-weighted assets of 13.2%.
In addition, the Federal Reserve Board has established minimum leverage ratio
guidelines for bank holding companies. These guidelines currently provide for a
minimum ratio of Tier 1 capital as a percentage of average total assets (the
Leverage Ratio) of 3% for bank holding companies that meet certain criteria,
including that they maintain the highest regulatory rating. The minimum leverage
ratio for all other bank holding companies is 4%. At September 30, 2005, the
Company had a leverage ratio of 7.7%.
The following table sets forth certain information concerning the Bank's
regulatory capital at September 30, 2005 and 2004:
To be Well
Capitalized under
For Capital Adequacy Prompt Corrective
Actual Purposes Action Provisions
---------------------------------------------------------------------------------------------------------------------------
Amount Ratio Amount Ratio Amount Ratio
---------------------------------------------------------------------------------------------------------------------------
(Dollars in Thousands)
As of September 30, 2005:
Total capital (to risk-weighted
assets) $45,750 10.7 % $=>34,122 =>8.0 % $=>42,653 =>10.0 %
Tier 1 capital (to risk-weighted
assets) 43,154 10.1 =>17,061 =>4.0 =>25,592 => 6.0
Tier 1 capital (to average assets) 43,154 6.5 =>26,745 =>4.0 =>33,431 => 5.0
As of September 30, 2004:
Total capital (to risk-weighted
assets) $50,887 12.7 % $=>32,009 =>8.0 % $=>40,011 =>10.0 %
Tier 1 capital (to risk-weighted
assets) 48,278 12.1 =>16,004 =>4.0 =>24,007 => 6.0
Tier 1 capital (to average assets) 48,278 7.7 =>25,156 =>4.0 =>31,445 => 5.0
Federal and state banking regulations place certain restrictions on dividends
paid and loans or advances made by the Bank to the Company. The total amount of
dividends which may be paid at any date is generally limited to the retained
earnings of the Bank and loans or advances are limited to 10 percent of the
Bank's capital stock and surplus on a secured basis.
At September 30, 2005, the Bank's retained earnings available for the payment of
dividends was $12.8 million. Accordingly, $33.3 million of the Company's equity
in the net assets of the Bank was restricted at September 30, 2005. Funds
available for loans or advances by the Bank to the Company amounted to $5.3
million. In addition, dividends paid by the Bank to the Company would be
prohibited if the effect thereof would cause the Bank's capital to be reduced
below applicable minimum capital requirements.
30 | FIDELITY BANCORP, INC. AND SUBSIDIARY | ANNUAL REPORT 2005
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
NOTE 13 - STOCK OPTION PLANS
On September 30, 2005, the Company has eight share-based compensation plans,
which are described below.
The Company's 2005 Stock-Based Incentive Plan (the Plan), which is
shareholder-approved, permits the grant of both incentive and compensatory stock
options to its employees and non-employee directors for up to 165,000 shares of
common stock. Option awards are generally granted with an exercise price equal
to the market value of the common stock on the date of grant, the options
generally vest over a three year period, and have a contractual term of seven
years, although the Plan permits contractual terms of up to ten years. Option
awards provide for accelerated vesting if there is a change in control, as
defined in the Plan. At September 30, 2005, there were 149,600 options available
for grant under the Plan.
The Company also maintains the 1993 Employee Stock Compensation Program, the
1993 Directors' Stock Option Plan and the 1997 Employee Stock Compensation
Program, all of which were shareholder approved. At September 30, 2005, no
remaining options are available for grant under these programs. Option awards
under these programs were granted with an exercise price equal to the market
value of the common stock on the date of grant, had vesting periods of from zero
to two years, and had contractual terms of from seven to ten years. Option
awards under these programs provided for accelerated vesting if there is a
change in control, as defined in the programs.
The Company also maintains the 1998 Stock Compensation Program, the 2000 Stock
Compensation Plan, the 2001 Stock Compensation Plan and the 2002 Stock
Compensation Plan, which provided for the grant of stock options to non-employee
directors. At September 30, 2005, no remaining options are available for grant
under these programs. Option awards under these programs were granted with an
exercise price equal to the market value of the common stock on the date of
grant, were exercisable immediately, and had contractual terms of ten years.
The following is a summary of the activity in the aforementioned stock option
plans, adjusted to reflect the 10% stock dividends distributed on May 28, 2003,
May 26, 2004 and May 27, 2005, for each of the years in the three-year period
ended September 30:
2005 2004 2003
---------------------------------------------------------------------------------------------------------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Options Price Options Price Options Price
---------------------------------------------------------------------------------------------------------------------------
Outstanding, beginning of year 390,711 $12.52 406,509 $10.76 372,360 $ 9.57
Granted 47,701 22.28 55,723 21.35 93,699 14.27
Exercised (57,351) 9.83 (67,565) 8.93 (54,979) 8.37
Forfeited (1,258) 21.24 (3,956) 18.01 (4,571) 13.25
---------------------------------------------------------------------------------------------------------------------------
Outstanding, end of year 379,803 $14.13 390,711 $12.53 406,509 $10.76
===========================================================================================================================
Exercisable, at end of year 354,753 $13.63
===========================================================================================================================
(Note Continued)
ANNUAL REPORT 2005 | FIDELITY BANCORP, INC. AND SUBSIDIARY | 31
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
The following is a summary of the information concerning currently outstanding
and exercisable options as of September 30, 2005:
Options Outstanding Options Exercisable
---------------------------------------------------------------------------------------------------------------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Options Life (in Exercise Number Exercise
Range of Exercise Prices Outstanding years) Price Exercisable Price
---------------------------------------------------------------------------------------------------------------------------
$6.77 to $7.43 37,267 4.49 $ 7.33 37,267 $ 7.33
$8.23 to $10.70 72,853 2.97 9.27 72,853 9.27
$11.06 to $14.41 169,681 5.97 13.18 169,681 13.18
$20.93 to $22.91 100,002 7.32 21.79 74,952 22.01
---------------------------------------------------------------------------------------------------------------------------
379,803 5.61 $14.13 354,753 $13.63
===========================================================================================================================
The fair value of the options granted during 2005, 2004 and 2003 was $4.03 to
$4.33, $4.96, and $2.52, respectively, on the date of grant using a
Black-Scholes option-pricing model. The following assumptions were used in
calculating the fair value of options granted during 2005: a dividend yield of
2.66% to 2.84%, volatility of 19.5% to 21.3%, risk-free interest rate of 3.61%
to 4.29% and a weighted-average expected life of 5 to 7 years. The following
assumptions were used in calculating the fair value of options granted during
2004: a dividend yield of 2.85%, volatility of 23.1%, risk-free interest rate of
3.65% and a weighted-average expected life of 7 years. The following assumptions
were used in calculating the fair value of options granted during 2003: a
dividend yield of 3.89%, volatility of 22.5%, risk-free interest rate of 3.17%
and a weighted-average expected life of 7 years.
NOTE 14 - EMPLOYEE BENEFIT PLANS
Post-Retirement Benefits Plan
During 1998, the Bank established a non-qualified Salary Continuation Plan
covering certain officers of the Bank. The Plan is unfunded and provides
benefits to participants based upon amounts stipulated in the Plan agreements
for a period of 15 years from normal retirement, as defined in the respective
Plan agreements. Participants vest in benefits based upon years of service from
Plan initiation to normal retirement age. Expense is being accrued based on the
present value of future benefits in which the participant is expected to be
vested. Expense recognized under the Plan for 2005, 2004 and 2003 was
approximately $143,000, $141,000 and $123,000, respectively.
The Bank has entered into life insurance policies designed to offset the Bank's
contractual obligation to pay preretirement death benefits and to recover the
cost of providing benefits. Participants in the Plan are the insured under the
policy, and the Bank is the owner and beneficiary.
Group Term Replacement Plan
The Bank has purchased life insurance policies on the lives of certain officers
of the Bank. By way of separate split dollar agreements, the policy interest is
divided between the Bank and the officer. The Bank owns the policy cash
surrender value, including accumulated policy earnings, and the policy death
benefits over and above the cash surrender value are endorsed to the employee
and beneficiary. Death benefit payments are the obligation of the insurance
company. The Bank has no benefit obligation to the officer. ▇▇▇▇▇▇ recognized in
2005, 2004 and 2003 as a result of increased cash surrender value was
approximately $89,000, $99,000 and $108,000, respectively.
Employee Stock Ownership Plan
The Bank maintains a non-contributory, tax qualified Employee Stock Ownership
Plan ("ESOP") for the benefit of officers and employees who have met certain
eligibility requirements related to age and length of service. Each year, the
Bank makes a discretionary contribution to the ESOP in cash, Company common
stock or a combination of cash and Company stock. Amounts charged to
compensation expense were $289,000, $255,000 and $221,000 in 2005, 2004 and
2003, respectively.
32 | FIDELITY BANCORP, INC. AND SUBSIDIARY | ANNUAL REPORT 2005
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
NOTE 15 - SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
Three Month Periods Ended
December 31 March 31 June 30 September 30
----------------------------------------------------------------------------------------------------------------------------
(Dollars in Thousands, Except per Share Data)
FISCAL 2005
Interest income $7,608 $7,753 $8,003 $8,300
Interest expense 4,152 4,255 4,529 4,888
----------------------------------------------------------------------------------------------------------------------------
Net interest income 3,456 3,498 3,474 3,412
Provision for loan losses 175 25 225 175
Other income 841 1,071 940 936
Other expenses 2,876 3,366 2,948 2,962
----------------------------------------------------------------------------------------------------------------------------
Income before income taxes 1,246 1,178 1,241 1,211
Income tax provision 241 214 300 245
----------------------------------------------------------------------------------------------------------------------------
Net income $1,005 $964 $941 $966
============================================================================================================================
Earnings per share:
Basic $0.34 $0.33 $0.32 $0.33
============================================================================================================================
Diluted $0.33 $0.32 $0.31 $0.31
============================================================================================================================
FISCAL 2004
Interest income $7,181 $7,458 $7,313 $7,373
Interest expense 4,138 3,975 3,930 3,962
----------------------------------------------------------------------------------------------------------------------------
Net interest income 3,043 3,483 3,383 3,411
Provision for loan losses 50 75 75 75
Other income 866 1,166 900 835
Other expenses 2,787 2,996 2,876 2,816
----------------------------------------------------------------------------------------------------------------------------
Income before income taxes 1,072 1,578 1,332 1,355
Income tax provision 220 264 218 314
----------------------------------------------------------------------------------------------------------------------------
Net income $852 $1,314 $1,114 $1,041
============================================================================================================================
Earnings per share:
Basic $0.29 $0.45 $0.38 $0.35
============================================================================================================================
Diluted $0.27 $0.43 $0.36 $0.34
============================================================================================================================
ANNUAL REPORT 2005 | FIDELITY BANCORP, INC. AND SUBSIDIARY | 33
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
NOTE 16 - FAIR VALUE OF FINANCIAL INSTRUMENTS
FASB Statement No. 107 "Disclosures about Fair Value of Financial Instruments"
(FAS 107), requires disclosure of fair value information about financial
instruments, whether or not recognized in the statement of financial condition,
for which it is practical to estimate that value. In cases where quoted market
prices are not available, fair values are based on estimates using present value
or other valuation techniques. These techniques are significantly affected by
the assumptions used, including the discount rate and estimates of future cash
flows.
Management uses its best judgment in estimating the fair value of the Company's
financial instruments, however, there are inherent weaknesses in any estimation
technique. Therefore, for substantially all financial instruments, the fair
value estimates herein are not necessarily indicative of the amounts the Company
could have realized in a sales transaction on the dates indicated. The estimated
fair value amounts have been measured as of their respective year-ends, and have
not been reevaluated or updated for purposes of these financial statements
subsequent to those respective dates. As such, the estimated fair values of
these financial instruments subsequent to the respective reporting dates may be
different than the amounts reported at each year-end.
The following information should not be interpreted as an estimate of the fair
value of the entire Company since a fair value calculation is only provided for
a limited portion of the Company's assets and liabilities. Due to a wide range
of valuation techniques and the degree of subjectivity used in making the
estimates, comparisons between the Company's disclosures and those of other
companies may not be meaningful. The Company, in estimating its fair value
disclosures for financial instruments, used the following methods and
assumptions:
Cash and Cash Equivalents
The carrying amounts reported approximate those assets' fair value.
Securities
Fair values of securities are based on quoted market prices, where available. If
quoted market prices are not available, fair values are based on quoted market
prices of comparable securities.
Loans Receivable
For variable rate loans that reprice frequently and with no significant change
in credit risk, fair values are based on carrying values. The fair values for
other loans receivable were estimated using discounted cash flow analyses, using
interest rates currently offered for loans with similar terms to borrowers of
similar credit quality. Loans with significant collectibility concerns were fair
valued on a loan-by-loan basis utilizing a discounted cash flow method or the
fair market value of the underlying collateral.
Restricted Investments in Bank Stock
The carrying amounts reported approximate those assets' fair value.
Accrued Interest Receivable and Payable
The carrying amount of accrued interest receivable and payable approximate their
fair value.
Deposit Liabilities
The fair values disclosed for demand deposits (e.g., interest bearing and
noninterest bearing checking, passbook savings and certain types of money market
accounts) are, by definition, equal to the amount payable on demand at the
reporting date (i.e., their carrying amounts). Fair values for fixed rate
certificates of deposit are estimated using a discounted cash flow calculation
that applies interest rates currently being offered on certificates of deposit
to a schedule of aggregated expected monthly maturities on time deposits.
(Note Continued)
34 | FIDELITY BANCORP, INC. AND SUBSIDIARY | ANNUAL REPORT 2005
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
Short-Term Borrowings and Securities Sold Under Agreements to Repurchase
The carrying amounts for short-term borrowings and securities sold under
agreements to repurchase approximate the estimated fair value of such
liabilities.
Subordinated Debt
Fair values for subordinated debt are estimated using a discounted cash flow
calculation similar to that used in valuing fixed rate certificate of deposit
liabilities.
Long-Term Debt
The fair values for long-term debt were estimated using the interest rate
currently available from the third party that holds the existing debt.
Off-Balance Sheet Instruments
Fair values for the Company's off-balance sheet instruments are based on fees
currently charged to enter into similar agreements, taking into account the
remaining terms of the agreements and the counterparties' credit standing.
The carrying amounts and fair values of the Company's financial instruments are
presented in the following table:
September 30,
2005 2004
---------------------------------------------------------------------------------------------------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
---------------------------------------------------------------------------------------------------------------------------
(In Thousands)
Financial assets:
Cash and cash equivalents $ 9,870 $ 9,870 $ 8,831 $ 8,831
Securities available for sale 182,157 182,157 186,112 186,112
Securities held to maturity 105,316 104,962 109,334 110,413
Loans, net (including loans held for sale) 346,324 342,689 290,505 295,348
Restricted investments in bank stock 12,215 12,215 11,156 11,156
Accrued interest receivable 3,113 3,113 3,081 3,081
Financial liabilities:
Deposits 366,812 365,231 359,772 361,305
Short-term borrowings 111,141 111,141 64,106 64,106
Securities sold under agreements to repurchase 6,674 6,674 5,118 5,118
Subordinated Debt 10,310 10,310 10,310 10,310
Accrued interest payable 1,193 1,193 1,104 1,104
Long-term debt 136,035 137,846 142,307 149,355
Off-balance sheet financial instruments:
Standby letters of credit - - - -
Commitments to extend credit - - - -
ANNUAL REPORT 2005 | FIDELITY BANCORP, INC. AND SUBSIDIARY | 35
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
NOTE 17 - FIDELITY BANCORP, INC. FINANCIAL INFORMATION
(PARENT COMPANY ONLY)
Following are condensed financial statements for the parent company:
CONDENSED STATEMENTS OF FINANCIAL CONDITION
September 30,
2005 2004
--------------------------------------------------------------------------------------------------------
(In Thousands)
ASSETS
Cash $ 1,596 $ 447
Investment in subsidiary bank 45,035 51,766
Investment in unconsolidated subsidiary trust 310 310
Securities available for sale 4,900 5,642
Other assets 521 96
--------------------------------------------------------------------------------------------------------
Total Assets $52,362 $58,261
========================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Subordinated debentures $10,310 $10,310
Intercompany payable to subsidiary - 5,867
Other liabilities 3 7
--------------------------------------------------------------------------------------------------------
Total Liabilities 10,313 16,184
Total Stockholders' Equity 42,049 42,077
--------------------------------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity $52,362 $58,261
========================================================================================================
CONDENSED STATEMENTS OF INCOME
Years Ended September 30,
2005 2004 2003
--------------------------------------------------------------------------------------------------------
(In Thousands)
Dividends from subsidiary $8,911 $1,725 $1,809
Interest income 241 257 250
Interest expense (659) (500) (1,208)
Other income 572 163 170
Other expense (108) (81) (94)
--------------------------------------------------------------------------------------------------------
Income Before Equity in Undistributed Net
Income of Subsidiary and Income Taxes 8,957 1,564 927
Income tax benefit 17 84 319
Equity in (excess of) undistributed net income of
subsidiary (5,098) 2,673 2,807
--------------------------------------------------------------------------------------------------------
Net Income $3,876 $4,321 $4,053
========================================================================================================
(Note Continued)
36 | FIDELITY BANCORP, INC. AND SUBSIDIARY | ANNUAL REPORT 2005
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
CONDENSED STATEMENTS OF CASH FLOWS
Years Ended September 30,
2005 2004 2003
-----------------------------------------------------------------------------------------------------------------------------
(In Thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $3,876 $4,321 $ 4,053
Adjustments to reconcile net income to net cash provided
by operating activities:
Equity in (excess of) undistributed earnings of subsidiary 5,098 (2,673) (2,807)
Gain on sale of investments - (101) (170)
Increase (decrease) in interest receivable (14) 19 16
Increase (decrease) in payable to subsidiary (5,867) 1,990 3,473
Write-off of unamortized debt issuance costs - - 599
Other changes, net 221 363 (541)
-----------------------------------------------------------------------------------------------------------------------------
Net Cash Provided by Operating Activities 3,314 3,919 4,623
-----------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of securities available for sale (1,801) (2,409) (339)
Sale of securities available for sale 527 421 543
Maturities and principal repayments of securities available
for sale 1,064 457 541
Repayment of loan receivable from subsidiary bank - - 10,000
Proceeds from FB Capital Trust - - 317
-----------------------------------------------------------------------------------------------------------------------------
Net Cash Provided by (Used in) Investing Activities (210) (1,531) 11,062
-----------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Redemption of subordinated debentures - - (10,567)
Stock options exercised 562 603 439
Sale of stock through Dividend Reinvestment Plan 153 144 99
Proceeds from the sale of stock in connection with the
acquisition of First Pennsylvania Savings Association - - 1,304
Dividends paid (1,405) (1,229) (1,191)
Acquisition of treasury stock (1,265) (1,474) (6,021)
-----------------------------------------------------------------------------------------------------------------------------
Net Cash Used in Financing Activities (1,955) (1,956) (15,937)
-----------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Cash and Cash Equivalents 1,149 432 (252)
CASH AND CASH EQUIVALENTS - BEGINNING 447 15 267
-----------------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS - ENDING $1,596 $447 $ 15
=============================================================================================================================
ANNUAL REPORT 2005 | FIDELITY BANCORP, INC. AND SUBSIDIARY | 37
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
NOTE 18 - CONTINGENT LIABILITIES
The Company is subject to a number of asserted and unasserted potential claims
encountered in the normal course of business. In the opinion of management,
after consultation with legal counsel, the resolution of these claims will not
have a material adverse effect on the Company's financial position, liquidity or
results of operations.
NOTE 19 - ACQUISITION
On July 12, 2002, the Company and First Pennsylvania Savings Association ("First
Pennsylvania") jointly announced the signing of an Agreement and Plan of Merger
Conversion, whereby it was agreed that First Pennsylvania would merge with and
into the Bank. On September 30, 2002, the agreement was amended to require an
offering of stock of the Company to certain members of First Pennsylvania.
Pursuant to the amended agreement, First Pennsylvania converted to a
Pennsylvania-chartered stock savings institution and simultaneously merged with
and into the Bank on December 31, 2002 and the Bank acquired all of the assets
and assumed all of the liabilities of First Pennsylvania for no additional
consideration. Liabilities assumed exceeded assets acquired by $161,000.
Additionally, in connection with the merger, the Company sold approximately
98,560 shares at $15.93 per share of its common stock to certain members of
First Pennsylvania and the Company's employee stock ownership plan in a
subscription offering and to the Company's stockholders and certain members of
the community in a stockholder and community offering.
The acquisition was accounted for under the purchase method of accounting and,
accordingly, the results of operations of First Pennsylvania have been included
in the Company's consolidated financial statements from December 31, 2002. The
Company acquired loans with a fair value of approximately $6.8 million,
investment and mortgage-backed securities with a fair value of $11.8 million,
deposits with a fair value of approximately $12.3 million and Federal Home Loan
Bank advances with a fair value of approximately $13.9 million in the
transaction. Goodwill and core deposit intangibles arising from the transaction
were approximately $161,000.
NOTE 20 - SUBSEQUENT EVENT
On October 15, 2005, the Bank's Carnegie branch office, located on West Main
Street in Carnegie, was destroyed by fire. The Company's insurance policy covers
replacement cost and carries a deductible of $1,000. Prior to the fire, the Bank
had acquired property in Carnegie and intends to build a new branch, with drive
up lanes and free parking. Zoning and building approvals are pending, however,
the branch is anticipated to be open by spring of 2006. On December 2, 2005, a
temporary banking facility was opened on the builiding site of the future
Carnegie Branch.
38 | FIDELITY BANCORP, INC. AND SUBSIDIARY | ANNUAL REPORT 2005
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
--------------------------------------------------------------------------------
Overview
The Company reported net income of $3.876 million or $1.27 per share on a
diluted basis for fiscal 2005 compared to $4.321 million or $1.40 per share on a
diluted basis for fiscal 2004 and compared to $4.053 million or $1.24 per share
on a diluted basis for fiscal 2003.
Return on average equity was 9.24%, 10.62% and 9.45% for fiscal years 2005, 2004
and 2003, respectively. Return on average assets was .59%, .69% and .66% for
fiscal 2005, 2004, and 2003, respectively. The ratio of other expenses to
average assets for fiscal 2005 was 1.85% compared to 1.83% in fiscal 2004 and
1.74% in fiscal 2003.
Total assets of the Company totaled $677.8 million at September 30, 2005,
compared to $627.7 million at September 30, 2004. Increases were noted in loans
receivable and cash and cash equivalents, partially offset by decreases in
securities.
The operating results of the Company depend primarily upon its net interest
income, which is the difference between the yield earned on its interest earning
assets and the rates paid on its interest bearing liabilities (interest-rate
spread) and also the relative amounts of its interest earning assets and
interest bearing liabilities. For the fiscal year ended September 30, 2005, the
tax-equivalent interest-rate spread decreased to 2.26%, as compared to 2.31% in
fiscal 2004. The tax-equivalent spread in fiscal 2003 was 2.15%. The ratio of
average interest earning assets to average interest bearing liabilities
increased to 102.8% in fiscal 2005, from 102.7% in fiscal 2004. The ratio was
103.5% in fiscal 2003. The decrease in the spread for fiscal 2005 is attributed
to the average yield on total interest earning assets increasing less than the
average rate paid on interest bearing liabilities. The Company's operating
results are also affected to varying degrees by, among other things, service
charges and fees, gains and losses on sales of securities and loans, provision
for loan losses, other operating income, operating expenses and income taxes.
Critical Accounting Policies, Judgments and Estimates
Certain critical accounting policies affect the more significant judgments and
estimates used in the preparation of the consolidated financial statements.
These policies are contained in Note 1 to the consolidated financial statements.
Our accounting and reporting policies conform with the accounting principles
generally accepted in the United States of America and general practices within
the financial services industry. Recent accounting pronouncements are contained
in Note 1 to the consolidated financial statements. The preparation of the
financial statements in conformity with accounting principles generally accepted
in the United States of America requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and the
accompanying notes. Actual results could differ from those estimates.
Management bases its estimates and judgments on historical experience and on
various other factors that are believed to be reasonable under the
circumstances, the results of which form the basis for making judgments about
the carrying values of assets and liabilities that are not readily apparent from
other sources. There can be no assurances that actual results will not differ
from those estimates. If actual results are different than management's
judgments and estimates, the Company's financial results could change, and such
change could be material.
Allowance for Loan Losses. The Company considers that the determination of the
allowance for loan losses involves a higher degree of judgment and complexity
than its other significant accounting policies. The balance in the allowance for
loan losses is determined based on management's review and evaluation of the
loan portfolio in relation to past loss experience, the size and composition of
the portfolio, current economic events and conditions, and other pertinent
factors, including management's assumptions as to future delinquencies,
recoveries and losses. All of these factors may be susceptible to significant
change. To the extent actual outcomes differ from management's estimates,
additional provisions for loan losses may be required that would adversely
impact earnings in future periods.
ANNUAL REPORT 2005 | FIDELITY BANCORP, INC. AND SUBSIDIARY | 39
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
--------------------------------------------------------------------------------
Valuation of Goodwill. The Company assesses the impairment of goodwill at least
annually, and whenever events or significant changes in circumstances indicate
that the carrying value may not be recoverable. Factors that the Company
considers important in determining whether to perform an impairment review
include significant underperformance relative to forecasted operating results
and significant negative industry or economic trends. If the Company determines
that the carrying value of goodwill may not be recoverable, then the Company
will assess impairment based on a projection of undiscounted future cash flows
and measure the amount of impairment based on fair value.
Accounting for Stock Options. As permitted by SFAS No. 123, the Company accounts
for stock-based compensation in accordance with Accounting Principles Board
Opinion (APB) No. 25. Under APB No. 25, no compensation expense is recognized in
the income statement related to any options granted under the Company's stock
option plans. The pro forma impact to net income and earnings per share that
would occur if compensation expense was recognized, based on the estimated fair
value of the options on the date of the grant, is disclosed in Note 1 to the
consolidated financial statements. SFAS No. 123R revised SFAS No. 123 and will
require compensation expense to be recognized in the financial statements. The
Company adopted SFAS 123R as of October 1, 2005. The estimated compensation
expense is not expected to be material to the Company's consolidated financial
statements.
Asset and Liability Management
The Company's vulnerability to interest rate risk exists to the extent that its
interest bearing liabilities, consisting of customer deposits and borrowings,
mature or reprice more rapidly or on a different basis than its interest earning
assets, which consist primarily of intermediate or long-term loans and
investment securities, mortgage-backed securities and collateralized mortgage
obligations.
The principal determinant of the exposure of the Company's earnings to interest
rate risk is the timing difference between the repricing or maturity of the
Company's interest earning assets and the repricing or maturity of its interest
bearing liabilities. If the maturities of such assets and liabilities were
perfectly matched, and if the interest rates carried by its assets and
liabilities were equally flexible and moved concurrently, neither of which is
the case, the impact on net interest income of rapid increases or decreases in
interest rates would be minimized.
The objective of interest rate risk management is to control, to the extent
possible, the effects that interest rate fluctuations have on net interest
income and on the net present value of the Company's interest earning assets and
interest bearing liabilities. Management and the Board are responsible for
managing interest rate risk and employing risk management policies that monitor
and limit exposure to interest rate risk. Interest rate risk is measured using
net interest margin simulation and asset/liability net present value sensitivity
analyses. These analyses provide a range of potential impacts on net interest
income and portfolio equity caused by interest rate movements.
The Company uses financial modeling to measure the impact of changes in interest
rates on net interest margin. Assumptions are made regarding loan and
mortgage-backed securities prepayments and amortization rates of passbook, money
market and NOW account withdrawal rates. In addition, certain financial
instruments may provide customers with a degree of "optionality," whereby a
shift in interest rates may result in customers changing to an alternative
financial instrument, such as from a variable to fixed rate loan product. Thus,
the effects of changes in future interest rates on these assumptions may cause
actual results to differ from simulation results.
The Company has established the following guidelines for assuming interest rate
risk:
Net interest margin simulation - Given a +/- 200 basis point parallel shift
in interest rates, the estimated net interest margin may not change by more
than 20% for a one-year period.
Portfolio equity simulation - Portfolio equity is the net present value of
the Company's existing assets and liabilities. Given a +200 basis point
change in interest rates, portfolio equity may not decrease by more than
50% of total stockholders' equity. Given a -200 basis point change in
interest rates, portfolio equity may not decrease by more than 20% of total
stockholders' equity.
40 | FIDELITY BANCORP, INC. AND SUBSIDIARY | ANNUAL REPORT 2005
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
--------------------------------------------------------------------------------
The following table illustrates the simulated impact of a 100 basis point or 200
basis point upward or downward movement in interest rates on net interest income
and the change in portfolio equity. This analysis was done assuming that
interest earning asset and interest bearing liability levels at September 30,
2005 remained constant. The impact of the rate movements was developed by
simulating the effect of rates changing immediately from the September 30, 2005
levels.
Interest Rate Simulation Sensitivity Analysis
Movements in interest rates from September 30, 2005 rates:
Increase Decrease
--------------------------------------------------------------------------------
+100 bp +200 bp -100 bp -200 bp
--------------------------------------------------------------------------------
Net interest income increase
(decrease) (0.7)% (5.7)% 3.9% (1.3)%
Portfolio equity decrease (13.4)% (32.2)% 0.7% (4.2)%
The matching of assets and liabilities may be analyzed by examining the extent
to which such assets and liabilities are "interest rate sensitive" and by
monitoring an institution's interest rate sensitivity "gap." An asset or
liability is said to be interest rate sensitive within a specific time period if
it will mature or reprice within that time period. The interest rate sensitivity
gap is defined as the difference between interest earning assets and interest
bearing liabilities maturing or repricing within a given time period. A gap is
considered positive when the amount of interest rate sensitive assets exceeds
interest rate sensitive liabilities. A gap is considered negative when the
amount of interest rate sensitive liabilities exceeds interest rate sensitive
assets. During a period of rising interest rates, a negative gap would tend to
adversely affect net interest income, while a positive gap would tend to result
in an increase in net interest income. During a period of falling interest
rates, a negative gap would tend to result in an increase in net interest
income, while a positive gap would tend to adversely affect net interest income.
The Company's one-year gap was a negative 8.5% at September 30, 2005 compared to
a negative .6% at September 30, 2004. The Company considers this result at
September 30, 2005 to be within its acceptable target range. The increase in the
negative gap postion is attributed to an increase in liabilities with shorter
terms. During fiscal 2005, customers sought shorter-term deposit products in
anticipation of rising interest rates. In addition, the Company utilized
short-term FHLB advances to supplement shortfalls in deposit growth. As part of
its efforts to minimize the impact of changes in interest rates, the Company
continues to emphasize the origination of loans with adjustable-rate features or
which have shorter average lives, the purchase of adjustable-rate securities,
the extension of interest bearing liabilities when market conditions permit, and
the maintenance of a large portion of the investment and mortgage-backed
securities portfolios in the available for sale category that could be sold in
response to interest rate movements. The table below shows the Bank's gap
position at September 30, 2005. Assumptions used in developing the table include
cash flow and repricing projections for assets and liabilities. In developing
the cash flow projections, prepayment estimates for loans and investments were
also used. At September 30, 2005, these estimates anticipate a moderate rate of
prepayment due to the relatively low interest rate environment that continues to
exist. The assumptions used may not be indicative of the actual prepayments and
withdrawals which may be experienced by the Company.
ANNUAL REPORT 2005 | FIDELITY BANCORP, INC. AND SUBSIDIARY | 41
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
--------------------------------------------------------------------------------
September 30, 2005
--------------------------------------------------------------------------------------------------------
Over Three After One
Three Months Year
Months or Through Through After
Less Twelve Months Five Years Five Years
--------------------------------------------------------------------------------------------------------
(Dollars in Thousands)
Interest earning assets $ 126,238 $ 98,265 $ 335,521 $ 90,984
Deposits, escrow liabilities and
borrowed funds 207,334 74,856 265,818 82,964
--------------------------------------------------------------------------------------------------------
Interest sensitivity $ (81,096) $ 23,409 $ 69,703 $ 8,020
========================================================================================================
Cumulative interest sensitivity $ (81,096) $ (57,687) $ 12,016 $ 20,036
Cumulative ratio as a percent of assets (12.0)% (8.5)% 1.6% 3.0%
In addition to managing the Company's gap as discussed above, the Bank has an
Asset Liability Management Committee composed of senior officers which meets
periodically to review the Company's exposure to interest rate risk resulting
from other factors. Among the areas reviewed are progress on previously
determined strategies, national and local economic conditions, the projected
interest rate outlook, loan and deposit demand, pricing, liquidity position,
capital position and regulatory developments. Management's evaluation of these
factors indicates the current strategies of emphasizing the origination and
purchase of adjustable rate or shorter-term loan products, while retaining in
the portfolio, a portion of the fixed rate loans originated, purchasing
investments with either fixed or adjustable rates and competitively pricing
deposits produces an acceptable level of interest rate risk in the current
environment.
Liquidity and Capital Resources
The Company has no operating business other than that of the Bank. The Company's
principal liquidity needs are for the payment of dividends and the payment of
interest on its outstanding subordinated debt. The Company's principal sources
of liquidity are earnings on its investment securities portfolio and dividends
received from the Bank. The Bank is subject to various regulatory restrictions
on the payment of dividends. At September 30, 2005, the Bank could pay
approximately $12.8 million in dividends to the Company without prior approval
from regulators.
The Bank's primary sources of funds have historically consisted of deposits,
amortization and prepayments of outstanding loans and mortgage-backed
securities, borrowings from the FHLB of Pittsburgh and other sources, including
repurchase agreements and sales of investments. During fiscal 2005, the Bank
used its capital resources primarily to meet its ongoing commitments to fund
maturing savings certificates and savings withdrawals, fund existing and
continuing loan commitments and asset growth, and to maintain its liquidity. At
September 30, 2005 the total of approved loan commitments amounted to $1.4
million and the Company had $23.1 million of undisbursed loan funds. Unfunded
commitments under lines and letters of credit amounted to $39.7 million at
September 30, 2005. The amount of savings certificates which are scheduled to
mature in the twelve-month period ended September 30, 2005 is $66.0 million.
Management believes that, by evaluation of competitive instruments and pricing
in its market area, it can, in most circumstances, manage and control maturing
deposits so that a substantial amount of such deposits are redeposited in the
Company.
42 | FIDELITY BANCORP, INC. AND SUBSIDIARY | ANNUAL REPORT 2005
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
--------------------------------------------------------------------------------
Contractual Obligations
The following table represents the Company's balance sheet aggregate contractual
obligations to make future payments as of September 30, 2005
September 30, 2005
---------------------------------------------------------------------------------------------------------
Less Than One Three
One Year to Years to Over Five
Total Year Three Years Five Years Years
---------------------------------------------------------------------------------------------------------
(Dollars in Thousands)
Long-Term Debt Obligations:
Time deposits $ 167,619 $ 66,018 $ 61,286 $ 36,538 $ 3,777
FHLB Advances 136,035 19,004 40,000 66,591 10,440
Subordinated debt 10,310 - - - 10,310
Operating leases 903 217 359 194 133
---------------------------------------------------------------------------------------------------------
Total $ 314,867 $ 85,239 $ 101,645 $ 103,323 $ 24,660
=========================================================================================================
In addition, the Company, in the conduct of ordinary business operations
routinely enters into contracts for services. These contracts may require
payment for services to be provided in the future and may also contain penalty
clauses for the early termination of the contract. Management is not aware of
any additional commitments or contingent liabilities, which may have a material
adverse impact on the liquidity or capital resources of the Company.
Off-Balance Sheet Arrangements
The Company is also party to financial instruments with off-balance sheet risk
in the normal course of business to meet the financing needs of its customers.
These financial instruments include commitments to extend credit and standby
letters of credit. The Company is not party to any off-balance sheet
arrangements that are reasonably likely to have a material current or future
effect on the Company's financial condition, revenues or expenses, results of
operations, liquidity or capital expenditures or resources.
Capital
At September 30, 2005, the Company had capital in excess of all applicable
regulatory capital requirements. At September 30, 2005, the ratio of the
Company's Tier 1 capital to average assets was 7.67%. The Company's ratio of
Tier 1 capital to risk-weighted assets was 12.55% and its ratio of total capital
to risk-weighted assets was 13.20%.
The Bank currently exceeds all regulatory capital requirements, having a
leverage ratio of Tier 1 capital to total average assets of 6.45% and a ratio of
qualifying total capital to risk-weighted assets and off-balance sheet items of
10.73% at September 30, 2005. As a result, regulatory capital requirements are
not expected to have a material impact on operations.
Financial Condition
The Company's assets were $677.8 million at September 30, 2005, an increase of
$50.1 million or 8.0% over assets at September 30, 2004. Increases were noted in
cash and net loans receivable, partially offset by a decrease in securities. The
growth was primarily funded by short-term borrowings.
ANNUAL REPORT 2005 | FIDELITY BANCORP, INC. AND SUBSIDIARY | 43
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
--------------------------------------------------------------------------------
Loan Portfolio
Net loans receivable increased $55.7 million or 19.2% to $346.1 million at
September 30, 2005 from $290.4 million at September 30, 2004. Loans originated
totaled $158.6 million in fiscal 2005, including amounts disbursed under lines
of credit, versus $137.2 million in fiscal 2004. Mortgage loans originated
amounted to $102.3 million, including $2.7 million originated for sale, and
$82.8 million, including $2.0 million originated for sale, in fiscal 2005 and
2004, respectively. The Bank did not purchase any mortgage loans in fiscal 2005
or fiscal 2004. The increase in the level of mortgage loan originations in
fiscal 2005 primarily reflects the continuing low interest rate environment that
existed during fiscal 2005. The origination of adjustable rate mortgages (ARM's)
increased to $62.2 million in fiscal 2005 from $58.3 million in fiscal 2004. The
increase reflects both the favorable rate environment and an increased emphasis
on adjustable loans by customers. Primarily for asset/liability management
purposes, the Company initiated a program in fiscal 2001 in which a portion of
the fixed rate, single-family mortgage loans originated were sold. Gains of
$36,000 were realized on these sales in fiscal 2005. Principal repayments on
outstanding mortgage loans increased to $51.2 million in fiscal 2005 as compared
to $46.3 million in fiscal 2004, reflecting the historically low interest rate
environment that continued to exist in fiscal 2005. The combination of the above
factors resulted in an overall increase in mortgage loans receivable to $260.3
million at September 30, 2005 from $208.9 million at September 30, 2004.
Other loan originations, including installment loans, commercial business loans
and disbursements under lines of credit, totaled $56.4 million in fiscal 2005
versus $54.4 million in fiscal 2004. During fiscal 2005, the Bank continued to
emphasize other loans, particularly home equity loans, equity lines of credit
and commercial business loans, since they generally have shorter terms than
mortgage loans and would perform better in a rising rate environment.
Installment loan originations and consumer lines of credit disbursements were
$25.7 million in fiscal 2005 compared to $30.7 million in fiscal 2004.
Commercial business loan originations and business line of credit disbursements
were $30.7 million in fiscal 2005 compared to $23.7 million in fiscal 2004.
Principal repayments on other loans were $52.7 million in fiscal 2005 compared
to $49.7 million in 2004. The net result of the above factors caused the balance
of installment loans to increase to $79.8 million at September 30, 2005, as
compared to $76.0 million at September 30, 2004. Commercial business loans and
leases, however, were $32.0 million at September 30, 2005 versus $32.1 million
at September 30, 2004.
Non-Performing Assets
The following table sets forth information regarding non-accrual loans and
foreclosed real estate at the dates indicated. The Bank did not have any loans
which were classified as troubled debt restructurings at the dates presented.
September 30,
2005 2004 2003
------------------------------------------------------------------------------------------------------------------
(Dollars in Thousands)
Non-accrual residential real estate loans
(one-to-four family) $ 533 $ 777 $ 795
Non-accrual construction, multi-family
residential and commercial real estate loans 179 269 367
Non-accrual installment loans 188 530 615
Non-accrual commercial business and lease loans 1,419 2,071 1,151
------------------------------------------------------------------------------------------------------------------
Total non-performing loans $2,319 $3,647 $2,928
==================================================================================================================
Total non-performing loans as a percent of net
loans receivable 0.67% 1.26% 1.11%
==================================================================================================================
Total foreclosed real estate, net of related
reserves $ 789 $1,517 $ 675
==================================================================================================================
Total non-performing loans and foreclosed real
estate as a percent of total assets 0.46% 0.82% 0.58%
==================================================================================================================
44 | FIDELITY BANCORP, INC. AND SUBSIDIARY | ANNUAL REPORT 2005
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MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
--------------------------------------------------------------------------------
At September 30, 2005, non-accrual loans consisted of ten 1-4 family residential
real estate loans totaling $533,000, two commercial real estate loans totaling
$179,000, twelve installment loans totaling $188,000 and eight commercial
business loans totaling $1.42 million. The largest individual non-accrual loan
is a commercial business loan for $499,000.
Management has evaluated these loans and is satisfied that the allowance for
loan losses at September 30, 2005 is adequate. The allowance for loan losses was
$2,596,000 at September 30, 2005, $2,609,000 at September 30, 2004 and
$3,091,000 at September 30, 2003. The balance at September 30, 2005, at .75% of
loans receivable and 111.9% of non-performing loans, is considered reasonable by
management.
Foreclosed real estate at September 30, 2005 consists of seventeen single-family
houses, and one commercial real estate property, all of which are located in the
Bank's market area. Management believes that the carrying value of the
properties at September 30, 2005 approximates the fair value less costs to sell.
However, while management uses the best information available to make such
determinations, future adjustments may become necessary.
Securities Available for Sale
Securities available for sale decreased $4.0 million to $182.2 million at
September 30, 2005 from $186.1 million at September 30, 2004. These securities
may be held for indefinite periods of time and are generally used as part of the
Bank's asset/liability management strategy. These securities may be sold in
response to changes in interest rates, prepayment rates or to meet liquidity
needs. These securities consist of mortgage-backed securities, collateralized
mortgage obligations, U.S. Government and Agency securities, tax-exempt
municipal obligations, mutual funds, Federal Home Loan Mortgage Corporation
stock, corporate obligations, trust preferred securities and other equity
securities. During fiscal 2005, the Bank purchased $65.1 million of these
securities and sold $24.2 million. Sales of these securities in fiscal 2005
resulted in a net pretax gain of $609,000. Fiscal 2005 results include a loss of
$43,000, resulting from the write-down of investments in equity securities for
declines in value that are considered other than temporary. There were no such
write-downs during fiscal 2004.
Securities Held to Maturity
Securities held to maturity decreased $4.0 million or 3.7% to $105.3 million at
September 30, 2005, compared to $109.3 million at September 30, 2004. These
investments are comprised of mortgage-backed securities, collateralized mortgage
obligations, U.S. Government and Agency securities, tax-exempt municipal
securities and corporate obligations. During fiscal 2005, the Bank purchased
$16.7 million of these securities. There were no sales of investment securities
held to maturity in fiscal 2005 or 2004.
Deposits
Deposits increased $7.0 million during fiscal 2005 to $366.8 million at
September 30, 2005 compared to $359.8 million at September 30, 2004. The
increase in deposits in primarily attributed to an increase in money market
accounts, partially offset by decreases in passbook accounts and time deposits.
In April 2005 the Bank introduced a new Super Money Market product whose rate is
based on current short-term market rates. Although a significant amount of new
money to the Bank has been deposited in these accounts, the increase is also
correlated to the decrease in passbook accounts, as customers sought a higher
return. The increase is also attributed to the decrease in time deposits as some
customers with maturing time deposits have transferred these funds to money
market accounts in anticipation of rising rates. Furthermore, the nature of the
Bank's primary market area for time deposits from other banks and thrifts
remains extremely competitive. In addition, the Bank faces competition for these
deposits from alternative sources such as the stock market and mutual funds.
ANNUAL REPORT 2005 | FIDELITY BANCORP, INC. AND SUBSIDIARY | 45
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--------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
--------------------------------------------------------------------------------
Short-Term Borrowings
Short-term borrowings include Federal Home Loan Bank "RepoPlus" advances and to
a much lesser extent, treasury, tax and loan notes. These borrowings increased
$47.0 million to $111.1 million at September 30, 2005, from $64.1 million at
September 30, 2004. Approximately $26.3 million of long-term FHLB advances
matured during fiscal 2005 and a significant portion of these advances were
replaced with short-term RepoPlus advances while the remaining were paid with
excess cash on hand. The Bank continues to utilize FHLB advances as both a
short-term funding source and as an effective means to structure borrowings to
complement asset/liability management goals.
Long-Term Debt
Long-term debt represents FHLB advances, including fixed-rate advances and
"Convertible Select" advances. Long-term debt decreased $6.3 million or 4.4% to
$136.0 million at September 30, 2005, from $142.3 million at September 30, 2004.
As noted above, long-term FHLB advances maturing during fiscal 2005 were either
paid with excess cash on hand or replaced with short-term FHLB RepoPlus advances
consistent with asset/liability management strategies.
Subordinated Debt
Subordinated debt represents debt issued by the Company to the Trust in
conjunction with the issuance of trust preferred securities by the Trust. The
debt is unsecured and ranks subordinated and junior in right of payment to all
indebtedness, liabilities and obligations of the Company. The debt is due
concurrently with the trust preferred securities. Subordinated debt was $10.3
million at September 30, 2005 and at September 30, 2004.
Stockholders' Equity
Stockholders' equity remained relatively unchanged at approximately $42.0
million at September 30, 2005 compared to September 30, 2004. This result
reflects net income of $3.88 million, stock options exercised of $722,000
(including tax benefit of $160,000) and stock issued under the Dividend
Reinvestment Plan of $153,000. Offsetting these increases was a decrease in
unrealized holding gains, net of unrealized holding losses, on securities
available for sale of $2.1 million, common stock cash dividends paid of $1.4
million and the purchase of treasury stock at cost for $1.3 million.
Results of Operations
Comparison of Fiscal Years Ended September 30, 2005, 2004, and 2003
Net income was $3.88 million ($1.27 per diluted share) for the year ended
September 30, 2005 compared to $4.32 million ($1.40 per diluted share) for
fiscal 2004 and $4.05 million ($1.24 per diluted share) for fiscal 2003. The
decrease from fiscal 2004 reflects an increase in the provision for loan losses
of $325,000 and an increase in other operating expenses of $678,000, or 5.91%.
Partially offsetting these factors was an increase in net interest income before
provision for loan losses of $521,000 or 3.91% and a decrease in the provision
for income taxes of $16,000, or 1.57%.
46 | FIDELITY BANCORP, INC. AND SUBSIDIARY | ANNUAL REPORT 2005
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
--------------------------------------------------------------------------------
Interest Rate Spread
The Bank's interest rate spread, the difference between yields on interest
earning assets and the cost of funds, decreased to 2.26% on a tax-equivalent
basis in fiscal 2005 from 2.31% in fiscal 2004. The tax-equivalent spread was
2.15% in fiscal 2003. The following table shows the average tax-equivalent
yields earned on the Bank's interest earning assets and the average rates paid
on its interest bearing liabilities for the periods indicated, the resulting
interest rate spreads, and the net yields on interest earning assets.
Fiscal Years Ended September 30,
2005 2004 2003
---------------------------------------------------------------------------------------------------------------------
Average yield on:
Mortgage loans 6.00% 6.37% 7.24%
Mortgage-backed securities and
collateralized mortgage obligations 3.94 3.53 3.80
Installment loans 5.90 5.96 6.83
Commercial business loans and leases 6.29 5.83 6.46
Interest earning deposits with other institutions,
investment securities, and FHLB stock(1) 4.66 4.41 4.80
---------------------------------------------------------------------------------------------------------------------
Total interest earning assets 5.17 5.06 5.70
---------------------------------------------------------------------------------------------------------------------
Average rates paid on:
Savings deposits 2.12 2.09 2.51
Borrowed funds 4.08 3.84 5.08
---------------------------------------------------------------------------------------------------------------------
Total interest bearing liabilities 2.91 2.75 3.55
---------------------------------------------------------------------------------------------------------------------
Average interest rate spread 2.26% 2.31% 2.15%
=====================================================================================================================
Net yield on interest earning assets 2.34% 2.39% 2.27%
=====================================================================================================================
(1) Interest income on tax-exempt investments has been adjusted for federal
income tax purposes using a rate of 34%.
Interest Income on Loans
Interest income on loans increased by $1.5 million or 8.4% to $18.9 million in
fiscal 2005 as compared to fiscal 2004. The increase primarily reflects an
increase in the average size of the loan portfolio, partially offset by a
decrease in the average yield earned on the loan portfolio. The average size of
the loan portfolio increased from an average balance of $280.7 million in fiscal
2004 to $314.2 million in fiscal 2005. The increase in the average balance of
the loan portfolio is primarily attributed to a record high level of residential
mortgage loan originations in fiscal 2005.
Interest income on loans decreased by $3.2 million or 15.5% to $17.4 million in
fiscal 2004 as compared to fiscal 2003. The decrease primarily reflects both a
decrease in the average size of the loan portfolio and a decrease in the average
yield earned on the loan portfolio. The average size of the loan portfolio
decreased from an average balance of $292.5 million in fiscal 2003 to $280.7
million in fiscal 2004.
ANNUAL REPORT 2005 | FIDELITY BANCORP, INC. AND SUBSIDIARY | 47
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
--------------------------------------------------------------------------------
Interest Income on Mortgage-Backed Securities
Interest income on mortgage-backed securities increased by $947,000 or 21.3% to
$5.4 million in fiscal 2005 from $4.4 million in fiscal 2004. The increase
reflects both an increase in the average balance of mortgage-backed securities
held, as well as an increase in the yield earned on these securities in fiscal
2005. The average balance of mortgage-backed securities held, including
mortgage-backed securities available for sale, increased from $125.9 million in
fiscal 2004 to $136.8 million in fiscal 2005. The yield earned on
mortgage-backed securities is affected, to some degree, by the repayment rate of
loans underlying the securities. Premiums or discounts on the securities, if
any, are amortized to interest income over the life of the securities using the
level yield method. During periods of falling interest rates, repayments of the
loans underlying the securities generally increase, which shortens the average
life of the securities and accelerates the amortization of the premium or
discount. Falling rates, however, also tend to increase the market value of the
securities. A rising rate environment generally causes a reduced level of loan
repayments and a corresponding decrease in premium/discount amortization rates.
Rising rates generally decrease the market value of the securities.
Interest income on mortgage-backed securities decreased $340,000 or 7.1% to $4.4
million in fiscal 2004 from $4.8 million in fiscal 2003. The average balance of
mortgage-backed securities held, including mortgage-backed securities available
for sale, remained relatively unchanged at $125.9 million in fiscal 2003 and
fiscal 2004. The yield on these securities, however, decreased in fiscal 2004.
Interest Income on Investments
Interest income on investments (including those available for sale), which
includes interest earning deposits with other institutions and FHLB stock, was
$7.4 million in fiscal 2005, compared to $7.5 million in fiscal 2005. The fiscal
2005 results reflect a decrease in the average balance of such investments to
$177.6 million in fiscal 2005 as compared to $192.9 million in fiscal 2004,
partially offset by an increase in the average tax-equivalent yield earned in
fiscal 2005 as compared to fiscal 2004.
Interest income on investments was $7.5 million in fiscal 2004 compared to $7.1
million in fiscal 2003. The fiscal 2004 results reflect an increase in the
average balance of such investments to $192.9 million in fiscal 2004 as compared
to $170.4 million in fiscal 2003, partially offset by a decrease in the average
tax-equivalent yield earned in fiscal 2004 as compared to fiscal 2003.
Interest Expense on Deposits
Interest on deposits increased $75,000 or 1.0% to $7.7 million in fiscal 2005
from $7.6 million in fiscal 2004. The increase reflects an increase in the
average rate paid on deposits in fiscal 2005, as compared to fiscal 2004,
partially offset by a decrease in the average balance of deposits in fiscal
2005.
Interest on deposits decreased $1.4 million or 15.9% to $7.6 million in fiscal
2004 from $9.1 million in fiscal 2003. The decrease reflects a decrease in the
average rate paid on deposits in fiscal 2004, as compared to fiscal 2003,
partially offset by an increase in the average balance of deposits in fiscal
2004. The fiscal 2003 balances include the approximately $12.3 million in
deposits assumed in the First Pennsylvania acquisition.
Interest Expense on Short-Term Borrowings
Interest expense on short-term borrowings (including FHLB "RepoPlus" advances
and treasury, tax and loan notes) increased $1.8 million or 234.3% to $2.6
million in fiscal 2005 compared to fiscal 2004. The increase reflects both a
higher level of average short-term borrowing in fiscal 2005 and an increase in
the cost of these funds. The Bank continued to use FHLB "RepoPlus" advances as
cost effective sources of funding in fiscal 2005.
Interest expense on short-term borrowings increased $608,000 or 335.9% to
$789,000 in fiscal 2004 compared to $181,000 in fiscal 2003. The increase
reflects a higher level of average short-term borrowing in fiscal 2004,
partially offset by a decrease in the cost of these funds.
48 | FIDELITY BANCORP, INC. AND SUBSIDIARY | ANNUAL REPORT 2005
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
--------------------------------------------------------------------------------
Interest Expense on Long-Term Debt
Interest expense on long-term debt (including FHLB fixed rate advances and
"Convertible Select" advances) decreased $265,000 or 3.7% to $6.8 million in
fiscal 2005, compared to $7.1 million in fiscal 2004. The decrease reflects a
decrease in the average balance of long-term debt as well as a slight decrease
in the cost of these borrowings.
Interest expense on long-term debt decreased $2.7 million or 27.3% to $7.1
million in fiscal 2004 compared to fiscal 2003. The decrease reflects both a
decrease in the average balance of long-term debt, as well as a decrease in the
cost of these borrowings. Fiscal 2003 balances include approximately $13.9
million of long-term FHLB advances assumed in the acquisition of First
Pennsylvania.
Provision for Loan Losses
The provision for loan losses is charged to operations to bring the total
allowance for loan losses to a level that represents management's best estimates
of the losses inherent in the portfolio, based on a monthly review by management
of the following factors:
o historical experience;
o volume;
o type of lending conducted by the Bank;
o industry standards;
o the level and status of past due and non-performing loans;
o the general economic conditions in the Bank's lending area; and
o other factors affecting the collectibility of the loans in its
portfolio.
Large groups of smaller balance homogenous loans, such as residential real
estate, small commercial real estate and home equity and consumer loans, are
evaluated in the aggregate using historical loss factors and other data. Large
balance and/or more complex loans, such as multi-family and commercial real
estate loans may be evaluated on an individual basis and are also evaluated in
the aggregate to determine adequate reserves. As individually significant loans
become impaired, specific reserves are assigned to the extent of the impairment.
The provision for loan losses was $600,000, $275,000 and $555,000 for the fiscal
years ended September 30, 2005, 2004 and 2003, respectively. The provisions
reflect management's evaluation of the loan portfolio, current economic
conditions, and other factors as described below. The allowance decreased from
$2.61 million at September 30, 2004 to $2.60 million at September 30, 2005. Loan
charge-offs, net of recoveries, were $612,000 in fiscal 2005 compared to
$757,000 in fiscal 2004 and $560,000 in fiscal 2003. The balance of
non-performing loans has decreased at September 30, 2005 compared to September
30, 2004, while the allowance for loan losses has remained relatively unchanged
over the same time period.
The allowance for loan losses is maintained at a level that represents
management's best estimate of losses in the loan portfolio at the balance sheet
date. However, there can be no assurance that the allowance for losses will be
adequate to cover losses which may be realized in the future and that additional
provisions for losses will not be required.
Other Income
Fidelity's non-interest or total other income increased by $21,000 or .6% to
$3.79 million in fiscal 2005 compared to $3.78 million in fiscal 2004. Other
income decreased by $266,000 or 6.6% to $3.78 million in fiscal 2004 as compared
to $4.03 million in fiscal 2003.
Included in non-interest income is service fee income on loans and late charges
of $363,000, relatively unchanged in fiscal 2005 from fiscal 2004. The fees
decreased by $219,000 in fiscal 2004 over the prior year. Fiscal 2005 results
include an increase in late charges on loans and other loan fees, partially
offset by a decrease in title insurance fees.
ANNUAL REPORT 2005 | FIDELITY BANCORP, INC. AND SUBSIDIARY | 49
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
--------------------------------------------------------------------------------
The Company recorded net gains on sales of securities of $566,000, $639,000 and
$638,000 in fiscal 2005, 2004 and 2003, respectively. All sales were made from
the available-for-sale category and reflected normal efforts to reposition
portions of the portfolio at various times during the years to reflect changing
economic conditions, changing market conditions and to carry out asset/liability
management strategies. Included in the above amounts are losses resulting from
the write-down of investments in equity securities for declines in value that
are considered other-than-temporary of $43,000 and $110,000 in fiscal years 2005
and 2003, respectively. There were no similar write-downs in fiscal 2004.
Gain on sale of loans was $36,000, $47,000 and $512,000 in fiscal years 2005,
2004 and 2003, respectively. In fiscal 2001, the Company began a program to
sell, servicing released, a portion of the fixed-rate, first mortgage
residential loans originated. This program is intended to allow the Company to
offer competitive market rates on loans, while not retaining in portfolio some
loans that may not fit the current asset/liability strategy. In addition, such
loans can generally be sold at a profit when a commitment to sell is locked in
when the application is taken. In addition, the Company sells a portion of the
loans originated under low-income housing programs in which it participates in
the Pittsburgh area.
Deposit service charges and fee income was $1.40 million, $1.39 million, and
$1.24 million in fiscal 2005, 2004 and 2003, respectively. Fiscal 2005 results
include a slight increase in service charge fees on savings and checking
accounts and fees related to returned checks. The increase in fiscal 2004 is
primarily attributed to increased returned check fees.
Automated teller machine (ATM) fees were $548,000, $491,000, and $496,000 in
fiscal years 2005, 2004, and 2003, respectively. The increase in fiscal 2005 is
primarily attributed to an increase in the interchange fees earned on debit card
transactions.
Other operating income includes miscellaneous sources of income, which consist
primarily of earnings on bank-owned life insurance, fees earned on the sale of
non-insured investment products, fees from the sale of cashiers checks and money
orders, and safe deposit box rental income. Such income amounted to $874,000,
$840,000 and $560,000 in fiscal 2005, 2004, and 2003, respectively. Fiscal 2005
results were attributed to increases in fees earned on the sale of non-insured
investment products such as mutual funds and annuities, partially offset by a
decrease in the profit on sale of fixed assets. Also, fiscal 2004 results
included a sales tax refund that was not available in fiscal 2005. The increase
in fiscal 2004 primarily reflects increases in: fees earned on the sale of
non-insured investment products; check printing fees; merchant fees; and gain on
sale of fixed assets. Also attributing to the increase was a tax refund received
in conjunction with a Pennsylvania sales and use tax petition.
Other Expenses
Other expenses increased $678,000 or 5.9% to $12.2 million in fiscal 2005 and
increased $764,000 or 7.1% to $11.5 million in fiscal 2004, from $10.7 million
in fiscal 2003.
Compensation, payroll taxes and fringe benefits, the largest component of
operating expenses, increased $324,000 or 4.6% to $7.4 million in fiscal 2005,
and increased $489,000 or 7.4% to $7.1 million in fiscal 2004 over the
respective prior years. Factors contributing to the increase in fiscal 2005 were
normal salary increases, increases in the cost of health insurance, increased
retirement costs, increased payroll taxes, and increased training expenses.
Factors contributing to the increase in fiscal 2004 were normal salary increases
for employees, increases in the cost of health insurance, increased retirement
costs and payroll taxes, and other personnel expense, partially offset by a
decrease in officer and employee expense.
Office occupancy and equipment expense increased $52,000 or 5.1% to $1.08
million in fiscal 2005 and increased $45,000 or 4.6% to $1.02 million in fiscal
2004 over the respective prior years. The increase in fiscal 2005 reflects an
increase in office repairs and maintenance expense and furniture, fixtures and
equipment expense. The increase in fiscal 2004 primarily reflects an increase in
real estate taxes paid on office buildings, as well as other occupancy and
equipment expenses associated with the Cranberry and ▇▇▇▇ ▇▇▇▇ branches
operating for the entire fiscal year.
50 | FIDELITY BANCORP, INC. AND SUBSIDIARY | ANNUAL REPORT 2005
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
--------------------------------------------------------------------------------
Depreciation and amortization decreased $32,000 or 4.2% to $726,000 in fiscal
2005 and increased $21,000 or 2.8% to $758,000 in fiscal 2004 over the
respective prior years. The decrease in depreciation in fiscal 2005 reflects
equipment becoming fully depreciated, partially offset by depreciation on
additions in fiscal 2005. The results in fiscal 2004 reflect depreciation on
additions to property being substantially offset by equipment becoming fully
depreciated.
The Bank recorded net losses on the sales of and writedowns of foreclosed real
estate of $138,000, $112,000 and $64,000 in fiscal years 2005, 2004 and 2003,
respectively. The results reflect the costs associated with the holding and
disposition of properties during the periods. At September 30, 2005, the Bank
had seventeen single-family residential properties, fifteen of which were owned
by the same borrower as investment properties, and one commercial real estate
property classified as foreclosed real estate.
Intangible amortization was $46,000, $52,000 and $50,000 in fiscal years 2005,
2004 and 2003, respectively. The results reflect the amortization of the
intangibles generated by the acquisition of Pennwood Bancorp, Inc. in July 2000,
Carnegie Financial Corporation in February 2002, and First Pennsylvania Savings
Association in December 2002, on an accelerated basis over ten years.
Advertising expense was $340,000, $350,000, and $286,000 in fiscal years 2005,
2004, and 2003, respectively. The Company strives to market its products and
services in a cost effective manner and incorporates a market segmentation
strategy in its business plan to effectively manage its advertising dollars.
Professional fees were $244,000, $344,000, and $250,000 in fiscal years 2005,
2004, and 2003, respectively. Professional fees include legal fees, audit fees,
and supervisory examination and assessment fees. The decrease in fiscal 2005 is
primarily attributed to a decrease in legal fees. The increase in fiscal 2004
includes an increase in legal fees partially offset by a decrease in audit fees.
Included in fiscal 2005 results is a pre-tax charge of $430,000 related to a
customer check kiting fraud loss discovered in March 2005 attributable to one
business customer. While a portion or all of the loss may ultimately be
recovered, the customer was unable to provide restitution or adequate collateral
at this time and the timing and amount of any recovery is therefore uncertain.
Other operating expenses, which consist primarily of check processing costs,
bank service charges, and other administrative expenses, amounted to $1.71
million in fiscal 2005, $1.72 million in fiscal 2004, and $1.72 million in
fiscal 2003. Significant variations in fiscal 2005, compared to fiscal 2004,
include increases in check printing charges, consulting fees, construction loan
inspection fees, stationery and supplies expense, and losses sustained from ATM
disputes, partially offset by decreases in bank service charges, checking
account charge-offs, ATM network fees, and losses sustained from branch
robberies. Significant variations in fiscal 2004, compared to fiscal 2003,
include increases in consulting fees and losses sustained from branch robberies.
Partially offsetting these increases in fiscal 2004 were decreases in checking
account charge-offs, stationery and supplies, and postage expense.
Income Taxes
The Company generated taxable income and, as a consequence, recorded tax
provisions of $1.00 million, $1.02 million and $961,000 for fiscal 2005, 2004
and 2003, respectively. These changes reflect the difference in the Bank's
profitability for the periods as well as differences in the effective tax rate,
which was 20.5%, 19.0% and 19.2%, for fiscal 2005, 2004 and 2003, respectively.
The difference between the Company's effective tax rate and the statutory rate
is primarily attributable to the Bank's portfolio of municipal obligations, the
interest on which is exempt from federal income tax. Also contributing to the
Company's lower effective tax rate is FBIC, Inc., a Delaware passive investment
corporation formed by the Bank to hold a portion of its mortgage loan portfolio.
Interest income received by FBIC, Inc. is exempt from state tax.
ANNUAL REPORT 2005 | FIDELITY BANCORP, INC. AND SUBSIDIARY | 51
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--------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
--------------------------------------------------------------------------------
Forward-Looking Statements
The Company may from time to time make written or oral "forward-looking
statements," including statements contained in the Company's filings with the
Securities and Exchange Commission (including this Annual Report and Form 10-K
and the exhibits hereto and thereto), in its reports to stockholders and in
other communications by the Company, which are made in good faith by the Company
pursuant to the "safe harbor" provisions of the Private Securities Litigation
Reform Act of 1995.
These forward-looking statements include statements with respect to the
Company's beliefs, plans, objectives, goals, expectations, anticipations,
estimates and intentions, that are subject to significant risks and
uncertainties and are subject to change based on various factors (some of which
are beyond the Company's control). The words "may," "could," "should," "would,"
"believe," "anticipate," "estimate," "expect," "intend," "plan," and similar
expressions are intended to identify forward-looking statements. The following
factors, among others, could cause the Company's financial performance to differ
materially from that expressed in such forward-looking statements: the strength
of the United States economy in general and the strength of the local economies
in which the Company conducts operations; the effects of, and changes in, trade,
monetary and fiscal policies, including interest rate policies of the Board of
Governors of the Federal Reserve System ("the FRB"); inflation; interest rate,
market and monetary fluctuations; the timely development of competitive new
products and services by the Company and the acceptance of such products and
services by customers; the willingness of customers to substitute competitors'
products and services for the Company's products and services and vice versa;
laws concerning taxes, banking, securities and insurance; technological changes;
future acquisitions; the expense savings and revenue enhancements from
acquisitions being less than expected; the growth and profitability of the
Company's noninterest or fee income being less than expected; unanticipated
regulatory or judicial proceedings; changes in consumer spending and saving
habits; and the success of the Company at managing the risks involved in the
foregoing.
The Company cautions that the foregoing list of important factors is not
exclusive. The Company does not undertake to update any forward-looking
statements, whether written or oral, that may be made from time to time by or on
behalf of the Company.
Impact of Inflation and Changing Prices
The Consolidated Financial Statements and related notes presented herein have
been prepared in accordance with generally accepted accounting principles which
require the measurement of financial position and operating results in terms of
historical dollars, without considering changes in the relative purchasing power
of money over time due to inflation.
Unlike most industrial companies, substantially all of the assets and
liabilities of the Bank are monetary in nature. As a result, interest rates have
a more significant impact on the Bank's performance than the effects of general
levels of inflation. Interest rates do not necessarily move in the same
direction or in the same magnitude as the prices of goods and services, since
such prices are affected by inflation to a larger extent than interest rates. In
the current interest rate environment, liquidity and the maturity structure of
the Company's assets and liabilities are critical to the maintenance of
acceptable performance levels.
52 | FIDELITY BANCORP, INC. AND SUBSIDIARY | ANNUAL REPORT 2005
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--------------------------------------------------------------------------------
CAPITAL STOCK INFORMATION
--------------------------------------------------------------------------------
STOCK INFORMATION
The following table sets forth for each quarter of fiscal 2005 and 2004 the high
and low prices as reported on the NASDAQ National Market System and the
dividends declared per common share. Amounts shown have been adjusted to reflect
the 10% stock dividends paid in May 2005 and May 2004.
Stock Price Dividends
--------------------------------------------------------------------------------
Quarter Ended: High Low Cash Stock
--------------------------------------------------------------------------------
September 30, 2005 $21.45 $18.05 $.13 --
June 30, 2005 23.00 19.40 .13 10%
March 31, 2005 22.60 20.73 .109 --
December 31, 2004 23.17 19.77 .109 --
--------------------------------------------------------------------------------
September 30, 2004 $20.50 $18.14 $.109 --
June 30, 2004 20.96 18.55 .109 10%
March 31, 2004 22.14 20.55 .099 --
December 31, 2003 21.69 19.59 .099 --
--------------------------------------------------------------------------------
As of September 30, 2005, Fidelity Bancorp, Inc. had 2,945,677 shares of stock
outstanding and approximately 1,000 stockholders, including beneficial owners
whose stock is held in nominee name.
COMMON STOCK MARKET MAKERS
NASDAQ National Market:
Common Stock
Symbol FSBI
Market Makers
▇▇▇▇▇▇/▇▇▇▇▇▇, Inc.
▇▇▇ ▇▇▇▇▇ ▇▇▇▇▇▇, ▇▇▇▇ ▇▇▇▇▇
▇▇▇▇▇▇▇▇▇▇, ▇▇▇▇▇▇▇▇▇▇▇▇ ▇▇▇▇▇ - (▇▇▇) ▇▇▇-▇▇▇▇
▇▇▇▇, ▇▇▇▇ & Co. (▇▇▇▇)
▇▇ ▇▇▇▇▇▇▇▇ ▇▇▇▇▇▇▇▇
▇▇▇▇▇▇▇, ▇▇▇ ▇▇▇▇▇▇ ▇▇▇▇▇ - (▇▇▇) ▇▇▇-▇▇▇▇
▇▇▇▇▇▇▇ ▇'▇▇▇▇▇ & Partners, LP (SDLR)
▇ ▇▇▇▇ ▇▇▇▇ ▇▇▇▇▇▇
▇▇▇ ▇▇▇▇, ▇▇▇ ▇▇▇▇ ▇▇▇▇▇ - (▇▇▇) ▇▇▇-▇▇▇▇
Moors & Cabot, Inc. (MCBT)
▇▇▇ ▇▇▇▇▇▇▇▇▇▇ ▇▇▇▇▇▇
▇▇▇▇▇▇, ▇▇▇▇▇▇▇▇▇▇▇▇▇ ▇▇▇▇▇ - (▇▇▇) ▇▇▇-▇▇▇▇
ANNUAL REPORT 2005 | FIDELITY BANCORP, INC. AND SUBSIDIARY | 53
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CORPORATE INFORMATION
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ANNUAL MEETING - The annual meeting of the stockholders will be held at 5:00
p.m., on February 14, 2006 at the Perrysville Office of the Bank at ▇▇▇▇ ▇▇▇▇▇
▇▇▇▇▇▇▇, ▇▇▇▇▇▇▇▇▇▇, ▇▇▇▇▇▇▇▇▇▇▇▇. Stockholders are encouraged to attend.
ANNUAL REPORT ON FORM 10-K - A copy of Fidelity Bancorp, Inc.'s Annual Report on
Form 10-K is available without charge to stockholders upon written request.
Requests should be addressed to Investor Relations at the Company's
headquarters. Also, periodic reporting documents filed with the Securities and
Exchange Commission can be found on the Company's website:
▇▇▇.▇▇▇▇▇▇▇▇▇▇▇▇▇▇▇.▇▇.▇▇▇.
INVESTOR RELATIONS - Analysis investors, stockholders and others seeking
financial information are asked to contact ▇▇▇▇▇ ▇. ▇▇▇▇▇▇▇, Corporate
Secretary, at the Company's headquarters. Requests for all other information
should be addressed to Investor Relations at the Company's headquarters.
STOCK TRANSFER/ADDRESS CHANGES - The Transfer Agent and Registrar of Fidelity
Bancorp, Inc. is Registrar and Transfer Company. Questions regarding transfer of
stock, address changes or lost certificates should be directed to Investor
Relations at the Company's headquarters or the transfer agent, Registrar and
Transfer Company.
DIVIDEND REINVESTMENT PLAN INFORMATION - The Fidelity Bancorp, Inc. Dividend
Reinvestment Plan enables shareholders of common stock to reinvest quarterly
dividends for the purchase of additional shares. Registered holders who enroll
in this plan may also make optional cash purchases of additional shares of stock
conveniently and without paying brokerage commissions or service charges. A
brochure describing the plan and an application to participate may be obtained
from Investor Relations.
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INVESTOR RELATIONS DIVIDEND REINVESTMENT FINANCIAL INFORMATION
Fidelity Bancorp, Inc. PLAN INFORMATION ▇▇▇▇ ▇. ▇▇▇▇▇▇▇▇, CPA
1009 Perry Highway Investor Relations Chief Financial Officer
Pittsburgh, Pennsylvania 15237 Fidelity Bancorp, Inc. Fidelity Bancorp, Inc.
(▇▇▇) ▇▇▇-▇▇▇▇, x3139 ▇▇▇▇ ▇▇▇▇▇ ▇▇▇▇▇▇▇ ▇▇▇▇ ▇▇▇▇▇ ▇▇▇▇▇▇▇
▇▇▇▇▇▇▇▇▇▇, ▇▇▇▇▇▇▇▇▇▇▇▇ ▇▇▇▇▇ ▇▇▇▇▇▇▇▇▇▇, ▇▇▇▇▇▇▇▇▇▇▇▇ ▇▇▇▇▇
TRANSFER AGENT (▇▇▇) ▇▇▇-▇▇▇▇, x3139 (▇▇▇) ▇▇▇-▇▇▇▇, x3180
Registrar and Transfer Company
▇▇ ▇▇▇▇▇▇▇▇ ▇▇▇▇▇ ANNUAL REPORT ON FORM ▇▇-▇
▇▇▇▇▇▇▇▇, ▇▇▇ ▇▇▇▇▇▇ ▇▇▇▇▇ Investor Relations
(▇▇▇) ▇▇▇-▇▇▇▇ Fidelity Bancorp, Inc.
▇▇▇▇ ▇▇▇▇▇ ▇▇▇▇▇▇▇
▇▇▇▇▇▇▇▇▇▇, ▇▇▇▇▇▇▇▇▇▇▇▇ ▇▇▇▇▇
(▇▇▇) ▇▇▇-▇▇▇▇, x 3139
or
▇▇▇.▇▇▇▇▇▇▇▇▇▇▇▇▇▇▇-▇▇.▇▇▇
54 | FIDELITY BANCORP, INC. AND SUBSIDIARY | ANNUAL REPORT 2005
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FIDELITY BANCORP, INC.
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Corporate Headquarters
▇▇▇▇ ▇▇▇▇▇ ▇▇▇▇▇▇▇, ▇▇▇▇▇▇▇▇▇▇, ▇▇▇▇▇▇▇▇▇▇▇▇ ▇▇▇▇▇ o (▇▇▇) ▇▇▇-▇▇▇▇
FAX (▇▇▇) ▇▇▇-▇▇▇▇ o E-Mail: ▇▇@▇▇▇▇▇▇▇▇▇▇▇▇▇▇▇-▇▇.▇▇▇
BOARD OF DIRECTORS
------------------
J. ▇▇▇▇▇▇ ▇▇▇▇▇ ▇▇▇▇▇▇ ▇. ▇▇▇▇▇ ▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇ ▇▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇▇, CPA
President President Owner President
▇.▇. ▇▇▇▇▇ & Associates Allegheny Plywood ▇▇▇▇▇ ▇. ▇▇▇▇, P.C. Chief Executive Officer
Partner
▇▇▇▇▇▇▇▇▇▇▇ ▇. ▇▇▇▇▇ APCO Management ▇▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇▇▇ ▇▇▇▇▇▇ ▇▇▇▇ ▇▇▇▇▇▇
Managing Partner President Attorney
Green & Bridges, LLP ▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇▇▇ ▇▇▇▇▇▇ & ▇▇▇▇▇▇▇▇, Inc. ▇▇▇▇▇▇ & ▇▇▇▇▇▇, P.C.
Registered Representative Retired President Retirement Designs
Select Financial Group, LLC X-Mark/CDT Unlimited, Inc. ▇▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇▇▇
Chairman
OFFICERS
------------------
▇▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇▇, CPA ▇▇▇▇ ▇. ▇▇▇▇▇▇▇▇, CPA ▇▇▇▇▇ ▇. ▇▇▇▇▇▇▇
President Senior Vice President Corporate Secretary
Chief Executive Officer Chief Financial Officer
Treasurer ▇▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇
▇▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇ Assistant Secretary
Executive Vice President
SPECIAL COUNSEL
------------------
▇▇▇▇▇▇▇ SPIDI & ▇▇▇▇▇, PC
▇▇▇▇ ▇▇▇ ▇▇▇▇ ▇▇▇▇▇▇, ▇▇▇▇▇ ▇▇▇ ▇▇▇▇
▇▇▇▇▇▇▇▇▇▇, ▇▇ ▇▇▇▇▇
INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
----------------------
▇▇▇▇▇ ▇▇▇▇▇▇ COMPANY LLP
▇▇▇▇ ▇▇▇▇▇▇▇ ▇▇▇ ▇▇▇▇, ▇▇▇ Floor
P.O. Box 101086
Pittsburgh, Pennsylvania 15237
ANNUAL REPORT 2005 | FIDELITY BANCORP, INC. AND SUBSIDIARY | 55
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FIDELITY BANK
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BANK HEADQUARTERS
▇▇▇▇ ▇▇▇▇▇ ▇▇▇▇▇▇▇, ▇▇▇▇▇▇▇▇▇▇, ▇▇▇▇▇▇▇▇▇▇▇▇ ▇▇▇▇▇ * (▇▇▇) ▇▇▇-▇▇▇▇
FAX (▇▇▇) ▇▇▇-▇▇▇▇ * E-Mail:▇▇@▇▇▇▇▇▇▇▇▇▇▇▇-▇▇.▇▇▇
BOARD OF DIRECTORS
------------------
J. ▇▇▇▇▇▇ ▇▇▇▇▇ ▇▇▇▇▇▇ ▇. ▇▇▇▇▇ ▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇ ▇▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇▇, CPA
President President Owner President
▇.▇. ▇▇▇▇▇ & Associates Allegheny Plywood ▇▇▇▇▇ ▇. ▇▇▇▇, P.C. Chief Executive Officer
Partner
▇▇▇▇▇▇▇▇▇▇▇ ▇. ▇▇▇▇▇ APCO Management ▇▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇▇▇ ▇▇▇▇▇▇ ▇▇▇▇ ▇▇▇▇▇▇
Managing Partner President Attorney
Green & Bridges, LLP ▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇▇▇ ▇▇▇▇▇▇ & ▇▇▇▇▇▇▇▇, Inc. ▇▇▇▇▇▇ & ▇▇▇▇▇▇, P.C.
Registered Representative Retired President Retirement Designs
Select Financial Group, LLC X-Mark/CDT Unlimited, Inc. ▇▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇▇▇
Chairman
OFFICERS
------------------
▇▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇▇, CPA ▇▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇▇ ▇▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇▇▇▇
President Vice President Assistant Vice President
Chief Executive Officer Financial Advisor Branch Manager
▇▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇ ▇▇▇▇ ▇. ▇▇▇▇▇▇▇▇ ▇▇▇▇ ▇. ▇▇▇▇▇▇
Executive Vice President Vice President Assistant Vice President
Chief Lending Officer Consumer Lending Business Development Officer
▇▇▇▇▇ ▇. ▇▇▇▇▇▇▇ ▇▇▇▇▇ ▇. ▇▇▇▇▇▇ ▇▇▇▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇▇
Corporate Secretary Vice President Assistant Vice President
Marketing Operations
▇▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇ ▇▇▇▇ ▇. ▇▇▇▇▇▇▇ ▇▇▇▇ ▇. ▇▇▇▇▇▇▇
Senior Vice President Vice President Assistant Vice President
Human Resources Commercial Loan Officer Business Development Officer
Assistant Secretary
▇▇▇▇ ▇. ▇▇▇▇▇▇▇▇, CPA ▇▇▇▇▇ ▇. ▇▇▇▇▇▇▇▇▇ ▇▇▇▇ ▇. ▇▇▇▇▇
Senior Vice President Vice President Assistant Vice President
Chief Financial Officer Internal Audit/Compliance Commercial Lending
Treasurer
▇▇▇▇▇▇ ▇. ▇▇▇ ▇▇▇▇▇ ▇. ▇▇▇▇▇▇▇▇ ▇▇▇▇▇▇▇ ▇. ▇▇▇▇▇
Senior Vice President Vice President Assistant Vice President
Operations Chartered Financial Consultant Business Development Officer
▇▇▇▇▇▇▇ ▇. ▇▇▇▇▇ ▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇ ▇▇▇▇▇ ▇. ▇▇▇▇
Senior Vice President Vice President Assistant Vice President
Community Banking Commercial Lending Branch Manager
▇▇▇▇▇ ▇. ▇▇▇▇▇▇▇▇▇▇ ▇▇▇▇▇▇ ▇▇▇▇▇ ▇▇▇▇ ▇▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇▇
Vice President Vice President Assistant Vice President
Financial Consultant/ Business Development Officer Data Processing
Registered Principal
▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇ ▇▇▇▇▇ ▇. ▇▇▇
▇▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇ Assistant Vice President Assistant Vice President
Vice President Business Development Officer Branch Manager
Residential Lending
56 | FIDELITY BANCORP, INC. AND SUBSIDIARY | ANNUAL REPORT 2005
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