--------------------------------------------------------------------------------
LETTER TO OUR STOCKHOLDERS
--------------------------------------------------------------------------------
TO OUR STOCKHOLDERS
Any discussion about fiscal 2006 results must be done within the context of
the interest rate environment. During this period, the Federal Reserve raised
the Fed Funds rate six times, bringing the total to 17 increases since the
current tightening cycle began in June 2004. The current Fed Funds rate of 5.25%
is 65 basis points higher than the 10-year treasury yield, resulting in an
inverted yield curve. Since the majority of our income comes from our net
interest margin, this type of a yield curve presents significant challenges to
us. We are not alone, however, as our peers and competitors in the industry are
also experiencing spread compression.
We accomplished much that we are pleased with in fiscal 2006, however. Net
income of $4.2 million was on target with internal projections, given the
interest rate environment discussed above. We also continued to grow, ending the
year at $731 million or about $53 million over the prior year. Most importantly
to us, the growth was almost entirely in loans, as the loan portfolio increased
$93 million, while our investment portfolio decreased by about $40 million.
Equally important is that much of the growth was funded internally, as deposits
grew by approximately $47 million.
--------------------------------------------------------------------------------
ASSETS
--------------------------------------------------------------------------------
[BAR GRAPH SHOWING TOTAL ASSETS IN MILLIONS AT END OF LAST FIVE FISCAL YEARS]
2006 $730.7
2005 $677.8
2004 $627.7
2003 $617.8
2002 $616.4
--------------------------------------------------------------------------------
As noted above, loan growth was significant during the year, with loan
originations totaling approximately $154 million. We continue to have a very
significant presence in the local mortgage origination market, with construction
financing being an area of particular expertise. During fiscal 2006, we
originated approximately $80 million in residential real estate loans, the
majority of which we retained for our portfolio, selling some into the secondary
market. We also had a good year on the commercial lending side, originating
approximately $29 million in commercial real estate loans and another $8 million
in commercial business loans. In the consumer area, we originated approximately
$37 million in loans, the majority of which were home equity loans.
The growth in deposits was due primarily to a very competitive money market
account that we introduced in early 2005. The rate on this money market account
has been priced to be near the top of local offerings, while still being below
the cost of wholesale overnight funding sources. While it has been important to
generate these deposits, this account has also been successful in attracting new
customers to the Bank, giving us the opportunity to establish banking
relationships by cross selling additional products and services.
Of course, one of the most important things to our stockholders is the
price of our stock. The performance was essentially flat during fiscal 2006,
ending the year at $19.00 per share, down slightly from $19.20 per share at last
fiscal year-end. While we are not in any way satisfied with this, we do note
that our stock's performance was very similar to many small bank and thrift
stocks over the last year, as all were affected by the interest rate environment
discussed above. The Board continues to have confidence in the stock, however,
and showed it by increasing the quarterly cash dividend by $.01 or 7.7% to $.14
per share in May 2006. The Board also extended the stock repurchase program
originally announced in October 2005 for another year, under which up to 5% of
the outstanding common stock can be repurchased.
While not all of the accomplishments and initiatives taken during the past
year can be easily quantified, I will attempt to describe a few of the things we
hope will benefit the Bank in years to come. First, we opened a
continued
--------------------------------------------------------------------------------
Annual Report 2006 - Fidelity Bancorp, Inc. and Subsidiary 1
--------------------------------------------------------------------------------
LETTER TO OUR STOCKHOLDERS (CONTINUED)
--------------------------------------------------------------------------------
new state-of-the-art branch office in Carnegie, our first "from the ground up"
facility in over 20 years. While this branch replaced one that was destroyed by
a fire, it is in a new location and represents a completely new design for our
branches. The results to date at the Carnegie branch have been very positive and
we hope that the design can serve as a prototype for any future branch expansion
that may occur.
--------------------------------------------------------------------------------
DEPOSITS
--------------------------------------------------------------------------------
[BAR GRAPH SHOWING TOTAL DEPOSITS IN MILLIONS AT END OF LAST FIVE FISCAL YEARS]
2006 $414.2
2005 $366.8
2004 $359.8
2003 $366.1
2002 $351.4
--------------------------------------------------------------------------------
In the lending area, we introduced our Small Business Lending Unit or
"SBLU." This unit provides products geared toward small businesses in our area,
including deposit, line of credit and money management products, with a
streamlined and simplified application and approval process. We also continued
to expand our consumer offerings, including an innovative new product that we
call the "Lifeline Loan". This loan is a floating rate home equity line of
credit that can be partitioned, at the borrowers direction, into up to three
fixed rate loans, without the borrower having to reapply. As the fixed rate
loans are paid down, the line of credit automatically increases by the same
amount. We believe this loan not only has tremendous potential to attract new
customers, but will also enable the Bank to retain and strengthen the
relationships of our existing customers.
Operationally, we continue to improve our capabilities. We completed an 18
month evaluation of available core processing systems and after careful
consideration, decided it to be in the best interest of the Bank to remain with
our current system, but in an outsourced environment rather than the system as
we currently do in-house. This "conversion" will take place in February 2007 and
will provide additional functionality while increasing security. We also
selected new internet banking, bill payment and telephone banking providers and
will have switched to these new platforms in the first quarter of fiscal 2007.
We are also continuing to emphasize a more focused marketing strategy
throughout the Bank -- one that targets specific segments of both the Bank's
customer base and the Bank's general market area based on demographic
characteristics and their potential for growth. In addition, the strategy is
being supplemented with a more consistent advertising presence, including
television, direct mail and radio advertisements. Fidelity is one of the few
remaining community banks in this area and we want to get the message out that
there is still a local Bank offering quality products and services, with
personalized customer service.
Looking ahead to 2007, it promises to be another challenging year. Interest
rates and regulatory issues will continue to affect us. We recognize that it
would be beneficial to increase other non-interest income sources and will
intensify our efforts in that area. We also know that we must grow and will
continue to look at appropriate opportunities to do so.
Finally, as always, I would like to thank our Board of Directors for their
continued support and, most importantly, our employees, who never cease to amaze
me with their dedication, loyalty and innovation. As a team, we will continue to
meet the challenges ahead with confidence and enthusiasm.
/s/ Xxxxxxx X. Xxxxxxx
Xxxxxxx X. Xxxxxxx
President and Chief Executive Officer
--------------------------------------------------------------------------------
2 Annual Report 2006 - Fidelity Bancorp, Inc. and Subsidiary
-------------------------------------------------------------------------------------------------------------------------------
SELECTED FINANCIAL DATA
-------------------------------------------------------------------------------------------------------------------------------
FINANCIAL CONDITION DATA
September 30,
(Dollars in Thousands) 2006 2005 2004 2003 2002
-------------------------------------------------------------------------------------------------------------------------------
Total assets $730,732 $677,779 $627,727 $617,778 $616,432
Loans receivable, net 439,027 346,076 290,389 264,412 316,320
Mortgage-backed securities and collateralized
mortgage obligations 1 100,838 131,132 130,738 129,572 114,059
Investment securities and other
earning assets 2 159,810 169,192 176,483 193,596 154,563
Total liabilities 686,537 635,730 585,650 577,583 573,852
Savings and time deposits 414,182 366,812 359,772 366,126 351,406
Advances from FHLB
and other borrowings 266,865 264,160 221,841 207,062 216,933
Stockholders' equity 44,195 42,049 42,077 40,195 42,580
Number of full service offices 13 13 13 13 11
-------------------------------------------------------------------------------------------------------------------------------
OPERATIONS DATA
Years Ended September 30,
(Dollars in Thousands, Except Per Share Data) 2006 2005 2004 2003 2002
-------------------------------------------------------------------------------------------------------------------------------
Interest income $37,373 $31,664 $29,325 $32,460 $36,610
Interest expense 23,814 17,823 16,005 20,213 23,114
-------------------------------------------------------------------------------------------------------------------------------
Net interest income 13,559 13,841 13,320 12,247 13,496
Provision for loan losses 600 600 275 555 400
-------------------------------------------------------------------------------------------------------------------------------
Net interest income after
provision for loan losses 12,959 13,241 13,045 11,692 13,096
Realized gain (loss) on sale of securities, net 552 609 639 748 234
Writedown of investment securities -- (43) -- (110) (246)
Gain on sale of loans 49 36 47 512 292
Service fees and other income 3,232 3,186 3,081 2,865 2,365
Operating expenses 12,086 12,153 11,475 10,711 10,070
-------------------------------------------------------------------------------------------------------------------------------
Income before income tax provision
and extraordinary gain 4,706 4,876 5,337 5,014 5,702
Income tax provision 840 1,000 1,016 961 1,276
Income from continuing operations 3,866 3,876 4,321 4,053 4,426
Income from extraordinary gain, net of taxes 318 -- -- -- --
-------------------------------------------------------------------------------------------------------------------------------
Net income $4,184 $3,876 $4,321 $4,053 $4,426
-------------------------------------------------------------------------------------------------------------------------------
Diluted earnings per share 3 $1.38 $1.27 $1.40 $1.24 $1.43
Cash dividends per share 3 .54 .478 .416 .378 .344
Book value per share 3 14.82 14.27 14.31 13.70 13.77
Average interest rate spread 2.03% 2.26% 2.31% 2.15% 2.48%
Return on average assets .59% .59% .69% .66% .76%
Return on average stockholders' equity 9.89% 9.24% 10.62% 9.45% 11.60%
===============================================================================================================================
Common shares outstanding 3 2,960,496 2,945,677 2,940,654 2,932,797 3,089,618
===============================================================================================================================
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 2006 - 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, 2006 and 2005 and
the related consolidated statements of income, stockholders' equity, and cash
flows for each of the three years in the period ended September 30, 2006. 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 audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Company is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audits included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, 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 at September 30, 2006 and 2005, and the results of their
operations and their cash flows for each of the three years in the period ended
September 30, 2006, in conformity with accounting principles generally accepted
in the United States of America.
/s/Xxxxx Xxxxxx Company LLP
Xxxxx Xxxxxx Company LLP
Pittsburgh, Pennsylvania
December 8, 2006
--------------------------------------------------------------------------------
4 Annual Report 2006 o Fidelity Bancorp, Inc. and Subsidiary
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
September 30,
2006 2005
----------------------------------------------------------------------------------------------------------------------------
(Dollars in Thousands,
Except per Share Data)
ASSETS
Cash and due from banks $ 8,480 $ 9,234
Interest bearing demand deposits with other institutions 187 636
----------------------------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents 8,667 9,870
Securities available for sale, amortized cost 2006 $167,699; 2005 $183,542 165,449 182,157
Securities held to maturity, fair value 2006 $84,851; 2005 $104,962 85,879 105,316
Loans held for sale 40 248
Loans receivable, net of allowance 2006 $2,917; 2005 $2,596 439,027 346,076
Foreclosed real estate, net 215 789
Restricted investments in bank stock, at cost 9,132 12,215
Office premises and equipment, net 6,073 5,126
Accrued interest receivable 3,359 3,113
Other assets 12,891 12,869
----------------------------------------------------------------------------------------------------------------------------
Total Assets $ 730,732 $ 677,779
============================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Deposits:
Non-interest bearing $ 32,927 $ 32,415
Interest bearing 381,255 334,397
----------------------------------------------------------------------------------------------------------------------------
Total Deposits 414,182 366,812
Short-term borrowings 78,625 111,141
Subordinated debt 10,310 10,310
Securities sold under agreement to repurchase 83,638 6,674
Advance payments by borrowers for taxes and insurance 1,508 1,425
Long-term debt 94,292 136,035
Other liabilities 3,982 3,333
----------------------------------------------------------------------------------------------------------------------------
Total Liabilities 686,537 635,730
============================================================================================================================
Stockholders' Equity
Preferred stock, $.01 par value per share; 5,000,000 shares authorized; none issued - -
Common stock, $.01 par value per share; 10,000,000 shares authorized;
issued 2006 3,569,525 shares; 2005 3,533,632 shares 35 35
Paid-in capital 44,774 44,250
Retained earnings 11,076 8,486
Accumulated other comprehensive loss, net of tax (1,485) (914)
Treasury stock, at cost 2006 609,029 shares; 2005 587,955 shares (10,205) (9,808)
----------------------------------------------------------------------------------------------------------------------------
Total Stockholders' Equity 44,195 42,049
----------------------------------------------------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity $ 730,732 $ 677,779
============================================================================================================================
See notes to consolidated financial statements.
--------------------------------------------------------------------------------
Annual Report 2006 o Fidelity Bancorp, Inc. and Subsidiary 5
CONSOLIDATED STATEMENTS OF INCOME
Years Ended September 30,
2006 2005 2004
----------------------------------------------------------------------------------------------------------------------------
(In Thousands, Except per Share Data)
Interest Income
Loans $24,439 $18,859 $17,401
Mortgage-backed securities 5,054 5,387 4,440
Investment securities:
Taxable 5,795 5,524 5,296
Tax exempt 2,050 1,886 2,185
Other 35 8 3
----------------------------------------------------------------------------------------------------------------------------
Total Interest Income 37,373 31,664 29,325
----------------------------------------------------------------------------------------------------------------------------
Interest Expense
Deposits 10,894 7,710 7,635
Short-term borrowings 4,707 2,507 732
Subordinated debt 863 659 500
Securities sold under agreement to repurchase 1,352 131 57
Long-term debt 5,998 6,816 7,081
----------------------------------------------------------------------------------------------------------------------------
Total Interest Expense 23,814 17,823 16,005
----------------------------------------------------------------------------------------------------------------------------
Net Interest Income 13,559 13,841 13,320
----------------------------------------------------------------------------------------------------------------------------
Provision for Loan Losses 600 600 275
----------------------------------------------------------------------------------------------------------------------------
Net Interest Income after Provision for Loan Losses 12,959 13,241 13,045
----------------------------------------------------------------------------------------------------------------------------
Other Income
Loan service charges and fees 294 363 364
Realized gain on sales of securities, net 552 609 639
Writedown of securities - (43) -
Gain on sales of loans 49 36 47
Deposit service charges and fees 1,373 1,401 1,386
ATM fees 586 548 491
Non-insured investment products 414 376 309
Other 565 498 531
----------------------------------------------------------------------------------------------------------------------------
Total Other Income 3,833 3,788 3,767
----------------------------------------------------------------------------------------------------------------------------
Other Expenses
Compensation and benefits 7,848 7,440 7,116
Office occupancy and equipment expense 1,147 1,075 1,023
Depreciation and amortization 661 726 758
Loss (gain) on sales of foreclosed real estate 58 (103) (78)
Foreclosed real estate expense 154 241 190
Amortization of intangible assets 40 46 52
Advertising 360 340 350
Professional fees 267 244 344
Customer fraud loss - 430 -
Other 1,551 1,714 1,720
----------------------------------------------------------------------------------------------------------------------------
Total Other Expenses 12,086 12,153 11,475
----------------------------------------------------------------------------------------------------------------------------
Income before Provision for Income Taxes and Extraordinary Gain 4,706 4,876 5,337
Provision for Income Taxes 840 1,000 1,016
----------------------------------------------------------------------------------------------------------------------------
Income from Continuing Operations 3,866 3,876 4,321
Income from Extraordinary Gain, Net of Taxes 318 - -
----------------------------------------------------------------------------------------------------------------------------
Net Income $ 4,184 $ 3,876 $ 4,321
============================================================================================================================
Earnings per Share
Basic
Income from Continuing Operations $1.30 $1.32 $1.47
Income from Extraordinary Gain, Net of Taxes .11 - -
----------------------------------------------------------------------------------------------------------------------------
Net Income $1.41 $1.32 $1.47
============================================================================================================================
Diluted
Income from Continuing Operations $1.28 $1.27 $1.40
Income from Extraordinary Gain, Net of Taxes .10 - -
----------------------------------------------------------------------------------------------------------------------------
Net Income $1.38 $1.27 $1.40
============================================================================================================================
See notes to consolidated financial statements.
--------------------------------------------------------------------------------
6 Annual Report 2006 o Fidelity Bancorp, Inc. and Subsidiary
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years Ended September 30, 2006, 2005 and 2004
------------------------------------------------------------------------------------------------------------------------------------
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, 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
------------------------------------------------------------------------------------------------------------------------------------
Comprehensive income:
Net income - - - 4,184 - - 4,184
Net unrealized losses on
available for sale securities - - - - (571) - (571)
------------------------------------------------------------------------------------------------------------------------------------
Total Comprehensive Income 3,613
------------------------------------------------------------------------------------------------------------------------------------
Stock-based compensation expense - - 66 - - - 66
Stock options exercised, including
tax benefit of $43 27,936 - 307 - - - 307
Cash dividends declared
($.540 per share) - - - (1,594) - - (1,594)
Treasury stock purchased
(21,074 shares) - - - - - (397) (397)
Sale of stock through Dividend
Reinvestment Plan 7,957 - 151 - - - 151
------------------------------------------------------------------------------------------------------------------------------------
Balance - September 30, 2006 3,569,525 $35 $44,774 $11,076 $(1,485) $(10,205) $44,195
====================================================================================================================================
See notes to consolidated financial statements.
--------------------------------------------------------------------------------
Annual Report 2006 o Fidelity Bancorp, Inc. and Subsidiary 7
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended September 30,
2006 2005 2004
------------------------------------------------------------------------------------------------------------------------------
(In Thousands)
Cash Flows from Operating Activities
Net income $ 4,184 $ 3,876 $ 4,321
Adjustments to reconcile net income to net cash provided by
operating activities:
Income from extraordinary gain, net of taxes (318) - -
Provision for loan losses 600 600 275
Loss (gain) on foreclosed real estate 58 (103) (78)
Provision for depreciation and amortization 661 726 758
Deferred loan fee amortization (112) (196) (269)
Amortization of investment and mortgage-backed
securities (discounts) premiums, net 500 719 1,402
Deferred income tax provision (91) 37 308
Amortization of intangibles 40 46 52
Net realized gains on sales of investments (552) (609) (639)
Writedown of investment securities - 43 -
Loans originated for sale (4,300) (2,668) (2,006)
Sales of loans held for sale 4,557 2,571 2,222
Net gains on sales of loans (49) (36) (47)
Increase in cash surrender value of life insurance policies (196) (198) (209)
Tax benefit realized on stock-based compensation - 160 216
(Increase) decrease in interest receivable (258) (15) 327
Increase (decrease) in interest payable (197) 89 (204)
Increase (decrease) in accrued taxes 281 103 (253)
Contribution to ESOP (240) (235) (103)
Changes in other assets, net 133 437 700
Changes in other liabilities, net 1,022 571 121
------------------------------------------------------------------------------------------------------------------------------
Net Cash Provided by Operating Activities 5,723 5,918 6,894
------------------------------------------------------------------------------------------------------------------------------
Cash Flows from Investing Activities
Proceeds from sales of securities available for sale 16,797 24,185 26,029
Proceeds from maturities and principal repayments of
securities available for sale 19,125 41,733 47,972
Purchases of securities available for sale (19,659) (65,098) (68,349)
Proceeds from maturities and principal repayments of
securities held to maturity 19,262 20,473 45,822
Purchases of securities held to maturity - (16,671) (35,640)
Net increase in loans (93,474) (56,314) (27,554)
Proceeds from sales of foreclosed real estate 432 813 78
Additions to office premises and equipment (1,742) (641) (154)
Proceeds from insurance claim - Carnegie Branch 601 - -
Proceeds from sales of office premises and equipment 24 - 31
Net (purchases) redemption of FHLB stock 3,083 (1,059) (709)
------------------------------------------------------------------------------------------------------------------------------
Net Cash Used in Investing Activities $ (55,551) $ (52,579) $ (12,474)
------------------------------------------------------------------------------------------------------------------------------
See notes to consolidated financial statements.
--------------------------------------------------------------------------------
8 Annual Report 2006 o Fidelity Bancorp, Inc. and Subsidiary
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Years Ended September 30,
2006 2005 2004
------------------------------------------------------------------------------------------------------------------------------
(In Thousands)
Cash Flows from Financing Activities
Net increase (decrease) in deposits $ 47,370 $ 7,040 $ (6,354)
Increase (decrease) in reverse repurchase agreements 76,964 1,556 (825)
Net increase (decrease) in short-term borrowings (32,516) 47,035 26,005
Increase (decrease) in advances by borrowers for taxes and insurance 83 296 (50)
Proceeds from long-term debt 15,000 20,000 10,000
Repayments of long-term debt (56,743) (26,272) (20,401)
Cash dividends paid (1,594) (1,405) (1,229)
Stock options exercised 264 562 603
Excess tax benefit realized on stock-based compensation 43 - -
Proceeds from sale of stock through Dividend Reinvestment Plan 151 153 144
Acquisition of treasury stock (397) (1,265) (1,474)
----------------------------------------------------------------------------------------------------------------------------
Net Cash Provided by Financing Activities 48,625 47,700 6,419
----------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Cash and Cash Equivalents (1,203) 1,039 839
Cash and Cash Equivalents - Beginning 9,870 8,831 7,992
----------------------------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents - Ending $ 8,667 $ 9,870 $ 8,831
============================================================================================================================
Supplementary Cash Flow Information
Interest paid on deposits and borrowings $ 24,011 $ 17,734 $ 16,209
============================================================================================================================
Income taxes paid $ 753 $ 350 $ 795
============================================================================================================================
Supplemental Schedule of Noncash Investing and Financing
Activities
Transfer of loans to foreclosed real estate $ 35 $ 223 $ 1,032
============================================================================================================================
See notes to consolidated financial statements.
--------------------------------------------------------------------------------
Annual Report 2006 o Fidelity Bancorp, Inc. and Subsidiary 9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Significant Accounting Policies
Nature of Operations
Fidelity Bancorp, Inc. (the "Company") 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 (the "Bank"), a
Pennsylvania-chartered, FDIC-insured state savings bank. The Bank conducts full
banking services through thirteen offices in Allegheny and Xxxxxx counties.
Basis of Presentation
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiary 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, the valuation of deferred
tax assets, and the evaluation of other than temporary impairment of securities.
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
For purposes of the statement of cash flows, cash and cash equivalents include
cash and amounts due from depository institutions and interest-bearing deposits
in other financial 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 Annual Report 2006 o Fidelity Bancorp, Inc. and Subsidiary
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.
(Note Continued)
--------------------------------------------------------------------------------
Annual Report 2006 o Fidelity Bancorp, Inc. and Subsidiary 11
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
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, 2006 and 2005. Goodwill amounted to $2.65 million at September 30,
2006 and September 30, 2005.
(Note Continued)
--------------------------------------------------------------------------------
12 Annual Report 2006 o Fidelity Bancorp, Inc. and Subsidiary
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,
2006 2005
------------------------------------------------------------------------------------------------------------------
Gross Carrying
Amount Accumulated Amortization
------------------------------------------------------------------------------------------------------------------
(Dollars in Thousands)
Amortizable intangible assets,
acquisition of deposit accounts $ 325 $ 207 $ 167
==================================================================================================================
Aggregate amortization expense:
For the year ended September 30, 2006 $ 40
Estimated amortization expense:
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
For the year ending September 30, 2011 11
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.
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.
Stock Option Plans
Prior to October 1, 2005, the Company accounted for its stock option plans under
the recognition and measurement principles of APB Opinion No. 25, "Accounting
for Stock Issued to Employees", and related interpretations. No stock-based
employee compensation was reflected in net income for periods ended prior to
October 1, 2005 as all options granted had an exercise price equal to the market
value of the underlying common stock on the grant date. However, the Company
adopted SFAS No. 123R "Share-based Payment" as of October 1, 2005, by using the
modified prospective approach, which requires recognizing expense for options
granted prior to the adoption date equal to the fair value of the unvested
amounts over their remaining vesting period. The portion of these options' fair
value attributable to vested awards prior to the adoption of SFAS 123R is never
recognized. For unvested stock-based awards granted before October 1, 2005, the
Company will expense the fair value of the awards at the grant date over the
remaining vesting period. As of September 30, 2006, there was $130,000 of total
unrecognized compensation cost related to non-vested share-based compensation
arrangements. That cost
(Note Continued)
--------------------------------------------------------------------------------
Annual Report 2006 o Fidelity Bancorp, Inc. and Subsidiary 13
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
is expected to be recognized over a weighted-average period of 1.6 years. The
compensation cost recognized in net income was $66,000 in fiscal 2006. The total
income tax benefit recognized in the income statement for share-based
compensation arrangements was $22,000 for fiscal 2006. Prior to the adoption of
SFAS 123R, tax benefits arising from share-based compensation arrangements were
classified as operating cash flows in the Consolidated Statement of Cash Flows.
However, SFAS 123R amends FASB Statement 95 "Statement of Cash Flows", and
requires excess tax benefits arising from increases in the value of equity
instruments issued under share-based payment arrangements to be treated as cash
inflows from financing activities.
The adoption of SFAS No. 123R had the following impact on reported amounts
compared with amounts that would have been reported using the intrinsic value
method under previous accounting:
2006
---------------------------------------------------------------------------------------------------------
Using SFAS
Previous 123R As
Accounting Adjustments Reported
---------------------------------------------------------------------------------------------------------
(Dollars in thousands, except per share data)
Income before taxes and extraordinary gain $4,772 $ (66) $4,706
Income taxes 862 (22) 840
---------------------------------------------------------------------------------------------------------
Income from continuing operations 3,910 (44) 3,866
Income from extraordinary gain, net of taxes 318 - 318
=========================================================================================================
Net income $4,228 $ (44) $4,184
=========================================================================================================
Basic earnings per share $ 1.42 $(.01) $ 1.41
=========================================================================================================
Diluted earnings per share $ 1.39 $(.01) $ 1.38
=========================================================================================================
2005
---------------------------------------------------------------------------------------------------------
Pro Forma
As Pro Forma if under
Reported Adjustments SFAS 123R
---------------------------------------------------------------------------------------------------------
(Dollars in thousands, except per share data)
Income before taxes $4,876 $ (190) $ 4,686
Income taxes 1,000 (65) 935
---------------------------------------------------------------------------------------------------------
Net income $3,876 $ (125) $ 3,751
=========================================================================================================
Basic earnings per share $ 1.32 $ (.04) $ 1.28
=========================================================================================================
Diluted earnings per share $ 1.27 $ (.04) $ 1.23
=========================================================================================================
(Note Continued)
--------------------------------------------------------------------------------
14 Annual Report 2006 o Fidelity Bancorp, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2004
--------------------------------------------------------------------------------------------------------
Pro Forma
As Pro Forma if under
Reported Adjustments SFAS 123R
--------------------------------------------------------------------------------------------------------
(Dollars in thousands, except per share data)
Income before taxes $5,337 $ (214) $5,123
Income taxes 1,016 (73) 943
--------------------------------------------------------------------------------------------------------
Net income $4,321 $ (141) $4,180
========================================================================================================
Basic earnings per share $ 1.47 $ (.05) $ 1.42
========================================================================================================
Diluted earnings per share $ 1.40 $ (.05) $ 1.35
========================================================================================================
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. The following table sets forth the computation of basic and diluted
earnings per share:
Years Ended September 30,
2006 2005 2004
---------------------------------------------------------------------------------------------------------
(Dollars in Thousands, Except per Share Data)
Basic earnings per share:
Net income $ 4,184 $ 3,876 $ 4,321
Weighted average shares outstanding 2,957,702 2,929,358 2,941,085
Earnings per share $1.41 $1.32 $1.47
Diluted earnings per share:
Net income $ 4,184 $ 3,876 $ 4,321
Weighted average shares outstanding 2,957,702 2,929,358 2,941,085
Dilutive effect of stock options 75,423 127,039 149,702
---------------------------------------------------------------------------------------------------------
Total diluted weighted average shares 3,033,125 3,056,397 3,090,847
outstanding
Earnings per share $1.38 $1.27 $1.40
Options to purchase 2,000 shares of common stock at $19.55 per share, 2,200
shares at $21.05 per share, 30,651 shares at $22.91 per share, 49,966 shares at
$21.35 per share and 13,200 shares at $20.93 per share were outstanding during
2006, but were not included in the computation of diluted EPS because to do so
would have been anti-dilutive. Similarly 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. Also, options to purchase 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.
(Note Continued)
--------------------------------------------------------------------------------
Annual Report 2006 o Fidelity Bancorp, Inc. and Subsidiary 15
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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,
2006 2005 2004
---------------------------------------------------------------------------------------------------------
(In Thousands)
Unrealized holding losses arising during the year $ (265) $ (2,630) $ (597)
Less reclassification adjustment for gains included
in net income (600) (566) (639)
---------------------------------------------------------------------------------------------------------
Net Unrealized Losses (865) (3,196) (1,236)
Tax benefit 294 1,087 420
---------------------------------------------------------------------------------------------------------
Net of Tax Amount $ (571) $ (2,109) $ (816)
=========================================================================================================
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 February 2006, the FASB issued SFAS No. 155, "Accounting for Certain Hybrid
Financial Instruments". SFAS No. 155 amends FASB Statement No. 133 and FASB
Statement No. 140, and improves the financial reporting of certain hybrid
financial instruments by requiring more consistent accounting that eliminates
exemptions and provides a means to simplify the accounting for these
instruments. Specifically, SFAS No. 155 allows financial instruments that have
embedded derivatives to be accounted for as a whole (eliminating the need to
bifurcate the derivative from its host) if the holder elects to account for the
whole instrument on a fair value basis. SFAS No. 155 is effective for all
financial instruments acquired or issued after the beginning of an entity's
first fiscal year that begins after September 15, 2006. The Company is required
to adopt the provisions of SFAS No. 155, as applicable, beginning in fiscal year
2007. Management does not believe the adoption of SFAS No. 155 will have any
impact on the Company's financial position and results of operations.
In March 2006, the FASB issued SFAS No. 156, "Accounting for Servicing of
Financial Assets -- An Amendment of FASB Statement No. 140" ("SFAS 156"). SFAS
156 requires that all separately recognized servicing assets and servicing
liabilities be initially measured at fair value, if practicable. The statement
permits, but does not require, the subsequent measurement of servicing assets
and servicing liabilities at fair value. SFAS 156 is effective as of the
beginning of an entity's first fiscal year that begins after September 15, 2006,
which for the Company will be as of the beginning of fiscal 2007. The Company
does not have any separately recognized servicing assets or liabilities
outstanding as of September 30, 2006, therefore the adoption of SFAS 156 will
not have an effect on its financial statements.
(Note Continued)
--------------------------------------------------------------------------------
16 Annual Report 2006 o Fidelity Bancorp, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
In July 2006, the Financial Accounting Standards Board (FASB) issued FASB
Interpretation No. 48, "Accounting for Uncertainty in Income Taxes--an
interpretation of FASB Statement No. 109" (FIN 48), which clarifies the
accounting for uncertainty in tax positions. This Interpretation requires that
companies recognize in their financial statements the impact of a tax position,
if that position is more likely than not of being sustained on audit, based on
the technical merits of the position. The provisions of FIN 48 are effective for
fiscal years beginning after December 15, 2006, with the cumulative effect of
the change in accounting principle recorded as an adjustment to opening retained
earnings. We are currently evaluating the impact of adopting FIN 48 on our
financial statements.
In September 2006, the FASB issued FASB Statement No. 157, Fair Value
Measurements, which defines fair value, establishes a framework for measuring
fair value under GAAP, and expands disclosures about fair value measurements.
FASB Statement No. 157 applies to other accounting pronouncements that require
or permit fair value measurements. The new guidance is effective for financial
statements issued for fiscal years beginning after November 15, 2007, and for
interim periods within those fiscal years. We are currently evaluating the
potential impact, if any, of the adoption of FASB Statement No. 157 on our
consolidated financial position, results of operations, and cash flows.
On September 13, 2006, the Securities and Exchange Commission "SEC" issued Staff
Accounting Bulleting No. 108 ("SAB 108"). SAB 108 provides interpretive guidance
on how the effects of the carryover or reversal of prior year misstatements
should be considered in quantifying a potential current year misstatement. Prior
to SAB 108, Companies might evaluate the materiality of financial-statement
misstatements using either the income statement or balance sheet approach, with
the income statement approach focusing on new misstatements added in the current
year, and the balance sheet approach focusing on the cumulative amount of
misstatement present in a company's balance sheet. Misstatements that would be
material under one approach could be viewed as immaterial under another
approach, and not be corrected. SAB 108 now requires that companies view
financial statement misstatements as material if they are material according to
either the income statement or balance sheet approach. SAB 108 is effective for
publicly-held companies for fiscal years ending after November 15, 2006. We are
currently evaluating the potential impact, if any, of the adoption of SAB 108 on
our consolidated financial position, results of operations, and cash flows.
On September 29, 2006, the FASB issued SFAS No. 158, Employers' Accounting for
Defined Benefit Pension and Other Postretirement Plans ("SFAS 158"), which
amends SFAS 87 and SFAS 106 to require recognition of the overfunded or
underfunded status of pension and other postretirement benefit plans on the
balance sheet. Under SFAS 158, gains and losses, prior service costs and
credits, and any remaining transition amounts under SFAS 87 and SFAS 106 that
have not yet been recognized through net periodic benefit cost will be
recognized in accumulated other comprehensive income, net of tax effects, until
they are amortized as a component of net periodic cost. The measurement date --
the date at which the benefit obligation and plan assets are measured -- is
required to be the company's fiscal year end. SFAS 158 is effective for
publicly-held companies for fiscal years ending after December 15, 2006, except
for the measurement date provisions, which are effective for fiscal years ending
after December 15, 2008. The Company is currently analyzing the effects of SFAS
158 but does not expect its implementation will have a significant impact on the
Company's financial condition or results of operations.
In September 2006, the FASB's Emerging Issues Task Force (EITF) issued EITF
Issue No. 06-4, "Accounting for Deferred Compensation and Postretirement Benefit
Aspects of Endorsement Split Dollar Life Insurance Arrangements" ("EITF 06-4").
EITF 06-4 requires the recognition of a liability related to the postretirement
benefits covered by an endorsement split-dollar life insurance arrangement. The
consensus highlights that the employer (who is also the policyholder) has a
liability for the benefit it is providing to its employee. As such, if the
policyholder has agreed to maintain the insurance policy in force for the
employee's benefit during his or her retirement, then the liability recognized
during the employee's active service period should be based on the future cost
(Note Continued)
--------------------------------------------------------------------------------
Annual Report 2006 o Fidelity Bancorp, Inc. and Subsidiary 17
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
of insurance to be incurred during the employee's retirement. Alternatively, if
the policy holder has agreed to provide the employee with a death benefit, then
the liability for the future death benefit should be recognized by following the
guidance in SFAS No. 106 or Accounting Principals Board (APB) Opinion No. 12, as
appropriate. For transition, an entity can choose to apply the guidance using
either of the following approaches: (a) a change in accounting principle through
retrospective application to all periods presented or (b) a change in accounting
principle through a cumulative-effect adjustment to the balance in retained
earnings at the beginning of the year of adoption. The disclosures required in
fiscal years beginning after December 15, 2007, with early adoption permitted.
The Company does not believe that the implementation of this guidance will have
a material impact on 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 based upon deposit composition. Based on its deposit
classifications in fiscal 2006, the Bank's reserve balance with the Federal
Reserve Bank was reduced to zero. The average amount of reserve balances
maintained for 2005 was approximately $1.3 million.
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 than1% 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 2005 and 2004 financial statements have been reclassified
to conform with the 2006 presentation format. These reclassifications had no
effect on net income.
--------------------------------------------------------------------------------
18 Annual Report 2006 o Fidelity Bancorp, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Note 2 - Securities
The amortized cost and fair value of securities are as follows:
September 30, 2006
----------------------------------------------------------------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
----------------------------------------------------------------------------------------------------------------------------
(In Thousands)
Securities Available for Sale:
U.S. government and agency
obligations $ 23,625 $ - $ 520 $ 23,105
Municipal obligations 20,760 105 95 20,770
Corporate obligations 11,107 68 141 11,034
Equity securities 4,037 83 204 3,916
Mutual funds 12,778 63 328 12,513
Trust preferred securities 27,969 238 131 28,076
Federal Home Loan Mortgage Corp. preferred stock 1,409 42 - 1,451
Mortgage-backed securities and
collateralized mortgage obligations 66,014 61 1,491 64,584
----------------------------------------------------------------------------------------------------------------------------
$ 167,699 $ 660 $ 2,910 $ 165,449
============================================================================================================================
Securities Held to Maturity:
U.S. government and agency
obligations $ 21,984 $ 4 $ 494 $ 21,494
Municipal obligations 22,648 696 28 23,316
Corporate obligations 4,993 24 49 4,968
Mortgaged-backed securities and
collateralized mortgage obligations 36,254 17 1,198 35,073
----------------------------------------------------------------------------------------------------------------------------
$ 85,879 $ 741 $ 1,769 $ 84,851
============================================================================================================================
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
============================================================================================================================
(Note Continued)
--------------------------------------------------------------------------------
Annual Report 2006 o Fidelity Bancorp, Inc. and Subsidiary 19
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The amortized cost and fair value of debt securities at September 30, 2006, 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 $ - $ - $ 3,509 $ 3,480
Due after one year through five years 25,705 25,228 16,554 16,276
Due after five years through ten years 33,229 32,796 19,551 19,013
Due after ten years 90,541 89,545 46,265 46,082
Equity securities and mutual funds 18,224 17,880 - -
----------------------------------------------------------------------------------------------------------------
$ 167,699 $ 165,449 $ 85,879 $ 84,851
================================================================================================================
Gross gains of $842,000, $866,000, and $906,000 and gross losses of $290,000,
$257,000, and $267,000 were realized on sales of securities in fiscal 2006, 2005
and 2004, respectively. During fiscal 2006 the Company recognized gains of
$5,000 and losses of $53,000 on the sales of securities, which were classified
as held-to-maturity. The held-to-maturity sales qualified as maturities for
purposes of FAS 115. There were no sales of held-to-maturity securities during
fiscal 2005 and 2004. In addition, losses of $43,000 resulting from the
writedown of investments in equity securities that are considered other than
temporary were realized in fiscal 2005. There were no writedowns of securities
during fiscal 2006 and 2004.
(Note Continued)
--------------------------------------------------------------------------------
20 Annual Report 2006 o Fidelity Bancorp, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following tables show 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:
September 30, 2006
------------------------------------------------------------------------------------------------------------------------------
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 $ - $ - $ 23,105 $ 520 $ 23,105 $ 520
Municipal obligations 4,169 38 8,664 57 12,833 95
Corporate obligations 1,960 30 3,435 111 5,395 141
Equity securities 1,439 31 692 173 2,131 204
Mutual funds - - 12,356 328 12,356 328
Trust preferred securities 3,397 73 10,428 58 13,825 131
Mortgage-backed securities
and collateralized
mortgage obligations 2,920 11 57,004 1,480 59,924 1,491
Securities Held to Maturity:
U.S. government and
agency obligations - - 20,492 494 20,492 494
Municipal obligations 569 3 3,324 25 3,893 28
Corporate obligations 1,007 1 1,937 48 2,944 49
Mortgage-backed securities
and collateralized
mortgage obligations - - 33,705 1,198 33,705 1,198
------------------------------------------------------------------------------------------------------------------------------
Total Temporarily Impaired
Securities $15,461 $187 $175,142 $4,492 $190,603 $4,679
==============================================================================================================================
(Note Continued)
--------------------------------------------------------------------------------
Annual Report 2006 o Fidelity Bancorp, Inc. and Subsidiary 21
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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
had 127 and 132 securities in an unrealized loss position as of September 30,
2006 and 2005, respectively. 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 anticipated market price
recovery. None of the individual unrealized losses are significant.
--------------------------------------------------------------------------------
22 Annual Report 2006 o Fidelity Bancorp, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Note 3 - Loans Receivable
Loans receivable, net are summarized as follows:
September 30,
2006 2005
--------------------------------------------------------------------------------------------------------
(In Thousands)
First mortgage loans:
Conventional:
1-4 family dwellings $190,040 $156,889
Multi-family dwellings 259 275
Commercial 72,171 67,889
Construction 61,399 35,224
--------------------------------------------------------------------------------------------------------
323,869 260,277
Less:
Loans in process (13,369) (23,070)
Unearned discounts and fees (28) (343)
--------------------------------------------------------------------------------------------------------
310,472 236,864
--------------------------------------------------------------------------------------------------------
Installment loans:
Home equity 90,263 76,045
Consumer loans 440 993
Other 2,603 2,742
--------------------------------------------------------------------------------------------------------
93,306 79,780
--------------------------------------------------------------------------------------------------------
Commercial business loans and leases:
Commercial business loans 37,930 31,577
Commercial leases 236 451
--------------------------------------------------------------------------------------------------------
38,166 32,028
--------------------------------------------------------------------------------------------------------
Less allowance for loan losses (2,917) (2,596)
--------------------------------------------------------------------------------------------------------
Loans Receivable, Net $439,027 $346,076
========================================================================================================
(Note Continued)
--------------------------------------------------------------------------------
Annual Report 2006 o Fidelity Bancorp, Inc. and Subsidiary 23
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Commitments to originate loans at September 30, 2006 were approximately as
follows:
Rate Amount
--------------------------------------------------------------------------------------------------------
(Dollars in Thousands)
First mortgage loans:
Fixed rate 6.125% to 6.500% $ 561
Adjustable rate 6.750% 274
Other loans:
Fixed rate 5.990% to 13.375% 323
Adjustable rate 8.000% to 11.000% 6,285
--------------------------------------------------------------------------------------------------------
$7,443
========================================================================================================
The Bank conducts its business through thirteen offices located in the greater
Pittsburgh metropolitan area. At September 30, 2006, 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,
2006 2005 2004
--------------------------------------------------------------------------------------------------------
(In Thousands)
Balance, beginning $2,596 $2,609 $3,091
Provision for loan losses 600 600 275
Loans charged off (326) (670) (819)
Recoveries 47 57 62
--------------------------------------------------------------------------------------------------------
Balance, ending $2,917 $2,596 $2,609
========================================================================================================
Non-accrual loans were approximately $2,685,000, $2,319,000, and $3,647,000 at
September 30, 2006, 2005 and 2004, respectively. The foregone interest on those
loans for the years ended September 30, 2006, 2005 and 2004 was $168,000,
$176,000, and $184,000, respectively. The amount of interest income on such
loans actually included in income in the years ended September 30, 2006, 2005
and 2004 was $55,000, $18,000, and $93,000, 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 $255,000 and
$53,000 at September 30, 2006 and 2005, respectively.
The recorded investment in loans that are considered to be impaired under SFAS
No. 114 was $2,043,000 and $1,669,000 at September 30, 2006 and 2005,
respectively. Included in the 2006 amount is $322,000 of impaired loans for
which the related allowance for credit losses was $322,000 and $1,721,000 of
impaired loans for which there is no allowance for credit losses. 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. The average recorded investment in impaired
loans during the fiscal years ended
(Note Continued)
--------------------------------------------------------------------------------
24 Annual Report 2006 o Fidelity Bancorp, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 2006, 2005 and 2004 was approximately $1,702,000, $2,182,000, and
$2,449,000, respectively. For the fiscal years ended September 30, 2006, 2005
and 2004, the Company recognized interest income on those impaired loans of
$34,000, $45,000, and $75,000, respectively, using the cash basis of income
recognition.
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,
2006 2005
----------------------------------------------------------------------------
(In Thousands)
Land $ 833 $ 847
Office buildings 6,333 5,199
Furniture, fixtures and equipment 2,835 2,963
Leasehold improvements 331 322
----------------------------------------------------------------------------
10,332 9,331
Accumulated depreciation and amortization (4,259) (4,205)
----------------------------------------------------------------------------
$ 6,073 $ 5,126
============================================================================
The Bank has operating leases with respect to four branch offices, the Bank's
Loan Center, one automated teller machine location, and a non-deposit investment
office which expire on various dates through fiscal 2013. Lease expense amounted
to $275,000, $237,000, and $235,000 in fiscal years 2006, 2005 and 2004,
respectively. Minimum annual lease commitments are approximately as follows (in
thousands):
2007 $225
2008 146
2009 118
2010 76
2011 55
Thereafter 78
--------------------------------------------------------------------------------
$698
================================================================================
--------------------------------------------------------------------------------
Annual Report 2006 o Fidelity Bancorp, Inc. and Subsidiary 25
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Note 6 - Deposits
Deposit balances are summarized as follows:
September 30,
Weighted Average Rates 2006 2005
-------------------------------------------------------------------------------------------------------------
(In Thousands)
Demand deposits Noninterest bearing $ 32,927 $ 32,415
Savings deposits:
NOW accounts .64% in 2006 and .47% in 2005 38,892 43,039
Passbooks 1.12% in 2006 and 1.15% in 2005 60,979 78,997
Money market deposit accounts 4.29% in 2006 and 2.95% in 2005 112,569 44,742
-------------------------------------------------------------------------------------------------------------
245,367 199,193
-------------------------------------------------------------------------------------------------------------
Time deposits:
Fixed rate Less than 1.00% 12 -
1.00% to 2.99% 12,514 40,604
3.00% to 4.99% 125,060 115,870
5.00% to 6.99% 31,213 11,130
7.00% to 8.99% 16 15
-------------------------------------------------------------------------------------------------------------
168,815 167,619
-------------------------------------------------------------------------------------------------------------
$414,182 $366,812
=============================================================================================================
The weighted average interest rate for all deposits was 3.31% and 2.35% at
September 30, 2006 and 2005, respectively. Time deposits with balances of
$100,000 or more totaled $34,090,000 and $28,605,000 at September 30, 2006 and
2005, respectively.
At September 30, 2006, no investment securities were required to be pledged to
secure deposits of public funds.
The maturities of time deposits at September 30, 2006 are summarized as follows
(in thousands):
2007 $ 99,821
2008 27,242
2009 27,796
2010 8,062
2011 4,115
Thereafter 1,779
--------------------------------------------------------------------------------
$168,815
================================================================================
(Note Continued)
--------------------------------------------------------------------------------
26 Annual Report 2006 o Fidelity Bancorp, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Interest expense by deposit category is as follows:
Years Ended September 30,
2006 2005 2004
--------------------------------------------------------------------------------
(In Thousands)
NOW accounts $ 220 $ 209 $ 270
Passbooks 788 1,037 1,099
Money market deposit accounts 3,343 622 128
Time deposits 6,543 5,842 6,138
--------------------------------------------------------------------------------
$10,894 $7,710 $7,635
================================================================================
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 2006 and 2005, ranging
individually from $690,000 to $134,650,000 and from $50,000 to $104,500,000,
respectively. The daily average balance during 2006 and 2005 was $73,111,000 and
$79,860,000, respectively, and the daily average interest rate was 4.60% and
2.88%, respectively. The maximum amount outstanding at any month-end during 2006
and 2005 was $131,520,000 and $110,800,000, respectively. At September 30, 2006,
there were no "RepoPlus" advances outstanding. There were $110,800,000
"RepoPlus" advances outstanding at an interest rate of 3.84% at September 30,
2005.
In fiscal 2006 the Bank opened a revolving line of credit with the Federal Home
Loan Bank of Pittsburgh, which carries a commitment of $125,000,000 maturing on
July 16, 2010. The rate is adjusted daily by the Federal Home Loan Bank, and any
borrowings on this line may be repaid at any time without penalty. The daily
average balance during 2006 was $14,546,000 and the daily average interest rate
was 5.35%. The maximum amount outstanding at any month-end during 2006 was
$73,611,000. At September 30, 2006 the amount outstanding on the line was
$70,768,000 at an interest rate of 5.30%.
In fiscal 2006 the Bank purchased federal funds as a short-term funding source.
Federal funds purchased represent unsecured borrowings from other banks and
generally mature daily. The daily average balance during 2006 was $3,329,000 and
the daily average interest rate was 5.11%. The maximum amount outstanding at any
month-end during 2006 was $7,500,000. At September 30, 2006 the amount
outstanding was $7,500,000 at an interest rate of 5.41%
Also included in short-term borrowings are treasury, tax and loan balances of
$357,000 and $341,000 at September 30, 2006 and 2005, respectively.
(Note Continued)
--------------------------------------------------------------------------------
Annual Report 2006 o Fidelity Bancorp, Inc. and Subsidiary 27
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Long-term debt consisted of the following:
Interest September 30,
Rate 2006 2005
--------------------------------------------------------------------------------
(In Thousands)
Fixed Rate Advances:
January 17, 2006 4.43% $ - $ 10,000
July 3, 2006 4.31 - 7,500
August 30, 2007 3.89 10,000 10,000
October 12, 2007 3.90 10,000 10,000
January 14, 2008 3.79 10,000 10,000
June 23, 2010 3.24 198 248
Convertible Select Advances:
December 22, 2005 4.05 - 1,000
December 22, 2005 2.28 - 504
April 7, 2006 6.44 - 15,000
July 22, 2006 5.26 - 1,984
July 22, 2006 4.57 - 5,000
July 23, 2006 2.95 - 529
February 20, 2008 5.48 10,000 10,000
December 18, 2008 5.15 10,000 10,000
January 10, 2010 3.24 756 773
January 21, 2010 3.23 1,626 1,662
February 8, 2010 3.26 1,086 1,103
March 1, 2010 3.24 1,086 1,110
March 17, 2010 6.05 20,000 20,000
March 17, 2010 3.15 871 891
April 21, 2010 3.12 542 554
May 19, 2010 5.39 1,042 1,052
June 23, 2010 3.50 223 228
August 18, 2010 3.39 549 560
August 30, 2010 5.93 10,000 10,000
September 22, 2010 3.42 552 564
September 22, 2010 3.35 327 333
October 20, 2010 3.33 434 440
November 2, 2011 4.40 5,000 5,000
--------------------------------------------------------------------------------
Total Long-Term Debt $94,292 $136,035
================================================================================
(Note Continued)
--------------------------------------------------------------------------------
28 Annual Report 2006 o Fidelity Bancorp, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Contractual maturities of long-term debt at September 30, 2006 were as follows
(in thousands):
2007 $10,000
2008 30,000
2009 10,000
2010 38,859
2011 433
Thereafter 5,000
--------------------------------------------------------------------------------
$94,292
================================================================================
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, 2006 was approximately
$163,639,000.
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, 2006 and 2005. 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 8.77% 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 8.77% through December 25, 2006, 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%.
--------------------------------------------------------------------------------
Annual Report 2006 o Fidelity Bancorp, Inc. and Subsidiary 29
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 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 broker/dealer who
arranged the transaction. The fair value of such securities exceeds the value of
the securities sold under agreements to repurchase.
Securities Sold Under Agreements to Repurchase included retail borrowings during
fiscal 2006 and 2005. The daily average balance during 2006 and 2005 was
$7,146,000 and $6,715,000, respectively, and the daily average interest rate was
4.44% and 2.33%, respectively. The maximum amount outstanding at any month-end
during 2006 and 2005 was $9,282,000 and $8,811,000, respectively. At September
30, 2006 retail borrowings outstanding were $8,638,000 at a weighted average
interest rate of 4.99%. There were $6,674,000 retail borrowings outstanding at a
weighted average interest rate of 3.49% at September 30, 2005. Securities
underlying sales of securities under retail repurchase agreements consisted of
investment securities that had an amortized cost of $11,990,000 and a market
value of $11,742,000 at September 30, 2006.
During the fiscal year ended September 30, 2006, the Bank began using structured
reverse repurchase agreements to replace various FHLB borrowings. The Bank has
six separate reverse repurchase agreements with PNC Bank, N.A. ("PNC") and
Citigroup Global Markets, Inc. ("CGMI"). Each agreement is structured as the
sale of a specified amount of identified securities to the counterparty which
the Bank has agreed to repurchase five to seven years after the initial sale.
The underlying securities consist of various U.S. Government and agency
obligations and mortgage-backed securities which continue to be carried as
assets of the Bank and the Bank is entitled to receive interest and principal
payments on the underlying securities. The Bank is required to post additional
collateral if the market value of the securities subject to repurchase falls
below 105% of principal amount. While the repurchase agreements are in effect,
the Bank is required to pay interest quarterly at the rate specified in the
agreement. Each of the agreements provide an initial fixed or floating interest
rate that converts to a floating or fixed rate at the end of six months to one
year. At September 30, 2006, the Bank had $30.0 million in reverse repurchase
agreements that bore interest at a rate equal to three-month LIBOR minus 100
basis points and are scheduled to convert to fixed rates from 4.73% to 4.97% in
fiscal 2007. At September 30, 2006, the Bank had $30.0 million in reverse
repurchase agreements with initial fixed rates between 3.98% to 4.65% scheduled
to convert in early 2007 to floating rates equal to 9.5% minus three month LIBOR
with a cap of 5.8% and floor of 0.0%. At September 30, 2006, the Bank had an
additional $15.0 million in reverse repurchase agreements that had already reset
to a fixed rate of 4.64%. The counterparty has the option of terminating the
reverse repurchase agreement at the reset date and quarterly thereafter. The
counterparty may also terminate the repurchase agreement upon certain events of
default including the Bank's failure to maintain well capitalized status. Upon
termination, the Bank would be required to repurchase the securities. The Bank
borrowed $35,000,000, with PNC, with a weighted average maturity of 4.45 years
and borrowed $40,000,000, with CGMI, with a weighted average maturity of 5.39
years. There were no structured borrowings outstanding at September 30, 2005.
Securities underlying sales of securities under structured repurchase agreements
consisted of investment securities that had an amortized cost of $87,843,000 and
a market value of $85,754,000 at September 30, 2006.
--------------------------------------------------------------------------------
30 Annual Report 2006 o Fidelity Bancorp, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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,
2006 2005
--------------------------------------------------------------------------------
(In Thousands)
Commitments to grant loans $ 7,443 $ 1,369
Unfunded commitments under lines of credit 43,416 39,414
Financial and performance standby letters of credit 218 295
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, 2006 and 2005 was $21,508,000 and $18,586,000, respectively,
for consumer lines of credit and $21,908,000 and $20,828,000, respectively, for
commercial lines of credit. The interest rate for the consumer lines of credit
range from 6.00% to 12.25%, 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, 2006 and 2005 was $218,000 and
$295,000, respectively. The interest rates are generally variable and based on
prevailing market conditions at the time of funding.
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,
2006 and 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, 2006,
except for the commitments referenced above.
--------------------------------------------------------------------------------
Annual Report 2006 o Fidelity Bancorp, Inc. and Subsidiary 31
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Note 11 - Income Taxes
The provision for income taxes in the consolidated statements of income consists
of the following:
Years Ended September 30,
2006 2005 2004
---------------------------------------------------------------------------------------------------------------------------
(In Thousands)
Current:
Federal $ 767 $ 933 $ 697
State - 30 11
---------------------------------------------------------------------------------------------------------------------------
767 963 708
Deferred, federal 73 37 308
---------------------------------------------------------------------------------------------------------------------------
$ 840 $1,000 $1,016
===========================================================================================================================
The differences between the expected and actual tax provision expressed as
percentages of income before tax are as follows:
Years Ended September 30,
2006 2005 2004
----------------------------------------------------------------------------------------------------------------------------
Expected federal tax rate 34.0 % 34.0 % 34.0 %
Tax-exempt interest (12.4) (11.4) (12.4)
State income tax, net of federal tax benefit - .1 .2
Other items, net (3.8) (2.2) (2.8)
----------------------------------------------------------------------------------------------------------------------------
Actual Tax Rate 17.8 % 20.5 % 19.0 %
============================================================================================================================
Deferred income taxes consisted of the following components:
September 30,
2006 2005
---------------------------------------------------------------------------------------------------------------------------
(In Thousands)
Deferred tax assets:
Office premises and equipment $ 495 $ 418
Allowance for loan losses 995 886
Deferred compensation 414 381
Net operating losses 91 116
Intangible assets 168 244
Unrealized losses on securities available for sale 765 471
Other 310 338
---------------------------------------------------------------------------------------------------------------------------
Gross Deferred Tax Assets $3,238 $2,854
---------------------------------------------------------------------------------------------------------------------------
Deferred tax liabilities:
Insurance proceeds $ (163) $ -
---------------------------------------------------------------------------------------------------------------------------
Gross Deferred Tax Liabilities $ (163) $ -
---------------------------------------------------------------------------------------------------------------------------
Net Deferred Tax Asset $3,075 $2,854
===========================================================================================================================
(Note Continued)
--------------------------------------------------------------------------------
32 Annual Report 2006 o Fidelity Bancorp, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Net operating loss carryforwards in the amount of $73,000, obtained from
acquisitions, were utilized in fiscal 2006 and 2005, respectively. Net operating
loss carryforwards in the amount of $142,000, obtained from acquisitions, were
utilized in fiscal 2004. The federal net operating loss carryforward of $267,000
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 income taxes since it is more likely than not that the
deferred income taxes 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, 2006, 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, 2006, that the
Bank meets all capital adequacy requirements to which it is subject.
As of September 30, 2006, 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, 2006, the Company had Tier I capital as a percentage of
risk-weighted assets of 12.1% and total risk-based capital as a percentage of
risk-weighted assets of 12.7%.
(Note Continued)
--------------------------------------------------------------------------------
Annual Report 2006 o Fidelity Bancorp, Inc. and Subsidiary 33
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
In addition, the FRB 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, 2006, the Company had a leverage
ratio of 7.5%.
The following table sets forth certain information concerning the Bank's
regulatory capital at September 30, 2006 and 2005:
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, 2006:
Total capital (to risk-weighted
assets) $48,056 10.2 % $=>37,556 =>8.0 % $=>46,945 =>10.0 %
Tier 1 capital (to risk-weighted
assets) 45,139 9.6 =>18,778 =>4.0 =>28,167 => 6.0
Tier 1 capital (to average assets) 45,139 6.3 =>28,841 =>4.0 =>36,051 => 5.0
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
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, 2006, the Bank's retained earnings available for the payment of
dividends was $1.1 million. Accordingly, $45.5 million of the Company's equity
in the net assets of the Bank was restricted at September 30, 2006. Funds
available for loans or advances by the Bank to the Company amounted to $4.8
million. Any such borrowing must be on terms that would be available to
unaffiliated parties and must be fully collateralized in accordance with FRB
regulations. 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.
--------------------------------------------------------------------------------
34 Annual Report 2006 o Fidelity Bancorp, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Note 13 - Stock Option Plans
On September 30, 2006, the Company has seven share-based compensation plans,
which are described below. The compensation cost that has been charged against
income for those plans was $66,000 in fiscal 2006. The total income tax benefit
recognized in the income statement for share-based compensation arrangements was
$22,000 for fiscal 2006.
The Company's 2005 Stock-Based Incentive Plan (the Plan), which is
shareholder-approved, permits the grant of share options and shares 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, 2006, there were 108,100 options which remain unawarded. No share
awards have been made under the Plan.
The Company also maintains the 1993 Employee Stock Compensation Program and the
1997 Employee Stock Compensation Program, both of which were shareholder
approved. At September 30, 2006, 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, 2006, 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 fair value of each option award is estimated at the date of grant using a
Black-Scholes option-pricing model that uses the assumptions noted in the
following table. Expected volatilities are based on the historical volatility of
the Company's stock. The Company uses historical data to estimate option
exercise and employee and director terminations within the model, as well as the
expected term of options granted, which represents the period of time that
options granted are expected to be outstanding. Separate groups of employees and
directors that have similar historical exercise behavior are considered
separately for valuation purposes. Ranges given below result from certain groups
pf employees and directors exhibiting different behavior. The risk-free rate for
periods within the contractual life of the option is based on the U.S. Treasury
yield curve in effect at the time of grant.
2006 2005 2004
--------------------------------------------------------------------------------
Expected volatility 22% - 23% 19% 23%
Weighted-average volatility 22% 19% 23%
Expected dividends 3.6% - 3.8% 2.4% - 2.8% 2.8% - 3.0%
Expected term (in years) 5.5 5.0 - 6.0 5.0 - 7.0
Risk-free rate 4.2% - 4.5% 3.6% - 4.3% 3.6%
(Note Continued)
--------------------------------------------------------------------------------
Annual Report 2006 o Fidelity Bancorp, Inc. and Subsidiary 35
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Weighted
Weighted Average
Average Remaining Aggregate
Exercise Contractual Intrinsic
Shares Price Term Value
---------------------------------------------------------------------------------------------
Outstanding as of September 30, 2005 379,803 $14.13
Granted 41,500 18.90
Exercised (27,936) 9.45
Forfeited (4,025) 21.91
---------------------------------------------------------------------------------------------
Outstanding at September 30, 2006 389,342 $14.89 5.0 $1,868,476
=============================================================================================
Exercisable at September 30, 2006 337,575 $14.21 4.8 $1,863,341
=============================================================================================
The weighted-average grant-date fair value of options granted during the fiscal
years 2006, 2005, and 2004 was $3.35, $3.98, and $4.07, respectively. The total
intrinsic value of options exercised during the fiscal years ended September 30,
2006, 2005, and 2004, was $275,000, $621,000, and $774,000, respectively.
A summary of the status of non-vested shares as of September 30, 2006, and
changes during the year ended September 30, 2006 is presented below:
Weighted
Average
Grant-Date
Non-vested Shares Shares Fair Value
--------------------------------------------------------------------------------
Non-vested at September 30, 2005 25,050 $3.79
Granted 41,500 3.35
Vested (13,876) 3.85
Forfeited (907) 3.93
--------------------------------------------------------------------------------
Non-vested at September 30, 2006 51,767 $3.37
As of September 30, 2006, there was $130,000 of total unrecognized compensation
cost related to non-vested share-based compensation arrangements. That cost is
expected to be recognized over a weighted-average period of 1.6 years. The total
fair value of shares vested during the years ended September 2006, 2005, and
2004, was $53,000, $202,000, and $186,000, respectively.
Xxxx received from options exercised under all share-based payment arrangements
for the fiscal years ended September 30, 2006, 2005, and 2004 was $264,000,
$562,000 and $603,000, respectively. The actual tax benefit realized for the tax
deductions from option exercise of the share-based payment arrangements totaled
$43,000, $160,000, and $216,000 for the fiscal years ended September 30, 2006,
2005 and 2004, respectively.
The Company has a policy of issuing shares from authorized but unissued shares
to satisfy share option exercises.
--------------------------------------------------------------------------------
36 Annual Report 2006 o Fidelity Bancorp, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 2006, 2005, and 2004 was
approximately $173,000, $143,000, and $141,000, respectively. The accrued
liability under the Plan for 2006, 2005, and 2004 was approximately $1,218,000,
$1,121,000, and $1,054,000, 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. Xxxxxx recognized in
2006, 2005 and 2004 as a result of increased cash surrender value was
approximately $60,000, $89,000, and $99,000, 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 $251,000, $289,000, and $255,000 in 2006, 2005 and
2004, respectively.
--------------------------------------------------------------------------------
Annual Report 2006 o Fidelity Bancorp, Inc. and Subsidiary 37
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 2006
Interest income $8,664 $9,139 $9,567 $10,003
Interest expense 5,354 5,736 6,171 6,553
-------------------------------------------------------------------------------------------------------------------------
Net interest income 3,310 3,403 3,396 3,450
Provision for loan losses 125 - 125 350
Other income 942 903 931 1,057
Other expenses 2,906 3,140 2,999 3,041
-------------------------------------------------------------------------------------------------------------------------
Income before income taxes and
extraordinary gain 1,221 1,166 1,203 1,116
Income tax provision 257 181 234 168
-------------------------------------------------------------------------------------------------------------------------
Income from continuing operations 964 985 969 948
-------------------------------------------------------------------------------------------------------------------------
Income from extraordinary gain,
net of taxes - - - 318
-------------------------------------------------------------------------------------------------------------------------
Net income $964 $985 $969 $1,266
=========================================================================================================================
Earnings per share:
Basic
Income from continuing operations $0.32 $0.33 $0.33 $0.32
Income from extraordinary gain,
net of taxes - - - .11
-------------------------------------------------------------------------------------------------------------------------
Net income $0.32 $0.33 $0.33 $0.43
=========================================================================================================================
Diluted
Income from continuing operations $0.32 $0.32 $0.32 $0.32
Income from extraordinary gain,
net of taxes - - - .10
-------------------------------------------------------------------------------------------------------------------------
Net income $0.32 $0.32 $0.32 $0.42
=========================================================================================================================
(Note Continued)
--------------------------------------------------------------------------------
38 Annual Report 2006 o Fidelity Bancorp, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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
=========================================================================================================================
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 Due From Banks
The carrying amounts reported approximate those assets' fair value.
Interest Bearing Demand Deposits with Other Institutions
The carrying amounts reported approximate those assets' fair value.
(Note Continued)
--------------------------------------------------------------------------------
Annual Report 2006 o Fidelity Bancorp, Inc. and Subsidiary 39
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
Short-Term Borrowings
The carrying amounts for short-term borrowings approximate the estimated fair
value of such liabilities.
Securities Sold Under Agreements to Repurchase
The fair values for securities sold under agreement to repurchase were estimated
using the interest rate currently available from the party that holds the
existing debt.
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 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.
(Note Continued)
--------------------------------------------------------------------------------
40 Annual Report 2006 o Fidelity Bancorp, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The carrying amounts and fair values of the Company's financial instruments are
presented in the following table:
September 30,
2006 2005
---------------------------------------------------------------------------------------------------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
---------------------------------------------------------------------------------------------------------------------------
(In Thousands)
Financial assets:
Cash and due from banks $ 8,480 $ 8,480 $ 9,234 $ 9,234
Interest bearing demand deposits with other
institutions 187 187 636 636
Securities available for sale 165,449 165,449 182,157 182,157
Securities held to maturity 85,879 84,851 105,316 104,962
Loans, net (including loans held for sale) 439,067 426,394 346,324 342,689
Restricted investments in bank stock 9,132 9,132 12,215 12,215
Accrued interest receivable 3,359 3,359 3,113 3,113
Financial liabilities:
Deposits 414,182 412,399 366,812 365,231
Short-term borrowings 78,625 78,625 111,141 111,141
Securities sold under agreements to repurchase 83,638 83,220 6,674 6,674
Subordinated Debt 10,310 10,310 10,310 10,310
Accrued interest payable 996 996 1,193 1,193
Long-term debt 94,292 94,634 136,035 137,846
Off-balance sheet financial instruments:
Standby letters of credit - - - -
Commitments to extend credit - - - -
--------------------------------------------------------------------------------
Annual Report 2006 o Fidelity Bancorp, Inc. and Subsidiary 41
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,
2006 2005
------------------------------------------------------------------------------------------------------
(In Thousands)
Assets
Cash $ 2,592 $ 1,596
Investment in subsidiary bank 46,623 45,035
Investment in unconsolidated subsidiary trust 310 310
Securities available for sale 4,289 4,900
Other assets 710 521
------------------------------------------------------------------------------------------------------
Total Assets $54,524 $52,362
======================================================================================================
Liabilities and Stockholders' Equity
Liabilities:
Subordinated debentures $10,310 $10,310
Other liabilities 19 3
------------------------------------------------------------------------------------------------------
Total Liabilities 10,329 10,313
Total Stockholders' Equity 44,195 42,049
------------------------------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity $54,524 $52,362
======================================================================================================
Condensed Statements of Income
Years Ended September 30,
2006 2005 2004
--------------------------------------------------------------------------------------------------------
(In Thousands)
Dividends from subsidiary $2,239 $8,911 $1,725
Interest income 248 241 257
Interest expense (863) (659) (500)
Other income 788 572 163
Other expense (195) (108) (81)
--------------------------------------------------------------------------------------------------------
Income Before Equity in Undistributed Net Income
of Subsidiary and Income Taxes 2,217 8,957 1,564
Income tax benefit 35 17 84
Equity in(excess of) undistributed net income of subsidiary 1,932 (5,098) 2,673
--------------------------------------------------------------------------------------------------------
Net Income $4,184 $3,876 $4,321
========================================================================================================
(Note Continued)
--------------------------------------------------------------------------------
42 Annual Report 2006 o Fidelity Bancorp, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Condensed Statements of Cash Flows
Years Ended September 30,
2006 2005 2004
-----------------------------------------------------------------------------------------------------------------------------
(In Thousands)
Cash Flows from Operating Activities
Net income $4,184 $3,876 $4,321
Adjustments to reconcile net income to net cash provided
by operating activities:
(Equity in) excess of undistributed earnings of
subsidiary (1,932) 5,098 (2,673)
Gain on sale of investments (668) - (101)
Tax benefit realized on stock-based compensation - 160 216
Increase (decrease) in interest receivable (5) (14) 19
Increase (decrease) in payable to subsidiary 8 (5,867) 1,990
Other changes, net 7 61 147
-----------------------------------------------------------------------------------------------------------------------------
Net Cash Provided by Operating Activities 1,594 3,314 3,919
-----------------------------------------------------------------------------------------------------------------------------
Cash Flows from Investing Activities
Purchase of securities available for sale (1,183) (1,801) (2,409)
Sale of securities available for sale 2,118 527 421
Maturities and principal repayments of securities available
for sale - 1,064 457
-----------------------------------------------------------------------------------------------------------------------------
Net Cash Provided by (Used in) Investing Activities 935 (210) (1,531)
-----------------------------------------------------------------------------------------------------------------------------
Cash Flows from Financing Activities
Stock options exercised 264 562 603
Excess tax benefit realized on stock-based compensation 43 - -
Sale of stock through Dividend Reinvestment Plan 151 153 144
Dividends paid (1,594) (1,405) (1,229)
Acquisition of treasury stock (397) (1,265) (1,474)
-----------------------------------------------------------------------------------------------------------------------------
Net Cash Used in Financing Activities (1,533) (1,955) (1,956)
-----------------------------------------------------------------------------------------------------------------------------
Net Increase in Cash and Cash Equivalents 996 1,149 432
-----------------------------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents - Beginning 1,596 447 15
-----------------------------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents - Ending $2,592 $1,596 $447
=============================================================================================================================
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 - Extraordinary Gain
During the fourth quarter of fiscal 2006, the Bank recorded an extraordinary
gain of $481,000, before taxes of $163,000, related to insurance proceeds
received from the destructive fire that devastated the Bank's Carnegie Branch
location in October 2005. While the insurance proceeds were reinvested in the
construction of the new Carnegie Branch location, the proceeds, net of the book
value of the associated assets at the time of the fire, were recorded as a gain
in accordance with accounting literature. Insurance proceeds received to date
total $601,000, however, the insurance claim has not been settled and additional
proceeds may be recovered in future periods.
--------------------------------------------------------------------------------
Annual Report 2006 o Fidelity Bancorp, Inc. and Subsidiary 43
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Overview
The Company reported net income of $4.18 million or $1.38 per share on a diluted
basis (including an extraordinary gain of $318,000, net of tax or $.10 per
diluted share) for fiscal 2006 compared to $3.88 million or $1.27 per share on a
diluted basis for fiscal 2005 compared to $4.32 million or $1.40 per share on a
diluted basis for fiscal 2004.
Return on average equity was 9.89%, 9.24%, and 10.62% for fiscal years 2006,
2005 and 2004, respectively. Return on average assets was .59%, .59%, and .69%
for fiscal 2006, 2005, and 2004, respectively. The ratio of other expenses to
average assets for fiscal 2006 was 1.70% compared to 1.85% in fiscal 2005 and
1.83% in fiscal 2004.
Total assets of the Company totaled $730.7 million at September 30, 2006,
compared to $677.8 million at September 30, 2005. Increases were noted in loans
receivable, partially offset by decreases in securities and cash and cash
equivalents.
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, 2006, the
tax-equivalent interest-rate spread decreased to 2.03%, as compared to 2.26% in
fiscal 2005. The tax-equivalent spread in fiscal 2004 was 2.31%. The ratio of
average interest earning assets to average interest bearing liabilities
decreased slightly to 102.7% in fiscal 2006, from 102.8% in fiscal 2005. The
ratio was 102.7% in fiscal 2004. The decrease in the spread for fiscal 2006 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
--------------------------------------------------------------------------------
44 Annual Report 2006 o Fidelity Bancorp, Inc. and Subsidiary
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
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.
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. Prior to October 1, 2005, the Company accounted
for its stock option plans under the recognition and measurement principles of
APB Opinion No. 25, "Accounting for Stock Issued to Employees", and related
interpretations. No stock-based employee compensation was reflected in net
income, for periods ended prior to October 1, 2005 as all options granted had an
exercise price equal to the market value of the underlying common stock on the
grant date. However, the Company adopted SFAS No. 123R as of October 1, 2005 and
stock based compensation expense is reported in net income. Stock based
compensation expense is reported in net income utilizing the fair-value-based
method set forth in SFAS No. 123R. The fair value of each option award is
estimated at the date of grant using a Black-Scholes option-pricing model that
uses the assumptions noted in Note 13. Expected volatilities are based on the
historical volatility of the Company's stock. The Company uses historical data
to estimate option exercise and employee and director terminations within the
model, as well as the expected term of options granted, which represents the
period of time that options granted are expected to be outstanding. Separate
groups of employees and directors that have similar historical exercise behavior
are considered separately for valuation purposes. Ranges result from certain
groups of employees and directors exhibiting different behavior. The risk-free
rate for periods within the contractual life of the option is based on the U.S.
Treasury yield curve in effect at the time of grant. All of these assumptions
may be susceptible to change and would impact earnings in future periods.
Securities. Securities for which the Company has the positive intent and ability
to hold to maturity are reported at cost adjusted for premiums and discounts
that are recognized in interest income using the interest method over the period
to maturity. Declines in the fair value of individual securities below their
amortized cost that are other than temporary result in writedowns of the
individual securities to their estimated fair value. Such writedowns are
included in earnings as realized losses. For a discussion on the determination
of an other than temporary decline, please refer to Note 1 of the consolidated
financial statements. The Company recognized other than temporary writedowns of
$43,000 in fiscal 2005. There were no writedowns in fiscal 2006 and 2004.
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 repricing and 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.
--------------------------------------------------------------------------------
Annual Report 2006 o Fidelity Bancorp, Inc. and Subsidiary 45
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
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.
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,
2006 remained constant. The impact of the rate movements was developed by
simulating the effect of rates changing immediately from the September 30, 2006
levels.
Interest Rate Simulation Sensitivity Analysis
Movements in interest rates from September 30, 2006 rates:
Increase Decrease
---------------------------------------------------------------------------------------
+100 bp +200 bp -100 bp -200 bp
---------------------------------------------------------------------------------------
Net interest income increase(decrease) (12.5%) (25.6%) 4.9% 4.2%
Portfolio equity increase (decrease) (23.2%) (50.2%) 12.3% 18.0%
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
--------------------------------------------------------------------------------
46 Annual Report 2006 o Fidelity Bancorp, Inc. and Subsidiary
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
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 23.4% at September
30, 2006 compared to a negative 8.5% at September 30, 2005. The Company
considers this result at September 30, 2006 to be within its acceptable target
range. The increase in the negative gap position is attributed to an increase in
liabilities with shorter terms. During fiscal 2006, customers sought
shorter-term deposit products, particularly money market deposit accounts, in
anticipation of rising interest rates. In addition, the Company utilized
short-term borrowings, as well as long-term fundings with adjustable-rate
features, 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, 2006. 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, 2006, 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.
September 30, 2006
-----------------------------------------------------------------------------------------------------------
Over Three
Three Months After One
Months or Through Year Through After Five
Less Twelve Months Five Years Years
-----------------------------------------------------------------------------------------------------------
(Dollars in Thousands)
Interest earning assets $ 131,103 $ 98,899 $ 335,115 $ 139,746
Deposits, escrow liabilities and
borrowed funds 283,962 116,640 218,124 62,320
-----------------------------------------------------------------------------------------------------------
Interest sensitivity $ (152,859) $ (17,741) $ 116,991 $ 77,426
===========================================================================================================
Cumulative interest sensitivity $ (152,859) $ (170,600) $ (53,609) $ 23,817
Cumulative ratio as a percent of assets (20.9%) (23.4%) (7.3%) 3.3%
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.
--------------------------------------------------------------------------------
Annual Report 2006 o Fidelity Bancorp, Inc. and Subsidiary 47
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
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, 2006, the Bank could pay
approximately $1.1 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 2006, 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, 2006 the total of approved loan commitments amounted to $7.4
million and the Company had $13.4 million of undisbursed loan funds. Unfunded
commitments under lines and letters of credit amounted to $43.6 million at
September 30, 2006. The amount of savings certificates which are scheduled to
mature in the twelve-month period ended September 30, 2007 is $99.8 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.
Contractual Obligations
The following table represents the Company's balance sheet aggregate contractual
obligations to make future payments as of September 30, 2006
September 30, 2006
-----------------------------------------------------------------------------------------------------------
One Three
Less Year to Years to
Than Three Five Over Five
Total One Year Years Years Years
-----------------------------------------------------------------------------------------------------------
(Dollars in Thousands)
Long-Term Debt Obligations:
Time deposits $168,815 $ 99,821 $55,038 $ 12,177 $ 1,779
FHLB Advances 94,292 10,000 40,000 39,292 5,000
Structured reverse
repurchase agreements 75,000 - - 60,000 15,000
Subordinated debt 10,310 - - - 10,310
Operating leases 698 225 264 131 78
-----------------------------------------------------------------------------------------------------------
Total $349,115 $110,046 $95,302 $111,600 $32,167
===========================================================================================================
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.
--------------------------------------------------------------------------------
48 Annual Report 2006 o Fidelity Bancorp, Inc. and Subsidiary
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
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, 2006, the Company had capital in excess of all applicable
regulatory capital requirements. At September 30, 2006, the ratio of the
Company's Tier 1 capital to average assets was 7.46%. The Company's ratio of
Tier 1 capital to risk-weighted assets was 12.06% and its ratio of total capital
to risk-weighted assets was 12.73%.
The Bank currently exceeds all regulatory capital requirements, having a
leverage ratio of Tier 1 capital to total average assets of 6.26%, a ratio of
Tier 1 capital to risk-weighted assets of 9.62%, and a ratio of qualifying total
capital to risk-weighted assets and off-balance sheet items of 10.24% at
September 30, 2006. As a result, regulatory capital requirements are not
expected to have a material impact on operations.
Financial Condition
The Company's assets were $730.7 million at September 30, 2006, an increase of
$53.0 million or 7.8% over assets at September 30, 2005. Increases were noted in
net loans receivable, partially offset by decreases in securities and cash. The
growth was primarily funded by deposits.
Loan Portfolio
Net loans receivable increased $93.0 million or 26.9% to $439.0 million at
September 30, 2006 from $346.1 million at September 30, 2005. Loans originated
totaled $183.7 million in fiscal 2006, including amounts disbursed under lines
of credit, versus $158.6 million in fiscal 2005. Mortgage loans originated
amounted to $108.5 million, including $4.4 million originated for sale, and
$102.3 million, including $2.7 million originated for sale, in fiscal 2006 and
2005, respectively. The Bank did not purchase any mortgage loans in fiscal 2006
or fiscal 2005. The increase in the level of mortgage loan originations in
fiscal 2006 primarily reflects the continuing low interest rate environment that
existed during fiscal 2006. The origination of adjustable rate mortgages (ARM's)
decreased to $53.8 million in fiscal 2006 from $62.2 million in fiscal 2005. The
decrease reflected the increased popularity of fixed rate loans with customers
as mortgage rates were low. 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 $49,000 were
realized on these sales in fiscal 2006. Principal repayments on outstanding
mortgage loans decreased to $40.9 million in fiscal 2006 as compared to $51.2
million in fiscal 2005, reflecting less customer refinancing. The combination of
the above factors resulted in an overall increase in mortgage loans receivable
to $323.9 million at September 30, 2006 from $260.3 million at September 30,
2005.
Other loan originations, including installment loans, commercial business loans
and disbursements under lines of credit totaled $75.2 million in fiscal 2006
versus $56.4 million in fiscal 2005. During fiscal 2006, 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
$37.4 million in fiscal 2006 compared to $25.7 million in fiscal 2005.
Commercial business loan originations and business line of credit disbursements
were $37.8 million in fiscal 2006 compared to $30.7 million in fiscal 2005.
Principal
--------------------------------------------------------------------------------
Annual Report 2006 o Fidelity Bancorp, Inc. and Subsidiary 49
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
repayments on other loans were $55.3 million in fiscal 2006 compared to $52.7
million in 2005. The net result of the above factors caused the balance of
installment loans to increase to $93.3 million at September 30, 2006, as
compared to $79.8 million at September 30, 2005. Commercial business loans and
leases were $38.2 million at September 30, 2006 versus $32.0 million at
September 30, 2005.
Non-Performing Assets
The following table sets forth information regarding non-accrual loans and
foreclosed real estate at the dates indicated. The table does not include
$255,000, $53,000 and $481,000 in loans at September 30, 2006, 2005 and 2004,
respectively, that were more than 90 days past maturity but were otherwise
performing in accordance with their terms. The Bank did not have any loans which
were classified as troubled debt restructurings at the dates presented.
September 30,
2006 2005 2004
--------------------------------------------------------------------------------------------------------
(Dollars in Thousands)
Non-accrual residential real estate loans
(one-to-four family) $ 403 $ 533 $ 777
Non-accrual construction, multi-family
residential and commercial real estate loans 344 179 269
Non-accrual installment loans 238 188 530
Non-accrual commercial business and lease loans 1,700 1,419 2,071
--------------------------------------------------------------------------------------------------------
Total non-performing loans $2,685 $2,319 $3,647
========================================================================================================
Total non-performing loans as a percent of net
loans receivable 0.61% 0.67% 1.26%
========================================================================================================
Total foreclosed real estate, net of related
reserves $ 215 $ 789 $1,517
========================================================================================================
Total non-performing loans and foreclosed real
estate as a percent of total assets 0.40% 0.46% 0.82%
========================================================================================================
At September 30, 2006, non-accrual loans consisted of seven 1-4 family
residential real estate loans totaling $403,000, one commercial real estate loan
totaling $344,000, eighteen installment loans totaling $238,000 and seven
commercial business loans totaling $1.70 million. The largest individual
non-accrual loan is a commercial business loan for $768,000.
Management has evaluated these loans and is satisfied that the allowance for
loan losses at September 30, 2006 is adequate. The allowance for loan losses was
$2.917 million at September 30, 2006, $2.596 million at September 30, 2005, and
$2.609 million at September 30, 2004. The balance at September 30, 2006, at .66%
of net loans receivable and 108.6% of non-performing loans, is considered
reasonable by management.
Foreclosed real estate at September 30, 2006 consists of seven single-family
houses, and two commercial real estate properties, all of which are located in
the Bank's market area. Management believes that the carrying value of the
properties at September 30, 2006 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.
--------------------------------------------------------------------------------
50 Annual Report 2006 o Fidelity Bancorp, Inc. and Subsidiary
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
Securities Available for Sale
Securities available for sale decreased $16.7 million to $165.4 million at
September 30, 2006 from $182.2 million at September 30, 2005. 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 2006, the Bank purchased $19.7 million of these
securities and sold $16.8 million. Sales of these securities in fiscal 2006
resulted in a net pretax gain of $600,000. 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 2006.
Securities Held to Maturity
Securities held to maturity decreased $19.4 million or 18.5% to $85.9 million at
September 30, 2006, compared to $105.3 million at September 30, 2005. 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 2006, the Bank did not
purchase any of these securities but sold $3.6 million. Sales of these
securities in fiscal 2006 resulted in a net pretax loss of $48,000. The
held-to-maturity sales qualified as maturities for purposes of FAS 115. There
were no sales of held-to-maturity investment securities during fiscal 2005.
Deposits
Deposits increased $47.4 million during fiscal 2006 to $414.2 million at
September 30, 2006 compared to $366.8 million at September 30, 2005. The
increase in deposits in primarily attributed to an increase in money market
accounts and time deposits, partially offset by decreases in passbook accounts
and checking accounts.
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. Furthermore, competition for time deposits from other banks and thrifts
in the Bank's market area is intense. In addition, the Bank faces competition
for these deposits from alternative sources such as the stock market and mutual
funds.
Short-Term Borrowings
Short-term borrowings include Federal Home Loan Bank "RepoPlus" advances, a
Federal Home Loan Bank revolving line of credit, federal funds purchased, and to
a much lesser extent, treasury, tax and loan notes. These borrowings decreased
$32.5 million to $78.6 million at September 30, 2006, from $111.1 million at
September 30, 2005. The decrease was a result of the Bank converting some of
these fundings to structured repurchase agreements with adjustable-rate
features, as well as the increase in the Bank's deposits. The Bank continues to
utilize short-term borrowings as both a short-term funding source and as an
effective means to structure borrowings to complement asset/liability management
goals.
--------------------------------------------------------------------------------
Annual Report 2006 o Fidelity Bancorp, Inc. and Subsidiary 51
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
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 both September 30, 2006 and September 30, 2005.
Long-Term Debt
Long-term debt represents FHLB advances, including fixed-rate advances and
"Convertible Select" advances. Long-term debt decreased $41.7 million or 30.7%
to $94.3 million at September 30, 2006, from $136.0 million at September 30,
2005. As noted above, structured repurchase agreements were utilized to replace
short-term borrowings and long-term debt consistent with asset/liability
management strategies.
Securities Sold Under Agreements To Repurchase
Securities sold under agreements to repurchase represents retail and structured
borrowings. Securities sold under agreement to repurchase increased $77.0
million or 1153.2% to $83.6 million at September 30, 2006, from $6.7 million at
September 30, 2005. As noted above, structured repurchase agreements were
utilized to replace short-term borrowings and long-term debt consistent with
asset/liability management strategies.
Stockholders' Equity
Stockholders' equity increased $2.1 million or 5.1% to $44.2 million at
September 30, 2006 compared to September 30, 2005. This result reflects net
income of $4.18 million, stock options exercised of $264,000, and a related tax
benefit of $43,000, stock issued under the Dividend Reinvestment Plan of
$151,000, and stock based compensation of $66,000. Offsetting these increases
was an increase in unrealized holding losses, net of unrealized holding gains,
on securities available for sale of $571,000, common stock cash dividends paid
of $1.6 million and the purchase of treasury stock at cost for $397,000.
Results of Operations
Comparison of Fiscal Years Ended September 30, 2006, 2005, and 2004
Net income was $4.18 million ($1.38 per diluted share) for the year ended
September 30, 2006 compared to $3.88 million ($1.27 per diluted share) for
fiscal 2005 and $4.32 million ($1.40 per diluted share) for fiscal 2004. Fiscal
2006 results include a $318,000 extraordinary gain which was recorded in the
fourth quarter. The gain was related to insurance proceeds received from the
destructive fire that devastated the Bank's Carnegie Branch location in October
2005. While the insurance proceeds were reinvested in the construction of the
new Carnegie Branch location, the proceeds, net of the book value of the
associated assets at the time of the fire, were recorded as a gain in accordance
with accounting literature. There were no extraordinary items recorded in fiscal
2005 and fiscal 2004. Income from continuing operations for the fiscal year
ended September 30, 2006 was $3.87 million ($1.28 per diluted share) compared to
$3.88 million ($1.27 per diluted share) for the fiscal year ended September 30,
2005 and $4.32 million ($1.40 per diluted share) for the fiscal year ended
September 30, 2004. Factors contributing to the decrease in net income from
continuing operations from fiscal 2005 include a decrease in net interest income
of $282,000 or 2.04% which offset an increase in other income of $45,000, or
1.19%, a decrease in the provision for income taxes of $160,000, or 16.00%, and
a decrease in other expenses of $67,000, or .55%.
--------------------------------------------------------------------------------
52 Annual Report 2006 o Fidelity Bancorp, Inc. and Subsidiary
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 2.03% on a tax-equivalent
basis in fiscal 2006 from 2.26% in fiscal 2005. The tax-equivalent spread was
2.31% in fiscal 2004. 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,
2006 2005 2004
--------------------------------------------------------------------------------------------------------------
Average yield on:
Mortgage loans 5.88 % 6.00 % 6.37 %
Mortgage-backed securities and
collateralized mortgage obligations 4.33 3.94 3.53
Installment loans 6.25 5.90 5.96
Commercial business loans and leases 8.54 6.29 5.83
Interest earning deposits with other institutions,
investment securities, and FHLB stock(1) 5.21 4.66 4.41
--------------------------------------------------------------------------------------------------------------
Total interest earning assets 5.62 5.17 5.06
--------------------------------------------------------------------------------------------------------------
Average rates paid on:
Deposits 2.76 2.12 2.09
Borrowed funds 4.81 4.08 3.84
--------------------------------------------------------------------------------------------------------------
Total interest bearing liabilities 3.59 2.91 2.75
--------------------------------------------------------------------------------------------------------------
Average interest rate spread 2.03 % 2.26 % 2.31 %
=============================================================================================================-
Net yield on interest earning assets 2.12 % 2.34 % 2.39 %
==============================================================================================================
(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 $5.6 million or 29.6% to $24.4 million in
fiscal 2006 as compared to fiscal 2005. The increase primarily reflects both an
increase in the average size of the loan portfolio and an increase in the
average yield earned on the loan portfolio. The average size of the loan
portfolio increased from an average balance of $314.2 million in fiscal 2005 to
$396.5 million in fiscal 2006. 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 2006.
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.
--------------------------------------------------------------------------------
Annual Report 2006 o Fidelity Bancorp, Inc. and Subsidiary 53
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
Interest Income on Mortgage-Backed Securities
Interest income on mortgage-backed securities decreased by $333,000 or 6.2% to
$5.1 million in fiscal 2006 from $5.4 million in fiscal 2005. The decrease
reflects a decrease in the average balance of mortgage-backed securities held,
partially offset by an increase in the yield earned on these securities in
fiscal 2006. The average balance of mortgage-backed securities held, including
mortgage-backed securities available for sale, decreased from $136.8 million in
fiscal 2005 to $116.8 million in fiscal 2006. 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 increased $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.
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
$7.9 million in fiscal 2006, compared to $7.4 million in fiscal 2005. The fiscal
2006 results reflect a decrease in the average balance of such investments to
$167.9 million in fiscal 2006 as compared to $177.6 million in fiscal 2005,
partially offset by an increase in the average tax-equivalent yield earned in
fiscal 2006 as compared to fiscal 2005.
Interest income on investments was $7.4 million in fiscal 2005 compared to $7.5
million in fiscal 2004. 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 Expense on Deposits
Interest on deposits increased $3.2 million or 41.3% to $10.9 million in fiscal
2006 from $7.7 million in fiscal 2005. The increase reflects both an increase in
the average balance of deposits, as well as an increase in the average rate paid
on deposits in fiscal 2006, as compared to fiscal 2005.
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.
--------------------------------------------------------------------------------
54 Annual Report 2006 o Fidelity Bancorp, Inc. and Subsidiary
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
Interest Expense on Short-Term Borrowings
Interest expense on short-term borrowings (including FHLB "RepoPlus" advances,
FHLB revolving line of credit, federal funds purchased, and treasury, tax and
loan notes) increased $2.2 million or 87.8% to $4.7 million in fiscal 2006
compared to fiscal 2005. The increase reflects both a higher level of average
short-term borrowing in fiscal 2006 and an increase in the cost of these funds.
The Bank continues to use short-term borrowings as cost effective sources of
funding in fiscal 2006.
Interest expense on short-term borrowings increased $1.8 million or 242.5% to
$2.5 million in fiscal 2005 compared to $732,000 in 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.
Interest Expense on Securities Sold Under Agreement to Repurchase
Interest expense on securities sold under agreement to repurchase (including
retail and structured borrowings) increased $1.2 million or 932.1% to $1.4
million in fiscal 2006 compared to fiscal 2005. The increase reflects both a
higher level of average securities sold under agreement to repurchase in fiscal
2006 and an increase in the cost of these funds.
Interest expense on securities sold under agreement to repurchase increased
$74,000 or 129.8% to $131,000 in fiscal 2005 compared to $57,000 in fiscal 2004.
The increase reflects both a higher level of average securities sold under
agreement to repurchase in fiscal 2005 and an increase in the cost of these
funds.
Interest Expense on Long-Term Debt
Interest expense on long-term debt (including FHLB fixed rate advances, and
"Convertible Select" advances ) decreased $818,000 or 12.0% to $6.0 million in
fiscal 2006, compared to $6.8 million in fiscal 2005. The decrease reflects a
decrease in the average balance of long-term debt, partially offset by an
increase in the cost of these borrowings.
Interest expense on long-term debt decreased $265,000 or 3.7% to $6.8 million in
fiscal 2005 compared to 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.
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.
--------------------------------------------------------------------------------
Annual Report 2006 o Fidelity Bancorp, Inc. and Subsidiary 55
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
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 for the fiscal years ended September
30, 2006 and 2005. The provision for loan losses was $275,000 for the fiscal
year ended September 30, 2004. The provisions reflect management's evaluation of
the loan portfolio, current economic conditions, and other factors as described
below. The allowance increased from $2.60 million at September 30, 2005 to $2.92
million at September 30, 2006. Loan charge-offs, net of recoveries, were
$279,000 in fiscal 2006 compared to $613,000 in fiscal 2005 and $757,000 in
fiscal 2004. The balance of non-performing loans has increased at September 30,
2006 compared to September 30, 2005.
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 $45,000 or 1.2% to
$3.83 million in fiscal 2006 compared to $3.79 million in fiscal 2005. Other
income increased by $21,000 or .6% to $3.79 million in fiscal 2005 as compared
to $3.78 million in fiscal 2004.
Included in non-interest income is service fee income on loans and late charges
of $294,000, which decreased by $69,000 in fiscal 2006. These fees were
relatively unchanged in fiscal 2005 over the prior year. Fiscal 2006 results
include decreases in late charges on loans and title insurance fees.
The Company recorded net gains on sales of securities of $552,000, $566,000 and
$639,000 in fiscal 2006, 2005 and 2004, respectively. The Company recorded net
gains on available-for-sale securities of $600,000 and net losses on held-to
maturity securities of $48,000 during fiscal 2006. Sales during fiscal years
2005 and 2004 were made from the available-for sale category only. The sales
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 in fiscal year 2005. There were no similar write-downs in fiscal
years 2006 or 2004.
Gain on sale of loans was $49,000, $36,000, and $47,000 in fiscal years 2006,
2005 and 2004, 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 $1.37 million, $1.40 million, and
$1.39 million, in fiscal 2006, 2005
--------------------------------------------------------------------------------
56 Annual Report 2006 o Fidelity Bancorp, Inc. and Subsidiary
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
and 2004, respectively. Fiscal 2006 results include a decrease in service charge
fees on savings and checking accounts, partially offset by an increase in fees
related to returned checks. The increase in fiscal 2005 is primarily attributed
to a slight increase in service charge fees on savings and checking accounts and
fees related to returned checks.
Automated teller machine (ATM) fees were $586,000, $548,000, and $491,000 in
fiscal years 2006, 2005, and 2004, respectively. The increase in fiscal 2006 and
2005 is primarily attributed to an increase in the interchange fees earned on
debit card transactions.
Non-insured investment product income was $414,000, $376,000, and $309,000 in
fiscal years 2006, 2005, and 2004, respectively. The increase in fiscal 2006 and
2005 is primarily attributed to an increase in the commissions earned on the
sales of these products.
Other operating income includes miscellaneous sources of income, which consist
primarily of earnings on bank-owned life insurance, fees from the sale of
cashiers checks and money orders, and safe deposit box rental income. Such
income amounted to $565,000, $498,000, and $531,000 in fiscal 2006, 2005, and
2004, respectively. Fiscal 2006 results were attributed to increases in the
profit on sale of fixed assets. Also, fiscal 2006 results included recoveries
relating to a customer check kiting fraud loss discovered in March 2005
attributable to one business customer. The decrease in fiscal 2005 primarily
reflects decreases in the profit on sale of fixed assets.
Other Expenses
Other expenses decreased $67,000 or .6% to $12.1 million in fiscal 2006 and
increased $678,000 or 5.9% to $12.2 million in fiscal 2005, from $11.5 million
in fiscal 2004. The lower level of other expenses in fiscal 2006 compared to
fiscal 2005 is primarily attributable to the fiscal 2005 loss of $430,000 due to
customer fraud.
Compensation, payroll taxes and fringe benefits, the largest component of
operating expenses, increased $408,000 or 5.5% to $7.8 million in fiscal 2006,
and increased $324,000 or 4.6% to $7.4 million in fiscal 2005 over the
respective prior years. Factors contributing to the increase in fiscal 2006 were
normal salary increases, increases in the cost of health insurance, increased
director fees, increased payroll taxes, and increased training expenses,
partially offset by decreases in personnel expense and officer's expense.
Factors contributing to the increase in fiscal 2005 were normal salary increases
for employees, increases in the cost of health insurance, increased retirement
costs, increased payroll taxes, and increased training expenses.
Office occupancy and equipment expense increased $72,000 or 6.7% to $1.15
million in fiscal 2006 and increased $52,000 or 5.1% to $1.08 million in fiscal
2005 over the respective prior years. The increase in fiscal 2006 reflects
increases in furniture, fixtures and equipment expense, utility expense, rent
expense and real estate taxes paid on office buildings, partially offset by a
decrease in office repairs and maintenance expense. The increase in 2006 is also
due to the opening of the new Carnegie branch. The increase in fiscal 2005
primarily reflects an increase in office repairs and maintenance expense and
furniture, fixtures and equipment expense.
Depreciation and amortization decreased $65,000 or 9.0% to $661,000 in fiscal
2006 and decreased $32,000 or 4.2% to $726,000 in fiscal 2005 over the
respective prior years. The decrease in depreciation in fiscal 2006 reflects
equipment becoming fully depreciated, partially offset by depreciation on
additions in fiscal 2006. The result in fiscal 2005 reflects equipment becoming
fully depreciated, partially offset by depreciation on additions in fiscal 2005.
--------------------------------------------------------------------------------
Annual Report 2006 o Fidelity Bancorp, Inc. and Subsidiary 57
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
The Bank recorded net losses on the sales of and writedowns of foreclosed real
estate of $58,000 in fiscal year 2006 and recorded net gains of $103,000 and
$78,000 in fiscal years 2005 and 2004, respectively. The results reflect the
costs associated with the holding and disposition of properties during the
periods. At September 30, 2006, the Bank had seven single-family residential
properties, six of which were owned by the same borrower as investment
properties, and two commercial real estate property classified as foreclosed
real estate.
Intangible amortization was $40,000, $46,000, and $52,000 in fiscal years 2006,
2005 and 2004, respectively. The results reflect the amortization of the
intangibles generated by the acquisitions 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 $360,000, $340,000, and $350,000 in fiscal years 2006,
2005, and 2004, 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 $267,000, $244,000, and $344,000 in fiscal years 2006,
2005, and 2004, respectively. Professional fees include legal fees, audit fees,
and supervisory examination and assessment fees. The increase in fiscal 2006 is
primarily attributed to an increase in legal fees, partially offset by a
decrease in audit fees. The decrease in fiscal 2005 includes a decrease in legal
fees.
Included in fiscal 2005 results is a pre-tax charge of $430,000 related to a
customer check kiting fraud loss 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 that time; however, as of
September 30, 2006 approximately $27,000 has been recovered and included in
other income.
Other operating expenses, which consist primarily of check processing costs,
bank service charges, and other administrative expenses, amounted to $1.55
million in fiscal 2006, $1.71 million in fiscal 2005, and $1.72 million in
fiscal 2004. Significant variations in fiscal 2006, compared to fiscal 2005,
include decreases in consulting fees, and losses sustained from ATM disputes,
partially offset by increases in checking account charge-offs and losses
sustained from branch robberies. 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.
The FDIC has adopted a new risk-based deposit insurance assessment system that
will require all FDIC-insured institutions to pay quarterly premiums beginning
in 2007. Annual premiums will range from 5 and 7 basis points for
well-capitalized banks with the highest examination ratings to up to 43 basis
points for undercapitalized institutions. The Bank will be able to offset the
premium with an estimated assessment credit of $420,000 for premiums paid prior
to 1996.
--------------------------------------------------------------------------------
58 Annual Report 2006 o Fidelity Bancorp, Inc. and Subsidiary
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
Income Taxes
The Company generated taxable income and, as a consequence, recorded tax
provisions of $840,000, $1.00 million, and $1.02 million for fiscal 2006, 2005
and 2004, 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 17.8%, 20.5%, and 19.0% for fiscal 2006, 2005 and 2004, respectively.
The difference between the Company's effective tax rate and the statutory rate
is primarily attributable to the Bank's tax-exempt income. Tax-exempt income
includes income earned on certain municipal investments that qualify for state
and/or federal income tax exemption; income earned by the Bank's Delaware
subsidiary which is not subject to state income tax, and earnings on Bank-owned
life insurance policies which are exempt from federal taxation. State and
federal tax-exempt income for fiscal 2006 was $8.0 million and $1.8 million,
respectively, compared to $8.4 million and $1.7 million, respectively, for
fiscal 2005, and $8.4 million and $2.0 million, respectively, for fiscal 2004.
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.
--------------------------------------------------------------------------------
Annual Report 2006 o Fidelity Bancorp, Inc. and Subsidiary 59
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
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.
--------------------------------------------------------------------------------
60 Annual Report 2006 o Fidelity Bancorp, Inc. and Subsidiary
--------------------------------------------------------------------------------
CAPITAL STOCK INFORMATION
--------------------------------------------------------------------------------
STOCK INFORMATION
The following table sets forth for each quarter of fiscal 2006 and 2005 the high
and low prices as reported on the NASDAQ Global Market System and the dividends
declared per common share. Amounts shown have been adjusted to reflect the 10%
stock dividend paid in May 2005.
Stock Price Dividends
--------------------------------------------------------------------------------
Quarter Ended: High Low Cash Stock
--------------------------------------------------------------------------------
September 30, 2006 $19.95 $17.13 $.14 --
June 30, 2006 20.02 17.74 .14 --
March 31, 2006 20.17 18.37 .13 --
December 31, 2005 20.90 18.04 .13 --
--------------------------------------------------------------------------------
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 --
--------------------------------------------------------------------------------
As of September 30, 2006, Fidelity Bancorp, Inc. had 2,960,496 shares of stock
outstanding and approximately 1,000 stockholders, including beneficial owners
whose stock is held in nominee name.
COMMON STOCK MARKET MAKERS
NASDAQ Global Market:
Common Stock
Symbol FSBI
Market Makers
Xxxxxx/Xxxxxx, Inc.
000 Xxxxx Xxxxxx, 00xx Xxxxx
Xxxxxxxxxx, Xxxxxxxxxxxx 00000 -- (000)000-0000
Xxxx, Xxxx & Co.
00 Xxxxxxxx Xxxxxxxx
Xxxxxxx, Xxx Xxxxxx 00000 -- (000) 000-0000
Xxxxxxx X'Xxxxx & Partners, LP
000 Xxxxx Xxxxxx, 0xx Xxxxx
Xxx Xxxx, Xxx Xxxx 00000 -- (000)000-0000
--------------------------------------------------------------------------------
Annual Report 2006 - Fidelity Bancorp, Inc. and Subsidiary 61
--------------------------------------------------------------------------------
CORPORATE INFORMATION
--------------------------------------------------------------------------------
ANNUAL MEETING -- The annual meeting of the stockholders will be held at 5:00
p.m., on February 13, 2007 at the Perrysville Office of the Bank at 0000 Xxxxx
Xxxxxxx, Xxxxxxxxxx, Xxxxxxxxxxxx. 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:
xxx.xxxxxxxxxxxxxxx.xx.xxx.
INVESTOR RELATIONS -- Analysts, investors, stockholders and others seeking
financial information are asked to contact Xxxxx X. XxXxxxx, 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.
--------------------------------------------------------------------------------
INVESTOR RELATIONS DIVIDEND REINVESTMENT FINANCIAL INFORMATION
Xxxxx X. XxXxxxx PLAN INFORMATION Xxxx X. Xxxxxxxx, CPA
Fidelity Bancorp, Inc. Investor Relations Chief Financial Officer
1009 Perry Highway Fidelity Bancorp, Inc. Fidelity Bancorp, Inc.
Pittsburgh, Pennsylvania 00000 0000 Xxxxx Xxxxxxx 0000 Xxxxx Xxxxxxx
(000) 000-0000, x3139 Pittsburgh, Pennsylvania 00000 Xxxxxxxxxx, Xxxxxxxxxxxx 00000
(000) 000-0000, x3139 (000) 000-0000, x3180
TRANSFER AGENT
Registrar and Transfer Company ANNUAL REPORT ON FORM 10-K
00 Xxxxxxxx Xxxxx Xxxxxxxx Xxxxxxxxx
Xxxxxxxx, Xxx Xxxxxx 00000 Fidelity Bancorp, Inc.
(800) 866-0000 0000 Xxxxx Xxxxxxx
Xxxxxxxxxx, Xxxxxxxxxxxx 00000
(000) 000-0000, x 3139
or
xxx.xxxxxxxxxxxxxxx-xx.xxx
--------------------------------------------------------------------------------
62 Annual Report 2006 - Fidelity Bancorp, Inc. and Subsidiary
--------------------------------------------------------------------------------
FIDELITY BANCORP, INC.
--------------------------------------------------------------------------------
Corporate Headquarters
0000 Xxxxx Xxxxxxx, Xxxxxxxxxx, Xxxxxxxxxxxx 00000 - (000) 000-0000
FAX (000) 000-0000 - E-Mail: XX@xxxxxxxxxxxxxxx-xx.xxx
BOARD OF DIRECTORS
------------------
J. XXXXXX XXXXX XXXXXX X. XXXXX XXXXXX X. XXXXXX XXXXXXX X. XXXXXXX, CPA
President President Owner President
X.X. Xxxxx & Associates Allegheny Plywood Xxxxx X. Xxxx, P.C. Chief Executive Officer
Partner
XXXXXXXXXXX X. XXXXX APCO Management XXXXXXX X. XXXXXXXX XXXXXX XXXX XXXXXX
Managing Partner Retired President Attorney
Green & Bridges, LLP XXXXXX X. XXXXXXXX Xxxxxx & Xxxxxxxx, Inc. Xxxxxx & Xxxxxx, P.C.
Registered Representative Retired President Retirement Designs
Select Financial Group, LLC X-Mark/CDT Unlimited, Inc. XXXXXXX X. XXXXXXXX
Chairman
OFFICERS
------------------
XXXXXXX X. XXXXXXX, CPA XXXX X. XXXXXXXX, CPA XXXXX X. XxXXXXX
President Senior Vice President Corporate Secretary
Chief Executive Officer Chief Financial Officer
Treasurer XXXXXXX X. XXXXXX
XXXXXXX X. XXXXXX Assistant Secretary
Executive Vice President
SPECIAL COUNSEL
------------------
XXXXXXX SPIDI & XXXXX, PC
000 Xxx Xxxx Xxxxxx, Xxxxx 000 Xxxx
Xxxxxxxxxx, XX 00000
INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
----------------------
XXXXX XXXXXX COMPANY LLP
0000 Xxxxxxx Xxx Xxxx, 0xx Floor
P.O. Box 101086
Pittsburgh, Pennsylvania 15237
--------------------------------------------------------------------------------
Annual Report 2006 - Fidelity Bancorp, Inc. and Subsidiary 63
--------------------------------------------------------------------------------
FIDELITY BANK
--------------------------------------------------------------------------------
BANK HEADQUARTERS
0000 Xxxxx Xxxxxxx, Xxxxxxxxxx, Xxxxxxxxxxxx 00000 - (000) 000-0000
FAX (000) 000-0000 - E-Mail:XX@xxxxxxxxxxxx-xx.xxx
BOARD OF DIRECTORS
------------------
J. XXXXXX XXXXX XXXXXX X. XXXXX XXXXXX X. XXXXXX XXXXXXX X. XXXXXXX, CPA
President President Owner President
X.X. Xxxxx & Associates Allegheny Plywood Xxxxx X. Xxxx, P.C. Chief Executive Officer
Partner
XXXXXXXXXXX X. XXXXX APCO Management XXXXXXX X. XXXXXXXX XXXXXX XXXX XXXXXX
Managing Partner President Attorney
Green & Bridges, LLP XXXXXX X. XXXXXXXX Xxxxxx & Xxxxxxxx, Inc. Xxxxxx & Xxxxxx, P.C.
Registered Representative Retired President Retirement Designs
Select Financial Group, LLC X-Mark/CDT Unlimited, Inc. XXXXXXX X. XXXXXXXX
Chairman
OFFICERS
------------------
XXXXXXX X. XXXXXXX, CPA XXXXXXX X. XXXXXXX XXXXXX X. XXXXXX
President Vice President Assistant Vice President
Chief Executive Officer Financial Advisor Business Development Officer
XXXXXXX X. XXXXXX XXXX X. XXXXXXXX XXXXXXXXX X. XXXXXXX
Executive Vice President Vice President Assistant Vice President
Chief Lending Officer Consumer Lending Operations
XXXXX X. XXXXXXX XXXXX X. XXXXXX XXXX X. XXXXXXX
Corporate Secretary Vice President Assistant Vice President
Marketing Business Development Officer
XXXXXXX X. XXXXXX
Senior Vice President XXXX X. XxXXXXX XXXX X. XXXXXX
Human Resources Vice President Assistant Vice President
Assistant Secretary Commercial Loan Officer Commercial Lending
XXXX X. XXXXXXXX, CPA XXXXX X. XXXXXXXXX XXXXXXX X. XXXXX
Senior Vice President Vice President Assistant Vice President
Chief Financial Officer Internal Audit/Compliance Business Development Officer
Treasurer
XXXXX X. XXXXXXXX XXXXX X. TILL
XXXXXX X. XXX Vice President Assistant Vice President
Senior Vice President Chartered Financial Consultant Branch Manager
Operations
XXXXXX X. XXXXXX XXXXXXX X. XXXXXXX
XXXXXXX X. XXXXX Vice President Assistant Vice President
Senior Vice President Commercial Lending Data Processing
Community Banking
XXXXXX X. XXXXXX XXXXXX XXXXX XXXX
XXXXX X. XXXXXXXXXX Assistant Vice President Assistant Vice President
Vice President Business Development Officer Business Development Officer
Financial Consultant/
Registered Principal XXXX X. XXXXXXX, CPA XXXXX X. XXX
Assistant Vice President Assistant Vice President
XXXXXXX X. XXXXXX Accounting Business Development Officer
Vice President
Residential Lending XXXX X. XXXXXXX
Assistant Vice President
Business Development Officer
--------------------------------------------------------------------------------
64 Annual Report 2006 - Fidelity Bancorp, Inc. and Subsidiary
