The Private Securities Litigation Reform Act of 1995 contains safe harbor provisions regarding forward-looking statements. When used in this discussion, the words "believes," "anticipates," "contemplates," "expects," and similar expressions are intended to identify forward-looking statements. Such statements are subject to certain risks and uncertainties which could cause actual results to differ materially from those projected. Those risks and uncertainties include changes in interest rates, risks associated with the effect of integrating newly acquired businesses, the ability to control costs and expenses, and general economic conditions. The Company does not undertake to, and specifically disclaims any obligation to, update any such forward-looking statements.

Fidelity Bancorp, Inc.'s ("Fidelity" or the "Company") business is conducted principally through its wholly-owned subsidiary, Fidelity Bank PaSB, (the "Bank"). All references to the Company refer collectively to the Company and the Bank, unless the context indicates otherwise.

Critical Accounting Policies

Note 1 on pages 53 through 61 of the Company's 2008 Annual Report to
Shareholders lists significant accounting policies used in the development and presentation of its financial statements. This discussion and analysis, the significant accounting policies, and other financial statement disclosures identify and address key variables and other qualitative and quantitative factors that are necessary for an understanding and evaluation of the Company and its results of operations.

The most significant estimates in the preparation of the Company's financial statements are for the allowance for loan losses, evaluation of investments for other-than-temporary impairment, and accounting for stock options. Please refer to the discussion of the allowance for loan losses in Note 7, "Allowance for Loan Losses", on pages 14 and 15 above. In addition, further discussion of the estimates used in determining the allowance for loan losses is contained in the discussion on "Provision for Loan Losses" on pages 40 and 41 of the Company's 2008 Annual Report to Shareholders.

At least quarterly, management reviews all securities where the market value is less than the amortized cost. 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. There are numerous factors considered in evaluating whether a decline in market value is other than temporary. The primary factors include (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. Additional factors considered in the assessment include the implied and historical volatility of the security; whether the market decline was affected by macroeconomic conditions or by specific information pertaining to an individual security; downgrades by rating agencies; changes in tax laws, regulation, or other governmental policies significantly affecting the issuer; changes in key financial indicators of the issuer (e.g. significant losses in the current year and prior years, loan covenant violations, changes in asset quality, liquidity, change in key management personnel); changes in the dividend policy of the issuer; and forecasts of economic and market or industry trends. If the security is deemed other than temporarily impaired it is written down to the current fair value and a corresponding charge to earnings is recognized. The Company recognized other-than-temporary impairment losses on available-for-sale securities of $75,000 and $322,000 for the three months ended December 31, 2008 and 2007, respectively. The impairment charges for the current period relate to the Company's holdings of Freddie Mac preferred stock, whereas the impairment charges for the prior year period primarily relate to the Company's holdings of the AMF Ultra Short Mortgage Fund.

In light of recent price volatility, management is closely monitoring its investments in trust preferred securities, which account for $9.3 million in unrealized losses as of December 31, 2008. At December 31, 2008, these securities represent investments in 23 different trust preferred offerings with an aggregate fair value of $15.9 million, of which $13.1 million had floating rates based on LIBOR at December 31, 2008. In addition to the factors mentioned above for determining whether the decline in market value is other than temporary, the analysis of each of these securities includes a review of its current credit rating as compared to its credit rating at purchase; its current collateral coverage test results; the number of issuers in each pooled trust preferred security; the number of issuers in default; the amount of principal in default; and the percent of principal in default. At December 31, 2008, all trust preferred securities were current with respect to principal and interest payments; however, there was one security for which a payment in kind was received in lieu of cash. Six of the trust preferred securities have a below investment grade rating at December 31, 2008. Due to dislocations in the credit markets broadly, and the lack of trading and new issuance in pooled trust preferred securities, market price indications generally reflect the lack of liquidity in the market rather than credit concerns. Prices on trust preferred securities were calculated by a third party. The third party obtained data about the deal structure and the underlying collateral. The collateral was analyzed in terms of its "quality" - or its ability to generate cash - based on its potential for eventually defaulting. The cash generated by the collateral was allocated across the deal's capital structure or priority-of-claims "waterfall" to see which investors get paid - and which suffer losses.

The cash flows to each tranche were discounted to December 31, 2008 to determine an intrinsic value. Based on the third party analysis and the current investment ratings of the securities, and because the Bank has the ability and intent to hold the investments until a recovery of fair value, which may be maturity, the Bank does not consider these assets to be other-than-temporarily impaired at December 31, 2008. However, continued price declines could result in a writedown of one or more of the trust preferred investments. Furthermore, management is also closely monitoring its investments in equity securities, which account for $1.8 million in unrealized losses as of December 31, 2008. At December 31, 2008, these securities represent investments in common equity offerings of seven financial institutions with an aggregate fair value of $2.7 million, one investment in preferred stock of an insurance company with a fair value of $598,000, and investments in three different mutual fund offerings with an aggregate fair value of $10.5 million. In addition to the general factors mentioned above for determining whether the decline in market value is other than temporary, the analysis of each of these securities includes a review of the profitability of each issuer and it's capital adequacy, and all data available to determine the credit quality of each issuer. Based on the Bank's detailed analysis, and because the Bank has the ability and intent to hold the investments until a recovery of fair value, which may be maturity, the Bank does not consider these assets to be other-than-temporarily impaired at December 31, 2008. However, continued price declines could result in a writedown of one or more of these equity investments.

Stock based compensation expense is reported in net income utilizing the fair-value-based method set forth in FAS No. 123R. The fair value of each option award is estimated at the date of grant using the Black-Scholes option-pricing model. Please refer to the discussion of stock based compensation in Note 4, "Stock Based Compensation", on pages 11 and 12 above. In addition, further discussion of the assumptions used in determining stock based compensation is contained in Note 13, "Stock Option Plans", on pages 78 through 80 of the Company's 2008 Annual Report to Shareholders.

Comparison of Financial Condition

Total assets of the Company increased $14.1 million, or 1.9%, to $741.3 million at December 31, 2008 from $727.2 million at September 30, 2008. Significant changes in individual categories include increases in securities held-to-maturity of $3.8 million, net loans of $12.3 million, and Federal Home Loan Bank stock of $2.1 million, partially offset by a decrease in cash and cash equivalents of $3.1 million and a decrease in securities available-for-sale of $3.2 million. The increase in net loans primarily relates to a $10.8 million increase in commercial real estate loans.

Total liabilities of the Company increased $9.5 million, or 1.4%, to $694.6 million at December 31, 2008 from $685.1 million at September 30, 2008. Significant changes include an increase in short-term debt of $12.5 million and an increase in advance payments by borrowers for taxes and insurance of $1.5 million, partially offset by a decrease in deposits of $5.2 million. The short-term debt increase was primarily attributed to the decrease in deposits.

Stockholders' equity increased to $46.7 million at December 31, 2008, compared to $42.2 million at September 30, 2008. This result reflects net income for the three month period ended December 31, 2008 of $1.7 million, stock options exercised of $1,000, stock issued under the Dividend Reinvestment Plan of $26,000, stock-based compensation of $29,000, common stock warrants issued of $302,000, and the issuance of Fixed Rate Cumulative Perpetual Preferred Stock, Series B (the "Series B Preferred Stock") of $6.6 million. On December 12, 2008, the Company sold $7 million in preferred stock to the U.S. Department of Treasury as a participant in the federal government's TARP Capital Purchase Program. In connection with the investment, the Company also issued a warrant to the Treasury which permits the Treasury to purchase up to 121,387 shares of its common stock at an exercise price of $8.65 per share. The Series B Preferred Stock will pay dividends at the rate 5% per annum until the fifth anniversary of issuance and, unless earlier redeemed, at the rate of 9% thereafter. Until the third anniversary of the issuance of the Series B Preferred Stock or its earlier redemption or transfer by the Treasury Department to an unaffiliated holder, the Company may not increase the dividend on the common stock or repurchase any shares of common stock. Offsetting these increases were common stock cash dividends paid of $424,000 and an increase in the accumulated other comprehensive loss of $3.2 million, as a result of changes in the net unrealized losses on the available-for-sale securities and by the unrealized loss recognized on the cash flow hedge as discussed in Note 8, "Derivative Instrument", on pages 15 and 16 above. Approximately $3.4 million of the balances in retained earnings as of December 31, 2008 and September 30, 2008 represent base year bad debt deductions for tax purposes only, as they are considered restricted accumulated earnings.

Non-Performing Assets

The following table sets forth information regarding non-accrual loans and foreclosed real estate held by the Company at the dates indicated. The table does not include $476,000 and $653,000 in loans at December 31, 2008 and September 30, 2008, respectively, that were more than 90 days past maturity but were otherwise performing in accordance with their terms. The Company did not have any loans which were classified as troubled debt restructurings at the dates presented (dollar amounts in thousands).

                                                        December 31,          September 30,
                                                            2008                  2008
Non-accrual residential real estate loans
(one-to-four family)                                    $       1,840        $           701
Non-accrual construction, multi-family residential
and commercial real estate loans                                4,776                  2,993
Non-accrual installment loans                                     730                    676
Non-accrual commercial business loans                           1,696                  1,357

Total non-performing loans                              $       9,042        $         5,727

Total non-performing loans as a percent of net
loans receivable                                                 1.91 %                 1.24 %

Total foreclosed real estate                            $         157        $           170

Total non-performing loans and foreclosed real
estate as a percent of total assets                              1.24 %                 0.81 %

Included in non-performing loans at December 31, 2008 are fourteen single-family residential real estate loans totaling $1.8 million, six commercial real estate loans totaling $4.8 million, twenty-five home equity and installment loans totaling $730,000, and thirteen commercial business loans totaling $1.7 million. Non-performing loans increased $3.3 million to $9.0 million at December 31, 2008 from $5.7 million at September 30, 2008 primarily because of four residential real estate loans with an aggregate balance of $1.2 million, four commercial real estate loans with an aggregate balance of $1.8 million, and two commercial business loans with an aggregate balance of $175,000 that were placed on non-accrual during the quarter.

At December 31, 2008, the Company had an allowance for loan losses of $3.6 million or 0.75% of gross loans receivable, as compared to an allowance of $3.4 million or 0.74% of gross loans receivable at September 30, 2008. The allowance for loan losses equals 39.6% of non-performing loans at December 31, 2008 compared to 59.8% at September 30, 2008. Management believes the balance is adequate based on its analysis of quantitative and qualitative factors as of December 31, 2008. Management has evaluated its entire loan portfolio, including these non-performing loans, and the overall allowance for loan losses and is satisfied that the allowance for losses on loans at December 31, 2008 is reasonable. See also "Provision for Loan Losses" on pages 25 and 26. However, there can be no assurance that the allowance for loan losses is sufficient to cover possible future loan losses.

The Company recognizes that it must maintain an Allowance for Loan and Lease Losses ("ALLL") at a level that is adequate to absorb estimated credit losses associated with the loan and lease portfolio. The Company's Board of Directors has adopted an ALLL policy designed to provide management with a systematic methodology for determining and documenting the ALLL each reporting period. This methodology was developed to provide a consistent process and review procedure to ensure that the ALLL is in conformity with the Company's policies and procedures and other supervisory and regulatory guidelines.

The Company's ALLL methodology incorporates management's current judgments about the credit quality of the loan portfolio. The following factors are considered when analyzing the appropriateness of the allowance: historical loss experience; volume; type of lending conducted by the Bank; industry standards; the level and status of past due and non-performing loans; the general economic conditions in the Bank's lending area; and other factors affecting the collectibility of the loans in its portfolio. The primary elements of the Bank's methodology include portfolio segmentation and impairment measurement. Management acknowledges that this is a dynamic process and consists of factors, many of which are external and out of management's control, that can change often, rapidly and substantially. The adequacy of the ALLL is based upon estimates considering all the aforementioned factors as well as current and known circumstances and events. There is no assurance that actual portfolio losses will not be substantially different than those that were estimated.

Net Income

Net income for the three months ended December 31, 2008 and 2007 was $1.7 million ($0.53 per diluted share) and $861,000 ($0.28 per diluted share), respectively. Excluding the tax benefit in the amount of $491,000 ($0.15 per diluted share) recorded during the quarter ended December 31, 2008, net income would have been $1.2 million ($0.38 per diluted share). The increase in net income is attributable to an increase in net interest income of $873,000, or 23.0%, an increase in other income of $196,000, or 33.9%, and a decrease in the provision for income taxes of $278,000, partially offset by an increase in the provision for loan losses of $375,000 and an increase in operating expenses of $146,000, or 4.7%.

Interest Rate Spread

The Company's interest rate spread, the difference between average yields calculated on a tax-equivalent basis on interest-earning assets and the average cost of funds, increased to 2.52% (annualized) in the three months ended December 31, 2008 from 1.96% (annualized) in the same period in 2007 as a result of the average rate paid on interest-bearing liabilities decreasing more than the average yield on interest-earning assets. The following table shows the average yields earned on the Company'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.

                                                                   Three Months Ended
                                                                      December 31,
                                                                  2008            2007
Average yield on:
Mortgage loans                                                      5.98 %          6.09 %
Mortgage-backed securities                                          4.74            4.47
Installment loans                                                   6.19            6.56
Commercial business loans and leases                                5.50            7.31
Interest-earning deposits with other institutions,
investment securities, and FHLB stock (1)                           5.09            5.57

Total interest-earning assets                                       5.63            5.92

Average rates paid on:
Deposits                                                            2.48            3.45
Borrowed funds                                                      3.98            4.74

Total interest-bearing liabilities                                  3.11            3.96

Average interest rate spread                                        2.52 %          1.96 %

Net yield on interest-earning assets                                2.75 %          2.27 %

(1) Interest income on tax-exempt investments has been adjusted for federal income tax purposes using a rate of 34%. Interest income on tax-exempt investment securities was $432,000 and $410,000 and the yield was 4.55% and 4.44%, prior to adjusting for federal income tax at December 31, 2008 and 2007, respectively.

Interest Income

Interest on loans decreased $255,000 or 3.5% to $7.1 million for the three months ended December 31, 2008, compared to $7.3 million in the same period in 2007. The decrease reflects a decrease in the yield earned on the loan portfolio, partially offset by an increase in the average loan balance outstanding.

Interest on mortgage-backed securities increased $197,000 or 21.0% to $1.1 million for the three month period ended December 31, 2008, compared to $940,000 in the same period in 2007. The increase reflects an increase in the average balance of mortgage-backed securities owned as well as an increase in the average yield earned on the portfolio.

Interest on interest-bearing demand deposits with other institutions and investment securities (non-tax equivalent) decreased $359,000 or 18.6% to $1.6 million for the three months ended December 31, 2008, as compared to $1.9 million in the same period in 2007. The decrease reflects a decrease in the average balance of investment securities in the portfolio as well as a decrease in the yield earned on these investments.

Interest Expense

Interest on deposits decreased $1.0 million or 30.4% to $2.4 million for the three month period ended December 31, 2008, as compared to $3.4 million during the same period in 2007. The decrease reflects a decrease in the average balance of deposits as well as a decrease in the average cost of the deposits.

Interest on securities sold under agreement to repurchase, including retail, term, and wholesale structured borrowings, increased $134,000 or 11.6% to $1.3 million for the three month period ended December 31, 2008, as compared to $1.2 million in the same period in 2007. The increase reflects an increase in the cost of these funds, partially offset by a lower level of average securities sold under agreement to repurchase. The Bank had $95 million of wholesale structured borrowings outstanding at December 31, 2008 and 2007.

Interest on short-term borrowings, including Federal Home Loan Bank ("FHLB") "RepoPlus" advances, FHLB revolving line of credit, federal funds purchased, and treasury, tax and loan notes, decreased $376,000 or 82.8% to $78,000 for the three month period ended December 31, 2008, as compared to $454,000 in the same period in 2007. The decrease reflects a decrease in the average cost of these borrowings, partially offset by an increase in the average balance of these borrowings.

Interest on long-term debt, including FHLB fixed rate advances and "Convertible Select" advances, increased $12,000 or 0.9% for the three months ended December 31, 2008 as compared to the same period in 2007. The increase reflects an increase in the average balance of the debt, partially offset by a decrease in the average cost of the debt.

Interest on subordinated debt decreased $32,000 or 23.4% to $105,000 for the three months ended December 31, 2008, as compared to $137,000 in the same period in 2007. The decrease reflects a decrease in the average cost of these floating-rate debentures while the average balance remained unchanged. The decrease in interest expense on subordinated debt was partially offset by $25,000 in interest expense on an interest rate swap contract to hedge its interest rate exposure from the subordinated debt.

Net Interest Income

The Company's net interest income increased $873,000 or 23.0% to $4.7 million, for the three month period ended December 31, 2008, as compared to $3.8 million in the same period in 2007. The increase is attributable to an increase in net interest-earning assets as well as an increase in the interest rate spread. As of December 31, 2008 and 2007 the ratio of average interest-earning assets to average interest-bearing liabilities was 108.7% and 109.0%, respectively.

Provision for Loan Losses

The provision for loan losses was $555,000 for the three month period ended December 31, 2008, as compared to $180,000 for the same period in 2007. At December 31, 2008, the allowance for loan losses increased to $3.6 million from $3.4 million at September 30, 2008. Net loan charge-offs were $394,000 for the three months ended December 31, 2008 as compared to net loan charge-offs of $65,000 for the three months ended December 31, 2007. Charge-offs for the current fiscal period are primarily attributed to four commercial business loans totaling $187,000, one home equity loan totaling $146,000, and two residential real estate loans totaling $30,000.

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 factors such as historical experience, volume, type of lending conducted by the Bank, industry standards, the level and status of past due and non-performing loans, the general economic conditions in the Bank's lending area, and other factors affecting the collectibility of the loans in its portfolio.

The allowance for loan losses is maintained at a level that represents management's best estimates of losses in the loan portfolio at the balance sheet date. However, there can be no assurance that the allowance for loan 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

Total non-interest or other income increased $196,000 or 33.9% to $775,000 for the three month period ended December 31, 2008 as compared to the same period in 2007. Increases in other income primarily relate to an increase in loan service charges and fees, a decrease in impairment charges on investments, an increase in gains on sales of loans, and an increase in ATM fees, partially offset by an increase in losses on loan interest rate swaps, a decrease in deposit service charges and fees, and a decrease in non-insured investment product income.

Loan service charges and fees, which includes late charges on loans and other miscellaneous loan fees, increased $13,000 or 11.4% to $127,000 for the three month period ended December 31, 2008, respectively, as compared to the same period in 2007. The increase is primarily attributed to an increase in late charges collected on lines of credit, installment, and commercial loans, and an increase in title insurance fees, partially offset by a decrease in miscellaneous fees collected on residential mortgage and equity loans.

Impairment charges on securities were $75,000 for the quarter ended December 31, 2008, compared to $322,000 in the prior year. The impairment charges for the current period relate to the Company's holdings of Freddie Mac preferred stock, whereas the impairment charges for the prior year period primarily relate to the Company's holdings of the AMF Ultra Short Mortgage Fund.

Gains on the sales of loans were $30,000 and $12,000 for the three month periods ended December 31, 2008 and 2007, respectively. The three month period ended December 31, 2008 results reflect the sale of approximately $2.1 million of fixed-rate, single-family mortgage loans, compared to $1.4 million of similar loan sales during the prior fiscal period.

Losses on loan interest rate swaps were $17,000 for the three months ended December 31, 2008. There were no losses on loan interest rate swaps for the three months ended December 31, 2007. As discussed in Note (8) above, the Company entered into a fixed rate loan with one of its commercial mortgage loan . . .