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, income taxes, and accounting for stock options. Please refer to the discussion of the allowance for loan losses in Note 8, "Allowance for Loan Losses", on pages 21 and 22 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. Please refer to the discussion of other-than-temporary impairment in Note 6, "Securities", on pages 14 through 20 above and in Note 2, "Securities", on pages 62 through 66 of the Company's 2008 Annual Report to Shareholders. Please refer to the discussion of income taxes on page 42 below and in Note 11, "Income Taxes", on pages 75 through 77 of the Company's 2008 Annual Report to Shareholders. 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 $13.4 million, or 1.8%, to $740.6 million at June 30, 2009 from $727.2 million at September 30, 2008. Significant changes in individual categories include increases in cash and cash equivalents of $43.3 million, loans held for sale of $2.6 million, Federal Home Loan Bank stock of $2.1 million, office premises and equipment of $1.1 million and other assets of $1.6 million, partially offset by decreases in securities held-to-maturity of $10.4 million, net loans of $23.8 million, and cash surrender value of life insurance of $1.4 million. The decrease in cash surrender value of life insurance was primarily due to $2.7 million of bank owned life insurance proceeds received upon the death of the Company's former Chairman of the Board. The Company is currently experiencing increased levels of loan and mortgage-backed security prepayment and loan refinancing activity. The decrease in net loans reflects $83.9 million of prepayments, partially offset by $61.1 million in loan originations. The increase in cash equivalents is a result of the increases in loans and mortgage-backed securities prepayments. The increase in other assets is primarily due to an increase in deferred tax assets.

Total liabilities of the Company increased $5.5 million, or 0.8%, to $690.6 million at June 30, 2009 from $685.1 million at September 30, 2008. Significant changes include an increase in deposits of $27.4 million, an increase in securities sold under agreement to repurchase of $7.6 million, and an increase in advance payments by borrowers for taxes and insurance of $1.9 million, partially offset by a decrease in short-term debt of $32.1 million. The short-term debt decrease was primarily attributed to the increase in deposits and the decreases in securities held-to-maturity, and net loans. The increase in deposits is primarily attributed to an increase in checking accounts of $12.0 million, an increase in savings accounts of $4.1 million, an increase in time deposits of $8.5 million, and an increase in money market accounts of $2.8 million.

Stockholders' equity increased to $50.0 million at June 30, 2009, compared to $42.2 million at September 30, 2008. This result reflects net income for the nine-month period ended June 30, 2009 of $1.8 million; stock options exercised of $1,000; stock issued under the Dividend Reinvestment Plan of $71,000; stock-based compensation of $75,000; a decrease in the accumulated other comprehensive loss of $624,000, which is 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 9, "Derivative Instrument", on pages 22 and 23 above; 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 $7.0 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 ten-year 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 of 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 and preferred stock cash dividends paid of $1.3 million. Approximately $3.4 million of the balances in retained earnings as of June 30, 2009 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 $1.5 million and $653,000 in loans at June 30, 2009 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).

                                                          June 30,          September 30,
                                                            2009                2008
Non-accrual residential real estate loans
(one-to-four family)                                      $   1,240        $           701
Non-accrual construction, multi-family residential
and commercial real estate loans                             14,582                  2,993
Non-accrual installment loans                                   308                    676
Non-accrual commercial business loans                         1,012                  1,357

Total non-performing loans                                $  17,142        $         5,727

Total non-performing loans as a percent of net loans
receivable                                                     3.92 %                 1.24 %

Total foreclosed real estate                              $      80        $           170

Total non-performing loans and foreclosed real estate
as a percent of total assets                                   2.33 %                 0.81 %

Included in non-performing loans at June 30, 2009 are twelve single-family residential real estate loans totaling $1.2 million, seven commercial real estate loans totaling $14.6 million, eight home equity and installment loans totaling $308,000, and five commercial business loans totaling $1.0 million. Non-performing loans increased $11.4 million to $17.1 million at June 30, 2009 from $5.7 million at September 30, 2008 primarily because of six commercial real estate loans with an aggregate balance of $12.0 million that were placed on non-accrual during the period.

At June 30, 2009, the Company had an allowance for loan losses of $3.6 million or 0.82% 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 21.2% of non-performing loans at June 30, 2009 compared to 59.8% at September 30, 2008. While non-performing loans have increased $11.4 million since September 30, 2008, the allowance for loan losses has not increased proportionately. As noted above, the increase in non-performing loans is primarily attributed to commercial real estate loans, which have also been deemed impaired under FAS 114. In accordance with accounting guidance, management determined that reserves of $105,000 were required to be maintained for the $16.7 million in commercial real estate loans considered impaired as of June 30, 2009. Management believes the balance in the allowance for loan losses is adequate based on its analysis of quantitative and qualitative factors as of June 30, 2009. 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 June 30, 2009 is reasonable. See also "Provision for Loan Losses" on page 38. 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

The Company recorded net income for the three months ended June 30, 2009 of $238,000 and net income available to common stockholders of $135,000 or $0.04 per diluted common share compared to net income of $1.2 million or $0.40 per diluted common share for the same period in 2008. The decrease in net income primarily reflects pre-tax charges of $1.4 million for other-than-temporary impairment ("OTTI") on certain investment securities. Excluding the impairment charges of $1.4 million, net income would have been $1.2 million or $0.37 per diluted share. Other factors contributing to the decrease include a decrease in net interest income of $432,000, or 10.1% and an increase in operating expenses of $800,000, or 24.6%, primarily due to a $733,000 increase in FDIC insurance premiums, partially offset by a decrease in the provision for loan losses of $80,000, an increase in other income (excluding OTTI charges) of $629,000, or 65.9%, and a tax benefit of $542,000.

Net income for the nine months ended June 30, 2009 was $1.8 million and net income available to common stockholders was $1.6 million or $0.52 per diluted common share compared to $3.3 million or $1.07 per diluted common share for the same period in 2008. The decrease in net income primarily reflects OTTI charges of $3.1 million on certain investment securities. Excluding the impairment charges of $3.1 million, net income would have been $4.3 million or $1.33 per diluted share. Other factors contributing to the decrease include an increase in the provision for loan losses of $405,000 and an increase in operating expenses of $1.1 million, or 11.2%, primarily due to a $802,000 increase in FDIC insurance premiums, partially offset by an increase in net interest income of $903,000, or 7.4%, an increase in other income (excluding OTTI charges) of $623,000, or 22.6%, and a tax benefit of $298,000.

The Company's net income available to common stockholders and diluted earnings per common share for the three and nine months ended June 30, 2009 reflects the impact of $103,000 and $223,000, respectively, of preferred stock dividends and discount accretion.

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, decreased to 2.01% (annualized) in the three months ended June 30, 2009 from 2.22% (annualized) in the same period in 2008. The Company's tax-equivalent interest rate spread increased to 2.31% (annualized) in the nine months ended June 30, 2009 from 2.11% (annualized) in the same period in 2008. The decrease for the three-month period ended June 30, 2009 is the result of the average rate paid on interest-bearing liabilities decreasing less than the average yield on interest-earning assets. The increase for the nine-month period ended June 30, 2009 is the 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           Nine Months Ended
                                                       June 30,                     June 30,
                                                 2009            2008          2009           2008
Average yield on:
Mortgage loans                                     5.47 %          5.97 %        5.81 %       6.03 %
Mortgage-backed securities                         4.20            4.48          4.45         4.44
Installment loans                                  5.90            6.24          6.00         6.40
Commercial business loans and leases               4.97            6.30          5.11         6.83
Interest-earning deposits with other
institutions, investment securities, and
FHLB stock (1)                                     3.93            5.10          4.53         5.36

Total interest-earning assets                      4.98            5.63          5.34         5.78

Average rates paid on:
Deposits                                           2.12            2.85          2.30         3.15
Borrowed funds                                     4.38            4.26          4.11         4.47

Total interest-bearing liabilities                 2.97            3.41          3.03         3.67

Average interest rate spread                       2.01 %          2.22 %        2.31 %       2.11 %

Net yield on interest-earning assets               2.30 %          2.52 %        2.59 %       2.42 %

(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 $435,000 and $423,000 and the yield was 4.47% and 4.44%, prior to adjusting for federal income tax for the three months ended June 30, 2009 and 2008, respectively. Interest income on tax-exempt investment securities was $1.3 million and $1.2 million and the yield was 4.50% and 4.44%, prior to adjusting for federal income tax for the nine months ended June 30, 2009 and 2008, respectively.

Interest Income

Interest on loans decreased $709,000 or 10.2% to $6.2 million for the three months ended June 30, 2009, compared to $6.9 million in the same period in 2008. Interest on loans decreased $1.2 million or 5.8% to $20.2 million for the nine months ended June 30, 2009, compared to the same period in 2008. The decrease for the three-month period ended June 30, 2009 reflects a decrease in the yield earned on the loan portfolio and a decrease in the average loan balance outstanding. The decrease for the nine-month period ended June 30, 2009 reflects a decrease in the yield earned on the loan portfolio, partially offset by an increase in the average loan balance outstanding. The decrease in the yield earned on the loan portfolio is primarily due to adjustable rate loans, such as prime-based loans, repricing downward in the current lower rate environment.

Interest on mortgage-backed securities decreased $194,000 or 17.8% to $894,000 for the three-month period ended June 30, 2009, compared to $1.1 million in the same period in 2008. Interest on mortgage-backed securities increased $34,000 or 1.1% to $3.0 million for the nine-month period ended June 30, 2009, compared to the same period in 2008. The decrease for the three-month period ended June 30, 2009 reflects a decrease in the average balance of mortgage-backed securities owned and a decrease in the average yield earned on the portfolio. The increase for the nine-month period ended June 30, 2009 reflects an increase in the average balance of mortgage-backed securities owned as well as a slight 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 $316,000 or 18.7% to $1.4 million for the three months ended June 30, 2009, as compared to $1.7 million in the same period in 2008. Interest on interest-bearing demand deposits with other institutions and investment securities (non-tax equivalent) decreased $1.0 million or 19.0% to $4.4 million for the nine months ended June 30, 2009, as compared to the same period in 2008. The decrease for the three-month period ended June 30, 2009 reflects a decrease in the yield earned on these investments, partially offset by an increase in the average balance of investment securities in the portfolio. The decrease for the nine-month period ended June 30, 2009 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 $666,000 or 24.2% to $2.1 million for the three-month period ended June 30, 2009, as compared to $2.8 million during the same period in 2008. Interest on deposits decreased $2.6 million or 27.9% to $6.6 million for the nine-month period ended June 30, 2009, as compared to the same period in 2008. The decrease for the three-month period ended June 30, 2009 reflects a decrease in the average cost of the deposits, partially offset by an increase in the average balance of deposits. The decrease for the nine-month period ended June 30, 2009 reflects a decrease in the average cost of the deposits as well as a decrease in the average balance of deposits.

Interest on securities sold under agreement to repurchase, including retail, term, and wholesale structured borrowings, increased $71,000 or 5.9% to $1.3 million for the three-month period ended June 30, 2009, as compared to $1.2 million in the same period in 2008. Interest on securities sold under agreement to repurchase increased $286,000 or 8.1% to $3.8 million for the nine-month period ended June 30, 2009, as compared to the same period in 2008. The increase for the three-month period ended June 30, 2009 reflects an increase in the cost of these funds, as well as a higher level of average securities sold under agreement to repurchase. The increase for the nine-month period ended June 30, 2009 reflects an increase in the cost of these funds, partially offset by a slightly lower level of average securities sold under agreement to repurchase. The Bank had $95.0 million of wholesale structured borrowings outstanding at June 30, 2009 and 2008.

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 $54,000 or 96.4% to $2,000 for the three-month period ended June 30, 2009, as compared to $56,000 in the same period in 2008. Interest on short-term borrowings decreased $561,000 or 82.1% to $122,000 for the nine-month period ended June 30, 2009, as compared to the same period in 2008. The decrease for the three-month period ended June 30, 2009 reflects a decrease in the average cost of these borrowings as well as a decrease in the average balance of these borrowings. The decrease for the nine-month period ended June 30, 2009 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, decreased $137,000 or 10.2% to $1.2 million for the three-month period ended June 30, 2009 as compared to $1.3 million in the same period in 2008. Interest on long-term debt decreased $286,000 or 7.2% to $3.7 million for the nine-month period ended June 30, 2009 as compared to the same period in 2008. The decrease for the three-month period ended June 30, 2009 reflects a decrease in the average cost of the debt and a decrease in the average balance of the debt. The decrease for the nine-month period ended June 30, 2009 reflects a decrease in the average cost of the debt, partially offset by an increase in the average balance of the debt.

Interest on subordinated debt decreased $1,000 or 1.0% to $102,000 for the three months ended June 30, 2009, as compared to $103,000 in the same period in 2008. Interest on subordinated debt decreased $38,000 or 11.0% to $308,000 for the nine months ended June 30, 2009, as compared to the same period in 2008. The decrease for both periods 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 $52,000 and $22,000 in interest expense for the three months ended June 30, 2009 and 2008, respectively, on an interest rate swap contract to hedge its interest rate exposure from the subordinated debt. For the nine months ending June 30, 2009 and 2008 the interest expense recorded on the interest rate swap contract was $116,000 and $11,000, respectively.

Net Interest Income

The Company's net interest income decreased $432,000 or 10.1% to $3.8 million, for the three-month period ended June 30, 2009, as compared to $4.3 million in the same period in 2008. The Company's net interest income increased $903,000 or 7.4% to $13.1 million, for the nine-month period ended June 30, 2009, as compared to the same period in 2008. The decrease for the three-month period ended June 30, 2009 is attributable to a decrease in the interest rate spread, partially offset by an increase in net interest-earning assets. The increase for the nine- month period ended June 30, 2009 is attributable to an increase in net interest-earning assets as well as an increase in the interest rate spread. For the three months ended June 30, 2009 and 2008 the ratio of average interest-earning assets to average interest-bearing liabilities was 110.8% and 109.2%, respectively. For the nine months ended June 30, 2009 and 2008 the ratio of average interest-earning assets to average interest-bearing liabilities was 109.6% and 109.1%, respectively.

Provision for Loan Losses

The provision for loan losses was $270,000 for the three-month period ended June 30, 2009, as compared to $350,000 for the same period in 2008. The provision for loan losses was $1.1 million for the nine months ended June 30, 2009 compared to $740,000 for the nine months ended June 30, 2008. At June 30, 2009, the allowance for loan losses increased to $3.6 million from $3.4 million at September 30, 2008. Net loan charge-offs were $399,000 for the three months ended June 30, 2009 as compared to net loan charge-offs of $229,000 for the three months ended June 30, 2008. Net loan charge-offs were $941,000 and $445,000 for the nine months ended June 30, 2009 and 2008, respectively. Charge-offs for the three months ended June 30, 2009 are primarily attributed to one commercial business loan totaling $235,000. Charge-offs for the nine months ended June 30, 2009 are primarily attributed to ten commercial business loans totaling $533,000, one home equity loan totaling $146,000, and three residential real estate loans totaling $58,000.

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 . . .