FORM 10-K
[X] ANNUAL REPORT UNDER SECTION 13 OFThe Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Disclosure of delinquent filers pursuant to item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment of this Form 10-K [x].
AGGREGATE MARKET VALUE OF THE VOTING COMMON STOCK HELD BY NONAFFILIATES OF THE REGISTRANT EQUALS $52,028,606. AS OF FEBRUARY 28, 2002, BASED ON A MARKET PRICE OF $36.50. THE NUMBER OF SHARES OF COMMON STOCK OUTSTANDING AS OF FEBRUARY 28, 2002, EQUALS 1,819,167.
Excerpts from the Registrant’s 2001 Annual Report to Shareholders are incorporated herein by reference in response to Part II. The Registrant’s definitive Proxy Statement to be used in connection with the 2002 Annual Meeting of Shareholders is incorporated herein by reference in partial response to Part III.
FIDELITY D & D BANCORP, INC.
PART I
1 BUSINESS
On August 10, 1999, Fidelity D&D Bancorp, Inc (the Company) was incorporated in the Commonwealth of Pennsylvania. Effective June 30, 2000, shareholders of The Fidelity Deposit and Discount Bank (the Bank) exchanged each of their shares of common stock for two shares of the Company’s common stock. The Company is now the holding company for the Bank.
As set forth in the Company’s Registration Statement filed on SEC Form S-4, common stock of the Company that is being held for exchange of common stock of the Bank, may be sold if the exchange does not occur by June 30, 2002. The Company will hold the net proceeds of the sale, together with any unpaid dividends, in a non interest-bearing account. Payment of the proceeds and any unpaid dividends, without interest, will be made upon proper surrender of the Bank’s common stock certificates.
The Company is headquartered at Blakely and Drinker Streets in Dunmore, Pennsylvania 18512. Financial holding company status was elected effective June 27, 2001.
The Bank is a commercial bank chartered by the Commonwealth of Pennsylvania. The Bank’s headquarters are located at Blakely and Drinker Streets in Dunmore, Pennsylvania 18512. The Bank has offered a full range of traditional banking services since it commenced operations in 1903. The Bank has a trust department and also provides alternative financial products. The service area is comprised of the Borough of Dunmore and the surrounding communities in Lackawanna and Luzerne counties.
A complete list of services provided by the Bank is detailed in the section entitled “Products & Services” contained herein.
The Bank is one of two financial institutions headquartered in Dunmore, Pennsylvania. Sources of competition come from:
There are no concentrations of loans that, if lost, would have a materially adverse effect on the business of the Bank. The Bank’s loan portfolio does not have a material concentration within a single industry or group of related industries that are vulnerable to the risk of a near-term severe impact.
On December 31, 2001, the Bank had 172 full-time equivalent employees, including officers and part-time employees.
The Company is subject to the regulations of:
The Bank is subject to the regulations of:
Accounting policies and procedures are designed to comply to accounting principles, generally accepted in the United States of America (GAAP).
Applicable regulations relate to, among other things:
The Bank is examined by the Pennsylvania Department of Banking and the Federal Deposit Insurance Corporation on an alternate year basis. The last examination was conducted by the Federal Deposit Insurance Corporation at June 30, 2001.
Beside historical information, this Form 10-K contains forward-looking statements. Forward-looking statements are subject to uncertainties that could cause actual results to differ materially from those projected in the forward-looking statements. Important factors that might cause differences include, but are not limited to, those discussed in the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations”. We caution readers not to place undue reliance on these forward-looking statements. The forward-looking statements reflect management’s analysis only as of December 31, 2001. The Company undertakes no obligation to update these forward-looking statements to reflect circumstances that arise after December 31, 2001. Readers should carefully review the risk factors described in other documents the Company files with the Securities and Exchange Commission. Such documents include Quarterly Reports on Form 10-Q.
Forward-looking statements by their nature are subject to assumptions, risks and uncertainties. For a variety of reasons, actual results could differ materially from those contained or implied by the forward-looking statements:
The Company and the Bank are headquartered at the main office on the corner of Blakely and Drinker Streets in Dunmore, Pennsylvania. The main office is a full-service banking center with a walk-up window, drive-in and two twenty-four hour automated teller machines (ATM). Administrative offices, some operational departments and customer service areas are in this building. Trust and personal investment services are available at the main office. There is limited space available for future use. The main office complex is free of any encumbrances.
The Keystone Industrial Park Branch (KIP) in Dunmore, Pennsylvania, is a full-service branch with a drive-in and a twenty-four hour ATM. KIP is free of encumbrances.
One Scranton facility operates from leased space in the Green Ridge Shopping Center. The branch is a full-service branch and has an ATM with twenty-four hour access.
A second Scranton office is in a leased facility located at 139 Wyoming Avenue, Scranton, Pennsylvania. The branch has a walk-up window and provides full service to the downtown Scranton market.
The Financial Center at 338 North Washington Avenue in Scranton, Pennsylvania uses the entire second floor and a portion of the first floor for operations. The remainder of the first floor is a full service branch with a twenty-four hour ATM. A portion of the third floor is currently leased to a non-related entity. Loan operations will occupy the remainder of the third floor in 2002. The Company owns the property free of encumbrance. The Company also owns, free of encumbrance, an adjacent building, which is leased to a non-related entity.
The Abington office is situated on the Morgan Highway in Clarks Summit, Pennsylvania. The building from which the branch operates is leased. The branch provides full-service banking, including a twenty-four hour ATM and drive-in, to our customers located throughout the greater Abington market area.
There is a limited banking facility for employees and patients of the Clarks Summit State Hospital, located within the hospital at Clarks Summit, Pennsylvania. The office is leased under a lease for service provided agreement, from the hospital.
The Bank operates a full-service branch in Bruno’s Supermarket 403 Kennedy Boulevard, Pittston, Pennsylvania. The office contains a twenty-four hour ATM. The space in the supermarket is leased. The office provides service to the Bank’s clientele in Luzerne County, Pennsylvania.
Another full-service branch with a twenty-four hour ATM is located in the Insalaco Shopping Center at 801 Wyoming Avenue, West Pittston, Pennsylvania. The leased facility provides additional service to the Luzerne County market.
A full service office with a twenty-four hour ATM and drive-in operates from leased space at 4010 Birney Avenue, Moosic, Pennsylvania. The branch provides a geographic link between the Lackawanna and Luzerne County offices.
Providing full service to the Bank’s upper valley clientele is the Peckville branch at 1598 Main Street, Peckville, Pennsylvania. The facility is leased and has a twenty-four hour ATM and drive-in.
The Bank expanded its coverage in Luzerne County with the opening of the Kingston office at 247 Wyoming Avenue, Kingston, Pennsylvania. The branch, opened on April 26, 2001, is a full-service office with a drive-in and a twenty-four hour ATM. The Kingston office is leased.
Plans are under way to open another full-service branch in Lackawanna County during 2002. The Eynon branch located on Route 6 business Eynon, Pennsylvania, will be a leased office with a drive-in and a twenty-four hour ATM.
The Bank has contracted space for free standing twenty-four hour ATMs at:
Another free standing twenty-four hour ATM, from which the Bank contracts space, at 1650 W. Main St. Stroudsburg, Pennsylvania, opened during January 2002.
None of the lessors of the properties leased by the Bank are affiliated with the Company or the Bank.
The Company owns two adjacent residential properties in Clarks Green, Pennsylvania. The properties are being rented to parties not affiliated with the Company. Originally it was the intention of the Bank to construct a branch at this location. However, that plan was discontinued with the opening of the Abington office. The sale of both properties is currently being negotiated.
The Bank owns a commercial facility located at 116 - 118 N. Blakely Street Dunmore, Pennsylvania. The facility is currently leased by a non-related entity. The property was acquired for future expansion.
Foreclosed Assets held for sale are:
A sales agreement for the Eynon property was signed in January 2002 with an unrelated party. After the sale, a portion of the property will be leased back to the Bank for the new Eynon branch.
The Bank also holds various vehicles that were either repossessed or were expired leases during 2001.
All foreclosed properties are listed for sale. Repossessed assets are sold at auction. Foreclosed properties and repossessed assets are recorded on the Company’s balance sheet at the lower of cost or fair value. The Bank does not expect to incur any material losses from the sale of these assets.
Expired leases are recorded at their residual value. The Bank carries insurance, which may pay off some or all of a difference between the vehicle’s residual value and the auction sale price. Any deficiency between the residual value and sales price is charged against current earnings. The Bank does not expect to incur any material losses from the sale of these assets.
3 LEGAL PROCEEDINGSIn the Company’s opinion, there are no proceedings pending to which the Company and or Bank is a party or to which its property is subject, which, if decided against the Company, would be of material consequence to the Company’s financial condition. There are no material proceedings pending or contemplated against the Company by government authorities.
4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERSPART II
5 MARKET FOR THE BANK'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Shareholders requesting information about the Company's common stock may contact the Company's Chairman of the Board and President, Michael F. Marranca or the Chief Executive Officer Joseph J. Earyes. Requests may be mailed to:
The common stock of the Company is traded on the over-the-counter bulletin board under the symbol FDBC.
The following table lists the quarterly cash dividends paid and the range of bid and asked prices for the Company’s common stock. Such over-the-counter prices do not include retail mark-ups, markdowns, or commissions. The table also may not represent actual transactions.
2001 2000
Prices Dividends Prices Dividends
High Low Paid High Low Paid
---- --- ---- ---- --- ----
1st Quarter $37.375 $36.00 $.1875 $36.12 $35.12 $.1875
2nd Quarter $37.00 $35.50 $.20 $37.38 $35.25 $.1875
3rd Quarter $37.00 $35.90 $.20 $38.00 $35.75 $.1875
4th Quarter $37.75 $36.40 $.20 $37.75 $37.00 $.1875
The Company expects to continue paying similar dividends in the future. However, future dividends are dependent on earnings, the capital needs of the Company and other factors. Prior to the formation of the Company, the Bank paid dividends on a quarterly basis for over thirty years. Dividends are determined and declared by the Board of Directors. For a further discussion of regulatory capital requirements see Note 15 “Regulatory Matters”, contained within the Notes to Consolidated Financial Statements.
The Company had approximately 1,412 shareholders at February 28, 2002 and approximately 1,412 at December 31, 2001. The number of shareholders is the actual number of individual shareholders of record. Security depositories are considered as individual shareholders for the purpose of determining the approximate number of shareholders.
The Company has established a Dividend Reinvestment Plan for its shareholders. The Plan is designed to make the Company’s stock more available to our shareholders and to raise additional capital for future needs.
Assets, Deposits and Capital 2001 2000 1999 1998 1997
---- ---- ---- ---- ----
Total assets $569,029,838 $491,077,054 $446,569,505 $348,069,896 $289,758,826
Total investment securities 153,973,988 119,756,391 109,262,221 78,607,860 72,712,902
Net loans 353,976,324 333,600,975 296,193,518 235,430,079 194,516,933
Loans available-for-sale 16,150,020 9,953,958 4,895,124 8,527,076 7,885,791
Total deposits 407,778,728 339,310,328 294,366,985 239,734,390 217,771,895
Total shareholders' equity 40,172,230 37,215,063 31,841,549 33,745,541 28,183,276
Operating Results
Total interest income $ 36,379,689 $ 35,085,780 $ 28,541,051 $ 23,443,709 $ 21,018,230
Total interest expense (20,853,631) (21,468,230) (15,375,799) (12,308,632) (10,639,884)
------------- ------------- ------------- ------------- -------------
Net interest income 15,526,058 13,617,550 13,165,252 11,135,077 10,378,346
Provision for loan losses (2,474,637) (1,158,260) (530,000) (646,000) (622,800)
------------- ------------- ------------- ------------- -------------
Net interest income after provision for
loan losses 13,051,421 12,459,290 12,635,252 10,489,077 9,755,546
Other income 3,701,578 3,005,218 2,227,787 1,902,734 1,303,470
Other expense (11,998,997) (11,699,489) (10,170,458) (7,609,162) (6,583,334)
------------- ------------- ------------- ------------- -------------
Income before provision for income taxes 4,754,002 3,765,019 4,692,581 4,782,649 4,475,682
Provision for income taxes (905,866) (558,391) (894,888) (1,246,760) (1,185,008)
------------- ------------- ------------- ------------- -------------
Net Income $3,848,136 $3,182,628 $3,797,693 $3,535,889 $3,290,674
============= ============= ============= ============= =============
Effective tax rate 19.05% 15.47% 19.07% 26.07% 26.48%
============= ============= ============= ============= =============
Net income per share * $ 2.12 $ 1.76 $ 2.12 $ 2.08 $ 1.98
============= ============= ============= ============= =============
Net income per share (diluted)* $ 2.12 $ 1.76 $ 2.12 $ 2.08 $ 1.98
============= ============= ============= ============= =============
Dividends declared $1,426,097 $1,366,075 $1,344,141 $ 1,200,409 $ 1,062,530
Dividends per share * $ 0.79 $ 0.76 $ 0.75 $ 0.70 $ 0.64
Weighted average number of shares
outstanding * 1,811,391 1,803,674 1,792,232 1,697,108 1,665,988
Actual shares outstanding at year end 1,819,168 1,806,274 900,392 893,647 837,260
Dividend payout ratio 37.06% 42.92% 35.39% 33.95% 32.29%
Return on average assets 0.72% 0.67% 0.94% 1.13% 1.20%
Return on average equity 9.64% 9.54% 11.42% 11.78% 12.43%
Equity to assets 7.06% 7.58% 7.13% 9.70% 9.73%
Equity to deposits 9.85% 10.97% 10.82% 14.08% 12.94%
*Based on weighted average shares and adjusted for the stock exchange in 2000.
Amounts reported for the years 1997 through 2000 have been restated as disclosed in Note 2 of the Notes to Consolidated Financial Statements contained herein.
The information required by Item 7a is set forth at Item 7 “Liquidity Management and Interest Rate Sensitivity” contained within Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) and incorporated herein by reference.
The presentation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect many of the reported amounts and disclosures. Actual results could differ from these estimates.
A material estimate that is particularly susceptible to significant change is the determination of the allowance for loan losses. Management believes that the allowance for loan losses is adequate and reasonable. The Company’s methodology for determining the allowance for loan losses is described in a separate section later in Management’s Discussion and Analysis. Given the very subjective nature of identifying and valuing loan losses, it is likely that well-informed individuals could make materially different assumptions, and could, therefore calculate a materially different allowance value. While management uses available information to recognize losses on loans, changes in economic conditions may necessitate revisions in future years. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Company’s allowance for loan losses. Such agencies may require the Company to recognize adjustments to the allowance based on their judgments of information available to them at the time of their examination. Further, a task force of the American Institute of Certified Public Accountants is working on detailed implementation guidance for calculating the allowance for loan losses. Implementation of that detailed implementation guidance, which may be issued in 2002, could result in an adjustment to the allowance.
Another material estimate is the calculation of fair values of the Company’s investment securities. The Company receives estimated fair values of investment securities from an independent valuation service through a broker. In developing these fair values, the valuation service uses estimates of cash flows, based on historical performance of similar instruments in similar interest rate environments. Based on experience, management is aware that estimated fair values of investment securities tend to vary among valuation services. Accordingly, when selling investment securities, management typically obtains price quotes from more than one source. As described in Notes 1 and 3 of the consolidated financial statements, the large majority of the Company’s investment securities are classified as available-for-sale. Accordingly, these securities are carried at fair value on the consolidated balance sheet, with unrealized gains and losses excluded from earnings and reported separately through accumulated other comprehensive income (included in shareholders’ equity).
The fair value of residential mortgage loans classified as available-for-sale is obtained from the Federal National Mortgage Association (Fannie Mae). The fair value of SBA loans classified as available-for-sale is obtained from an outside pricing source. The market to which the Bank sells mortgage and other loans is restricted and price quotes from other sources are not typically obtained. Further discussion on the accounting treatment of available-for-sale loans is in the section entitled “Loans available-for-sale”, contained within Management’s Discussion and Analysis.
All significant accounting policies are contained in Note 1 “Nature of Operations and Summary of Significant Accounting Policies”, contained within the Notes to Consolidated Financial Statements, and incorporated herein by reference.
The following discussion and analysis presents the significant changes in the results of operations and financial condition of the Company and its wholly-owned subsidiary, the Bank. This discussion should be read in conjunction with the consolidated financial statements and notes included in this report.
A comparison of balance sheet accounts and percentage to total assets at December 31, 2001, 2000 and 1999:
(Thousands of Dollars)
2001 2000 1999
Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ -------
Assets
Cash and due from banks $19,845 3.49% $5,503 1.12% $6,416 1.44%
Interest-bearing deposits with
Depository institutions 5,800 1.02 3,277 0.67 11,542 2.58
Investment securities 153,974 27.06 119,756 24.39 109,262 24.47
Net loans 353,976 62.21 333,601 67.93 296,194 66.32
Loans Available-for-sale 16,150 2.84 9,954 2.03 4,895 1.10
Accrued interest receivable 3,268 0.57 3,546 0.72 2,971 0.67
Bank premises and equipment 11,514 2.02 11,391 2.32 9,506 2.13
Foreclosed assets held for sale 688 0.12 353 0.07 413 0.09
Other assets 3,815 0.67 3,696 0.75 5,370 1.20
--------- ------- -------- ------- -------- -------
Total assets $ 569,030 100.00% $491,077 100.00% $446,569 100.00%
========= ======= ======== ======= ======== =======
Liabilities
Deposits, noninterest-bearing $53,302 9.37% $ 47,185 9.61% $ 37,241 8.34%
Certificates of deposit of $100,000
or more 132,680 23.32 94,718 19.29 66,643 14.92
Other interest-bearing deposits 221,797 38.98 197,407 40.20 190,483 42.65
Short-term borrowings 54,481 9.57 48,025 9.78 60,249 13.49
Other borrowed funds 63,000 11.07 63,000 12.82 57,305 12.83
Accrued interest payable and other
Liabilities 3,598 0.63 3,527 0.72 2,807 0.64
--------- ------- -------- ------- -------- -------
Total liabilities 528,858 92.94 453,862 92.42 414,728 92.87
Shareholders' equity 40,172 7.06 37,215 7.58 31,841 7.13
--------- ------- -------- ------- -------- -------
Total liabilities and shareholders'
Equity $ 569,030 100.00% $491,077 100.00% $446,569 100.00%
========= ======= ======== ======= ======== =======
The year 2001Due to the economic volatility experienced throughout 2001, many investors moved funds from mutual funds into insured financial institutions. The Bank experienced growth in most deposit segments in reaction to market conditions. A $18,209,000 increase in internet-generated deposits in 2001, clearly reflects this trend.
Internet-generated deposits of $26,449,000 comprise 6.49% of total deposits at December 31, 2001, whereas they were only 2.43% of total deposits at December 31, 2000. Approximately $8,500,000 of these deposits were certificates of deposit (CDs) with terms exceeding twelve months. During the fourth quarter of 2001, the Bank lowered the rates on internet-generated CDs and as a planned result the growth in internet-generated deposits stopped.
With the flatness in the national economy predicted for 2002, the Bank anticipates that it will retain internet-generated deposit accounts for the near future.
Among the reasons cited by depositors as to why they selected the Bank are:
Personal demand deposit accounts (DDAs) increased $3,051,000 or 15.82% from $19,283,000 at December 31, 2000, to $22,334,000 at December 31, 2001. Part of the growth is attributed to recent branch expansion. For example, the new Kingston office had $273,000 in personal DDAs at December 31, 2001. Personal DDAs at the Peckville office, which opened in February 2000, increased $217,000 during 2001.
Commercial DDAs and Public Fund DDAs grew $4,302,000 or 19.40% from $22,180,000 at December 31, 2000, to $26,482,000 at December 31, 2001. Increased commercial lending relationships contributed to the growth in commercial deposits, as also did the successful marketing of commercial deposit products. Commercial products include:
Official Bank checks issued and outstanding decreased $1,237,000 from $5,723,000 at December 31, 2000, to $4,486,000 at December 31, 2001.
As a net result of these changes, total noninterest-bearing deposits grew $6,116,000 or 12.96% from $47,186,000 at December 31, 2000, to $53,302,000 at December 31, 2001. The increase in noninterest-bearing deposits represents 9.06% of the growth in total deposits during 2001.
Interest-bearing deposits increased $62,352,000 or 21.34% from $292,125,000 at December 31, 2000, to $354,477,000 at December 31, 2001.
Savings and club accounts collectively increased $2,029,000 in 2001.
Due to the drop in deposit rates throughout 2001, NOW accounts and money market deposits declined $2,191,000 and $7,980,000, respectively. A portion of this decrease was transferred into CDs, as depositors favored a guaranteed rate over liquidity.
CDs rose $70,494,000 or 34.20%. Personal CDs grew $32,601,000 or 21.35%. Nonpersonal CDs grew $19,739,000 or 40.76%. Public fund CDs increased $18,154,000 or 73.32% over year-end 2000.
The maturity distribution of CDs $100,000 or more at December 31, 2001 is as follows:
3 Months 3 - 6 6 - 12 Over
or less Months Months 12 months Total
------- ------ ------ --------- -----
$34,870,205 $10,697,915 $26,123,776 $60,988,099 $132,679,995
The over 12 months maturity distribution of CDs $100,000 or more increased $16,591,000 over 2000. This category represents 14.96% of total deposits at December 31, 2001 as compared to 13.08% in 2000. The increase provides the Bank with a stable source of funds for future requirements.
Total public fund deposits of $54,510,000 represent 13.37% of total deposits at December 31, 2001. Public funds at December 31, 2001 increased 17.59% over 2000. CDs comprise $44,855,000 of public fund deposits.
Bank policy states that public fund deposits with original maturities of one year or less cannot exceed 25% of total assets. At December 31, 2001 that ratio was 3.35%. Many of the public entities have had deposit relations with the Bank for a number of years. Other relations developed through branch expansion. While there may be a higher degree of risk
in retaining these deposits due to funding and earnings requirements of these depositors, the Bank is confident that it can maintain and increase this important source of funds.
At the end of 2001, total deposits had grown $68,469,000 or 20.18% from $339,310,000 at December 31, 2000, to $407,779,000 at December 31, 2001.
Short-term borrowings:With the increase in deposits and repurchase agreements (Repos), the Bank paid off short-term borrowings at the Federal Home Loan Bank of Pittsburgh (FHLB) which were $10,950,000 at December 31, 2000.
Repos are included with short-term borrowings on the balance sheet (see Note 8 “Short-term Borrowings”, contained within the Notes to Consolidated Financial Statements). Repos increased $18,271,000 or 50.77% from $35,987,000 at December 31, 2000 to $54,258,000 at December 31, 2001. Sweep accounts comprise approximately 74% of Repos. A sweep account transfers excess noninterest-bearing DDA funds into an interest-bearing Repo on a daily basis.
Long-term debt:Long-term debt consists of borrowings from the FHLB. The weighted average rate on funds borrowed at December 31, 2001, was 5.59%. The weighted-average rate is 166 basis points below the tax-equivalent yield of 7.25% on average earning assets for the year ending December 31, 2001. Rates on the advances are adjustable quarterly, should market rates increase. However, year-end rates on similar FHLB advances are 298 basis points below the rates being paid by the Bank. It is unlikely that FHLB borrowing rates will increase above the rates currently being quoted by the FHLB during 2002. Should this occur, the Bank has the option, at that time, to repay or renegotiate the advances.
At December 31, 2001, the Bank had the ability to borrow an additional $48,000,000 at the FHLB. The FHLB has short, medium and long-term funding products available to the Bank. Most lines of credit extended to banks by other lenders are short-term.
Balance Sheet, Assets:Total assets of the Company increased $77,953,000 or 15.87% during 2001. The increase is the result of growth primarily in deposits and Repos, as previously discussed, and the retention of profits.
Cash and due from banks:During the final week of December 2001, the Bank began to process its cash letter through the Federal Reserve Bank, Philadelphia, Pa., (Fed). Cash letters consists of cashed or deposited checks that are not drawn on the Bank and need to be sent for collection. The Fed was selected based on lower processing costs and improved availability of funds collection. It is estimated that the savings will approximate $30,000 annually.
While the transition was in process, correspondent bank balances ran higher than normal. This was done to insure that all processing reports were thoroughly understood in order to avoid potential overdrafts. The Bank anticipates that correspondent balances will return to historic levels during 2002.
Investments:Total investments had an increase during 2001 of $34,218,000, net of the change in the market value of available-for-sale investments. However, the amount of net change doesn’t truly reflect the activity during 2001, which was caused by market volatility.
With the fall in market rates, United States Government Agency bonds of $89,295,000 and municipal securities of $3,820,000 were called during 2001. United States Government Agency bonds of $4,000,000, classified as held-to-maturity, were included in the total amount called. There were no losses incurred on any called bond.
FHLB stock of $1,793,000, net of purchases, was redeemed by the FHLB during 2001. The FHLB requires participants to purchase stock to support borrowings. The FHLB determines the amount of stock required and at times may redeem stock.
Payments on mortgaged-backed securities increased from $1,207,000 during 2000, to $2,820,000 during 2001, as a result of the decline in market rates. Included in the total were payments of $1,234,000 on held-to-maturity bonds.
In 2001, the Bank sold United States Government Agency bonds and municipal investments from the available-for-sale category, having a net book value of $12,000,000 and $2,004,000, respectively, at the time of sale. Included in that amount were securities of $7,000,000 that the Bank had for less than one year, the shortest time period being five months. The remainder had been in the investment portfolio of the Bank between one and ten years. The investments were sold to protect the Bank from call provisions, which all the investments had, and for liquidity purposes.
There were no sales of investments categorized as held-to–maturity in 2001 and there were no trading securities during 2001.
United States Government Agency bonds totaling $137,904,000, mortgage-backed securities of $7,107,000 and preferred term securities of $1,000,000 were purchased in 2001. After careful consideration of the characteristics of the individual securities and their potential reaction to market changes, $18,994,000 United States Government Agency bonds were classified as held-to-maturity. The remaining securities were classified as available-for-sale.
Of the total amount purchased, United States Government Agency bonds with a par amount totaling $33,000,000 had maturities under five years. While the rates on these bonds were less than those with longer maturities, the purchases were made taking potential future market rate changes into consideration. Should rates increase, the proceeds of these bonds at maturity could be reinvested at higher rates quicker than bonds with longer maturities.
Preferred term securities are pooled borrowings by financial institutions located within the United States. The deposits of the institutions are insured by the Federal Deposit Insurance Corporation. The institutions must have a five-year satisfactory operating history and tier 1 capital greater than ten percent. The securities offer a slight diversity in the investment portfolio, approximately 200 basis points above Federal Funds, floating interest rate and five-year call protection.
Classifying bonds as held-to-maturity protects the balance sheet from downward market trends that available-for-sale securities are exposed to. The decision to classify securities as available-for-sale gives the Bank greater flexibility in the management of the investment portfolio and overall liquidity management.
The Bank actively monitors depreciation in the bond portfolio. When an individual bond, classified as available-for-sale, starts to depreciate, the Bank will determine if it is advisable to sell the security and reinvest the proceeds at a higher yield. Such considerations are based on current market conditions and liquidity needs. Even though bonds in the Bank’s portfolio may depreciate in market value, the principal and interest of the United States Government Agency bonds, mortgage-backed securities and municipal investments is guaranteed by the issuer.
Investments constituted 27.06% of total assets at December 31, 2001. Held-to-maturity securities were $21,640,000. The remaining $132,334,000 of the portfolio was classified as available-for-sale.
A comparison of investments at year-end for the three previous periods is as follows:
2001 2000 1999
---- ---- ----
Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ -------
U.S. Government Agencies $118,229,745 76.78% $ 81,513,237 68.07% $ 73,348,911 67.13%
Mortgage Backed Securities 19,349,772 12.57 15,033,019 12.55 7,686,688 7.04
State & Municipal Subdivisions 11,609,765 7.54 17,530,127 14.64 22,556,775 20.64
Preferred Term Securities 1,000,000 0.65 0 0.00 0 0.00
Common Stock 3,784,706 2.46 5,680,007 4.74 5,669,847 5.19
- ---------------------------------------------------------------------------------------------------------------------------
Total $ 153,973,988 100.00% $119,756,390 100.00% $109,262,221 100.00%
===========================================================================================================================
The distribution of debt securities by stated maturity date at December 31, 2001 is as follows:
1 Year 1 Through 5 Through More than
or less 5 years 10 years 10 years Total
------- ------- -------- -------- -----
U.S. Government Agencies $ 0 $ 32,512,284 $ 40,076,787 $ 45,640,674 $118,229,745
Mortgage Backed Securities 4,711 5,704 1,641,630 17,697,727 19,349,772
State & Municipal Subdivisions 200,653 985,853 6,235,904 4,187,355 11,609,765
Preferred Term Securities 0 0 0 1,000,000 1,000,000
- ---------------------------------------------------------------------------------------------------------------------------
Total debt securities $ 205,364 $ 33,503,841 $ 47,954,321 $ 68,525,756 $150,189,282
===========================================================================================================================
Debt securities are net of unrealized loss on available-for-sale securities. Net unrealized loss on available-for-sale debt securities at December 31, 2001, was $1,912,190. Debt securities do not include common stock, having a market value of $3,784,706 at December 31, 2001.
The tax equivalent yield on debt securities by stated maturity date at December 31, 2001, is as follows:
1 Year 1 Through 5 Through More than
or less 5 years 10 years 10 years Total
------- ------- -------- -------- -----
U.S. Government Agencies 0.000% 4.502% 5.779% 6.621% 5.751%
Mortgaged Backed Securities 7.863 7.000 5.377 6.284 6.207
State & Municipal Subdivisions 6.882 7.298 7.246 7.114 7.196
Preferred Term Securities 0.000 0.000 0.000 3.625 3.625
- ---------------------------------------------------------------------------------------------------------------------------
Total debt securities 6.390% 4.580% 5.960% 6.520% 5.910%
===========================================================================================================================
Loans:Gross loans increased $20,276,000 or 5.99% from $338,699,000 at December 31, 2000, to $358,975,000 at December 31, 2001. Gross loans represent 63.09% of total assets at December 31, 2001.
Loan growth was modest relative to previous years. Growth in the portfolio was slowed by the economic downturn both nationally and locally. As lending rates fell, prepayments on existing loans increased. Loans refinanced at lower rates increased the Bank’s exposure to interest-rate risk from potential market upturns. Many new and refinanced loans were classified as available-for-sale, with the intention of immediate sale. As detailed in the “Consolidated Statement of Cash Flows” contained herein, proceeds from the sale of loans in 2001 increased by $15,119,000 over 2000.
For a further discussion on these issues, see the MD&A sections entitled, “Loans available-for-sale” and “Liquidity Management and Interest Rate Sensitivity”. Additional discussion is in Note 1 “Nature of Operations and Summary of Significant Accounting Policies – Loans Held for Sale”, contained within the Notes to Consolidated Financial Statements, and incorporated herein by reference.
Increases in the amount of non-performing loans and net charge-offs also reflect the economic downturn. For a further discussion of delinquencies and net charge-offs, see the MD&A section entitled “Provision for Loan Losses”. Further discussion is in Note 1 “Nature of Operations and Summary of Significant Accounting Policies – Allowance for Loan Losses” and Note 5 “Loans and Leases” contained within the Notes to Consolidated Financial Statements, and incorporated herein by reference.
As a commitment to the market area, the Bank continues to seek quality loans, both commercial and consumer. However, the results of 2001 caused the Bank to review lending policies and collection efforts. Additional personnel, including a new experienced chief credit officer, were hired late in 2001, to address these concerns.
It is anticipated that the volume of prepayments and refinance requests will decrease, as rates become less volatile. Furthermore, new loans will be structured to better withstand market fluctuations and improved collection efforts should curtail serious delinquencies.
In the final analysis, the commitment of the Bank to our local communities remains strong and the Bank is sufficiently capitalized and structured to deal with these challenges.
Commercial loans at December 31, 2001 represent 49.88% of total gross loans, as compared to 43.29% at December 31, 2000. Commercial loans increased $32,433,000 or 22.12% from $146,611,000 at December 31, 2000, to $179,044,000 at December 31, 2001. The Bank increased the portfolio to improve profitability and to better service our community.
The Bank continues to originate loans using the Small Business Administration (SBA) guaranteed loan program. In return for the Bank funding a loan, which met the criteria of the program, the SBA guarantees a material portion of the principal balance to the Bank, should the borrower default.
Tax-free industrial development loans made to or backed by local municipalities increased 18.03% to $12,112,000 at December 31, 2001.
The Bank participates in the Pennsylvania Capital Access Program (PENNCAP). PENNCAP is a small business lending program whereby the State allocates a reserve fund to be used in the event the Bank were to experience a loss on a loan registered in the program. At December 31, 2001, $5,048,000 commercial loans were registered in this program. Loans registered in the PENNCAP program at December 31, 2001 increased 8.47% over the previous year-end.
The Bank continues to serve the local market with real estate loans. Real estate and construction loan totals of $102,187,000 were 28.47% of gross loans at December 31, 2001. Outstanding balances of real estate loans declined $10,727,000 since December 31, 2000.
In addition to prepayments, residential mortgages of $19,382,000, classified as available-for-sale, were sold on the secondary market. Servicing rights on sold loans were retained by the Bank. Servicing rights are retained so the borrower can still deal directly with the Bank. The loans were sold to provide the Bank with liquidity necessary to meet loan demand and to mitigate potential interest-rate risk from potential market rate increases. At December 31, 2001, the outstanding balance of sold residential mortgage loans in which the Bank retained servicing rights was $53,000,000.
Included with real estate loans are home equity lines of credit. The outstanding balance on the credit lines increased $642,000 or 12.14% from $5,289,000 at December 31, 2000 to $5,931,000 at December 31, 2001.
Consumer loans and direct-financing leases decreased $1,430,000 or 1.81% from $79,174,000 at December 31, 2000, to $77,744,000 at December 31, 2001. A combination of prepayments and the decision not to aggressively seek new leases
brought about this decline. Consumer loans also include credit card advances, which increased $215,000 or 7.29% to $3,162,000 at December 31, 2001.
In addition to direct issuance of credit cards, the Bank issues cards under an Affinity Credit Card program. Affinity Cards are initially offered to cardholders at below market rates for a predetermined time. After the time expires, the cards are repriced at rates usually slightly below market rates. A percent of the interest charged is donated to a named entity. Participating with the Bank in the program are:
At December 31, 2001, the outstanding balance on Affinity Cards was $1,211,000, or 38.30% of the outstanding credit card portfolio. The Bank is pursuing new program participants for 2002.
A comparison of loans by amount at year-end for the five previous periods is as follows (all loans are domestic):
2001 2000 1999 1998 1997
----- ----- ---- ---- ----
Real estate $ 96,740,226 $109,942,570 $111,242,490 $99,955,640 $87,931,770
Consumer 67,782,196 66,441,389 64,998,362 47,549,512 38,673,662
Commercial 179,043,816 146,610,685 113,061,093 85,425,708 67,201,013
Direct financing leases 9,961,967 12,733,075 5,710,579 2,248,990 1,536,074
Real estate construction 5,446,870 2,971,504 5,335,753 3,810,975 2,568,997
- ---------------------------------------------------------------------------------------------------------------------
Gross loans 358,975,075 338,699,223 300,348,277 238,990,825 197,911,516
Less:
Unearned discount 1,256,818 1,833,968 982,384 553,033 585,517
Allowance for loan losses 3,741,933 3,264,280 3,172,375 3,007,713 2,809,066
- ---------------------------------------------------------------------------------------------------------------------
Net Loans $353,976,324 $333,600,975 $296,193,518 $235,430,079 $194,516,933
=====================================================================================================================
Loans available-for-sale $16,150,020 $9,953,958 $4,895,124 $8,527,076 $7,885,791
=====================================================================================================================
A comparison of gross loans by percent at year-end for the five previous periods is as follows:
2001 2000 1999 1998 1997
---- ---- ---- ---- ----
Real estate 26.95% 32.46% 37.04% 41.82% 44.43%
Consumer 18.88 19.62 21.64 19.90 19.54
Commercial 49.88 43.29 37.64 35.74 33.96
Direct financing leases 2.77 3.76 1.90 0.94 0.78
Real estate construction 1.52 0.87 1.78 1.60 1.29
- ---------------------------------------------------------------------------------------------------------------------
Gross loans 100.00% 100.00% 100.00% 100.00% 100.00%
=====================================================================================================================
There are no concentrations of loans to a number of borrowers engaged in similar activities exceeding 10% of total loans, that are not otherwise disclosed as a category in tables above.
The following table sets forth the maturity distribution of the loan portfolio at December 31, 2001. Excluded from the table are non-construction real estate loans, consumer loans and direct financing leases (amounts in thousands):
1 year 1 - 5 More than
or less years 5 years Total
------- ----- ------- -----
Commercial loans $51,482 $49,655 $77,907 $179,044
Real estate construction 5,447 5,447
- ---------------------------------------------------------------------------------------------
Total $56,929 $49,655 $77,907 $184,491
=============================================================================================
The following table sets forth the sensitivity changes in interest rates for commercial and real estate construction loans at December 31, 2001 (amounts in thousands):
1 - 5 More than
years 5 years Total
----- ------- -----
Fixed interest rate $17,657 $21,814 $39,471
Variable interest rate 31,998 56,093 88,091
- ---------------------------------------------------------------------------------
Total $49,655 $77,907 $127,562
=================================================================================
Loans available-for sale:Loans are classified as available-for-sale at origination. Should market rates increase, fixed rate loans and loans not immediately repricable would no longer produce yields consistent with the current market. To protect the Bank from interest-rate risk, loans meeting these conditions may be classified as saleable. Certain consideration is also given to current liquidity needs.
Fees or costs associated with loan originations are capitalized and charged or credited to loan income over the term of the loan. The measures apply to both available-for-sale and held-to- maturity loans.
Saleable loans are carried on the balance sheet at the lower of cost or fair value. If the fair value falls below cost, the difference is charged to current earnings. Appreciation in the portfolio is credited to current earnings, only to the extent of previous write-downs below cost.
Due to the falling rate environment experienced in 2001, the Bank increased loans available-for-sale by $6,196,000 or 62.25% to $16,150,000 at December 31, 2001 due to concern of potential interest-rate risk.
Bank premises and equipment, net:Additions to premises and equipment were $1,224,000 before depreciation of $1,101,000 in 2001. Improvements to and equipping the new Kingston branch accounted for $718,000 of the increase. The remainder was used for system improvements and the expansion of the ATM network.
Foreclosed assets held for sale:The $335,000 increase was primarily due to repossessed vehicles and from vehicles returned at the expiration of direct financing lease agreements.
Personal DDAs increased $2,141,000 or 12.49% from $17,158,000 at December 31, 1999, to $19,299,000 at December 31, 2000. During 2000, the Bank accepted personal deposits of $13,000 from internet-generated accounts.
Commercial DDAs and Public Fund DDAs grew $3,812,000 or 20.75% from $18,368,000 at December 31, 1999, to $22,180,000 at December 31, 2000. Commercial deposits grew as a result of increased commercial lending relationships and the successful marketing of Bank products designed for the commercial segment.
Official Bank checks issued and outstanding increased $3,991,000 from $1,716,000 at December 31, 1999, to $5,707,000 at December 31, 2000.
As a net result of these changes noninterest-bearing deposits grew $9,944,000 or 26.70% from $37,242,000 at December 31, 1999, to $47,186,000 at December 31, 2000. The increase in non interest-bearing deposits represents 22.13% of the growth in total deposits during 2000.
Interest-bearing deposits increased $34,999,000 or 13.61% from $257,126,000 at December 31, 1999, to $292,125,000 at December 31, 2000.
NOW accounts increased $7,434,000 or 24.16% during 2000. The growth was based on the tiered Super NOW account that has a monthly interest rate based on a discount of the most current auction of the 13-week United State Treasury bill. During 1999, NOW accounts increased $16,014,000. During 2000, the Bank accepted deposits of $37,000 from internet-generated accounts.
Money market deposit accounts and savings accounts declined $10,004,000 or 17.69%. During 1999, these deposits grew $7,388,000. The decrease, during 2000, in money market and savings deposits was caused in part by the transfer of funds into the higher rate NOW accounts and certificates of deposit (CDs).
CDs rose $37,540,000 or 22.27%. Personal CDs grew $13,090,000 or 9.38%. Non-personal CDs grew $16,642,000 or 138.17%. Public fund CDs increased $7,808,000 or 46.06% over year-end 1999. During 2000 the Bank accepted brokered deposits of $9,851,000 for liquidity purposes. The Bank also accepted $8,190,000 in new CDs from the internet.
At the end of 2000, total deposits had grown $44,943,000 or 15.27% from $294,367,000 at December 31, 1999, to $339,310,000 at December 31, 2000.
The success at gathering new deposits by branch expansion is evidenced by the deposit totals at the locations opened during the last twenty-four months. Total deposits at the three branches opened during 1999 increased $13,489,000 during 2000. The Peckville office, in eleven months, had deposit totals of $9,410,000 at December 31, 2000. Those branches contributed 50.97% of the total growth in deposits during 2000.
Short-term Borrowings:Having successfully passed the advent of “Year 2000", the Bank reduced short-term borrowings at the Federal Home Loan Bank (FHLB) by $19,650,000, from $30,600,000 at December 31, 1999, to $10,950,000 at December 31, 2000. Repurchase Agreements (Repos) are included with short-term borrowings, on the balance sheet. Repos increased
$7,500,000 or 26.33% from $28,487,000 at December 31, 1999, to $35,987,000 at December 31, 2000. Sweep accounts comprise approximately 70% of Repos.
Long-term debt:The Bank repaid maturing long-term debt of $1,305,000 at the FHLB in 2000. As interest rates increased during 2000, the Bank restructured $41,000,000 variable rate long-term debt at the FHLB. The purpose of the restructure was to minimize the increase in interest expense. Another $7,000,000 was borrowed in long-term funds from the FHLB to fund loan demand and for other liquidity needs. The weighted-average rate on funds borrowed at December 31, 2000 was 5.59%. The weighted-average rate is 236 basis points below the tax equivalent yield of 7.95% on average earning assets for the month ending December 31, 2000.
Balance sheet Assets:Total assets of the Company increased $44,508,000 or 9.97% during 2000. The increase is the result of growth in the liability section, as previously discussed and the retention of profits.
Cash and Due from Banks:At December 31, 1999, total cash and due from banks was $17,957,000. This amount was established to provide additional liquidity in the event of any Year 2000 problems. Of that amount $11,542,000 was in an interest-bearing account at the Federal Home Loan Bank. Having successfully passed year-end 1999, the Bank reduced the level of additional cash and cash equivalents by $9,178,000 at December 31, 2000, to more historic levels. The funds were used to paydown short-term borrowings.
Investments:Total investments had an increase during 2000 of $10,494,000, net of the change in the market value of available-for-sale investments.
United States Government Agency bonds totaling $4,000,000 par value, having a weighted average rate of 8.01%, and Pennsylvania municipal bonds with a par value of $1,860,00 and a weighted average tax-equivalent rate of 8.02%, were purchased in 2000. The investments were classified as available-for-sale.
The Bank sold certain qualifying residential mortgage loans totaling $8,329,000 to FNMA and immediately repurchased the assets as investments (mortgage backed securities). The purpose of this strategy was threefold:
Since it was determined that the securities would not be sold in the future, the Bank classified them as held-to–maturity. This classification protects the balance sheet from downward market trends that available-for-sale securities are exposed to.
Municipal securities and other investments of $1,898,000 were purchased in 2000. Those assets were categorized as available-for-sale. One municipal security of $150,000 was called in 2000.
In 2000, the Bank sold municipal investments from the available-for-sale category having a net book value of $7,466,000 at the time of sale. Included in that amount were securities of $1,412,000 that the Bank had for less than one year, the shortest time period being six months. The remainder had been assets of the Bank between two and nine years. The investments were sold to protect the Bank from call provisions, which all the investments had, and for liquidity purposes.
There were no sales of investments categorized as held-to-maturity during 2000 and there are no trading securities in 2000.
Investments constituted 24.39% of total assets at December 31, 2000. Held-to maturity securities were $7,879,000. The remaining $111,877,000 of the portfolio was classified as available-for-sale. The decision to classify securities as available-for-sale gives the Bank greater flexibility in the management of the investment portfolio.
The tax equivalent yield on debt securities by stated maturity date at December 31, 2000, is as follows (yields are based on amortized cost):
1 year 1 through 5 through More than
or less 5 years 10 years 10 years Total
------- ------- -------- -------- -----
U.S. Government Agencies 0.000% 6.005% 6.574% 6.946% 6.809%
Mortgage Backed Securities 0.000 7.567 6.448 6.534 6.531
State & Municipal Subdivisions 7.120 7.289 7.297 7.297 7.293
- ---------------------------------------------------------------------------------------------------------------------------
Total debt securities 7.120% 6.592% 6.714% 6.914% 6.847%
===========================================================================================================================
Loans:
Gross loans increased $38,351,000 or 12.77% from $300,348,000 in 1999, to $338,699,000 in 2000. Gross loans represent 68.97% of total assets at December 31, 2000.
Commercial loans at December 31, 2000 represent 43.29% of total gross loans, as compared to 37.64% at December 31, 1999. Commercial loans increased $33,550,000 or 29.67% from $113,061,000 at December 31, 1999, to $146,611,000 at December 31, 2000. The Bank increased the portfolio to improve profitability and to better service our community.
At December 31, 2000, the outstanding balance of SBA loans was $4,904,000, a 12.26% increase over 1999.
Tax-free industrial development loans made to or backed by local municipalities increased 41.72% to $10,262,000 at December 31, 2000.
Throughout the year, the Bank has worked closely with Northeast Pennsylvania Economic Development Council, City of Scranton Office of Economic Community Development and the Pennsylvania Economic Development Finance.
Real estate and construction loans of $112,914,000 were 33.34% of gross loans at December 31, 2000. While the outstanding balance of real estate loans at December 31, 2000 were $3,664,000 less than the balances at December 31, 1999, several factors must be considered. As detailed in the discussion of investments, fixed rate residential mortgages of
$8,329,000 were securitized through FNMA and reclassified as investments. In addition, residential mortgages of $8,383,000 were sold on the secondary market, with the Bank retaining the servicing rights. The loans were sold to provide the Bank with liquidity necessary to meet loan demand.
Included with real estate loans are home equity lines of credit. The outstanding balance on the credit lines increased $829,000 or 18.59% from $4,460,000 at December 31, 1999, to $5,289,000 at December 31, 2000.
Consumer loans increased $1,443,027 or 2.22% from $64,998,000 at December 31, 1999, to $66,441,000 at December 31, 2000. The largest portion of consumer loans are simple interest loans secured by vehicles. At December 31, 2000 auto loans were $28,045,000.
During 2000, the Bank sold $7,000,000 loans secured by vehicles that had been initiated by car dealers. The Bank reviewed the loans in an attempt to retain the borrowers who had other relationships with the Bank. The loans were sold without recourse and servicing rights. The loans were sold to provide liquidity.
Credit card outstanding balances increased $1,450,000 or 96.82% from $1,497,00 at December 31, 1999, to $2,947,000 at December 31, 2000.
In 2000, the Bank started an Affinity Credit Card program. At December 31, 2000, the outstanding balance on Affinity Cards was $1,264,000.
Direct financing leases increased $7,022,000 or 122.97% from $5,711,000 at December 31, 1999, to $12,733,000 at December 31, 2000. The growth primarily resulted from increased demand from auto dealers for consumer auto leases.
There are no concentrations of loans to a number of borrowers engaged in similar activities exceeding 10% of total loans that are not otherwise disclosed as a category in tables above.
The Bank sold residential real estate mortgage loans in 2000. At December 31, 2000, the outstanding balance of sold residential mortgage loans in which the Bank retained servicing rights was $42,631,000.
The following table sets forth the maturity distribution of the loan portfolio at December 31, 2000. Excluded from the table are real estate loans, consumer loans and direct financing leases (amounts in thousands):
1 year 1 - 5 More than
or less years 5 years Total
------- ----- ------- -----
Commercial loans $45,214 $40,539 $60,858 $146,611
Real estate construction 2,972 2,972
- ---------------------------------------------------------------------------------------------
Total $48,186 $40,539 $60,858 $149,583
=============================================================================================
The following table sets forth the sensitivity changes in interest rates for commercial and real estate construction loans at December 31, 2000, (amounts in thousands):
1 - 5 More than
Years 5 years Total
----- ------- -----
Fixed interest rate $25,768 $20,775 $46,543
Variable interest rate 14,771 40,083 54,854
- ---------------------------------------------------------------------------------
Total $40,539 $60,858 $101,397
=================================================================================
Fixed asset additions were $2,930,000 in 2000.
Main Office and KIP renovations were $1,393,000 and $393,000 respectively. The renovations were made to modernize and improve both facilities. Another $55,000 was capitalized for system upgrades and furniture at the newly remodeled KIP branch.
The Bank acquired a commercial property in Dunmore, Pennsylvania for future expansion. The acquisition cost was $128,000.
Leasehold improvements of $198,000 and furniture and fixture additions of $120,000 were needed to open the new Peckville branch.
Additions to furniture and fixtures for system hardware and software requirements were $363,000 during 2000.
Other Assets:Due to the market appreciation of available-for-sale investments, the deferred tax asset of $2,408,000 at December 31, 1999, was reduced $1,725,000 to $683,000 at December 31, 2000.
Mortgage servicing rights increased $129,000 from $123,000 at December 31, 1999 to $252,000 at December 31, 2000, due to the mortgages sold during 2000.
Capital ResourcesThe Bank’s major source of capital has been from the retention of earnings, as reflected below:
Net Dividends Earnings
Income Declared Retained
------ -------- --------
2001 $3,848,136 $1,426,097 $2,422,039
2000 3,182,628 1,366,075 1,816,553
1999 3,797,693 1,344,141 2,453,552
1998 3,535,889 1,200,409 2,335,480
1997 3,290,674 1,062,530 2,228,144
Capital was further increased in 2001, through the Dividend Reinvestment Plan (DRIP). Shareholders reinvested $420,000 in dividends to purchase additional shares of stock.
The reinvestment in 2001 was greater than 2000 but more in line with 1999. During 2000, the Bank’s DRIP ended when it merged with the Company. The Company had to receive regulatory approval for its own DRIP and during the process two dividend payments were disbursed. After the approval was granted, shareholders had to apply to become part of the Company’s DRIP.
Capital was affected by changes in market rates, which caused a $63,000 improvement, net of deferred taxes, in the fair value of investments classified as available-for-sale. At December 31, 2000, the Bank reported a net unrealized loss on AFS securities of $1,325,000. At December 31, 2001, the loss was reduced to $1,262,000.
Fluctuations in the capital markets cause frequent changes in the fair value of available-for-sale securities. A future decline in value should not indicate a material weakness in the capital position of the Company. The Company monitors market conditions closely and is prepared to take remedial action when appropriate.
Capital is evaluated in relation to total assets and the risk associated with those assets. With greater capital resources, a bank is more likely to be able to meet its cash obligations and absorb unforeseen losses. Federal regulatory definitions of capital adequacy take the form of minimum ratios. The Bank exceeds all minimum regulatory capital requirements (see Note 15 “Regulatory Matters”, contained within the Notes to Consolidated Financial Statements, and incorporated herein by reference).
A yearly comparison of growth trends is as follows (Increase/(Decrease)):
Earning Short-term Other
Assets % Assets % Deposits % Borrowings % Borrowings %
------ - ------ - -------- - ---------- - ---------- -
2001 $77,952,784 16% $60,585,502 13% $68,468,400 20% $ 6,456,267 13% $ 0 0%
2000 44,507,549 10 44,562,595 10 44,943,343 15 (12,224,325) (20) 5,695,000 10
1999 98,499,609 29 88,171,199 26 54,632,595 23 30,843,747 105 15,053,000 36
1998 58,311,070 20 54,885,888 19 21,962,495 10 304,848 1 30,000,000 245
1997 21,100,757 8 21,363,323 8 5,940,340 3 9,510,675 49 2,252,000 22
Earning assets do not include loans placed on non-accrual.
Liquidity Management and Interest Rate Sensitivity:Liquidity for a bank is primarily the ability to meet working capital requirements and to fund customers’ needs for borrowings and withdrawals. The Bank further desires to have funds available at certain times to take advantage of appropriate investment opportunities. Other considerations include capital expansion, dividend payments and unforeseen events. Sources of liquidity are:
Normally, long-term borrowed funds and stock issuance are used for long-term asset acquisitions or capital considerations and not for short-term liquidity needs.
Management monitors asset and liability maturities to match anticipated cash flow requirements. These cash flow requirements are reviewed with the use of internally generated reports. The Bank has instituted certain procedures and policy guidelines to manage interest-rate risk. These guidelines enable management to react to interest rate changes and potential shifts in the volumes of assets and liabilities. One objective is to insulate the net interest margin from
significant fluctuations. Included in these guidelines are tolerance levels that specify the percentage of asset paydowns and maturities to potential liability maturities and runoff.
The intent of the Bank is to maintain a cumulative gap (rate sensitive assets to rate sensitive liabilities) ratio, over a one year time horizon, between 0.75 and 1.25. At December 31, 2001, the ratio was 0.96. That ratio was arrived at by scheduling investments by call date and liabilities by expected maturity or repricing dates.
Under current market conditions, it was felt that certain securities in the investment portfolio, which had the potential to be called prior to stated maturity, were more likely than not to be called. Even though it is believed that market rates will not significantly change during 2002, many of the investments have rates above the current market and this makes it more likely such securities will be called by the issuers sometime before their scheduled maturity dates.
Loans were scheduled by cash flow projections to the date of maturity or the date of next rate change. Loans available-for-sale were scheduled by stated maturity dates.
Over the years, the Bank has sold fixed-rate mortgage loans to the secondary market. The decision to pursue this course of action was based upon two parameters:
The following chart depicts the contractual maturity and repricing characteristics of interest-earning assets. When evaluating interest-rate risk, the data is refined to include optionality. Such analysis takes into account call features, cash flows, prepayment assumptions and other factors, which may affect the rate sensitivity of the assets (amounts in thousands of dollars):
90 days 91 through 1 to 5 5 or more
or less 365 days years years Total
- ----------------------------------------------------------------------------------------------------------------------
Loans:
Fixed rate............................. $ 4,147 $ 9,916 $ 54,181 $153,012 $ 221,256
Adjustable rate........................ 100,637 24,155 23,263 900 148,955
Debt Securities:
Fixed rate............................. 82,383 30,802 29,858 5,048 148,091
Adjustable rate........................ 2,036 62 - - 2,098
Interest-bearing deposits................ 5,800 - - - 5,800
- ----------------------------------------------------------------------------------------------------------------------
Total.................. $195,003 $ 64,935 $107,302 $158,960 $ 526,200
======================================================================================================================
Nonaccrual loans of $4,914,000 and investments in common stock of $3,785,000 at December 31, 2001 are not included in the maturity distribution table. Loans include those designated as available-for-sale.
Earning assets are based on book value. Book value is net of unrealized losses in the available-for-sale investment portfolio. The total of net unrealized losses in the portfolio before federal taxes is $1,912,000. The net loss reflects the December 31, 2001 market value of the available-for sale investment portfolio. If held until maturity, the Bank would receive full face value.
Scheduling investments by call dates and using amortized cost instead of market values on available-for-sale investments would make the presentation more asset-sensitive in the earlier gap periods.
Investments with call provisions are likely to be called in a downward rate environment. Fixed rate investments of $111,900,000, subject to call during 2002, have maturity dates exceeding one year. Of that amount, $37,000,000 have rates of 6.50% or more which would greatly increase the potential for these bonds to be called, based on year-end rates.
Loans due to mature in one year or less do not include principal reductions on fixed rate loans and leases that historically prepay in a downward rate environment.
The following chart depicts the contractual maturity and repricing characteristics of liabilities with either a defined maturity or repricing schedule. Non-maturity deposits are based on an aging schedule. In evaluating interest-rate risk, data may be refined depending on the anticipated direction of interest rates, expected shifts in volume and other factors which may affect the specific liability’s rate sensitivity.
90 days 91 through 1 to 5 or more
or less 365 days 5 years years Total
------- -------- -------- -------- ---------
Deposits, noninterest- bearing $ 2,068 $ 6,498 $ 25,042 $ 19,694 $ 53,302
Certificates of deposit over $100,000 34,870 36,822 60,883 105 132,680
Other interest-bearing deposits 14,830 59,145 111,411 36,411 221,797
Securities sold under repurchase agreement 52,987 1,265 6 - 54,258
Demand notes, U.S. Treasury 223 - - - 223
Long-term debt 53,000 10,000 - - 63,000
- --------------------------------------------------------------------------------------------------------
Total $157,978 $113,730 $197,342 $ 56,210 $ 525,260
========================================================================================================
Liabilities not having stated maturity dates have been scheduled based upon an aging of the liabilities. The time frames relied upon suggest that the liabilities will have the potential to possibly reprice to current market rates or be withdrawn within the stated period.
For example, at December 31, 2001, the one-year cumulative gap shows that $8,566,000 noninterest-bearing deposits will payout over the next twelve months. In reality, non interest-bearing deposits grew $6,210,000 during 2001. Historical data suggests that the Bank will not experience appreciable repricing or runoff of these non interest-bearing accounts over the course of the next twelve months.
At December 31, 2001, the Bank had the following additional sources of funds, which totaled $76,967,000, available to meet liquidity requirements:
Because more investments were pledged for public funds and Repos than was necessary at December 31, 2001, the available amount at the Fed could be increased approximately $6,576,000.
Management continually monitors the gaps between assets and liabilities and makes adjustments as market rates change. Presently Management believes that there is adequate liquidity to meet normal requirements.
Interest rate risk management:Interest-rate risk management is an integral part of the Asset/ Liability management process. The management of and authority to assume interest-rate risk is the responsibility of the Company’s Asset/Liability Committee (ALCO). ALCO is
comprised of senior management and the Board of Directors. ALCO meets quarterly to monitor the ratio of interest sensitive assets to interest sensitive liabilities. The process to review interest rate risk is a regular part of the management of the Company. Consistent policies to measure and report interest-rate risk are in effect. In addition, policies are reviewed annually by the committee. The annual review establishes acceptable limits on the impact to earnings from shifts in interest rates. These limits may be altered during the year, if so warranted.
Interest-rate risk is defined as the degree to which interest rate movements may affect net interest income, net income and the balance sheet. Fluctuations in rates can affect both interest income and interest expense through the balance of repricing assets and source funds. In addition, changes in interest rates may affect the volume of various assets and liabilities.
If more assets reprice than liabilities within a given time horizon, the balance sheet is positively gapped. This position suggests that the net interest margin and net income would be positively impacted should interest rates rise. Conversely, the net interest margin would be adversely affected should rates fall.
If the balance sheet has more liabilities repricing than assets within a given time horizon, the balance sheet is liability sensitive and negatively gapped. In a declining rate environment, this suggests that net interest income has the potential to improve but with rising rates, net interest income has the potential to decrease.
The Bank uses a simulation model, which attempts to measure the impact changes in rates and/or volumes may have on net interest income, net income and capital adequacy. The model measures the impact of changing interest rates for several scenarios. The following table illustrates the theoretical impact of interest rate changes. The rate movements shown below represent parallel shifts in the yield curve, occurring immediately and lasting for the twelve-month projection.
The analysis assumes that December 31, 2001 levels of assets and liabilities will grow by approximately nine percent over the next twelve months. In the normal course of events, balance sheet growth during a given twelve-month period is anticipated. Growth will affect both revenues and expense. Generally, a higher rate of growth will produce higher levels of net revenues. On a year to year basis, the average rate of the Bank’s growth over the past five years has been slightly above twenty percent. The Bank considers growth of nine percent to be a conservative estimate of how much the Bank will grow in size by the end of 2002. The relative mix of assets and liabilities should remain constant in 2002.
The interest rate movements are immediate and the revenue impacts are estimated for the subsequent twelve-month period.
The table below shows the increase or (decrease) from 2001 reported figures that would occur under the interest rate changes over a twelve-month period beginning January 1, 2002:
Basis Point Change, change in thousands +400 bps +200 bps +100 bps 12/31/01 -100 bps -200 bps -400 bps
- ---------------------------------------- ----------- ----------- ----------- --------------- ----------- ----------- -----------
Net Interest Income $16,147 $16,768 $17,079 $15,526 $17,234 $16,458 $14,439
Net Income $4,040 $4,579 $4,695 $3,848 $4,848 $4,156 $2,771
Present Value of Equity $54,634 $47,805 $44,189 $40,172 $35,753 $30,531 $21,291
======================================== =========== =========== =========== =============== =========== =========== ===========
Proforma +400 bps +200 bps +100 bps 12/31/01 -100 bps -200 bps -400 bps
- ---------------------------------------- ----------- ----------- ----------- --------------- ----------- ----------- -----------
Earnings Per Share $2.23 $2.50 $2.61 $2.12 $2.67 $2.29 $1.53
======================================== =========== =========== =========== =============== =========== =========== ===========
At January 1, 2002, if there was an immediate 200 basis point increase in all market interest rates, net interest income is projected to increase by $1,242,000 over the next twelve months, a 8.00% increase from 2001‘s net interest income. The present value of Bank capital is projected to increase 19.00% to $47,805,000.
If there were an immediate 200 basis point decrease in rates, net interest income is projected to increase $932,000 or 6.00% over twelve months. The present value of the Bank’s capital is projected to decrease 24.00% to $30,531,000.
The reason for earnings improvement under both 200 basis point scenarios is twofold. Historically, when rates increase, the Bank immediately raises borrowing rates and seeks opportunities in the bond market to improve net interest income. Rates on interest-bearing liabilities may be gradually increased, depending on funding requirements. Conversely, when rates decline the Bank is more likely to decrease liability rates before it decreases rates on new loans.
Secondly, the weighted average rate on term deposits and Repos of $190,739,000, maturing within twelve months, was 4.08% at December 31, 2001. The Bank’s offering rate for CDs at December 31, 2001 was 2.25%. If rates went up 200 basis points CDs would be costing approximately the same as at year-end and rates on interest-bearing assets would have increased.
Therefore, under either 200 basis point scenario the Bank is able to improve net interest income.
The same does not hold true should rates drop 400 basis points. At December 31, 2001, non-term interest-bearing deposits of $76,981,000 were at rates of 1.67% or less. It would not be possible to reduce those deposit rates a full 400 basis points at this point in the economic cycle.
The interest rate changes described above are extreme. However, the market events of 2001 proved that rates can move dramatically over the course of twelve months. While the decrease in national prime occurred not immediately but with eleven reductions, prime was reduced 475 basis points.
The projections require a variety of assumptions, including but not limited to prepayment speeds on assets, and, as such, the results should be viewed as approximations. It should be noted that, while the reader is cautioned that these are approximations of possible but not certain events, the December 31, 2000 projection for 2001 net interest income in a 400 basis point declining rate environment was within 96% of actual results.
Should changing interest rates have a negative effect on the financial position of the Bank, prompt corrective measures would be undertaken to minimize any adverse impact.
The percent change in the present value of equity in either an upward or downward 200 basis point shift is within the Bank’s tolerance level of 25%.
The severity of the decrease in the present value of equity in a 400 basis point rate decrease relates to the inability to reduce all interest-bearing liabilities the full 400 basis points. The market value of assets would theoretically increase since rates on assets would either be at or above the current market. With the inability to effectively reduce rates on all interest-bearing liabilities, the liabilities would be above market rates and overvalued. The overvaluation of the liabilities would be deducted from equity to bring that combined section into balance with assets.
Although interest rates have the potential to change appreciably over the course of a year, it is unlikely that some of the more extreme rate changes depicted in the table above will occur, given current market conditions.
2001 2000 1999
---- ---- ----
Net income $3,848,136 $3,182,628 $3,797,693
Earnings per share $2.12 $1.76 $2.12
Increase/(decrease) per share 20.45% (16.98)% 1.92%
Per share data has been adjusted for the stock exchange in 2000.
Net Interest Income:The Federal Reserve Bank lowered the discount rate eleven times in 2001. The discount rate is the rate at which the Federal Reserve Bank lends overnight funds to banks. In response to these actions, national prime dropped 475 basis points from 9.50% to 4.75%.
There is a 234 basis point differential between the weighted average of national prime in 2001 and 2000. The weighted average of national prime in 2001 and 2000 was 6.90% and 9.24%, respectively. This difference reflects on the yield on earning assets and the cost of funds when comparing both years.
The actions of the Federal Reserve Bank caused decreases in the rates charged on loans that were subject to repricing and on the rates offered on new loans in 2001. Approximately 23% of the entire loan portfolio was subject to immediate repricing at December 31, 2001. Rates charged on new loans paralleled the reductions in prime. Sales of older loans contributed to the decline in the overall yield on loans.
Market reaction to the drop in prime significantly increased the amount of bonds called during 2001. To properly collateralize public fund deposits and Repos, the Bank had to replace the called bonds with bonds producing a lower yield.
Excess funds from asset turnover and the increase of liabilities were sold daily. The rates on these “Fed funds sold” were at historic lows.
Due to the combination of these factors, the tax equivalent yield on earning assets decreased 58 basis points.
Interest expense was also effected by the decline in national prime. In addition to the drop in rates paid on deposits and Repos, the Bank used the increase in funds to payoff $10,950,000 in short-term borrowings at the FHLB, further reducing interest expense. There were rate promotions at the new Kingston branch to develop deposit growth. This had minimal effect on the overall reduction of interest expense.
The effect of market changes caused a 72 basis point decrease in the cost of funds.
With the 14 basis point increase in the tax-equivalent net interest spread and volume increases in loans and investments, net interest income rose $1,909,000 or 14.02% during 2001.
During 2000, the Federal Reserve Bank raised the discount rate three times. These actions caused national prime to increase from 8.50% to 9.50%. The weighted average rate of national prime rose 124 basis points.
The actions of the Federal Reserve Bank caused increases in the rates charged on loans that were subject to repricing and on the rates offered on new loans in 2000. Approximately 18% of the entire loan portfolio was subject to immediate repricing at December 31, 2000.
To remain competitive, the rates charged on new residential mortgages and consumer loans did not rise directly with the increases in prime. New products, such as the Affinity Card, were offered at discounts from established Bank products.
With the increase in national prime, it became difficult to sell from the inventory of fixed rate residential loans at a break even level. The sale of loans provides a source of funds that can then be loaned at a higher yield in a rising rate market.
In the preceding year, the Bank realized a significant increase in short-term public fund deposits and Repos. To properly secure these deposits, the Bank purchased callable fixed rate bonds. When rates increased, the bonds were not called, as the issuers took advantage of the lower cost of borrowings.
Due to the combination of these factors, the Bank was only able to recognize a 35 basis point improvement in the tax equivalent yield on earning assets.
In order to provide the liquidity to meet loan demand and thereby improve the yield on earning assets, the Bank began to raise the interest rates paid on deposits and Repos. Interest expense was also effected by a rise in the rates charged on borrowed funds. In addition, the cost of funds was increased by deposit promotions, including the Super NOW and internet-generated deposit accounts and the acceptance of brokered funds.
The effect of these increases caused an 80 basis point increase in the cost of funds.
Despite a 45 basis point reduction in tax-equivalent net interest spread, net interest income rose $452,000 or 3.44% during 2000. This was primarily accomplished through volume increases in loans and investments.
A comparison of average earnings assets and the net tax equivalent yields for 2001, 2000 and 1999, in thousands, is as follows:
2001 2000 1999
--------------------------------------------------------------------------------------------
Average Revenue Yield Average Revenue Yield Average Revenue Yield
Earning assets: Balance (Expense) (Cost) Balance (Expense) (Cost) Balance (Expense) (Cost)
--------------------------------------------------------------------------------------------
Interest-bearing deposits $12,716 $181 1.42% $6,833 $45 0.66% $6,629 $89 1.34%
-------- -------- -------- -------- -------- -------- -------- -------- --------
Investments:
US Treasuries 0 0 0.00 0 0 0.00 2,985 205 6.87
US Government Agencies 85,365 5,535 6.48 81,741 5,545 6.78 63,863 4,257 6.67
Mortgage-backed securities 16,971 1,070 6.30 13,180 876 6.65 6,946 444 6.39
State & Municipal 15,144 1,017 6.72 21,320 1,520 7.12 23,698 1,649 6.96
Other 4,311 272 6.31 5,555 383 6.90 3,390 219 6.46
-------- -------- -------- -------- -------- -------- -------- -------- --------
Total Investments 121,791 7,894 6.48 121,796 8,324 6.51 100,882 6,774 6.71
-------- -------- -------- -------- -------- -------- -------- -------- --------
Loans:
Commercial 169,621 13,748 8.11 138,420 12,473 9.01 110,446 9,004 8.15
Consumer 62,180 5,436 8.74 60,728 5,272 8.68 47,588 3,996 8.40
Real estate 110,854 8,207 7.40 118,375 8,720 7.37 118,637 8,826 7.44
Direct financing leases 10,026 724 7.22 8,775 764 8.71 3,101 296 9.55
Credit cards 2,959 283 9.56 2,054 202 9.83 1,230 147 11.95
-------- -------- -------- -------- -------- -------- -------- -------- --------
Total loans 355,640 28,398 7.99 328,352 27,431 8.35 281,002 22,269 7.92
-------- -------- -------- -------- -------- -------- -------- -------- --------
Federal funds sold 20,501 544 2.65 0 0 0 2,682 128 4.77
-------- -------- -------- -------- -------- -------- -------- -------- --------
Total earning assets $510,648 $37,017 7.25% $456,981 $35,800 7.83% $391,195 $29,260 7.48%
=========================================================================================================================
Interest-bearing liabilities
Deposits:
Savings $31,523 ($448) 1.42% $32,881 ($631) 1.92% $35,548 ($723) 2.03%
NOW 35,513 (747) 2.10 38,125 (1,840) 4.83 17,838 (333) 1.87
MMDA 11,538 (324) 2.81 13,655 (533) 3.90 14,569 (500) 3.43
CDs < $100,000 130,494 (7,133) 5.47 109,665 (6,291) 5.74 107,531 (5,685) 5.29
CDs > $100,000 123,928 (6,871) 5.54 91,055 (5,783) 6.35 66,095 (3,584) 5.42
Clubs 1,287 (33) 2.56 1,216 (32) 2.61 1,176 (33) 2.81
-------- -------- -------- -------- -------- -------- -------- -------- --------
Total Deposits 334,283 (15,556) 4.65 286,597 (15,110) 5.27 242,757 (10,858) 4.47
-------- -------- -------- -------- -------- -------- -------- -------- --------
Repurchase agreements 40,970 (1,510) 3.69 34,149 (1,917) 5.61 31,639 (1,519) 4.80
Borrowed funds 66,674 (3,788) 5.68 74,070 (4,441) 6.00 56,943 (2,999) 5.27
-------- -------- -------- -------- -------- -------- -------- -------- --------
Total interest-bearing
liabilities $441,927 ($20,854) 4.72% $394,816 ($21,468) 5.44% $331,339 ($15,376) 4.64%
-------- -------- -------- -------- -------- -------- -------- -------- --------
Net interest income $16,163 $14,332 $13,884
======== ======== ========
Net interest spread 2.53% 2.39% 2.84%
Net interest margin 3.17% 3.14% 3.55%
Total average assets $533,007 $472,838 $403,953
======== ======== ========
Average noninterest-bearing
deposits $46,921 $41,813 $36,129
======== ======== ========
Interest income was adjusted to a tax-equivalent basis to recognize the income from tax-exempt assets as if the interest was taxable. This treatment allows a uniform comparison to be made between yields on assets. The calculations were computed on a fully tax-equivalent basis using the corporate federal tax rate of 34%.
Nonaccrual loans and any related interest recorded have been included in computing the average rate earned on the loan portfolio. Installment loans and direct financing leases are presented net of unearned interest. All deposits are in domestic bank offices. The average balances are based on amortized cost and do not reflect unrealized gains or losses.
Net yield on earning assets represents the difference between interest revenue and (expense) divided by total average earning assets.
The following table reflects the change in net interest income attributable to fluctuations in volume and rate:
Years ended December 31,
( in thousands )
2001 Compared to 2000 2000 Compared to 1999
Increase (Decrease) due to Increase (Decrease) due to
-------------------------- --------------------------
Volume Rate Total Volume Rate Total
------ ---- ----- ------ ---- -----
Interest income:
Loans and leases:
Mortgage $ (553) $ 39 $ (514) $ (20) $ (86) $ (106)
Commercial 2,462 (1,304) 1,158 2,498 986 3,484
Consumer 303 (83) 220 1,709 77 1,786
Total loans and leases 2,212 (1,348) 864 4,187 977 5,164
Investment securities, interest-bearing
deposits and federal funds sold 886 (456) 430 1,294 86 1,380
Total interest income $ 3,098 $(1,804) $ 1,294 $ 5,481 $ 1,063 $6,544
Interest expense:
Deposits:
Certificates of deposit greater
than $100,000 $ 1,821 $ (726) $ 1,095 $ 1,585 $ 615 $2,200
Other 1,069 (1,717) (648) 1,191 860 2,051
Total deposits 2,890 (2,443) 447 2,776 1,475 4,251
Other interest-bearing liabilities (169) (893) (1,062) 1,169 672 1,841
Total interest expense $ 2,721 $(3,336) $ (615) $ 3,945 $ 2,147 $6,092
Net interest income $ 377 $(1,532) $ 1,909 $ 1,536 $(1,084) $452
The portion of the total difference attributable to both volume and rate changes during the periods has been allocated to the volume and rate components based upon the absolute dollar amount of the change in each component prior to the allocation. Tax- exempt income was not converted to a tax-equivalent basis on the rate volume analysis.
Provision for Loan Losses:The provision is an expense charged against earnings for actual or potential losses from uncollectible loans and leases. Through the provision, the allowance for loan loss is funded. Loans determined to be uncollectible are charged-off against the allowance.
The Bank has established an Asset Quality Committee which meets monthly to review known and potential problem loans and leases. The committee is comprised of senior management, credit administration and collection personnel. The committee reports quarterly to the Credit Administration Committee of the Board of Directors.
Management continuously reviews the risks inherent in the loan and lease portfolios. Specific factors used to evaluate the adequacy of the loan loss provision during this formal process include:
The Bank does not have significant concentrations of loans in specific industries or outside the Northeastern Pennsylvania geographic area. For the period ended December 31, 2001, there were no adjustments made to the historical loan loss experience for the factors specified above. There are no individual significant nonperforming loans.
The following table sets forth loans and lease financing charge-offs and recoveries, through the allowance for loan loss by category for the past five years:
(in thousands)
2001 2000 1999 1998 1997
---- ---- ---- ---- ----
Balance at beginning of period $3,264 $3,172 $3,008 $2,809 $2,590
--------- --------- --------- --------- ---------
Charge-offs:
Commercial and all other 1,003 602 139 193 286
Real estate 119 75 146 43
Consumer 909 456 196 258 183
Lease financing 180 18 - 86 15
--------- --------- --------- --------- ---------
Total 2,211 1,151 481 580 484
--------- --------- --------- --------- ---------
Recoveries:
Commercial and all other 86 14 46 56 47
Real estate 3 17 6 36 5
Consumer 108 53 63 39 28
Lease financing 17 1 - 2 -
--------- --------- --------- --------- ---------
Total 214 85 115 133 80
--------- --------- --------- --------- ---------
Net charge-offs 1,997 1,066 366 447 404
--------- --------- --------- --------- ---------
Additions charged to operations 2,475 1,158 530 646 623
--------- --------- --------- --------- ---------
Balance at end of period $3,742 $3,264 $3,172 $3,008 $2,809
========= ========= ========= ========= =========
Net charge-offs to average loans outstanding 0.56% 0.33% 0.13% 0.20% 0.23%
Allowance for loan loss to net charge-offs 187.38% 306.19% 866.67% 672.93% 695.30%
Allowance for loan loss to net loans 1.01% 0.95% 1.05% 1.23% 1.39%
Loans 30 - 89 days past due and accruing $7,156 $11,049 $4,914 $2,829 $3,521
Loans 90 days or more past due and accruing $5,398 $1,493 $2,917 $2,689 $2,189
Allowance for loan loss to loans 90 days or
more past due and accruing 69.32% 218.69% 108.74% 111.86% 128.32%
Nonaccruing loans $4,914 $2,287 $1,210 $1,364 $1,076
Allowance for loan loss to nonaccruing loans 76.15% 142.75% 262.15% 220.49% 261.09%
Allowance for loan loss to non-performing loans 36.29% 86.37% 76.86% 74.21% 86.03%
Average net loans $352,230 $325,163 $277,809 $218,170 $178,363
As evidenced in the table above, there has been no significant difference between the additions charged to operations and actual net charge-off results over the last five years.
The allowance for loan losses can generally absorb losses throughout the loan and lease portfolios. However, in some instances an allocation is made for specific loans or groups of loans.
As detailed in the table above, the allowance for loan loss expressed as a percent of net charge-offs has been declining for the past two years due to the increase in the amount of loans being charged off.
The slowing economy has impacted the loan portfolio the past two years. That trend is reflected in the increase in charged-off loans, especially commercial and consumer. The increase in the number of delinquencies necessitated the hiring of additional collection personnel.
Allocation of the allowance among major categories of loans for the past five years is summarized below. This table should not be interpreted as an indication that charge-offs in future periods will occur in these amounts or proportions, or that the allocation indicates future charge-off trends.
2001 2000 1999 1998 1997
----- ----- ---- ---- ----
Category
Real Estate $ 269,490 $ 117,534 $1,165,295 $1,066,687 $ 877,939
Consumer 959,408 736,613 692,878 507,946 399,063
Commercial 2,197,365 2,270,663 1,196,789 914,305 678,407
Direct financing leases 136,091 131,150 62,989 25,397 19,953
Real estate 0 0 31,494 25,397 19,953
construction
Unallocated 179,579 8,320 22,930 467,981 813,751
- ---------------------------------------------------------------------------------------------------------------------------
Total $3,741,933 $3,264,280 $3,172,375 $3,007,713 $2,809,066
===========================================================================================================================
Consumer loans include credit cards.
The December 31, 2000 allocation for commercial loans was $2,271,000 compared to actual 2001 net charge-offs of $917,000. The positive variance was the result of collection efforts in 2001. The 2001 commercial loan allocation is based upon delinquency levels at year-end.
The December 31, 2000 allocation for all other categories of loans and leases was adequate compared to the actual net charge-offs in 2001.
Over the last five years, management has analyzed and relied on similar factors in determining the amount of loan loss provision relative to the adequacy of the allowance for loan loss. The methodology used by the bank to analyze the adequacy of the allowance for loan losses is as follows (loans and leases are collectively referred to as loans):
Allocation of the allowance for loan losses for different categories of loans is based on the methodology used by the Bank, as explained above. The changes in the allocations from year to years is based upon year end reviews of the loan and lease portfolios.
The following table sets forth non-performing assets for the past five years (in thousands):
2001 2000 1999 1998 1997
---- ---- ---- ---- ----
Net loans $370,126 $343,555 $301,089 $243,957 $202,403
Restructured loans $0 $0 $0 $0 $0
Loans past due 90 days or more and accruing 5,398 1,493 2,917 2,689 2,189
Nonaccrual loans 4,914 2,287 1,210 1,364 1,076
- ----------------------------------------------------------------------------------------------------------------------
Non-performing loans 10,312 3,780 4,127 4,053 3,265
Foreclosed real estate 465 353 413 201 276
Repossessed assets 158 0 0 0 0
- ----------------------------------------------------------------------------------------------------------------------
Total non-performing assets $10,935 $4,133 $4,540 $4,254 $3,541
======================================================================================================================
Nonaccrual loans to net loans 1.33% 0.67% 0.40% 0.56% 0.53%
Non-performing assets to net loans, foreclosed real estate
and repossessed assets 2.95% 1.20% 1.51% 1.74% 1.75%
Non-performing assets to total assets 1.92% 0.84% 1.02% 1.22% 1.22%
Non-performing loans to net loans 2.79% 1.10% 1.37% 1.66% 1.61%
Net loans include loans available-for-sale.
Gross interest income that would have been recorded in 2001, if nonaccrual loans were current, was $386,717. There was no recognition of interest income on non-accrual loans during 2001.
Payments received on non-accrual loans are recognized on a cash basis. Payments are first applied against the outstanding principal balance until the balance is satisfied. Subsequent payments are then recorded as interest income and finally late charges.
In the internal review of loans for both delinquency and collateral sufficiency, management concluded that there were an above average number of loans that lacked the ability to repay in accordance with contractual terms. The decision to place loans or leases on a non-accrual basis is made on an individual basis after considering factors pertaining to the loan.
In addition, it was determined throughout the year there were other loans that did not have the ability to make any repayment. Accordingly, management found it necessary to charge-off $2,211,000 of these loans and to increase the allowance for loan loss for certain other loans. The charge-offs were made after collateral was repossessed, foreclosed upon or notice was forwarded to governmental guarantors. The allowance for loan loss was increased through the provision for loan loss. Even with these actions, the percentage of non-performing loans to net loans increased from 1.10% at December 31, 2000, to 2.79% at December 31, 2001.
The majority of the increase in non-performing loans and loans past due 90 days or more for the period is attributed to credit made to small businesses and start-up companies that experienced cash flow problems. Several of these loans are guaranteed by governmental agencies and the Bank’s loss exposure is reduced accordingly. Consumer loan payments have also slowed during the year and increased collection efforts have been implemented to reduce delinquencies.
A specific reserve through PENNCAP has been established for eligible loans to cover losses sustained by the Bank on enrolled loans. The reserve balance at December 31, 2001 was $91,0000.
The Bank is unaware of any potential problem loans that have not been reviewed and addressed. Potential problem
loans are those where there is known information that leads the Bank to believe repayment of principal and/or interest is in jeopardy and the loans are neither non-accrual nor past due 90 days or more.
Based upon the thorough analysis of both the loan portfolio and the allowance for loan losses at December 31, 2001, the Bank is confident that the allowance provides adequate protection against portfolio loss. However, there could be instances of which the Bank is unaware that may require additional charge-offs and or increases to the provision.
Other IncomeThe $94,000 increase in service charges on deposit accounts is a result of the growth in the number of accounts and changes to the service charge structure. Service charges were last revised during the second quarter of 2000. Service charges on deposit accounts exceeded 1.00% of gross income.
The Bank sold investment securities in order to protect earnings from potential calls. Waiting for a bond to be called under the prevailing market conditions would have exposed the Bank to reinvesting the proceeds at lower yields. By selling before call, the Bank was able to reinvest the proceeds at a higher rate with an extended call period. The sales produced a gain of $459,000, which exceeded 1.00% of gross income.
Included in the gains on sold investments was $225,000 from the sale of Sallie Mae stock. At one time that banks were required to own the stock if they desired to participate in the student loan program. Banks are no longer required to own the stock in order to participate.
There were no sales of investments classified as held-to-maturity.
As discussed in previous sections herein, loan sales were also based upon the need to protect future earnings from interest-rate risk. Loan sales generated net gains of $315,000 in 2001. That amount was increased by the recognition of the discounted future value of servicing rights on sold loans. The amount of realized income from servicing rights, included in total net gains from the sale of loans, was $117,000.
There were no sales of loans classified as held-to-maturity.
The increase in loans before the allowance for loan losses, helped to generate an additional $138,000 in service charges during 2001. Service charges on loans are classified as a component of fees and other service charges. Service charges are recognized as income upon collection.
Some components of fees and other service charges and other operating income and their related increase during 2001:
Increase
--------
Service fees on sold loans $114,000
Trust income 77,000
Annuity commissions 66,000
ATM service charges 55,000
Fees on sold loans rose through volume increases.
Expanding business in the trust department increased revenues.
Late in 2000, a new business development officer was hired to accommodate the sale of alternative financial products. Those products include mutual funds and annuities, which are not insured by the FDIC. An additional staff member was hired in 2001. Their combined efforts generated increased revenues.
The new ATM locations generated additional service charge income.
The year 2000 as compared to 1999The $248,000 increase in service charges on deposit accounts is a result of the growth in the number of accounts and changes to the service charge structure.
Investment securities were sold in order to provide liquidity when needed. By providing funds for loan demand, the Bank improved its yield on earning assets. The 2000 tax equivalent yield on average loans and investments was 7.92% and 6.51%, respectively. Sales of available-for-sale investments produced net gains of $41,000. There were no sales of investments classified as held-to-maturity.
Loan sales were also predicated upon liquidity needs. Sales generated net gains of $62,000 in 2000. That amount was increased by the recognition of the discounted future value of servicing rights on sold loans. The amount of realized income from servicing rights was $149,000.
In compliance with FASB Statement No. 65, loans designated as available-for-sale must be carried at the lower of cost or market. By the end of 2000, the market value slightly surpassed book value and the Bank was able to recoup the $146,000 which it had written down during 1999, when the market value was below book.
The $57,980,000 increase in loans, before the allowance for loan losses, helped to generate an additional $185,000 in service charges.
Some components of fees and other service charges and other operating income and their related increase during 2000:
Increase
--------
ATM service charges $109,000
Fees on sold loans 49,000
Checkbook fees 47,000
Merchant credit card income 47,000
Fees on sold loans, merchant credit card income and checkbook fees rose through volume increases.
The new branch locations and issued card increases helped to generate additional income from ATM service charges.
Other ExpenseThe average number of full-time equivalent employees was 168 in 2001. Merit pay raises, higher benefit costs and the addition of senior officers to address the growing needs of the Bank increased 2001 salaries and employee benefits by $508,000 above the amount reported for 2000.
During 2001, the Peckville office, opened in February 2000, was operating for a full twelve months. The Kingston office was opened for nine months. The impact of these branches contributed to a $172,000 increase in premises and equipment expense during 2001. Over 32% of the increase resulted from a $55,000 rise in depreciation expense. Depreciation on premises was $326,000 and depreciation on furniture and fixtures was $775,000. Furniture and fixture depreciation exceeded 1% of gross income.
Despite the addition of the Kingston branch new branch advertising decreased 3.00% from 2000.
Some components of other expense and their change during 2001:
Increase/
(Decrease)
----------
Merchant card expense $(209,000)
Donations 190,000
Fidelity D&D Bancorp organization (150,000)
Stationery and supplies (99,000)
Capital shares tax (70,000)
Correspondent banks 55,000
MAC expense 58,000
During 2001, the Bank sold its merchant credit card portfolio. This resulted in savings of $209,000.
Under a state-sponsored initiative, the Bank contributed $111,000 to a specified qualified local educational unit. In exchange for the donation the Bank received state tax credits of $100,000 which were applied towards capital shares expense.
The Fidelity D & D Bancorp, Inc. organization resulted in a one time expense of $150,000 in 2000. No such expense was incurred during 2001.
With the reduction of new branch additions in 2001 and tighter purchasing controls, stationery and supply expense was reduced.
Charges from correspondents for the processing of the Bank’s cash letter constitute the majority of this expense. Because of increased costs, the Bank elected to process its cash letter through the Fed in order to reduce costs.
Additional ATM units placed in service during 2001 increased expense.
The year 2000 as compared to 1999The average number of full-time equivalent employees increased by 10 to 166 in 2000. The 6% average staff increase, merit pay raises and higher benefit costs increased 2000 salaries and employee benefits by $424,000 above the amount reported for 1999.
During 2000, the West Pittston, Financial Center and Moosic retail branches were opened for a full twelve months. The Peckville office was opened for eleven months. The impact of these branches contributed to a $621,000 increase in premises and equipment expense during 2000. Over 45% of the increase resulted from a $283,000 rise in depreciation. Depreciation on premises was $292,000 and depreciation on furniture and fixtures was $754,000. Furniture and fixture depreciation exceeded 1% of gross income.
Advertising expense of $398,000 exceeded 1% of gross income during 2000. However, despite the addition of a new branch during 2000, advertising remained relatively unchanged from 1999.
Some components of other expense and their increases during 2000:
Increase
--------
FDIC insurance assessment $ 33,000
Audit 52,000
Legal and professional 77,000
Fidelity D&D Bancorp organization 150,000
Postage 35,000
Consumer leasing 81,000
Donations 34,000
Credit information 30,000
MAC expense 41,000
The Fidelity D&D Bancorp, Inc. organization resulted in a one time expense of $150,000. The organization also caused expense increases in other areas. Among those line items effected were audit, $11,000 and legal and professional, $74,000.
The 123% growth in direct financing leases caused related insurance coverage to rise $81,000. The other items rose due to the increase in the number of Bank locations and accounts serviced.
Other Items:From time to time, various types of federal and state legislation have been proposed that could result in additional regulations and restrictions on the business of the company and the Bank. We cannot predict whether legislation will be adopted, or if adopted, how the new laws would affect our business. As a consequence, we are susceptible to legislation that may increase the cost of doing business. Management believes that the effects of current proposals on the liquidity, capital resources and the results of operations of the Company and the Bank will be immaterial.
Management is unaware of any other specific regulatory recommendations which, if implemented, would have a material effect upon our liquidity, capital resources or results of operations. However, the general cost of compliance with numerous federal and state laws does have, and in the future may have, a negative impact on our results of operations.
Further, our business is also affected by the state of the financial services industry, in general. As a result of legal and industry changes, management predicts that the industry will continue to experience an increase in consolidations as the financial industry strives for greater cost efficiencies and market share. Management is optimistic that these consolidations may enhance the Bank’s competitive position as a community bank.
Outlook for 2002:As detailed in Section 2, “Properties”, the Bank plans to open a branch in Eynon, Pennsylvania during 2002. Costs to open the branch are estimated at $250,000. The costs will be capitalized.
In 1990, the Bank purchased a core processing system. That system provides the means from which the Bank gathers and processes data information on a day to day basis. Enhancements to the system over the years have increased memory and processing speeds. In addition, other systems such as the electronic data retrieval system, a network and our Web page, to name a few, were acquired to compliment the core processing system.
After eleven years, it has become apparent that the core system needed to be replaced, in order to effectively operate the Bank and service our clientele. To this end, the Bank will install a new core processing system during 2002. The cost of the system will approximate $1,300,000. The costs will be capitalized. The new system has the capability of utilizing some of the complementary systems already in place.
The Bank anticipates that the costs to open the Eynon branch and the purchase of the core processing system will be internally funded.
After a down year in 2000, net income for 2001 increased beyond the previous high. While this was a positive development, we recognize that there are challenges ahead. The addition of key personnel was an important step in addressing future challenges. Review and implementation of policies, procedures and products will continue. These steps are designed to provide the Company with stability and the wherewithal to provide customer service and increase shareholder value.
8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATABoard of Directors and Shareholders
Fidelity D & D Bancorp, Inc.
Dunmore, Pennsylvania:
We have audited the accompanying consolidated balance sheet of Fidelity D & D Bancorp, Inc. and Subsidiary as of December 31, 2001 and 2000 and the related consolidated statements of income, changes in shareholders’ equity and cash flows for each of the three years in the period ended December 31, 2001. 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 auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Fidelity D & D Bancorp, Inc. and Subsidiary as of December 31, 2001 and 2000, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2001 in conformity with accounting principles generally accepted in the United States of America.
2001 2000
ASSETS:
Cash and due from banks $ 19,845,029 $ 5,502,430
Interest-bearing deposits with financial institutions 5,799,943 3,277,062
--------------- -----------------
Total cash and cash equivalents 25,644,972 8,779,492
Held-to-maturity securities 21,640,254 7,879,433
Available-for-sale securities 132,333,734 111,876,958
Loans and leases, net (allowance for loan losses of
$3,741,933 in 2001 and $3,264,280 in 2000) 353,976,324 333,600,975
Loans available-for-sale (fair value $16,418,155 in
2001; $10,100,707 in 2000) 16,150,020 9,953,958
Accrued interest receivable 3,268,456 3,546,504
Bank premises and equipment, net 11,513,154 11,390,479
Foreclosed assets held for sale 688,041 353,253
Other assets 3,814,883 3,696,002
--------------- -----------------
Total assets $ 569,029,838 $ 491,077,054
=============== =================
LIABILITIES:
Deposits:
Noninterest-bearing $ 53,301,605 $ 47,185,597
Certificates of deposit of $100,000 or more 132,679,995 94,717,931
Other interest-bearing deposits 221,797,128 197,406,800
--------------- -----------------
Total deposits 407,778,728 339,310,328
Accrued interest payable and other liabilities 3,597,892 3,526,942
Short-term borrowings 54,480,988 48,024,721
Long-term debt 63,000,000 63,000,000
--------------- -----------------
Total liabilities 528,857,608 453,861,991
--------------- -----------------
SHAREHOLDERS' EQUITY:
Preferred stock authorized 5,000,000 shares with no par
value, none issued - -
Capital stock authorized 10,000,000 shares with no par
value; issued and outstanding 1,819,168 shares in
2001 and 1,806,274 shares in 2000 9,353,452 8,881,713
Retained earnings 32,080,824 29,658,785
Accumulated other comprehensive loss (1,262,046) (1,325,435)
--------------- -----------------
Total shareholders' equity 40,172,230 37,215,063
--------------- -----------------
Total liabilities and shareholders' equity $ 569,029,838 $ 491,077,054
=============== =================
2001 2000 1999
------ ------ ------
INTEREST INCOME:
Loans:
Taxable $ 26,588,925 $ 25,813,687 $ 21,098,998
Nontaxable 768,403 681,517 662,857
Leases 695,406 693,518 262,452
Interest-bearing deposits with financial institutions 181,172 44,789 89,323
Investment securities:
U.S. Treasury - - 204,705
U.S. government agency and corporations 6,604,787 6,421,742 4,701,262
States and political subdivisions (nontaxable) 724,878 1,047,280 1,173,783
Other securities 272,395 383,247 219,256
Federal funds sold 543,723 - 128,415
-------- -- --------
Total interest income 36,379,689 35,085,780 28,541,051
----------- ----------- -----------
INTEREST EXPENSE:
Certificates of deposit of $100,000 or more 6,847,969 5,753,162 3,558,826
Other deposits 8,708,515 9,356,475 7,299,315
Securities sold under repurchase agreements 1,509,567 1,917,453 1,519,054
Other short-term borrowings and long-term debt 3,762,258 4,411,197 2,973,266
Other 25,322 29,943 25,338
------- ------- -------
Total interest expense 20,853,631 21,468,230 15,375,799
----------- ----------- -----------
NET INTEREST INCOME 15,526,058 13,617,550 13,165,252
PROVISION FOR LOAN LOSSES 2,474,637 1,158,260 530,000
---------- ---------- --------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 13,051,421 12,459,290 12,635,252
----------- ----------- -----------
OTHER INCOME:
Service charges on deposit accounts 1,075,990 982,056 733,939
Gain on sale of:
Investment securities 458,980 41,109 1,400
Loans 315,357 211,698 196,813
Gain (loss) on sale of loans available-for sale - 145,871 (145,847)
Gain (loss) on sale of foreclosed assets held for sale 18,051 (65,209) (71,413)
Fees and other service charges 1,784,955 1,537,028 1,349,476
Other operating income 48,245 87,456 92,006
------- ------- -------
Total other income 3,701,578 2,940,009 2,156,374
---------- ---------- ----------
OTHER EXPENSES:
Salaries and employee benefits 6,122,589 5,614,256 5,190,480
Premises and equipment 2,425,920 2,253,659 1,632,530
Advertising 386,473 398,443 402,960
Other 3,064,015 3,367,922 2,873,075
---------- ---------- ----------
Total other expenses 11,998,997 11,634,280 10,099,045
----------- ----------- -----------
INCOME BEFORE PROVISION FOR INCOME TAXES 4,754,002 3,765,019 4,692,581
PROVISION FOR INCOME TAXES 905,866 582,391 894,888
-------- -------- --------
NET INCOME, AS RESTATED FOR 2000 AND 1999 $ 3,848,136 $ 3,182,628 $ 3,797,693
============ ============ ============
Per share data:
Net income - basic $ 2.12 $ 1.76 $ 2.12
Net income - diluted $ 2.12 $ 1.76 $ 2.12
Dividends $ 0.79 $ 0.76 $ 0.75
See Notes to Consolidated Financial Statements
ACCUMULATED
OTHER
CAPITAL STOCK RETAINED COMPREHENSIVE
SHARES AMOUNT EARNINGS LOSS TOTAL
BALANCE, DECEMBER 31, 1998, AS PREVIOUSLY REPORTED 1,787,294 $ 8,222,993 $ 25,656,844 $ 133,868 $ 34,013,705
Prior period adjustment - error in accounting
for student loans and related interest income (268,164) (268,164)
---------- ---------- ---------- ---------- ----------
BALANCE, DECEMBER 31, 1998, AS RESTATED 1,787,294 8,222,993 25,388,680 133,868 33,745,541
---------- ---------- ---------- ---------- ----------
Comprehensive loss:
Net income, as restated 3,797,693 3,797,693
Change in net unrealized holding gains (losses)
on available-for-sale securities, net of
reclassification adjustment and tax effects (4,807,581) (4,807,581)
----------
Comprehensive loss, as restated (1,009,888)
----------
Dividends (1,344,141) (1,344,141)
Dividends reinvested 13,490 450,038 450,038
---------- ---------- ---------- ---------- ----------
BALANCE, DECEMBER 31, 1999 1,800,784 8,673,031 27,842,232 (4,673,713) 31,841,550
Comprehensive income:
Net income, as restated 3,182,628 3,182,628
Change in net unrealized holding gains (losses)
on available-for-sale securities, net of
reclassification adjustment and tax effects 3,348,278 3,348,278
----------
Comprehensive income, as restated 6,530,906
----------
Stock options excercised 250 15,500 15,500
Dividends (1,366,075) (1,366,075)
Dividends reinvested 5,240 193,182 193,182
---------- ---------- ---------- ---------- ----------
BALANCE, DECEMBER 31, 2000 1,806,274 8,881,713 29,658,785 (1,325,435) 37,215,063
----------
Comprehensive income:
Net income 3,848,136 3,848,136
Change in net unrealized holding gains (losses)
on available-for-sale securities, net of
reclassification adjustment and tax effects 63,389 63,389
----------
Comprehensive income 3,911,525
----------
Stock options excercised 1,500 51,313 51,313
Dividends (1,426,097) (1,426,097)
Dividends reinvested 11,394 420,426 420,426
---------- ---------- ---------- ---------- ----------
BALANCE, DECEMBER 31, 2001 1,819,168 $ 9,353,452 $ 32,080,824 $(1,262,046) $ 40,172,230
========== ========== ========== ========== ==========
See Notes to Consolidated Financial Statements
2001 2000 1999
- ------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 3,848,136 $3,182,628 $ 3,797,693
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation 1,101,522 1,046,261 762,865
Amortization of securities (net of accretion) (42,029) (69,083) (119,263)
Provision for loan losses 2,474,637 1,158,260 530,000
Deferred income taxes (56,116) 473,828 258,291
Gain on sale of investment securities (458,980) (41,109) (1,400)
Gain on sale of loans (315,357) (211,698) (196,813)
(Gain) loss on sale of foreclosed assets held for sale (18,051) 14,582 71,413
(Gain) loss on sale of loans available for sale - (145,871) 145,847
Amortization of loan servicing rights 42,046 19,494 -
Change in:
Accrued interest receivable 278,048 (574,974) (830,219)
Other assets (137,466) (543,691) (1,718,471)
Accrued interest payable and other liabilities 70,950 720,018 (102,896)
---------- ---------- ----------
Net cash provided by operating activities 6,787,340 5,028,645 2,597,047
---------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net decrease in federal funds sold - - 6,500,000
Held-to-maturity securities:
Proceeds from maturities and calls 5,233,860 449,746 -
Purchases (18,993,750) - -
Available-for-sale securities:
Proceeds from sales 14,463,072 7,507,108 201,400
Proceeds from maturities, calls and paydowns 92,693,241 957,744 22,974,907
Purchases (127,016,966) (5,896,249) (57,409,856)
Proceeds from sale of loans available-for-sale 22,048,265 6,929,056 11,796,340
Net increase in loans and leases (51,400,803) (58,899,416) (73,436,547)
Acquisition of bank premises and equipment (1,224,197) (2,930,432) (3,820,032)
Improvements to foreclosed assets held for sale (71,263) (18,266) (33,239)
Proceeds from sale of foreclosed assets held for sale 376,372 437,552 232,366
---------- ---------- ----------
Net cash used in investing activities (63,892,169) (51,463,157) (92,994,661)
---------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in noninterest-bearing deposits 6,116,008 9,944,394 4,057,576
Net increase in certificates of deposit
of $100,000 or more 37,962,064 28,075,275 17,206,938
Net increase in other interest-bearing deposits 24,390,328 6,923,674 33,368,091
Net increase (decrease) in short-term borrowings 6,456,267 (12,224,325) 30,843,747
Increase in long-term debt - 5,695,000 15,053,000
Exercise of stock options 51,313 15,500 -
Dividends paid, net of dividend reinvestment and
issuance of common stock (1,005,671) (1,172,893) (894,103)
---------- ---------- ----------
Net cash provided by financing activities 73,970,309 37,256,625 99,635,249
---------- ---------- ----------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 16,865,480 (9,177,887) 9,237,635
CASH AND CASH EQUIVALENTS, BEGINNING 8,779,492 17,957,379 8,719,744
---------- ---------- ----------
CASH AND CASH EQUIVALENTS, ENDING $25,644,972 $8,779,492 $ 17,957,379
============ =========== ============
1. Nature Of Operations And Summary Of Significant Accounting Policies
Principles Of Consolidation
The accompanying consolidated financial statements include the accounts of Fidelity D & D Bancorp, Inc. and its wholly-owned subsidiary, Fidelity Deposit & Discount Bank (the “Bank”) (collectively, the “Company”). All significant intercompany balances and transactions have been eliminated in consolidation.
Nature Of Operations
The Company provides a variety of financial services to individuals and corporate customers in Lackawanna and Luzerne Counties, Pennsylvania. This region has a diversified and fairly stable economy. The Company’s primary deposit products are savings accounts, NOW accounts, money market deposit accounts, certificates of deposit and checking accounts. Its primary lending products are single-family residential loans, secured consumer loans, and secured loans to businesses. In addition to these traditional banking services, the Company also provides annuities, mutual funds and trust services.
A significant portion of the Company’s loan portfolio consists of single-family residential loans in its market area. Although the Company has a diversified loan portfolio, a substantial portion of its debtor’s ability to honor their contracts is dependent on the economic sector in which the Company operates. While management uses available information to recognize losses on loans and foreclosed assets, future additions to the allowances may be necessary based on changes in local economic conditions. In addition, regulatory agencies, as an integral part of their examination process, periodically review the Company’s allowances for loan losses and foreclosed assets. Such agencies may require the Company to recognize additions to the allowances based on their judgments about information available to them at the time of their examination. Because of these factors, it is reasonably possible that the allowances for loan losses and foreclosed assets may change materially in the near future.
Use Of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Material estimates that are particularly susceptible to significant change relate to the determination for the allowance for losses on loans and the valuation of real estate acquired in connection with foreclosures or in satisfaction of loans. In connection with the determination of allowances for losses on loans and foreclosed real estate, management obtains independent appraisals for significant properties.
Held-To-Maturity Securities
Debt 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 over the period to maturity.
Trading Securities
Debt and equity securities held principally for resale in the near term are recorded at their fair values. Unrealized gains and losses are included in other income. The Company did not have any investment securities held for trading purposes during 2001, 2000 or 1999.
Available-For-Sale Securities
Available-for-sale securities consist of debt and equity securities not classified as either held-to-maturity securities or trading securities and are reported at fair value. Unrealized holding gains and losses, net of deferred income taxes, on available-for-sale securities are reported as a net amount as a separate component of shareholders’ equity until realized. These net unrealized holding gains and losses are the sole component of accumulated other comprehensive income (loss).
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 are recognized through a valuation allowance by charges to income.
Loans
Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are stated at face value, net of unearned income, unamortized loan fees and costs and the allowance for loan losses. Interest on residential real estate loans is recorded on an amortized schedule. Commercial loan interest is accrued on the principal balance on an actual day basis. Interest on consumer loans is determined using the actuarial method or the simple interest method.
The accrual of interest on impaired loans is discontinued when, in the opinion of management, there is an indication that the borrower may be unable to meet payments as they become due. Any payments received on impaired loans are applied, first to the outstanding loan amounts, then to the recovery of any charged-off loan amounts. Any excess is treated as a recovery of lost interest.
Allowance For Loan Losses
The allowance for loan losses is established through a provision for loan losses. The allowance represents an amount which, in management’s judgment, will be adequate to absorb probable losses on existing loans and leases that may become uncollectible. Management’s judgment in determining the adequacy of the allowance is based on evaluations of the collectibility of the loans. These evaluations take into consideration such factors as changes in the nature and volume of the loan portfolio, current economic conditions that may affect the borrower’s ability to pay, overall portfolio quality and review of specific impaired loans. Loans considered uncollectible are charged to the allowance. Recoveries on loans previously charged off are added to the allowance.
A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments in accordance to the contractual terms of the loan. Factors considered in determining impairment include payment status, collateral value, and the probability of collecting payments when due. The significance of payment delays and/or shortfalls, is determined on a case by case basis. All circumstances surrounding the loan are taken into account. Such factors include the length of the delinquency, the underlying reasons and the borrower’s prior payment record. Impairment is measured on all loans on a loan by loan basis.
Large groups of smaller balance homogeneous loans are collectively evaluated for impairment. Accordingly, the Company does not separately identify individual consumer and residential loans for impairment disclosures.
Leases
Financing of equipment and automobiles is provided to customers under lease arrangements accounted for as direct financing leases. Income earned is based on a constant periodic return on the net investment in the lease.
Loan Fees
Nonrefundable loan origination fees and certain direct loan origination costs are recognized over the life of the related loans as an adjustment of yield. The unamortized balance of these fees and costs are included as part of the loan balance to which it relates.
Bank Premises And Equipment
Bank premises and equipment are stated at cost less accumulated depreciation. Depreciation is computed on the straight-line and accelerated methods over the estimated useful lives of the assets.
Loan Servicing and Loan Servicing Rights
The Company services real estate loans for investors in the secondary mortgage market, which are not included in the balance sheet. The cost of mortgage servicing rights is amortized in proportion to, and over the period of, estimated net servicing revenues. For purposes of measuring impairment, the rights are stratified based on the present dominant risk characteristics of the underlying loans, stated term of the loan and interest rate. The amount of impairment recognized is the amount by which the capitalized mortgage servicing rights for a stratum exceeds its fair value. Fair values are estimated using discounted cash flows based on a current market interest rate.
Foreclosed Assets Held For Sale
Foreclosed assets held for sale are carried at the lower of cost or fair value less cost to sell. Losses from the acquisition of property in full and partial satisfaction of debt are treated as credit losses. Routine holding costs and subsequent declines in value are included in other operating expenses.
Trust Fees
Trust fees are recorded on the cash basis which is not materially different from the accrual basis.
Advertising Costs
Advertising costs are charged to expense as incurred.
Fair Value Of Financial Instruments
Cash and short-term instruments: The carrying amounts of cash and short-term instruments approximate their fair value.
Available-for-sale and held-to-maturity securities: Fair values for securities are based on bid prices received from securities dealers. Restricted equity securities are carried at cost.
Loans receivable: The fair value of all loans is estimated by the net present value of the future expected cash flows.
Loans available for sale: For loans available for sale, the fair value is estimated using rates currently offered for similar borrowings and are stated at the lower of cost or market.
Deposit liabilities: The fair value of demand deposits, NOW accounts, savings accounts, and money market deposits is estimated by the net present value of the future expected cash flows. For certificates of deposit, the discount rates used reflect the Company’s current market pricing. The discount rates used for nonmaturity deposits are the current book rate of the deposits.
Short-term borrowings: For short-term borrowings, the fair value is estimated using the rates currently offered for similar borrowings.
Long-term debt: For other borrowed funds, the fair value is estimated using the rates currently offered for similar borrowings.
Accrued interest: The carrying amounts of accrued interest approximate their fair values.
Off-balance-sheet instruments: Commitments to extend credit are generally short term and are priced to market. The rates on standby letters of credit are priced on prime. Therefore, the estimated fair value of these financial instruments is face value.
Income Taxes
Deferred tax assets and liabilities are reflected at currently enacted income tax rates applicable to the period in which the deferred tax assets or liabilities are expected to be realized or settled. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through the provision for income taxes.
Cash Flows
For purposes of reporting cash flows, cash and cash equivalents includes cash on hand, amounts due from banks and interest-bearing deposits with financial institutions.
For the years ended December 31, 2001, 2000, and 1999, the Company paid interest in cash on interest-bearing liabilities of $20,860,286, $20,465,322 and $15,272,903, respectively. For the years ended December 31, 2001, 2000, and 1999, the Company paid cash for income taxes of $1,210,000, $391,000 and $725,500, respectively.
Transfers from loans to foreclosed assets held for sale amounted to $621,846, $374,199 and $482,201 in 2001, 2000, and 1999, respectively. Noncash investing activities also included transferring $6,331,825, $13,393,655 and $3,603,841 from loans to loans available-for-sale in 2001, 2000 and 1999, respectively. Noncash investing activities also included transferring $8,329,179 from loans available-for-sale to held- to-maturity securities in 2000.
Other Comprehensive Income (Loss)
The components of other comprehensive income (loss) and related tax effects are as follows:
2001 2000 1999
Unrealized holding gains (losses) on
available-for-sale securities $555,025 $5,114,257 $(7,282,815)
Less reclassification adjustment for
gains realized in income (458,980) (41,109) (1,400)
Net unrealized gains (losses) 96,045 5,073,148 (7,284,215)
Tax effect (32,656) (1,724,870) 2,476,634
Net of tax amount $ 63,389 $3,348,278 $(4,807,581)
2. RestatementThe accompanying financial statements for 2000 and 1999 have been restated to correct an error in accounting for student loans and related interest income from 1992 through 2000. The effect of the restatement was as follows:
2000 1999
AS AS
PREVIOUSLY AS PREVIOUSLY AS
REPORTED RESTATED REPORTED RESTATED
BALANCE SHEET:
Loans available for sale $10,318,792 $9,953,958
Accrued interest receivable 3,885,291 3,546,504
Other assets 3,659,198 3,696,002
Noninterest-bearing deposits 47,500,335 47,185,597
Retained earnings 29,963,134 29,658,785 $28,126,918 $27,842,231
STATEMENT OF INCOME:
Interest income 35,115,572 35,085,780 28,566,085 28,541,051
Income before provision for income
taxes 3,794,811 3,765,019 4,717,615 4,692,581
Provision for income taxes 592,520 582,391 903,400 894,888
Net income 3,202,291 3,182,628 3,814,215 3,797,693
Per share data:
Net income - basic $1.78 $1.76 $2.13 $2.12
Net income - diluted $1.77 $1.76 $2.12 $2.12
Retained earnings at January 1, 1999 has been reduced by $268,164 to correct the effect of the misstatement through December 31, 1998.
The Company is required to maintain average reserve balances with the Federal Reserve Bank based on a percentage of deposits. The amounts of those reserve requirements on December 31, 2001 and 2000 were $5,664,000 and $4,731,000, respectively.
Deposits with any one financial institution are insured up to $100,000. The Company maintains cash and cash equivalents with certain other financial institutions in excess of the insured amount.
Amortized cost and fair value of investment securities at December 31, 2001 and 2000, are as follows (in thousands):
2001
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
---- ----- ------ -----
Held to maturity securities,
U.S. government agencies and
corporations $14,995 $ 216 $14,779
Mortgage-backed securities 6,645 $27 44 6,628
-------- ----- ----- --------
Total held-to-maturity securities $21,640 $27 $260 $21,470
======== ===== ===== ========
Available-for-sale securities:
U.S. government agencies and
corporations $104,921 $95 $1,781 $103,235
Obligations of states and political
subdivisions 11,750 72 212 11,610
Corporate bonds 1,000 1,000
Mortgage-backed securities 12,796 17 109 12,704
-------- ----- ----- --------
Total debt 130,467 184 2,102 128,549
Equity securities:
Restricted 3,500 3,500
Other 279 24 18 285
-------- ----- ----- --------
Total $134,246 $208 $2,120 $132,334
======== ===== ===== ========
2000
---------------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
---- ----- ------ -----
Held to maturity securities,
Mortgage-backed securities $ 7,879 $ 4 $ 93 $ 7,790
------- --- ---- -------
Available-for-sale securities:
U.S. government agencies and
corporations $83,295 $94 $1,876 $81,513
Obligations of states and political
subdivisions 17,744 76 290 17,530
Mortgage-backed securities 7,275 1 122 7,154
------- --- ---- -------
Total debt securities 108,314 171 2,288 106,197
Equity securities:
Restricted 5,293 5,293
Other 279 201 93 387
------- --- ---- -------
Total $113,886 $372 $2,381 $111,877
======= === ===== ========
There are no significant concentrations of investments (greater than 10 percent of shareholders’ equity) in any individual security issuer other than securities of the United States government and agencies.
Most of the Company’s debt and equity securities are pledged to secure trust funds, public deposits, short-term borrowings, Federal Home Loan Bank of Pittsburgh (“FHLB”) borrowings, Federal Reserve Bank of Philadelphia Discount Window borrowings and certain other deposits as required by law. U.S. government securities pledged on repurchase agreements are under the Company’s control.
The amortized cost and fair value of debt securities at December 31, 2001 by contractual maturity are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or repay obligations with or without call or repayment penalties.
AMORTIZED FAIR
COST VALUE
---- -----
(IN THOUSANDS)
Held-to-maturity securities,
Due after ten years $14,995 $14,779
Mortgage-backed securities 6,645 6,628
------- -------
Total held-to-maturity securities $21,640 $21,407
======= =======
Available-for-sale securities:
Due in one year or less $ 200 $ 201
Due after one year through five years 33,975 33,498
Due after five years through ten years 47,159 46,313
Due after ten years 36,337 35,833
------- -------
Total 117,671 115,845
Mortgage-backed securities 12,796 12,704
Equity securities 3,779 3,785
------- -------
Total available-for-sale securities $134,246 $132,334
======= =======
Gross realized gains and losses on sales of available-for-sale securities, determined using specific identification of the securities were as follows:
2001 2000 1999
---- ---- ----
Gross realized gains $458,980 $41,109 $1,400
Gross realized losses - - -
The major classifications of loans and leases at December 31, 2001 and 2000 are summarized as follows:
2001 2000
---- ----
Real estate $96,740,226 $109,942,570
Consumer 67,782,196 66,441,389
Commercial 179,043,816 146,610,685
Direct financing leases 9,961,967 12,733,075
Real estate construction 5,446,870 2,971,504
------------ ------------
Total 358,975,075 338,699,223
Less:
Unearned income 1,256,818 1,833,968
Allowance for loan losses 3,741,933 3,264,280
------------ ------------
Loans and leases, net $353,976,324 $333,600,975
============ ============
The Company has no concentration of loans to borrowers engaged in similar businesses or activities which exceed 5 percent of total assets at December 31, 2001 or 2000.
Net unearned loan fees and costs of $459,193 and $173,563 have been deducted from the carrying value of loans at December 31, 2001 and 2000, respectively.
Impaired loans information is as follows:
2001 2000
---- ----
At December 31:
Accruing loans that are contractually past due 90 days
or more as to principal or interest $5,397,970 $1,492,626
Amount of impaired loans that have a related allowance 679,314 708,304
Amount of impaired loans with no related allowance 4,718,656 784,322
Allowance for impaired loans 418,350 422,956
During the year ended December 31:
Average investment in impaired loans 4,747,812 3,160,740
Interest income recognized on impaired loans
(cash basis) - -
Principal collected on impaired loans 1,117,964 68,724
Changes in the allowance for loan losses are as follows:
2001 2000 1999
---- ---- ----
Balance, beginning $3,264,280 $3,172,375 $3,007,713
Recoveries 213,639 84,649 115,623
Provision for loan losses 2,474,637 1,158,260 530,000
Losses charged to allowance (2,210,623) (1,151,004) (480,961)
----------- ----------- -----------
Balance, ending $3,741,933 $3,264,280 $3,172,375
=========== =========== ===========
For federal income tax purposes, the allowance for loan losses is $315,958 at December 31, 2001, 2000, and 1999. The amounts deducted for loan losses in the federal income tax returns were $1,817,574 in 2001, $1,066,355 in 2000 and $365,338 in 1999. These amounts were the maximum allowable deduction.
The Company services real estate loans, which are not included in the accompanying balance sheet, for investors in the secondary mortgage market. The approximate amount of mortgages serviced amounted to $53,000,000 at December 31, 2001 and $42,631,000 at December 31, 2000. Mortgage servicing rights were $327,690 at December 31, 2001 and $252,298 at December 31, 2000 and are included in other assets. Amortization of mortgage servicing rights was $42,046 in 2001.
Components of bank premises and equipment at December 31, 2001 and 2000 are summarized as follows:
2001 2000
---- ----
Land $1,054,330 $1,054,330
Bank premises 7,738,710 7,637,808
Furniture, fixtures and equipment 6,646,382 6,719,831
Leasehold improvements 2,140,454 1,493,660
--------- ---------
Total 17,579,876 16,905,629
Less accumulated depreciation and amortization 6,066,722 5,515,150
--------- ---------
Premises and equipment, net $11,513,154 $11,390,479
=========== ===========
The Company leases its Green Ridge, Scranton, Pittston, West Pittston, Moosic, Kingston, Peckville and Clarks Summit branches under the terms of operating leases. Rental expense was $321,782 for 2001, $287,971 for 2000 and $223,281 for 1999. The future minimum rental payments at December 31, 2001 under these leases are as follows:
YEAR AMOUNT
---- ------
2002 $ 320,946
2003 298,967
2004 262,846
2005 260,500
2006 and thereafter 1,262,828
---------
Total $2,406,087
==========
Amortization of leasehold improvements is included in depreciation expense.
7. DEPOSITSAt December 31, 2001, the scheduled maturities of certificates of deposit are as follows:
2002 $136,496,006
2003 62,938,068
2004 58,296,603
2005 15,790,178
2006 and thereafter 3,602,398
------------
$277,123,253
============
Short-term borrowings are as follows at December 31:
2001 2000
---- ----
Securities sold under repurchase agreements $54,258,326 $35,987,446
Demand note, U.S. Treasury 222,662 1,087,275
Line of credit, FHLB - 10,950,000
------------- -------------
Total $54,480,988 $48,024,721
============= =============
The maximum and average amounts of short-term borrowings outstanding and related interest rates for the years ended December 31, 2001 and 2000 are as follows:
MAXIMUM WEIGHTED
OUTSTANDING AVERAGE
AT ANY AVERAGE RATE DURING RATE AT
2001 MONTH END OUTSTANDING THE YEAR YEAR END
---- --------- ----------- -------- --------
Line of credit, FHLB $12,250,000 $2,611,918 6.00% 0.00%
Securities sold under repurchase
agreements 54,258,326 40,969,993 3.68% 3.02%
Demand note, U. S. Treasury 1,118,424 706,515 4.02% 1.41%
----------- ----------
Total $66,726,750 $44,288,426
=========== ===========
MAXIMUM WEIGHTED
OUTSTANDING AVERAGE
AT ANY AVERAGE RATE DURING RATE AT
2001 MONTH END OUTSTANDING THE YEAR YEAR END
---- --------- ----------- -------- --------
Line of credit, FHLB $28,450,000 $15,586,148 6.59% 6.63%
Securities sold under repurchase
Agreements 39,800,700 34,149,033 5.61% 5.68%
Demand note, U. S. Treasury 1,144,407 668,166 6.38% 5.74%
----------- ----------
Total $69,395,107 $50,403,347
=========== ===========
At December 31, 2001, the Company has a $47,000,000 line of credit with the FHLB, which is secured by certain mortgage loans, and expires March 4, 2002. There were no borrowings at December 31, 2001. Borrowings were $10,950,000 at December 31, 2000.
Securities sold under agreements to repurchase (repurchase agreements) are secured short-term borrowings, and generally mature within 1 to 89 days from the transaction date. Repurchase agreements are reflected at the amount of cash received in connection with the transaction. The carrying value of the underlying securities is approximately $54,300,000 and $36,000,000 at December 31, 2001 and 2000, respectively. The Bank may be required to provide additional collateral based on the fair value of the underlying securities. The demand note, U. S. Treasury is generally repaid within 1 to 90 days.
At December 31, 2001, the Company has $47,717,000 available to borrow from the Federal Home Loan Bank of Pittsburgh and approximately $29,250,000 that it can borrow at the Discount Window from the Federal Reserve Bank of Philadelphia. There were no borrowings on these lines at December 31, 2001 or 2000.
Long-term debt consists of advances from the FHLB with interest rates ranging from 4.69% to 6.22% at December 31, 2001. These advances are secured by unencumbered U.S. government agency securities, mortgage-backed securities, U.S. Treasury notes and certain residential mortgages.
At December 31, 2001, the maturities of long-term debt are as follows:
YEAR ENDING DECEMBER 31
-----------------------
2004, 5.92% interest $5,000,000
2008, 4.69% interest 10,000,000
2010, 4.85% interest to 6.22% interest 48,000,000
----------
$63,000,000
===========
10. STOCK PLANSAt December 31, 2001, the Company has reserved 86,344 shares of its unissued capital stock for issuance under a dividend reinvestment plan. Shares issued under this plan are valued at fair value as of the dividend payment date.
The Company has established the 1998 Independent Directors Stock Option Plan and has reserved 50,000 shares of its unissued capital stock for issuance under the plan. Under the 1998 Independent Directors Stock Option Plan, each outside director will be awarded stock options to purchase 500 shares of the Company’s common stock on the first business day of January, each year, at the fair market value on date of grant. 4,500 stock options with a ten-year life were awarded in 2001, 2000 and 1999.
The Company has established the 1998 Stock Incentive Plan and has reserved 50,000 shares of its unissued capital stock for issuance under the plan. Under the 1998 Stock Incentive Plan, key officers and certain other employees are eligible to be awarded qualified options to purchase the Company’s common stock at the fair market value on the date of grant. 2,900, 3,400 and 3,000 qualified stock options with a ten-year life were awarded in 2001, 2000 and 1999, respectively.
The Company applies Accounting Principles Board Opinion No. 25 and related interpretations in accounting for the Option Plans. Accordingly, no compensation expense has been recognized for the Option Plans. Had compensation cost for the Option Plans been determined based on fair values at the grant date for awards consistent with the method of Statement of Financial Accounting Standards (“SFAS”) No. 123, the Company’s net income and earnings per share would have been adjusted to the pro forma amounts indicated below:
December 31, 2001 AS REPORTED PRO FORMA
----------- ---------
Net income (in thousands) $3,848 $3,834
Earnings per share - Basic 2.12 2.12
- Diluted 2.12 2.11
December 31, 2000
Net income, restated (in thousands) $3,183 $3,168
Earnings per share - Basic 1.76 1.76
- Diluted 1.76 1.75
December 31, 1999
Net income, restated (in thousands) $3,798 $3,774
Earnings per share - Basic 2.12 2.11
- Diluted 2.12 2.10
For purposes of the pro forma calculations, the fair value of each option is estimated using the Black-Scholes option pricing model with the following weighted-average assumptions for grants issued in 2001, 2000 and 1999:
2001 2000 1999
---- ---- ----
Dividend yield 3.33% 2.89% 2.48%
Expected volatility 6.24% 6.26% 6.85%
Risk-free interest rate 3.52% 4.34% 5.50%
Expected lives 5 years 5 years 5 years
A summary of the status of the Company’s option plans as of December 31, 2001, 2000, and 1999, and changes during the year ended is presented below:
WEIGHTED AVERAGE
SHARES EXERCISE PRICE
------ --------------
Outstanding, December 31, 1998 -
Granted 7,500 $31.00
Exercised -
Forfeited - -
------- -------
Outstanding, December 31, 1999 7,500 31.00
Granted 7,900 35.12
Exercised (500) 31.00
Forfeited (500) 35.12
------- -------
Outstanding, December 31, 2000 14,400 33.12
Granted 7,400 36.50
Exercised (1,500) 34.21
Forfeited (1,000) 33.06
------- -------
Outstanding, December 31, 2001 19,300 $34.33
======= =======
11. INCOME TAXESThe following temporary differences gave rise to the deferred tax asset at December 31:
2001 2000
---- ----
Deferred tax assets:
Provision for loan losses $1,225,831 $1,002,429
Deferred compensation 104,384 104,973
Unrealized gain on available-for-sale securities 650,143 682,800
Other 25,683 8,160
----------- -----------
Total 2,006,041 1,798,362
----------- -----------
Deferred tax liabilities:
Leasing (802,955) (682,212)
Depreciation (433,207) (423,279)
Loan fees and costs (174,028) (186,259)
Other (97,916) (32,136)
----------- -----------
Total (1,508,106) (1,323,886)
----------- -----------
Deferred tax asset, net $ 497,935 $ 474,476
=========== ===========
The provision for income taxes is as follows:
2001 2000 1999
---- ---- ----
Current $961,982 $108,563 $636,597
Deferred (56,116) 473,828 258,291
--------- --------- ---------
Total provision $905,866 $582,391 $894,888
========= ========= =========
A reconciliation between the expected statutory income tax and the actual provision for income taxes is as follows:
2001 2000 1999
---- ---- ----
Expected provision at the statutory rate $1,616,360 $1,280,107 $1,595,477
Tax-exempt income (562,055) (661,374) (660,622)
Nondeductible interest expense 73,125 97,780 95,891
Other nondeductible expenses 14,264 40,132 2,968
Low income housing tax credits (112,738) (122,628) (73,910)
Other, net (123,090) (51,626) (64,916)
----------- ----------- -----------
Actual provision for income taxes $ 905,866 $ 582,391 $ 894,888
=========== =========== ===========
12. RETIREMENT PLANThe Company has a defined contribution 401(k) plan covering substantially all employees of the Company. It is subject to the provisions of the Employee Retirement Income Security Act of 1974 (ERISA). Contributions to the Plan were $211,518 in 2001, $236,564 in 2000 and $212,898 in 1999.
The Company is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers and to reduce its own exposure to fluctuations in interest rates. These financial instruments include commitments to extend credit and standby letters of credit. Those instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the balance sheet. The contract or notional amounts of those instruments reflect the extent of the Company’s involvement in particular classes of financial instruments.
The Company’s exposure to credit loss from nonperformance by the other party to the financial instruments for commitments to extend credit and standby letters of credit is represented by the contractual amount of those instruments. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet instruments.
A summary of the notional amounts of the Bank's financial instruments with off-balance-sheet risk at December 31, 2001 follows:
NOTIONAL
AMOUNT
------
Commitments to extend credit $98,763,324
Standby letters of credit 5,832,788
Commitments to extend credit are legally binding agreements to lend to customers. Commitments generally have fixed expiration dates or other termination clauses and may require payment of fees. Since commitments may expire without being drawn upon, the total commitment amounts do not necessarily represent future liquidity requirements. The Company evaluates each customer’s credit-worthiness on a case-by-case basis. The amount of collateral obtained, if considered necessary by the Company on extension of credit, is based on management’s credit assessment of the customer.
Standby letters of credit written are conditional commitments issued by the Company guaranteeing performance by a customer to a third party. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers.
The Company has not incurred any losses on its commitments in 2001, 2000 or 1999.
The carrying or notional amount and estimated fair values of the Company’s financial instruments were as follows at December 31, 2001 and 2000:
2001 2000
CARRYING CARRYING
OR NOTIONAL ESTIMATED OR NOTIONAL ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
------ ---------- ------ ----------
(IN THOUSANDS) (IN THOUSANDS)
Financial assets:
Cash and cash equivalents $25,645 $25,645 $ 8,779 $ 8,779
Held-to-maturity securities 21,640 21,407 7,879 7,790
Available-for-sale securities 132,334 132,334 111,877 111,877
Loans and leases 357,718 359,739 336,865 339,664
Loans available-for-sale 16,150 16,418 9,954 10,061
Accrued interest 3,268 3,268 3,547 3,547
Financial liabilities:
Deposit liabilities $407,779 $410,065 $339,310 $340,011
Accrued interest 2,454 2,454 2,764 2,764
Short-term borrowings 54,481 54,481 48,025 48,095
Long-term debt 63,000 62,497 63,000 63,271
Off-balance sheet liabilities:
Commitments to extend credit $98,763 $98,763 $78,705 $ 78,705
Standby letters of credit 5,833 5,833 3,663 3,663
14. EARNINGS PER SHAREEarnings per share (EPS) is computed using the weighted-average number of shares of common stock outstanding after giving effect to the assumed exercise of stock options. Prior year amounts have been restated to reflect the 2001 stock split.
The following data shows the amounts used in computing earnings per share and the effects on income and the weighted average number of shares of dilutive potential common stock for the years ended December 31, 2001, 2000 and 1999.
INCOME COMMON SHARES
NUMERATOR DENOMINATOR EPS
2001
Basic EPS $3,848,136 1,811,391 $2.12
Dilutive effect of potential common stock
Stock options:
Exercise of options outstanding 19,300
Hypothetical share repurchase at $37.75 (17,554)
---------- ---------
Diluted EPS $3,848,136 1,813,137 $2.12
========== ========= =====
INCOME COMMON SHARES
NUMERATOR DENOMINATOR EPS
2000
Basic EPS $3,182,628 1,803,674 $1.76
-----
Dilutive effect of potential common stock
Stock options:
Exercise of options outstanding 14,400
Hypothetical share repurchase at $35.13 (12,761)
---------- ---------
Diluted EPS $3,182,628 1,805,313 $1.76
========== ========= =====
INCOME COMMON SHARES
NUMERATOR DENOMINATOR EPS
1999
Basic and Diluted EPS $3,797,693 1,792,232 $2.12
========== ========= =====
The Company is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possible additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company must meet specific capital guidelines that involve quantitative measures of the Company’s assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The Company’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 Company to maintain minimum amounts and ratios (set forth in the table below) of total and Tier I capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier I capital (as defined) to average assets (as defined). As of December 31, 2001, the Bank meets all capital adequacy requirements to which it is subject.
To be categorized as well capitalized the Company must maintain minimum total risk-based, Tier I risk-based, and Tier I leverage ratios as set forth in the table. The Company’s actual capital amounts and ratios are also presented in the table. No amounts were deducted from capital for interest-rate risk in either 2001, 2000 or 1999.
To Be Well Capitalized
For Capital Under Prompt Corrective
Actual Adequacy Purposes: Action Provisions:
--------------------------- ---------------------------- ---------------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
As of December 31, 2001:
Total Capital
(to Risk Weighted Assets) $45,146,000 12.5% >$28,846,000 >8.0% >$36,058,000 >10.0%
- - - -
Tier I Capital
(to Risk Weighted Assets) $41,402,000 11.5% >$14,423,000 >4.0% >$21,635,000 >6.0%
- - - -
Tier I Capital
(to Average Assets) $41,402,000 7.8% >$21,349,000 >4.0% >$26,687,000 >5.0%
- - - -
As of December 31, 2000:
Total Capital
(to Risk Weighted Assets) $41,829,000 13.2% >$25,414,000 >8.0% >$31,767,000 >10.0%
- - - -
Tier I Capital
(to Risk Weighted Assets) $38,515,000 12.1% >$12,707,000 >4.0% >$19,060,000 >6.0%
- - - -
Tier I Capital
(to Average Assets) $38,515,000 8.1% >$18,940,000 >4.0% >$23,675,000 >5.0%
- - - -
The Bank can pay dividends to the Company equal to the Bank’s retained earnings which approximated $33,000,000 at December 31, 2001. However, such dividends are limited due to the capital requirements discussed above.
During the ordinary course of business, loans are made to executive officers, directors, shareholders and associates of such persons. These transactions were made on substantially the same terms and at those rates prevailing at the time for comparable transactions with others. These loans do not involve more than the normal risk of collectability or present other unfavorable features. A summary of loan activity with officers, directors, shareholders and associates of such persons is as follows:
2001 2000 1999
---- ---- ----
Balance, beginning $6,975,141 $4,125,035 $4,337,908
Additions 1,731,695 6,821,466 1,981,163
Collections (2,922,578) (3,971,360) (2,194,036)
---------- ---------- ----------
Balance, ending $5,784,258 $6,975,141 $4,125,035
========== ========== ==========
Aggregate loans to directors and associates exceeding 2.5% of shareholders' equity included in the table above are as follows:
2001 2000 1999
---- ---- ----
Number of persons 2 2 1
Balance, beginning $4,848,966 $1,871,358 $2,447,527
Additions 128,851 5,510,253 689,343
Collections (603,180) (2,755,754) (375,165)
Prior loan balance now above threshold 223,109
Adjustment for loans no longer
exceeding 2.5% of shareholders' equity - - (890,347)
---------- ---------- ----------
Balance, ending $4,374,637 $4,848,966 $1,871,358
========== ========== ==========
17. COMMITMENTSThe Bank plans to open a branch in Eynon, Pennsylvania. Costs are estimated to be $250,000 and will be funded internally.
The Bank will install a new core processing system in 2002. The cost will approximate $1,300,000 and will be funded internally.
18. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)The following is a summary of quarterly results of operations for the years ended December 31, 2001, 2000 and 1999:
FIRST SECOND THIRD FOURTH
2001 QUARTER QUARTER QUARTER QUARTER TOTAL
---- ------- ------- ------- ------- -----
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Interest income $9,169 $9,259 $9,264 $8,688 $36,380
Interest expense (5,398) (5,146) (5,146) (5,164) (20,854)
------ ------ ------ ------ -------
Net interest income 3,771 4,113 4,118 3,524 15,526
Provision for loan losses (328) (276) (570) (1,301) (2,475)
Other income 865 830 857 1,150 3,702
Other expenses (2,931) (3,177) (3,230) (2,661) (11,999)
------ ------ ------ ------ -------
Income before provision for
income taxes 1,377 1,490 1,175 712 4,754
Provision for income taxes (294) (350) (251) (11) (906)
---- ---- ---- --- ----
Net income $1,803 $1,140 $ 924 $ 701 $3,848
====== ====== ====== ====== ======
Net income per share $.60 $.62 $.51 $.39 $2.12
==== ==== ==== ==== =====
FIRST SECOND THIRD FOURTH
2000 QUARTER QUARTER QUARTER QUARTER TOTAL
---- ------- ------- ------- ------- -----
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Interest income $8,072 $8,577 $9,172 $9,265 $35,086
Interest expense (4,667) (5,142) (5,797) (5,862) (21,468)
------ ------ ------ ------ -------
Net interest income 3,405 3,435 3,375 3,403 13,618
Provision for loan losses (106) (137) (138) (777) (1,158)
Other income 622 715 888 715 2,940
Other expenses (2,875) (3,002) (2,914) (2,844) (11,635)
------ ------ ------ ------ -------
Income before provision for
income taxes 1,046 1,011 1,211 497 3,765
Provision for income taxes (184) (174) (267) 43 (582)
------ ------ ------ ------ -------
Net income $ 862 $ 837 $ 944 $ 540 $3,183
====== ====== ====== ====== ======
Net income per share $ .48 $ .46 $ .52 $ .30 $ 1.76
====== ====== ====== ====== ======
FIRST SECOND THIRD FOURTH
1999 QUARTER QUARTER QUARTER QUARTER TOTAL
---- ------- ------- ------- ------- -----
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Interest income $6,207 $6,877 $7,554 $7,903 $28,541
Interest expense (3,235) (3,670) (4,072) (4,399) (15,376)
------ ------ ------ ------ -------
Net interest income 2,972 3,207 3,482 3,504 13,165
Provision for loan losses (180) (140) (85) (125) (530)
Other income 480 556 584 536 2,156
Other expenses (2,254) (2,466) (2,665) (2,713) (10,098)
------ ------ ------ ------ -------
Income before provision for
income taxes 1,018 1,157 1,316 1,202 4,693
Provision for income taxes (218) (259) (301) (117) (895)
------ ------ ------ ------ -------
Net income $ 800 $ 898 $1,015 $1,085 $3,798
====== ====== ====== ====== ======
Net income per share $ .45 $.50 $. 57 $ .60 $ 2.12
====== ====== ====== ====== ======
19. RECENT ACCOUNTING PRONOUNCEMENTSIn September 2000, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities.” This statement supercedes and replaces the guidance in Statement 125. It revises the standards for accounting for securities and other transfers of financial assets and collateral and requires certain disclosures, although it carries over most of the Statement 125‘s provisions without reconsideration. The Statement is effective for transfers and servicing of financial assets and extinguishments of liabilities occurring after March 31, 2001 and for recognition and reclassification of collateral for fiscal years ending after December 15, 2000. This Statement is to be applied prospectively with certain exceptions. Other than those exceptions, earlier or retroactive application of its accounting provisions is not permitted. The 2001 adoption of this statement had no impact on the Company’s financial condition, equity, results of operations or disclosure.
In June 2001, the FASB issued SFAS No. 141, “Business Combinations.” This Statement addresses financial accounting and reporting for business combinations and supercedes APB Opinion No. 16, “Business Combinations”, and FASB Statement 38, “Accounting for Preacquisition Contingencies of Purchased Enterprises.” All business combinations in the scope of the Statement are to be accounted for using the purchase method. The provisions of the Statement apply to all business combinations initiated after June 30, 2001.
In June 2001, the FASB issued SFAS No. 142, “Goodwill and Other Intangible Assets.” The Statement addresses financial accounting and reporting for acquired goodwill and other intangible assets and supercedes APB Opinion No. 17,
“Intangible Assets”. It addresses how intangible assets that are acquired individually or with a group of other assets (but not those acquired in a business combination) should be accounted for in financial statements upon their acquisition. The Statement also addresses how goodwill and other intangible assets should be accounted for after they have been initially recognized in the financial statements. The provisions of the Statement are required to be applied starting with fiscal years beginning after December 15, 2001, except that goodwill and intangible assets acquired after June 30, 2001 will be subject immediately to the nonamortization and amortization provisions of the Statement. Early application is permitted for entries with fiscal years beginning after March 15, 2001, provided that the first interim financial statements have not previously been issued. The Statement is required to be applied at the beginning of an entity’s fiscal year and to be applied to all goodwill and other intangible assets recognized in its financial statement at that date. There is no expected impact on earnings, financial condition or equity upon adoption of Statement No. 142.
The following is condensed financial information for Fidelity D & D Bancorp, Inc. on a parent company only basis (in thousands):
CONDENSED BALANCE SHEET
DECEMBER 31,
2001 2000
---- ----
ASSETS:
Cash $ 1 $ 1
Investment in subsidiary 40,141 37,160
Other 30 54
------ ------
Total $40,172 $37,215
====== ======
LIABILITIES AND SHAREHOLDERS' EQUITY:
Liabilities $ - $ -
Shareholders' equity 40,172 37,215
------ ------
Total $40,172 $37,215
====== ======
CONDENSED INCOME STATEMENT
YEARS ENDED DECEMBER 31,
2001 2000
---- ----
INCOME:
Equity in undistributed earnings of subsidiary $2,918 $1,969
Dividends from subsidiary 1,056 1,396
------ ------
Total income 3,974 3,365
OPERATING EXPENSES 191 238
------ ------
INCOME BEFORE TAXES 3,783 3,127
CREDIT FOR INCOME TAXES 65 55
------ ------
NET INCOME $3,848 $3,182
====== ======
CONDENSED STATEMENT OF CASH FLOWS
YEARS ENDED
DECEMBER 31,
2001 2000
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 3,848 $ 3,182
Adjustments to reconcile net income to net cash
provided by operations:
Equity in earnings of subsidiary (3,974) (3,365)
Deferred income taxes 2 (8)
Net change in other assets 23 (47)
-------- --------
Net cash provided by operating activities (101) (238)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES,
Dividends received from subsidiary 1,056 1,396
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends paid, net of dividend reinvestment (1,006) (1,173)
Exercise of stock options 51 16
Proceeds from borrowings - 155
Repayment of borrowings - (155)
-------- --------
Net cash used in financing activities (955) (1,157)
-------- --------
Net increase in cash - 1
CASH, BEGINNING 1 -
-------- --------
CASH, ENDING $ 1 $ 1
======== ========
The information required under Item 401 of Regulation S-K is incorporated by reference herein, to the section, “Board of Directors and Management”, subsections “Information as to Directors and Nominees”, “Family Relationships”, “Executive Officers of the Company”, and “Executive Officers of the Bank”, contained within the Company’s 2002 Proxy Statement.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934 requires the Company’s directors, executive officers and shareholders owning in excess of 10% of the Company’s outstanding equity stock to file initial reports of ownership and reports of changes in ownership of common stock and other equity securities of the Company with the Securities and Exchange Commission (the SEC). SEC regulations require that these reporting persons furnish the Company with copies of all Section 16(a) forms which they file. Based on a review of copies of such reports received by it, and on written statements of the reporting persons, the Company believes that the reporting persons complied with all such Section 16(a) filing requirements in a timely fashion.
11 EXECUTIVE COMPENSATIONThe information required by this item is incorporated by reference herein, to the section titled “Executive Compensation”, and the section titled “Board of Directors and Management”, subsection “Compensation of Directors”, contained within the Company’s 2002 Proxy Statement.
12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENTThe information required by this item is incorporated by reference herein, to the section titled “Beneficial Ownership of the Company’s Common Stock by Significant Shareholders, Directors and Executive Officers”, contained within the Company’s 2002 Proxy Statement.
13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONSThe information required by this Item, relating to transactions with management and others, certain business relationships and indebtedness of management, is set forth above in Item 8 “Financial Statements and Supplementary Data”and is incorporated by reference herein to the section titled “Certain Business Relationships and Transactions with Management”, contained within the Company’s 2002 Proxy Statement.
(a) (1)Financial Statements - The following financial statements are included by reference in Part II, item 8 hereof:
(2)Financial Statement Schedules
Financial Statement Schedules are omitted because the required information is either not applicable, not required or is shown in the respective financial statements or in the notes thereto.
(3)Exhibits
The following exhibits are filed herewith or incorporated by reference as a part of this Annual Report.
3(i) Amended and Restated Articles of Incorporation of Registrant. Incorporated by reference to Exhibit 3(i) to Registrant's Registration Statement No. 333- 90273 on Form S-4, filed with the SEC on November 3, 1999 and as amended on April 6, 2000.
3(ii) Bylaws of Registrant. Incorporated by reference to Exhibit 3 (ii) to Registrant's Registration Statement No. 333-90273 on Form S-4, filed with the SEC on November 3, 1999 and as amended on April 6, 2000.
10.1 1998 Independent Directors Stock Option Plan of The Fidelity Deposit and Discount Bank, as assumed by Registrant. Incorporated by reference to Exhibit 10.1 to Registrant's Registration Statement No. 333-90273 on Form S-4, filed with the SEC on November 3, 1999 and as amended on April 6, 2000.
10.2 1998 Stock Incentive Plan of The Fidelity Deposit and Discount Bank, as assumed by Registrant. Incorporated by reference to Exhibit 10.2 of Registrant's Registration Statement No. 333-90273 on Form S-4, filed with the SEC on Nov. 3, 1999 and as amended on April 6, 2000.
10.3 Form of Deferred Compensation Plan of The Fidelity Deposit and Discount Bank. Incorporated by reference to Exhibit 10.3 to Registrant's Registration Statement No. 333-45668 on Form S-1, filed with the SEC on September 12, 2000 and as amended on October 11, 2000.
10.4 Registrant's 2000 Dividend Reinvestment Plan. Incorporated by reference to Exhibit 4 to Registrant's Registration Statement No. 333-45668 on Form S-1, filed with the SEC on September 12, 2000 and as amended by Pre-Effective Amendment No. 1 on October 11, 2000 and by Post-Effective Amendment No. 1 on May 30, 2001.
10.5 Registrant's 2000 Independent Directors Stock Option Plan. Incorporated by reference to Exhibit 4.3 to Registrant's Registration Statement No. 333- 64356 on Form S-8 filed with the SEC on July 2, 2001.
10.6 Registrant's 2000 Stock Incentive Plan. Incorporated by reference to Exhibit 4.4 to Registrant's Registration Statement No. 333-64356 on Form S-8 filed with the SEC on July 2, 2001.
10.7 Form of Employment Agreement with Joseph J. Earyes. Incorporated by reference to Exhibit 10.1 to Registrant's Form 8-K filed with the SEC on March 25, 2002.
11 Statement regarding computation of earnings per share.Included herein in Note 14 “Earnings per Share”, contained within the Notes to Consolidated Financial Statements, and incorporated herein by reference.
12 Statement regarding computation of ratios. Included herein in section 6, "Selected Financial Data".
21 Subsidiaries of the Registrant.
23 Consent of Independent Auditors.
(b) No Current Report on Form 8-K was filed by the Company during the fourth quarter of the fiscal year ended December 31, 2001.Pursuant to the requirements of Sections 13 or 15(d) of the Securities and Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
FIDELITY D&D BANCORP, INC.
(Registrant)
By:___________________________
Michael F. Marranca,
Chairman of the Board of Directors and President
Date: March 28, 2002
By:___________________________
Joseph J. Earyes,
Executive Vice President and Chief Executive Officer
Date: March 28, 2002
Pursuant to the requirements of the Securities and Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
DATE
----
By:_________________________________ March 28, 2002
Michael F. Marranca, Chairman of
the Board of Directors and President
By:_________________________________ March 28, 2002
Joseph J. Earyes, Executive Vice President
and Chief Executive Officer
By:_________________________________ March 28, 2002
Robert P. Farrell, Treasurer
(Principal Financial and Accounting Officer)
By:_________________________________ March 28, 2002
Samuel C. Cali, Director and Chairman Emeritus
By:_________________________________ March 28, 2002
John F. Glinsky, Jr., Secretary of the
Board of Directors and Director
By:_________________________________ March 28, 2002
Patrick J. Dempsey, Vice Chairman of the
Board of Directors and Director
By:_________________________________ March 28, 2002
Paul A. Barrett, Director
By:_________________________________ March 28, 2002
John T. Cognetti, Director
By:_________________________________ March 28, 2002
Michael J. McDonald, Director
By:_________________________________ March 28, 2002
David L. Tressler, Director
By:_________________________________ March 28, 2002
Mary E. McDonald, Director
By:_________________________________ March 28, 2002
Brian J. Cali, Director
3(i) Amended and Restated Articles of Incorporation of Registrant. Incorporated by reference to Exhibit 3(i) to Registrant's Registration Statement No. 333- 90273 on Form S-4, filed with the SEC on November 3, 1999 and as amended on April 6, 2000.
3(ii) Bylaws of Registrant. Incorporated by reference to Exhibit 3 (ii) to Registrant's Registration Statement No. 333-90273 on Form S-4, filed with the SEC on November 3, 1999 and as amended on April 6, 2000.
10.1 1998 Independent Directors Stock Option Plan of The Fidelity Deposit and Discount Bank, as assumed by Registrant. Incorporated by reference to Exhibit 10.1 to Registrant's Registration Statement No. 333-90273 on Form S-4, filed with the SEC on November 3, 1999 and as amended on April 6, 2000.
10.2 1998 Stock Incentive Plan of The Fidelity Deposit and Discount Bank, as assumed by Registrant. Incorporated by reference to Exhibit 10.2 of Registrant's Registration Statement No. 333-90273 on Form S-4, filed with the SEC on Nov. 3, 1999 and as amended on April 6, 2000.
10.3 Form of Deferred Compensation Plan of The Fidelity Deposit and Discount Bank. Incorporated by reference to Exhibit 10.3 to Registrant's Registration Statement No. 333-45668 on Form S-1, filed with the SEC on September 12, 2000 and as amended on October 11, 2000.
10.4 Registrant's 2000 Dividend Reinvestment Plan. Incorporated by reference to Exhibit 4 to Registrant's Registration Statement No. 333-45668 on Form S-1, filed with the SEC on September 12, 2000 and as amended by Pre-Effective Amendment No. 1 on October 11, 2000 and by Post-Effective Amendment No. 1 on May 30, 2001.
10.5 Registrant's 2000 Independent Directors Stock Option Plan. Incorporated by reference to Exhibit 4.3 to Registrant's Registration Statement No. 333- 64356 on Form S-8 filed with the SEC on July 2, 2001.
10.6 Registrant's 2000 Stock Incentive Plan. Incorporated by reference to Exhibit 4.4 to Registrant's Registration Statement No. 333-64356 on Form S-8 filed with the SEC on July 2, 2001.
10.7 Form of Employment Agreement with Joseph J. Earyes. Incorporated by reference to Exhibit 10.1 to Registrant's Form 8-K filed with the SEC on March 25, 2002.
11 Statement regarding computation of earnings per share.Included herein in Note 14 “Earnings per Share”, contained within the Notes to Consolidated Financial Statements, and incorporated herein by reference.
12 Statement regarding computation of ratios. Included herein in section 6, "Selected Financial Data".
21 Subsidiaries of the Registrant.
23 Consent of Independent Auditors.
21 Subsidiaries of the Registrant.The Fidelity Deposit and Discount Bank, Blakely and Drinker Streets Dunmore, Pennsylvania. Incorporated in Pennsylvania December 13, 1902.
23 Consent of Independent Auditors.
We consent to the incorporation by reference in this Annual Report on Form 10-K for the year ended December 31, 2001, of Fidelity D & D Bancorp, Inc. of our report dated February 2, 2002, except for Note 2 as to which the date is March 18, 2002, included in the Registrant’s Annual Report to Shareholders.
Wilkes Barre, Pennsylvania Parente Randolph, PC March 28, 2002 Accountants & Consultants