The Company (1) has filed all reports required to be filed by Section 13 of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Company was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
The number of outstanding shares of Common Stock of Fidelity D & D Bancorp, Inc. at August 6, 2002, the latest practicable date was 1,812,409.
FIDELITY D & D BANCORP, INC and SUBSIDIARY.
DUNMORE, PA 18512
FORM 10-Q JUNE 30, 2002
INDEX
PART I. FINANCIAL INFORMATION Page
ITEM 1. FINANCIAL STATEMENTS:
Consolidated Balance Sheets as of June 30, 2002
and December 31, 2001 3
Consolidated Statement of Income for the three and six
months ended June 30, 2002 and 2001 4
Consolidated Statement of Changes in Shareholders' Equity
for the six months ended June 30, 2002 and 2001 5
Consolidated Statement of Cash Flows for the six months
ended June 30, 2002 and 2001 6
Notes to Consolidated Financial Statements 7-10
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 11-24
ITEM 3. Quantitative and Qualitative Disclosure about Market Risk,
included in Item 2 22-23
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings 24
ITEM 2. Change in Securities and Use of Proceeds 24
ITEM 3. Defaults upon Senior Securities 24
ITEM 4. Submission of Matters to a Vote of Security Holder 25
ITEM 5. Other Information 25
ITEM 6. Exhibits and Reports on Form-8K 26
Signature Page 27
Exhibit Index 28
FIDELITY D & D BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
As of June 30, 2002 and December 31, 2001
June 30, 2002 December 31, 2001
(unaudited) (audited)
------------------------------------------
ASSETS
Cash and due from banks $ 13,839,182 $ 19,845,029
Interest bearing deposits with financial institutions 611,498 5,799,943
------------------------------------
Total cash and cash equivalents 14,450,680 25,644,972
Federal funds sold 14,950,000
Held to maturity securities 29,610,034 21,640,254
Available-for-sale securities 121,944,216 132,333,734
Loans net of unearned income 366,847,525 357,718,257
Allowance for loan losses 3,822,073 3,741,933
------------------------------------
Net loans 363,025,452 353,976,324
Loans available-for-sale 15,709,991 16,150,020
Bank premises and equipment 12,861,424 11,513,154
Accrued interest receivable 3,038,468 3,268,456
Foreclosed assets held for sale 144,464 688,041
Other assets 2,706,292 3,814,883
------------------------------------
Total assets $ 578,441,021 $ 569,029,838
====================================
LIABILITIES
Deposits
NonInterest-bearing $ 56,807,716 $ 53,301,605
Cert. of deposit $100,000 or more 151,511,537 132,679,995
Other interest-bearing deposits 217,647,061 221,797,128
------------------------------------
Total deposits 425,966,314 407,778,728
Accrued expenses and other liabilities 3,783,911 3,597,892
Shortterm borrowings 42,954,153 54,480,988
Longterm debt 63,000,000 63,000,000
------------------------------------
Total liabilities 535,704,377 528,857,608
------------------------------------
Shareholders' Equity:
Preferred stock authorized 5,000,000 shares,
no par value, none issued
Common stock authorized 10,000,000 shares,
no par value 9,584,419 9,353,452
Treasury stock, 12,960 shares (479,640)
Accumulated other comprehensive income/(loss) 110,642 (1,262,046)
Retained earnings 33,521,223 32,080,824
------------------------------------
Total shareholders' equity 42,736,644 40,172,230
------------------------------------
Total liabilities and shareholders' equity $ 578,441,021 $ 569,029,838
====================================
See notes to consolidated financial statements
FIDELITY D & D BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF INCOME
Three and Six Months Ended June 30, 2002 and 2001
(unaudited)
Three Months Ended Six Months Ended
June 30, 2002 June 30, 2001 June 30, 2002 June 30, 2001
Interest Income
Interest and fees on loans:
Taxable $ 6,279,804 $ 6,857,753 $ 12,492,690 $ 13,708,936
Nontaxable 145,552 190,981 306,998 379,123
Interest and fees on leases 133,747 181,089 284,274 369,628
Interest-bearing deposits with financial institutions 4,853 (273) 10,760 8,174
Investment securities:
US Government agencies 1,977,464 1,656,292 3,935,447 3,275,200
States & political subdivisions (nontaxable) 119,417 194,132 251,886 408,177
Other securities 59,620 58,177 119,019 156,592
Federal funds sold 38,789 120,683 88,786 121,644
--------------------------------------------------------------
Total interest income 8,759,246 9,258,834 17,489,860 18,427,474
--------------------------------------------------------------
Interest expense
Certificates of deposit of $100,000 or more 1,494,447 1,874,084 2,925,789 3,473,530
Other deposits 1,915,985 2,026,068 3,940,367 4,292,862
Securities sold under repurchase agreements 257,854 326,746 563,207 814,032
Other 897,788 919,315 1,784,783 1,963,486
--------------------------------------------------------------
Total interest expense 4,566,074 5,146,213 9,214,146 10,543,910
--------------------------------------------------------------
Net interest income 4,193,172 4,112,621 8,275,714 7,883,564
Provision for loan losses 496,000 276,000 956,000 604,000
--------------------------------------------------------------
Net interest income, after
provision for loan losses 3,697,172 3,836,621 7,319,714 7,279,564
--------------------------------------------------------------
Other income:
Service charges on deposit accounts 289,398 300,606 543,275 558,870
Gain on sale of investment securities 40,173 - 59,861 114,375
Gain on sale of loans and leases 180,833 78,828 262,419 158,706
Gain/(loss) on foreclosed assets held for sale (29,824) (7,784) 54,935 18,018
Other income 498,683 458,014 1,030,957 844,304
--------------------------------------------------------------
Total other income 979,263 829,664 1,951,447 1,694,273
--------------------------------------------------------------
Other operating expenses:
Salaries and employee benefits 1,545,435 1,477,715 3,137,025 2,832,198
Premises and equipment 549,782 634,122 1,194,784 1,273,306
Advertising 120,197 104,207 186,332 194,247
Other expenses 942,844 960,903 1,784,702 1,807,973
--------------------------------------------------------------
Total operating expenses 3,158,258 3,176,947 6,302,843 6,107,724
--------------------------------------------------------------
Income before provision for income taxes 1,518,177 1,489,338 2,968,318 2,866,113
Provision for income taxes 409,424 349,328 781,436 642,663
--------------------------------------------------------------
Net income $ 1,108,753 $ 1,140,010 $ 2,186,882 $ 2,223,451
==============================================================
Basic earnings per share $ 0.61 $ 0.63 $ 1.20 $ 1.23
Diluted earnings per share $ 0.61 $ 0.63 $ 1.20 $ 1.23
Dividends per share $ 0.21 $ 0.20 $ 0.41 $ 0.39
See Notes to Consolidated Financial Statements.
FIDELITY D & D BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
For the Six Months Ended June 30, 2002 and 2001
(unaudited)
Accumulated
Capital Stock Treasury Retained Other Comprehensive
Shares Amount Stock Earnings Income/(Loss) Total
-------------------------------------------------------------------------------------------
Balance, Dec. 31, 2000, as previously reported 1,806,274 $8,881,713 $ - $29,963,134 ($1,325,435) $37,519,412
Prior period adjustment error in accounting for
student loans and related interest income (304,349) (304,349)
-------------------------------------------------------------------------------------------
Balance, Dec. 31, 2000, as restated 1,806,274 8,881,713 - 29,658,785 (1,325,435) 37,215,063
--------------
Net income 2,223,451 2,223,451
Change in net unrealized holding
gains/(losses) on available-for-sale
securities, net of reclassification
adjustments and tax effects 963,949 963,949
--------------
Comprehensive income 3,187,400
--------------
Dividends (700,457) (700,457)
Dividends reinvested 5,603 204,347 204,347
-------------------------------------------------------------------------------------------
Balance, June 30, 2001 1,811,877 $ 9,086,060 $ $ 31,181,779 $ (361,486) $ 39,906,353
==========================================================================================
Balance, December 31, 2001 1,819,168 $ 9,353,452 $ $ 32,080,824 $ (1,262,046) $ 40,172,230
--------------
Net income 2,186,882 2,186,882
Change in net unrealized holding
gains/(losses) on available-for-sale
securities, net of reclassification
adjustments and tax effects 1,372,688 1,372,688
--------------
Comprehensive income 3,559,570
--------------
Dividends (746,483) (746,483)
Treasury stock purchased, 12,960 shares at cost (479,640) (479,640)
Dividends reinvested 6,202 230,967 230,967
-------------------------------------------------------------------------------------------
Balance June 30, 2002 1,825,370 $ 9,584,419 $ (479,640)$ 33,521,223 $ 110,642 $ 42,736,644
==========================================================================================
See notes to consolidated financial statements.
Comprehensive income for the three months ended June 30, 2002 and June 30, 2001 was $3,128,294 and $1,033,217, respectively.
FIDELITY D & D BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
For the Six Months Ended June 30, 2002 and 2001
(unaudited)
2002 2001
------------------- --------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 2,186,882 $ 2,223,451
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 514,297 597,400
Amortization of securities (net of accretion) (33,429) (22,619)
Provision for loan losses 956,000 604,000
Deferred income tax 203,376 (240,264)
Amortization of mortgage servicing rights 46,125 19,991
(Gain)/loss sale of investment securities (59,861) (114,375)
(Gain)/loss on sale of loans and leases (262,419) (158,706)
(Gain)/Loss on sale of foreclosed assets held for sale (74,356) (18,018)
Loss on sale of disposed assets 10,928
Net change in interest receivable 229,988 172,554
Net change in accrued expenses 186,019 423,590
Net change in other assets 151,949 (91,186)
------------------- --------------------
Net cash provided by operating activities 4,055,499 3,395,818
------------------- --------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of held-to-maturity securities (9,057,722) 0
Proceeds from maturity, call and paydown
of held-to-maturity securities 1,083,389 482,874
Proceeds from the sale of available-for-sale securities 29,274,261 4,114,375
Proceeds from maturity, call and paydown
of available-for-sale securities 22,283,358 12,971,688
Purchase of available-for-sale securities (38,990,429) (19,123,750)
(Increase)/decrease in federal funds sold (14,950,000) (13,600,000)
Proceeds from sale of available-for-sale loans 18,879,873 10,775,758
Net change in loans & leases (28,474,110) (19,545,310)
Purchase of bank premises and equipment (1,873,495) (883,613)
Improvements to foreclosed assets held for sale (9,338)
Proceeds from sale of foreclosed assets held for sale 909,489 308,814
------------------- --------------------
Net cash used in investing activities (20,915,386) (24,508,502)
------------------- --------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in noninterest bearing deposits 3,506,111 651,661
Net change in interest bearing deposits (4,150,067) (2,797,355)
Net change in CD's $100,000 or more 18,831,542 45,603,022
Net change in short term borrowings (11,526,835) (12,249,047)
Purchase of treasury stock (479,640)
Dividends, net of dividends reinvested (515,516) (496,110)
------------------- --------------------
Net cash provided by financing activities 5,665,595 30,712,171
------------------- --------------------
Net increase(decrease) in cash and cash equivalents (11,194,292) 9,599,487
Cash and cash equivalents, beginning 25,644,972 8,779,492
------------------- --------------------
Cash and cash equivalents, ending $14,450,680 $18,378,979
=================== ====================
See notes to consolidated financial statements.
The accompanying unaudited consolidated financial statements of Fidelity D&D Bancorp, Inc., and subsidiary, The Fidelity Deposit & Discount Bank, (Bank), (collectively the “Company”) have been prepared in accordance with accounting principles, generally accepted in the United States of America (GAAP), for interim financial information and with the instructions to Form 10Q and Article 1001 of Regulation SX. In the opinion of management, all normal recurring adjustments necessary for a fair presentation of the financial position and results of operations for the periods have been included. All significant inter-company balances and transactions have been eliminated in the consolidation. Prior period amounts are reclassified when necessary to conform with the current year’s presentation.
The preparation of financial statements in conformity with GAAP 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 reported periods. Actual results could differ from those estimates. For additional information and disclosures required under GAAP, please refer to the Bank’s Annual Report on Form 10K for the year ended December 31, 2001.
The Bank is a commercial bank chartered by the Commonwealth of Pennsylvania. Having commenced operations in 1903, the Bank provides a full range of traditional banking services and alternative financial products from its main office located in Dunmore and other branches throughout Lackawanna and Luzerne counties.
Management is responsible for the fairness, integrity and objectivity of the unaudited financial statements included in this report. Management prepared the unaudited financial statements in accordance with GAAP. In meeting its responsibility for the financial statements, management depends on the Company’s accounting systems and related internal controls. These systems and controls are designed to provide reasonable, but not absolute, assurance that the financial records accurately reflect the transactions of the Company, that Company assets are safeguarded and that financial statements present fairly the financial position and results of operations of the Company.
In the opinion of management, the consolidated balance sheets as of June 30, 2002 and December 31, 2001 present fairly the consolidated financial position of the Company as of those dates and the related statements of income for the three and six months ended June 30, 2002 and 2001 and changes in shareholders’ equity and cash flows for the six months ended June 30, 2002 and 2001 present fairly the consolidated results of its operations and its cash flows for the periods then ended. All material adjustments required for fair presentation have been made. These adjustments are of a normal reoccurring nature. There have been no material changes in accounting principles, practices or in the method of application and there have been no retroactive adjustments during this period.
This Quarterly Report on Form 10Q should be read in conjunction with the Company’s audited financial statements for the year ended December 31, 2001 and the notes included therein, in the Company’s Annual Report on Form 10K. The results of operations for interim periods are not necessarily indicative of the results of operations to be expected for the entire year.
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 wellinformed 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.
The 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, net of income tax, 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.
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 six months ended June 30, 2002 and 2001
Weighted
Average
Common Earnings
Income Shares per
June 30, 2002 Numerator Denominator Share
--------------------------------------------------------
Basic EPS $ 2,186,882 1,820,071 $1.20
===========
Dilutive effect of potential common stock
Stock options;
Exercise of outstanding options 17,800
Hypothetical share repurchase at $37.50 (15,673)
--------------------------------------
Diluted EPS $ 2,186,882 1,822,198 $1.20
========================================================
June 30, 2001
Basic EPS $ 2,223,451 1,808,255 $1.23
===========
Dilutive effect of potential common stock
Stock options;
Exercise of outstanding options 14,400
Hypothetical share repurchase at $37.75 (13,066)
--------------------------------------
Diluted EPS $ 2,223,451 1,809,589 $1.23
========================================================
The accompanying financial statements for 2001 have been restated to correct an error in accounting for student loans and related interest income from 1992 through June 30, 2001. The effect of the restatement was as follows:
June 30,2001
AS
PREVIOUSLY AS
REPORTED RESTATED
-------- --------
BALANCE SHEET:
Retained earnings $31,475,679 $31,181,779
STATEMENT OF INCOME,
(six months ended June 30, 2001):
Interest income 18,439,485 18,427,474
Income before provision for income
taxes 2,878,124 2,866,113
Provision for income taxes 665,122 642,663
Net income 2,213,002 2,223,451
Per share data:
Net income - basic $1.22 $1.23
Net income - diluted $1.22 $1.23
STATEMENT OF INCOME,
(three months ended June 30, 2001):
Interest income 9,264,840 9,258,834
Income before provision for income
taxes 1,495,343 1,489,338
Provision for income taxes 360,558 349,328
Net income 1,134,785 1,140,010
Per share data:
Net income - basic $.62 $.63
Net income - diluted $.62 $.63
Retained earnings at January 1, 2001 has been reduced by $304,349 to correct the effect of the misstatement through December 31, 2000.
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
In addition to historical information, this Form 10-Q may contain forward-looking statements. Forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from those projected in the forward-looking statements. Important factors that might cause such a difference include, but are not limited to, those discussed in the section entitled, “Management’s Discussion and Analysis of Financial Condition and Results of Operations”. Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect management’s analysis only as of this date. The Company undertakes no obligation to publicly revise or update these forward-looking statements to reflect events or circumstances that arise in the future.
1. Changes in Financial Condition
Dollar Percent
June 30, 2002 December 31, 2001 change change
Noninterest-bearing deposits
Personal $ 22,224,408 $ 22,333,970 $ (109,563) -0.49%
Non-personal 23,134,038 23,622,034 (487,996) -2.07%
Public fund 5,346,099 2,872,126 2,473,973 86.14%
Bank checks 6,103,171 4,473,474 1,629,697 36.43%
- --------------------------------------------------------------------------------------------------------------------------------
Total $ 56,807,716 $ 53,301,605 $ 3,506,111 6.58%
================================================================================================================================
Certificates of deposit
of $100,000 or more
Personal $ 66,121,767 $ 61,521,341 $ 4,600,427 7.48%
Non-personal 24,260,199 23,391,143 869,056 3.72%
Public fund 55,824,442 42,578,923 13,245,519 31.11%
IRA's 5,305,128 5,188,588 116,541 2.25%
- --------------------------------------------------------------------------------------------------------------------------------
Total $ 151,511,537 $ 132,679,995 $ 18,831,542 14.19%
================================================================================================================================
Other interest-bearing deposits
CD's less than $100,000:
Personal $ 92,121,983 $ 98,038,828 $ (5,916,844) -6.04%
Non-personal 23,504,671 25,035,720 (1,531,049) -6.12%
Public fund 784,850 833,561 (48,711) -5.84%
IRA's 20,145,401 20,535,149 (389,748) -1.90%
- --------------------------------------------------------------------------------------------------------------------------------
sub total 136,556,905 144,443,257 (7,886,352) -5.46%
NOW acounts 35,086,700 36,012,247 (925,547) -2.57%
Money market deposits 7,296,755 7,411,972 (115,217) -1.55%
Savings and clubs 38,706,701 33,929,652 4,777,049 14.08%
- --------------------------------------------------------------------------------------------------------------------------------
Total $ 217,647,061 $ 221,797,128 $ (4,150,067) -1.87%
================================================================================================================================
Total deposits
Noninterest-bearing deposits $ 56,807,716 $ 53,301,605 $ 3,506,111 6.58%
Interest-bearing deposits 369,158,598 354,477,123 14,681,475 4.14%
- --------------------------------------------------------------------------------------------------------------------------------
Total $ 425,966,314 $ 407,778,728 $ 18,187,586 4.46%
================================================================================================================================
As indicated in the table above, deposit growth was modest in the first six months of 2002.
Public fund deposits accounted for 92.81% of the total growth in deposits. The Bank was able to attract public funds due to long established relationships and competitive product pricing. However, it is recognized that public fund deposits are sensitive to the operating demands of the various public entities and the Bank could experience material shifts in these outstanding balances throughout the year.
Bank checks are used to pay operating expenses of the Bank, deposit paydowns and loan disbursements. While Bank checks are included in deposits, they are not deposits from customers. Bank checks accounted to 8.96% of the overall growth in total deposits.
Short-term borrowings, which are comprised of repurchase agreements (Repos), treasury tax and loan retained funds and federal funds purchased, decreased $11,527,000 or 21.16%. Some Repo customers transferred their funds into insured deposit products to lock in fixed rates and terms. Other non-personal and public fund customers reduced their balances to meet operating requirements or to reinvest outside of the Bank. Two taxing authorities increased their balances in excess of $1,200,000. At June 30, 2002 there were 179 Repos, approximating the number at December 31, 2001.
During the second quarter of 2002, 12,960 shares of common stock became available on the open market. The Bank purchased the stock for $479,640 with the intention to reissue the stock under the dividend reinvestment plan.
Total cash and cash equivalents decreased due to Repo runoff, net loan disbursements, fixed asset acquisitions and the purchase of treasury stock. In addition the Bank sold Fed Funds at June 30, 2002. There were no sales of Fed Funds at December 31, 2001. The decrease was partially offset by a net decrease in the investment portfolio and an increase in deposits.
During 2002, net loans, including available-for-sale loans, grew $8,609,000 or 2.33%. Commercial loans increased $17,552,000 or 9.80%. Consumer loans and direct financing leases decreased due to reduced demand. The demand was affected by current economic conditions and Bank policies designed to improve the overall quality of the portfolio. Residential mortgages and student loans totaling $18,617,000 were sold during 2002 to provide liquidity and improve yield. The Company has classified certain residential mortgages, student loans and SBA guaranteed loans of $15,710,000 as available-for-sale (AFS) at June 30, 2002. The fair value of AFS loans at June 30, 2002 and December 31, 2001 was $15,921,00 and $16,418,000, respectively.
The following table reflects the composition of the loan portfolio:
June 30, 2002 December 31, 2001
Real estate $93,635,708 $96,740,226
Consumer 62,627,068 67,782,196
Commercial 196,595,571 179,043,816
Direct financing leases 8,677,130 9,961,967
Real estate construction 6,242,377 5,446,870
- ------------------------------------------------------------------------------------------
Gross loans $367,777,853 $358,975,075
Less:
Unearned discount 930,328 1,256,818
Allowance for loan losses 3,822,073 3,741,933
- ------------------------------------------------------------------------------------------
Net Loans $363,025,452 $353,976,324
==========================================================================================
Paydowns and early calls of US agency and municipal bonds totaled $23,017,000. Available-for-sale US Government Agency bonds and mortgage-backed securities of $29,214,000 were sold to provide liquidity and to improve the yield on earning assets. Investments primarily in US Government Agency bonds and mortgage-backed securities of $47,888,000 were purchased during 2002. In light of fluctuations in the bond market, the investment strategy used during 2002 was able to produce a 5.80% tax equivalent yield on the entire portfolio at June 30, 2002. That yield is comparable to the 5.84% tax equivalent yield at December 31, 2001. The yield comparisons are as of the period ending dates and do not reflect the year-to-date yields. As would be expected, the decline in market rates caused a decrease in the year-to-date yield for 2002.
However, the decline in market rates also meant that bonds, which were not called, were worth more at June 30, 2002, than they were at December 31, 2001. Consequently the market value of the available-for-sale securities improved $2,080,000 and the total portfolio improved $2,438,000 during 2002.
Fluctuations in capital markets cause frequent changes in the market value of investments. Market conditions are monitored daily and the Company is prepared to take remedial actions if deemed appropriate.
Securities held-to-maturity and available-for-sale at June 30, 2002 consist of the following:
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
Held-to-maturity
Mortgage backed securities $ 14,612,901 $ 189,422 $ 5,526 $ 14,796,797
Government agencies 14,997,133 2,425 61,572 14,937,986
-------------------------------------------------------------------------------------
Total held-to-maturity $ 29,610,034 $ 191,847 $ 67,098 $ 29,734,783
-------------------------------------------------------------------------------------
Available-for-sale
Agencies $ 70,960,765 $ 233,304 $ 540,745 $ 70,653,324
State and municipal 9,872,706 104,103 58,071 9,918,738
Corporate bonds 2,987,366 706 2,986,660
Mortgage backed securities 34,367,115 420,979 27,580 34,760,514
-------------------------------------------------------------------------------------
Sub total 118,187,952 758,386 627,102 118,319,236
Equity securities 3,588,625 63,113 26,758 3,624,980
-------------------------------------------------------------------------------------
Total available-for-sale $ 121,776,577 $ 821,499 $ 653,860 $ 121,944,216
-------------------------------------------------------------------------------------
Grand total $ 151,386,611 $ 1,013,346 $ 720,958 $ 151,678,999
=====================================================================================
At June 30, 2002, the contractual maturities of securities held-to-maturity and available-for-sale are listed below. Mortgage backed securities, which are subject to monthly principal reductions, are listed in total. Equity securities have no stated maturity dates and are listed in total.
Amortized Market
Held-to-maturity cost value
Over ten years $ 14,997,133 $ 14,937,986
- ------------------------------------------------------------------------------------------
sub total 14,997,133 14,937,986
Mortgage backed securities 14,612,901 14,796,797
- ------------------------------------------------------------------------------------------
Total held-to maturity $ 29,610,034 $ 29,734,783
- ------------------------------------------------------------------------------------------
Available-for-sale
One year or less $ 20,250,000 $ 20,208,701
One through five years 14,575,000 14,671,295
Five through ten years 26,594,404 26,361,710
Over ten years 22,401,433 22,317,016
- ------------------------------------------------------------------------------------------
sub total 83,820,837 83,558,722
Mortgage backed securities 34,367,115 34,760,514
Equity securities 3,588,625 3,624,980
- ------------------------------------------------------------------------------------------
Total available-for-sale $ 121,776,577 $ 121,944,216
- ------------------------------------------------------------------------------------------
Grand total $ 151,386,611 $ 151,678,999
==========================================================================================
At June 30, 2002 capital expenditures for the new core processing system, scheduled for operations during the fourth quarter of 2002, were $1,038,000. Capital expenditures for a new loan processing system were $54,000.
Unforeseen environmental issues increased the estimated costs of the new Eynon branch. At June 30, 2002 the Bank had capitalized expenditures of $764,000. The branch is scheduled to open during July 2002.
2. Changes in Results of Operations:
Net Income for the six months ending June 30, 2002 and 2001 was $2,186,882 and $2,223,451, respectively. The significant differences are as follows:
2002 2001 Difference
--------- --------- ----------
Net interest income 8,275,714 7,883,564 392,150 A
Provision for loan losses 956,000 604,000 (352,000) B
Deposit service charges and other income 1,574,232 1,403,174 171,058 C
Gain on sale of assets 377,215 291,099 86,116
Salaries and employee benefits 3,137,025 2,913,872 (223,153) D
Premises and equipment 1,194,784 1,273,306 78,522
Other expense 1,971,034 1,920,546 (50,488)
Provision for income tax 781,436 642,663 (138,773) E
The year-to-date tax equivalent (“TE”) yield on Average Earning Assets decreased 125 basis points (bp) from 7.79% at June 30, 2001, to 6.54% at June 30, 2002. This reduction reflects the five reductions in the discount rate since June 30, 2001. The reductions totaled 200 bp.
It should be noted that discount rate was 9.50% at January 1, 2001 and only 4.75% at January 1, 2002, a difference of 475bp. In effect, that means that the yields on earnings assets were significantly higher in the beginning of 2001, than they were at the beginning of 2002.
The discount rate is the rate at which the Federal Reserve Bank lends overnight funds to banks. Changes in the discount rate have a direct effect on loans and investments subject to immediate repricing and call features.
The decline in market rates allowed the Bank to reduce rates paid on interest-bearing liabilities. The cost of funds decreased 118 bp from 5.07% at June 30, 2001, to 3.89% at June 30, 2002.
The improvement in net interest income results from a volume increase in earning assets and a decrease in interest expense.
The increase in the provision for loan losses is a result of loan growth and Management’s analysis of potential loss within the portfolio.
Increases in trust income and annuity sales produced the increase in deposit service charges and other income.
Staff increases, merit pay increases and higher benefit costs increased personnel expense $223,000. The year to date average number of full time equivalent employees increased from 163 at June 30, 2001, to 171 at June 30, 2002.
The effective federal income tax rate was 26.33% and 23.11% for the six months ending June 30, 2002 and June 30, 2001, respectively. Income before provision for income taxes in 2002 increased $102,000 over 2001. Non-taxable income as a percentage of net income before taxes declined from 27.12% in 2001, to 17.91% in 2002.
Net Income for the three months ending June 30, 2002 and 2001 was $1,108,753 and $1,140,010, respectively. The significant differences are as follows
2002 2001 Difference
--------- --------- ----------
Net interest income 4,193,172 4,112,621 80,551 A
Provision for loan losses 496,000 276,000 (220,000) B
Deposit service charges and other income 788,081 758,620 29,461
Gain on sale of assets 191,182 71,044 120,138
Salaries and employee benefits 1,545,435 1,477,715 (67,720) C
Premises and equipment 549,782 634,122 84,340
Other expense 1,063,041 1,065,110 2,069
Provision for income tax 409,424 349,328 (60,096) D
The tax equivalent yield on earning assets was 6.47% and 7.63% for the three months ending June 30, 2002 and June 30, 2001, respectively. Cost of funds was 3.82% and 4.82% for the three months ending June 30, 2002 and June 30, 2001, respectively. The improvement in net interest income results from a volume increase in earning assets and a decrease in interest expense.
The increase in the provision for loan losses is a result of loan growth and Management’s analysis of potential loss within the portfolio.
The average number of full time equivalent employees for the three months ending June 30, 2002 and June 30, 2001 was 174 and 165, respectively.
The effective federal income tax rate was 26.97% and 23.46% for the three months ending June 30, 2002 and June 30, 2001, respectively. Income before provision for income taxes in 2002, increased $29,000 over 2001. Non-taxable income as a percentage of net income before taxes declined from 25.86% in 2001, to 16.68% in 2002.
THE FIDELITY DEPOSIT & DISCOUNT BANK
MANAGEMENT'S DISCUSSION AND ANALYSIS
(in thousands of dollars)
TAX EQUIVALENT YIELD
- ----------------------------------
Six months ended Year ended Six months ended
June 30, 2002 December 31, 2001 June 30, 2001
---------------- ----------------- ----------------
Average earning assets:
Loans and leases $ 382,718 $ 355,640 $ 352,888
Investments 152,392 121,791 119,288
Federal funds sold 10,411 20,501 6,406
Interest-bearing deposits 1,184 12,716 7,429
----------------------------------------------------------
Total $ 546,705 $ 510,648 $ 486,011
==========================================================
Average Interest-Bearing Liabilities:
Other Interest-bearing deposits $ 80,200 $ 79,861 $ 81,326
Certificates of deposit 288,048 254,422 230,491
Other borrowed funds 64,047 66,674 69,267
Repurchase agreements 45,794 40,970 38,647
----------------------------------------------------------
Total $ 478,089 $ 441,927 $ 419,731
==========================================================
Interest Income
Loans and leases $ 13,211 $ 28,398 $ 14,602
Investments 4,406 7,894 4,031
Federal funds sold 89 544 122
Interest-bearing deposits 11 181 8
----------------------------------------------------------
Total $ 17,717 $ 37,017 $ 18,763
==========================================================
Interest Expense
Other Interest-bearing deposits $ 483 $ 1,552 $ 960
Certificates of deposit 6,383 14,004 6,807
Other borrowed funds 1,785 3,788 1,963
Repurchase agreements 563 1,510 814
----------------------------------------------------------
Total $ 9,214 $ 20,854 $ 10,544
==========================================================
Net Interest Income $ 8,503 $ 16,163 $ 8,219
==========================================================
Yield on average earning assets 6.54% 7.25% 7.79%
Cost of average interest-bearing liabilities 3.89% 4.72% 5.07%
----------------------------------------------------------
Interest rate spread 2.65% 2.53% 2.72%
==========================================================
Net yield on average earning assets 3.14% 3.17% 3.41%
==========================================================
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 increased. 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:
For the six months ended June 30, 2002, there were no adjustments made to the historical loan loss experience, based on a review of the loan portfolio, for the factors specified above.
The Bank does not have significant concentrations of loans in specific industries or outside the Northeastern Pennsylvania geographic area. There are no individual significant nonperforming loans.
June 30, 2002 December 31, 2001 June 30, 2001
Loans, net of unearned discount and fees 382,557,516 373,868,277 339,759,829
Allowance for loan losses 3,822,073 3,741,933 3,300,086
Percentage to net loans 1.00% 1.00% 0.97%
Provision for loan losses
Year ended 2,474,637
Six months ended 956,000 604,000
Three months ended 496,000 276,000
(Charge offs)/recoveries, net
Year ended (1,996,984)
Six months ended (875,860) (568,194)
Three months ended (518,570) (376,140)
Loans, net of unearned discount and fees, include loans available-for-sale.
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.
The slowing economy has impacted the loan portfolio. 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.
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 period to period are based upon reviews of the loan and lease portfolios.
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 on a non-accrual basis is made on an individual basis after considering factors pertaining to the loan.
In addition, it was determined there were other loans that did not have the ability to make any repayment. Accordingly, management found it necessary to charge-off 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 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 June 30, 2002, 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.
Interest rate risk management is an integral part of the Asset Liability Management Process. Interest rate risk is defined as the degree to which interest rate movements may affect net interest income and the balance sheet. Fluctuations in rates can affect income through the balance of repricing assets and source funds. If more assets reprice than liabilities, the balance sheet is positively gapped. This position contributes favorably to net interest income in a rising interest rate environment. Conversely, if the balance sheet has more liabilities repricing than assets, the balance sheet is liability sensitive and negatively gapped. In a declining rate environment, net interest income would improve.
The Company uses a simulation model to better understand the risks to the Company that may be brought about by changes in market interest rates. At June 30, 2002, the Company simulated the effects on net interest income given an immediate parallel shift in the yield curve of 200 basis points in either direction. The results of the simulation did not fall within the Company’s established policy limits for changes in net interest income if rates decreased 200 basis points. Given the current market conditions it is highly unlikely that there would be an immediate 200 basis point decline in rates. However, the Company is exploring strategies to improve this situation.
Liquidity for a bank is the ability to fund customers' needs for borrowings and withdrawals. Sources of liquidity are:
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 Company has instituted certain procedures and policy guidelines to manage the rate sensitive position. Those internal rules enable the Company to react to changes in market rates and protect net interest income from significant fluctuations.
Cumulative liquidity (in thousands of dollars):
June 30, 2002 Dec 31, 2001 June 30, 2001
Assets due within one year $216,454 $169,775 $157,118
Liabilities due within one year $275,592 $272,214 $253,726
Percent of assets due within one year
to liabilities due within one year 78.54% 62.37% 61.92%
Investments included with assets due within one year were scheduled by maturity dates and not by call dates.
Liabilities include deposits not having stated maturity dates (DDA’s, NOWs, Savings & MMDA’s) in the amounts reported. In addition, sweep accounts were classified as having immediate maturity dates.
The improvement in liquidity was caused by the reduction in market rates. As market rates began to decrease, investment securities, subject to call dates, were in fact called. Other investments and loans began to prepay. This provided the Bank with a significant source of funds to meet liquidity demands.
Management believes that the present level of liquidity is adequate for current operations.
This presentation does not take into consideration lines of credit that are available to the Company, or assets available-for-sale, both of which could be used to meet liquidity needs. The Company’s capital amounts and ratios at June 30, 2002 are as follows:
To be Well Capitalized
For Capital Under Prompt Corrective
Actual Adequacy Purposes Action Provisions
Amount Ratio Amount Ratio Amount Ratio
Total Capital
(to Risk Weighted Assets) $46,417,616 12.38% $ 29,997,579 8.00% $ 37,496,974 10.00%
Tier 1 Capital
(to Risk Weighted Assets) $42,579,183 11.36% $ 14,998,789 4.00% $ 22,498,184 6.00%
Tier 1 Capital
(to Average Assets) $42,579,183 7.39% $ 23,052,542 4.00% $ 28,815,677 5.00%
The ratios for the Bank are not materially different from those of the Company.
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings.
On July 1, 2002 the Bank
was served with a civil complaint that was filed on June 28, 2002. The complaint
was referred to legal counsel and is under investigation at the time of this
writing. Due to the timing of the complaint and the filing deadline for this
report, legal counsel is unable to render an opinion as to the merits of the
complaint. An opinion will be forthcoming upon completion of the investigation.
Management does not know of any material proceedings pending, threatened or contemplated against the Company by government
authorities.
ITEM 2. Changes in Securities and Use of Proceeds.
ITEM 3. Default Upon Senior Securities.
ITEM 4. Submission of matters to a Vote by Security Holders.
At the annual meeting of Shareholders held on May 7, 2002, 1,566,778 shares of common stock representing 85.99% of the total number of shares outstanding, were represented in person or by proxy. The following votes were cast:
A Election of three Class B Directors to serve for a three-year term::
Withhold
For Authority
---- ---------
Samuel C. Cali 1,547,886 11,054
Mary E. McDonald 1,554,214 4,437
David L. Tressler 1,534,015 23,944
B Proposal to approve and adopt The Fidelity D & D Bancorp, Inc. 2002
Employee Stock Purchase Plan:
For Against Abstain
-------- ------- -------
1,433,309 29,490 18,744
C Ratification of the selection of Parante Randolph, P.C., Certified Public
Accountants as the independent auditors for the Company for the year ending
December 31, 2002:
For Against Abstain
--------- -------- -------
1,558,483 5,410 2,508
ITEM 5. Other Information.
None.ITEM 6. Exhibits and Reports on Form 8-K.
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 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.
10.2 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.
10.3 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, as amended by Pre-effective Amendment No. 1 on October 11, 2000 and by Post-effective Amendment No. 1 on Form S-3 on May 30, 2001.
10.4 Registrant's 2000 Dividend Reinvestment Plan. Incorporated by reference to Exhibit 4.3 to Registrant's Registration Statement No. 333-45668 on Form S-1, filed with the SEC on September 12, 2000, as amended by Pre-effective Amendment No. 1 on October 11, 2000 and by Post-effective Amendment No. 1 on Form S-3 on May 30, 2001.
10.5 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 on page 9.
Pursuant to the requirements of the Securities Exchange Act of 1934, the Company has caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
DATE: August 7, 2002 /s/ Michael F. Marranca
-----------------------------------
Michael F. Marranca, Chairman of the Board and President
DATE: August 7, 2002 /s/ Joseph J. Earyes
-----------------------------------
Joseph J. Earyes, Executive Vice President and C E O
DATE: August 7, 2002 /s/ Robert P. Farrell
-----------------------------------
Robert P. Farrell, Treasurer
Exhibit Index
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 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.
10.2 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.
10.3 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, as amended by Pre-effective Amendment No. 1 on October 11, 2000 and by Post-effective Amendment No. 1 on Form S-3 on May 30, 2001.
10.4 Registrant's 2000 Dividend Reinvestment Plan. Incorporated by reference to Exhibit 4.3 to Registrant's Registration Statement No. 333-45668 on Form S-1, filed with the SEC on September 12, 2000, as amended by Pre-effective Amendment No. 1 on October 11, 2000 and by Post-effective Amendment No. 1 on Form S-3 on May 30, 2001.
10.5 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 on page 9.
In connection with the Quarterly Report of Fidelity D&D Bancorp, Inc. (the “Company”) on form 10-Q for the period ending June 30, 2002, as filed with the Securities and Exchange Commission (the “Report”), I, Joseph J. Earyes, Executive Vice President and Chief Executive Officer, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
The information contained in the Report fairly represents, in all material respects, the financial condition and results of operations of the Company as of the dates and for the periods expressed in the Report.
/s/ Joseph J. Earyes
-------------------------------------------
Joseph, J. Earyes, Executive Vice President
and Chief Executive Officer
Date: August 7, 2002
In connection with the Quarterly Report of Fidelity D&D Bancorp, Inc. (the “Company”) on form 10-Q for the period ending June 30, 2002, as filed with the Securities and Exchange Commission (the “Report”), I, Robert P. Farrell, Treasurer, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
The information contained in the Report fairly represents, in all material respects, the financial condition and results of operations of the Company as of the dates and for the periods expressed in the Report.
/s/ Robert P. Farrell
-------------------------------------------
Robert P. Farrell, Treasurer
Date: August 7, 2002