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 November 12, 2002, the latest practicable date was 1,815,623.
PART I. FINANCIAL INFORMATION Page
----
ITEM 1. FINANCIAL STATEMENTS:
Consolidated Balance Sheet as of September 30, 2002
and December 31, 2001 3
Consolidated Statement of Income for the three and nine
months ended September 30, 2002 and 2001 4
Consolidated Statement of Changes in Shareholders' Equity
for the nine months ended September 30, 2002 and 2001 5
Consolidated Statement of Cash Flows for the nine months
ended September 30, 2002 and 2001 6
Notes to Consolidated Financial Statements 7-11
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 12-25
ITEM 3. Quantitative and Qualitative Disclosure about Market Risk,
included in Item 2 23-24
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings 25
ITEM 2. Change in Securities and Use of Proceeds 25
ITEM 3. Defaults upon Senior Securities 25
ITEM 4. Submission of Matters to a Vote of Security Holder 25
ITEM 5. Other Information 26
ITEM 6. Exhibits and Reports on Form 8-K 26
Signature Page 27
Certification of Officers 28-29
Exhibit Index 30
September 30, 2002 December 31, 2001
(unaudited) (audited)
-------------------------------------------
ASSETS
Cash and due from banks $ 11,698,730 $ 19,845,029
Interest bearing deposits with financial institutions 1,636,776 5,799,943
-------------------------------------------
Total cash and cash equivalents 13,335,506 25,644,972
Federal funds sold 8,100,000 -
Held to maturity securities 16,557,681 21,640,254
Available for sale securities 153,551,692 132,333,734
Loans net of unearned income 366,618,938 357,718,257
Allowance for loan losses 3,861,378 3,741,933
-------------------------------------------
Net loans 362,757,560 353,976,324
Loans available-for-sale 18,406,478 16,150,020
Premises and equipment, net 12,934,591 11,513,154
Accrued interest receivable 2,990,843 3,268,456
Foreclosed assets held for sale 171,104 688,041
Other assets 2,860,877 3,814,883
-------------------------------------------
Total assets $ 591,666,333 $ 569,029,838
===========================================
LIABILITIES
Deposits
NonInterest-bearing $ 54,761,814 $ 53,301,605
Cert. of deposit $100,000 or more 157,650,964 132,679,995
Other interest-bearing deposits 220,104,188 221,797,128
-------------------------------------------
Total deposits 432,516,966 407,778,728
Accrued expenses and other liabilities 3,880,076 3,597,892
Short-term borrowings 48,405,360 54,480,988
Long-term debt 63,000,000 63,000,000
-------------------------------------------
Total liabilities 547,802,403 528,857,608
-------------------------------------------
Shareholders' Equity:
Preferred stock authorized 5,000,000 shares,
no par value, none issued - -
Common stock authorized 10,000,000 shares,
no par value 9,585,125 9,353,452
Accumulated other comprehensive income/(loss) 565,582 (1,262,046)
Retained earnings 34,073,721 32,080,824
-------------------------------------------
Subtotal 44,224,429 40,172,230
Less treasury stock, 9,741 shares at cost (360,499) -
-------------------------------------------
Total shareholders' equity 43,863,930 40,172,230
-------------------------------------------
Total liabilities and shareholders' equity $ 591,666,333 $ 569,029,838
===========================================
Three Months Ended Nine Months Ended
September 30, 2002 September 30, 2001 September 30, 2002 September 30, 2001
Interest Income
Interest and fees on loans:
Taxable $ 6,101,228 $ 6,689,194 $ 18,593,918 $ 20,398,130
Nontaxable 146,238 189,818 453,236 568,941
Interest and fees on leases 136,400 167,730 420,674 537,358
Interest-bearing deposits with financial institutions 3,145 126,454 13,905 134,628
Investment securities:
US Government agencies 1,937,666 1,663,023 5,873,113 4,938,223
States & political subdivisions (nontaxable) 112,615 173,651 364,501 581,828
Other securities 50,325 63,113 169,344 219,705
Federal funds sold 68,120 191,931 156,906 313,575
----------------------------------------------------------------------------
Total interest income 8,555,737 9,264,914 26,045,597 27,692,388
----------------------------------------------------------------------------
Interest expense
Certificates of deposit of $100,000 or more 1,527,874 1,741,275 4,453,663 5,214,805
Other deposits 1,816,353 2,180,065 5,756,720 6,472,927
Securities sold under repurchase agreements 228,868 310,791 792,075 1,124,823
Other 907,836 914,033 2,692,619 2,877,519
----------------------------------------------------------------------------
Total interest expense 4,480,931 5,146,164 13,695,077 15,690,074
----------------------------------------------------------------------------
Net interest income 4,074,806 4,118,750 12,350,521 12,002,314
Provision for loan losses 220,000 569,937 1,176,000 1,173,937
----------------------------------------------------------------------------
Net interest income, after
provision for loan losses 3,854,806 3,548,813 11,174,521 10,828,377
----------------------------------------------------------------------------
Other income:
Service charges on deposit accounts 317,866 485,073 861,141 812,329
Gain/(loss) on sale of investment securities (1,033) 85,510 58,828 199,885
Gain on sale of loans and leases 53,267 42,312 315,686 201,018
Gain/(loss) on foreclosed assets held for sale (64,980) - (10,045) 18,018
Other income 431,866 245,072 1,462,824 1,320,990
----------------------------------------------------------------------------
Total other income 736,986 857,967 2,688,433 2,552,240
----------------------------------------------------------------------------
Other operating expenses:
Salaries and employee benefits 1,606,407 1,558,109 4,743,432 4,387,505
Premises and equipment 695,147 616,942 1,889,931 1,890,248
Advertising 124,679 122,524 311,011 316,771
Other expenses 875,772 932,923 2,660,474 2,743,698
----------------------------------------------------------------------------
Total operating expenses 3,302,005 3,230,498 9,604,849 9,338,222
----------------------------------------------------------------------------
Income before provision for income taxes 1,289,787 1,176,282 4,258,105 4,042,395
Provision for income taxes 356,733 252,144 1,138,169 894,807
----------------------------------------------------------------------------
Net income $ 933,054 $ 924,138 $ 3,119,936 $ 3,147,588
============================================================================
Basic earnings per share $ 0.52 $ 0.51 $ 1.72 $ 1.73
Diluted earnings per share $ 0.51 $ 0.51 $ 1.71 $ 1.73
Dividends per share $ 0.21 $ 0.20 $ 0.62 $ 0.59
Accumulated Other
Capital Stock Treasury Stock Retained Comprehensive
Shares Amount Shares Amount 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 3,147,588 3,147,588
Change in net unrealized holding
gains/(losses) on available-for-sale
securities, net of reclassification
adjustments and tax effects 1,772,338 1,772,338
------------
Comprehensive income 4,919,926
------------
Dividends (1,062,834) (1,062,834)
Dividends reinvested 8,551 313,115 313,115
----------------------------------------------------------------------------------
Balance, September 30, 2001 1,814,825 $9,194,828 - $ - $ 31,743,539 $ 446,903 $ 41,385,270
==================================================================================
Balance, December 31, 2001 1,819,168 $ 9,353,452 - $ - $ 32,080,824 $ (1,262,046)$ 40,172,230
------------
Net income 3,119,936 3,119,936
Change in net unrealized holding
gains/(losses) on available-for-sale
securities, net of reclassification
adjustments and tax effects 1,827,628 1,827,628
------------
Comprehensive income 4,947,564
------------
Dividends (1,127,038) (1,127,038)
Treasury stock purchased at cost (12,960) (479,640) (479,640)
Dividends reinvested 6,200 231,673 3,219 119,141 350,814
----------------------------------------------------------------------------------
Balance September 30, 2002 1,825,368 $ 9,585,125 (9,741) $(360,499) $34,073,722 $ 565,582 $43,863,930
==================================================================================
Comprehensive income for the three months ended September 30, 2002 and September 30, 2001 was $1,387,994 and $1,727,303 respectively.
2002 2001
--------------------- ----------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 3,119,936 $ 3,147,588
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 795,905 898,600
Amortization of securities (net of accretion) 9,968 (29,798)
Provision for loan losses 1,176,000 1,173,937
Deferred income tax 405,092 (180,742)
Amortization of mortgage servicing rights 85,445 30,678
(Gain)/loss sale of investment securities (58,828) (199,885)
(Gain)/loss on sale of loans and leases (315,686) (201,018)
(Gain)/Loss on sale of foreclosed assets held for sale 10,045 (18,051)
Net change in interest receivable 277,613 165,372
Net change in accrued expenses 282,184 945,879
Net change in other assets (478,038) (144,366)
--------------------- ----------------------
Net cash provided by operating activities 5,309,636 5,588,194
--------------------- ----------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of held-to-maturity securities (9,057,722) (15,993,750)
Proceeds from maturity, call and paydown
of held-to-maturity securities 14,132,688 721,209
Proceeds from the sale of available-for-sale securities 37,251,761 11,203,976
Proceeds from maturity, call and paydown
of available-for-sale securities 61,464,284 58,128,211
Purchase of available-for-sale securities (117,108,403) (42,230,646)
(Increase) in federal funds sold (8,100,000) 0
Proceeds from sale of available-for-sale loans 21,420,261 16,335,656
Net change in loans (33,362,021) (25,792,024)
Purchase of bank premises and equipment (2,217,341) (1,100,000)
Improvements to foreclosed assets held for sale - (10,356)
Proceeds from sale of foreclosed assets held for sale 550,644 167,076
--------------------- ----------------------
Net cash provided by/(used In) investing activities (35,025,848) 1,429,352
--------------------- ----------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in non-interest bearing deposits 1,460,209 (389,462)
Net change in interest bearing deposits (1,692,940) 23,057,410
Net change in CD's $100,000 or more 24,970,969 45,012,095
Net change in short term borrowings (6,075,627) 3,624,784
Purchase of treasury stock (479,640) -
Dividends paid, net of dividend reinvestment (776,224) (749,719)
--------------------- ----------------------
Net cash provided by financing activities 17,406,747 70,555,108
--------------------- ----------------------
Net increase/(decrease) in cash and cash equivalents (12,309,466) 77,572,654
Cash and cash equivalents, beginning 25,644,972 8,779,492
--------------------- ----------------------
Cash and cash equivalents, ending $ 13,335,506 $ 86,352,146
===================== ======================
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 10-Q and Article 10-01 of Regulation S-X. 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 to 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 Company’s Annual Report on Form 10-K 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 September 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 nine months ended September 30, 2002 and 2001 and changes in shareholders’ equity and cash flows for the nine months ended September 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 10-Q 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 10-K. The results of operations for interim periods are not necessarily indicative of the results of operations to be expected for the entire year.
The Company maintains a system of controls and procedures designed to provide reasonable assurance as to the reliability of the financial statements and other disclosures included in this report, as well as to safeguard assets from unauthorized use or disposition. The Company evaluated the effectiveness of the design and operation of our disclosure controls and procedures under the supervision and with the participation of management, including our Chief Executive Officer and Chief Financial Officer, within 90 days prior to the filing date of this report. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective in timely alerting them to material information required to be included in our periodic Securities and Exchange Commission filings. No significant changes were made to our internal controls or other factors that could significantly affect these controls subsequent to the date of their evaluation.
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. 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 September 30, 2002 and 2001
Weighted
Average
Common Earnings
Income Shares per
September 30, 2002 Numerator Denominator Share
----------- ----------- ---------
Basic EPS $ 3,119,936 1,817,736 $1.72
=========
Dilutive effect of potential common stock
Stock options;
Exercise of outstanding options 26,300
Hypothetical share repurchase at $38.00 (23,857)
----------------------------
Diluted EPS $ 3,119,936 1,820,179 $1.71
===========================================
September 30, 2001
Basic EPS $ 3,147,588 1,809,702 $1.73
=========
Dilutive effect of potential common stock
Stock options;
Exercise of outstanding options 18,800
Hypothetical share repurchase at $37.00 (17,416)
----------------------------
Diluted EPS $ 3,147,588 1,811,086 $1.73
===========================================
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 September 30, 2001. The effect of the restatement was as follows:
September 30,2001
AS
PREVIOUSLY AS
REPORTED RESTATED
-------- --------
BALANCE SHEET:
Retained earnings $32,032,217 $31,743,539
STATEMENT OF INCOME,
(nine months ended September 30, 2001):
Interest income 27,709,353 27,692,388
Income before provision for
income taxes 4,058,723 4,042,395
Provision for income taxes 926,807 894,807
Net income 3,131,916 3,147,588
Per share data:
Net income - basic $1.73 $1.73
Net income - diluted $1.73 $1.73
STATEMENT OF INCOME,
(three months ended
September 30, 2001):
Interest income 9,269,868 9,264,914
Income before provision
for income taxes 1,180,599 1,176,282
Provision for income taxes 261,685 252,144
Net income 918,914 924,138
Per share data:
Net income - basic $.62 $.51
Net income - diluted $.62 $.51
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
September 30, 2002 December 31, 2001 change change
Noninterest-bearing deposits
Personal $ 23,234,135 $ 22,333,970 $ 900,165 4.03%
Non-personal 25,797,383 23,622,034 2,175,349 9.21%
Public fund 2,796,683 2,872,126 (75,444) -2.63%
Bank checks 2,933,613 4,473,474 (1,539,861) -34.42%
- --------------------------------------------------------------------------------------------------------------------------------
Total $ 54,761,814 $ 53,301,605 $ 1,460,209 2.74%
================================================================================================================================
Certificates of deposit
of $100,000 or more
Personal $ 76,743,172 $ 61,521,341 $ 15,221,831 24.74%
Non-personal 23,055,901 23,391,143 (335,242) -1.43%
Public fund 52,783,959 42,578,923 10,205,036 23.97%
IRA's 5,067,931 5,188,588 (120,657) -2.33%
- --------------------------------------------------------------------------------------------------------------------------------
Total $ 157,650,964 $ 132,679,995 $ 24,970,969 18.82%
================================================================================================================================
Other interest-bearing deposits
CD's less than $100,000:
Personal $ 97,013,942 $ 98,038,828 $ (1,024,885) -1.05%
Non-personal 11,028,438 25,035,720 (14,007,282) -55.95%
Public fund 784,754 833,561 (48,807) -5.86%
IRA's 20,905,616 20,535,149 370,467 1.80%
- --------------------------------------------------------------------------------------------------------------------------------
sub total 129,732,750 144,443,257 (14,710,507) -10.18%
NOW acounts 38,952,014 36,012,247 2,939,767 8.16%
Money market deposits 12,190,149 7,411,972 4,778,177 64.47%
Savings and clubs 39,229,276 33,929,652 5,299,624 15.62%
- --------------------------------------------------------------------------------------------------------------------------------
Total $ 220,104,188 $ 221,797,128 $ (1,692,939) -0.76%
================================================================================================================================
Total deposits
Noninterest-bearing deposits $ 54,761,814 $ 53,301,605 $ 1,460,209 2.74%
Interest-bearing deposits 377,755,152 354,477,123 23,278,029 6.57%
- --------------------------------------------------------------------------------------------------------------------------------
Total $ 432,516,966 $ 407,778,728 $ 24,738,238 6.07%
================================================================================================================================
As indicated in the table above, deposits increased 6.07% during the first nine months of 2002.
Public fund deposits accounted for 16.76% of total 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 changing political landscape. Thus the Bank could experience material shifts in these outstanding balances throughout the year.
During the year the Bank instituted several programs to attract deposits.
The Fidelity Check Card Campaign was designed to issue check cards to new and existing depositors. With the ease of purchasing goods and services with check cards, the Bank provides
depositors an incentive to increase balances carried in their accounts. During the campaign maintenance charges were waived for one year for any card issued.
Fidelity’s All-American Checking Campaign was initiated to attract personal and small business checking accounts. Incentives included no minimum balance requirements and the first order of 50 checks free.
The Visa Business Check Card Campaign targeted new business check cards and demand deposit accounts.
The Bank also offered discounts on home equity loan fees and first year free safe deposit box rentals for customers who had their payments directly charged to a demand deposit account.
Commercial borrowers were encouraged to have their operating and payroll accounts at the Bank.
At September 30, 2002 the new Eynon branch had $3,594,000 in new deposits. Certificates of deposit comprised 95.12% of those new deposits.
Bank checks (official 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.
Short-term borrowings, which are comprised of repurchase agreements (repos), treasury tax and loan retained funds and federal funds purchased, decreased $6,076,000 or 11.15%.
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. At the September 10, 2002 dividend payment date, 3,219 shares of treasury stock were reissued under the dividend reinvestment plan.
As detailed in the statement of cash flows, total cash and cash equivalents had a net decrease due to a reduction in short-term borrowings, primarily repos, increases in Federal Funds sold and the investment portfolio, net loan disbursements, fixed asset acquisitions and the purchase of treasury stock. The decrease was partially offset by an increase in deposits.
During 2002, net loans, grew $8,901,000 or 2.49%. Commercial loans increased $21,109,000 or 11.79%. Consumer loans and direct financing leases decreased due to reduced demand and a Management directive to substantially curtail leasing activities. 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 $21,105,000 were sold during 2002 to provide liquidity and address future interest rate and credit risk.
At September 30, 2002 the outstanding balance on credit card receivables was $2,902,000. The Bank is considering discontinuing this line of business and selling the entire portfolio to a third-party processor. Credit risk within the portfolio, current and future net earnings from the cards and overall liquidity requirements will be factored into the decision to sell or retain.
The following table reflects the composition of the loan portfolio, (available-for-sale loans not included):
September 30, 2002 December 31, 2001
Real estate $93,040,995 $96,740,226
Consumer 60,214,452 67,782,196
Commercial 200,152,415 179,043,816
Direct financing leases 7,544,833 9,961,967
Real estate construction 6,423,924 5,446,870
- ----------------------------------------------------------------------------------------------
Gross loans $367,376,618 $358,975,075
Less:
Unearned discount 757,680 1,256,818
Allowance for loan losses 3,861,378 3,741,933
- ----------------------------------------------------------------------------------------------
Net Loans $362,757,560 $353,976,324
==============================================================================================
The Company has classified certain residential mortgages, student loans and SBA guaranteed loans of $18,406,000 as available-for-sale (AFS) at September 30, 2002. The fair value of AFS loans at September 30, 2002 and December 31, 2001 was $18,938,000 and $16,418,000, respectively.
Paydowns and early calls of US agency, mortgage-backed securities and municipal bonds totaled $75,247,000. Available-for-sale US Government Agency bonds and mortgage-backed securities of $37,193,000 were sold to provide liquidity and to improve the yield on earning assets. Investments primarily in mortgage-backed securities of $126,006,000 were purchased during 2002.
Investments in mortgage-backed securities were made because these securities provide a monthly cash flow that can be used for reinvestment, they historically do not extend to their stated maturity dates and they are not susceptible to a full call.
In light of fluctuations in the bond market, the investment strategy used during 2002 was able to produce a 5.71% year-to-date tax equivalent yield on the entire portfolio at September 30, 2002. That yield is comparable to the 5.84% tax equivalent yield at December 31, 2001. As would be expected, the decline in market rates caused a decrease in the year-to-date yield for 2002.
Due to the dramatic change in the composition of the portfolio, the market value of the available-for-sale securities improved $2,769,000 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 September 30, 2002 consist of the following:
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------------------------------------------------------------------
Held-to-maturity
Mortgage-backed securities $ 13,557,681 $ 383,583 $ - $ 13,941,263
Government agencies 3,000,000 - 27,465 2,972,535
--------------------------------------------------------------------
Total held-to-maturity $ 16,557,681 $ 383,583 $ 27,465 $ 16,913,798
--------------------------------------------------------------------
Available-for-sale
Agencies $ 31,071,348 $ 229,703 $ 159,213 $ 31,141,838
State and municipal 9,703,681 266,881 - 9,970,562
Corporate Bonds 3,988,035 - 1,375 3,986,660
Mortgage-backed securities 104,343,062 659,991 174,506 104,828,547
--------------------------------------------------------------------
Sub total 149,106,125 1,156,575 335,094 149,927,606
Equity securities 3,588,625 62,369 26,908 3,624,086
--------------------------------------------------------------------
Total available-for-sale $ 152,694,750 $ 1,218,944 $ 362,001 $ 153,551,692
--------------------------------------------------------------------
Grand total $ 169,252,431 $ 1,602,527 $ 389,466 $ 170,465,491
====================================================================
At September 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
One year or less $ 3,000,000 $ 2,972,535
-------------------------------------------
sub total 3,000,000 2,972,535
Mortgage-backed securities 13,557,681 13,941,263
- ---------------------------------------------------------------------------------------------
Total held-to maturity $ 16,557,681 $ 16,913,798
- ---------------------------------------------------------------------------------------------
Available-for-sale
One year or less $ 6,000,000 $ 6,049,266
One through five years 5,400,000 5,418,960
Five through ten years 17,710,417 17,929,726
Over ten years 15,652,646 15,701,107
- ---------------------------------------------------------------------------------------------
sub total 44,763,063 45,099,060
Mortgage-backed securities 104,343,062 104,828,547
Equity securities 3,588,625 3,624,086
- ---------------------------------------------------------------------------------------------
Total available-for-sale $ 152,694,750 $ 153,551,692
- ---------------------------------------------------------------------------------------------
Grand total $ 169,252,431 $ 170,465,491
=============================================================================================
At September 30, 2002, capital expenditures for the new core processing system, scheduled for operations during the fourth quarter of 2002, were $1,189,000. The projected cost of the system was $1,300,000. Capitalized expenditures will be depreciated over their estimated useful lives using the straight-line method.
Construction cost overruns increased capitalized expenditures at the Eynon branch to approximately $930,000 at September 30, 2002. Capital expenditures for Eynon, excluding bank equipment, were originally projected at $250,000. The branch opened July 17, 2002. Capitalized expenditures will be depreciated over their estimated useful lives.
2. Changes in Results of Operations:
Net Income for the nine months ending September 30, 2002 and 2001 was $3,119,936 and $3,147,588, respectively. The significant differences are as follows:
2002 2001 Difference
Net interest income $ 12,350,521 $ 12,002,314 $ 348,207 A
Provision for loan losses $ 1,176,000 $ 1,173,937 $ (2,063) B
Deposit service charges and other income $ 2,323,965 $ 2,151,337 $ 172,628 C
Gain on sale of assets $ 364,468 $ 400,903 $ (36,435)
Salaries and employee benefits $ 4,743,432 $ 4,387,505 $(355,927) D
Premises and equipment $ 1,889,931 $ 1,890,248 $ 317
Other expense $ 2,971,485 $ 3,060,469 $ 88,984
Provision for income tax $ 1,138,169 $ 894,807 $(243,362) E
Net Income for the three months ending September 30, 2002 and 2001 was $933,054 and $924,138, respectively. The significant differences are as follows
2002 2001 Difference
Net interest income $ 4,074,806 $ 4,118,750 $ (43,944) A
Provision for loan losses $ 220,000 $ 569,937 $ 349,937 B
Deposit service charges and other income $ 749,732 $ 730,145 $ 19,587
Gain/(loss) on sale of assets $ (12,746) $ 127,822 $(140,568)
Salaries and employee benefits $ 1,606,407 $ 1,558,109 $ (48,298) C
Premises and equipment $ 695,147 $ 616,942 $ (78,205)
Other expense $ 1,000,451 $ 1,055,447 $ 54,996
Provision for income tax $ 356,733 $ 252,144 $(104,589) D
TAX EQUIVALENT YIELD
- -------------------------------------------------
Nine months ended Year ended Nine months ended
September 30, 2002 December 31, 2001 September 30, 2001
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Average earning assets:
Loans and leases $ 382,781 $ 355,640 $ 353,496
Investments 153,216 121,791 119,056
Federal funds sold 12,266 20,501 11,966
Interest-bearing deposits 974 12,716 12,129
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Total $ 549,237 $ 510,648 $ 496,647
===========================================================================
Average Interest Bearing Liabilities:
Other Interest-bearing deposits $ 81,537 $ 79,861 $ 80,626
Certificates of deposit 289,777 254,422 242,675
Other borrowed funds 64,056 66,674 67,530
Repurchase agreements 44,547 40,970 38,386
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Total $ 479,917 $ 441,927 $ 429,217
===========================================================================
Interest Income
Loans and leases $ 19,653 $ 28,398 $ 21,720
Investments 6,546 7,894 6,016
Federal funds sold 157 544 314
Interest-bearing deposits 14 181 134
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Total $ 26,370 $ 37,017 $ 28,184
===========================================================================
Interest Expense
Other Interest-bearing deposits $ 715 $ 1,552 $ 1,284
Certificates of deposit 9,495 14,004 10,404
Other borrowed funds 2,693 3,788 2,877
Repurchase agreements 792 1,510 1,125
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Total $ 13,695 $ 20,854 $ 15,690
===========================================================================
Net Interest Income $ 12,675 $ 16,163 $ 12,494
===========================================================================
Yield on average earning assets 6.42% 7.25% 7.59%
Cost of average interest-bearing liabilities 3.82% 4.72% 4.89%
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Interest rate spread 2.60% 2.53% 2.70%
===========================================================================
Net yield on average earning assets 3.09% 3.17% 3.37%
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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 losses 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 nine months ended September 30, 2002, there were no adjustments made to the historical loan loss experience. However, there were qualitative adjustments made to the above factors based upon current delinquency levels within the loan portfolio and net charge-offs. The qualitative adjustments necessitated an increase in the provision for loan losses.
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.
September 30, 2002 December 31, 2001 September 30, 2001
Loans, net of unearned income $ 366,618,938 $ 357,718,257 $ 340,968,097
Allowance for loan losses $ 3,861,378 $ 3,741,933 $ 3,511,115
Percentage to net loans 1.05% 1.05% 1.03%
Provision for loan losses
Year ended $ 2,474,637
Nine months ended $ 1,176,000 $ 1,173,937
Three months ended $ 220,000 $ 569,937
(Charge offs)/recoveries, net
Year ended $ (1,996,984)
Nine months ended $ (1,056,556) $ (927,102)
Three months ended $ (180,695) $ (358,908)
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 during 2002, to help facilitate the collection process.
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 during 2002, 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 allowance for loan losses was increased based upon these findings.
Bank policy stipulates that loans not secured by residential or commercial real estate, in payment default exceeding 90 days, shall be placed in a non-accrual status. Loans secured by real estate will by placed in a non-accrual status when payment default exceeds 180 days.
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 September 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 September 30, 2002, the Company simulated the effects on the net interest margin 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 the net interest margin if rates decreased 200 basis points. There was however, an improvement since June 30, 2002. A 200 basis point decrease at June 30, 2002 would have reduced the net interest margin by 17.86%. At September 30, 2002, the reduction was 13.95%.
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. Such strategies could include increasing the relative amount of rate sensitive assets by shorting the terms on investments or by acquiring more adjustable rate assets. Another tactic would be to emphasize longer-term deposit rates.
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):
Sept 30, 2002 Dec 31, 2001 Sept 30, 2001
Assets due within one year $240,088 $259,938 $231,749
Liabilities due within one year $281,500 $271,708 $276,143
Percent of assets due within one year
to liabilities due within one year 85.29% 95.67% 83.92%
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.
Liquidity for a bank is the ability to fund customers' needs for borrowings deposit withdrawals and normal operating expenses of the Bank. 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.
Management believes that the present level of liquidity is adequate for current operations.
The Company's capital amounts and ratios at September 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) $47,131,482 12.35% $ 30,530,723 8.00% $ 38,163,403 10.00%
Tier 1 Capital
(to Risk Weighted Assets) $43,254,146 11.33% $ 15,265,361 4.00% $ 22,898,042 6.00%
Tier 1 Capital
(to Average Assets) $43,254,146 7.47% $ 23,149,008 4.00% $ 28,936,261 5.00%
The ratios for the Bank are not materially different from those of the Company.
ITEM 1. Legal Proceedings.
On July 1, 2002, the bank was served with a Civil Complaint that was filed in the Court of Common Pleas of Lackawanna County,
Pennsylvania, on June 28, 2002. Scaccia Construction Company, the plaintiff, based upon multiple causes of action, demands
approximately $250,000 in connection with certain environmental remediation activities purportedly performed prior to the opening of
the bank's new Eynon branch. On July 22, 2002, the bank filed Preliminary Objections to the Complaint. Plaintiff replied to the
bank's Preliminary Objections on August 20, 2002, and filed a Brief in Opposition. The bank awaits the Court's determination to these
pleadings. The bank intends to vigorously defend this action.
Management, after consulting with the company's legal counsel, is not aware of any litigation that would have a material adverse
effect on the consolidated financial position of the company. There are no proceedings pending other than ordinary routine
litigation incident to the business of the company and of the bank. In addition, management does not know of any material
proceedings contemplated by governmental authorities against the company or the bank.
ITEM 2. Changes in Securities and Use of Proceeds.
None.
ITEM 3. Default Upon Senior Securities.
None.
ITEM 4. Submission of matters to a Vote by Security Holders.
None
ITEM 5. Other Information.
None.
ITEM 6. Exhibits and Reports on Form 8-K.
a) Exhibits 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 10 b) The Company filed a current report on Form 8-K with the Securities and Exchange Commission on March 25, 2002 (Disclosing the Form of Employment Agreement with Joseph J. Earyes made as of January 15, 2002)
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: November 14, 2002 ___________________________________
Michael F. Marranca, Chairman of the Board and President
DATE: November 14, 2002 ___________________________________
Joseph J. Earyes, Executive Vice President and C E O
I, Joseph J. Earyes, certify that:
I, Robert Farrell, certify that:
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 10