FIDELITY D & D BANCORP INC - Quarter Report: 2002 March (Form 10-Q)
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR QUARTER ENDED MARCH 31, 2002
COMMISSION FILE NUMBER: 333-90273
FIDELITY D & D BANCORP, INC.
| STATE OF INCORPORATION: | IRS EMPLOYER IDENTIFICATION NO: |
| PENNSYLVANIA | 23-3017653 |
PRINCIPAL OFFICE:
BLAKELY & DRINKER ST.
DUNMORE, PENNSYLVANIA 18512
TELEPHONE:
570-342-8281
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.
__X__ YES ___ NO
The number of outstanding shares of Common Stock of Fidelity D & D Bancorp, Inc. at May 9, 2002, the\ latest practicable date was 1,822,142.
FIDELITY D & D BANCORP, INC and SUBSIDIARY.
DUNMORE, PA 18512
FORM 10-Q MARCH 31, 2002
INDEX
PART I. FINANCIAL INFORMATION
Page
----
ITEM 1. FINANCIAL STATEMENTS:
Consolidated Balance Sheets as of March 31, 2002
and December 31, 2001 3
Consolidated Statement of Income for the three
months ended March 31, 2002 and 2001 4
Consolidated Statement of Changes in Shareholders' Equity
for the three months ended March 31, 2002 and 2001 5
Consolidated Statement of Cash Flows for the three months
ended March 31, 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- 22
ITEM 3. Quantitative and Qualitative Disclosure about Market Risk,
included in Item 20
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings 22
ITEM 2. Change in Securities and Use of Proceeds 22
ITEM 3. Defaults upon Senior Securities 22
ITEM 4. Submission of Matters to a Vote of Security Holder 22
ITEM 5. Other Information 22
ITEM 6. Exhibits and Reports on Form 8-K 23
Signature Page 24
Exhibit Index 25
2
FIDELITY D & D BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
As of Mach 31, 2002 and December 31, 2001
March 31, 2002 December 31, 2001
(unaudited) (audited)
----------------------------------------------
ASSETS
Cash and due from banks $13,651,659 $19,845,029
Interest bearing deposits with financial institutions 1,989,005 5,799,943
----------------------------------------------
Total cash and cash equivalents 15,640,664 25,644,972
Federal funds sold 2,380,000 -
Held to maturity securities 30,268,746 21,640,254
Available for sale securities 118,132,128 132,333,734
Loans net of unearned income 356,439,264 357,718,257
Allowance for loan losses 3,844,643 3,741,933
----------------------------------------------
Net loans 352,594,620 353,976,324
Loans available-for-sale 25,077,977 16,150,020
Bank premises and equipment 12,390,585 11,513,154
Accrued interest receivable 3,791,027 3,268,456
Foreclosed assets held for sale 264,836 688,041
Other assets 3,743,348 3,814,883
----------------------------------------------
Total assets $564,283,931 $569,029,838
==============================================
LIABILITIES
Deposits
NonInterest-bearing $49,067,029 $53,301,605
Cert. of deposit $100,000 or more 136,085,056 132,679,995
Other interest-bearing deposits 224,418,250 221,797,128
----------------------------------------------
Total deposits 409,570,336 407,778,728
Accrued expenses and other liabilities 3,925,727 3,597,892
Short-term borrowings 47,436,577 54,480,988
Long-term debt 63,000,000 63,000,000
----------------------------------------------
Total liabilities 523,932,640 528,857,608
----------------------------------------------
Shareholders' Equity:
Preferred stock authorized 5,000,000 shares,
no par value, none issued - -
Common stock authorized 10,000,000 shares,
no par value 9,465,070 9,353,452
Accumulated other comprehensive income/(loss) (1,908,899) (1,262,046)
Retained earnings 32,795,120 32,080,824
----------------------------------------------
Total shareholders' equity 40,351,291 40,172,230
----------------------------------------------
----------------------------------------------
Total liabilities and shareholders' equity $564,283,931 $569,029,838
==============================================
See notes to consolidated financial statements
3
FIDELITY D & D BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF INCOME
Three Months Ended March 31, 2002 and 2001
(unaudited)
Three Months Ended
March 31, 2002 March 31, 2001
Interest Income
Interest and fees on loans:
Taxable $6,212,886 $6,851,183
Nontaxable 161,446 188,142
Interest and fees on leases 150,527 188,539
Interest-bearing deposits with financial
institutions 5,907 8,447
Investment securities:
US Government agencies 1,957,983 1,618,908
States & political subdivisions (nontaxable) 132,469 214,045
Other securities 59,399 98,415
Federal funds sold 49,997 961
--------------------- ---------------------
Total interest income 8,730,614 9,168,640
--------------------- ---------------------
Interest expense
Certificates of deposit of $100,000 or more 1,431,342 1,599,446
Other deposits 2,024,382 2,266,794
Securities sold under repurchase agreements 305,353 487,286
Other 886,995 1,044,171
--------------------- ---------------------
Total interest expense 4,648,072 5,397,697
--------------------- ---------------------
Net interest income 4,082,542 3,770,943
Provision for loan losses 460,000 328,000
--------------------- ---------------------
Net interest income, after
provision for loan losses 3,622,542 3,442,943
--------------------- ---------------------
Other income:
Service charges on deposit accounts 253,877 258,264
Gain on sale of investment securities 19,688 114,375
Gain on sale of loans and leases 81,586 79,878
Gain on foreclosed assets held for sale 84,759 25,801
Other income 532,274 386,292
--------------------- ---------------------
Total other income 972,184 864,610
--------------------- ---------------------
Other operating expenses:
Salaries and employee benefits 1,591,590 1,379,823
Premises and equipment 645,002 639,184
Advertising 66,135 90,040
Other expenses 841,858 821,730
--------------------- ---------------------
Total operating expenses 3,144,585 2,930,777
--------------------- ---------------------
Income before provision for income taxes 1,450,141 1,376,776
Provision for income taxes 372,012 293,335
Net income $1,078,129 $1,083,441
--------------------- ---------------------
Basic earnings per share $0.59 $0.60
Diluted earnings per share $0.59 $0.60
Dividends per share $0.20 $0.1875
See Notes to Consolidated Financial Statements.
4
FIDELITY D & D BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CHANGES IN
SHAREHOLDERS' EQUITY
For the Three Months Ended March 31, 2002 and 2001
(unaudited)
Accumulated
Capital Stock Retained Other Comprehensive
Shares Amount Earnings Income/(Loss) Total
------------------------------------------------------------------------------
Balance, Dec. 31, 2000, as previously 1,806,274 $8,881,713 $29,963,134 ($1,325,435) $37,519,412
reported
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 1,083,441 1,083,441
Change in net unrealized holding
gains/(losses) on available-for-sale _
securities, net of reclassification
adjustments and tax effects 1,070,742 1,070,742
-------------
Comprehensive income 2,154,183
-------------
Dividends (338,678) (338,678)
Dividends reinvested 2,623 97,070 97,070
------------------------------------------------------------------------------
Balance, March 31, 2001 1,808,897 $8,978,783 $30,403,548 $(254,693) $39,127,638
==============================================================================
Balance, December 31, 2001 1,819,168 $9,353,452 $32,080,824 $(1,262,046) $40,172,230
-------------
Net Income 1,078,129 1,078,129
Change in net unrealized holding
gains/(losses) on available-for-sale _
securities, net of reclassification
adjustments and tax effects (646,853) (646,853)
-------------
Comprehensive income 431,276
---------------
Dividends (363,833) (363,833)
Dividends reinvested 2,976 111,618 111,618
------------------------------------------------------------------------------
Balance March 31, 2002 1,822,144 $9,465,070 $32,795,120 $(1,908,899) $40,351,291
==============================================================================
See notes to consolidated financial statements.
Comprehensive income for the three months ended March 31, 2002 and March 31, 2001 was $431,276 and $2,154,183, respectively.
5
FIDELITY D & D BANCORP, INC AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
For the Three Months Ended March 31, 2002 and 2001
(unaudited)
2002 2001
---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $1,078,129 $1,083,441
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 302,100 298,200
Amortization of securities (net of accretion) (23,766) (12,216)
Provision for loan losses 460,000 328,000
Deferred income tax 353,371 (23,245)
Amortization of mortgage servicing rights 11,985 9,672
(Gain)/loss sale of investment securities (19,688) (114,375)
(Gain)/loss on sale of loans and leases (81,586) (79,878)
(Gain)/loss on sale of foreclosed assets held for sale (84,759) (25,801)
Net change in interest receivable (522,571) (376,338)
Net change in accrued expenses 327,835 423,730
Net change in other assets 39,407 (221,992)
---------------- ----------------
Net cash provided by operating activities 1,840,457 1,289,198
---------------- ----------------
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 430,450 328,814
Proceeds from the sale of available-for-sale securities 6,019,688 4,114,375
Proceeds from maturity, call and paydown
of available-for-sale securities 12,479,399 7,277,368
Purchase of available-for-sale securities (5,235,328) (7,000,000)
(Increase)/decrease in federal funds sold (2,380,000) (1,400,000)
Proceeds from sale of available-for-sale loans 5,557,977 4,870,060
Net change in loans & leases (13,765,159) (8,852,022)
Purchase of bank premises and equipment (1,179,530) (156,417)
Proceeds from sale of foreclosed assets held for sale 790,479 168,596
---------------- ----------------
Net cash used in investing activities (6,339,746) (656,871)
---------------- ----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in non-interest bearing deposits (4,234,576) (3,285,552)
Net change in interest bearing deposits 2,621,123 (5,848,873)
Net change in CD's $100,000 or more 3,405,061 22,319,678
Net change in short term borrowings (7,044,411) (9,226,308)
Dividends, net of dividends reinvested (252,216) (241,608)
---------------- ----------------
Net cash provided by/(used in) financing activities (5,505,019) 3,717,337
---------------- ----------------
Net increase(decrease) in cash and cash equivalents (10,004,308) 4,349,664
Cash and cash equivalents, beginning 25,644,972 8,779,492
---------------- ----------------
Cash and cash equivalents, ending $15,640,664 $13,129,156
================ ================
See notes to consolidated financial statements
6
FIDELITY D & D BANCORP, INC. and SUBSIDIARY
DUNMORE, PA 18512
FORM 10-Q MARCH 31, 2001
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The accompanying unaudited consolidated financial statements of Fidelity D & D Bancorp, Inc., and subsidiary, The Fidelity Deposit and 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 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 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 March 31, 2002 and December 31, 2001 present fairly the consolidated financial position of the Company as of those dates and the related statements of income, changes in shareholders' equity and cash flows for the three months ended March 31, 2002 and 2001 present fairly the consolidated results of its operations and its cash flows for the
7
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.
Critical Accounting Policies
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).
8
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 three months ended March 31, 2002 and 2001
9 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 March 31, 2001. The
effect of the restatement was as follows: Retained earnings at
January 1, 2001 has been reduced by $304,349 to correct the effect of the
misstatement through December 31, 2000. 10
FIDELITY D & D BANCORP, INC. and SUBSIDIARY 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. 11
1. Changes in Financial Condition Noninterest-bearing deposits Certificates of deposit
of $100,000 or more Other interest-bearing deposits Total deposits As indicated in the table
above, deposit growth was relatively flat in the first three months of 2002.
Historically, growth has been modest during the first quarter. Excess public
fund and non-personal deposits at December 31, 2001 were withdrawn by the
depositors to meet their first quarter operating needs. The decline in
outstanding Bank checks had a material effect on growth. 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. Discounting the effect of Bank checks, total deposits would have increased
$3,908,000 or 0.97%. during 2002. 12
Short-term borrowings,
which are comprised of repurchase agreements (Repos), treasury tax and loan
retained funds and federal funds purchased, decreased $7,044,000 or 12.93%. Two
public fund Repos and one non-personal Repo withdrew $9,823,000 to meet
operating expenses or to reinvest outside of the Bank. At March 31, 2002 there
were 180 Repos, approximating the number at December 31, 2001. Total cash and cash
equivalents decreased due to liability runoff, net loan disbursements and fixed
asset acquisitions. In addition the Bank sold Fed Funds at March 31, 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. During 2002, net loans,including
available-for-sale loans,
grew $7,546,000 or 2.04%. Commercial loans increased $6,823,000 or 3.81%.
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 $5,558,000 were sold during 2002 to provide liquidity and improve
yield. The Company has classified certain residential mortgages, student loans
and SBA guaranteed loans of $25,078,000 as available-for-sale (AFS) at March 31,
2002. The fair value of AFS loans at March 31, 2002 and December 31, 2000 was
$25,096,00 and $16,418,000, respectively.
The following table
reflects the composition of the loan portfolio: Paydowns and early calls of
US agency and municipal bonds and a FHLB stock redemption totaled $12,910,000.
US Government Agency bonds of $6,000,000, classified as available-for-sale, were
sold to provide liquidity and to improve the yield on earning assets. US
Government Agency bonds, mortgage-backed securities and municipal bonds of
$14,293,000 were purchased during 2002. These activities, plus a
$980,000 decrease in the market value of available-for-sale securities, caused
by changes in current market rates, were the major changes in the investment
portfolio. 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. 13
Securities held-to-maturity
and available-for-sale at March 31, 2002 consist of the following: 14 At March 31, 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. The increase in bank
premise and equipment was caused by leasehold improvements to the new Eynon
branch and initial deposits on the new core processing system being installed in
2002. 15 Net Income for the three
months ending March 31, 2002 and 2001 was $1,078,129 and $1,083,441,
respectively. The significant differences are as follows: 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 provision for loan losses was increased as a result of the growth
in the loan and available-for-sale loan portfolios. Increases in trust income, annuity sales and service charges on loans
produced the increase in deposit service charges and other income. Staff increases, merit pay increases and higher benefit costs
increased personnel expense $212,000. The year to date average number of
employees increased from 159 at March 31, 2001 to 169 at March 31,
2002. The effective federal income tax rate was 25.65% and
21.31% for the three months ending March 31, 2002 and March 31, 2001
respectively. Income before provision for income taxes in 2002 increased $73,000
over 2001. Non-taxable income as a percentage of net income before taxes
declined from 29.21% in 2001 to 20.27% in 2002. 16 THE FIDELITY DEPOSIT & DISCOUNT BANK 17 FIDELITY D & D BANCORP, INC. and SUBSIDIARY 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 three months ended
March 31, 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. 18 FIDELITY D & D BANCORP, INC. AND SUBSIDIARY The allowance for loan
losses can generally to 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. 19 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 allowance for loan loss was
increased through the provision for loan loss. 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 March
31, 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 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 March 31, 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 with in 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 basisi point decline in rates.
However, the Company is exploring strategies to improve this situation. 20 Liquidity Management 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. 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. 21 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 March 31, 2002 are as follows: The ratios for the Bank are
not materially different from those of the Company. PART II. OTHER INFORMATION In the opinion of
Management, there are no proceedings pending to which the Company is a party or
to which its property is subject, which if determined adversely to the Company,
would be material in relation to the Company's undivided profits or
financial condition. In addition, Management does not know of any material
proceedings pending, threatened or contemplated against the Company by
government authorities. 22 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 9. 23 FIDELITY D &D BANCORP, INC. and SUBSIDIARY 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. 24 FIDELITY D & D BANCORP, INC. and SUBSIDIARY 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. 25
Weighted
Average
Common Earnings
Income Shares per
March 31, 2002 Numerator Denominator Share
--------- ----------- -----
Basic EPS $1,078,129 1,819,895 $0.59
-------
Dilutive effect of potential common stock
Stock options;
Exercise of outstanding options 17,800
Hypothetical share repurchase at $37.50 (16,302)
-----------------------------------
Diluted EPS $1,078,129 1,821,393 $0.59
=================================================
March 31, 2001
Basic EPS $1,083,441 1,806,945 $0.60
Dilutive effect of potential common stock
Stock options;
Exercise of outstanding options 14,400
Hypothetical share repurchase at $37.75 (13,248)
-----------------------------------
Diluted EPS $1,083,441 1,808,097 $0.60
=================================================
March 31,2001
AS
PREVIOUSLY AS
REPORTED RESTATED
-------- --------
BALANCE SHEET:
Retained earnings $30,702,672 $30,403,548
STATEMENT OF INCOME:
Interest income 9,174,644 9,168,640
Income before provision for income
taxes 1,382,780 1,376,776
Provision for income taxes 304,564 293,335
Net income 1,078,216 1,083,441
Per share data:
Net income - basic $0.60 $0.60
Net income - diluted $0.60 $0.60
DUNMORE, PA 18512
FORM 10-Q MARCH 31, 2002
Dollar Percent
March 31, 2002 December 31, 2001 change change
-------------- ----------------- ------ ------
Personal $22,430,002 $22,333,970 $96,032 0.43%
Non-personal 22,248,610 23,622,034 (1,373,424) -5.81%
Public fund 2,031,055 2,872,126 (841,072) -29.28%
Bank checks 2,357,363 4,473,474 (2,116,111) -47.30%
---------------------------------------------------------------------------------------------------------------------------------
Total $49,067,029 $53,301,605 $(4,234,576) -7.94%
=================================================================================================================================
Personal $66,263,078 $61,521,341 $4,741,737 7.71%
Non-personal 23,799,425 23,391,143 408,282 1.75%
Public fund 40,663,997 42,578,923 (1,914,926) -4.50%
IRA's 5,358,556 5,188,588 169,968 3.28%
---------------------------------------------------------------------------------------------------------------------------------
Total $136,085,056 $132,679,995 $3,405,061 2.57%
=================================================================================================================================
CD's less than $100,000:
Personal $96,996,300 $98,038,828 $(1,042,528) -1.06%
Non-personal 24,582,331 25,035,720 (453,389) -1.81%
Public fund 936,259 833,561 102,698 12.32%
IRA's 20,499,629 20,535,149 (35,519) -0.17%
---------------------------------------------------------------------------------------------------------------------------------
sub total 143,014,519 144,443,257 (1,428,738) -0.99%
NOW acounts 36,378,876 36,012,247 366,629 1.02%
Money market deposits 7,950,470 7,411,972 538,498 7.27%
Savings and clubs 37,074,386 33,929,652 3,144,734 9.27%
---------------------------------------------------------------------------------------------------------------------------------
Total $224,418,250 $221,797,128 $2,621,123 1.18%
=================================================================================================================================
Noninterest-bearing deposits $49,067,029 $53,301,605 $(4,234,576) -7.94%
Interest-bearing deposits 360,503,307 354,477,123 6,026,184 1.70%
---------------------------------------------------------------------------------------------------------------------------------
Total $409,570,336 $407,778,728 $1,791,608 0.44%
=================================================================================================================================
March 31, 2002 December 31, 2001
Real estate $93,171,180 $96,740,226
Consumer 63,717,337 67,782,196
Commercial 185,866,883 179,043,816
Direct financing leases 9,413,895 9,961,967
Real estate construction 5,359,054 5,446,870
------------------------------------------------------------------------------------------
Gross loans $357,528,349 $358,975,075
Less:
Unearned discount 1,089,085 1,256,818
Allowance for loan losses 3,844,643 3,741,933
------------------------------------------------------------------------------------------
Net Loans $352,594,620 $353,976,324
==========================================================================================
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------------------------------------------------------------------------------------
Held-to-maturity
Mortgage backed securities $15,271,967 $29,329 $281,839 $15,019,457
Government agencies 14,996,779 - 503,539 14,493,240
--------------------------------------------------------------------------------------
Total held-to-maturity $30,268,746 $29,329 $785,378 $29,512,697
--------------------------------------------------------------------------------------
Available-for-sale
Agencies $91,940,902 $ - $2,685,973 $89,254,929
State and municipal 10,931,156 40,779 230,838 10,741,097
Corporate bonds 2,986,704 - 44 2,986,660
Mortgage backed securities 11,737,013 57,405 85,170 11,709,248
--------------------------------------------------------------------------------------
Sub total 117,595,775 98,184 3,002,025 114,691,934
Equity securities 3,428,625 46,127 34,558 3,440,194
--------------------------------------------------------------------------------------
Total available-for-sale $121,024,400 $144,311 $3,036,583 $118,132,128
--------------------------------------------------------------------------------------
Grand total $151,293,146 $173,640 $3,821,961 $147,644,825
======================================================================================
Amortized Market
Held-to-maturity cost value
----------- -----------
Over ten years $14,996,779 $14,493,240
------------------------------------------------------------------------------------------
sub total 14,996,779 14,493,240
Mortgage backed securities 15,271,967 15,019,457
------------------------------------------------------------------------------------------
Total held-to maturity $30,268,746 $29,512,697
------------------------------------------------------------------------------------------
Available-for-sale
One through five years 15,200,000 15,035,679
Five through ten years 54,394,061 52,797,828
Over ten years 36,264,701 35,149,178
------------------------------------------------------------------------------------------
sub total 105,858,762 102,982,686
Mortgage backed securities 11,737,013 11,709,248
Equity securities 3,428,625 3,440,194
------------------------------------------------------------------------------------------
Total available-for-sale $121,024,400 $118,132,128
------------------------------------------------------------------------------------------
Grand total $151,293,146 $147,644,825
2. Changes in Results of Operations:
2002 2001 Difference
Net interest income 4,082,542 3,770,943 311,599A
Provision for loan losses 460,000 328,000 (132,000)B
Deposit service charges and other income 786,152 644,556 141,596C
Gain on sale of assets 186,033 220,054 (34,021)
Salaries and employee benefits 1,591,591 1,379,823 (211,768)D
Premises and equipment 645,002 639,184 (5,818)
Other expense 907,993 911,770 3,777
Provision for income tax 372,012 293,335 (78,677)E
The decline in market rates allowed the Bank to reduce rates
paid on interest-bearing liabilities. The cost of funds decreased 136 bp from
5.32% at March 31, 2001 to 3.96% at March 31, 2002.
MANAGEMENT'S DISCUSSION AND ANALYSIS
(in thousands of dollars)
TAX EQUIVALENT YIELD
Three months ended Year ended Three months ended
March 31, 2002 December 31, 2001 March 31, 2001
-----------------------------------------------------------------
Average earning assets:
Loans and leases $379,265 $355,640 $349,342
Investments 151,446 121,791 119,452
Federal funds sold 11,799 20,501 61
Interest-bearing deposits 1,463 12,716 6,695
-----------------------------------------------------------------
Total $543,973 $510,648 $475,550
=================================================================
Average Interest Bearing Liabilities:
Other Interest-bearing deposits $80,101 $79,861 $83,565
Certificates of deposit 283,426 254,422 213,701
Other borrowed funds 64,115 66,674 73,984
Repurchase agreements 48,826 40,970 39,977
-----------------------------------------------------------------
Total $476,468 $441,927 $411,227
=================================================================
Interest Income
Loans and leases $6,594 $28,398 $7,298
Investments 2,204 7,894 2,037
Federal funds sold 50 544 1
Interest-bearing deposits 6 181 8
-----------------------------------------------------------------
Total $8,854 $37,017 $9,344
=================================================================
Interest Expense
Other Interest-bearing deposits $243 $1,552 $597
Certificates of deposit 3,213 14,004 3,269
Other borrowed funds 887 3,788 1,045
Repurchase agreements 305 1,510 487
-----------------------------------------------------------------
Total $4,648 $20,854 $5,398
=================================================================
Net Interest Income $4,206 $16,163 $3,946
=================================================================
Yield on average earning assets 6.60% 7.25% 7.97%
Cost of average interest-bearing liabilities 3.96% 4.72% 5.32%
=================================================================
Interest rate spread 2.64% 2.53% 2.65%
=================================================================
Net yield on average earning assets 3.14% 3.17% 3.37%
=================================================================
MANAGEMENT'S DISCUSSION AND ANALYSIS
Provision for Loan Losses
MANAGEMENT'S DISCUSSION AND ANALYSIS
PROVISION FOR LOAN LOSSES
March 31, 2002 December 31, 2001 March 31, 2001
Loans, net of unearned discount and fees 381,517,241 373,868,277 351,454,149
Allowance for loan losses 3,844,643 3,741,933 3,400,226
Percentage to net loans 1.01% 1.00% 0.97%
Provision for loan losses
Year ended 2,474,637
Three months ended 460,000 328,000
(Charge offs)/recoveries, net
Year ended (1,996,984)
Three months ended (357,290) (192,054)
Cumulative liquidity (in thousands of dollars):
Mar 31, 2002 Dec 31, 2001 Mar 30, 2001
Assets due within one year $175,364 $169,775 $136,533
Liabilities due within one year $270,992 $272,214 $228,447
Percent of assets due within one year
to liabilities due within one year 64.71% 62.37% 59.77%
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) $46,074,152 12.43% $29,652,595 8.00% $37,065,744 10.00%
Tier 1 Capital
(to Risk Weighted Assets) $42,224,303 11.39% $14,826,298 4.00% $22,239,447 6.00%
Tier 1 Capital
(to Average Assets) $42,224,303 7.35% $22,990,690 4.00% $28,738,362 5.00%
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.
DUNMORE, PA 18512
FORM 10-Q MARCH 31, 2002
DATE: May 10, 2002 ___________________________________
Michael F. Marranca, Chairman of the Board and President
DATE: May 10, 2002 ___________________________________
Robert P. Farrell, Treasurer
DUNMORE, PA 18512
FORM 10-Q MARCH 31, 2002