As permitted by Accounting Principles Board Opinion No. 25, the Company uses the intrinsic value method of accounting for stock compensation plans. Utilizing the intrinsic value method, compensation cost is measured by the excess of the quoted market price of the stock as of the grant date (or other measurement date) over the amount an employee or director must pay to acquire the stock. Stock options issued under the Company’s stock option plans have no intrinsic value, and accordingly, no compensation cost is recorded for them.
The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value provisions of Statement of Financial Accounting Standards No. 123, “Accounting for Stock-based Compensation,” to stock options.
The Bank invested in bank owned life insurance (BOLI) as a source of funding for employee benefit expenses. BOLI involves the purchasing of life insurance by the Bank on a chosen group of employees. The Bank is the owner and beneficiary of the policies. Income generated from the increase in cash surrender value of the policies is included in other income on the income statement.
FIDELITY D & D BANCORP, INC.
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
Deposits
The following table represents the composition of total deposits as of March 31, 2003 and comparative funding changes since previous year end.
Dollar Percent
March 31, 2003 December 31, 2002 change change
-------------- ----------------- ------ ------
Noninterest-bearing deposits
----------------------------
Personal $ 24,760,113 $ 22,956,626 $ 1,803,487 7.86%
Non-personal 23,166,990 24,877,991 (1,711,001) -6.88%
Public fund 4,057,811 4,039,547 18,264 0.45%
Bank checks 5,170,907 9,277,301 (4,106,393) -44.26%
- ----------------------------------------------------------------------------------------------------------------------------------
Total $ 57,155,821 $ 61,151,465 $ (3,995,644) -6.53%
==================================================================================================================================
Certificates of deposit
of $100,000 or more
-------------------
Personal $ 81,313,106 $ 79,169,750 $ 2,143,357 2.71%
Non-personal 23,355,960 23,571,462 (215,501) -0.91%
Public fund 24,388,276 21,111,991 3,276,285 15.52%
IRA's 6,020,354 5,633,296 387,058 6.87%
- ----------------------------------------------------------------------------------------------------------------------------------
Total $ 135,077,697 $ 129,486,498 $ 5,591,199 4.32%
==================================================================================================================================
Other interest-bearing deposits
-------------------------------
CD's less than $100,000:
Personal $ 94,964,262 $ 95,302,987 $ (338,725) -0.36%
Non-personal 5,667,463 11,054,526 (5,387,063) -48.73%
Public fund 746,428 633,489 112,939 17.83%
IRA's 20,290,632 20,358,968 (68,336) -0.34%
- ----------------------------------------------------------------------------------------------------------------------------------
sub total 121,668,785 127,349,970 (5,681,185) -4.46%
NOW acounts 39,546,862 40,719,446 (1,172,584) -2.88%
Money market deposits 14,921,294 16,561,358 (1,640,064) -9.90%
Savings and clubs 41,623,580 38,519,440 3,104,140 8.06%
- ----------------------------------------------------------------------------------------------------------------------------------
Total $ 217,760,520 $ 223,150,213 $ (5,389,693) -2.42%
==================================================================================================================================
Total deposits
--------------
Noninterest-bearing deposits $ 57,155,821 $ 61,151,465 $ (3,995,644) -6.53%
Interest-bearing deposits 352,838,217 352,636,711 201,506 0.06%
- ----------------------------------------------------------------------------------------------------------------------------------
Total $ 409,994,038 $ 413,788,176 $ (3,794,137) -0.92%
==================================================================================================================================
As indicated in the previous table, deposits decreased $3.8 million or 0.9% during the first three months of 2003.
Public fund deposits accounted for $48.9 million or 11.9% 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.
10
Bank checks (official checks) are used to pay operating expenses of the Bank, deposit withdrawals and loan disbursements. While Bank checks are included in total deposits, they are not deposits from customers.
Borrowings
Short-term borrowings, which are comprised of repurchase agreements (repos), treasury tax and loan retained funds and federal funds purchased, increased $4.3 million or 8.4% to $55.5 million at March 31, 2003.
Long-term debt with the Federal Home Loan Bank remains at $63 million as of March 31, 2003.
Shareholders' Equity
During the first quarter of 2003, Shareholders’ equity increased by $0.4 million or 1.0%, primarily from earnings retained after dividend payments. At the March 10, 2003 dividend payment date, 3,317 shares of treasury stock were reissued under the dividend reinvestment plan.
Loans
Loans, net of unearned income, decreased $4.4 million or 1.2% to date during 2003. Commercial loans increased $1.5 million or 0.8% from strong growth in floating rate and tax free commercial loans offsetting the pay downs within the fixed rate loan portfolio. Consumer loans and direct financing leases decreased $4.7 million or 7.3% primarily because of the sale of the Bank’s $2.7 million credit card portfolio in February. The demand was also affected by tightening Bank credit standard policies to improve the overall quality of the consumer portfolio. This continued reduced demand stemmed from management’s decision last year to substantially curtail non-profitable indirect dealer lending and stopping retail direct leasing activities.
The following table reflects the composition of the loan portfolio, excluding loans held as available-for-sale:
March 31, 2003 December 31, 2002
-------------- -----------------
Real estate $ 84,913,748 $ 85,447,703
Commercial 204,520,896 202,974,155
Consumer 53,245,035 56,984,927
Real estate construction 5,921,732 6,797,002
Direct financing leases 5,649,914 6,578,720
- ------------------------------------------------------------------------------------------
Gross loans 354,251,325 358,782,507
Less:
Unearned discount 494,268 620,704
Allowance for loan losses 3,700,951 3,899,753
- ------------------------------------------------------------------------------------------
Net Loans $ 350,056,106 $ 354,262,050
==========================================================================================
The Company has classified certain residential mortgages, student loans and SBA guaranteed loans of $33.1 million and $28.7 million as available-for-sale (AFS) at March 31, 2003 and 2002, respectively. The fair value of AFS loans at March 31, 2003 and December 31, 2002 was $ 33.7 million and $29.7 million, respectively. Residential mortgages AFS grew $4.4 million or 16.9%, net of residential mortgages AFS sold totaling $0.7 million, during 2003. These mortgages were sold to provide liquidity and begin to address future interest rate risk considerations and other risks associated with historically low mortgage rates compared with the long term duration of these types of loans.
Securities
The majority of the investment portfolio remains in mortgage-backed securities because these types of securities provide a monthly cash flow, which can be used for reinvestment, have shorter weighted average lives and historically do not extend to their stated long term maturity dates and have no imbedded call options.
11
In light of fluctuations in the bond market, the current investment strategy utilized was able to produce a 4.20% year-to-date tax equivalent yield on the entire investment portfolio as of March 31, 2003. The current yield is down 124 basis points from the 5.44% tax equivalent yield as of December 31, 2002. As would be expected, the continued repricing of assets during a decline in market interest rates over the last year caused an overall decrease in the year-to-date yield for 2003.
Pay downs of $12.9 million from mortgage-backed securities and $7.5 million of called US agency and municipal bonds totaled $20.4 million of liquidity. Available-for-sale US Government Agency bonds and mortgage-backed securities of $12.0 million were sold to improve the yield in the investment portfolio. Investment purchases were made primarily in mortgage-backed securities and municipal bonds totaling $35.1 million, during 2003.
The investment securities portfolio at March 31, 2003 consists of the following:
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
----------------------- -------------------- --------------------- -----------------------
Securities held-to-maturity:
- ----------------------------
Mortgage-backed securities $ 10,030,430 $ 402,014 $ (273) $ 10,432,717
Government agencies $ - $ - $ - $ -
----------------------- -------------------- --------------------- -----------------------
Total securities held-to-maturity $ 10,030,430 $ 402,014 $ (273) $ 10,432,717
----------------------- -------------------- --------------------- -----------------------
Securities available-for-sale:
- ------------------------------
Agencies $ 21,159,512 $ 122,969 $ 21,783 $ 21,260,698
State and municipal 11,133,137 99,227 47,568 11,184,796
Corporate Bonds 3,989,279 13,840 5,619 3,997,500
Mortgage-backed securities 99,798,920 1,348,604 28,510 101,119,015
----------------------- -------------------- --------------------- -----------------------
Sub total 136,080,848 1,584,641 103,480 137,562,009
Equity securities 4,576,225 75,438 - 4,651,663
----------------------- -------------------- --------------------- -----------------------
Total securities available-for-sale $ 140,657,072 $ 1,660,079 $ 103,480 $ 142,213,672
----------------------- -------------------- --------------------- -----------------------
Total Securities $ 150,687,502 $ 2,062,093 $ 103,207 $ 152,646,388
======================= ==================== ===================== =======================
12
At March 31, 2003, 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
Securities held-to-maturity cost value
--------------------------- ---- -----
Mortgage-backed securities $10,030,430 $10,432,717
- ----------------------------------------------------- ----------------------- -----------------------
Total securities held-to maturity $10,030,430 $10,432,717
- ----------------------------------------------------- ----------------------- -----------------------
Securities available-for-sale
-----------------------------
One year or less $1,169,667 $1,171,643
One through five years 10,510,000 10,563,569
Five through ten years 11,541,729 11,660,996
Over ten years 13,060,532 13,046,786
- ----------------------------------------------------- ----------------------- -----------------------
sub total 36,281,928 36,442,994
Mortgage-backed securities 99,798,920 101,119,015
Equity securities 4,576,225 4,651,663
- ----------------------------------------------------- ----------------------- -----------------------
Total securities available-for-sale $140,657,072 $142,213,672
- ----------------------------------------------------- ----------------------- -----------------------
Total securities $150,687,502 $152,646,388
===================================================== ======================= =======================
Bank Owned Life Insurance
During February 2003, the bank purchased $7 million of bank owned life insurance (BOLI) for a chosen group of employees, namely its officers, where the bank is the owner and beneficiary of the policies. The bank’s excess liquidity from investment and loan pay downs funded the BOLI and the earnings from the BOLI are recognized as other income. The BOLI is profitable from the appreciation of the cash surrender values of the pool of insurance, and its tax-free advantage to the bank. This profitability is used to offset a portion of current and future employee benefit costs. The BOLI is an asset that can be liquidated, if necessary, with tax costs associated. However, it is the bank’s intention to hold this pool of insurance because it provides income that enhances the bank’s capital position.
2. Changes in Results of Operations:
Net Income for the three months ending March 31, 2003 and 2002 was $887 thousand and $1.1 million, respectively. Detailed breakdowns of the significant differences reflecting the overall $191 thousand reduction in earnings are as follows:
13
2003 2002 Difference
----- ----- ----------
Net interest income $3,831,968 $4,082,542 $(250,574)
Provision for loan losses $ 300,000 $ 460,000 $ 160,000
Deposit service charges and other income $ 810,861 $ 786,152 $ $24,709
Gain/(loss) on sale of assets $ 146,124 $ 186,033 $ (39,909)
Salaries and employee benefits $1,660,629 $1,591,590 $ (69,039)
Premises and equipment $ 697,206 $ 645,002 $ (52,204)
Other expense $ 937,092 $ 907,994 $ (29,098)
Provision for income tax $ 306,726 $ 372,012 $ 65,286
TAX EQUIVALENT YIELD:
- -------------------
Three months ended Year ended Three months ended
March 31,2003 December 31,2002 March 31,2002
--------------------- --------------------- --------------------
Average earning assets:
Loans and leases $389,104 $384,791 $379,265
Investments 149,111 154,000 151,446
Federal funds sold 5,726 11,584 11,799
Interest-bearing deposits 866 919 1,463
--------------------- --------------------- --------------------
Total $544,807 $551,294 $543,973
===================== ===================== ====================
Average Interest Bearing Liabilities:
Other Interest-bearing deposits $96,315 $84,782 $80,101
Certificates of deposit 264,579 286,496 283,426
Other borrowed funds 65,722 64,045 64,115
Repurchase agreements 47,222 45,872 48,826
--------------------- --------------------- --------------------
Total $473,837 $481,195 $476,468
===================== ===================== ====================
Interest Income
Loans and leases $6,167 $26,402 $6,594
Investments 1,545 8,382 2,204
Federal funds sold 19 190 50
Interest-bearing deposits 2 17 6
--------------------- --------------------- --------------------
Total $7,732 $34,991 $8,854
===================== ===================== ====================
Interest Expense
Other Interest-bearing deposits $195 $934 $243
Certificates of deposit 2,555 12,351 3,213
Other borrowed funds 891 3,601 887
Repurchase agreements 164 996 305
--------------------- --------------------- --------------------
Total $3,806 $17,882 $4,648
===================== ===================== ====================
Net Interest Income $3,927 $17,109 $4,206
===================== ===================== ====================
Yield on average earning assets 5.76% 6.35% 6.60%
Cost of average interest-bearing
liabilities 3.26% 3.72% 3.96%
--------------------- --------------------- --------------------
Interest rate spread 2.50% 2.63% 2.64%
===================== ===================== ====================
Net yield on average earning assets 2.92% 3.10% 3.14%
===================== ===================== ====================
The reduction of net interest income results from total earning asset volume remaining flat with a 84 basis point decrease in yield on earning assets along with only a 70 basis point reduction in rates of interest-bearing liabilities. The tax equivalent yield on earning assets was 5.76% and 6.60% for the three months ending March 31, 2003 and 2002, respectively. Cost of interest-bearing liabilities was 3.26% and 3.96% for the three months ending March 31, 2003 and 2002, respectively. The yields on earning assets were driven down by declining market rates while the rates on interest-bearing liabilities also declined to the extent possible. However, average costs could not be decreased enough in comparison with the decrease of earning yields because of repricing characteristics within the time deposit portfolio and long-term borrowings.
The decrease in the provision for loan losses is a result of a net $100 thousand allowance for loan loss reduction associated with the sale of the credit card portfolio along with the decreased provision required during 2003 from management’s analysis of potential loss within the portfolio as compared to the first three months of 2002.
The increase in fee income resulted from management’s focus on collections of non-sufficient fund fees and other fees from deposit services provided. The Bank had invested $7 million in life insurance policies of which the $23 thousand of earnings from the increase in cash surrender values are accounted for within other income.
Operating expenses increased $150 thousand or 4.8% for the period ended March 31, 2003 compared to the same period of the previous year. As stated within the table above, salaries and benefit costs increased 4.3%, premises and equipment expenses increased 8.1% and other expenses increased 2.5% in comparison to the first three months of 2002. Most of the increase in operating costs can be attributed to the opening of the Eynon office and the major conversion of the Bank’s core processing system.
The provision for income taxes differs from the amount of income tax determined from applying the statutory federal corporate income tax rate to taxable income from continuing operations primarily because of tax-free income, non-deductible expenses and low income housing credits. The effective tax rate on pre-tax book income remained at 25.7% for the three months ending March 31, 2003 and 2002. Income before provision for income taxes in 2003 decreased $256 thousand over the same period ended during 2002, which resulted in the $65 thousand reduction in provision for income tax.
Provision for Loan Losses
The provision is an expense charged against current earnings for actual or potential losses from uncollectible loans and leases. Through the provision, the allowance for loan losses is increased. Loans and leases determined to be uncollectible are charged-off against the allowance.
The Bank maintains an Asset Quality Committee which meets monthly to review known and potential problem loans and leases. The committee is comprised of bank 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:
14
- Specific loans that could have loss potential
- Levels of and trends in delinquencies and non accrual loans
- Levels of and trends in charge-offs and recoveries
- Trends in volume and terms of loans
- Changes in risk selection and underwriting standards
- Changes in lending policies, procedures and practices
- Experience, ability and depth of lending management
- National and local economic trends and conditions
- Changes in credit concentrations
The Bank does not have significant concentrations of loans in specific industries or outside the Northeastern Pennsylvania geographic area.
Allowance for Loan Losses
March 31, 2003 December 31, 2002 March 31, 2002
-------------- ----------------- --------------
Total loans, net of unearned income $386,811,678 $386,877,158 $381,517,241
Allowance for loan losses $3,700,951 $3,899,753 $3,844,643
Percentage to net loans 0.96% 1.01% 1.01%
Provision for loan losses
Year ended $1,664,000
Three months ended $300,000 $460,000
(Charge offs)/recoveries, net
Year ended $(1,506,180)
Three months ended $(498,802) $(357,290)
Over the last five years, management has analyzed and relied on specific factors in determining the amount of loan loss provision relative to the adequacy of the allowance for loan losses. 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):
- Identification of specific problem loans by loan category by the credit administration.
- Calculation of specific reserves required based on collateral and other persuasive evidence.
- Identification of loans collateralized by cash.
- Determination of remaining homogenous pools by loan category and eliminating loans collateralized by cash and loans with specific reserves.
- Application of historical loss percentages (3-year average) to pools to determine the allowance allocation.
- Application of qualitative factor adjustment percentage for trends or changes in the loan portfolio.
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.
Net charge offs for the three month period ending March 31, 2003 increased $142 thousand from the same period in 2002. The primary reason for the increase was credit card charge-offs of $41 thousand that were required to be taken in connection with the sale of the credit card portfolio and three residential foreclosed properties which were written down by $69 thousand to their fair value when transferred to Other Real Estate. The remainder of the increase was in commercial loan gross charge offs of $284 thousand for the first quarter of 2003 versus $167 thousand in the first quarter of 2002. One large commercial loan accounted for almost half of the 2003 commercial gross charge offs. The overall reduction in the allowance for loan losses balance was mainly due to the credit card portfolio sale, which reduced the allowance by $141 thousand, and the $69 thousand charge-off from the properties transferred to other real estate.
15
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 analysis of both the loan portfolio and the allowance for loan losses at March 31, 2003, Management believes 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.
ITEM 3. Quantitative and Qualitative Disclosure about Market Risk
Interest Rate Sensitivity
The Company is subject to the interest rate risks inherent in our lending, investing and financing activities. Fluctuations of interest rates will impact interest income and interest expense along with affecting market values of all interest-earning and interest-bearing liabilities, except for those assets or liabilities with a short term remaining to maturity. Interest rate risk management is an integral part of the Asset/Liability Management process. The Company has instituted certain procedures and policy guidelines to manage the interest rate risk position. Those internal policies enable the Company to react to changes in market rates to protect net interest income from significant fluctuations. The primary objective in managing interest rate risk is to minimize the adverse impact of changes in interest rates on net interest income along with creating an asset/liability structure that maximizes earnings.
To manage this interest rate sensitivity position, an asset/liability model called 'cumulative gap analysis' is used to monitor the difference in the volume of the Company’s interest sensitive assets and liabilities that mature or reprice within given periods. A positive gap (asset sensitive) indicates that more assets reprice during a given period compared to liabilities, while a negative gap (liability sensitive) has the opposite effect. The Company employs computerized net interest income simulation modeling to assist in quantifying interest rate risk exposure. This process measures and quantifies the impact on net interest income through varying interest rate changes and balance sheet compositions. The use of this model assists the Asset/Liability Committee (ALCO) to gauge the effects of the interest rate changes on interest sensitive assets and liabilities in order to determine what impact these rate changes will have upon the net interest spread.
At March 31, 2003, the Company maintained a one year cumulative gap of negative $14.3 million or 2.5% of total assets. The effect of this gap position provided a negative mismatch of assets and liabilities, which can expose the Bank to interest rate risk during a period of increasing interest rates. Conversely, in a declining interest rate environment, net income could be positively affected because more liabilities than assets will reprice during a one year period.
16
Interest Sensitivity Gap at March 31, 2003
------------------------------------------------------------------
3 months 3 through 1 through Over
or less 12 months 3 years 3 years Total
------------ --------- ----------- ------- -----
(Dollars in thousands)
Cash and cash equivalents................... $ 465 $ - $ - $ 17,075 $ 17,540
Investment securities....................... 22,662 33,472 55,030 41,080 152,244
Loans....................................... 125,808 85,124 90,395 81,783 383,110
Fixed and other assets...................... - - - 25,522 25,522
--------- -------- --------- --------- --------
Total assets............................. $ 148,935 $118,596 $ 145,425 $ 165,460 $578,416
========= ======== ========= ========= ========
Total cumulative assets.................. $ 148,935 $267,531 $ 412,956 $ 578,416
========= ======== ========= =========
Non interest-bearing transaction deposits... $ - $ 5,726 $ 15,747 $ 35,683 $ 57,156
Interest-bearing transaction deposits....... 2,984 46,554 36,407 10,146 96,091
Time deposits............................... 41,532 129,271 75,362 10,582 256,747
Repurchase Agreements....................... 31,427 8,077 8 - 39,512
Short-term borrowings....................... 15,988 - - - 15,988
Long-term debt.............................. - - 5,000 58,000 63,000
Other liabilities........................... - - - 4,239 4,239
--------- -------- --------- --------- --------
Total liabilities........................ $ 91,931 $189,628 $ 132,524 $118,650 $532,733
========= ======== ========= ======== ========
Total cumulative liabilities............. $ 91,931 $281,559 $ 414,083 $532,733
========= ======== ========= ========
Interest sensitivity gap.................... $ 57,004 $(71,032) $ 12,901 $ 46,810
========= ======== ========= ========
Cumulative gap.............................. $ 57,004 $(14,028) $ (1,127) $ 45,683
========= ======== ========= ========
Cumulative gap to total assets.............. 9.86% -2.43% -0.19% 7.90%
Investments and loans are included in the earlier of the period in which interest rates were next scheduled to adjust or the period in which they are due. In addition, loans were included in the periods in which they are scheduled to be repaid based on scheduled amortization. For amortizing loans and mortgage-backed securities, annual prepayment rates are assumed reflecting historical experience as well as management’s knowledge and experience of its loan products.
The Bank’s demand and savings accounts were generally subject to immediate withdrawal. However, management considers a certain amount of such accounts to be core accounts having significantly longer effective maturities based on the retention experiences of such deposits in changing interest rate environments. The effective maturities presented are the recommended maturity distribution limits for non-maturing deposits based on historical deposit studies.
Certain shortcomings are inherent in the method of analysis presented in the above table. Although certain assets and liabilities may have similar maturities or periods of repricing, they may react in different degrees to changes in market interest rates. The interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market interest rates, while interest rates on other types of assets and liabilities may lag behind changes in market interest rates. Certain assets, such as adjustable-rate mortgages, have features which restrict changes in interest rates on a short-term basis and over the life of the asset. In the event of a change in interest rates, prepayment and early withdrawal levels may deviate significantly from those assumed in calculating the table. The ability of many borrowers to service their adjustable-rate debt may decrease in the event of an interest rate increase.
Liquidity
Liquidity for a bank is the ability to fund customers' needs for borrowings, deposit withdrawals and maturities and normal operating expenses of the Bank. Current sources of liquidity are:
- Cash and cash equivalents
- Asset maturities and pay downs within one year
- Loans and investments available-for-sale
- Growth of core deposits
- Growth of repurchase agreements
- Increase of other borrowed funds from correspondent banks
- Issuance of capital stock
17
As detailed in the statement of cash flows, total cash and cash equivalents had a net $8.7 million decrease due to purchases of investment securities and funding the $7.0 million purchase of life insurance policies. Funding new loan growth was offset by proceeds received from the credit card portfolio sale. The $4.0 million decrease in demand deposits resulted from Bank checks clearing through internal accounts to fund operations. The net cash utilized to fund operations throughout the quarter was funded through the increase of short-term borrowings. The $5.4 million decrease in other interest bearing deposits was offset by a $5.6 million increase in public fund time deposits greater than $100,000.
Management believes that the present level of liquidity is strong and adequate for current operations based upon the short-term liquidity position of $17.5 million in cash and cash equivalents. A secondary source of liquidity is provided from expected cash flow from principal reductions in the investment and loan portfolios and the ability to sell $33.1 million in mortgage loans available for sale at March 31, 2003. Management monitors asset and liability maturities to match anticipated large cash flow requirements. These cash flow requirements are reviewed daily with the use of internally generated reports.
The Bank considers its core deposit base as the primary source of liquidity. However, the Bank can also borrow in the Federal Funds market to meet temporary liquidity needs. The Bank has other sources to obtain liquidity from borrowings with the Federal Reserve Discount Window and Federal Home Loan Bank advances.
Capital
The Company is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possible additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company must meet specific capital guidelines that involve quantitative measures of the Company’s assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The Company’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy require the Company to maintain minimum amounts and ratios (set forth in the table below as defined in the regulations) of total and Tier I capital to risk-weighted assets, and of Tier I capital to average assets. As of March 31, 2003, the Company meets all capital adequacy requirements to which it is subject.
The Company's capital amounts and ratios at March 31, 2003 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) $48,353,178 12.90% $29,984,406 8.00% $37,480,507 10.00%
Tier 1 Capital
(to Risk Weighted Assets) $44,618,280 11.90% $14,992,203 4.00% $22,488,304 6.00%
Tier 1 Capital
(to Average Assets) $44,618,280 7.71% $23,134,585 4.00% $28,918,231 5.00%
The ratios for the Bank are not materially different from those of the Company.
18
ITEM 4. Controls and Procedures
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, except for the internal control components of risk assessment and monitoring, in timely alerting them to material information required to be included in our periodic Securities and Exchange Commission filings. The Company has made significant changes to our internal controls and other factors that could significantly affect these controls subsequent to the date of evaluation by the Chief Executive Officer and Chief Financial Officer, as follows:
- A formal risk assessment was not completed for the quarter ended March 31, 2003 or the year ended December 31, 2002. It is management’s intention to have a formally documented risk assessment completed and submitted to the Company’s Audit Committee for approval by April 30, 2003.
- Management intends to work with the Internal Audit Department to perform a risk assessment, from which an internal audit schedule will be developed and submitted to the Company’s Audit Committee for approval by April 30, 2003. Once approved, the Audit Committee will monitor the risk assessments and the timely completion of each scheduled internal audit.
The Company’s internal audit department completed a formal risk assessment and internal audit schedule for 2003 through 2005. On April 30, 2003, the Company’s Audit Committee reviewed and approved the risk assessment and internal audit schedule.
PART II. OTHER INFORMATION
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. The activities were 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. The preliminary objections were decided on November 26, 2002, and the Bank filed its answer and new matter raising various legal defenses. Formal discovery has commenced and depositions are scheduled through June 2003. The Bank intends to vigorously defend this action.
The nature of the Company’s business generates some litigation involving matters arising in the ordinary course of business. However, in the opinion of the Company after consulting with legal counsel, no other legal proceedings are pending, which, if determined adversely to the Company or the Bank, would have a material effect the Company’s undivided profits or financial condition. No other legal proceedings are pending other than ordinary routine litigation incident to the business of the Company and the Bank. In addition, to management’s knowledge, no governmental authorities have initiated or contemplated any material legal actions 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. |
19
| 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 | 1998 Independent Directors Stock Option Plan of The Fidelity Deposit and Discount Bank, as assumed by Registrant.Incorporated by reference to Exhibit 10.1 to Registrant’s Registration Statement No. 333-90273 on Form S-4, filed with the SEC on November 3, 1999 and as amended on April 6, 2000. |
| | |
| 10.2 | 1998 Stock Incentive Plan of The Fidelity Deposit and Discount Bank, as assumed by Registrant. Incorporated by reference to Exhibit 10.2 of Registrant’s Registration Statement No. 333-90273 on Form S-4, filed with the SEC on November 3, 1999 and as amended on April 6, 2000. |
| | |
| 10.3 | Form of Deferred Compensation Plan of The Fidelity Deposit and Discount Bank.Incorporated by reference to Exhibit 10.3 to Registrant’s Registration Statement No.333-45668 on Form S-1, filed with the SEC on September 12, 2000 and as amended on October 11, 2000. |
| | |
| 10.4 | Registrant's 2000 Dividend Reinvestment Plan. Incorporated by reference to Exhibit 4 to Registrant's Registration Statement No. 333-45668 on Form S-1, filed with the SEC on September 12, 2000 and as amended by Pre-Effective Amendment No. 1 on October 11, 2000 and by Post-Effective Amendment No. 1 on May 30, 2001. |
| | |
| 10.5 | Registrant's 2000 Independent Directors Stock Option Plan. Incorporated by reference to Exhibit 4.3 to Registrant's Registration Statement No. 333-64356 on Form S-8 filed with the SEC on July 2, 2001. |
| | |
| 10.6 | Registrant's 2000 Stock Incentive Plan. Incorporated by reference to Exhibit 4.4 to Registrant's Registration Statement No. 333-64356 on Form S-8 filed with the SEC on July 2, 2001. |
| | |
| 10.7 | Form of Employment Agreement with Joseph J. Earyes. Incorporated by reference to Exhibit 10.1 to Registrant's Form 8-K filed with the SEC on March 25, 2002. |
| | |
| 11 | Statement regarding computation of earnings per share.Included herein in Note 2 “Earnings per Share”, contained within the Notes to Consolidated Financial Statements, and incorporated herein by reference. |
| | |
| 99.1 | Certification of Principal Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, filed herewith. |
| | |
| 99.2 | Certification of Principal Accounting Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, filed herewith. |
| | |
| 99.3 | Certification of Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, filed herewith. |
| | |
b) No Current Report on Form 8-K was filed by the Registrant during the quarter ended March 31, 2003.
20
FIDELITY D&D BANCORP, INC.
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: May 15, 2003 /s/ Michael F. Marranca
-----------------------------------
Michael F. Marranca,
Chairman of the Board of Directors and President
DATE: May 15, 2003 /s/ Joseph J. Earyes
-----------------------------------
Joseph J. Earyes,
Executive Vice President and Chief Executive Officer
DATE: May 15, 2003 /s/ Salvatore R. DeFrancesco
-----------------------------------
Salvatore R. DeFrancesco,
Treasurer and Chief Financial Officer
21CERTIFICATIONS
I, Joseph J. Earyes, certify that:
- I have reviewed this quarterly report on Form 10-Q of Fidelity D & D Bancorp, Inc;
- Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
- Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;
- The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
- designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
- evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and
- presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
- The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):
- all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and
- any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and
- The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
| Date: May 15, 2003 | /s/Joseph J. Earyes |
| | Joseph J. Earyes |
| | Executive Vice President and |
| | Chief Executive Officer |
22
CERTIFICATIONS
I, Salvatore R. DeFrancesco, certify that:
- I have reviewed this quarterly report on Form 10-Q of Fidelity D & D Bancorp, Inc;
- Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
- Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;
- The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
- designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
- evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and
- presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
- The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):
- all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and
- any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and
- The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
| Date: May 15, 2003 | /s/Salvatore R. DeFrancesco |
| | Salvatore R. DeFrancesco |
| | Treasurer and Chief Financial Officer |
23
CERTIFICATIONS
I, Robert P. Farrell, certify that:
- I have reviewed this quarterly report on Form 10-Q of Fidelity D & D Bancorp, Inc;
- Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
- Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;
- The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
- designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
- evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and
- presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
- The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):
- all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and
- any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and
- The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
| Date: May 15, 2003 | /s/Robert P. Farrell |
| | Robert P. Farrell |
| | Principal Accounting Officer |
24
FIDELITY D&D BANCORP, INC.
| Exhibit Index | | Page |
| 3(i) | Amended and Restated Articles of Incorporation of Registrant. Incorporated by reference to Exhibit 3(i) to Registrant's Registration Statement No. 333-90273 on Form S-4, filed with the SEC on November 3, 1999 and as amended on April 6, 2000. | * |
| | | |
| 3(ii) | Bylaws of Registrant.Incorporated by reference to Exhibit 3 (ii) to Registrant's Registration Statement No. 333-90273 on Form S-4, filed with the SEC on November 3, 1999 and as amended on April 6, 2000. | * |
| | | |
| 10.1 | 1998 Independent Directors Stock Option Plan of The Fidelity Deposit and Discount Bank, as assumed by Registrant.Incorporated by reference to Exhibit 10.1 to Registrant's Registration Statement No. 333-90273 on Form S-4, filed with the SEC on November 3, 1999 and as amended on April 6, 2000. | * |
| | | |
| 10.2 | 1998 Stock Incentive Plan of The Fidelity Deposit and Discount Bank, as assumed by Registrant.Incorporated by reference to Exhibit 10.2 of Registrant's Registration Statement No. 333-90273 on Form S-4, filed with the SEC on Nov. 3, 1999 and as amended on April 6, 2000. | * |
| | | |
| 10.3 | Form of Deferred Compensation Plan of The Fidelity Deposit and Discount Bank.Incorporated by reference to Exhibit 10.3 to Registrant's Registration Statement No. 333-45668 on Form S-1, filed with the SEC on September 12, 2000 and as amended on October 11, 2000. | * |
| | | |
| 10.4 | Registrant's 2000 Dividend Reinvestment Plan.Incorporated by reference to Exhibit 4 to Registrant's Registration Statement No. 333-45668 on Form S-1, filed with the SEC on September 12, 2000 and as amended by Pre-Effective Amendment No. 1 on October 11, 2000 and by Post-Effective Amendment No. 1 on May 30, 2001. | * |
| | | |
| 10.5 | Registrant's 2000 Independent Directors Stock Option Plan.Incorporated by reference to Exhibit 4.3 to Registrant's Registration Statement No. 333-64356 on Form S-8 filed with the SEC on July 2, 2001. | * |
| | | |
| 10.6 | Registrant's 2000 Stock Incentive Plan.Incorporated by reference to Exhibit 4.4 to Registrant's Registration Statement No. 333-64356 on Form S-8 filed with the SEC on July 2, 2001. | * |
| | | |
25
| 10.7 | Form of Employment Agreement with Joseph J. Earyes.Incorporated by reference to Exhibit 10.1 to Registrant's Form 8-K filed with the SEC on March 25, 2002. | * |
| | | |
| 11 | Statement regarding computation of earnings per share. | 8 |
| | | |
| 99.1 | Certification of Principal Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, filed herewith. | 28 |
| | | |
| 99.2 | Certification of Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, filed herewith. | 29 |
| | | |
| 99.3 | Certification of Principal Accounting Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, filed herewith. | 30 |
| | | |
* - Incorporated by Reference
26
