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 JUNE 30, 2000
F.D.I.C INSURANCE CERTIFICATE NUMBER: 11868
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 Bank 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 June 30, 2000 was 1,804,011.
FIDELITY D & D BANCORP, INC. and SUBSIDIARY.
DUNMORE, PA 18512
FORM 10-Q JUNE 30, 2000
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS:
Consolidated Balance Sheets as of June 30, 2000 and December 31, 1999
Consolidated Statement of Income for the three and six months ended
June 30, 2000 and 1999
Consolidated Statement of Changes in Shareholders' Equity for the six
months ended June 30, 2000 and 1999
Consolidated Statement of Cash Flows for the six months ended
June 30, 2000 and 1999
Notes to Consolidated Financial Statements
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
2
FIDELITY D & D BANCORP, INC. and SUBSIDIARY
CONSOLIDATED BALANCE SHEET
As of June 30, 2000 and December 31, 1999
June 30, 2000 December 31, 1999
(unaudited) (audited)
------------- -----------------
ASSETS
Cash and due from banks $ 5,992,396 $ 6,415,519
Interest-bearing deposits with financial
institutions 6,675,713 11,541,860
------------ ------------
Total cash and cash equivalents 12,668,109 17,957,379
Investment Securities:
Held to maturity
U.S. Treasuries & Agencies 5,960,630 0
Available for sale
U.S. Treasuries & Agencies 82,637,147 81,035,599
State & Municipal 19,672,352 22,556,775
Other securities 5,601,828 5,669,848
------------ ------------
Total investment securities 113,871,957 109,262,221
Loans net of unearned income 330,981,295 299,365,893
Allowance for loan losses 3,294,190 3,172,375
------------ ------------
Net loans 327,687,105 296,193,518
Loans available-for-sale 10,588,245 5,254,316
Bank premises and equipment, net 11,173,080 9,506,308
Accrued interest receivable 3,592,632 3,262,362
Foreclosed assets held for sale 214,321 412,922
Other assets 5,646,042 5,361,991
------------ ------------
Total assets $485,441,491 $447,211,017
============ ============
LIABILITIES
Deposits
Noninterest-bearing $ 41,878,518 $ 37,575,183
Cert. of deposit $100,000 or more 95,611,396 66,642,656
Other interest-bearing deposits 195,505,725 190,483,126
------------ ------------
Total deposits 332,995,639 294,700,965
Accrued expenses and other liabilities 3,231,136 2,829,770
Short-term borrowings 58,594,218 60,249,046
Long-term debt 57,305,000 57,305,000
------------ ------------
Total liabilities 452,125,993 415,084,781
------------ ------------
Shareholders' Equity
Common stock, 10,000,000 shares 1,409,679 1,406,863
authorized with out par value
Surplus 7,388,325 7,266,168
Undivided profits 29,159,086 28,126,918
Accumulated other comprehensive income
(loss) (4,641,592) (4,673,713)
------------ ------------
Total shareholders' equity 33,315,498 32,126,236
------------ ------------
Total liabilities and shareholders'
equity $485,441,491 $447,211,017
============ ============
See Notes to Consolidated Financial Statements.
3
FIDELITY D & D
BANCORP, INC. and SUBSIDIARY
CONSOLIDATED STATEMENT OF INCOME
Three & Six Month Periods Ended June 30, 2000 and 1999
(unaudited)
Three Months Ended Six Months Ended
----------------------------- -------------------------------
06/30/00 06/30/99 06/30/00 06/30/99
---------------- ---------- ----------- ------------------
Interest Income
Loans:
Taxable $6,417,767 $5,177,384 $12,429,630 $10,093,095
Nontaxable 154,635 151,336 302,216 282,101
Leases 171,016 48,004 296,416 86,580
Interest-bearing deposits with financial institutions 7,905 33,034 18,447 65,879
Investment securities:
US Treasury 0 85,104 0 204,705
US Government Agencies 1,581,843 1,122,197 3,106,670 1,824,230
States & Political Subdivisions (nontaxable) 272,487 295,967 557,804 595,806
Other Securities 94,232 45,135 185,151 78,614
Income federal funds sold 0 56,419 0 128,415
---------- ---------- ----------- -----------
Total interest income 8,699,885 7,014,580 16,896,335 13,359,425
---------- ---------- ----------- -----------
Interest expense
Certificates of deposit of $100,000 or more 1,291,749 923,427 2,419,174 1,566,070
Other Deposits 2,185,353 1,752,095 4,268,767 3,423,590
Securities sold under repurchase agreements 463,107 366,557 903,769 742,852
Other Borrowings 1,202,264 628,211 2,217,354 1,173,208
Total interest expense 5,142,473 3,670,290 9,809,064 6,905,720
---------- ---------- ----------- -----------
Net interest income 3,557,412 3,344,290 7,087,270 6,453,705
Provision for loan losses 136,500 140,000 243,000 320,000
---------- ---------- ----------- -----------
Net interest income, after
provision for loan losses 3,420,912 3,204,290 6,844,270 6,133,705
---------- ---------- ----------- -----------
Other income
Service charge on deposit accounts 298,670 220,557 553,312 419,487
Gain on sale of securities 9,023 0 20,123 0
Gain on sale of loans and leases 30,791 40,597 79,153 60,774
Gain on loans available-for-sale 53,690 0 79,063 0
Other income 223,584 166,911 404,971 299,312
---------- ---------- ----------- -----------
Total other income 615,758 428,065 1,136,622 779,573
---------- ---------- ----------- -----------
Other expenses
Salaries and employee benefits 1,322,134 1,136,270 2,690,746 2,311,747
Occupancy and equipment 484,925 363,312 982,831 667,745
Shares Tax Expense 47,314 48,303 116,221 97,955
FDIC assessment 14,937 7,382 30,347 14,564
Advertising 112,326 120,331 229,543 216,597
(Gain)/loss on sale of foreclosed assets
held for sale 69,035 (1,184) 69,035 27,945
Other expenses 967,103 795,204 1,790,277 1,390,389
---------- ---------- ----------- -----------
Total other expenses 3,017,774 2,469,618 5,908,999 4,726,941
---------- ---------- ----------- -----------
Income before income taxes 1,018,896 1,162,737 2,071,893 2,186,337
Provision for income taxes 176,900 260,830 363,700 481,130
---------- ---------- ----------- -----------
Net Income $ 841,996 $ 901,907 $ 1,708,193 $ 1,705,207
========== ========== =========== ===========
Net income per weighted average share $ 0.47 $0.50 $ 0.95 $0.95
Diluted earnings per share $ 0.47 $0.50 $ 0.95 $0.95
Dividends per weighted average share $0.188 $0.15 $0.375 $0.30
See Notes to Consolidated Financial Statements.
4
FIDELITY D & D BANCORP, INC. and SUBSIDIARY
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
For the Six Months Ended June 30, 2000 and 1999
Accumulated
Capital Stock Other
------------------------ Undivided Comprehensive
Shares Amount Surplus Profits Income(Loss) Total
------- ---------- ---------- ----------- ------------- -----------
Balance, Dec. 31, 1998 893,647 $1,396,324 $6,826,669 $25,656,844 $133,868 $34,013,705
-----------
Comprehensive income:
Net income 1,705,207 1,705,207
Change in net unrealized holding
gains/(losses) on available-for-sale
securities, net of reclassification
adjustment and tax effects (2,782,375) (2,782,375)
-----------
Comprehensive income (1,077,168)
-----------
Cash dividends (536,589) (536,589)
Dividend reinvestment 2,839 4,437 173,644 178,082
--------- ---------- ---------- ----------- ----------- -----------
Balance, June 30, 1999 896,486 $1,400,761 $7,000,313 $26,825,462 ($2,648,507) $32,578,029
========= ========== ========== =========== =========== ===========
Balance, Dec. 31, 1999 900,392 $1,406,863 $7,266,168 $28,126,918 ($4,673,713) $32,126,236
-----------
Comprehensive income:
Net income 1,708,193 1,708,193
Change in net unrealized
holding gains/(losses) on
available-for-sale
securities, net of reclassification
adjustment and tax effects 32,121 32,121
-----------
Comprehensive income 1,740,314
-----------
Cash dividends (676,026) (676,026)
Stock options exercised 250 391 15,109 15,500
Dividend reinvestment 1,553 2,425 107,048 109,473
Stock exchange 901,816
--------- ---------- ---------- ----------- ----------- -----------
Balance June 30, 2000 1,804,011 $1,409,679 $7,388,325 $29,159,085 ($4,641,592) $33,315,498
========= ========== ========== =========== =========== ===========
See Consolidated Notes to Financial Statements.
5
FIDELITY D & D BANCORP, INC. and SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
For the Six Months Ended June 30, 2000 and 1999
2000 1999
------------- ------------
CASH FLOW FROM OPERATING ACTIVITIES:
Net income $ 1,708,193 $ 1,705,207
Adjustments to reconcile net income to net
cash provided by, (used in), by operating activities:
Depreciation 427,800 286,866
Amortization of securities
(net of accretion) (34,184) (80,967)
Provision for loan losses 243,000 320,000
Deferred income tax 107,000 (23,000)
Amortization of mortgage servicing rights 9,527 0
(Gain)/loss sale of investment securities (20,123) 0
(Gain)/loss on sale of loans (79,153) (59,511)
(Gain)/loss on sale of foreclosed assets held for sale 69,035 34,384
(Appreciation)/depreciation available-for-sale loans (79,063) 0
(Increase)/decrease in interest receivable (330,270) (698,338)
Increase/(decrease) in accrued expenses 611,701 (237,591)
(Increase)/decrease in other assets (610,913) (1,317,178)
------------- ------------
Net cash provided by, (used in), operating activities 2,022,550 (70,128)
------------- ------------
CASH FLOW FROM INVESTING ACTIVITIES:
Proceeds from paydown of held-to-maturity securities 33,580 0
Proceeds from sale of available-for-sale securities 4,809,783 0
Proceeds from maturity, call and paydown
of available-for-sale securities 540,334 20,793,361
Purchase of available-for-sale securities (3,896,249) (48,755,890)
(Increase)/decrease in federal funds sold 0 6,500,000
Proceeds from sale of loans 2,671,002 7,389,669
(Increase)/decrease in loans and leases (45,678,916) (44,246,300)
Purchase of bank premises and equipment (2,094,572) (1,858,095)
Capital expenditures on foreclosed assets held for sale 0 (327,060)
Proceeds from sale of foreclosed assets held for sale 214,425 167,707
------------- ------------
Net cash used in investing activities (43,400,613) (60,009,548)
------------- ------------
CASH FLOW FROM FINANCING ACTIVITIES:
Net increase (decrease) in non interest-bearing deposits 4,303,335 2,433,510
Net increase (decrease) in interest-bearing deposits 5,022,599 8,924,546
Net increase (decrease) in CD's $100,000 or more 28,968,740 28,370,234
Increase(decrease) in short term borrowings (1,654,828) 20,712,151
Dividends paid (676,026) (536,589)
Proceeds from stock options exercised 15,500 0
Proceeds from dividend reinvestment 109,473 178,082
------------- ------------
Net cash provided by financing activities 36,088,793 60,081,934
------------- ------------
Net increase (decrease) in cash and cash equivalents (5,289,270) 2,258
Cash and cash equivalents at beginning of period 17,957,379 8,719,744
------------- ------------
Cash and cash equivalents at end of period $ 12,668,109 $ 8,722,002
============= ============
See Notes to Consolidated Financial Statements.
6
FIDELITY D & D BANCORP, INC. and SUBSIDIARY
DUNMORE, PA 18512
FORM 10-Q JUNE 30, 2000
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
On August 10, 1999 Fidelity D&D Bancorp, Inc., was incorporated. Effective
June 30, 2000, by operation of law, one share of The Fidelity Deposit & Discount
Bank stock became the right to receive two shares of Fidelity D&D Bancorp, Inc.
common stock. Fidelity D&D Bancorp, Inc., is not issuing fractional shares. Cash
will be paid at the fair market value for the fractional shares of The Fidelity
Deposit & Discount Bank stock after June 30, 2000.
The accompanying unaudited financial statements of Fidelity D&D Bancorp,
Inc., and subsidiary, The Fidelity Deposit & Discount Bank, (collectively, the
"Company"), have been prepared in accordance with generally accepted accounting
principals ("GAAP") for interim financial information and with the instructions
to Form 10-Q and Article 10-01 of Regulation S-X. In the opinion of management,
all normal recurring adjustments necessary for a fair presentation of the
financial position and results of operations for the periods have been included.
All significant inter-company balances and transactions have been eliminated in
the consolidation. Prior period amounts are reclassified when necessary to
conform to the current year's presentation.
The preparation of financial statements in conformity with GAAP requires
management to make estimates and assumptions that effect 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 see the bank's Annual Report on Form 10-K for the period ended December
31, 1999.
The bank is a commercial bank chartered by the Commonwealth of
Pennsylvania. Commencing 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 in
accordance with GAAP prepared the unaudited financial statements. 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.
7
In the opinion of management, the balance sheets as of June 30, 2000 and
December 31, 1999 present fairly the financial position of the company as of
those dates and the related statements of income, changes in shareholders'
equity and cash flows for the six month periods ended June 30, 2000 and 1999
present fairly the results of its operations and its cash flows for the periods
then ended. All material adjustments required for fair presentation have been
made, and 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. These adjustments are of a normal reoccurring
nature.
This Current Report on Form 10-Q should be read in conjunction with the
bank's audited financial statements for the year ended December 31, 1999 and the
notes included therein, in the bank's Annual Report on Form 10-K, filed with the
FDIC on March 31, 2000. The results of operations for interim periods are not
necessarily indicative of the results of operations to be expected for the
entire year.
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 the date hereof. The company undertakes no obligation to
publicly revise or update these forward-looking statements to reflect events or
circumstances that arise after the date hereof.
8
Basic earnings per common share are computed by dividing net income by the
weighted average number of common shares outstanding during the period,
(1,803,017 in 2000 and 1,789,339 in 1999).
Diluted earnings per share is similar to the computation of basic earnings
per common share except that the denominator is increased to include the number
of additional common shares that would have been outstanding if the dilutive
potential common shares had been issued.
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 periods ended June 30, 2000 and 1999:
Common Earnings
Income Shares per
June 30, 2000 Numberator Denominator Share
---------- ----------- -------
Basic EPS $1,708,193 1,803,017 $0.95
=====
Dilutive effect of potential common stock
Stock options;
Exercise of outstanding options 14,400
Hypothetical share repurchase at $35.75 (13,341)
---------- ---------
Diluted EPS $1,708,193 1,804,076 $0.95
========== ========= =====
June 30, 1999
Basic EPS $1,705,207 1,789,339 $0.95
=====
Dilutive effect of potential common stock
Stock options;
Exercise of outstanding options 7,500
Hypothetical share repurchase at $31.00 (7,500)
---------- ---------
Diluted EPS $1,705,207 1,789,339 $0.95
========== ========= =====
Diluted earnings per share have been restated for the 2000 two-for-one
stock exchange.
9
FIDELITY D & D BANCORP, INC. and SUBSIDIARY
DUNMORE, PA 18512
FORM 10-Q JUNE 30, 2000
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
1. Changes in Financial Condition
Total deposits increased $38,295,000 or 12.99% from $294,701,000 at
December 31, 1999 to $332,996,000 at June 30, 2000. The success at attracting
new customers and additional funds from existing depositors can be linked to the
new and renovated branches and competitive product pricing.
Non interest-bearing deposits rose $4,303,000 or 11.45% during 2000.
Interest-bearing deposits increased $33,992,000 or 13.22%. The introduction
of the tiered balance Super NOW accounts helped to generate a $16,740,000
overall increase in NOW accounts. An increase of $24,805,000 in public fund CD's
of $100,000 or more, caused CD's of $100,000 or more to increase $28,969,000 or
43.47% during 2000. Withdrawals from savings and money market accounts,
particularly public funds, reduced the amount of the increases.
Short-term Borrowings, which are comprised of Repurchase Agreements
(Repos), Treasury, Tax and Loan Retained Funds and Federal Funds Purchased,
decreased $1,655,000 or 2.75%. Of the total decrease, Fed Funds Purchased was
reduced $5,850,000. The reduction in Fed Funds Purchased was due, in part, to
reductions in currency, which had been increased for Year 2000 considerations.
Repos increased $4,321,000, due in part to real estate tax collections from
local municipalities.
The rise in Deposits less the decrease in Short-term Borrowings, the
increase in Common Stock and Surplus, through the Dividend Reinvestment Plan,
and the retention of earnings, caused Total Footings to increase $38,230,000 or
8.55% since December 31, 1999.
During 2000, net loans grew $31,494,000 or 10.63%. Commercial loans
increased $26,036,000 and consumer loans and leases increased $9,845,000.
Residential mortgages and student loans totaling $2,592,000 were sold during
2000 to provide liquidity and improve yield. In addition, residential mortgages
of $5,994,000 were securitized and reclassified as investments. This activity
provided the company with a FNMA guarantee on the loans within the investment
pools, thereby reducing the potential for loss due to delinquency. The
investment pools became an acceptable asset to pledge as collateral for Public
Fund deposits. The company has classified residential mortgages, student loans
and SBA guaranteed loans of $10,588,000 as available-for-sale.
10
The following table reflects the composition of the loan portfolio:
June 30, 2000 December 31, 1999
------------- -----------------
Real estate $109,365,985 $111,242,490
Consumer 71,046,462 64,998,362
Commercial 139,097,491 113,061,093
Direct financing leases 9,507,935 5,710,579
Real estate construction 3,594,052 5,335,753
- -----------------------------------------------------------------------------
Gross Loans 332,611,925 300,348,277
Less:
Unearned discount 1,630,630 982,384
Allowance for loan loss 3,294,190 3,172,375
- -----------------------------------------------------------------------------
Net Loans $327,687,105 $296,193,518
=============================================================================
Paydowns and early calls of US Agency and Municipal bonds totaled $574,000.
Municipal bonds of $4,790,000, classified as available-for-sale, were sold prior
to being called. A $2,000,000 US Government Agency bond and municipal bonds
totaling $1,896,000 were purchased during the first half of 2000. These
activities and the addition of the $5,994,000 securitized loans, plus a $32,000
increase in the market value of available-for-sale securities were the major
changes in the investment portfolio.
Fluctuations in capital markets cause frequent changes in the market value
of investments. This particular decline does not indicate a material weakness in
the company. Market conditions are monitored daily and the bank is prepared to
take remedial actions if deemed appropriate.
Securities held-to-maturity and available-for-sale, at June 30, 2000,
consist of the following:
Amortized Unrealized Unrealized Fair
cost gains Losses value
Held-to-maturity
Mortgage backed securities $5,960,630 $0 $340,877 $5,619,753
--------------------------------------------------------------
Total held-to-maturity $5,960,630 $0 $340,877 $5,619,753
==============================================================
Available-for-sale
Agencies $81,294,133 $0 $5,975,273 $75,318,861
State and municipal 20,394,695 82,510 804,853 19,672,352
Mortgage backed securities 7,684,088 7,863 373,665 7,318,286
--------------------------------------------------------------
Sub total 109,372,916 90,374 7,153,791 102,309,499
Stock 5,571,126 111,270 80,568 5,601,828
--------------------------------------------------------------
Total available-for-sale $114,944,042 $201,644 $7,234,359 $107,911,326
==============================================================
Grand total $120,904,672 $201,644 $7,575,236 $113,531,080
==============================================================
11
We list below the contractual maturities of securities held-to-maturity and
securities available-for-sale at June 30, 2000. 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.
Book Market
Held-to-maturity Value value
---------------- ----- -----
Mortgage backed securities $ 5,960,630 $ 5,619,753
- ----------------------------------------------------------------------------------------
Total held-to maturity $ 5,960,630 $ 5,619,753
========================================================================================
Available-for-sale
------------------
One year or less $200,087 $200,156
One through five years 2,950,000 2,846,047
Five through ten years 31,118,029 29,417,863
Over ten years 67,420,712 62,527,147
- ----------------------------------------------------------------------------------------
sub total 101,688,828 94,991,213
Mortgage backed securities 7,684,088 7,318,286
Equity securities 5,571,126 5,601,828
========================================================================================
Total available-for-sale $114,944,042 $107,911,327
========================================================================================
Grand total $120,904,672 $113,531,080
========================================================================================
Continued branching and improvements to both plant and equipment caused
bank premises and equipment to increase $1,667,000, net of depreciation, in
2000. During the first quarter of 2000 the company opened a new branch at 1598
Main Street, Peckville, Pennsylvania. The property is leased from a non-related
entity.
The company purchased a commercial property at 116-118 N. Blakely Street,
Dunmore, Pennsylvania, during the first quarter of 2000. The building is
currently occupied by the United States Postal Service and will continue to be
under a lease expiring January 31, 2005. The Post Office has an option to renew
that is scheduled to expire on January 31, 2010. The property was acquired for
future expansion.
Total assets of the company have grown $78,070,000 or 19.16% from
$407,371,000 to $485,441,000 for the twelve months ending June 30, 2000. The
increase is a result of a $53,267,000 rise in deposits, a $23,530,000 net
increase in borrowings and a net increase in Capital of $737,000.
The funds accumulated through the increases in liabilities were used for
net loan growth of $59,737,000, an increase in investments of $9,417,000 and
fixed asset expansion of $3,153,000.
Excluding the effect of the net change in the market value of
available-for-sale securities, Shareholders' Equity increased $1,157,000 for the
six months ending June 30, 2000 and by $2,731,000 for the twelve-month period
ending June 30, 2000. The increases are a result of the retention of profits and
the issuance of common stock under the Dividend Reinvestment plan.
12
2. Changes in Results of Operations
Net Income
Net Income for the six months ending June 30, 2000 and 1999 was $1,708,193
and $1,705,207, respectively. The significant differences are as follows:
2000 1999 Difference
---------- ---------- ----------
Net interest income $7,087,270 $6,453,705 $633,566 A
Provision for loan losses 243,000 320,000 77,000
Deposit service charges and other income 958,283 718,799 239,484 B
Gain on sale of assets 99,276 60,774 38,502
AFS loan appreciation 79,063 0 79,063
Salaries and employee benefits 2,690,746 2,311,747 (378,999) C
Occupancy and equipment 982,831 667,745 (315,086) D
Other expense 2,235,422 1,747,449 (487,973) E
Provision for income tax 363,700 481,130 117,430 F
A) The tax equivalent, ("TE"), yield on Average Earning Assets increased 28
basis points, from 7.45% at June 30, 1999 to 7.73% at June 30, 2000. This
action was caused by changes in National Prime, which had a direct effect on
loans subject to immediate repricing. Approximately 18% of the loan
portfolio is subject to immediate repricing. At the same time competition
from non-traditional sources for deposit dollars and competitive interest
rates paid for preferred accounts and accounts at the new branch locations,
caused the cost of funds to increase 61 basis points. The decline in TE net
yield was offset by a rise in loan and investment volume, and that enabled
the company to increase Net Interest Income by $633,566.
B) Service charges on deposit accounts increased $134,000 due to volume
increases and a new fee structure. Gross fees from the Trust Department and
merchant credit cards increased $84,000.
C) Merit pay increases and additions to staff caused Personnel expense to
increase 16.39%. At June 30, 2000, the company employed 171 full time
equivalent employees and at June 30, 1999, the company employed 161. On
average, the number of full time equivalent employees increased 12% since
June 30, 1999.
D) Occupancy and equipment expense increased due to the opening of the new
branches. Included in the increase is a $141,000 increase in depreciation
expense.
E) Included in Other Expense, at June 30, 2000, are charges of $150,000
related to organization of Fidelity D&D Bancorp, Inc. A rise in merchant
credit card volume caused related expenses to increase $48,000. Advertising,
postage, courier expense, supplies, ATM expenses and communications, all
impacted by the bank's new locations, increased $134,000. Correspondent bank
expense increased $13,000, capital shares expense increased $18,000 and
state banking charges and the bank's FDIC assessment increased $20,000.
F) The difference between the expected and actual provision for income
taxes is primarily the result of tax-free interest income. Also, for the six
months ended June 30, 2000, the provision has been reduced by approximately
$61,000 of low income housing credits.
13
FIDELITY D & D BANCORP, INC. and SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS
(in thousands of dollars)
TAX EQUIVALENT YIELD
Average Earnings June 30, 2000 December 31, 1999 June 30, 1999
Assets
Loans & Leases $315,688 $281,347 $262,805
Investments 120,053 100,882 88,372
Fed Funds 0 2,682 5,365
Interest Bearing
Deposits 7,081 6,629 6,809
-------- -------- --------
Total $442,822 $391,540 $363,351
======== ======== ========
Average Interest
Bearing Liabilities
Other Interest-bearing Deposits $ 85,312 $ 69,131 $ 64,890
CD's 186,517 173,626 161,767
Other Borrowed Funds 75,622 56,943 46,055
Repurchase Agreements 33,300 31,639 31,699
-------- -------- --------
Total $380,751 $331,339 $304,411
======== ======== ========
Six months ended Year ended Six months ended
June 30, 2000 December 31, 1999 June 30, 1999
Interest Income
Loans & Leases $ 12,925 $ 22,294 $ 10,309
Investments 4,080 6,774 2,227
Fed Funds 0 128 128
Interest Bearing
Deposits 18 89 66
-------- -------- --------
Total $ 17,023 $ 29,285 $ 13,430
======== ======== ========
Interest Expense
Other Interest-bearing Deposits $ 1,366 $ 1,589 $ 702
CD's 5,322 9,269 4,288
Other Borrowed Funds 2,217 2,999 1,173
Repurchase Agreements 904 1,519 743
-------- -------- --------
Total $ 9,809 $ 15,376 $ 6,906
======== ======== ========
Net Interest Income $ 7,214 $ 13,909 $ 6,524
======== ======== ========
Yield on Average
Earning Assets 7.73% 7.48% 7.45%
Cost of Average Interest-bearing
Liabilities 5.18% 7.48% 4.57%
-------- -------- --------
Interest Rate Spread 2.55% 2.84% 2.88%
======== ======== ========
Net Yield on Average Earning Assets 3.28% 3.55% 3.62%
14
FIDELITY D & D BANCORP, INC. and SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS
Provision for Loan Losses
June 30, 2000 December 31, 1999 June 30, 1999
Net Loans 338,275,350 301,447,834 278,538,334
Allowance for loan losses 3,294,190 3,172,375 3,205,142
Percentage to net loans 0.97% 1.05% 1.15%
Provision for loan losses
Year ended 530,000
Six months ended 243,000 320,000
Three months ended 136,500 140,000
(Charge offs)/recoveries, net
Year ended (365,338)
Six months ended (121,185) (122,571)
Three months ended 11,696 (75,952)
In addition to the Allowance for Loan Loss, there are other reserves not
recorded on the bank's records that are available to mitigate potential loan
loss. The guaranteed portion of SBA and Student Loans, which are either 90 days
or more delinquent or classified as non-accrual, was $182,000 at June 30, 2000.
The reserve set aside by the Commonwealth of Pennsylvania for loans registered
in the PENNCAP program was $215,000 at June 30, 2000.
The allowance for loan loss is established through a provision for loan
losses. The allowance represents an amount, which, in management's judgement
will be adequate to absorb possible losses on existing loans and leases.
Management's judgment in determining the adequacy of the allowance is based on
evaluations of the collectibility of the loans. These evaluations take into
consideration such factors as:
o changes in the nature and volume of the loan portfolio;
o current economic conditions that may affect the borrower's ability
to repay;
o overall portfolio quality; and o review of specific impaired loans.
Loans considered uncollectible are charged to the allowance. Recoveries on
charged-off loans are added to the allowance.
15
A loan is considered impaired when, based on current information, it is
probable that the company will be unable to collect the scheduled payments.
Factors considered in determining impairment include payment status and
collateral value. The significance of payment shortfalls is determined on a
case-by-case basis. Such factors include the length of the delinquency, the
underlying reasons and the borrowers prior payment record. Impairment is
measured on a case-by-case basis. The company does not group homogeneous loans
collectively for the purpose of determining impairment.
The company carefully monitors potential problem loans. Potential problem
loans are those where there is known information that leads the company to
believe repayment is in jeopardy. The loans are either non-accrual or past due
90 days or more. Non-accrual loans and loans that were past due 90 days or more,
at June 30, 2000, were $1,535,000 and $2,934,000, respectively. At June 30,
2000, the allowance for loan loss represents 214.65% of non-accrual loans and
112.27% of loans 90 days or more past due.
Interest rate risk management is an integral part of the Asset Liability
Management Process. Interest rate risk is defined as the degree to which
interest rate movements may affect net Interest Income and the Balance Sheet.
Fluctuations in rates can affect income through the balance of repricing assets
and source funds. If more assets reprice than liabilities, the Balance Sheet is
positively gapped. This position contributes favorably to net interest income in
a rising interest rate environment. Conversely, if the Balance Sheet has more
liabilities repricing than assets, the Balance Sheet is liability sensitive and
negatively gapped. In a declining rate environment, net interest income would
improve.
The company uses a simulation model to better understand the risks to the
company that may be brought about by changes in market interest rates. At June
30, 2000, 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 were within established policy limits
for changes in net interest income.
Liquidity for a bank is the ability to fund customers' needs for borrowings
and withdrawals. Sources of liquidity are:
o Asset maturities, paydowns and sales,
o Growth of core deposits,
o Growth of Repurchase Agreements, and
o Increase of other borrowed funds.
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.
16
Liquidity (in thousands of dollars)
June 30, 2000 Dec 31, 1999 June 30, 1999
Assets due within one year $131,574 $117,952 $105,656
Liabilities due within one year $235,471 $210,598 $186,496
Percent of assets due within one year
to liabilities due within one year 55.88% 56.01% 56.65%
Management believes that the present level of liquidity is adequate for
current operations. Investments were scheduled by maturity dates.
Liabilities included 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.
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 bank's capital amounts and ratios are as follows:
To be Well Capitalized Under
For Capital Adequacy Prompt Corrective Action
Actual Purposes Provisions
Amount Ratio Amount Ratio Amount Ratio
As of June 30, 2000
Total Capital
(to Risk Weighted Assets) $41,199,497 12.64% $26,071,512 8.00% $32,589,391 10.00%
Tier 1 Capital
(to Risk Weighted Assets) $37,905,307 11.63% $13,035,756 4.00% $19,553,634 6.00%
Tier 1 Capital
(to Average Assets) $37,905,307 8.30% $18,275,427 4.00% $22,844,283 5.00%
The ratios for the company are not materially different from those of the bank.
17
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings: 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,
there are no material proceedings pending, threatened or contemplated against
the Company by government authorities.
ITEM 2. Changes in Securities: None
ITEM 3. Default Upon Senior Securities: None
ITEM 4. Submission of Matters to a Vote by Security Holders.
At the annual meeting of shareholders held on May 2, 2000, the following
matters were voted on:
A) The reorganization of the bank as a wholly owned subsidiary of
Fidelity D & D Bancorp, Inc., a Pennsylvania corporation.
For 717,792 Against 19,925, Abstain 2,196
B) Fixing the number of Class A Directors at four:
For 755,863, Against 2,295, Abstain 2,381
C) Election of Class A Directors to a term ending in 2002:
Withhold
Nominee For Authority
------- --- ---------
Paul A. Barrett 757,795 2,744
John T. Cognetti 757,795 2,744
John F. Glinsky, Jr. 757,795 2,744
Michael J. McDonald 757,795 2,744
Directors continuing in office:
Michael F. Marranca Samuel C. Cali
Patrick A. Calvey, Jr. Patrick J. Dempsey
Herbert M. McDonald, MD David L Tressler, Sr.
D) Appointment of Parente Randolph, PC., Wilkes Barre, Pa. as the
independent audit firm for the bank during the year ending
December 31, 2000:
For 753,413, Against 4,111, Abstain 3,015
At the record date, 902,200 shares of common stock were outstanding.
Total votes cast equaled 765,539 or 84.85% of eligible shares.
ITEM 5. Other Information: Not applicable.
18
ITEM 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
Exhibit 3(i) Amended and Restated Articles of
Incorporation of Registrant, incorporated by
reference to Annex B of the Proxy
Statement/Prospectus included in
Registrant's Amendment No. 4 to its
Registration Statement No. 333-90273 on Form
S-4, filed with the SEC on April 6, 2000.
Exhibit 3(ii) Bylaws of Registrant, incorporated by
reference to Annex C of the Proxy
Statement/Prospectus included in
Registrant's Amendment No. 4 to its
Registration Statement No. 333-90273 on Form
S-4, filed with the SEC on April 6, 2000.
Exhibit 10.1 1998 Independent Directors Stock Option
Plan of The Fidelity Deposit and Discount
Bank, incorporated by reference to Exhibit
10.1 of Registrant's Registration Statement
No. 333-90273 on Form S-4, filed with the
SEC on November 3, 1999.
Exhibit 10.2 1998 Stock Incentive Plan of The
Fidelity Deposit and Discount Bank,
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.
Exhibit 27 Financial Data Schedule
(b) Reports on Form 8-K
On July 12, 2000, Registrant filed a Current Report on Form 8-K with the
SEC to report, under Item 2, the acquisition of The Fidelity Deposit and
Discount Bank as Registrant's wholly owned subsidiary effective June 30, 2000.
19
FIDELITY D&D BANCORP, INC. and SUBSIDIARY
DUNMORE, PA 18512
Form 10-Q JUNE 30, 2000
Pursuant to the requirements of the Securities Exchange Act of 1934, the Company
has caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
DATE: August 8, 2000 /s/ Michael F. Marranca
----------------------------------------
MICHAEL F. MARRANCA, PRESIDENT AND CEO
DATE: August 8, 2000 /s/ Robert P. Farrell
----------------------------------------
ROBERT P. FARRELL
TREASURER
20