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 SEPTEMBER 30, 2001
COMMISSION FILE NUMBER: 333-90273
FIDELITY D & D BANCORP, INC.
STATE OF INCORPORATION: IRS EMPLOYER IDENTIFICATION NO:
PENNSYLVANIA 23-3017653
PRINCIPAL OFFICE:
BLAKELY & DRINKER ST.
DUNMORE, PENNSYLVANIA 18512
TELEPHONE:
570-342-8281
The Company (1) has filed all reports required to be filed by Section 13 of the
Securities Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the Company was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days.
__X__ YES ___ NO
The number of outstanding shares of Common Stock of Fidelity D & D Bancorp, Inc.
at October 26, 2001, the latest practicable date was 1,814,822.
FIDELITY D & D BANCORP, INC and SUBSIDIARY.
DUNMORE, PA 18512
FORM 10-Q SEPTEMBER 30, 2001
INDEX
PART I. FINANCIAL INFORMATION Page
ITEM 1. FINANCIAL STATEMENTS:
Consolidated Balance Sheets as of September 30, 2001
and December 31, 2000 3
Consolidated Statement of Income for the nine and three
months ended September 30, 2001 and 2000 4
Consolidated Statement of Changes in Shareholders' Equity
for the nine months ended September 30, 2001 and 2000 5
Consolidated Statement of Cash Flows for the nine months
ended September 30, 2001 and 2000 6
Notes to Consolidated Financial Statements 7-8
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 9-19
ITEM 3. Quantitative and Qualitative Disclosure about Market Risk,
included in Item 2 17
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings 19
ITEM 2. Change in Securities and Use of Proceeds 19
ITEM 3. Defaults upon Senior Securities 19
ITEM 4. Submission of Matters to a Vote of Security Holder 19
ITEM 5. Other Information 19
ITEM 6. Exhibits and Reports on Form 8-K 20
Signature Page 21
Exhibit Index 22
2
FIDELITY D & D BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
As of September 30, 2001 and December 31, 2000
September 30, 2001 December 31, 2000
(unaudited) (audited)
----------------------------------------
ASSETS
Cash and due from banks $ 6,898,438 $ 5,502,430
Interest bearing deposits with financial institutions 79,453,707 3,277,062
----------------------------------------
Total cash and cash equivalents 86,352,146 8,779,492
Held to maturity securities 23,151,983 7,879,433
Available for sale securities 87,690,451 111,876,958
Loans net of unearned income 341,434,753 336,865,255
Allowance for loan losses 3,511,115 3,264,280
----------------------------------------
Net loans 337,923,638 333,600,975
Loans available-for-sale 13,770,436 10,318,792
Bank premises and equipment 11,591,879 11,390,479
Accrued interest receivable 3,737,936 3,885,291
Foreclosed assets held for sale 491,922 353,253
When issued securities 18,000,000 -
Other assets 3,589,700 3,659,198
----------------------------------------
Total assets $ 586,300,090 $ 491,743,871
========================================
LIABILITIES
Deposits
NonInterest-bearing $ 47,180,910 $ 47,500,335
Cert. of deposit $100,000 or more 139,730,026 94,717,931
Other interest-bearing deposits 220,464,210 197,406,799
----------------------------------------
Total deposits 407,375,146 339,625,066
Accrued expenses and other liabilities 4,601,491 3,574,672
Liability for security settlement 18,000,000 -
Short-term borrowings 51,649,505 48,024,721
Long-term debt 63,000,000 63,000,000
----------------------------------------
Total liabilities 544,626,142 454,224,459
----------------------------------------
Shareholders' Equity:
Preferred stock authorized 5,000,000 shares,
no par value, none issued - -
Common stock authorized 10,000,000 shares,
no par value 9,194,828 8,881,713
Accumulated other comprehensive income/(loss) 446,903 (1,325,435)
Retained earnings 32,032,217 29,963,134
----------------------------------------
Total shareholders' equity 41,673,948 37,519,412
----------------------------------------
Total liabilities and shareholders' equity $ 586,300,090 $ 491,743,871
========================================
See notes to consolidated financial statements
3
FIDELITY D & D BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF INCOME Three and Nine Months
Ended September 30, 2001 and 2000
(unadited)
Three Months Ended Nine Months Ended
September 30, 2001 September 30, 2000 September 30, 2001 September 30, 2000
Interest Income Interest and fees on loans:
Taxable $ 6,694,150 $ 6,797,354 $ 20,415,097 $ 19,031,379
Nontaxable 189,818 185,516 568,941 487,732
Interest and fees on leases 167,730 179,791 537,358 439,154
Interest-bearing deposits with financial institutions 126,454 23,194 134,628 41,641
Investment securities:
US Government agencies 1,663,022 1,648,118 4,938,223 4,754,789
States & political subdivisions (nontaxable) 173,651 249,472 581,828 807,276
Other securities 63,112 95,225 219,705 280,376
Federal funds sold 191,931 - 313,575 -
-----------------------------------------------------------------------------
Total interest income 9,269,868 9,178,670 27,709,353 25,842,347
-----------------------------------------------------------------------------
Interest expense
Certificates of deposit of $100,000 or more 1,741,275 1,682,333 5,214,805 4,101,508
Other deposits 2,180,065 2,487,329 6,472,927 6,756,096
Securities sold under repurchase agreements 310,791 483,600 1,124,823 1,387,369
Other 914,033 1,143,712 2,877,519 3,361,066
-----------------------------------------------------------------------------
Total interest expense 5,146,164 5,796,974 15,690,074 15,606,039
-----------------------------------------------------------------------------
Net interest income 4,123,704 3,381,696 12,019,279 10,236,308
Provision for loan losses 569,937 138,000 1,173,937 381,000
-----------------------------------------------------------------------------
Net interest income, after
provision for loan losses 3,553,767 3,243,696 10,845,342 9,855,308
-----------------------------------------------------------------------------
Other income:
Service charges on deposit accounts 331,323 348,816 1,043,943 902,128
Gain on sale of investment securities 85,510 - 199,885 20,123
Gain on sale of loans and leases 42,312 68,621 201,018 147,774
Gain on loans available-for-sale - 66,808 - 145,871
Other income 398,184 420,154 1,106,756 1,057,783
-----------------------------------------------------------------------------
Total other income 857,329 904,399 2,551,602 2,273,679
-----------------------------------------------------------------------------
Other operating expenses:
Salaries and employee benefits 1,611,278 1,345,344 4,525,151 4,223,643
Premises and equipment 616,942 582,116 1,890,248 1,564,947
Advertising 122,524 100,906 316,771 330,449
Other expenses 879,753 901,820 2,606,052 2,720,146
-----------------------------------------------------------------------------
Total operating expenses 3,230,497 2,930,186 9,338,221 8,839,185
-----------------------------------------------------------------------------
Income before provision for income taxes 1,180,599 1,217,909 4,058,723 3,289,802
Provision for income taxes 261,685 270,050 926,807 633,750
-----------------------------------------------------------------------------
Net income $ 918,914 $ 947,859 $ 3,131,916 $ 2,656,052
=============================================================================
Basic earnings per share $ 0.51 $ 0.52 $ 1.73 $ 1.47
Diluted earnings per share $ 0.51 $ 0.52 $ 1.73 $ 1.47
Dividends per share $ 0.20 $ 0.20 $ 0.59 $ 0.57
See Notes to Consolidated Financial Statements.
4
FIDELITY D & D BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
For the Nine Months Ended September 30, 2001 and 2000
(unaudited)
Accumulated
Capital Stock Retained Other Comprehensive
Shares Amount Earnings Income/(Loss) Total
--------------------------------------------------------------------------
Balance, Dec. 31, 1999 900,392 $8,673,031 $28,126,918 ($4,673,713) $32,126,236
Net income 2,656,052 2,656,052
Change in net unrealized holding
gains/(losses) on available-for-sale
securities, net of reclassification
adjustments and tax effects 928,675 928,675
------------
Comprehensive income 3,584,727
------------
Dividends (1,027,821) (1,027,821)
Stock exchange 901,816
Issuance of stock 250 15,500 15,500
Dividends reinvested 1,553 109,445 109,445
--------------------------------------------------------------------------
Balance, September 30, 2000 1,804,011 $ 8,797,976 $ 29,755,149 $ (3,745,038) $34,808,087
==========================================================================
Balance, December 31, 2000 1,806,274 $ 8,881,713 $ 29,963,134 $ (1,325,435) $ 37,519,412
------------
Net income 3,131,916 3,131,916
Change in net unrealized holding
gains/(losses) on available-for-sale
securities, net of reclassification
adjustments and tax effects 1,772,338 1,772,338
------------
Comprehensive income 4,904,254
------------
Dividends (1,062,834) (1,062,834)
Dividends reinvested 8,551 313,115 313,115
--------------------------------------------------------------------------
Balance September 30, 2001 1,814,825 $ 9,194,828 $ 32,032,216 $ 446,903 $ 41,673,948
==========================================================================
See notes to consolidated financial statements.
Comprehensive income for the three months ended September 30, 2001 and
September 30, 2000 was $1,727,303 and $1,844,413, respectively.
5
FIDELITY D & D BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS For the Nine Months
Ended September 30,2001 and 2000
(unaudited)
2001 2000
--------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 3,131,916 $ 2,656,052
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 898,600 716,700
Amortization of securities (net of accretion) (29,799) (52,374)
Provision for loan losses 1,173,937 381,000
Deferred income tax (180,742) 503,625
Amortization of mortgage servicing rights 30,678 15,629
(Gain)/loss sale of investment securities (199,885) (20,123)
(Gain)/loss on sale of loans and leases (201,018) (147,774)
(Gain)/Loss on Sale of foreclosed assets held for sale (18,051) 69,035
(Appreciation)/depreciation available-for-sale loans - (145,871)
Net change in interest receivable 147,355 (1,193,892)
Net change in accrued expenses 796,596 506,332
Net change in other assets (110,677) (711,025)
--------------- -------------
Net cash provided by operating activities $ 5,438,910 $ 2,577,314
--------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of held-to-maturity securities $ (15,993,750) $ -
Proceeds from maturity, call and paydown
of held-to-maturity securities 721,209 157,489
Proceeds from the sale of available-for-sale securities 11,203,976 4,809,783
Proceeds from maturity, call and paydown
of available-for-sale securities 58,128,211 854,360
Purchase of available-for-sale securities (42,230,646) (5,896,249)
Proceeds from sale of available-for-sale loans 16,335,656 5,424,884
Net change in loans & leases (25,712,778) (53,410,703)
Purchase of bank premises and equipment (1,100,000) (2,643,384)
Improvements to foreclosed assets held for sale (10,356) (41,177)
Proceeds from sale of foreclosed assets held for sale 167,076 197,509
--------------- -------------
Net cash provided by/(used in) investing activities $ 1,508,598 $ (50,547,488)
--------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in non-interest bearing deposits $ (319,426) $ 3,279,106
Net change in interest bearing deposits 23,057,410 7,125,609
Net change in CD's $100,000 or more 45,012,095 36,537,990
Net change in short term borrowings 3,624,784 (2,885,678)
Dividends, net of dividends reinvested (749,719) (918,376)
Proceeds from issuance of common stock - 15,500
--------------- -------------
Net cash provided by financing activities $ 70,625,145 $ 43,154,151
--------------- -------------
Net increase(decrease) in cash and cash equivalents $ 77,572,654 $ (4,816,023)
Cash and cash equivalents, beginning 8,779,492 17,957,379
--------------- -------------
Cash and cash equivalents, end $ 86,352,146 $ 13,141,356
=============== =============
See notes to consolidated financial statements.
6
FIDELITY D & D BANCORP, INC. and SUBSIDIARY
DUNMORE, PA 18512
FORM 10-Q SEPTEMBER 30, 2001
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The accompanying unaudited consolidated financial statements of Fidelity
D&D Bancorp, Inc., and subsidiary, The Fidelity Deposit & Discount Bank, (Bank),
(collectively the "Company") have been prepared in accordance with accounting
principles, generally accepted in the United States of America (GAAP), for
interim financial information and with the instructions to Form 10-Q and Article
10-01 of Regulation S-X. In the opinion of management, all normal recurring
adjustments necessary for a fair presentation of the financial position and
results of operations for the periods have been included. All significant
inter-company balances and transactions have been eliminated in the
consolidation. Prior period amounts are reclassified when necessary to conform
with the current year's presentation.
The preparation of financial statements in conformity with GAAP requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reported periods. Actual results could differ from those
estimates. For additional information and disclosures required under GAAP,
please refer to the Bank's Annual Report on Form 10-K for the year ended
December 31, 2000.
The Bank is a commercial bank chartered by the Commonwealth of
Pennsylvania. Having commenced operations in 1903, the Bank provides a full
range of traditional banking services and alternative financial products from
its main office located in Dunmore and other branches throughout Lackawanna and
Luzerne counties.
Management is responsible for the fairness, integrity and objectivity of
the unaudited financial statements included in this report. Management prepared
the unaudited financial statements in accordance with GAAP. In meeting its
responsibility for the financial statements, management depends on the Company's
accounting systems and related internal controls. These systems and controls are
designed to provide reasonable, but not absolute, assurance that the financial
records accurately reflect the transactions of the Company, that Company assets
are safeguarded and that financial statements present fairly the financial
position and results of operations of the Company.
7
In the opinion of management, the consolidated balance sheets as of
September 30, 2001 and December 31, 2000 present fairly the consolidated
financial position of the Company as of those dates and the related statements
of income, changes in shareholders' equity and cash flows for the nine months
ended September 30, 2001 and 2000 present fairly the consolidated results of its
operations and its cash flows for the periods then ended. All material
adjustments required for fair presentation have been made. These adjustments are
of a normal reoccurring nature. There have been no material changes in
accounting principles, practices or in the method of application, and there have
been no retroactive adjustments during this period.
This Quarterly Report on Form 10-Q should be read in conjunction with the
Company's audited financial statements for the year ended December 31, 2000 and
the notes included therein, in the Company's Annual Report on Form 10-K. The
results of operations for interim periods are not necessarily indicative of the
results of operations to be expected for the entire year.
The 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 September 30, 2001 and 2000:
Weighted
Average
Common Earnings
Income Shares per
September 30, 2001 Numerator Denominator Share
Basic EPS $ 3,131,916 1,809,702 $1.73
=========
Dilutive effect of potential common stock
Stock options;
Exercise of outstanding options 18,800
Hypothetical share repurchase at $37.00 (17,416)
---------------------------------
Diluted EPS $ 3,131,916 1,811,086 $1.73
====================================================
September 30, 2000
Basic EPS $ 2,656,052 1,803,388 $1.47
=========
Dilutive effect of potential common stock
Stock options;
Exercise of outstanding options 14,400
Hypothetical share repurchase at $37.75 (12,634)
---------------------------------
Diluted EPS $ 2,656,052 1,805,154 $1.47
====================================================
8
FIDELITY D & D BANCORP, INC. and SUBSIDIARY
DUNMORE, PA 18512
FORM 10-Q SEPTEMBER 30, 2001
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
Total deposits increased $67,750,000 or 19.95% from $339,625,000 at
December 31, 2000 to $407,375,000 at September 30, 2001. The success at
attracting new customers and additional funds from existing depositors can be
linked to our new and renovated branches, services and competitive product
pricing. The increase in deposits may also be attributed, in part, to the
uncertainties in current financial markets. Historically, in times of economic
downturns, excess funds are deposited in well-capitalized commercial financial
institutions.
Non interest-bearing deposits decreased $319,000 or 0.67% during 2001. The
decline was generally in outstanding official checks issued by the Bank.
Official checks decreased $1,693,000. Personal demand deposit accounts (DDA's)
increased $512,000, business DDA's increased $151,000 and public fund DDA's
increased $852,000.
Interest-bearing deposits increased $68,070,000 or 23.30%. Public fund
certificates of deposit (CD's), personal CD's and non-personal CD's increased
$37,054,000, $18,730,000 and $20,183,000, respectively. Savings and club
accounts increased $2,053,000. Decreases of $2,631,000 in NOW accounts and
$7,319,000 in money market deposit accounts reduced the increase in CD's,
savings and club accounts. Some of the funds in NOW and money market deposit
accounts transferred into CD's to take advantage of higher yields.
9
Short-term borrowings, which are comprised of repurchase agreements
(Repos), treasury tax and loan retained funds and federal funds purchased,
increased $3,625,000 or 7.55%. Federal funds purchased at December 31, 2000 were
$10,950,000 and $0 at September 30, 2001. The reduction in federal funds
purchased was due to the increase in deposits and a $14,578,000 increase in
Repos.
Liability for security settlement was caused by the recognition of a
liability for the purchase of when issued securities. US Government Agency bonds
totaling $18,000,000 were traded for during September 2001, with settlement
dates in October 2001.
Total cash and cash equivalents increased due to the call of investment
securities, the sale of assets, the increase in deposits and short term
borrowings and a reduction in loan demand. Excess funds were placed in an
interest-bearing account at the Federal Home Loan Bank of Pittsburgh at
September 30, 2001.
During 2001, net loans, including available-for-sale loans, grew $7,774,000
or 2.26%. Commercial loans increased $13,673,000 or 9.33%. Consumer loans grew
$2,709,000 or 4.08%. Residential mortgages, SBA guaranteed loans and student
loans totaling $16,135,000 were sold during 2001 to provide liquidity and
improve yield. The Company has classified certain residential mortgages, student
loans and SBA guaranteed loans of $13,770,000 as available-for-sale (AFS) at
September 30, 2001. The market value of AFS loans at September 30, 2001 and
December 31, 2000 was $14,280,00 and $10,507,000, respectively.
The following table reflects the composition of the loan portfolio:
September 30, 2001 December 31, 2000
Real estate $97,544,981 $109,942,570
Consumer 69,150,602 66,441,389
Commercial 160,283,515 146,610,685
Direct financing leases 10,989,594 12,733,075
Real estate construction 4,968,134 2,971,505
- --------------------------------------------------------------------------------------------
Gross loans $342,936,826 $338,699,223
Less:
Unearned discount 1,502,074 1,833,968
Allowance for loan loss 3,511,115 3,264,280
- --------------------------------------------------------------------------------------------
Net Loans $337,923,638 $333,600,975
============================================================================================
Paydowns and early calls of US agency and municipal bonds totaled
$58,649,000. US agency and municipal bonds of $11,005,000, classified as
available-for-sale, were sold to provide liquidity and to improve the yield on
earning assets. US Government agency bonds and mortgage-backed securities of
$58,099,000 were purchased during 2001. Due to the reduction of borrowings from
the Federal Home Loan Bank of Pittsburgh (FHLB), the FHLB redeemed $1,793,000 in
FHLB stock, owned by the Company to support the borrowings.
It should be noted that the proceeds of called bonds were reinvested at
lower rates. The reinvested rates were determined by current market conditions.
This could have a potentially negative impact on future net earnings.
10
These activities, plus a $2,685,000 improvement in the market value of
available-for-sale securities, caused by the reduction in current market rates,
were the major changes in the investment portfolio.
Fluctuations in capital markets cause frequent changes in the market value
of investments. Market conditions are monitored daily and the Company is
prepared to take remedial actions if deemed appropriate.
Securities held-to-maturity and available-for-sale at September 30, 2001
consist of the following:
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- ---------- ---------- -----
Held-to-maturity
Mortgage backed securities $ 7,158,223 $ 123,800 $ 6,672 $ 7,275,352
Government agencies 15,993,760 $ 104,000 10 16,097,750
Total held-to-maturity $ 23,151,983 $ 227,800 $ 6,682 $ 23,373,102
Available-for-sale
Agencies $ 56,700,880 $ 302,368 $ 28,743 $ 56,974,505
State and municipal 12,922,736 141,625 82,515 12,981,846
Mortgage backed securities 13,611,084 133,552 5,302 13,739,334
Sub total 83,234,700 577,545 116,560 83,695,685
Equity securities 3,778,626 256,749 40,608 3,994,767
Total available-for-sale $ 87,013,326 $ 834,293 $ 157,168 $ 87,690,451
Grand total $ 110,165,309 $ 1,062,093 $ 163,849 $ 111,063,553
11
At September 30, 2001, the contractual maturities of securities
held-to-maturity and available-for-sale are listed below. Mortgage backed
securities, which are subject to monthly principal reductions, are listed in
total. Equity securities have no stated maturity dates and are listed in total.
Amortized Market
Held-to-maturity cost value
Five through ten years $ 4,000,000 $ 4,064,000
Over ten years 11,993,760 12,033,750
- -------------------------------------------------------------------------------------------
sub total 15,993,760 16,097,750
Mortgage backed securities 7,158,223 7,275,352
- -------------------------------------------------------------------------------------------
Total held-to maturity $ 23,151,983 $ 23,373,102
- -------------------------------------------------------------------------------------------
Available-for-sale
One year or less $ 10,450,000 10,476,814
One through five years 4,404,966 4,417,155
Five through ten years 14,933,117 15,141,062
Over ten years 39,835,532 39,921,320
- -------------------------------------------------------------------------------------------
sub total 69,623,615 69,956,351
- -------------------------------------------------------------------------------------------
Mortgage backed securities 13,611,084 13,739,334
Equity securities 3,778,626 3,994,767
- -------------------------------------------------------------------------------------------
Total available-for-sale $ 87,013,325 $ 87,690,451
- -------------------------------------------------------------------------------------------
Grand total $ 110,165,308 $ 111,063,553
===========================================================================================
When issued securities were comprised US Government Agency bonds traded for
during September 2001, with settlement dates in October 2001.
12
2. Changes in Results of Operations:
Net Income for the nine months ending September 30, 2001 and 2000 was
$3,131,916 and $2,656,052, respectively. The significant differences are as
follows:
2001 2000 Difference
---------- ---------- ----------
Net interest income 12,019,279 10,236,308 1,782,971 A
Provision for loan losses 1,173,937 381,000 (792,937) B
Deposit service charges and other income 2,150,698 2,105,782 44,916
Gain on sale of assets 400,904 167,897 233,007 C
Salaries and employee benefits 4,525,151 4,223,643 (301,508) D
Premises and equipment 1,890,248 1,564,947 (325,301) E
Other expense 2,922,823 3,050,595 127,772
Provision for income tax 926,807 633,750 (293,057) F
A) The tax equivalent ("TE") yield on Average Earning Assets decreased 21
basis points (bp) from 7.79% at September 30, 2000 to 7.58% at September
30, 2001. This reduction reflects the nine reductions in the discount rate
since December 31, 2000. The reductions totaled 400 bp.
The discount rate is the rate at which the Federal Reserve Bank lends
overnight funds to banks. Changes in the discount rate have a direct effect
on loans and investments subject to immediate repricing and call features.
The decline in market rates allowed the Bank to reduce rates paid on
interest-bearing liabilities. The cost of funds decreased 45 bp from 5.34%
at September 30, 2000 to 4.89% at September 30, 2001.
The changes in pricing and volume increases in loans improved the TE net
yield on earning assets by 19 bp and that increased net interest income by
$1,783,000.
B) In the internal review of loans for both delinquency and collateral
sufficiency, there was an increase in loans that lacked the ability to
repay in accordance with contractual terms. Accordingly, the allowance for
loan losses was increased through the provision for loan losses.
13
C) During 2001, AFS investments of $11,004,000 and AFS loans of $16,135,000
were sold to improve liquidity and to protect the investment portfolio from
called securities. Gains on the sales of these assets were $200,000 and
$201,000, respectively.
D) Merit pay increases and higher benefit costs increased personnel expense
$302,000.
E) A full nine months of depreciation on the Peckville branch and fixed assets
purchased during 2000 caused depreciation expense to increase $182,000.
Occupancy expense at the Kingston branch, which opened in April 2001, was
$46,000 before depreciation of $10,000.
F) The effective federal income tax rate was 22.8% and 19.3% for the nine
months ending September 30, 2001 and September 30, 2000 respectively.
Income before provision for income taxes in 2001 increased $769,000 over
2000. Non-taxable income as a percentage of net income before taxes
declined from 37.67% in 2000 to 27.47% in 2001.
14
THE FIDELITY DEPOSIT & DISCOUNT BANK
MANAGEMENT'S DISCUSSION AND ANALYSIS
(in thousands of dollars)
TAX EQUIVALENT YIELD
- -------------------------------------
Nine months ended Year ended Nine months ended
September 30, 2001 December 31, 2000 September 30, 2000
-------------------------------------------------------------------
Average earning assets:
Loans and leases $ 353,963 $ 328,714 $ 324,036
Investments 119,056 121,796 121,164
Federal funds sold 11,966 - -
Interest-bearing deposits 12,129 6,833 7,126
Total $ 497,114 $ 457,343 $ 452,326
Average Interest Bearing Liabilities:
Other Interest-bearing deposits $ 80,626 $ 85,927 $ 86,432
Certificates of deposit 242,675 200,670 195,327
Other borrowed funds 67,530 74,070 75,302
Repurchase agreements 38,386 34,149 33,375
Total $ 429,217 $ 394,816 $ 390,436
Interest Income
Loans and leases $ 21,738 $ 27,461 $ 20,146
Investments 6,016 8,324 6,190
Federal funds sold 314 - -
Interest-bearing deposits 134 45 42
Total $ 28,202 $ 35,830 $ 26,378
Interest Expense
Other Interest-bearing deposits $ 1,284 $ 3,036 $ 2,221
Certificates of deposit 10,404 12,074 8,637
Other borrowed funds 2,877 4,441 3,361
Repurchase agreements 1,125 1,917 1,387
Total $ 15,690 $ 21,468 $ 15,606
Net Interest Income $ 12,512 $ 14,362 $ 10,772
Yield on average earning assets 7.58% 7.83% 7.79%
Cost of average interest-bearing liabilities 4.89% 5.44% 5.34%
Interest rate spread 2.69% 2.39% 2.45%
Net yield on average earning assets 3.37% 3.14% 3.18%
15
FIDELITY D & D BANCORP, INC. and SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS
Provision for Loan Losses
FIDELITY D & D BANCORP, INC. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS
PROVISION FOR LOAN LOSSES
September 30, 2001 December 31, 2000 September 30, 2000
Loans, net of unearned discount and fees 341,434,753 336,865,255 326,830,462
Allowance for loan losses 3,511,115 3,264,280 3,121,703
Percentage to net loans 1.03% 0.97% 0.96%
Provision for loan losses
Year ended 1,158,260
Nine months ended 1,173,937 381,000
Three months ended 569,937 138,000
(Charge offs)/recoveries, net
Year ended (365,338)
Nine months ended (927,102) (431,672)
Three months ended (358,908) (310,486)
In addition to the allowance for loan losses, there are guarantees and
other reserves not recorded on the Company's records that are available to
mitigate potential loan loss. The guaranteed portion of SBA and Student Loans
that are either 90 days or more delinquent or classified as non-accrual was
$550,000 at September 30, 2001. The reserve set aside by the Commonwealth of
Pennsylvania for loans registered in the PENNCAP program was $390,000 at
September 30, 2001.
Loans secured by deposits were $4,079,000 at September 30, 2001.
The allowance for loan losses 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 judgement 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:
Changes in the nature and volume of the loan portfolio;
Current economic conditions that may effect the borrowers ability to repay;
Overall portfolio quality; and
16
Review of specific impaired loans.
Loans considered uncollectible are charged to the allowance. Recoveries on
charged-off loans are added to the allowance.
A loan is considered impaired when, based on current information, it is
probable that the Company will not 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. Factors include the length of the delinquency, the underlying reasons and
the borrower's prior payment record. Impairment is measured on a case by case
basis. The Company does not group non-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 September 30, 2001 were $3,999,000 and $5,533,000 respectively. At September
30, 2001, the allowance for loan loss represents 87.80% of non-accrual loans and
63.46% 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
September 30, 2001, 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 the Company's
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:
Asset maturities, paydowns and sales
Growth of core deposits
Growth of Repos
Increase of other borrowed funds
17
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.
Liquidity (in thousands of dollars)
Sept 30, 2001 Dec 31, 2000 Sept 30, 2000
Assets due within one year $231,749 $106,310 $131,897
Liabilities due within one year $276,143 $233,931 $237,571
Percent of assets due within one year
to liabilities due within one year 83.92% 45.45% 55.52%
Investments included with assets due within one year were scheduled by
maturity dates and not by call dates.
Liabilities include deposits not having stated maturity dates (DDA's, NOWs,
Savings & MMDA's) in the amounts reported. In addition, sweep accounts were
classified as having immediate maturity dates.
The improvement in liquidity was caused by the reduction in market rates.
As market rates began to decrease, investment securities, subject to call dates,
were in fact called. Other investments and loans began to prepay. This provided
the Bank with a significant source of funds to meet liquidity demands. Demand
for funds lowered in the commercial sector due to concerns over the economy and
retail funds increased as consumers grew conservative.
Management believes that the present level of liquidity is adequate for
current operations.
This presentation does not take into consideration lines of credit that are
available to the Company, or assets available-for-sale, both of which could be
used to meet liquidity needs.
18
The Company's capital amounts and ratios at September 30, 2001 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) $ 44,806,298 12.22% $ 29,336,717 8.00% $ 36,670,897 10.00%
Tier 1 Capital
(to Risk Weighted Assets) $ 41,197,920 11.23% $ 14,668,359 4.00% $ 22,002,538 6.00%
Tier 1 Capital
(to Average Assets) $ 41,197,920 7.94% $ 20,767,084 4.00% $ 25,958,856 5.00%
The ratios for the Bank are not materially different from those of the
Company.
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, Management does not know
of any material proceedings pending, threatened or contemplated against the
Company by government authorities.
ITEM 2. Changes in Securities and Use of Proceeds.
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.
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ITEM 6. Exhibits and Reports on Form 8-K.
a) Exhibits
3(i) Amended and Restated Articles of Incorporation of Registrant.
Incorporated by reference to Exhibit 3(i) to Registrant's Registration
Statement No. 333-90273 on Form S-4, filed with the SEC on November 3, 1999
and as amended on April 6, 2000.
3(ii) Bylaws of Registrant. Incorporated by reference to Exhibit 3 (ii) to
Registrant's Registration Statement No. 333-90273 on Form S-4, filed with
the SEC on November 3, 1999 and as amended on April 6, 2000.
10.1 Registrant's 2000 Independent Directors Stock Option Plan.
Incorporated by reference to Exhibit 4.3 to Registrant's Registration
Statement No. 333-64356 on Form S-8, filed with the SEC on July 2, 2001.
10.2 Registrant's 2000 Stock Incentive Plan. Incorporated by reference to
Exhibit 4.4 to Registrant's Registration Statement No. 333-64356 on Form
S-8, filed with the SEC on July 2, 2001.
10.3 Form of Deferred Compensation Plan of the Fidelity Deposit and
Discount Bank. Incorporated by reference to Exhibit 10.3 to Registrant's
Registration Statement No. 333-45668 on Form S-1, filed with the SEC on
September 12, 2000, as amended by Pre-effective Amendment No. 1 on October
11, 2000 and by Post-effective Amendment No. 1 on Form S-3 on May 30, 2001.
10.4 Registrant's 2000 Dividend Reinvestment Plan. Incorporated by
reference to Exhibit 4.3 to Registrant's Registration Statement No.
333-45668 on Form S-1, filed with the SEC on September 12, 2000, as amended
by Pre-effective Amendment No. 1 on October 11, 2000 and by Post-effective
Amendment No. 1 on Form S-3 on May 30, 2001.
11 Statement regarding computation of earnings per share. Included herein
on page 8.
b) The Company did not file any current reports on Form 8-K during the quarter
ended September 30, 2001.
20
FIDELITY D&D BANCORP, INC. and SUBSIDIARY
DUNMORE, PA 18512
FORM 10-Q SEPTEMBER 30, 2001
Pursuant to the requirements of the Securities Exchange Act of 1934, the Company
has caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
DATE: November 2, 2001 ___________________________________
MICHAEL F. MARRANCA, PRESIDENT
DATE: November 2, 2001 _________________________________
ROBERT P. FARRELL, TREASURER
21
FIDELITY D&D BANCORP, INC. and SUBSIDIARY
DUNMORE, PA 18512
FORM 10-Q SEPTEMBER 30, 2001
Exhibit Index
3(i)Amended and Restated Articles of Incorporation of Registrant.
Incorporated by reference to Exhibit 3(i) to Registrant's Registration
Statement No. 333-90273 on Form S-4, filed with the SEC on November 3, 1999
and as amended on April 6, 2000.
3(ii)Bylaws of Registrant. Incorporated by reference to Exhibit 3 (ii) to
Registrant's Registration Statement No. 333-90273 on Form S-4, filed with
the SEC on November 3, 1999 and as amended on April 6, 2000.
10.1 Registrant's 2000 Independent Directors Stock Option Plan.
Incorporated by reference to Exhibit 4.3 to Registrant's Registration
Statement No. 333-64356 on Form S-8, filed with the SEC on July 2, 2001.
10.2 Registrant's 2000 Stock Incentive Plan. Incorporated by reference to
Exhibit 4.4 to Registrant's Registration Statement No. 333-64356 on Form
S-8, filed with the SEC on July 2, 2001.
10.3 Form of Deferred Compensation Plan of the Fidelity Deposit and
Discount Bank. Incorporated by reference to Exhibit 10.3 to Registrant's
Registration Statement No. 333-45668 on Form S-1, filed with the SEC on
September 12, 2000, as amended by Pre-effective Amendment No. 1 on October
11, 2000 and by Post-effective Amendment No. 1 on Form S-3 on May 30, 2001.
10.4 Registrant's 2000 Dividend Reinvestment Plan. Incorporated by
reference to Exhibit 4.3 to Registrant's Registration Statement No.
333-45668 on Form S-1, filed with the SEC on September 12, 2000, as amended
by Pre-effective Amendment No. 1 on October 11, 2000 and by Post-effective
Amendment No. 1 on Form S-3 on May 30, 2001.
11 Computation of earnings per share. Included herein on page 8.
22