As filed with the Securities and Exchange Commission on January 4,April 6, 2000
Registration No. 333-90273
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------
PRE-EFFECTIVE AMENDMENT NO. 14
TO
FORM S-4
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
-------------------------------------------
FIDELITY D & D BANCORP, INC.
------------------------------------------------------
(Exact name of Registrant as specified in its charter)
Pennsylvania 67126021 23-3017653
- ------------------------------- ------------------------------------------------------- -------------------
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
Michael F. Marranca
President and Chief Executive Officer
FIDELITY D & D BANCORP, INC. FIDELITY D & D BANCORP, INC.
Blakely and Drinker Streets Blakely and Drinker Streets
Dunmore, Pennsylvania 18512 Dunmore, Pennsylvania 18512
(570) 342-8281 (570) 342-8281
- -------------------------------------------- ------------------------------------------------------------------------------------- ------------------------------------------
(Address, including ZIP Code, and telephone (Name, address, including ZIP Code,
and
number, including area code, of registrant's and telephone number, including area
principal executive offices) including area code, of agent for service)
With a Copy to:
Nicholas Bybel, Jr., Esquire
Cheryl A. Zeman, Esquire
SHUMAKER WILLIAMS, P.C.
P.O. Box 88, Harrisburg, Pennsylvania 17108
(717) 763-1121
Approximate date of commencement of the proposed sale of the securities to the
public: As soon as practicable after the effective date of the Registration
Statement.
If the securities being registered on this Form are being offered in connection
with the formation of a holding company and there is compliance with General
Instruction G, check the following box. / /
CALCULATION OF REGISTRATION FEE
- --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Title of Each Class Amount Proposed Proposed Maximum Amount of
of Securities to to be Offering Price Aggregate Registration
be Registered Registered Per Share(1)Share Offering Price(1) Fee(2)
- --------------------------------------------------------------------------------------------------Price Fee
------------------- ---------- -------------- ---------------- --------------
Common Stock, without
par value 1,901,472 shares
(originally registered,
includes 99,500 shares
to be reserved for
issuance under stock
option plans) $ 18.39 $34,968,070.08 $9,722
- ---------------------------------------------------------------------------------------------------18.39(1) $34,968,070.08(1) $9,722.00(2)
Common Stock, without
par value 2,428 shares $ 17.34(3) $ 42,101.52(3) $ 11.11(4)
(additional shares
registered)(3)
(1) Estimated solely for the purpose of calculating the registration fee and
based, in accordance with Rule 457(f)(2), upon the book value of the
897,736.20888 outstanding shares of common stock of The Fidelity Deposit
and Discount Bank, par value $1.5625, of $36.78 per share as of September
30, 1999, the latest practicable date prior to the date of filing this
Registration Statement, and estimated based upon the issuance of a maximum
of 1,901,472 shares of Registrant's common stock, without par value, in the
reorganization of The Fidelity Deposit and Discount Bank as a subsidiary of
Registrant. Registrant will issue 2 shares of common stock in exchange for
each share of bank common stock, resulting in the proposed offering price
per share which is half of the $36.78. The 1,901,472 shares include 100,00050,000
shares to be reserved for issuance under the bank's Independent Directors
Stock Option Plan and 49,500 shares under the bank's Stock Incentive Plan,
which Registrant will assume.
(2) Fee paid prior to original filing on November 3, 1999.
(3) Estimated solely for the purpose of calculating the registration fee and
based, in accordance with Rule 457(f)(2), upon the book value of the
900,392.1402 outstanding shares of common stock of The Fidelity Deposit and
Discount Bank, par value $1.5625, of $35.68 per share as of December 31,
1999, the latest practicable date prior to the date of filing this
Pre-Effective Amendment No. 2 to the Registration Statement, and estimated
based upon the issuance of a total maximum of 1,903,900 shares of
Registrant's common stock, without par value, in the reorganization of The
Fidelity Deposit and Discount Bank as a subsidiary of Registrant.
Registrant will issue 2 shares of common stock in exchange for each share
of bank common stock, resulting in the proposed offering price per share
which is half of the $35.68. Registrant initially registered 1,901,472
shares, but due to a dividend on March 10, 2000, by the bank and the
issuance of shares for the reinvestment of dividends under the bank's
Dividend Reinvestment Plan, must register 2,428 additional shares.
(4) Fee paid prior to filing Pre-Effective Amendment No. 2.
The Registrant hereby amends this Registration Statement on such date or dates
as may be necessary to delay its effective date until the Registrant shall file
a further amendment which specifically states that this Registration Statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933, as amended, or until the Registration Statement shall
become effective on such date as the Commission, acting pursuant to such Section
8(a), may determine.
PROXY STATEMENT/PROSPECTUS
FIDELITY D & D BANCORP, INC.
Prospectus for 1,901,4721,903,900 Shares of Common Stock
THE FIDELITY DEPOSIT AND DISCOUNT BANK
Proxy Statement
This document is a PROXY STATEMENT FOR THE ANNUAL MEETING OF SHAREHOLDERS
We provide this proxy statement/prospectus to you in connection with the
solicitation of Fidelity D & D Bancorp, Inc., a
Pennsylvania business corporation andproxies for the proposed holding company for The
Fidelity Deposit and Discount Bank. Fidelity D & D Bancorp proposes to issue
approximately 1,801,472 sharesannual meeting of its common stock to the shareholders of the
bank as part of a reorganization of the bank as the holding company's
wholly-owned subsidiary, and to reserve an additional 100,000 shares for
issuance under stock option plans the holding company will assume from the bank.
The proposed holding company does not have an operating history. We anticipate
that its common stock will trade on a very limited basis in the local
over-the-counter market.
This document is also a proxy statement of The Fidelity
Deposit and Discount Bank, for its Special Meeting of Shareholders to be held on __________,
January ____,Tuesday, May 2, 2000, at ______ ___.m.3 p.m.,
Eastern Standard Time.Time, at the bank's main office. At the meeting, shareholders will vote
on a proposal to approve and adopt the Plan of
Reorganization and Plan of Merger, providing for the reorganization of the bank as the wholly owned
subsidiary of Fidelity D & D Bancorp, Inc. and the automatic
exchange of each whole share of common stock of the bankwill vote to elect 4 Class A
directors for 2 shares of common
stock of the holding company.a 3-year term. The proposed reorganization, the election of
directors, and related matters that shareholders will vote on at the meeting are
described in this document. The bank's common stock trades on the OTC Bulletin
Board under the symbol "FDDB."
In addition to being the bank's proxy statement, this document is the
prospectus of Fidelity D & D Bancorp, Inc., the proposed holding company for the
bank. If the proposed reorganization takes place, Fidelity D & D Bancorp will
issue 2 shares of its common stock for each share of the bank's outstanding
common stock as part of the reorganization. We anticipate that the holding
company's common stock will trade on a very limited basis in the local over-
the-counter market.
The proposed reorganization involves elements of risk, including certainmaterial
anti-takeover strategies, which are described under "Risk Factors" beginning on
page 8.10.
Neither the Securities and Exchange Commission, the Federal Deposit
Insurance Corporation, the Pennsylvania Department of Banking, the Pennsylvania
Securities Commission nor any other state securities commission has approved or
disapproved these securities or determined if this document is truthful or
complete. Any representation to the contrary is a criminal offense.
The shares of Fidelity D & D Bancorp common stock offered in this proxy
statement/ prospectus are not savings accounts, deposits, or other obligations
of a bank or savings association and are not insured by the Federal Deposit
Insurance Corporation or any other governmental agency.agency nor guaranteed by the
bank or the holding company. There can be no assurance that the trading price of
the common stock being offered will not decrease at any time.
The date of this proxy statement/prospectus is January ____,April 7, 2000.
You should rely only on the information contained or referred to in this
document or any supplement. Neither Fidelity D & D Bancorp nor the bank has
authorized anyone else to provide you with different or additional information.
This document does not constitute an offer of securities in any
jurisdiction in which or to any person to whom, it is not permitted. You should
not assume that the information in this document or any supplement is accurate
as of any other date than the date indicated on those documents.
This proxy statement/prospectus does not cover resales of shares of
Fidelity D & D Bancorp common stock after completion of the proposed
reorganization, and no person is authorized to make use of this document in
connection with any resale.
TABLE OF CONTENTS
Table of Contents
Page
----
SUMMARY ............................................................................................1
Basic Information................................................................................1
Address/Telephone Number................................................................1
Type of Organization/Description of Business............................................1Questions and Answers about the Proposal to Form a Bank Holding Company...........................................1
Summary .........................................................................................................3
Proposals for Consideration at the Annual Meeting........................................................3
Proposal to Form a Bank Holding Company..................................................................3
Voting at the Annual Meeting.............................................................................7
General Information......................................................................................8
Summary Financial Information.....................................................................................9
Risk Factors.....................................................................................................10
Per Share Price Information......................................................................................13
General Information about the Special Meeting of The Fidelity Deposit and Discount
Bank and Voting Procedure........................................................................2
Date ...............................................................................2
Time and Place..........................................................................2
Who is entitled to attend and vote at the meeting.......................................2
What will constitute a quorum at the meeting............................................2
How do I vote...........................................................................2
What is the effect if I do not vote.....................................................2
May I change my vote after I have mailed my signed proxy form...........................3
What vote is required to approve each proposal..........................................3
What percentage of the outstanding shares do the directors and
executive officers of the bank hold.....................................................3
Information about the Proposed Transaction.......................................................3
What are you proposing..................................................................3
Why are you forming a bank holding company..............................................4
What will happen to my stock............................................................4
How will the 2-for-1 exchange affect the value of my stock..............................4
Will I have to turn in my stock certificates............................................4
Does formation of a holding company affect my federal income taxes......................5
Will the management of the bank change after the reorganization.........................5
What will happen to my stock options....................................................5
What will happen to the bank's dividend reinvestment plan...............................5
If the shareholders approve the reorganization, when will it occur......................5
How will you treat the reorganization for accounting purposes...........................6
Does the proposed transaction carry risks for shareholders..............................6
What rights will I have under Pennsylvania law if I vote against the
Plan of Reorganization and Plan of Merger...............................................7
RISK FACTORS.........................................................................................8
Risks Relating to the Reorganization.............................................................8
The holding company's articles of incorporation and by-laws
have anti-takeover defenses that could delay or prevent an
acquisition and could adversely affect the price of the common stock....................8
Certain strong anti-takeover defenses of the Pennsylvania Business
Corporation Law will also apply to the holding company and could
delay or prevent an acquisition........................................................12
The holding company's issuance of additional shares of common
stock or preferred stock could dilute or depress the value of your shares
of the holding company's common stock..................................................12
The issuance of preferred stock could limit the holding company's
ability to pay dividends to common stock shareholders..................................13
i
Upon the dissolution or winding up of the holding company, the claims
of others, including the holders of preferred stock, may limit your ability
recover your investment in the holding company.........................................13
Reorganizing the bank into a holding company structure will add an
additional layer of government regulation which will result in additional costs........13
Risks Shared by the Bank and the Holding Company................................................14
We may be unable to retain or replace members of the board of directors or
senior management or to hire and retain other skilled personnel........................14
Our future success is dependent on our ability to compete effectively in
the highly competitive banking industry................................................14
The banking industry is highly susceptible to economic change..........................14
Increases in interest rates could make us less profitable..............................15
Our allowance for loan losses may prove to be insufficient to absorb
potential losses in our loan portfolio.................................................15
Changes in real estate values may adversely impact our loans that are
secured by real estate.................................................................16
Federal and state governmental entities extensively regulate and
supervise the banking industry.........................................................16
Changes in the law and regulations may affect our ability to do business,
our costs, and our profits.............................................................16
Regulatory restrictions on dividend payments from the bank may affect
our ability to pay dividends to our shareholders.......................................17
You will have a minimal influence on shareholder decisions.............................17
The market for the bank's common stock is not active...................................18
Our computer systems, and the systems of our customers and suppliers,
may not properly process date information after December 31, 1999,
which could disrupt our business and increase our costs................................18
The by-laws of the holding company provide for the indemnification
of directors, officers and employees and limit the liability of directors..............19
The forward-looking statements we make in this document are
inherently uncertain...................................................................19
SUMMARY FINANCIAL INFORMATION.......................................................................20
PER SHARE PRICE INFORMATION.........................................................................21
INFORMATION ABOUT THE SPECIAL MEETING...............................................................22Annual Meeting.....................................................................13
Time and Place of Special Meeting...............................................................22Annual Meeting........................................................................13
Purpose of the Special Meeting..................................................................22Annual Meeting...........................................................................13
Voting Rights,Procedures................................................................................................14
Voting Securities and Record Date.......................................................................14
Quorum and Vote Required.........................................................22...............................................................................................14
Votes Required for Approval.............................................................................14
Solicitation of Proxies.........................................................................23Proxies.................................................................................15
Voting by Proxy and Revocation of Proxies.......................................................23Proxies...............................................................16
Information about Beneficial Ownership of the Bank's Common Stock by SignificantPrincipal
Shareholders Directors and Executive Officers......................................24
INFORMATION ABOUT THE PROPOSED REORGANIZATION.......................................................27Management.............................................................................17
Proposal No. 1: Reorganization of the Fidelity Deposit and Discount Bank as the
Subsidiary of Fidelity D & D Bancorp, Inc........................................................................19
Description of Reorganization Procedure.........................................................27Procedure.................................................................19
Amendment or Termination of the Plan of Reorganization and Plan of Merger.......................27
ii
Merger...............................20
Exchange of Stock, 2-for-1 Exchange Ratio.......................................................28
Stock Options and Stock Option Plans............................................................28
Dividend Reinvestment Plan......................................................................29Ratio...............................................................20
Exchange of Stock Certificates..................................................................29Certificates..........................................................................21
Failure to Surrender Stock Certificates.........................................................29Certificates.................................................................21
Reasons for the Proposed Reorganization.........................................................30
Financing..............................................................................30
Authorized Capital............................................................30
Debt Financing................................................................32
Trust Preferred Stock.........................................................32
Non-Banking Activities.................................................................32
Protection Against an Unfriendly Takeover..............................................32
Flexibility in Responding to Changes in Law............................................33
Bank Acquisitions......................................................................33Reorganization.................................................................21
Dissenters' Rights of Appraisal.................................................................33
General ..............................................................................33
Fair Value.............................................................................34
Notice of Intention to Dissent.........................................................34
Notice to Demand Payment...............................................................34
Failure to Comply with Notice to Demand Payment, etc...................................34
Payment of Fair Value of Shares........................................................34
Estimate by Dissenter of Fair Value of Shares..........................................35
Valuation Proceeding...................................................................35
Costs and Expenses.....................................................................35Appraisal.........................................................................24
Material Conditions.............................................................................35Conditions.....................................................................................27
Closing Date....................................................................................37Date............................................................................................28
Tax Consequences................................................................................37Consequences........................................................................................28
Accounting Treatment............................................................................38Treatment....................................................................................29
Trading and Resale of Holding Company Common Stock..............................................38
DESCRIPTION OF THE HOLDING COMPANY..................................................................40Stock......................................................30
Stock Options and Stock Option Plans....................................................................31
i
Dividend Reinvestment Plan..............................................................................32
Financial Information about the Reorganization..........................................................32
Description of the Holding Company...............................................................................34
Organization and Description of Business........................................................40
Properties......................................................................................40
Management......................................................................................40Business................................................................34
Properties..............................................................................................34
Management..............................................................................................35
Executive and Director Compensation.............................................................41Compensation.....................................................................35
Information about Beneficial Ownership of Significant Shareholders,
Directors and Executive Officers................................................................41Officers...................................................................35
Certain Relationships and Related Transactions..................................................41Transactions with Directors and Officers......................................36
Directors' and Officers' Indemnification and Limits on Liability................................41Liability........................................36
Supervision and Regulation of the Holding Company...............................................42
The Securities ActCompany.......................................................36
Permitted Activities....................................................................................39
Permitted Activities for Financial Holding Companies....................................................43
Proposal No. 2: To Fix the Number of 1933 - The Offer and SaleDirectors to Be Elected....................................................44
Proposal No. 3: Election of Securities..........................42
The Securities Exchange Act of 1934 - Periodic Reporting Requirements..................42
The Bank Holding Company Act of 1956 - Supervision by the Federal
Reserve Board..........................................................................42
General Supervision by the Federal Reserve Board..............................43
Restrictions on Acquiring Control of other Banks and Companies................43
Anti-Tie-In Provisions........................................................43
iii
Restrictions on Extensions of Credit by BanksFour Directors to their
Holding Companies.............................................................44
Risk-Based Capital Guidelines.................................................44
Capital Leverage Ratio Requirements...........................................44
Restrictions on Control Changes...............................................44
The Pennsylvania Banking Code of 1965 - Supervision by the
Pennsylvania Department of Banking.....................................................44
The Riegle-Neal Interstate Banking and Branching Efficiency
Act of 1994 - Interstate Banking.......................................................45
Permitted Activities............................................................................45
DESCRIPTION OF THE BANK.............................................................................49
History .......................................................................................49
Offices .......................................................................................49Serve a Three-year Term...........................................44
Description of Business.........................................................................49
Properties......................................................................................52the Bank..........................................................................................45
History ...............................................................................................45
Offices ...............................................................................................45
Description of Business.................................................................................46
Properties..............................................................................................48
Supervision and Regulation of the Bank..........................................................53
Pennsylvania Banking Law...............................................................53
Federal Banking Law....................................................................54
Capital Adequacy Guidelines...................................................54
FDIC Insurance Assessments....................................................55
Meeting the NeedsBank..................................................................49
Legal Proceedings.......................................................................................54
Directors...............................................................................................55
Board Meetings, Compensation of Directors...............................................................57
Nominating Directors....................................................................................57
Committees of the Community............................................56
Truth-In-Savings..............................................................56
Restrictions on Control Changes...............................................57
Suspicious Activities Reports.................................................57
Interstate Banking............................................................57
Securities Regulation..................................................................57
New Legislation........................................................................57
Legal Proceedings...............................................................................57
Directors.......................................................................................58Board of Directors....................................................................58
Principal Officers..............................................................................59Officers......................................................................................60
Executive Compensation..........................................................................59Compensation..................................................................................61
Stock Option Awards.............................................................................60Grants in Fiscal Year 1999.................................................................62
Exercises of Stock Options in Fiscal Year 1999 and Fiscal Year-end Option Values........................63
401(k) Profit Sharing Plan..............................................................................63
Compensation of Directors.......................................................................61Committee Report on Executive Compensation.................................................64
Compensation Committee Interlocks and Insider Participation.............................................65
Shareholder Performance Graph...........................................................................66
Section 16(a) Beneficial Ownership Reporting Compliance.................................................66
Certain Relationships between OfficerBetween Officers and Directors and Certain Transactions
between OfficerBetween Officers and Directors and the Bank......................................................61
Family Relationships...................................................................61
IndebtednessBank........................................................67
Description of Management.............................................................61
FINANCIAL INFORMATION ABOUT THE REORGANIZATION......................................................62
Capitalization..................................................................................62
Other Financial Information.....................................................................64
DESCRIPTION OF THE BANK'S CAPITAL SECURITIES........................................................65the Bank's Capital Securities.....................................................................68
Common Stock....................................................................................65
Voting Rights..........................................................................65
Preemptive Rights......................................................................65
Liquidation............................................................................65Stock............................................................................................68
Comparative Market Prices...............................................................................69
ivii
Liability for Further Assessments......................................................65
Sinking Fund Provision.................................................................65
Redemption Provision...................................................................65
Capital Requirements under State Banking Law...........................................65
Dividends..............................................................................65
Comparative Market Prices.......................................................................66
Trade Price High's and Low's....................................................................67Low's............................................................................70
Stock Option Plans..............................................................................67
1998 Independent Directors Stock Option Plan...........................................67
1998 Stock Incentive Plan..............................................................69Plans......................................................................................70
Dividend Reinvestment Plan......................................................................71
DESCRIPTION OF THE HOLDING COMPANY'S CAPITAL SECURITIES.............................................72Plan..............................................................................74
Description of the Holding Company's Capital Securities..........................................................75
Common Stock....................................................................................72
Voting Rights..........................................................................72
Preemptive Rights......................................................................72
Liquidation............................................................................72
Liability for Further Assessments......................................................72
Sinking Fund Provision.................................................................72
Redemption or Conversion Rights........................................................72
Dividends..............................................................................72
Stock Option Plans.....................................................................73
Dividend Reinvestment Plan.............................................................73Stock............................................................................................75
Preferred Stock.................................................................................73
Voting Rights..........................................................................73
Preemptive Rights......................................................................73
Liquidation............................................................................73
Liability for Further Assessments......................................................74
Sinking Fund Provision.................................................................74
Redemption or Conversion Rights........................................................74
Dividends..............................................................................74Stock.........................................................................................76
Issuance of Additional Securities...............................................................74Securities.......................................................................77
Legal Opinion...................................................................................74Opinion...........................................................................................77
Anti-Takeover Provisions in Articles and By-laws................................................75
Authorized Capital.....................................................................75
Classified Board.......................................................................75
No Cumulative Voting...................................................................75
Supermajority Vote for Approval of Extraordinary Transactions..........................76
Authorization to Consider Various Factors in Tender Offers.............................76
Supermajority Vote for Amendment of By-laws............................................76
Supermajority Vote for Amendment of Certain Articles...................................77By-laws........................................................77
Anti-takeover Provisions Applicable to Registered Corporations..................................77
COMPARISON OF SHAREHOLDER RIGHTS....................................................................82
v
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATION............................................................................85
Management's Discussion and AnalysisCorporations..........................................80
Comparison of Financial Condition
And Results of Operation and Quantitative and Qualitative Disclosures
about Market Risk as of December 31, 1998.......................................................86Shareholder Rights.................................................................................84
Management's Discussion and Analysis of Financial Condition and Results of Operation
asand Quantitative and Qualitative Disclosures about Market Risk...................................................87
Proposal No. 4: Ratification of September 30, 1999..............................................105
INDEPENDENT AUDITORS...............................................................................112
SHAREHOLDER PROPOSALS..............................................................................112
OTHER MATTERS......................................................................................112Independent Auditors...........................................................111
Shareholder Proposals...........................................................................................111
Other Matters...................................................................................................112
Where You Can Find More Information................................................................113
The Holding Company's Registration Statement...................................................113
Prior Annual Reports SentInformation.............................................................................113
Index to ShareholdersFinancial Statements...................................................................................F-1
Annex A Plan of Reorganization and Information Filed with the FDIC..................113
Periodic ReportsPlan of Merger.
ANNEX B Amended and Information Filed with the SEC Following the Reorganization...............114
INDEX TO FINANCIAL STATEMENTS......................................................................F-1Restated Articles of Incorporation of Fidelity D & D Bancorp, Inc.
ANNEX C By-Laws of Fidelity D & D Bancorp, Inc.
ANNEX D Statutes Regarding Dissenters' Rights.
ANNEX A PLAN OF REORGANIZATION AMONG THE FIDELITY DEPOSIT AND
DISCOUNT BANK, THE FIDELITY DEPOSIT AND DISCOUNT INTERIM BANK,
AND FIDELITY D & D BANCORP, INC., WITH EXHIBIT A, PLAN OF
MERGER BETWEEN THE FIDELITY DEPOSIT AND DISCOUNT BANK AND THE
FIDELITY DEPOSIT AND DISCOUNT INTERIM BANK
ANNEX B AMENDED AND RESTATED ARTICLES OF INCORPORATION OF
FIDELITY D & D BANCORP, INC.
ANNEX C BY-LAWS OF FIDELITY D & D BANCORP, INC.
ANNEX D STATUTES REGARDING DISSENTING SHAREHOLDERS' RIGHTS
viiii
Notice of Anti-Takeover Provisions
Fidelity D & D Bancorp, Inc.'s articles of incorporation and by-laws
include certain provisions that may be considered "anti-takeover"anti-takeover in nature. They may
have the effect of discouraging or making the acquisition of control over the
holding company more difficult by means of an unsolicited tender or exchange
offer, proxy contest or similar transaction. The anti-takeover provisions in the
holding company's articles of incorporation include the following:
o aA provision that provides for substantial authorized but unissued
capital stock, including both common stock and preferred stock,stock;
o aA provision that denies shareholderseliminates the right of shareholders to cumulate their
votes in the election of directors,directors;
o aA provision that establishes broad criteria to be applied by the board
of directors in evaluating an acquisition proposal,proposal;
o aA supermajority provision that requires greater than a majority vote to
approve a merger or other extraordinary corporate transaction, unless
approved by a supermajority vote of the directors.directors;
o theThe absence of a provision for shareholders' preemptive rights to
subscribe to purchase additional shares of stock on a pro rata basis,basis;
and
o aA supermajority provision that requires greater than a majority vote to
amend certainsome of the provisions of our articles of incorporation, unless
approved by a supermajority vote of the directors.
The provisions of the holding company's by-laws that may be considered
anti-takeover in nature include the following:
o aA provision that establishes a classified board of directors,directors; and
o aA supermajority provision that requires greater than a majority vote in
order to amend the by-laws.
The overall effect of these provisions may result in the entrenchment of
current management by enabling it to retain its current position and placing it in a
better position to resist changes that shareholders may want to make if
dissatisfied with the conduct of our management and business, regardless of
whether these changes are desired by or are beneficial to a majority of the
shareholders. You may determine that these provisions are not in your best
interest inasmuch asbecause they may substantially limit your voting power.
As a Pennsylvania business corporation, we are also subject to the
Pennsylvania Business Corporation Law of 1988, as amended, which includes provisions
applicable to us that may have similar effects. As stated above,
these provisions may have the effect of entrenching management against the
wishes of the shareholders. See "Risk Factors - Risks Relating to the
Reorganization"Factors" and
"Description of the Holding Company's Capital Securities -- Anti-Takeover
Provisions in Articles and By-laws, Anti-Takeover Provisions Applicable to
Registered Corporations."
viiiv
SUMMARY
Questions and Answers about the Proposal
to Form a Bank Holding Company
Q: What are you proposing?
A: We are proposing that The Fidelity Deposit and Discount Bank reorganize as
the subsidiary of a bank holding company. We established Fidelity D & D
Bancorp, Inc. to become the bank holding company for The Fidelity Deposit
and Discount Bank.
Q: How will the reorganization be effected?
A: We formed The Fidelity Deposit and Discount Interim Bank as a subsidiary of
Fidelity D & D Bancorp, Inc. The interim bank will merge into The Fidelity
Deposit and Discount Bank. At the time of the merger, shareholders of the
bank will receive shares of common stock of the holding company in exchange
for their shares of the bank. The bank, the interim bank and the holding
company have entered into a plan of reorganization to effect these
transactions if shareholders approve.
Q: What are you asking me to do?
A: Please indicate on your proxy form how you want your shares to be voted at
the annual meeting. On the proxy form, you may mark your selection on how
your shares should be voted on various matters, including the proposal to
adopt the plan of reorganization and related plan of merger and the
election of directors. This will ensure your proper representation at the
annual meeting of shareholders to be held on May 2, 2000.
Your vote is very important. Approval of the reorganization requires the
affirmative vote of 662/3% of the outstanding shares of common stock of the
bank.
Q: If my shares are held in street name by my broker, will my broker vote my
shares for me?
A: Your broker will vote your shares only if you provide instructions on how
to vote. You should follow the directions provided by your broker.
Q: Can I change my vote after I have mailed my signed proxy?
A: Yes. There are 3 ways for you to revoke your proxy and change your vote.
First, you may give notice to the Secretary of the bank that you would like
to revoke your proxy. Second, you may complete and submit a new proxy with
a later date to the Secretary of the bank. Third, you may vote in person at
the meeting after giving notice to the Secretary.
1
Q: When do you expect the reorganization to occur?
A: We are working toward completing the bank holding company formation as soon
as possible after shareholders approve the reorganization. In addition to
shareholders' approval, we must also obtain regulatory approvals. We expect
to complete the reorganization by June 30, 2000.
Q: Whom may I contact with any questions I may have?
A: Michael F. Marranca, President
The Fidelity Deposit and Discount Bank
Blakely and Drinker Streets
Dunmore, Pennsylvania 18512
Telephone (570) 342-8281
2
SUMMARY
The following questions and answers aresummary is designed to help you understand various matters
relating to the reorganization proposal. These questions and answers and the rest of theannual meeting. This summary only highlighthighlights information in the
proxy statement/prospectus. The remainder of the proxy statement/prospectus and
attached exhibitsannexes contain more detailed information. We urge you to read the entire proxy
statement/prospectus and exhibitsannexes to fully understand the reorganization.
Basic Information
Address/Telephone Number:
The mailingproposed reorganization
and physical addressother matters.
You should rely only on the information contained or referred to in this
document or any supplement. Neither Fidelity D & D Bancorp nor the bank has
authorized anyone else to provide you with different or additional information.
Proposals for Consideration at the Annual Meeting
At the annual meeting, shareholders will be asked to vote on the following
proposals by the bank's Board of Directors:
o To approve and adopt the plan of reorganization and related plan of
merger providing for the reorganization of the principal executive officesbank as the wholly
owned subsidiary of Fidelity D & D Bancorp, Inc.
ando To fix the number of Class A directors of the bank to be elected at 4;
o To elect 4 Class A directors to serve on the board of directors of The
Fidelity Deposit and Discount Bank is:
Blakelyfor a 3-year term and Drinker Streets
Dunmore,until their
successors have been duly elected and qualified;
o To ratify the selection of Parente Randolph, P.C., Certified Public
Accountants, of Wilkes-Barre, Pennsylvania, 18512
The telephone number of Fidelity D & D Bancorp andas the bank is (570)
342-8281. In addition, the bank maintains a Web site at www.the-fidelity.com.
Type of Organization/Description of Business:
Fidelity D & D Bancorp is a Pennsylvania business corporation. The bank
filed the holding company's articles of incorporation with the Pennsylvania
Corporation Bureau on August 10, 1999, to create a one-bank holding company for
the bank. The same persons who serve on the board of directorsindependent auditors
of the bank serve
asfor the holding company's directors. The holding company has no operating
history.
The bank isyear ending December 31, 2000;
o If necessary, to adjourn the annual meeting to a Pennsylvania-chartered banklater date to permit
further solicitation of proxies if there are insufficient votes at the
time of the meeting to constitute a quorum or to approve the plan of
reorganization and trust company. The bank
engages in a full service commercial and consumer banking business, including:
o the acceptanceplan of time and demand deposits;
o the making of secured and unsecured commercial and consumer loans;merger; and
o To transact other business as may properly come before the offeringannual
meeting and any adjournment of trust services.
The bank's primary service area is locatedthe meeting.
Proposal to Form a Bank Holding Company
We are asking you to approve a plan of reorganization and related plan of
merger that would result in Lackawanna and Luzerne Counties,
Pennsylvania.
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Information about the Special Meetingreorganization of The Fidelity Deposit and
Discount Bank
and Voting Procedure
Date:
January ____, 2000
Time and Place:
______ ___.m., Eastern Standard Time, at the main office of The Fidelity
Deposit and Discount Bank, Blakely and Drinker Streets, Dunmore, Pennsylvania
18512.
Who is entitled to attend and vote at the meeting?
Holding the bank's common stock at the close of business on December ___,
1999, the record date, entitles the holder to attend and vote at the meeting. On
the record date, approximately 897,736 shares of the bank's common stock were
outstanding. Each share of the bank's common stock entitles its holder to 1 vote
with respect to all matters presented at the meeting.
What will constitute a quorum at the meeting?
Each matter to be acted upon at the meeting requires the presence of a
quorum. The presence, in person or by proxy, of shareholders entitled to cast at
least a majority of the votes that all shareholders are entitled to cast
constitutes a quorum.
How do I vote?
After carefully reading and considering the information contained in this
document, please fill out and sign the enclosed proxy form. Then mail the proxy
to the bank in the enclosed prepaid return envelope as soon as possible so that
your shares will be represented at the special meeting. Your proxy will instruct
the persons named on the form as proxy holders to vote your shares at the
meeting as you direct on the proxy form. The board of directors recommends that
you vote for the reorganization proposal.
What is the effect if I do not vote?
A bank shareholder who abstains from voting is not included in the
affirmative vote necessary to approve and adopt the Plan of Reorganization and
Plan of Merger. This has the effect of voting against a matter, for purposes of
whether or not shareholders approve a proposal. If you abstain from voting and
do not follow the requirements under Pennsylvania law for dissenters' rights of
appraisal, and if at least 2/3 of the outstanding shares of bank common stock
vote in favor of the reorganization, you will automatically, without any action
on your part, receive 2 shares of holding company common stock in exchange for
each share of bank common stock you hold.
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May I change my vote after I have mailed my signed proxy form?
You may change your vote at any time before your shares are voted at the
meeting by
o giving notice of revocation to John F. Glinsky, Jr., Secretary of the
bank, Blakely and Drinker Streets, Dunmore, Pennsylvania 18512;
o delivering a properly executed proxy form bearing a later date to John
F. Glinsky, Jr.; or
o by voting in person after giving notice to John F. Glinsky, Jr.
Your attendance at the special meeting will not by itself revoke your
proxy.
What vote is required to approve each proposal?
Approval and adoption of the Plan of Reorganization and Plan of Merger
requires the affirmative vote of the holders of at least 2/3 of the outstanding
shares of the bank's common stock. Approval of the proposal to adjourn the
meeting to a later date if necessary requires the affirmative vote of a majority
of the shares present and entitled to vote at the meeting, in person or by
proxy.
What percentage of the outstanding shares do the directors and executive
officers of the bank hold?
As of December ____, 1999, the bank's directors, executive officers and
their affiliates own 19.77% of the bank's outstanding common stock. Their shares
represent about 29.6% of the affirmative votes needed to approve the
reorganization. We anticipate that these shares will be voted for the
reorganization.
Information about the Proposed Transaction
What are you proposing?
We are asking you to approve a Plan of Reorganization and related Plan of
Merger that would result in the reorganization of the bank into a holding company structure. These agreements provide for the
reorganization of the bank as the wholly owned subsidiary of Fidelity D & D
Bancorp, Inc.
The
reorganization will occur through the merger of the bank with The Fidelity
Deposit and Discount Interim Bank, a Pennsylvania chartered banking institution
and subsidiary of Fidelity D & D Bancorp. The bank is organizing the interim
bank to facilitate the proposed reorganization. The bank will be the surviving
bank after its merger into the interim bank and will be a wholly owned
subsidiary of the holding company, which will own 100% of its shares. Upon
completion of the reorganization, each whole share of common stock of the bank
will automatically represent 2 shares of common stock of Fidelity D & D Bancorp.
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We also ask you to approveReasons for Forming a proposal to adjourn the special meeting to a
later date, if necessary, to permit further solicitation of proxies if there are
not sufficient votes at the time of the meeting to constitute a quorum or to
approve the reorganization.
Why are you forming a bank holding company?Bank Holding Company
In our opinion, the reorganization of the bank into a holding company
structure will provide greater flexibility in:
o financing;Financing,
o engagingEngaging in non-banking activities;activities,
o protectingProtecting against an unfriendly takeover;takeover, and
o respondingResponding to changes in law.
What will happen to my stock?2-for-1 Exchange of Stock
Upon the completion of the Plan of Reorganization and Plan of Merger,proposed reorganization, all shareholders of the
bank, except those who exercise dissenting shareholders' rights, will become
shareholders of Fidelity D & D Bancorpthe holding company and will automatically own 2 shares of the
holding company's common stock for each share of common stock of the bank owned prior to the reorganization. 2 shares of common stock of the holding
company will automatically replace each share of the bank's common stock.they
owned. The holding company will not issue fractional shares in connection with
the reorganization. Instead, the holding company will pay the holders of
fractional shares of the holding company's common stock, resulting from the 2-for-1
exchange,interests the fair market value of their fractional interests in
cash.
How will the 2-for-1 exchange affect the value of my stock?Effect on Stock Value
We cannot predict changes in market value. However, we anticipate that the
2-for-1 exchange ratio will have the same effect as a 2-for-1 stock split of the
bank's common stock. Immediately after the reorganization, the market value per
share of the holding company's common stock willis likely to be about 1/2 of the
market value per share of the bank's common stock immediately prior to the
reorganization. As a result, the total market value of your shares immediately
after the reorganization should remain about the same as before the
reorganization.
Reasons for the 2-for 1-Exchange
We have chosen the 2-for-1 exchange ratio to create a more liquid market
for the holding company's common stock. We believe that the exchange ratio will
make the holding company's common stock more affordable to persons in the
communities in which the bank does business and will enhance the trading volume
and marketability of the shares. The 2-for-1 exchange ratio also provides the
holding company with more flexibility to issue additional shares of common stock
to raise additional capital, because the market value per share will be less.
Will I have to turn in my stock certificates?
You must exchange your stock certificates, bearing the name "The Fidelity
Deposit and Discount Bank," for new stock certificates, bearing the name
"Fidelity D & D Bancorp, Inc." At its option, the holding company may withhold
4
dividends payable after the reorganization to those who have received
notification to exchange their stock certificates but have not done so within a
reasonable period of time. The holding company will pay any dividends withheld,
without interest, upon the proper surrender of the bank stock certificates.
You must surrender your Bank stock certificates within 2 years of receiving
notification to exchange the certificates. In the event that you do not
surrender your stock certificates within that time, the holding company may sell
the shares of holding company common stockFederal Income Tax Consequences
We anticipate that the holding company would
otherwise have issued you. The holding company will hold the net proceeds of the
sale, together with any cash to which you are entitled instead of the issuance
of a fractional share and any previously accrued and unpaid dividends, in a
non-interest bearing account for your benefit. After this sale, your only right
would be the right to collect the net sales proceeds, cash and accumulated
dividends held for your account. Generally, the holding company will pay you the
net proceeds, cash and accumulated dividends, without interest, only upon the
proper surrender of the bank stock certificates.
Does formation of a holding company affect my federal income taxes?
The proposed reorganization will bequalify as a tax-free
reorganization under federal tax laws. You will not recognize any gain or loss
for federal income tax purposes upon your receipt of Fidelity D & D Bancorp
common stock in exchange for your shares of the bank's common stock. However,
you will recognize a gain or loss upon the receipt of cash instead of holding
company stock if you are a dissenting shareholder or upon the receipt of cash
for any fractional interests you acquire in the bank's common stock. You should consult your
own tax advisors concerning the specific tax consequences of the reorganization
to you, including any state or local tax consequences. WillThe holding company and
the managementbank have obtained a tax opinion on this matter from special legal counsel,
described in detail on page 28.
Management of the bank change after the reorganization?
The managementHolding Company
Management of the bank will not change as a result of the reorganization.
The current members of the bank's board of directors were elected to serve as
the board of directors of the holding company until its first annual meeting of
shareholders.shareholders in 2001. The executive officers of the holding company, including
the President, are also executive officers of the bank.
What will happen to my stock options?
After the reorganization, the holding company will assume the bank's
obligations under any outstanding stock options and stock option plans. We will
adjust these plans and outstanding stock options under the plans to account for
the 2-for-1 exchange of Fidelity D & D Bancorp common stock for bank common
stock.
What will happen4
Risks Related to the bank's dividend reinvestment plan?
The bank's dividend reinvestment plan will terminate upon completionFormation of the
reorganization. After the proposed reorganization, we expect that Fidelity D & D
Bancorp will establish a dividend reinvestment plan with substantially the same
terms as the bank's plan.
If the shareholders approve the reorganization, when will it occur?
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We would like to complete the reorganization as soon as possible after the
special meeting. In order to complete the reorganization, the bank, The Fidelity
Deposit and Discount Interim Bank and the holding company must obtain certain
regulatory approvals from the Pennsylvania Department for Banking, the FDIC, and
the Board of Governors of the Federal Reserve System. If the necessary approvals
are issued in time, the bank and holding company anticipate completing the
reorganization immediately after obtaining shareholder approval, before the end
of the 1999 fiscal year.
How will you treat the reorganization for accounting purposes?
We intend to account for the reorganization as a pooling-of-interests. The
pooling-of- interest method of accounting for a business combination reflects
the union of ownership between the entities involved. Because Fidelity D & D
Bancorp will be a one-bank holding company, immediately after the
reorganization, its consolidated financial statements will be substantially the
same to the bank's financial statements prior to the reorganization. The holding
company's parent-only financial statements will reflect its investment in 100%
of the shares of the bank's common stock.
Does the proposed transaction carry risks for shareholders?Holding Company
The proposed transaction will create certain new risks for shareholders resulting
from "anti-takeover" strategiesanti-takeover provisions contained in the holding company's articles of
incorporation and by-laws and in applicable provisions of the Pennsylvania Business Corporation Law of
1988. The general effect of these anti-takeover strategies may be to delay or
prevent a merger or acquisition that a majority of the shareholders might view
to be in their best interests. For
example, shareholders might favor an offer that includedPlease refer to "Risk Factors" on page 10 for a
substantial premium
over the market pricedescription of the holding company's common stock. These provisions
may also assistanti-takeover and other risks associated with the proposed
reorganization.
New Limitations on Shareholders' Rights
Your rights as a shareholder will change in several key ways after the
reorganization. As noted above, the holding company's current board of directors in retaining
its position and in resisting changes that the shareholders may desire.
For example, the following anti-takeover provisions of the articles of incorporation
and by-laws, and the Pennsylvania Business Corporation Law, contain
anti-takeover provisions that do not currently exist at the bank level. To the
extent these provisions make it more difficult for an outside party to acquire
control of the holding company are uniquebank, they also tend to the holding
company and represent changes from the bank's articles of incorporation and
by-laws:limit shareholders' rights in general.
The provisions changing or limiting your rights as a shareholder include:
o the authorization of 10 million shares of common stock, and the
authorization of 5 million shares of preferred stock all of which may
be issued without shareholder approval,
o theThe elimination of cumulative votingthe right to cumulate your votes in the election of
directors, resulting in the ability of the holders of a majority of
outstanding shares to elect all members of the Board of Directors;
o The authority of the board of directors to issue preferred stock and
determine the rights of such stock, without prior shareholder approval.
The issuance of preferred stock could affect the holding company's
ability to pay dividends to common stock shareholders;
o theThe requirement that holders75%, instead of at least 75%a majority, of the outstanding
shares entitled to vote approve an amendment to the holding company's
by-laws;
o The requirement that at least 75% of outstanding shares entitled to
vote, instead of two-thirds, approve any merger, consolidation or other
extraordinary corporate
transaction, unless at least 80% of all of the members of the board of directors has
approved the transaction. (Then the transaction must be
approved by only 51%transaction;
o The requirement that 75%, instead of a majority, of the holders of outstanding
shares entitled to vote.)
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In additionvote approve an amendment to delaying or preventing an acquisition, the issuance of a
substantial number of additional shares could dilute prior shareholders' value.
Also, the issuance of preferred shares could depress the pricesome of the common
stock.
Additionally, investmentprovisions
in the common stockholding company's articles of incorporation;
o The elimination of the holding company
involves a degreeability of risk, similarshareholders to propose amendments to
the riskarticles of investmentincorporation; and
o The elimination of dissenters' rights of appraisal in the common
stocktransfers of
the bank. The FDIC will not insure investments in the common stockcorporate assets.
Dissenters' Rights of the holding company. Funds invested in common stock will not earn interest.
Intense competition, government regulation, and economic uncertainties result in
a degree of risk for any investment in the common stock of the holding company.
What rights will I have under Pennsylvania law if I vote against the Plan of
Reorganization and Plan of Merger?Appraisal
You will be entitled to receive cash payment of the fair value of your
shares if the reorganization is completed if you:
o doDo not vote in favor of the Planplan of Reorganizationreorganization and Planplan of Merger;merger;
and
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o if you complyComply with the statutory requirements of Pennsylvania law concerning
dissenters' rights of appraisal.
To be eligible to demand payment for your shares as a dissenter, you must
file with the bank, prior to the vote on the proposal, a written notice of
intention to demand payment for the fair value of your shares if the
reorganization is completed. Merely voting against the Plan of Reorganization
and Plan of Merger at the special meetingreorganization will not
perfectentitle a shareholder's
dissenter's rights. Ifshareholder to cash payment for his or her shares. Please see
"Proposal No. 1: Reorganization of The Fidelity Deposit and Discount Bank as the
reorganization is approved,Subsidiary of Fidelity D & D Bancorp - Dissenters' Rights of Appraisal" on page
24 for a full discussion of the bank will then mailstatutory requirements you must follow to claim
dissenters' rights of appraisal.
Please also refer to "Voting Procedures" for information about how to vote
on the reorganization. In particular, you may find the information on page 16,
about how to revoke your proxy, useful if you decide that you wish to claim
dissenters' rights of appraisal but have already executed a further notice to all dissenters who gave due notice and who did not voteproxy marked in
favor of the reorganization. For information about the number of shares owned by
management, which are likely to be voted in favor of the reorganization, please
refer to "Information about Beneficial Ownership of the Bank's Common Stock by
Principal Shareholders and Management." This further noticeinformation may help give you an
indication as to the likelihood that the reorganization proposal will provide instructionsbe
approved.
Stock Certificate Exchange
You must exchange your stock certificates, bearing the name "The Fidelity
Deposit and Discount Bank," for new stock certificates, bearing the name
"Fidelity D & D Bancorp, Inc." At its option, the holding company may withhold
dividends payable after the reorganization to those who have received
notification to exchange their stock certificates but have not done so. The
holding company will pay any dividends withheld, without interest, upon the
proper surrender of the bank stock certificates.
Holding Company's Assumption of Stock Options
Your stock options will essentially not change as a result of the
reorganization. After the reorganization, the holding company will assume the
bank's obligations under any outstanding stock options and stock option plans.
We will adjust these plans and outstanding stock options under the plans to
account for the 2-for-1 exchange of Fidelity D & D Bancorp common stock for bank
common stock.
Time Frame for Completion of the Holding Company Formation
We would like to complete the reorganization as soon as possible after the
annual meeting. In order to complete the reorganization, the bank, the interim
bank and the holding company must obtain regulatory approvals from the
Pennsylvania Department of Banking, the Board of Governors of the Federal
Reserve System and the Federal Deposit Insurance Corporation. The bank and
holding company have received all necessary regulatory approvals, except for the
approval of the FDIC for the merger of the interim bank into the bank. That
application is pending. If all necessary approvals are issued in time, we
anticipate completing the reorganization immediately after obtaining shareholder
approval, by June 30, 2000.
6
VOTING AT THE ANNUAL MEETING
Date, Time and Place of the Annual Meeting
Tuesday, May 2, 2000, 3:00 p.m., Eastern Time, at the main office of The
Fidelity Deposit and Discount Bank, Blakely and Drinker Streets, Dunmore,
Pennsylvania 18512.
Record Date
Holding the bank's common stock at the close of business on howMarch 24, 2000,
the record date, entitles the holder to proceed further.attend and vote at the meeting. On the
record date, approximately 902,200 shares of the bank's common stock were
outstanding. Each share of the bank's common stock entitles its holder to one
vote on all matters presented at the meeting.
Voting Methods
There are two methods. You may vote by completing and mailing the enclosed
proxy form to the bank or by attending the annual meeting and voting in person.
If you vote by proxy but wish to change your vote prior to the annual meeting,
you may do so by following the procedure described on page 16.
Proxy Holder's Discretionary Authority
If you sign your proxy but do not make any selections, you give
discretionary authority to the proxy holders to vote on the proposals at the
meeting. Also, every proxy gives the holder discretionary authority to vote on
other matters that may arise at the meeting of which management is not currently
aware. However, the proxy holders will not vote any proxy that withholds
authority or that is voted against the reorganization in favor of any
adjournment of the meeting.
Confidentiality
Yes. Only the judges of election and the proxy holders will have access to
your proxy.
Quorum
Each matter to be acted upon at the meeting requires the presence of a
quorum. As of March 24, 2000, approximately 902,200 shares of common stock were
issued and outstanding. The holders of a majority of the outstanding shares, or
about 451,101shares, must be present or represented by proxy, in order to
establish a quorum. If you vote in person or by proxy, you will be part of the
quorum.
Votes Required for Approval
Approval and adoption of the plan of reorganization and related plan of
merger require the affirmative vote of the holders of at least 2/3 of the
outstanding shares of the bank's common
7
stock. The 4 nominees for Class A director of the bank receiving the highest
number of votes cast by shareholders entitled to vote for the election of
directors shall be elected.
The following proposals require the affirmative vote of a majority of the
shares present and entitled to vote at the meeting, in person or by proxy:
o Fixing the number of Class A directors to be elected at 4,
o Ratifying the bank's independent auditors, and
o Adjourning the meeting to a later date if necessary.
Percentage of Common Stock Owned by Officers and Directors
Officers and directors owned approximately 20% of our common stock as of
February 29, 2000. Their shares represent about 30% of the affirmative votes
needed to approve the reorganization. We anticipate that these shares will be
voted for the reorganization proposal, for the election of the 4 nominees for
Class A director and for the other proposals.
GENERAL INFORMATION
Address/Telephone Number
The mailing and physical address of the principal executive offices of
Fidelity D & D Bancorp, Inc. and of The Fidelity Deposit and Discount Bank is:
Blakely and Drinker Streets
Dunmore, Pennsylvania 18512
The telephone number of the holding company and the bank is (570) 342-8281.
In addition, the bank maintains a Web site at www.the-fidelity.com.
Type of Organization and Business
Fidelity D & D Bancorp is a Pennsylvania business corporation, and The
Fidelity Deposit and Discount Bank is a Pennsylvania chartered bank and trust
company. The same persons who serve on the board of directors of the bank serve
as the holding company's directors. The holding company has no operating
history.
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SUMMARY FINANCIAL INFORMATION
Immediately following the effective time of the reorganization, the
consolidated financial statements of Fidelity D & D Bancorp will be
substantially the same as the bank's financial statements immediately prior to
the reorganization. Prior to the closing of the reorganization, Fidelity D & D
Bancorp will not have commenced operations and will have no material assets or
liabilities. Presented below is summary financial information for The Fidelity
Deposit and Discount Bank.
As of and for the Years Ended December 31,
-------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
------------- ------------- ------------- ------------- --------------
Assets, Deposits and Capital
Total assets $ 447,211,017 $ 348,604,421 $ 290,252,442 $ 269,136,881 $ 240,812,179
Total investment securities 109,262,221 78,607,860 72,712,902 87,237,566 71,461,979
Net loans 296,193,518 235,430,079 194,516,933 159,644,245 143,282,316
Loans Available-for-sale 5,254,316 8,858,157 8,202,404 2,964,081 2,825,634
Total deposits 294,700,965 240,000,751 218,025,010 212,069,670 180,904,613
Total shareholders' equity 32,126,236 34,013,705 28,423,777 25,366,382 23,791,705
Operating Results
Total interest income 28,566,085 23,471,372 21,037,613 19,112,187 17,546,782
Total interest expense (15,375,799) (12,308,632) (10,639,884) (9,878,012) (9,471,983)
Net interest income 13,190,286 11,162,740 10,397,729 9,234,175 8,074,799
Provision for loan losses (530,000) (646,000) (622,800) (338,000) (313,000)
Net interest income after
provision for loan losses 12,660,286 10,516,740 9,774,929 8,896,175 7,761,799
Other income 2,227,787 1,902,734 1,303,470 987,106 1,246,713
Other expense (10,170,458) (7,609,162) (6,583,334) (6,063,236) (5,283,320)
Income before provision for
income taxes 4,717,615 4,810,312 4,495,065 3,820,044 3,725,192
Provision for income taxes (903,400) (1,246,760) (1,185,008) (995,340) (916,800)
Net Income 3,814,215 3,563,552 3,310,057 2,824,704 2,808,392
Effective tax rate 19.15% 25.92% 26.36% 26.06% 24.61%
Net income per share (adjusted for
stock split) $ 4.26 $ 4.20 $ 3.97 $ 3.43 $ 3.43
Net income per share (diluted) $ 4.25 $ 4.20 $ 3.97 $ 3.43 $ 3.43
Dividends paid $ 1,344,140 $ 1,200,409 $ 1,062,530 $ 906,793 $ 820,327
Dividends per share (adjusted for
stock split) $ 1.50 $ 1.40 $ 1.28 $ 1.10 $ 1.00
Weighted average number of shares
outstanding (adjusted for stock split) 896,116 848,554 832,994 824,450 820,270
Actual shares outstanding 900,392 893,647 837,260 413,889 411,210
Dividend payout ratio 35.24% 33.69% 32.10% 32.10% 29.21%
Book value per share $ 35.68 $ 38.06 $ 33.95 $ 30.64 $ 28.93
Return on average assets 0.94% 1.14% 1.20% 1.09% 1.17%
Return on average equity 11.38% 11.77% 12.40% 11.69% 12.54%
Equity to assets 7.18% 9.76% 9.79% 9.43% 9.88%
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RISK FACTORS
You should carefully consider all information in this document, especially
the risk factors below, in determining how to vote. We have divided risk factors
into two groups:
o risks relating tovote on the reorganization, and
o risks that apply to theproposed formation of
a bank and will apply substantially
equally to Fidelity D & D Bancorp because Fidelity D & D
Bancorp's primary asset will be its ownership of the equity of
the bank.
Risks Relating to the Reorganization
The proposed transaction will create certain new risks that do not
currently exist for shareholders of the bank. Some of these new risks will occur
because the articles of incorporation and by-laws of the holding company differ
in key ways from those of the bank. Also, the Pennsylvania Banking Code of 1965
governs the rights of shareholders of the bank, but the Pennsylvania Business
Corporation Law of 1988 will govern the rights of shareholders of the holding
companycompany.
The holding company's articles of incorporation and by-laws have anti-takeover
defenses that could delay or prevent an acquisition and could adversely affect
the price of the common stock.
The banking industry has experienced significant consolidation in recent
years. The amended and restated articles of incorporation and the by-laws of the holding company
contain provisions that may be considered "anti-takeover"anti-takeover in nature that will
immediately apply to you upon completion of the reorganization. The articles and by-laws are attached as Annexes B and C. The Pennsylvania
Business Corporation Law permits theseThese
anti-takeover strategies, whichprovisions will help the holding company's board of directors to
discourage or stop takeover attempts itof the holding company by another entity if
the board does not favor.favor the takeover. These anti-takeover defenses constitute a
risk to shareholders for the following reasons:
o ShareholdersThe potential acquirer may disagree with the board of directors'
opposition to a takeover. For example, you may determine the
takeover would be in your best interests if the potential
acquiror offeredoffer a substantial premium over the market
price of the holding company's common stock, orbut you would be unable to
take advantage of the offer if you were
dissatisfied with the current board of directors.anti-takeover defenses prevented the
takeover.
o You might desire a change in management, but the anti-takeover defenses
will discourage any changes in management.
o A shareholder who disagrees with management's opposition to a tender
offer may have less negotiating power to get more money
from the potential acquiror forsell his or her shares.shares to the
potential acquirer at a higher price.
o These provisions could negatively affect the price of the holding
company's common stock and may discourage third parties from bidding
for the holding company.
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o These provisions will give the board of directors of the holding
company more control than the board of directors of the bank currently
has. This means that shareholders will generally have less control over
the company.
The following table describes the anti-takeover defenses in the holding
company's articles of incorporation and by-laws:
- -------------------------------------------------------------------------------------------------------------------
Anti-Takeover Provision Anti-Takeover Effect Risks to Shareholders
- -------------------------------------------------------------------------------------------------------------------
The articles of incorporation authorize 10 The board of directors will Shareholders may believe
million shares of common stock and 5 million have more flexibility to issue the acquisition or merger
shares of preferred stock. The holding company additional shares to would be in their best
may issue these shares without shareholder management-friendly parties interests.
approval (Article 5 of the articles of in order to weaken the
incorporation, Annex B). position of a potential Shareholders' percentage
acquiror. ownership of stock and
voting power may be
diluted.
The issuance of preferred
stock could depress the
price of common stock.
- -------------------------------------------------------------------------------------------------------------------
The articles of incorporation eliminate The prohibition against Shareholders may believe
cumulative voting in the election of directors. cumulative voting will make it the acquisition or merger
Cumulative voting entitles a shareholder to as more difficult for a potential would be in their best
many votes as equal the number of shares acquiror to elect its own interests.
owned by the shareholder multiplied by the nominees to the board and
number of directors to be elected. A control the company. No cumulative voting may
shareholder may cast all of these votes for one make it more difficult for
candidate or distribute them among any two or shareholders to elect their
more candidates. nominees to the board of
directors, even if they do
not intend to gain control
over the company.
- -------------------------------------------------------------------------------------------------------------------
75% of the outstanding shares entitled to vote This provision ensures that Many shareholders may
must approve any merger, consolidation, any extraordinary corporate believe the acquisition or
liquidation or dissolution of the holding transaction opposed by the merger would be in their
company or the sale of all or substantially all of board can occur only with a best interests, but may be
its assets, unless at least 80% of all of the clear mandate from unable to unable to garner the 75%
members of the board of directors has approved shareholders. vote required for approval.
the transaction. Then, only 51% of the holders
of shares entitled to vote can approve the
transaction (Article 7 of the articles of
incorporation, Annex B).
- -------------------------------------------------------------------------------------------------------------------
9
- -------------------------------------------------------------------------------------------------------------------
Anti-Takeover Provision Anti-Takeover Effect Risks to Shareholders
- -------------------------------------------------------------------------------------------------------------------
The holders of at least 75% of the outstanding This provision would make it Shareholders may believe
shares entitled to vote must approve any change more difficult for an acquiror the acquisition or merger
in the by-laws, unless a majority of the members to change the by-laws. would be in their best
of the board of directors has approved the interests.
change. (Exceptions:
Shareholders with no
1. The directors may not make or alter intention of taking over the
any by-laws fixing their qualification, company will have more
classification or term of office. difficulty amending the by-
laws.
2. The power of the board of directors to
change the by-laws is subject to the
power of the holders of 75% of the
outstanding shares entitled to vote to
change action by the board of directors)
(Article 34 of the by-laws, Annex C)
- -------------------------------------------------------------------------------------------------------------------
The articles of incorporation authorize the board This provision makes it easier Shareholders may believe
of directors to oppose a tender offer on the basis for the board to oppose an the acquisition or merger
of factors other than economic benefit to offer by a potential acquiror would be in their best
shareholders, such as social and economic because the board is interests.
effects, and to use any legal means to resist an authorized to consider factors
unwanted takeover (Article 10 of the articles of in its decision-making other
incorporation, Annex B). than the economic benefit to
shareholders.
- -------------------------------------------------------------------------------------------------------------------
The affirmative vote of at least 75% of the This may make it more Shareholders may believe
outstanding shares entitled to vote is required to difficult for a potential the acquisition or merger
amend the "anti-takeover" provisions of the acquiror to amend the articles would be in their best
articles of incorporation, unless 80% of the to assist the acquiror in interests.
members of the board of directors has approved gaining control of the holding
the amendment. If 80% of the Board has company. Shareholders with no
approved the Amendment, then 51% of intention of taking over the
outstanding shares entitled to vote may amend company will have more
the Articles (Article 12 of the articles of difficulty amending the
incorporation, Annex C). articles of incorporation.
- -------------------------------------------------------------------------------------------------------------------
The following anti-takeover defenses are
already in use by the bank and apply to the
holding company as well:
The by-laws provide for 3-year staggered terms Electing a board with Shareholders may believe
of office for directors (Section 9.2 of the by- staggered terms of office, also the acquisition or merger
laws, Annex C). known as a "classified" or would be in their best
"staggered" board, will make interests.
it more difficult for an
acquiror to change the All shareholders will find it
management of the company. more difficult to change the
Only one-third of the directors composition of the board.
come up for election each
year, so shareholders will only
be able to elect a full board
over a span of 3 years.
- -------------------------------------------------------------------------------------------------------------------
10
- -------------------------------------------------------------------------------------------------------------------
Anti-Takeover Provision Anti-Takeover Effect Risks to Shareholders
- -------------------------------------------------------------------------------------------------------------------
Like shareholders of the bank, shareholders of The board of directors may Shareholders may believe
the holding company will not have a guarantee issue additional shares to the acquisition or merger
of preemptive rights. The articles of management-friendly parties would be in their best
incorporation do not guarantee preemptive in order to weaken the interests.
rights of shareholders. "Preemptive rights" position of a potential
mean that a company must give current acquiror. Shareholders' percentage
shareholders the opportunity to purchase the ownership of stock may be
same proportion of new shares it issues as the diluted. However, the
shareholder's current ownership proportion. board of directors may
Without preemptive rights, a company may choose to grant preemptive
issue shares to third parties without offering rights to shareholders in a
them to current shareholders. particular stock offering.
- -------------------------------------------------------------------------------------------------------------------
For a more detailed description of these anti-takeover defenses, please refer to the
section entitled "Description of the Holding Company's Capital Securities -
Anti-Takeover Provisions in Articles and By-laws."
11
Certain strongMaterial anti-takeover defenses of the Pennsylvania Business Corporation Law
will also apply to the holding company and could delay or prevent an
acquisition.
Under the Business Corporation Law, certain strongmaterial anti-takeover provisions are availableapply
to corporations that have their securities registered with the SEC under Section
12 of the Securities Exchange Act of 1934. TheAfter the reorganization, the holding
company will be requiredfile with the SEC to register its stocksecurities under the 1934 Act because it will have
more than 500 shareholders and more than $10 million in assets on a consolidated
basis after the reorganization. TheSection 12.
These anti-takeover provisions of Pennsylvania corporate law do not apply to the
bank. The holding company expects to attain
the status of a registered corporation upon filing the appropriate form with the
SEC after completion of the reorganization, at which time these anti-takeover
provisions of Pennsylvania corporate law will apply. To the extent that these
provisions limit a potential acquiror's rights, they tend also to limit all
shareholders' rights. See section entitled "Description of the Holding Company's Capital
Securities - Anti-Takeover Provisions Applicable to Registered Corporations."
The10
As a shareholder of the holding company, your rights will be more limited than
as a shareholder of the bank.
Your rights as a shareholder will change in several key ways after the
reorganization. As noted above, the holding company's issuancearticles of additional sharesincorporation
and by-laws, and the Pennsylvania Business Corporation Law, contain
anti-takeover provisions that do not currently exist at the bank level. To the
extent that these provisions limit a potential acquirer's rights, they tend also
to limit all shareholders' rights. For example, as a shareholder of common stockthe holding
company you will not be permitted to cumulate your votes in the election of
directors or preferred
stock could dilute or depressto propose amendments to the valueholding company's articles of
your sharesincorporation.
You will have minimal influence on shareholder decisions because the directors
and officers of the holding company will own a substantial percentage of the
holding company's common stock. The holding company's articles of incorporation authorize the issuance of
up to 10 million shares of commonThis substantial stock and 5 million shares of preferred stock.
The issuance of additional stock within these limitsownership by management
will not require prior
shareholder approval. We anticipate that the holding company will issue
approximately 1,801,472 shares of common stock, if the reorganization is
completed, and approximately 8,198,528 shares of common stock will remain
unissued. The holding company will not issue any preferred stockassist it in the
reorganization. Sales of additional shares of stock, or the perception that
shares may be sold, could negatively affect the market price of the holding
company's stock.
The issuance of additional shares could also dilute the percentage
ownership interest and corresponding voting power of the prior shareholders.
Shareholdersretaining control of the holding company like shareholders of the bank, will not
have preemptive rights, which is the right to subscribe for additional shares
being offered on a proportional basis to their stock ownership percentage.
However, the holding company may make the right of preemption a contractual term
of a particular stock offering.
Additionally, we anticipate that the holding company will implement a
dividend reinvestment plan shortly after the reorganization which will be
substantially similar to the bank's dividend reinvestment plan. We expect that
the dividend reinvestment plan will permit the holding company to sell up to
100,000 shares of common stock to its shareholders. The subsequent sale of these
shares could reduce the market price for the common stock and result in a
dilution to our shareholders.
The holding company will assume the obligations of the bank under its 1998
Independent Directors Stock Option Plan and 1998 Stock Incentive Plan. As
adjusted for the 2-for-1 exchange ratio in the reorganization, the holding
company will be able to issue up to 50,000 shares under each of these stock
option plans. The issuance and exercise of stock options under these plans may
also depress the price of holding company common stock or dilute shareholder
value.
12
The issuance of a substantial number of preferred stock could also
have the
effect of depressing the price of the common stock because the public could show
more demand for the preferred stock.
The issuance of preferred stock could limit the holding company's ability to pay
dividends to common stock shareholders.
The holding company's issuance of preferred stock could limit its ability
to pay dividends to common stock shareholders if the holding company granted the
preferred shares preferential dividend rights. The holding company may issue
preferred stock and determine the rights of preferred stock shareholders without
prior approval by the holders of common stock.
Upon the dissolution or winding up of the holding company, the claims of others,
including the holders of preferred stock, may limit your ability recover your
investment in the holding company.
In the event of dissolution and termination of the holding company, the
proceeds, if any, realized from liquidation of the holding company's assets will
first be used to satisfy all claims of creditors, including depositors. This
risk also exists for current shareholders of the bank.
If the holding company issues any preferred stock, the holders of preferred
stock are also likely to have priority over the holders of common stock in
recovering their investment in the case of dissolution. Although the holding
company's board of directors currently has no plans to issue preferred stock, it
may do so at any time without shareholder approval. Because the bank could not
issue preferred stock without prior shareholder approval, this risk does not
currently exist for the bank's shareholders.
Accordingly, your ability as common stock shareholder to recover all or any
portion of your investment under these circumstances will depend on the amount
of funds realized, the claims of creditors, depositors and others to be
satisfied, and the amount of preferred stock issued, if any.
Reorganizing the bank into a holding company structure will add an additional
layer of government regulation which will result in additional costs.
The bank is already subject to extensive governmental supervision,
regulation and control, and the reorganization will result in additional
regulation. The holding company will be subject to the provisions and
restrictions of the Bank Holding Company Act of 1956 and to supervision by the
Board of Governors of the Federal Reserve System. It may engage only in banking
activities and activities related to banking and is subject to various other
restrictions. It must file an annual report with the Federal Reserve Board,
which may also conduct examinations of the holding company. Although these
requirements may be costly and burdensome, they are designed to protect the
safety and soundness of the bank subsidiaries of holding companies.
The holding company must also generally file registration statements with
the SEC under the Securities Act of 1933, as well as with certain state
securities commissions under state securities laws, for the offer and sale of
its securities to the public. Presently, the bank is exempt
13
from the registration requirements under the 1933 Act because of exemptions for
bank securities. However, the bank must file periodic financial reports, proxy
statements and other information with the FDIC under the Securities Exchange Act
of 1934. The additional filings under the 1933 Act will entail additional costs,
including legal fees and filing fees. See "Description of the Holding Company -
Supervision and Regulation of the Holding Company" below.
Risks Shared by the Bank and the Holding Company
Investment in the common stock of the holding company also involves risks
substantially similar to risks for the current shareholders of the bank. The
FDIC does not insure money invested in the common stock of the holding company,
unlike money deposited with the bank. Funds invested in common stock will not
earn interest. After the reorganization, the following risk factors may
influence the value of the holding company's common stock:
We may be unable to retain or replace members of the board of directors or
senior management or to hire and retain other skilled personnel.
The business success of the bank and holding company depends to a great
extent upon the services of the board of directors of the bank. The loss of key
personnel by the bank would have a material adverse effect upon the future
prospects of the bank or holding company.
Our future success is dependent on our ability to compete effectively in the
highly competitive banking industry.
We face substantial competition in all phases of our operations from a
variety of different competitors. Our future growth and success will depend on
our ability to compete effectively in this highly competitive environment. We
compete for loans, deposits and other financial services in our geographic
market with other commercial banks, savings and loan associations, credit
unions, finance companies, mutual funds, insurance companies, brokerage and
investment banking firms and various other non-bank competitors. Many of our
competitors offer services which we do not, and many have substantially greater
resources, name recognition and market presence that benefit them in attracting
business. In addition, larger competitors may be able to price loans and
deposits more aggressively than we do. Within the bank's Lackawanna and Luzerne
County marketplace, the bank is 1 of ___ commercial banks and ___ savings banks
competing for customers. While ___ super-regional banks currently control ____%
of the deposit base, ______ community banks maintain the other _____% of the
total deposits. As of June 30, 1998, The Fidelity Deposit and Discount Bank held
6.75% of FDIC-insured deposits in Lackawanna County and .05% of FDIC-insured
deposits in Luzerne County. The non-bank financial institutions and financial
services organizations with which we compete are not subject to the same degree
of regulation as is imposed on banks. As a result, these non-bank competitors
have an advantage over us in providing certain services.
The banking industry is highly susceptible to economic change.
Commercial banking is affected by local, domestic and international
economic and political conditions, and by governmental monetary and fiscal
policies. Conditions such as inflation, recession, unemployment, volatile
interest rates, tight money supply, scarce natural resources, real estate
values, international conflicts and other factors beyond the bank's control
14
can adversely affect the profitability of the bank. Future rising interest
rates, while increasing the income yield on the bank's earning assets, can
adversely affect loan demand and, consequently, the profitability of the bank.
Future decreases in interest rates can adversely affect the bank's profitability
because they reduce the return which the bank earns on its assets. Economic
downturns could result in the delinquency of outstanding loans. In particular, a
downturn in the economic conditions in northeastern Pennsylvania, where the
bank's lending and deposit-gathering are concentrated, could reduce our growth
rate, impair our ability to collect loans and generally affect our financial
condition and results of operations.
Increases in interest rates could make us less profitable.
Our profitability is dependant to a large extent on our net interest
income. Net interest income is the difference between interest income on
interest-earning assets and interest expense on interest-bearing liabilities.
Like most financial institutions, we are affected by changes in general interest
rate levels, which are currently at relatively low levels, and by other economic
factors beyond our control. In addition, interest rate risks can result from
mismatches between the dollar amount of repricing or maturing assets and
liabilities and is measured in terms of the ratio of the interest rate
sensitivity gap to total assets. Although our management believes it has
implemented strategies to reduce the potential effects of changes in interest
rates on our results of operations, any substantial and prolonged increase in
market interest rates could adversely affect our operating results.
Our allowance for loan losses may prove to be insufficient to absorb potential
losses in our loan portfolio.
Lending money is a substantial part of our business. However, every loan we
make carries a certain risk of non-payment. We cannot assure that our allowance
for loan losses will be sufficient to absorb actual loan losses. We also cannot
assure you that we will not experience significant losses in our loan portfolios
that may require significant increases to the allowance for loan losses in the
future. Although we evaluate every loan that we make against our underwriting
criteria, we may experience losses by reasons of factors beyond our control.
Some of these factors include changes in market conditions affecting the value
of real estate and unexpected problems affecting the creditworthiness of our
borrowers.
We determine the adequacy of our allowance of loan losses by considering
various factors, including:
o an analysis of the risk characteristics of various classifications of
loans;
o previous loan loss experience;
o specific loans that would have loan loss potential;
o delinquency trends;
o estimated fair value of the underlying collateral;
o current economic conditions;
o the view of our regulators; and
o geographic and industry loan concentration.
15
Changes in real estate values may adversely impact our loans that are secured by
real estate.
A significant portion of our loan portfolio consists of residential and
commercial mortgages secured by real estate. These properties are concentrated
in northeastern Pennsylvania. Real estate values and real estate markets
generally are affected by, among other things, changes in national, regional or
local economic conditions, fluctuations in interest rates and the availability
of loans to potential purchasers, changes in the tax laws and other governmental
statutes, regulations and policies, and acts of nature. If real estate prices
decline, particularly in northeastern Pennsylvania, the value of the real estate
collateral securing the bank's loans could be reduced. This reduction in the
value of the collateral would increase the number of non-performing loans and
could have a material negative impact on our financial performance.
Additionally, the bank has increased its level of commercial real estate loans,
which are considered to involve a higher degree of credit risk than that of the
one-to-four family residential loans.
Federal and state governmental entities extensively regulate and supervise the
banking industry.
The bank is subject to, and will continue to be subject to, extensive
governmental supervision, regulation and control. The bank is subject to federal
and state statutes applicable to bank and trust companies chartered under the
banking laws of Pennsylvania and to banks whose deposits are insured by the
Federal Deposit Insurance Corporation. The primary regulator of the bank is the
Pennsylvania Department of Banking, and the bank's primary federal regulator is
the FDIC. Federal and state banking laws and regulations govern the scope of a
bank's business, a bank's investments, a bank's reserves against deposits, a
bank's loans, interest rates, the activities of a bank with respect to mergers
and consolidations, and the establishment of branches.
In addition, due to its number of shareholders and the size of its assets,
the bank is registered under Section 12 of the Securities Exchange Act of 1934
and is subject to various reporting requirements and to regulations regarding
proxy solicitations or tender offers. Under the 1934 Act, the bank files proxy
materials, financial reports and other information with the FDIC. After the
reorganization, the holding company will register its stock under Section 12 of
the 1934 Act and will file proxy statements and periodic reports with the SEC
that contain consolidated financial information on both the holding company and
the bank. The bank will cease to file these reports and information, although it
will continue to file financial information with its regulators under other
laws.
The regulatory burden on banks is costly and makes competition with other
types of financial institutions, such as insurance companies and brokerage
houses, that are not subject to the same regulatory burden difficult. See
"Description of the Bank - Supervision and Regulation of the bank" below.
Changes in the law and regulations may affect our ability to do business, our
costs, and our profits.
We are subject to extensive state and federal supervision and regulation.
These laws and regulations are intended to protect depositors, not shareholders.
16
Any change in applicable laws or regulations may have a material effect on our
business and prospects. We cannot predict the nature or the extent of the effect
on our business or earnings that monetary policies, economic control, or new
federal or state regulations may have in the future. For example, we cannot
predict the full impact of the new financial services reform law, the
Gramm-Leach-Bliley Financial Services Modernization Act, signed into law on
November 12, 1999, which will allow bank holding company subsidiaries and
national bank operating subsidiaries to offer a wide range of new financial
services, including securities underwriting. The new law also permits bank
holding company subsidiaries to engage in real estate development and insurance
underwriting.
Regulatory restrictions on dividend payments from the bank may affect our
ability to pay dividends to our shareholders.
The ability of the holding company to pay cash dividends will be subject to
certain restrictions under Pennsylvania corporate law. In addition, because the
cash that the holding company uses to pay dividends will come from dividends the
bank pays to the holding company, the holding company's ability to pay dividends
will depend upon the bank. The bank's ability to pay dividends is subject to and
limited by certain legal and regulatory restrictions applicable to banks.
Assuming a dividend would satisfy the minimum legal requirements, we will decide
whether or not to pay dividends after considering the our capital requirements
and current and projected net income. See "Description of the Bank's Capital
Securities - Dividends."
You will have a minimal influence on shareholder decisions.liquidity.
The directors, officers and substantial investors may have sufficient
beneficial ownership of the common stock to control the holding company. As of
December ____, 1999,February 29, 2000, the directors and executive officers of the bank owned 19.67%19.79%
of the bank's common stock and are expected to own approximately the same
percentage of common stock of the holding company upon completion of the
proposed reorganization. See "Principal"Information about Beneficial OwnersOwnership of the
Bank's Common Stock.Stock by Principal Shareholders and Management."
The ownership of a substantial percentage of the outstanding common stock
by a limited number of shareholders with a common interest, particularly those
who share management of a company, may result in disproportionate control of the
holding company. Although a minority of total shareholders, this group may be
able to consistently determine the outcome of votes in matters submitted to a
vote of the holding company's shareholders. It would be difficult for another
shareholder group to defeat a proposal favored by the holding company's
directors and officers, or to approve a proposal opposed by the directors and
officers.
The ownership of a relatively large percentage of shares by the holding
company's board of directors and officers may assist the board of directors and
its appointed officers in retaining control of the holding company, even if the
other shareholders are dissatisfied with the Board.company. This effect
may be even more significant for the holding company because of its
anti-takeover strategies designed to assist management in retaining control. See
"Description of the Holding Company's Capital Securities - Anti-Takeover
Provisions in Articles and By-laws, Anti-Takeover Provisions Applicable to
Registered Corporations."
The ownership of a substantial number of shares by a limited number of
persons can also adversely affect the liquidity of the market for the common
17
stock because only a limited number of shares are widely dispersed and likely to
change hands. Stock prices in an illiquid market tend to increase and decrease
in a more volatile manner than stock prices in a liquidan actively traded market,
because prices for a relatively small number of shares can have a significant
impact on the price quoted for the common stock.
The holding company is unable to estimate the
number of shares of common stock that may be sold in the future by any of its
shareholders. These sales will depend upon a number of factors, including the
market price for the shares of common stock and the individual circumstances of
each shareholder. The sale of a substantial block of shares of common stock in
the public market is likely to have an adverse impact on the market price of the
common stock.
The market for the bank'sholding company's common stock iswill not be active.
The public trades the bank's common stock on a limited basis in the local
over-the-counter market, primarily in the bank's geographic service area, and
several brokers make a market in the bank's common stock. ThisWe expect this will
also be the
casetrue for the holding company's common stock. Even though the 2-for-1
exchange ratio of holding company stock for bank common stock may create
slightly more liquidity for shares of holding company stock, we do not expect
the holding company's stock to be very liquid. A liquid market is an active
market. In a less active market, you may not be able to sell your shares when
you would like to sell them.
The bank's stock trades on the OTC Bulletin Board under the symbol "FDDB,"
and we anticipate that the holding company's stock will also trade on the OTC
Bulletin Board. The holding company does not presently intend to apply to the
National Association of Securities Dealers to have its common stock listed for tradingquoted on
the National Association of Securities Dealers Automated Quotation System or to
apply for listing on any national securities exchange. While the holding company
does intend to comply with regulatory requirements necessary for brokerage firms
to make an active market in the common stock and to maintain its quotation on
the OTC Bulletin Board, we cannot assure that a more liquid market for the
common stock will develop.
Our computer systems,The holding company's success will depend upon the ability of management to
adapt to the new holding company structure.
The business success of the bank and holding company depends to a great
extent upon the systemsservices of our customerstheir directors and suppliers,executive officers. Management's
ability to operate the holding company profitably will require the acquisition
of new knowledge and skills. In particular, if the holding company expands
geographically or expands to provide nonbanking services through the acquisition
or formation of additional subsidiaries, current management may not properly process date information after December 31, 1999, which could disrupt
our businesshave the
necessary experience for successful operation in these new areas. There is no
guarantee that management would be able to meet these new challenges or that the
holding company would be able to retain new directors or personnel with the
appropriate background and increase our costs.
The "Year 2000 Problem" is the result of computer programs having been
written using two digits rather than four to define the applicable year. Anyexpertise. See "Description of the bank's computer systems that have date-sensitive software or date-sensitive
hardware may recognize a date using "00" as the year 1900 rather than the year
2000. This could result in a system failure or miscalculations causing
disruptions of operations, including, among other things, a temporary inability
to process transactions, send statements, or engage in similar normal business
activities. The Year 2000 Problem also extends to embedded controllers, which
are microprocessors located within a piece of machinery.
BecauseHolding Company -
Supervision and Regulation of the interdependence of businesses, public utilities and other
entities, andHolding Company, Permitted Activities,
Permitted Activities for Financial Holding Companies."
Regulatory restrictions on dividend payments from the possible widespread naturebank may affect our
ability to pay dividends to our shareholders.
The ability of the Year 2000 problem, its
extent is difficultholding company to determine.pay cash dividends will be subject to
restrictions under Pennsylvania corporate law. In addition, because the cash
that the holding company uses to pay dividends will come from dividends the bank
pays to the holding company, the holding company's ability to pay dividends will
depend upon the bank. The Year 2000 problem could cause a
significant economic disruption. Because of their dependence on technology and
date-sensitive data, financial institutions may be particularly vulnerable. As a
result, various regulators have issued guidelines concerning the Year 2000
problem. Also, the bankbank's ability to pay dividends is subject to and
limited by certain legal and regulatory restrictions applicable to banks.
Assuming a dividend would satisfy the regulationminimum legal requirements, we will decide
whether or not to pay dividends after considering our capital requirements and
oversightcurrent and projected net income. See "Description of the FDIC,
whose oversight includes the provision of specific timetables, programsHolding Company's
Capital Securites - Common Stock" and guidance regarding Year 2000 issues. Regulatory examination"Description of the bank's Year
2000 readiness is conductedBank's Capital
Securities - Common Stock" for more detailed information about the legal
restrictions on a quarterly basis.
The worst case scenario fordividends.
Reorganizing the bank is that the Year 2000 problem couldinto a holding company structure will result in an inability to operateadditional
costs.
The reorganization of the bank using any computer-related systems,
services, or products for an indefinite period, as well asinto a lossholding company will result in
increased costs that may adversely affect the profitability of business
from customers affected by the Year 2000 problem. Many calculations which rely
18
on date-sensitive information, such as interest and payment calculations, could
become unreliable or inoperable,bank and the
bank could losevalue the abilityholding company's common stock. Governmental supervision and
regulation of the holding company will increase administrative and legal costs.
For example, the holding company will incur increased costs in conducting public
stock offerings because federal and state securities laws generally require the
registration of corporate securities offered to process
transactions and perform other basic banking functions. Also, the bank could
lose access to its normal supply of products and services, and its borrowers
could suffer losses affecting their creditworthiness.public. Although we have addressedno
current plans to expand the issueholding company's operations through the acquisition
or formation of our Year 2000 readinessnew subsidiaries, this type of activity would result in
increased legal and will
continue to assessother fees. See "Description of the situation, we cannot assure you that we have successfully
identified or resolved all year 2000 problems which may affectHolding Company -
Supervision and Regulation of the bank. We also
cannot assure you that we will be able to implement any necessary corrective
actions in a timely manner. If the bank or the companies that provide services
to the bank or with which the bank's systems interconnect fail to successfully
identify and resolve their year 2000 problems, the bank's services and
operations could be disrupted. The bank has contacted third parties, including
its vendors, service providers and significant customers, to determine these
entities' readiness for the year 2000. The ability of vendors and service
providers to provide supplies, equipment and services to the bank is critical to
the bank's operations. Also, the unresolved year 2000 problems of significant
customers could cause the bank to lose business. The bank has taken steps to
ensure its own year 2000 compliance and to insulate itself from third parties'
lack of readiness, but a substantial risk still exists that the year 2000
problem will affect the bank. See "Management's Discussion and Analysis of
Financial Condition and Results of Operation."Holding Company" below.
The by-laws of the holding company provide for the indemnification of directors,
officers and employees and limit the liability of directors.
The holding company's by-laws provide for indemnification of its directors,
officers, employees and agents to the fullest extent permitted under
Pennsylvania corporate law. Indemnification will only apply to persons who act
in good faith, in a manner he or she reasonably believed to be in the best
interest of the company, without willful misconduct or recklessness. The bank's
by-laws provide similar indemnification provisions, but for directors only.apply only to directors.
The holding company's by-laws also limit the liability of directors for
monetary damages to acts of self-dealing, willful misconduct or recklessness,
unless the act constitutes a crime or involves liability for the payment of
taxes. We believe that these provisions will help reduce baseless litigation,
but they may also make it more difficult for shareholders to sue these persons
on behalf of the company. The bank's by-laws provide similar limits on
directors' liability.
The holding company's issuance of additional shares of common stock or preferred
stock could dilute or depress the value of your shares of the holding company's
common stock.
The holding company's articles of incorporation authorize the issuance of
up to 10 million shares of common stock and 5 million shares of preferred stock.
The issuance of additional stock within these limits will not require prior
shareholder approval. Sales of additional shares of stock, or the perception
that shares may be sold, could negatively affect the market price of the holding
company's stock. The issuance of additional shares could also dilute the
percentage ownership interest and corresponding voting power of the prior
shareholders.
The issuance of preferred stock could limit the holding company's ability to pay
dividends to common stock shareholders.
The holding company's issuance of preferred stock could limit its ability
to pay dividends to common stock shareholders if the holding company granted the
preferred shares preferential dividend rights. The holding company may issue
preferred stock and determine the rights of preferred stock shareholders without
prior approval by the holders of common stock.
Upon the dissolution or winding up of the holding company, the claims of others,
including the holders of preferred stock, may limit your ability to recover your
investment in the holding company.
In the event of dissolution and termination of the holding company, the
proceeds, if any, realized from liquidation of the holding company's assets will
first be used to satisfy all claims of creditors, including depositors. In
addition, if the holding company issues any preferred stock, the holders of
preferred stock will likely have priority over the holders of common stock in
recovering their investment in the case of dissolution. Although the holding
company's board of directors currently has no plans to issue preferred stock, it
may do so at any time without shareholder approval. Because the bank does not
have an authorized class of preferred stock, this risk does not currently exist
for the bank's shareholders.
Accordingly, your ability as a common stock shareholder to recover all or
any portion of your investment under these circumstances will depend on the
amount of funds realized, the claims of creditors, depositors and others to be
satisfied, and the amount of preferred stock issued, if any.
11
The forward-looking statements we make in this document are inherently
uncertain.
This proxy statement/prospectus contains forward-looking statements,
including statements regarding intent, belief, anticipation or current
expectations about matters (including statements as to "beliefs," "expectations," "anticipations,"
"intentions" or similar words) that may or may not occur in the future. A
forward-looking statement is any statement that is not a historical fact. These
statements are subject to risks, uncertainties and assumptions. These include
the risk that projected trends for the continued growth of the bank will not
occur. If one or more of these risks or uncertainties occursoccur or if underlying
assumptions prove incorrect, actual results, performance or achievements in 1999
and beyond could differ materially from those stated.
19
SUMMARY FINANCIAL INFORMATION
ImmediatelyPlease read the following warnings as to limitations on the effective timeaccuracy of
information in this proxy statement/prospectus and on the extent of this
offering.
o Under the rules of the reorganization,Securities Exchange Act of 1934 and federal law,
we have the consolidated financialduty to correct or revise statements made in this proxy
statement/prospectus if the statements become materially misleading in
light of Fidelity D & D Bancorp will be
substantiallysubsequent events. We also have a duty to correct any
statement that we later discover to have been materially false and
misleading from the same asoutset. This duty applies only if we know or should
have known that persons are reasonably relying on any material portion
of the bank's financial statements immediately priorstatements.
o This proxy statement/prospectus does not constitute an offer of
securities in any jurisdiction in which, or to any person to whom, it
is not permitted. We are offering securities only to the reorganization. Prior to the closingshareholders
of the bank as of the voting record date, March 24, 2000. This offer is
only permitted in the following states:
California North Carolina
Colorado New Hampshire
Connecticut New Jersey
Delaware New Mexico
Florida New York
Georgia Ohio
Illinois Oklahoma
Massachusetts Pennsylvania
Maryland Texas
Missouri Vermont
Mississippi Virginia
Wisconsin
o This proxy statement/prospectus does not cover resales of shares of
holding company common stock after completion of the proposed
reorganization, Fidelity D & D
Bancorp will not have commenced operations and will have no material assets or
liabilities. Presented belowperson is summary financial information for The Fidelity
Deposit and Discount Bank.
As of and for
the Nine Months
Ended September 30, As of and for the Years Ended December 31,
(unaudited) ---------------------------------------------------------------------
1999 1998 1998 1997 1996 1995 1994
------------ ------------ ------------ ------------ ------------ ------------ ------------
Assets, Deposits and Capital
Total assets $431,471,117 $331,736,721 $348,604,421 $290,252,442 $269,136,881 $240,812,179 $228,246,215
Total investment securities 110,105,755 73,860,691 78,697,860 72,712,902 87,237,566 71,461,979 73,358,144
Net loans 273,924,997 219,867,101 235,430,079 194,516,933 159,644,245 143,282,316 138,018,150
Loans Available-for-sale 22,148,624 7,205,243 8,858,157 8,202,404 2,964,081 2,825,634 3,998,000
Total deposits 297,656,625 241,035,628 240,000,751 218,025,010 212,069,670 180,904,613 169,329,224
Total shareholders' equity 33,021,984 31,551,202 34,013,705 28,423,777 25,366,382 23,791,705 20,002,108
Operating Results
Total interest income $ 20,656,550 $ 17,216,384 $ 23,471,372 $ 21,037,613 $ 9,112,187 $ 17,546,782 $ 15,102,157
Total interest expense (10,977,277) (9,098,429) (12,308,632) (10,639,884) (9,878,012) (9,471,983) (7,119,822)
Net interest income 9,679,274 8,117,955 11,162,740 10,397,729 9,234,175 8,074,799 7,982,335
Provision for loan losses (405,000) (548,000) (646,000) (622,800) (338,000) (313,000) (559,000)
Net interest income after
provision for loan losses 9,274,274 7,569,955 10,516,740 9,774,929 8,896,175 7,761,799 7,423,335
Other income 1,673,931 1,261,438 1,902,734 1,303,470 987,106 1,246,713 755,004
Other expense (7,438,585) (5,531,301) (7,609,162) (6,583,334) (6,063,236) (5,283,320) (4,986,303)
Income before provision
for income taxes 3,509,620 3,300,092 4,810,312 4,495,065 3,820,044 3,725,192 3,192,036
Provision for income taxes (784,900) (833,850) (1,246,760) (1,185,008) (995,340) (916,800) (690,000)
Net Income 2,724,720 2,466,242 3,563,552 3,310,057 2,824,704 2,808,392 2,502,036
Net income per share
(adjusted for stock split) $ 3.04 $ 2.94 $ 4.20 $ 3.97 $ 3.43 $ 3.43 $ 3.11
Dividends paid $ 805,509 $ 754,760 $ 1,200,409 $ 1,062,530 $ 906,793 $ 820,327 $ 725,519
Dividends per share
(adjusted for stock split) $ 0.90 $ 0.90 $ 1.40 $ 1.28 $ 1.10 $ 1.00 $ 0.90
Weighted average number of
shares outstanding
(adjusted for stock split) 895,356 839,493 848,554 832,994 824,450 820,270 805,010
Actual shares outstanding 897,736 857,317 893,647 837,260 413,889 411,210 409,299
Dividend payout ratio 29.57% 30.60% 33.69% 32.10% 32.10% 29.21% 29.00%
Book value per share $ 36.78 $ 36.80 $ 38.06 $ 33.95 $ 30.64 $ 28.93 $ 24.43
20authorized to make use of this proxy
statement/prospectus in connection with any resale.
12
PER SHARE PRICE INFORMATION
There has never been an organized public trading market for the bank's
common stock. Bank common stock is traded over-the-counter from time to time.
The last reported sale of Bankbank common stock prior to the public announcement of
the reorganization was a trade of 110 shares at $69.50 per share on October 5,
1999. Due to the infrequency of trading and the fact that these trades are
generally private transactions, we are unable to determine actual trading prices
on any given date.
Because Fidelity D & D Bancorp has no substantial assets or liabilities,
the holding company's common stock had no market value at the time of the public
announcement. We anticipate that after the reorganization, the per share market
value of the holding company's common stock will be approximately 1/2 of the per
share market value of the bank's common stock immediately after the
reorganization, based on the 2-for-1 stock exchange ratio.
21
GENERAL INFORMATION ABOUT THE SPECIALANNUAL MEETING
Time and Place of SpecialAnnual Meeting
The board of directors of The Fidelity Deposit and Discount Bank, a
Pennsylvania- chartered bank and trust company, is furnishing this proxy
statement to solicit your proxy for use at the SpecialAnnual Meeting of Shareholders of
the bank and any adjournment of the meeting. The specialannual meeting will be held at
the main office of The Fidelity Deposit and Discount Bank, Blakely and Drinker
Streets, Dunmore, Pennsylvania 18512, on __________, January ____,Tuesday, May 2, 2000, at ______ ___.m.3:00 p.m.,
Eastern Standard Time.
Purpose of the SpecialAnnual Meeting
At the specialannual meeting, the board of directors of the bank will request that
shareholders:
o to considerConsider and act upon a proposal to approve and adopt the Plana plan of
Reorganizationreorganization and related Planplan of Mergermerger dated __________,December 21, 1999,
providing for
o theThe reorganization of the bankThe Fidelity Deposit and Discount Bank as the
wholly owned subsidiary of Fidelity D & D Bancorp, Inc., a Pennsylvania corporation organized
by the bank to become the bank's holding company, through the
merger of the bank with The Fidelity Deposit and Discount Interim Bank, a
Pennsylvania chartered interim banking institution and subsidiary
of Fidelity D & D Bancorp, Inc.;, into The Fidelity Deposit and
Discount Bank; and
o and theThe exchange of each share of common stock of the bank for 2 shares
of common stock of Fidelity D & D Bancorp, Inc.;
o Fix the number of Class A directors of the bank to considerbe elected at 4;
13
o Elect 4 Class A directors of the bank to serve for a 3-year term and
until their successors are properly elected and qualified;
o Consider any adjournment of the meeting to a later date, if necessary,
to permit further solicitation of proxies in the event there are not
sufficient votes at the time of the meeting to constitute a quorum or
to approve the Planplan of Reorganizationreorganization and Planplan of Merger;merger;
o Ratify the selection of Parente Randolph, P.C., Certified Public
Accountants, of Wilkes-Barre, Pennsylvania, as independent auditors for
the bank for the fiscal year ending December 31, 2000; and
o to transactTransact any other business that may properly come before the specialannual
meeting and any adjournment of the meeting.
VOTING PROCEDURES
Voting Rights, QuorumSecurities and Vote RequiredRecord Date
The board of directors of the bank has fixed the close of business on December ___, 1999,March
24, 2000, as the record date for the determination of shareholders of the bank
entitled to vote at the specialannual meeting. On the record date, the bank had
outstanding approximately _________902,200 shares of common stock, par value $1.5625 per
share, the only authorized class of stock, which wasstock. Approximately 1,264 shareholders held
by
approximately _______ shareholders.these shares. Each outstanding share of common stock entitles the record holder
to one vote.
Quorum
Under Pennsylvania law and the bank's by-laws, of the bank, the presence of a quorum is
required for each matter to be acted upon at the specialannual meeting. HoldersThe holders of
a majority interest of allthe outstanding shares of common stock, or about 451,101 shares as
of March 24, 2000, must be present at the meeting, either in person or by proxy,
to
22
establish a quorum. For purposes of establishing a quorum, the bank will
count as present shareholders represented by proxies marked "withhold" or
"abstain." "Broker non-votes"Broker non-votes will alsonot be counted in determining the presence of
a quorum for the particular matter. "Broker non-votes"Broker non-votes are shares represented at
the meeting held by brokers or nominees as to which instructions have not been
received from the beneficial owners or persons entitled to vote and the broker
or nominee does not have the discretionary voting power on a particular matter.
In the absence of a quorum, the board of directors of the bank intends to
adjourn the meeting to another place and time without further notice to
shareholders, until the necessary shareholders area quorum is present.
Votes Required for Approval
Reorganization Proposal. The required vote for the approval of the
reorganization is the affirmative vote of at least 2/3 of the outstanding shares
of common stock. Abstentions and broker non-votes are not votes cast and
therefore do not count either for or against the approval and
14
adoption of matters before the meeting. Although abstentions and broker
non-votes are not votes cast, they have the practical effect of votes cast
against the reorganization proposal.
If you abstain from voting and do not follow the requirements under
Pennsylvania law for dissenters' rights of appraisal, and if at least 2/3 of the
outstanding shares of bank common stock vote in favor of the reorganization,
each share you own will automatically, without any reasonsaction on your part,
represent two shares of holding company common stock.
Election of Directors. Assuming the boardpresence of a quorum, the 4 nominees
for director receiving the highest number of votes cast by shareholders entitled
to vote for the election of directors ofshall be elected. Votes withheld and
broker non-votes count neither for nor against the bank believes additional
time should be allowed to obtain proxies, the Board may adjourn the meeting to
another place and time with a voteelection of a nominee. In the
election of directors only, each shareholder may, in person or by proxy,
multiply the number of votes to which he or she may be entitled by the number of
directors to be elected. This is known as "cumulative voting." The shareholder
may cast all of his or her votes for one director candidate, or he or she may
distribute the votes among any 2 or more candidates.
Other Proposals. A majority of shares present, atin person or by proxy, is
necessary to approve the meeting.following proposals:
o Fixing the number of Class A directors to be elected;
o Ratifying the bank's independent auditors; and
o Adjourning the meeting if necessary.
Although broker non-votes do not count either for or against the proposal,
they have the practical effect of reducing the number of affirmative votes
required to achieve a majority for the matter by reducing the total number of
shares voted from which the required majority is calculated.
Solicitation of Proxies
The Bank'sbank's board of directors is sending this proxy statement and the
enclosed proxy form to shareholders of the bank on or about January ____,April 7, 2000.
In connection with the solicitation of proxies, the bank will:
o bearBear the cost of soliciting proxies and
o reimburseReimburse brokerage firms and other custodians, nominees and
fiduciaries for their reasonable forwarding expenses to the beneficial
owners of the stock.
We estimate the total amount spent by us on proxy solicitation will be no
more than $2,000. As of February 29, 2000, we have not spent any funds on proxy
solicitation.
The directors, officers and oemployees of the bank may if the directors so decide,also solicit proxies
personally or by telephone, telegraph, facsimile transmission or other
electronic mail.means. The bank will not pay additional compensation for such
solicitation.
15
Voting by Proxy and Revocation of Proxies
By properly completing and signing a proxy form, you will be appointing the
proxy holders to vote your shares at the specialannual meeting according to your
instructions on the proxy form. If a proxy is completed, signed and returned
without indicating any voting instructions, the shares represented by the proxy
will be voted:
o FOR the approval and adoption of the Planplan of Reorganizationreorganization and Planrelated
plan of Merger,merger;
o FOR the proposal to fix the number of Class A directors of the bank to
be elected at 4;
o FOR the election of the 4 nominees for Class A director of the bank
named below;
o FOR the ratification of Parente Randolph, P.C., Certified Public
Accountants of Wilkes-Barre, Pennsylvania, as the bank's independent
auditors for the year ending December 31, 2000; and
o FOR the adjournment of the meeting to a later date, if necessary, to
permit further solicitation of proxies in the event there are not
sufficient votes at the time of the meeting to constitute a quorum or
to approve the reorganization proposal.
23
The proxy holders will not vote any proxy that withholds authority or that
is voted against the mergerreorganization in favor of any adjournment of the meeting.
A proxy also gives the persons named as proxy holders the right to vote on
other matters incidental to the conduct of the meeting. If other matters are
properly brought before the meeting, the proxy holders will vote your proxy in
accordance with the recommendations of the bank's management.
Execution and return of the enclosed proxy will not affect your right to
attend the specialannual meeting and vote in person if you first give notice to John F.
Glinsky, Jr., Secretary of the bank. A shareholder of the bank who returns a
proxy may revoke the proxy prior to the time it is voted:
o byBy giving notice of revocation to John F. Glinsky, Jr., Secretary of
The Fidelity Deposit and Discount Bank, Blakely and Drinker Streets,
Dunmore, Pennsylvania 18512;
o byBy delivering a properly executed proxy bearing a later date to John F.
Glinsky, Jr., Secretary of the bank; or
o byBy voting in person after giving notice to John F. Glinsky, Jr.,
Secretary of the bank.
Attendance by a shareholder at the specialannual meeting will not itself revoke
the proxy.
Information about Beneficial Ownership of the Bank's Common Stock by Significant
Shareholders, Directors and Executive Officers16
INFORMATION ABOUT BENEFICIAL OWNERSHIP OF THE BANK'S COMMON
STOCK BY PRINCIPAL SHAREHOLDERS AND MANAGEMENT
As of December _____, 1999,February 29, 2000, we know of no shareholder who owns more than 5% of
the bank's outstanding common stock, either on the bank's records or indirectly
as a "beneficial"beneficial owner.
The following table provides information, as of December _____, 1999,February 29, 2000, with
respect to the following beneficial owners of the bank's common stock:
o each executive officerEach director of the bank,
o eachEach nominee for director,
ofo Each executive officer named in the bank,Summary Compensation Table on page
61, and
o all BankAll bank executive officers and directors as a group.
We determined beneficial ownership by applying the General Rules and
Regulations of the SEC, which state that a person may be credited with the
ownership of common stock:
o ownedOwned by or for the person's spouse, minor children or any other
relative sharing the person's home;
o ofOf which the person shares voting power, which includes the power to
vote or to direct the voting of the stock; and
24
o ofOf which the person has investment power, which includes the power to
dispose or direct the disposition of the stock.
Also, a person who has the right to acquire shares within 60 days after
December _____, 1999,February 29, 2000, will be considered to own the shares. As of February 29,
2000, the number of common stock issued and outstanding was approximately
900,541. The calculation of percentages is based upon this number, plus 3,500
shares if the acquisition
of shares is either direct or indirect as a beneficial owner.common stock subject to exercisable options.
- ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
AMOUNT AND NATURE OF PERCENTAGE OF BANK'S
NAME OF INDIVIDUAL AND BENEFICIAL OWNERSHIP OF COMMON STOCK
POSITION WITH BANK BANK'S COMMON STOCK (1) BENEFICIALLY OWNED
- ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Paul A. Barrett 17,785 (2) 1.967%
Director and Nominee
- ------------------------------------------------------------------------------------------------------------------
Samuel C. Cali 26,756 (2) 2.980%26,806 (3) 2.965%
Chairman of the Board
- ------------------------------------------------------------------------------------------------------------------
Patrick A. Calvey, Jr 2,941 (4) *
Director
- ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
John T. Cognetti 3,007 (5) *
Director and Nominee
- ------------------------------------------------------------------------------------------------------------------
17
- ------------------------------------------------------------------------------------------------------------------
AMOUNT AND NATURE OF PERCENTAGE OF BANK'S
NAME OF INDIVIDUAL AND BENEFICIAL OWNERSHIP OF COMMON STOCK
POSITION WITH BANK BANK'S COMMON STOCK (1) BENEFICIALLY OWNED
- ------------------------------------------------------------------------------------------------------------------
Patrick J. Dempsey 15,746 (6) 1.742%
Director
- ------------------------------------------------------------------------------------------------------------------
John F. Glinsky, Jr 17,102 (7) 1.892%
Secretary, Director and Nominee
- ------------------------------------------------------------------------------------------------------------------
Michael F. Marranca 25,159 (3) 2.802%26,068 (8) 2.883%
President and Chief Executive Officer,
Director
- ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Herbert M. McDonald 44,502 (4) 4.957%44,527 (9) 4.924%
Director
- ----------------------------------------------------------------------------------------------------------
John F. Glinsky, Jr 17,075 (5) 1.902%
Director and Secretary
- ----------------------------------------------------------------------------------------------------------
Patrick A. Calvey, Jr 2,906 (6) .323%
Director
- ----------------------------------------------------------------------------------------------------------
Patrick J. Dempsey 15,670 (7) 1.745%
Director
- ----------------------------------------------------------------------------------------------------------
Paul A. Barrett 17,668 (8) 1.968%
Director
- ----------------------------------------------------------------------------------------------------------
John T. Cognetti 2,960 (9) .33%
Director
- ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Michael J. McDonald 19,34219,555 (10) 2.154%2.163%
Director and Nominee
- ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
David L. Tressler, Sr. 2,5472,708 (11) .283%*
Director
- ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Kevin R. Messett 458 (12) *
Executive Vice President
- ------------------------------------------------------------------------------------------------------------------
Joseph E. Quinnan 1,276 (12) .142%1,285 (13) *
Senior Vice President and
Chief Operating Officer
of the bank,
Senior Vice President of the
Holding Company
- ----------------------------------------------------------------------------------------------------------
John J. Keeler 622 (13) .069%
Vice President
- ----------------------------------------------------------------------------------------------------------
Kevin R. Messett 456 (14) .051%
Senior Vice President
- ----------------------------------------------------------------------------------------------------------
Robert P. Farrell 255 (15) .028%
Cashier/Comptroller of the bank
Treasurer of the Holding Company
- ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
All Officers and Directors as a Group 177,214 19.768%
(10 178,912 19.790%
Directors, 5 Officers, 14 persons in total)
- ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
25
* Represents beneficial ownership of less than 1% of the bank's common stock.
(1) Information furnished by the directors and the bank. Fractional shares are
rounded to the nearest whole number.
(2) Figure includes 50068 shares held solely by Mr. Barrett, 4,560 shares held
solely by Mr. Barrett in an IRA, 997 shares held jointly by Mr. Barrett and
his spouse, 1,062 shares held by Mr. Barrett's spouse, 10,848 shares held
as Trustee and co-owner of the Estate of Mildred Barrett, and 250
exercisable options.
(3) Figure includes 500 shares held jointly by Mr. Cali and his spouse, 24,261
shares held in the S.C. Cali Revocable Trust, 1,7451,795 shares held in Jane
Cali's Revocable Trust, and 250 exercisable stock options.
(3)(4) Figure includes 2,117 shares held solely by Mr. Calvey, 574 shares held by
Calvey Enterprises Inc. of which Mr. Calvey is the former President, and
250 exercisable stock options.
(5) Figure includes 100 shares held solely by Mr. Cognetti in an IRA, 1,378
shares held jointly by Mr. Cognetti and his spouse, 511 shares held by Mr.
Cognetti's spouse, 767 shares held by Mr. Cognetti's spouse and child, and
250 exercisable stock options.
(6) Figure includes 2,000 shares held solely by Mr. Dempsey, 10,548 shares held
by Mr. Dempsey's spouse, 2,947 shares held by Mr. Dempsey's children, and
250 exercisable stock options.
(7) Figure includes 6,204 shares held solely by Mr. Glinsky, 9,998 shares held
jointly by Mr. Glinsky and his spouse, 650 shares held jointly by Mr.
Glinsky and his children, and 250 exercisable stock options.
(8) Figure includes 7,906 shares held solely by Mr. Marranca, 693710 shares held
solely by Mr. Marranca in an IRA, 880 shares held jointly by Mr. Marranca
and his IRA, 14,439spouse, 14,451 shares held by Mr. Marranca'sMr .Marranca's spouse, 1,771 shares
held by Mr. Marranca's spouse and grandchildren and 350 exercisable stock
options.
(4)18
(9) Figure includes 36,824 shares held solely by Dr. McDonald, 4,9724,997 shares
held jointly by Dr. McDonald and his spouse, 356 shares held by Dr.
McDonald's spouse, 2,100 shares held jointly by Dr. McDonald and his
sister, and 250 exercisable stock options.
(5) Figure includes 6,204 shares held solely by Mr. Glinsky, 9,997 shares
held jointly by Mr. Glinsky and his spouse, 624 shares held jointly by
Mr. Glinsky and his children, and 250 exercisable stock options.
(6) Figure includes 2,556 shares held solely by Mr. Calvey, 100 shares held
by Calvey Enterprises Inc. of which Mr. Calvey is the former President,
and 250 exercisable stock options.
(7) Figure includes 2,000 shares held solely by Mr. Dempsey, 10,546 shares
held by Mr. Dempsey's spouse, 3,124 shares held by Mr. Dempsey's
children, and 250 exercisable stock options.
(8) Figure includes 10 shares held solely by Mr. Barrett, 4,523 shares held
solely by Mr. Barrett in his IRA, 988 shares held jointly by Mr.
Barrett and his spouse, 1,049 shares held by Mr. Barrett's spouse,
10,848 shares held as Trustee and co-owner of the Estate of Mildred
Barrett, and 250 exercisable options.
(9) Figure includes 100 shares held solely by Mr. Cognetti in his IRA,
1,366 shares held jointly by Mr. Cognetti and his spouse, 506 shares
held by Mr. Cognetti's spouse, 735 shares held by Mr. Cognetti's spouse
and child, and 250 exercisable stock options.
(10) Figure includes 16,37816,545 shares held solely by Mr. McDonald, 2,3032,349 shares
held by Mr. McDonald's spouse, 400 shares held by Mr. McDonald's spouse and
children, 11 shares held by Mr. McDonald's children, and 250 exercisable
stock options.
(11) Figure includes 50 shares held solely by Mr. Tressler, 44786 shares held
jointly by Mr. Tressler and his spouse, 451 shares held in trust by Mr.
Tressler's spouse and child, 1,6981,713 shares held jointly by Mr. Tressler in
trust with his son, 102133 shares held jointly by Mr. Tressler in trust withand his
daughter, 25 shares held jointly by Mr. Tressler and his grandchildren, and
250 exercisable stock options.
(12) Figure includes 511 shares held in trust by Mr. Quinnan, 515 shares
held in a revocable trust by Mr. Quinnan's spouse, and 250 exercisable
stock options.
(13) Figure includes 408 shares held solely by Mr. Keeler, 14 shares held by
Mr. Keeler's child, and 200 exercisable stock options.
(14) Figure includes 161162 shares held jointly by Mr. Messett and his spouse, 4546
shares held jointly by Mr. Messett with his spouse and children, and 250
exercisable options.
(15)(13) Figure includes 55766 shares held jointlyin revocable trust by Mr. Farrell with his spouse,Quinnan and
200 exercisable stock options.
The required vote for the approval of the reorganization is the
affirmative vote of at least 2/3 of the outstanding shares of bank common stock.521shares held in a revocable trust by Mr. Quinnan's spouse.
In terms of the number of shares, as of December _____, 1999,February 29, 2000, the affirmative
votes of the holders of at least approximately 598,491600,360 shares will result in the
approval of the proposed reorganization. The executive officers and directors,
as a group, beneficially own 177,214178,912 shares, or approximately 29.6%30% of the shares
representing affirmative votes needed to approve the reorganization.
26
INFORMATION ABOUTPROPOSAL NO. 1:
REORGANIZATION OF THE PROPOSEDFIDELITY DEPOSIT AND DISCOUNT BANK
AS THE SUBSIDIARY OF FIDELITY D & D BANCORP, INC.
DESCRIPTION OF REORGANIZATION Description of Reorganization ProcedurePROCEDURE
We are asking that you approve a Planplan of Reorganizationreorganization and related Planplan of
Mergermerger that would result in the reorganization of the bank as athe wholly owned
subsidiary of Fidelity D & D Bancorp, Inc. and in Fidelity D & D Bancorp, Inc.
becoming a bank holding company. The reorganization involves two steps. First,
we incorporated Fidelity D & D Bancorp, Inc. under the Pennsylvania Business
Corporation Law of 1988 to be the holding company for the bank, and we organized
The Fidelity Deposit and Discount Interim Bank under the Pennsylvania Banking
Code of 1965 as its wholly owned subsidiary. Fidelity D & D Bancorp is a
Pennsylvania business corporation, and the interim bank is a
Pennsylvania-chartered interim banking institution. Neither the holding company
nor the interim bank will conduct any business prior to the reorganization. On
December _____,28, 1999, the boards of directors of the holding company, the bank and
the interim bank and Fidelity
D & D Bancorp unanimously approved the Planplan of Reorganizationreorganization and Planplan of
Merger.merger. We are incorporating the plan of reorganization and plan of merger into
this proxy statement/prospectus and attaching them as Annex A.
19
Next, under the terms of the Planplan of Reorganizationreorganization and Planplan of Merger,merger, if
the bank's shareholders approve the transaction and certain other conditions are met,
the interim bank will merge into the bank on the effective date of the
reorganization. The bank will survive as the wholly owned subsidiary of Fidelity
D & D Bancorp. At that time, the shareholders of the bank will automatically
become shareholders of the holding company. Each whole outstanding share of the
bank's common stock will automatically represent 2 shares of the holding
company's common stock. The prior shareholders of the bank will cease to have
any rights as shareholders of the bank, and their rights will be based solely on
their shares of holding company common stock. Alternatively, if demanded in
accordance with Subchapter D of Chapter 15 of the Pennsylvania Business
Corporation Law of 1988, a shareholder of the bank's shareholdersbank will have the right to
receive cash in the amount of the appraised value of theirhis or her shares of the
bank's common stock. See "Dissenters' Rights of Appraisal" below. After the reorganization, the bank will continue its
banking business substantially unchanged and under the same management. See
"Dissenters' Rights of Appraisal" below for a description of the procedure for
claiming dissenters' rights of appraisal.
Assuming that no shareholder exercises his or her appraisal rights, the
number of shares of the holding company outstanding immediately after the
reorganization will be approximately double the number of shares of the bank
outstanding prior to the reorganization.
Amendment or Termination of the Plan of Reorganization and Plan of MergerAMENDMENT OR TERMINATION OF THE PLAN OF REORGANIZATION AND PLAN OF MERGER
The boards of directors of the bank,holding company, the holding companybank and the interim
bank may amend the Planplan of Reorganizationreorganization and Planplan of Mergermerger by mutual consent
either before or after approval by the bank's shareholders. However, no
amendments can be made to the provisions relating to the exchange of shares of
the bank for shares of the holding company without proper shareholder approval.
The boardboards of directors of the bank,holding company, the holding companybank and the interim
bank may terminate the Planplan of Reorganizationreorganization and Planplan of Mergermerger by mutual
27
consent either before or after approval by the bank's shareholders if the bank's
board of directors believes the reorganization would be inadvisable for any
other proper reason.
We are incorporating the Plan of Reorganization and Plan of Merger into
this proxy statement/prospectus and attaching them as Annex A.
Exchange of Stock, 2-for-1 Exchange RatioEXCHANGE OF STOCK, 2-FOR-1 EXCHANGE RATIO
On the day of the reorganization, shareholders of the bank who do not
perfect dissenters' rights will become shareholders of the holding company
without any action by the shareholders. Generally, they will automatically own
twice the number of shares of the holding company's common stock as they
previously owned of the bank's common stock. Each whole outstanding share of the
bank's common stock, par value $1.5625 per share, will becomebe automatically
exchanged for 2 shares of common stock, without par value, of the holding
company. We anticipate that immediately after the reorganization, theeach share of
common stock of the holding company will have a market value of 1/2 that of each
share of the bank's common stock prior to the reorganization.
Fidelity D & D Bancorp will not issue fractional shares of common stock in
the reorganization. The holding company will pay each former shareholder of the
bank cash in an amount equal to the fair market value of any fractional share
interest.interest in holding company stock resulting from the stock exchange.
20
You should not interpret the fact that the holding company's stock has
no par value as a negative aspect of the exchange. Par value for corporations
has little, if any, meaning in today's marketplace. In organizing the holding
company, we decided not to assign a par value to its common stock or preferred
stock in order to provide for cleaner bookkeeping and maximum flexibility. The
lack of par value is not likely to affect the market value of the common stock
issued in the exchange.
Stock Options and Stock Option Plans
In 1998, the bank implemented an Independent Directors Stock Option Plan
and a Stock Incentive Plan. As of September 30, 1999, the bank had issued
directors and key employees options to purchase 3,750 shares of the bank's
common stock at the price of $62.00 per share under these plans. Following the
reorganization, the holding company will assume these stock options and the
plans. We will adjust the stock options and the plans to reflect the 2-for-1
exchange ratio of holding company common stock for bank common stock. The
holders of stock options will be entitled to receive twice the number of shares
of common stock of the holding company as the original number of shares of the
bank's common stock, and at half of the original exercise price. Accordingly,
after the reorganization, the outstanding options will automatically convert
into options to purchase 7,500 shares of the holding company's common stock at
the price of $31.00 per share. As a result, the value of the stock options
should remain about constant.
Similarly, the number of shares which the holding company may issue under
the plans will adjust automatically. As a result, the holding company will be
able to issue up to 50,000 shares of common stock under each of these plans.
Otherwise, the original terms of these stock options and rights will continue to
apply. See "Description of the Bank's Common Stock - Stock Option Plans" for a
description of the bank's 1998 Independent Directors Stock Option Plan and 1998
Stock Incentive Plan.
28
Dividend Reinvestment Plan
On the day of the reorganization, The Fidelity Deposit and Discount Bank
Dividend Reinvestment Plan, which the bank adopted in 1995 to provide
shareholders a simple and convenient method of investing cash dividends in
additional shares of Bank common stock, will terminate. The holding company will
issue to each participant a certificate representing that number of full shares
of holding company common stock which the participant is entitled to, based on
the 2-for-1 exchange of bank common stock held under the plan for the
participant. The holding company will not issue any fractional shares. If a
participant owns a fractional interest, the holding company will pay him or her
the fair market value of the fractional interest in cash. See "Description of
the Bank's Common Stock - Dividend Reinvestment Plan."
After the reorganization, we anticipate that the holding company will
implement a dividend reinvestment plan with substantially the same terms as the
prior bank dividend reinvestment plan. The holding company will send
shareholders an offering circular for the shares which may be issued under the
plan, along with a registration form.
Exchange of Stock CertificatesEXCHANGE OF STOCK CERTIFICATES
Following the reorganization and until properly requested and surrendered,
each outstanding stock certificate of the bank will, for all corporate purposes,
represent the number of whole shares of the holding company that the holder
would be entitled to receive upon its surrender.
The bank and the holding company will require that shareholders exchange
their present stock certificates, bearing the name "The Fidelity Deposit and
Discount Bank," for new stock certificates, bearing the name "Fidelity D & D
Bancorp, Inc." After the reorganization, the bank and the holding company will
send shareholders a notice requiring surrender of the stock certificates of the
bank in exchange for stock certificates of the holding company. The holding
company may withhold dividends payable after the reorganization from those
shareholders who do not exchange their present stock certificates for new stock
certificates within a reasonable period of time after receiving the notification
to exchange their certificates. The holding company will pay any dividends
withheld, without interest, to former shareholders of the bank upon the proper
surrender of the bank's common stock certificates.
Failure to Surrender Stock CertificatesFAILURE TO SURRENDER STOCK CERTIFICATES
Shareholders of the bank must surrender their stock certificates within 2
years of receiving notification to exchange their certificates. In the event
that any former shareholder of the bank does not surrender his or her stock
certificates within that time, the holding company may sell the shares of
holding company common stock that would otherwise have been issued. The bank
will hold the net proceeds of the sale, together with any cash to which the
shareholder is entitled instead of the issuance of a fractional share and any
previously accrued and unpaid dividends, in a non-interestnoninterest bearing account for
the shareholder's benefit. After this sale, the only right of the holders of the
unsurrendered outstanding certificates will be the right to collect the net
sales proceeds, cash and accumulated dividends held for their account.
29
Generally, the net proceeds, cash and accumulated dividends will be paid to the
former shareholder of the bank, without interest, only upon the proper surrender
of the bank's stock certificates.
Reasons for the Proposed ReorganizationREASONS FOR THE PROPOSED REORGANIZATION
In our opinion, the reorganization of the bank into a holding company
structure will provide greater flexibility in:
o financing,Financing,
o engagingEngaging in non-banking activities,
o protectingProtecting against an unfriendly takeover,
21
o respondingResponding to changes in law, and
o acquiringAcquiring other banks.
Financing.FINANCING. The Bankbank has experienced a period of sustained and substantial
growth. In order to continue this rate of growth, additional capital may be
necessary. One of the advantages of formation of a holding company is the
greater number of alternatives for raising capital. When used, these
alternatives as described below may support the growth of the bank and holding
company:
o Authorized Capital. The authorized capitalization of the holding
company is:
o 10 million shares of common stock, and
o 5 million shares of preferred stock.
Currently, the bank is only authorized to issue up to 5 million shares
of common stock. If the Plan of Reorganization and Plan of Merger are
approved, we anticipate thatreorganization had occurred on February 29,
2000, the holding company will issuewould have issued approximately 1,801,4721,801,082
shares of its common stock in the
reorganization. This estimate takes into account the possibility of up
to 3,000 additional shares of bank common stock being issued under the
bank's dividend reinvestment plan if the bank declares a dividend in
December, prior to the reorganization. As a result, the
holding company would have had approximately 8,198,5288,195,918 authorized but
unissued shares of common stock and the full 5 million unissued shares
of preferred stock.
Also upon the reorganization, theThe holding company will assumereserve for issuance a total of 99,500 shares
of common stock under the bank's
obligations under its 1998 Independent Directors Plan and
1998 Stock Incentive Plan. The Directors Plan, provides for the issuance of up to
25,000 shares of bank common stock, and the Incentive Plan provides for
the issuance of up to 25,000 shares. The holding company will be able to
issue up to 50,000 shares of its common stock under each plan, as
adjusted after the reorganization. As of September 30, 1999, options to
purchase 3,750 shares of the bank's common stock at the price of $62.00
per share were outstanding under these plans. Upon the reorganization,
these options will automatically convert into options to purchase 7,500
shares of the holding company's common stock at the price of $31.00 per
share.
30
We anticipate thatwhich the holding company will implementassume, and
about 100,000 shares of common stock for issuance under a dividend
reinvestment plan shortly after the reorganization with substantially
the same terms as the bank's dividend reinvestment plan. The bank may
issue up to 50,000 sharesOther than issuances under its plan. As of September 30, 1999, the
bank had issued approximately 22,455 shares under its dividend
reinvestment plan. We anticipate that the holding company's plan will
provide for the issuance of up to 100,000 shares.
Wethese plans, we have no
plans to approve future issuances of additional shares of common stock
or shares of preferred stock other than the shares reserved
for issuance under the above plans.stock. However, we have authorized a larger
number of shares of common stock and a class of preferred stock of the
holding company so that we have shares available to provide us with
additional business and financing flexibility in the future. The board
of directors may use the additional shares without further shareholder
approval to:
o issue additionalIssue stock dividends in the form ofand effect stock splits,
o raiseRaise capital,
o provideProvide equity incentives to employees, officers or directors,
o establishEstablish strategic relationships with other companies,
o expandExpand the holding company's business through the acquisition
of otherOther businesses, and
o to opposeOppose a hostile takeover attempt or delay or prevent an
acquisition.
Also, we believe that the 2-for-1 exchange ratio will make the market
for the holding company's common stock more liquid than the market for
the bank's common stock, and this should add to our flexibility.
22
The articles of incorporation of the holding company authorize the
board of directors to approve the issuance of preferred stock at terms
set by the board, without prior shareholder approval. The board of
directors may designate a series of preferred stock and determine the
rights, preferences and limitations of the series. For example, the
board could grant the preferred stock the right to receive dividends
before common stock shareholders, to convert to common stock, to vote
or to receive assets upon the liquidation or winding up of the business
prior to the distribution of assets to common stock shareholders.
Provisions granting directors this type of authority are known as
"blank check" provisions. The authority to issue blank check preferred
stock will provide us with the flexibility to create a series of
preferred stock customized to meet the needs of any particular
transaction or market condition.
The further issuance of common or preferred stock could dilute the
voting rights and book value per share of the common stock of the
holding company. See "Risk Factors - Risks Relating to the
Reorganization.Factors."
31
o Debt Financing. The ability to incur indebtedness at the holding
company level and to contribute the proceeds to the bank as equity
capital provides further flexibility.
o Trust Preferred Stock. The issuance of trust preferred stock is one
alternative for raising capital. Although the manner in which trust
preferred stock is issued is very complicated, the basic form of the
transaction is as follows:
o A holding company creates a special trust subsidiary, usually a
Delaware business trust.
o The subsidiary issues preferred stock to interested investors.
o The holding company then issues long-term debt to the subsidiary in
return for the subsidiary paying the holding company the proceeds
from the sale of the trust preferred stock. The holding company
must pay interest to the subsidiary whichthat the subsidiary passes
through to the holders of the trust preferred stock.
A bank may not issue trust preferred stock. The holding company
structure is necessary to issue such securities. Although we have no
plans to issue trust preferred stock at this time, it is possible that
we may use this form of financing in the future. The advantages of
trust preferred stock to the holding company are that:
o It qualifies as "Tier 1" capital, which is a term used by regulators to
identify the safest type of capital, and is a key factor examined by
the holding company's regulators in determining whether thea holding company is adequately
capitalized.
o Under current tax law, the holding company's payment of interest to
a subsidiary is tax deductible.
o The issuance of trust preferred stock will not dilute the holding
company's common stock equity ownership or earnings per share.
A Bank may not issue trust preferred stock. The holding company
structure is necessary to issue such securities. Although we have no
plans to issue trust preferred stock at this time, it is possible that
we may utilize this form of financing in the future.23
Non-Banking Activities. Under the Bank Holding Company Act of 1956, as
amended, with
the prior approval of the Federal Reserve Board, the holding company may
organize or acquire other financially oriented businesses without shareholder
approval. The holding company has no present plans to expand in this way.
Subsidiaries of the holding company not engaged in banking, but rather in
activities related to banking, are not subject to geographic restrictions.
Holding companies may also engage in a wide range of financial activities under
the Gramm-Leach-Bliley Financial Services Modernization Act. See section
entitled "Description of the Holding Company - Permitted Activities."Activities, Permitted
Activities for Financial Holding Companies" below.
Banks may also engage in non-banking activities that are related to
banking, as prescribed by federal and state laws, and under the
Gramm-Leach-Bliley Financial Services Modernization Act, may engage in a wide
range of financial activities through the establishment of operating
subsidiaries. However, it is the position of management that the holding company
structure will provide more options for engaging in non-banking activities in
terms of the choice of corporate structure and the applicability of Pennsylvania
corporate law, rather than Pennsylvania banking law. Pennsylvania corporate law
will facilitate our ability to obtain various forms of financing not available
to Pennsylvania chartered banks, to assist in our potential growth into
non-banking areas.
Protection Against an Unfriendly Takeover. Anti-takeover defenses in the
holding company's articles of incorporation and by-laws and anti-takeover
provisions in the Pennsylvania Business Corporation Law of 1988 will allow the
board of directors of the holding company to more easily resist a takeover which
it considers undesirable than can the board of directors of the bank. Several of
the defenses in the Articles and by-laws would not be allowed for banks under
banking laws but are permissible for corporations. Also, the anti-takeover
provisions of the Business Corporation Law are not applicable to banks or bank
32
and trust companies. See sections entitled "Description of the Holding Company's
Capital Securities - Anti-Takeover Provisions and Anti-Takeover Provisions
Applicable to Registered Corporations." See also section entitled "Risk
Factors
- - Risks Relating to the Reorganization.Factors."
Flexibility in Responding to Changes in Law. The holding company structure
will generally provide more flexibility in responding to changes in banking and
corporate law. For example,As a Pennsylvania corporation, we can take advantage of more
flexible provisions in the Pennsylvania corporate law in terms of the types of
financing we are able to obtain. We will have the ability, under the
Gramm-Leach-Bliley Financial Services Modernization Act, recently becamesigned into law on
November 12, 1999. The law
repeals provisions in the Banking Act1999, to apply to become a financial holding company. This is a
special type of 1933 (the Glass- Steagall Act) to
permit bank holding company that may engage in any financial activities
that are financial in nature or incidental to financial activities, to include
insurance underwriting, agency and brokerage services and investment banking and
securities brokerage services. Although bank subsidiaries, and national bank operating
subsidiaries to offer a wide rangemay also generally
engage in most of newthe same financial services, including
securities underwriting. Theactivities under this new law, also allows bankfinancial
holding company subsidiaries tocan engage in several activities not permitted for
bank subsidiaries, including real estate development and insurance underwriting.
Bank Acquisitions.However, we currently have no specific plans to enter into other types of
businesses or to obtain financing through the holding company.
BANK ACQUISITIONS. Although we currently have no plans to acquire other
banks, the holding company structure will permit greater flexibility in
acquiring other banking institutions in the future, if we decide to do so. Under
the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994,
adequately capitalized and well-managed bank holding companies may acquire banks
in any state, subject to deposit concentration limits and approval by the
Federal Reserve Board. The Act also permits interstate mergers between
adequately capitalized and managed banks, subject to approval by the appropriate
regulators. The Act further permits the establishment of new branches in another
state if the law of the state where the new branch is located expressly permits
it. However, the ability to acquire another bank, either within Pennsylvania or
outside Pennsylvania, as an additional subsidiary of the holding company,
without merging The Fidelity Deposit and Discount Bank and the target bank,
gives us more options for growth.
Dissenters' Rights of AppraisalDISSENTERS' RIGHTS OF APPRAISAL
General. Under the Pennsylvania Banking Code of 1965, which directs that
dissenter's rights are governed by the Pennsylvania Business Corporation Law of
1988, shareholders of the bank's common stock have the right to dissent from the
merger and reorganization and to obtain payment of the "fair value"fair value of their
shares in the event we complete the reorganization. The
24
Pennsylvania Business Corporation Law of 1988 also grants shareholders of the
bank the right to dissent from the transaction and receive the "fair value"fair value of
their shares.
If you contemplate exercising your right to dissent, we urge you to read
carefully the provisions of Subchapter D of Chapter 15 of the Pennsylvania
Business Corporation Law of 1988, which is attached to this proxy
statement/prospectus as Exhibit E.Annex D. A discussion of the provisions of the statute
is included here. The discussion describes the steps that you must take if you
want to exercise your right to dissent. You should read both this summary and
the full text of the law.
Send any written notice or demand required concerning your exercise of
dissenters' rights to Michael F. Marranca, President, The Fidelity Deposit and
Discount Bank, Blakely and Drinker Streets, Dunmore, Pennsylvania 18512.
33
Fair Value. The term "fair value" means the value of a share of the bank's
common stock immediately before the day of the merger and reorganization, taking
into account all relevant factors, but excluding any appreciation or
depreciation in anticipation of the reorganization
Notice of Intention to Dissent. If you wish to dissent, you must:
o fileFile a written notice of intention to demand payment of the fair value
of your shares if the reorganization is completed, prior to the vote of
shareholders on the reorganization at the specialannual meeting;
o makeMake no change in your beneficial ownership of stock from the date you
give notice through the day of the reorganization; and
o notNot vote your stock for approval of the Planplan of Reorganizationreorganization and Planplan
of Merger.
Neithermerger.
Voting in favor of the reorganization constitutes a waiver of dissenters'
rights of appraisal. Further, neither a proxy marked against approval of the
reorganization nor a vote at the annual meeting against approval of the
reorganization satisfies the necessary written notice of intention to dissent. A
separate written notice must be filed with the bank prior to the vote of
shareholders on the reorganization, as described above.
Notice to Demand Payment. If the reorganization is approved by the required
vote of shareholders, the bank will mail a notice to all dissenters who gave due
notice of intention to demand payment and who did not vote for approval of the
Planplan of Reorganizationreorganization and Planplan of Merger.merger. The notice will state where and when
you must deliver a written demand for payment and where you must deposit
certificates for stock in order to obtain payment. The notice will include a
form for demanding payment and a copy of the law. The time set for receipt of
the demand for payment and deposit of stock certificates will be not less than
30 days from the date of mailing of the notice.
Failure to Comply with Notice to Demand Payment, etc. You must take each
step in the indicated order and in strict compliance with the statute to keep
your dissenters' rights. If you fail
25
to follow the steps, you will lose you right to dissent and you will receive 2
shares of Fidelity D & D Bancorp's common stock for each share of the bank's
common stock that you hold.
Payment of Fair Value of Shares. Promptly after the reorganization, the
bank will send dissenters, who have timely filed the demand for payment and
deposited their stock certificates, the amount that the bank estimates to be the
fair value of the stock. The remittance or notice will be accompanied by:
o aA closing balance sheet and statement of income of the bank for a
fiscal year ending not more than 16 months before the date of
remittance or notice together with the latest available interim
financial statements;
o aA statement of the bank's estimate of the fair value of its common
stock; and
o aA notice of the right of the dissenter to demand supplemental payment,
accompanied by a copy of the law.
34
Estimate by Dissenter of Fair Value of Shares. If a dissenter believes that
the amount stated or remitted by the bank is less than the fair value of the
stock, the dissenter may send an estimate of the fair value of the stock to the
bank. If the bank remits payment of estimated value of a dissenter's stock and
the dissenter does not file his or her own estimate within 30 days after the
bank mailed its remittance, the dissenter will be entitled to any additional
payment.no more than the
amount remitted by the bank.
Valuation Proceeding. If any demands for payment remain unsettled within 60
days after the latest to occur of:
o theThe reorganization,
o theThe bank's timely receipt of any demands for payment, or
o theThe bank's timely receipt of any estimates by dissenters of the fair
value,
then, the bank may file an application, in the Court of Common Please of
Lackawanna County, requesting that the court determine the fair value of the
stock. If this happens, all dissenters, no matter where they reside, whose
demands have not been settled, shall be made parties to the proceeding. In
addition, a copy of the application will be delivered to each dissenter.
If the bank fails to file the application, then any dissenter, on behalf of
all dissenters who have made a demand and who have not settled their claim
against the bank, may file an application in the name of the bank at any time
within the 30-day period after the expiration of the 60-day period and request
that the Lackawanna County Court determine the fair value of the shares. The
fair value determined by the Court may, but need not, equal the dissenters'
estimates of fair value. If no dissenter files an application, then each
dissenter entitled to do so shall be paid the bank's estimates of the fair value
of the common stock and no more, and may bring an action to recover any amount
not previously remitted, plus interest at a rate the Court finds fair and
equitable.
26
Costs and Expenses. The costs and expenses of any valuation proceedings in
the Lackawanna County Court, including the reasonable compensation and expenses
of any appraiser appointed by the Court to recommend a decision on the issue of
fair value, will be determined by the Court and assessed against the bank except
that any part of the costs and expenses may be apportioned and assessed by the
Court against all or any of the dissenters who are parties and whose action in
demanding supplemental payment the Court finds to be arbitrary, vexatious or in
bad faith.
Material ConditionsMATERIAL CONDITIONS
The reorganization will not occur unless the following conditions are met:
o The holders of at least 2/3 ofShareholders approve the outstanding shares of the
bank's common stock vote to approve and adopt the Plan of
Reorganization and Plan of Merger. The Pennsylvania Banking
Code of 1965 requires this percentage of affirmative votes for
any transaction involving a merger.transaction.
o The Pennsylvania Department of Banking must approve the organization of
the interim bank and the merger of the interim bank into the bank. On
October 29, 1999, the organizers of the interim bank filed an
application with the Department for Banking for approval to charter the
interim bank.bank, and on December 14, 1999, the Department of Banking
approved the charter. On ________,
1999,January 5, 2000, the bank filed an application
to merge with the interim bank. Thebank, and on February 9, 2000, the Department
of Banking granted its approval of the
charter for the interim bank and for the proposed merger on
___________, 2000.
35
merger.
o Under the Bank Merger Act, the Federal Deposit Insurance Corporation,
as the bank's primary federal regulator, must approve the merger of the
bank into the interim bank. The bank filed a Bank Merger Act
application with the FDIC on ______________,March 29, 2000, which remains pending. The
FDIC has not yet issued approval for the merger between the bank and
the interim bank.
o The formation of a bank holding company requires the approval or
nonobjection of the Board of Governors of the Federal Reserve System.
Fidelity D & D Bancorp filed a notice with the Federal Reserve Bank of
Philadelphia of its proposal to become a bank holding company on
November 9, 1999, and the Federal Reserve Board issued a letter of
nonobjection to the proposal on December 7, 1999.
In general, the bank regulatory authorities may disapprove this transaction
if the reorganization and merger of the interim bank with and into the bank and
the reorganization of the bank into a one-bank holding company would not be
consistent with adequate sound banking practices and would not be in the public
interest.
In addition, the merger of the interim bank with the bank may not occur for
15 days from the date of the latest approval by the Department, the FDIC and
Federal Reserve Board.FDIC. If the United States Department
of Justice has issued a challenge on anti-trust grounds, the regulators may
extend thisthe waiting period
before which the merger may not occur.period. The merger of the interim bank with the bank and the
reorganization of the bank into a one-bank holding company cannot proceed in the
absence of these requisite regulatory approvals. We cannot assure that the bank regulatory
authorities will issue all necessary approvals for the reorganization and
merger, or that they will issue the approvals in a timely manner. If the
regulators issue the necessary approvals
27
in time, the bank and
holding companywe anticipate completing the reorganization immediately after obtaining
shareholder approval, during the first fiscal quarter ofby June 30, 2000.
The approval of the bank regulatory authorities reflects only their view
that the transaction does not violate the competitive standards of the law and
is consistent with regulatory concerns relating to bank management and to the
safety and soundness of the banking system. You should not interpret their
approval as an opinion by the bank regulatory authorities that the
reorganization is favorable to shareholders from a financial point of view or
that the terms of the exchange are fair. The bank regulatory authorities'
approval is not an endorsement or recommendation of the reorganization and
merger.
36
Closing Date
TheCLOSING DATE
After all regulatory approvals have been issued, the reorganization and the
merger of the interim bank withinto the bank will take place at the time specified on the
letters of official certification to be
issued by thePennsylvania Department of Banking and FDIC.files the Articles of Merger with the
Pennsylvania Department of State. Presently, the bank plans to request that the
Department of Banking and FDIC issue their certification for
closingfile the transactionArticles of Merger by no later than ______________,June 30,
2000. The Department of Banking approved the proposed transaction on ______________, 2000, and the FDIC
approved the proposed transaction on ______________,February 9,
2000. However, theThe Department of Banking and the FDIC will not issue their letterfile the Articles of certification
for closing the transactionMerger until the bank gives notice to the Department of
Banking and the FDIC that holders of at
least 2/3 of the issued and outstanding shares of common stock of the bank have
approved and adopted the Planplan of
Reorganization and Plan of Merger. The regulators' approval is not an
endorsement or recommendation of the reorganization and plan of merger.
Tax ConsequencesTAX CONSEQUENCES
Shumaker Williams, P.C., Special Counsel to the bank and Holding Company,holding company,
issued a tax opinion dated December ____, 1999,March 16, 2000, regarding federal tax consequences of
the proposed transaction, the contents of which are summarized below. The
opinion is attached as an exhibit to the Registration Statement, filed with the
SEC, of which this proxy statement/prospectus forms a part. This is only a
general description of the material federal income tax consequences of the
reorganization. We recommend that you consult your own tax advisors as to
particular facts and circumstances that may be unique to you and not common to
shareholders as a whole and also as to any estate, gift, state, local or foreign
tax consequences arising out of this transaction. We do not anticipate that the
law will change before closing.
The following is a summary of the opinion of Shumaker Williams, P.C.
and is not binding on the Internal Revenue Service. Under the current provisions
of the Internal Revenue Code of 1986, as amended, it is anticipatedwe anticipate that:
o theThe bank, the holding company and the interim bank will recognize no
gain or loss because of the reorganization;
o theThe bank's shareholders will recognize no gain or loss upon the
exchange of the bank's common stock solely for the holding company's
common stock in accordance with the reorganization, except for
o thatThat gain or loss recognized due to the receipt of cash which is
received by any dissenting shareholder of the bank, and
28
o thatThat gain or loss recognized due to the receipt of cash by any
shareholder in lieu of fractional shares of the holding company's
common stock;
o theThe tax basis of the holding company's common stock received by each of
the bank's shareholders will be the same as the tax basis of the bank's
common stock owned prior to the reorganization by the shareholder;
o theThe holding period of the holding company's common stock received by
the bank's shareholders, generally, will include the holding period of
the bank's common stock, provided that the common stock of the bank was
held as a capital asset on the date of the exchange;
o theThe payment of cash to the bank's shareholders in lieu of their
fractional share interests of the holding company's common stock
generally will represent a distribution in full payment in exchange for
the fractional share interest in the holding company and will qualify
as a capital gain or loss; and
o anyAny distribution by the surviving bank to the holding company for the
repayment of the loan to charter the interim bank will not have any tax
consequence.
(End of Summary of Opinion by Shumaker Williams, P.C.)
37
In general, under Section 302(a) of the Internal Revenue Code, dissenting
shareholders will treat any cash they receive from the bank in redemption of
their bank common stock as a capital gain or loss, if the shares are held as a
capital asset. Otherwise, the tax law would require shareholders to treat cash
as ordinary income. It is possible, however, that the provisions of Section
302(a) will not apply to a particular dissenting shareholder due to rules that
treat certainsome shareholders as owning shares actually owned by other individuals and
entities, including certainsome individuals related to the shareholder and certainsome
partnerships, estates, trusts and corporations in which the shareholder has an
interest. If these rules apply, the amounts the bank pays to the dissenting
shareholder may be taxable as dividends.
Under current Pennsylvania personal income tax law, shareholders who reside
in Pennsylvania will not recognize a gain or loss on the exchange of the bank's
common stock for the holding company's common stock, except for shareholders
exercising dissenters' rights and except for fractional shares. Based on
recent
developments in Pennsylvania law, the holding company's common stock may beis not subject to personal
property taxes in the various counties of Pennsylvania.
In some jurisdictions, the state and local law treats shares of common
stock of a business corporation like the holding company differently from shares
of stock of a banking institution. We urge you to consult your own tax advisors
to make an individual appraisal of the federal, state and local income tax and
personal property and other tax consequences of the reorganization and the
exercise of dissenters' rights.
Accounting TreatmentACCOUNTING TREATMENT
We intend to treat the proposed reorganization as a pooling of interestspooling-of-interests
for financial accounting purposes. The pooling -of-interestpooling-of-interest method of accounting
for a business combination reflects the union of ownership between the entities
involved. Results of operations are restated for prior periods as if the
entities involved had always been combined. Because Fidelity D & D Bancorp will
be a one-bank holding company, immediatelyImmediately after the
reorganization, its consolidated financial statements will be substantially
equivalent to the bank's financial statements prior to the reorganization. The
holding company's parent-only financial statements will reflect its investment
in 100% of the shares of the bank's common stock.
Trading and Resale of Holding Company Common Stock29
TRADING AND RESALE OF HOLDING COMPANY COMMON STOCK
The bank's shares are sold from time to time in the over-the-counter market
and in private transactions. Initially, we do not expect that holding company's
common stock will trade on a more establishedfrequent basis following the merger. Currently, weWe have
no plans to list shares of the holding company's common stock on any stock
exchange, although we may do so in the future.
The holding company is registering its common stock to be issued in the
reorganization with the SEC under the Securities Act of 1933. Following the
reorganization, former shareholders may freely resell or otherwise transfer
their shares, except those former shareholders who are deemed "affiliates"affiliates of
the bank,holding company, within the meaning of Commission Rules 144 and 145.145 under the
Securities Act. An affiliate is any person who directly or indirectly controls,
is controlled by, or is under common control with the holding company. In
general terms, any person who is an executive officer, director or 10%
shareholder of the bank 38
at the time of the shareholders' meeting may be deemed
to be an affiliate of the bank, and an affiliate of the holding company upon
completion of the reorganization, for purposes of Commission Rules 144 and 145. This proxy
statement/prospectus does not cover resales of shares of the holding company's
common stock to be issued to affiliates of the bankholding company in connection
with the transaction.
The holding company's common stock received by persons who are deemed to be
affiliates of the bankholding company may be resold only:
o inIn compliance with the resale provisions of Commission Rule 145(d);
o inIn compliance with the provisions of another applicable exemption from
the registration requirements of the Securities Act; or
o pursuantPursuant to an effective registration statement filed with the Commission.SEC.
In general terms, Commission Rules 144 and 145(d) under the Securities Act permit an
affiliate of the bankholding company to sell shares of the holding company's common
stock received by him or her in ordinary brokerage transactions subject to certain
limitations on the number of shares that may be resold in any consecutive 3-
month period. Generally, the affiliate, not acting in concert with others, may
not sell that number of shares which is more than 1% of the outstanding shares
of the holding company's common stock during the 3-month period.
The ability of affiliates to resell shares of the holding company's common
stock received in the transaction under Rule 144 orand Rule 145145(d) is subject to
the holding company's having satisfied its Exchange1934 Act reporting requirements, if
any, for specified periods prior to the time of sale.
The limitations under Rules 144 and 145(d) will cease to apply in the case
of a person who is no longer an affiliate of the holding company and has not
been an affiliate of the holding company for at least three months, if a period
of at least two years has elapsed since the date the prior affiliate acquired
the holding company's shares in the reorganization.
30
Finally, under accounting rules for a pooling-of-interest, an affiliate of
the bank may not, as a general rule and subject to an exception in a case of
certainsome very small sales:
o sellSell any shares of the holding company's common stock during the 30-day
period immediately preceding the day of the reorganization; or
o sellSell any shares of the holding company's common stock received by him
or her in exchange for shares of the bank's common stock until after
the publication of financial results covering at least 30 days of
post-reorganization operations.
39STOCK OPTIONS AND STOCK OPTION PLANS
Stock options will essentially not change as a result of the
reorganization. In 1998, the bank implemented an Independent Directors Stock
Option Plan and a Stock Incentive Plan. As of February 29, 2000, under these
plans, the bank had issued directors and key employees options to purchase 3,750
shares of the bank's common stock at the price of $62.00. As of that date, 250
shares had been purchased through the exercise of these options. The bank had
also issued options to purchase 3,950 shares of the bank's common stock at the
price of $70.25 as of February 29, 2000. Following the reorganization, the
holding company will assume these stock options and the plans. The holding
company will reserve 99,500 shares of common stock for issuance under these
plans. We will adjust the stock options and the plans to reflect the 2-for-1
exchange ratio of holding company common stock for bank common stock, as
follows:
o The holders of stock options will be entitled to receive twice the
number of shares of common stock of the holding company as the original
number of shares of the bank's common stock, and at half of the
original exercise price. As a result, the value of the stock options
should remain about constant.
o Accordingly, after the reorganization, the outstanding options to
purchase 3,500 shares at an exercise price of $62.00 per share will
automatically convert into options to purchase 7,500 shares of the
holding company's common stock at the price of $31.00 per share.
o The options to purchase 3,950 shares at an exercise price of $70.25 per
share will automatically convert into options to purchase 7,900 shares
of the holding company's stock at an exercise price of $35.125 per
share.
Similarly, the number of shares which the holding company may issue under
the plans will adjust automatically. As a result, the holding company will be
able to issue up to 50,000 shares of common stock under the Independent
Directors Stock Option Plan and 49,500 shares of common stock under the Stock
Incentive Plan. Otherwise, the original terms of these stock options and rights
will continue to apply. See "Description of the Bank's Common Stock - Stock
Option Plans" for a description of the bank's 1998 Independent Directors Stock
Option Plan and 1998 Stock Incentive Plan.
31
DIVIDEND REINVESTMENT PLAN
On the day of the reorganization, The Fidelity Deposit and Discount Bank
Dividend Reinvestment Plan, which the bank adopted in1995 to provide
shareholders a simple and convenient method of investing cash dividends in
additional shares of bank common stock, will terminate. After the
reorganization, we anticipate that the holding company will implement a dividend
reinvestment plan with substantially the same terms as the prior bank dividend
reinvestment plan. The holding company will send shareholders an offering
circular for the shares which may be issued under the plan, along with a
registration form.
FINANCIAL INFORMATION ABOUT THE REORGANIZATION
Capitalization
We set forth below the capitalization, as of December 31, 1999, of
o The bank,
o The interim bank, and
o The holding company.
The Fidelity Fidelity Deposit
Deposit and and Discount Fidelity D & D
Discount Bank Interim Bank Bancorp, Inc.
------------- ------------ -------------
Prior to Merger
Number of Shares Authorized,
Common Stock, par value
$1.5625 for Bank, $2.00 for Interim
Bank and without par value
for Holding Company 5,000,000 5,000,000 10,000,000
Number of Shares Authorized,
Preferred Stock, Holding
Company only, without
par value (Not applicable) (Not applicable) 5,000,000
Number of Shares outstanding:
Common Stock 900,392 50,000 (1) 5 (2)
Preferred Stock -- -- 0
Capital Accounts:
Common Stock $ 1,406,863 $ 100,000 (1) $ 5.00 (2)
Preferred Stock -- -- 0
Capital Surplus 7,266,168 55,000 (1)
Undivided Profits 28,126,918 0
Accumulated Other
Comprehensive Income (Loss) (4,673,713) 0 0
----------- ---------------- ----------
Total Equity Capital $32,126,236 $ 155,000 $ 5.00
32
Set forth below is the same information, as adjusted to reflect the
reorganization and the merger of the interim bank into the bank:
After Merger
Number of Shares Outstanding:
Common Stock par value
$1.5625 for Bank, $2.00 for
Interim Bank and without
par value for Holding
Company 900,392 (3) 1,800,784 (4)
Preferred Stock (Holding
Company only, without par
value) -- -- 0
Capital Accounts:
Common Stock $ 1,406,863 -- $ 1,406,863
Preferred Stock -- -- 0
Capital Surplus 7,226,168 -- 7,226,168
Undivided Profits 28,126,918 -- 28,126,918
Net Unrealized Holding Gains
(Losses) on Available-for-
Sale Securities (4,673,713) -- (4,673,713)
----------- ---- -----------
Total Equity Capital $32,126,236 (5) 0 $32,126,236 (6)
===
(1) Represents shares issued upon the initial capitalization of the interim
bank for $3.10 per share. The organizers of the interim bank subscribed for
5,000 shares, and Fidelity D & D Bancorp subscribed for 45,000 shares. At
the time the merger is completed, the organizers will transfer their 5,000
shares to Fidelity D & D Bancorp at the same purchase price, $3.10 per
share. The $55,000 in capital surplus includes a $5,000 expense fund, as
required by the Pennsylvania Banking Code of 1965.
(2) Represents 5 shares issued to the incorporators of the holding company for
$1.00 per share. At the time of the merger, Fidelity D & D Bancorp will
repurchase these shares at the same purchase price, $1.00 per share, and
retire them.
(3) Represents the merger of the interim bank into the bank. At the time of the
merger, the 50,000 shares of interim bank common stock owned by Fidelity D
& D Bancorp will be converted into that number of shares of bank common
stock outstanding immediately prior to the merger, resulting in the bank's
equity remaining the same.
(4) Represents the maximum number of shares to be issued to the holders of
common stock of the bank as the result of the merger. No fractional shares
of holding company common stock will be issued in the reorganization. Cash
will be paid in lieu of fractional shares. The payment of cash to
fractional shareholders and to shareholders who exercise their dissenters'
rights could reduce the number of outstanding shares the holding company
issues.
(5) Total equity capital reflects the capital accounts after payment of the
$155,000 dividend to the holding company to repay its loan to purchase the
shares that provided the funds for the initial capitalization of the
interim bank. This borrowing will be through an unaffiliated bank in
Pennsylvania at approximately prime rate. If the proposed reorganization
had occurred on January 1, 1999, the payment of the dividend to repay the
holding company's loan would have reduced interest income for the bank's
1999 fiscal year by less than $500.
(6) Amounts after the merger are on a consolidated basis. The above
capitalization does not account for the expense of forming the holding
company. Legal and accounting fees, filing fees, printing costs and
other expenses are expected to amount to approximately $115,000.
For financial reporting purposes, the cost will be accounted as an expense
for the 2000 fiscal year.
33
Other Financial Information
Immediately following the effective time of the reorganization, the
consolidated financial statements of Fidelity D & D Bancorp will be
substantially the same as the bank's financial statements immediately prior to
the reorganization. Prior to the closing of the reorganization, Fidelity D & D
Bancorp will not have commenced operations and will have no material assets or
liabilities.
For information about the financial condition of The Fidelity Deposit and
Discount Bank, please refer to "Management's Discussion and Analysis of
Financial Condition and Results of Operation." Please also refer to the
financial statements for the bank following the Index to Financial Statements at
the end of this document, starting at page F-1.
DESCRIPTION OF THE HOLDING COMPANY
Organization and Description of BusinessORGANIZATION AND DESCRIPTION OF BUSINESS
We organized the holding company as a Pennsylvania business corporation on
August 10, 1999, for the purpose of forming a bank holding company. The articles
of incorporation of the holding company authorize the issuance of up to 10
million shares of common stock, without par value, and 5 million shares of
preferred stock, without par value. The holding company issuedhas authorized the
issuance of 5 shares of the common stock to its incorporators, which are the only outstanding shares. The
holding company will repurchase these shares after the reorganization.incorporators.
The primary function of the holding company is to own of all of the bank's
common stock. Its profitability will be dependent on the financial results of
its operating subsidiary, the bank. In the future, we may decide to acquire or
form additional subsidiaries, including other banks.
At present, the holding company does not own or lease any property and has
no paid employees. It will not actively engage in business until after the
completion of the proposed reorganization. Until the day of the reorganization,
the holding company will use the bank's space and employees without payment.
After the reorganization, it will reimburse the bank on a fair and reasonable
basis for all services furnished to it and for all expenses which the bank pays
on its behalfbehalf.
Copies of the amended and restated articles of incorporation and by-laws of
the holding company are attached to this proxy statement/prospectus as Annexes B
and C. PleaseWe recommend that you read them carefully.
PropertiesPROPERTIES
The holding company does not own or lease any properties. For information
about properties which the bank owns or leases, see "Description of the Bank -
Properties."
Management34
MANAGEMENT
The same persons who serve on the board of directors of the bank also serve
on the board of directors of the holding company. See "Description of the Bank -
Directors and Executive Officers" below. After the reorganization, the
holding company will be the sole shareholder of the bank and will elect one
class, or approximately 1/3, of the directors of the bank annually.annually to serve for
a 3-year term. The board of directors of the holding company will appoint the
officers of the holding company toannually. See "Description of the Bank -
Directors" below for information about the directors of the bank, who also serve
for one-year terms.
40
as directors of the holding company.
The following table provides information about the current officers of
the holding company. All of these officers also serve as officers of the bank
and are employees of the bank. Further information about their business
experience may be found under "Description of the Bank - Principal Officers."
- --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Age as of
Name December __, 1999March 24, 2000 Position
- --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Michael F. Marranca 67 President and Chief Executive
Officer
- --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Kevin R. Messett 44 Senior Vice President
- --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Joseph E. Quinnan (1) 55 Senior Vice President
- --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
John F. Glinsky, Jr. 6869 Secretary
- --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Robert P. Farrell 4647 Treasurer
- --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Executive and Director Compensation
Because the(1) Mr. Quinnan has announced his retirement, effective May 1,2000.
EXECUTIVE AND DIRECTOR COMPENSATION
The holding company was not in existence in 1998, it paid no compensation to its directors andor officers
for that year.during 1999. Further, the holding company has paid no compensation to its
directors or officers to date during 1999.2000. We anticipate that together the
holding company and the bank will pay directors and officers the same
compensation which they currently receive, with such increases in the future as
may have occurred had the proposed reorganization not occurred. Although the
holding company will hold several board meetings each year, we expect the total
amount spent on directors for their attendance at board meetings to remain the
same as before the reorganization. The holding company will not pay its
directors separate compensation for their attendance at board meetings, but the
bank will continue to compensate directors for their attendance at bank board
meetings. See "Description of the Bank - Executive Compensation" and
"Description of the Bank - - Director Compensation" below.
Informationbelow for information about
Beneficial Ownershipthe bank's compensation of Significant Shareholders, Directorsits officers and Executive Officersdirectors.
INFORMATION ABOUT BENEFICIAL OWNERSHIP OF SIGNIFICANT SHAREHOLDERS, DIRECTORS
AND EXECUTIVE OFFICERS
After the reorganization, we anticipate that the percentage ownership of
the holding company by each of its significant shareholders, directors and
executive officers will be approximately the same as thetheir percentage ownership
byof the bank's significant shareholders, directors and executive officersbank immediately prior to the reorganization. See "Information about the Special Meeting -
Information about Beneficial"Beneficial Ownership
of the Bank's Common Stock by SignificantPrincipal Shareholders Directors and Executive Officers.Management."
Certain Relationships and Related Transactions35
CERTAIN RELATIONSHIPS AND TRANSACTIONS WITH DIRECTORS AND OFFICERS
The information regarding certain relationships between the directors and officers
of the bank and transactions between the bank and its directors and officers of the
bank and the bank
also applies to the holding company. Please refer to "Description of the Bank -
Certain Relationships between Officers and Related Transactions.Directors and Certain Transactions
between Officers and Directors and the Bank."
Directors' and Officers' Indemnification and Limits on LiabilityDIRECTORS' AND OFFICERS' INDEMNIFICATION AND LIMITS ON LIABILITY
The holding company's by-laws provide for indemnification of its directors,
officers, employees and agents against liabilities and expenses incurred in
legal proceedings concerning the holding company, to the fullest extent
permitted under Pennsylvania corporate law.
41
Indemnification will only apply to
persons who act in good faith, in a manner he or she reasonably believed to be
in the best interest of the company, without willful misconduct or recklessness.
We expect to extend the present directors' and officers' liability
insurance policy to cover the holding company's directors and officers without
significant additional cost. This liability policy would cover the typical
errors and omissions liability associated with the activities of the holding
company. The provisions of the insurance policy would probably not indemnify any
of the holding company's officers and directors against liability arising under
the Securities Act of 1933. In the opinion of the SEC, indemnification of
officers, directors or persons controlling the holding company for liabilities
arising under the 1933 Act is against public policy and unenforceable.
The holding company's by-laws also limit the liability of directors for
monetary damages to acts of self-dealing, willful misconduct or recklessness,
unless the act constitutes a crime or involves liability for the payment of
taxes. We believe that these provisions will help reduce baseless litigation,
but they may also make it more difficult for shareholders to sue these persons
on behalf of the company.
Supervision and Regulation of the Holding CompanySUPERVISION AND REGULATION OF THE HOLDING COMPANY
The Securities Act of 1933 - The-The Offer and Sale of Securities. Under the
1933the1933
Act, the holding company will be subject to the jurisdiction of the SEC and of
state securities commissions for matters relating to the offer and sale of its
securities. Presently, the bank is exempt from thesethe SEC registration requirements.requirements
and most state registration requirements because of exemptions for bank stock.
Accordingly, additional issuances of the holding company's stock to raise
capital or for dividend reinvestment, stock option and other plans will require
registration, (absentabsent any exemption from registration).registration. Registration will result
in additional costs that the bank does not presently have to incur
because of an exemption for bank stock under the 1933 Act.incur.
The Securities Exchange Act of 1934 - Periodic1934--Periodic Reporting Requirements. Due
to its number of shareholders and size of its assets, the bank's common stock is
registered under Section 12 of the Securities Exchange Act of 1934. As a
registered company, the bank is subject to certain periodic reporting requirements and
to regulations regarding proxy solicitations orand tender offers. In accordance withUnder the 1934
Act, the bank files reports, proxy statements and other information with
36
its primary federal regulator, the FDIC. After the reorganization, Section 12 of
the 1934 Act will require that the holding company likewiseto register its stock.stock because it
will have more than 500 shareholders and $10 million in assets on a consolidated
basis. The holding company will file periodic reports, proxy statements and
other information with the SEC. The reports will include consolidated financial
information about both the holding company and the bank. The bank will terminate its
Section 12 registration and cease to file these reports under the 1934 Act.
The Bank Holding Company Act of 1956 - Supervision-Supervision by the Federal Reserve
Board. On the day of the reorganization, the holding company will become subject
to the provisions of the Bank Holding Company Act of 1956, as amended, and to
supervision by the Federal Reserve Board. The following restrictions will apply:
42
o General Supervision by the Federal Reserve Board. As a bank holding
company, our activities will be limited to the business of banking and
activities closely related or incidental to banking. Bank holding
companies are required to file periodic reports with and are subject to
examination by the Federal Reserve Board. The Board has adopted a
risk-focused supervision program for small shell bank holding companies
which is tied to the examination results of the subsidiary bank. The
Federal Reserve Board has issued regulations under the Bank Holding
Company Act that require a bank holding company to serve as a source of
financial and managerial strength to its subsidiary banks. As a result,
the Federal Reserve Board may require that the holding company stand
ready to provide adequate capital funds to The Fidelity Deposit and
Discount Bank during periods of financial stress or adversity.
o Restrictions on Acquiring Control of other Banks and Companies. A bank
holding company may notnot:
o acquireAcquire direct or indirect control of more than 5% of the
outstanding shares of any class of voting stock, or substantially
all of the assets of, any bank, or
o mergeMerge or consolidate with another bank holding company,
without prior approval of the Federal Reserve Board.
In addition, a bank holding company may notnot:
o engageEngage in a non-banking business, or
o acquireAcquire ownership or control of more than 5% of the outstanding
shares of any class of voting stock of any company engaged in a
non-banking business,
unless the business is determined by the Federal Reserve Board to be so
closely related to banking as to be a proper incident to banking. In
making this determination, the Federal Reserve Board considers whether
these activities offer benefits to the public that outweigh any
possible adverse effects.
37
o Anti-Tie-In Provisions. A bank holding company and its subsidiaries may
not engage in certain tie-in arrangements in connection with any extension of
credit or provision of any property or services. The
so-called "anti-tie-in"These anti-tie-in
provisions state generally that a bank may notnot:
o extendExtend credit,
o leaseLease or sell property, or
o furnishFurnish any service to a customer
on the condition that the customer provide additional credit or service
to the bank or its affiliates, or on the condition that the customer
not obtain other credit or service from a competitor of the bank.
43
o Restrictions on Extensions of Credit by Banks to their Holding
Companies. Subsidiary banks of a bank holding company are also subject
to certain restrictions imposed by the Federal Reserve Act onon:
o anyAny extensions of credit to the bank holding company or any of its
subsidiaries,
o investmentsInvestments in the stock or other securities of the bank holding
company, and
o takingTaking these stock or securities as collateral for loans to any
borrower.
o Risk-Based Capital Guidelines. Bank holding companies must comply with
the Federal Reserve Board's risk- based capital guidelines. The
required minimum ratio of total capital to risk-weighted assets,
including certainsome off-balance sheet activities, such as standby letters of
credit, is 8%. At least half of the total capital is required to be
"TierTier I Capital," consisting principally of common stockholders'
equity, less certain intangible assets. The remainder, "TierTier II
Capital," may consist ofof:
o certainSome types of preferred stock,
o aA limited amount of subordinated debt,
o certainSome hybrid capital instruments,
o otherOther debt securities, and
o aA limited amount of the general loan loss allowance.
The risk-based capital guidelines are required to take adequate account
of interest rate risk, concentration of credit risk, and risks of
nontraditional activities.
o Capital Leverage Ratio Requirements. The Federal Reserve Board requires
a banking holding company to maintain a leverage ratio of a minimum
level of Tier I capital, (asas determined under the risk-based capital
guidelines)guidelines, equal to 3% of average total consolidated assets for those
bank holding companies that have the highest regulatory examination
rating and are not contemplating or experiencing significant growth or
expansion. All other bank holding companies are required to maintain a
ratio of at least 1% to 2% above the stated minimum. The Bankbank is
subject to almost identical capital requirements adopted by the FDIC.
38
o Restrictions on Control Changes. The Change in Bank Control Act of 1978
requires persons seeking control of a bank or bank holding company to
obtain approval from the appropriate federal banking agency before
completing the transaction. "Control" is generally presumed to beThe law contains a presumption that the
power to vote 10% or more of a company's voting stock.stock confers control of the bank
or bank holding company. The Federal Reserve Board is responsible for
reviewing changes in control of bank holding companies. In doing so,
the Federal Reserve Board reviews the financial position, experience
and integrity of the acquiring person and the effect on the financial
condition of the bank holding company, relevant markets and federal
deposit insurance funds.
The Pennsylvania Banking Code of 1965 - Supervision-Supervision by the Pennsylvania
Department of Banking. As a Pennsylvania bank holding company, the holding
44
company will also be subject to regulation and examination by the Pennsylvania
Department of Banking. For example, the holding company must obtain the
Department'sDepartment of Banking's approval to acquire any additional banks located in
Pennsylvania.
The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994
- -Interstate Banking. Prior to the passage of the Riegle-Neal Interstate Banking
and Branching Efficiency Act of 1994, also known as the Interstate Banking Act,
the Bank Holding Company Act prohibited a bank holding company located in one
state from acquiring a bank located in another state, unless the law of the
state where the bank to be acquired was located specifically authorized the
acquisition. Similarly, prior law generally prohibited interstate branching by a
single bank. The Interstate Banking Act permits an adequately capitalized and
adequately managed bank holding company to acquire a bank in another state
whether or not the lawlaws of that other state permits the acquisition, subject to
certain
deposit concentration caps and approval by the Federal Reserve Board. The law
permits states to require stricter concentration limitations or to require that
the target be in existence for up to 5 years before an out-of-state bank or bank
holding company may acquire it. In contrast to interstate acquisitions and
mergers, the Interstate Banking Act permits acquisitions of less than all
branches of a bank only if the state's laws permit it.
In addition, under the Interstate Banking Act, an adequately capitalized
and well managedwell-managed bank can engage in interstate expansion by merging with a bank
in another state, unless the other state affirmatively opted out of the
legislation before June 1, 1997. The Interstate Banking Act also permits the
establishment of new branches in another state, but only if a state
affirmatively opts in by adopting appropriate legislation.
Pennsylvania,
Delaware, Maryland and New Jersey, as well as other states, have adopted "opt
in" legislation which allows these transactions.
AFinally, a bank holding company or bank may not acquire a bank outside its
home state primarily for the purpose of deposit production, and the transaction
must not have a negative impact on the communities that the target bank serves.
Permitted ActivitiesPERMITTED ACTIVITIES
The Federal Reserve Board permits bank holding companies to engage in
activities so closely related to banking or managing or controlling banks as to
be a proper incident of banking. In 1997, the Federal Reserve Board
significantly expanded its list of permissible non-bankingnon- banking activities to
improve the competitiveness of bank holding companies. The following list
includes
39
activities that a holding company may presently conduct and is subject to change
by the Federal Reserve Board:
o Making, acquiring or servicing loans and other extensions of credit for
its own account or for the account of others.
o Any activity used in connection with making, acquiring, brokering, or
servicing loans or other extensions of credit, as determined by the
Federal Reserve Board. The Board has determined that the following
activities are permissible:
45
o Real estate and personal property appraising;
o Arranging commercial real estate equity financing;
o Check-guaranty services;
o Collection agency services;
o Credit bureau services;
o Asset management, servicing, and collection activities;
o Acquiring debt in default, if the holding company divests shares or
assets securing debt in default that are not permissible
investments for bank holding companies within prescribed time
periods, and meets certainvarious other conditions; and
o Real estate settlement services.
o Leasing personal and real property or acting as agent, broker, or
advisor in leasing property, provided that:
o The lease is a nonoperating lease;
o The initial term of the lease is at least 90 days;
o If real property is being leased, the transaction will compensate
the lessor for at least the lessor's full investment in the
property and costs, with certainvarious other conditions.
o Operating nonbank depository institutions, including an industrial bank
or savings association.
o Performing functions or activities that may be performed by a trust
company, (includingincluding activities of a fiduciary, agency or custodial
nature),nature, in the manner authorized by federal or state law, so long as
the holding company is not a bank.
o Acting as investment or financial advisor to any person, including:
o servingServing as investment advisor to an investment company registered
under the Investment Company Act of 1940;
o furnishingFurnishing general economic information and advice, general
economic statistical forecasting services, and industry studies;
40
o providingProviding advice in connection with mergers, acquisitions,
divestitures, investments, joint ventures, capital structuring,
financing transactions, and conducting financial feasibility
studies;
o providingProviding general information, statistical forecasting, and advice
concerning any transaction in foreign exchange, swaps and similar
transactions, commodities, and options, futures and similar
instruments;
o providingProviding educational courses and instructional materials to
consumers on individual financial management matters; and
o providingProviding tax planning and tax preparation services to any person.
o Agency transactional services for customer investments, including:
46
o Securities brokerage -- Providing securities brokerage services,
whether alone or in combination with investment advisory services,
and incidental activities, including related securities credit
activities compliant with Federal Reserve Board Regulation T and
custodial services, if the securities brokerage services are
restricted to buying and selling securities solely as agent for the
account of customers and do not include securities underwriting or
dealing.
o Riskless-principal transactions -- Buying and selling all types of
securities in the secondary market on the order of customers as
a
"riskless principal".principal."
o Private-placement services -- Acting as agent for the private
placement of securities in accordance with the requirements of the
Securities Act of 1933 and the rules of the Commission.
o Futures commission merchant -- Acting as a futures commission
merchant for unaffiliated persons in the execution and clearance of
any futures contract and option on a futures contract traded on an
exchange in the United States or abroad, ,ifif the activity is
conducted through a separately incorporated subsidiary of the bank
holding company and the company satisfies certainvarious other conditions.
o Investment transactions as principal:
o Underwriting and dealing in government obligations and money market
instruments, including bankers' acceptances and certificates of
deposit, under the same limitations applicable if the activity were
performed by the bank holding company's subsidiary member banks.
o Engaging as principal in:
o foreignForeign exchanges, and
o forwardForward contracts, options, futures, options on futures, swaps,
and similar contracts, with certainvarious conditions.
o Buying and selling bullion, and related activities.
o Management consulting and counseling activities:
41
o Subject to certainvarious limitations, management consulting on any matter
to unaffiliated depository institutions, or on any financial,
economic, accounting, or audit matter to any other company.
o Providing consulting services to employee benefit, compensation,
and insurance plans, including designing plans, assisting in the
implementation of plans, providing administrative services to
plans, and developing employee communication programs for plans.
o Providing career counseling services to:
o aA financial organization and individuals currently employed by,
or recently displaced from, a financial organization;
47
o individualsIndividuals who are seeking employment at a financial
organization; and
o individualsIndividuals who are currently employed in or who seek positions
in the finance, accounting, and audit departments of any
company.
o Support services:
o Providing limited courier services; and
o Printing and selling checks and related items requiring magnetic
ink character recognition.
o Insurance agency and underwriting:
o Subject to certainvarious limitations, acting as principal, agent, or
broker for credit life, accident, health and unemployment insurance
that is directly related to an extension of credit by the bank
holding company or any of its subsidiaries.
o Engaging in any insurance agency activity in a place where the bank
holding company or a subsidiary of the bank holding company has a
lending office and that has a population not exceeding 5,000 or has
inadequate insurance agency facilities, as determined by the
Federal Reserve Board.
o Supervising, on behalf of insurance underwriters, the activities of
retail insurance agents who sell fidelity insurance and property
and casualty insurance on the real and personal property used in
the bank holding company's operations or its subsidiaries, and
group insurance that protects the employees of the bank holding
company or its subsidiaries.
o Engaging in any insurance agency activities if the bank holding
company has total consolidated assets of $50 million or less, with
the sale of life
42
insurance and annuities being limited to sales in small towns or as
credit insurance.
o Making equity and debt investments in corporations or projects designed
primarily to promote community welfare, and providing advisory services
to these programs.
o Subject to certainvarious limitations, providing others financially oriented
data processing or bookkeeping services.
o Issuing and selling money orders, travelers' checks and United States
savings bonds.
o Providing consumer financial counseling that involves counseling,
educational courses and distribution of instructional materials to
individuals on consumer-oriented financial management matters,
including debt consolidation, mortgage applications, bankruptcy, budget
management, real estate tax shelters, tax planning, retirement and
estate planning, insurance and general investment management, so long
as this activity does not include the sale of specific products or
investments.
o Providing tax planning and preparation advice.
48PERMITTED ACTIVITIES FOR FINANCIAL HOLDING COMPANIES
The Gramm-Leach-Bliley Financial Services Modernization Act, signed into
law on November 12, 1999, amends the Bank Holding Company Act of 1956 to create
a new category of holding company - the financial holding company. To be
designated as a financial holding company, a bank holding company must file an
application with the Federal Reserve Board. The holding company must be well
capitalized and well managed, as determined by Federal Reserve Board
regulations. Once a bank holding company becomes a financial holding company,
the holding company or its affiliates may engage in any financial activities
that are financial in nature or incidental to financial activities. Furthermore,
the Federal Reserve may approve a proposed activity if it is financial
complementary to financial activities and does not threaten the safety and
soundness of banking. The act provides an initial list of activities that
constitute activities that are financial in nature, including:
o Lending and deposit activities,
o Insurance activities, including underwriting, agency and brokerage,
o Providing financial investment advisory services,
o Underwriting in, and acting as a broker or dealer in, securities,
o Merchant banking, and
o Insurance company portfolio investment.
The primary tool granted the Federal Reserve under the Act is the authority
to require that the financial holding company remain well capitalized and well
managed.
43
PROPOSAL NO. 2:
TO FIX THE NUMBER OF DIRECTORS
TO BE ELECTED
Under Article III, Section 1 of the by-laws, the shareholders shall
determine the number of directors to be elected at the annual meeting. The
by-laws further provide for 3 classes of directors with staggered 3-year terms
of office. The board of directors is proposing that shareholders fix the number
of Class A directors to be elected at the annual meeting at 4, which is the
current number of Class A directors. Unless otherwise instructed, the proxy
holders will vote the proxies for this proposal.
The board of directors recommends that shareholders vote FOR the proposal
to fix the number of Class A directors to be elected at 4.
PROPOSAL NO. 3:
ELECTION OF FOUR DIRECTORS TO SERVE
A THREE-YEAR TERM
Pursuant to Article III, Section 1 of the bank's by-laws, the authorized
number of directors may not be less than 7 nor more than 10. The by-laws provide
for 3 classes of directors with staggered 3-year terms of office. The board of
directors currently consists of 10 members, classified as follows:
o 4 Class A directors,
o 3 Class B directors, and
o 3 Class C directors.
The board of directors nominated the 4 persons named below to serve as
directors until the 2003 annual meeting of shareholders and until their
successors are duly elected and qualified. All of the nominees are presently
members of the board of directors, and all have consented to serve another term
as a director if reelected.
The board of directors is proposing the following nominees for election as
Class A directors at the annual meeting:
o Paul A. Barrett, Esquire,
o John T. Cognetti,
o John F. Glinsky, Jr., and
o Michael J. McDonald, Esquire.
For information about these individuals' experience and background, please
refer to "Description of the Bank - Directors" below.
44
The proxy holders will vote the proxies for the election of each of the 4
nominees named above, unless you indicate that your vote should be withheld from
any or all of them. The proxy holders also have the right to vote cumulatively
and to distribute their votes among the nominees as they determine to be in the
best interests of the bank, unless you indicate otherwise on your proxy.
Although we do not anticipate that any of the nominees will be unwilling or
unable to stand for election, in the event of such an occurrence, proxies may be
voted for a substitute designated by the board of directors. Further, if a
director should be unavailable to serve for any reason, a majority of the
remaining members of the board may fill the vacancy until the expiration of the
term of the class of directors to which he or she was appointed.
The board of directors recommends that shareholders vote FOR the election
of the above- named nominees as Class A directors.
DESCRIPTION OF THE BANK
HistoryHISTORY
The Fidelity Deposit and Discount Bank was organized on December 13, 1902,
as a Pennsylvania state-chartered banking institution, in accordance with Act
13th, 1876, entitled "An Act for the Incorporation and Regulation of Deposit and
Discount Banks." The Bank commenced operations in 1903. Deposits held by the
bank are insured by the FDIC to the maximum extent permitted by law. In 1997,
the bank became a bank and trust company when it established a Trust Department.
The Bank'sbank's legal headquarters and main office are at Blakely and Drinker
Streets, Dunmore, Lackawanna County, Pennsylvania 18512.
OfficesOFFICES
The bank currently has 910 full-service offices, including its main office,
in the counties of Lackawanna and Luzerne, Pennsylvania, as follows:
o 2 in Dunmore (MainDunmore--Main Office and Keystone Industrial Park),Park,
o 3 in Scranton,
o 1 in Clarks Summit,
o 1 in Pittston (atPeckville,
o 1 in Pittston-- at Bruno's Supermarket),Supermarket,
o 1 in West Pittston, and
o 1 in Moosic (opened during the second fiscal quarter, 1999).Moosic.
The bank also has a limited service branch at the Clarks Summit State
Hospital, Clarks Summit, Pennsylvania. The Clarks Summit State Hospital facility
provides patients and employees of the hospital with check cashing and deposit
taking services, as well as offering for sale money orders and cashier's checks.
The bank has 2 stand-alone automatic tellers, or "moneymoney access centers," in
Scranton, and a third in Moosic.
In addition, we plan to establish a full-service branch office in Blakely,
Lackawanna County, Pennsylvania, on January __, 2000. We recently received
approval from the Pennsylvania Department of Banking and the FDIC to establish
this branch office.
Description of Business45
DESCRIPTION OF BUSINESS
The bank engages in a full service commercial and consumer banking
business, including the following services:
o acceptingAccepting time and demand deposits,
49
o providingProviding personal and business checking accounts at competitive rates,
o makingMaking secured and unsecured commercial and consumer loans, and
o offeringProviding trust services.
The bank is a locally managed community bank that seeks to provide personal
attention and professional assistance to its customer base which consists
principally of individuals and small and medium-sized businesses. The bank's
philosophy includes offering direct access to its officers and personnel,
providing friendly, informed and courteous service, local and timely decision
making, flexible and reasonable operating procedures, and consistently-applied
credit policies.
The bank's primary service area is located in the counties of Lackawanna
and Luzerne, Pennsylvania. Within the defined service area of the bank's main
office, the banking business is highly competitive. The bank is one of the two
financial institutions headquartered in Dunmore, Pennsylvania. Competition is
primarily with this bank and another commercial bank operating in Dunmore.
Additionally, the bank competes with regionally-based commercial banks, which
generally have greater assets, capital and lending limits.limits
Within the bank's Lackawanna and Luzerne County marketplace, the bank is 1one of ___at
least 14 commercial banks and ___two savings banksassociations competing for customers. There are ____ commercial banks
which are either headquartered or have a presence in the Dunmore and Scranton
markets in Lackawanna County.
Our Luzerne County offices in Clarks Summit,
Pittston and West Pittston sharesshare many of the same
competitors we face in Lackawanna County. While ___ super-regional banks currently control ____% of the
deposit base in Lackawanna and Luzerne Counties, ______ community banks maintain
the other _____% of the total deposits. As of June 30, 1998,1999, The Fidelity
Deposit and Discount Bank held 6.75%7.44% of FDIC-insured deposits in Lackawanna
County and .05%1.00% of FDIC- insuredFDIC-insured deposits in Luzerne County. Within the bank's
Luzerne County marketplace, the bank is one of at least 22 commercial banks and
one savings association competing for customers. The bank also competes with
other types of financial institutions, including credit unions, finance
companies, brokerage firms, insurance companies and retailers. Deposit
deregulation has intensified the competition for deposits among banks in recent
years.
The bank's acceptance of time demand and savings deposits includes passbook
accounts, statement savings accounts, NOW accounts, money market accounts,
regular savings accounts, certificates of deposit and club accounts. The bank
also offers overdraft protection to its checking customers. The bank has a trust
department offering a wide range of trust and fiduciary services, including
investment services.
The bank makes secured and unsecured commercial, consumer, installment and
construction loans. Residential mortgages and small business loans have always
been at the core of the bank's portfolio. Consumer loans include revolving
credit lines and commercial lending.
5046
The bank offers the following support services to make financial management
more efficient and convenient for its customers:
o on-line home and business o MasterCard/Visa credit card services,
banking, o night deposit services,
o telephone banking, o notary public services,
o direct deposit, drive-in banking, o payroll deduction plan,
o discount brokerage services, o safe deposit boxes,
o federal tax depository, o signature guarantees,
o "Money Access Centers" (at o travelers checks,o on-line home and business banking,
o telephone banking,
o direct deposit, drive-in banking,
o discount brokerage services,
o federal tax depository,
o money access centers-- at every office except 139 Wyoming Avenue,
Scranton, Pennsylvania,
o MasterCard/Visa credit card services,
o night deposit services,
o notary public services,
o payroll deduction plan,
o safe deposit boxes,
o signature guarantees,
o travelers checks,
o treasury securities,
Wyoming Avenue, Scranton,
o U.S. savings bonds,
PA),
o individual retirement accounts, and
o utility and municipal payments.
As of September 30,December 31, 1999, the bank had
o totalTotal assets of approximately $431,471,117,$447,211,017,
o totalTotal shareholders' equity of approximately $33,021,984,$32,126,236, and
o totalTotal liabilities of approximately $398,449,133,$415,084,781, which includes
$297,656,625$294,700,965 of deposits.
Major classifications of loans and leases are summarized as follows:
September 30,December 31, December 31, December 31, December 31,
1999 1998 1997 1996
------------ ------------ ------------ ------------
Loan and Lease Classifications:
Commercial and Industrial $__________$113,061,093 $ 85,425,70785,425,708 $ 67,201,013 $ 47,832,107
Agricultural __________0 0 0 0
Real Estate Mortgages __________111,242,490 99,955,640 87,931,770 79,936,722
Real Estate Construction __________5,335,753 3,810,975 2,568,997 3,590,175
Loans to Individuals - Consumer __________64,998,362 47,549,512 38,673,662 31,555,744
Loans to Municipal Governments __________0 0 0 0
Direct Financing Leases __________5,710,579 2,248,990 1,536,074 691,098
Less Unearned Income __________(982,384) (553,033) (585,517) (1,371,625)
Less Allowance for Loan Losses (3,195,220)(3,172,375) (3,007,713) (2,809,066) (2,589,976)
------------ ----------- ----------------------- ------------ ------------
Net Loans $296,073,621$296,193,518 $235,430,077 $194,516,933 $159,644,245
============ ============ ============ ============
On September 30,December 31, 1999, the bank had approximately 174 employees, including
154 full-timefull- time employees and 20 part-time employees. Management considers
relations with our employees to be good.
5147
PropertiesPROPERTIES
Below is a schedule of all the bank's properties, showing the location,
whether the property is owned or leased and its use:
Type of
Property Location Ownership Use
-TYPE OF
PROPERTY LOCATION OWNERSHIP USE
-------- -------- --------- ---
1 Blakely and Drinker Streets Own Main Office
Dunmore, PA 18512
2 116-118 Blakely Street Own For future expansion,
Dunmore, PA 18512 currently leased by
Dunmore Post Office
3 Keystone Industrial Park Own Dunmore Branch
Dunmore, PA 18512
34 The Fidelity Financial Center Own Scranton Branch
338 North Washington Avenue
Scranton, PA 18503
45 Green Ridge Office Lease Scranton Branch
Green Ridge Plaza
Scranton, PA 18509
56 Central City Office Lease Scranton Branch
139 Wyoming Avenue
Scranton, PA 18640
67 Abington Office Lease Clarks Summit Branch
1311 Morgan Highway
Clarks Summit, PA 18411
78 Clarks Summit State Hospital Lease Clarks Summit State
Office Hospital Limited
1451 Hillside Drive Service Branch
Clarks Summit, PA 18411
89 Peckville Office Lease Peckville Branch
1598 Main Street
Peckville, PA 18452
10 Pittston Office Lease Pittston BranchBranch--
403 Kennedy Boulevard (Bruno'sBruno's Supermarket
Pittston, PA 18640
Supermarket)
911 West Pittston Office Lease West Pittston Branch
801 Wyoming Avenue
West Pittston, PA 18640
1012 Moosic Office Lease Moosic Branch
4010 Birney Avenue
Moosic, PA 18507
1113 Marywood University Lease Free-standing
Nazareth Hall Money Access Center
Scranton, PA 18509
1214 Montage Mountain Sky Lodge Lease Free-standing
Scranton, PA 18505 Money Access Center
1315 Lackawanna County Stadium Lease Free-standing
Moosic, PA 18507 Money Access Center
5248
In addition, the bank owns a building adjacent to The Financial Center in
Scranton, which a non-related entity leases from the bank, and two-residentialtwo residential
properties in Clarks Green, Pennsylvania, which the bank also leases to parties
not affiliated with the bank. The bank owns several residential properties as
foreclosed assets, and these properties are listed for sale.
We also anticipate that the bank will enterentering into a lease for its new branch
office at 1500 Main Street, Blakely, Pennsylvania. We anticipate opening this
new branch office on January , 2000. We have received the requisite approvals
fromsales agreement with the Pennsylvania
Department of BankingTransportation to purchase a right-of-way easement located at the
corner of Keystone Industrial Park Road and O'Neill Highway, adjacent to the
FDIC for establishingbank's Keystone Industrial Park branch. The bank recently constructed a new
building to better serve the branch office.
Supervision and Regulationcustomers of the Bankthis branch. The property will provide
additional parking.
SUPERVISION AND REGULATION OF THE BANK
As an FDIC-insured, Pennsylvania-charteredPennsylvania chartered bank and trust company, the bank
is subject to supervision, regulation and examination by the Pennsylvania
Department of Banking and the Federal Deposit Insurance Corporation. The bank is
also subject to requirements and restrictions under federal and state law,
including
o requirementsRequirements to maintain reserves against loans and lease losses,
o restrictionsRestrictions on the types and amounts of loans that may be granted and
the interest that may be charged on the loans,
o limitationsLimitations on the types of investments the bank may make and the types
of services the bank may offer, and
o restrictionsRestrictions on loans to insiders of the bank or other insider
transactions.
Various consumer loans regulations also affect the operations of the bank.
In addition, the actions of the Federal Reserve Board, as it attempts to control
the money supply and credit availability in order to influence the economy,
impact commercial banks. The proposed reorganization will not significantly
change the authority of these agencies over the bank. The information below
highlights various aspects of regulation of the bank under Pennsylvania and
federal laws.
Pennsylvania Banking LawPENNSYLVANIA BANKING LAW
The laws of Pennsylvania applicable to the bank include, among other
things, provisions that:
o limitLimit the scope of the bank's business;
49
o requireRequire the maintenance of certain reserves against loans and lease losses;
o limitLimit the type and amount of loans that may be made and the interest
that may be made and that may be charged on loans;
o restrictRestrict investments and borrowings by the bank;
o limitLimit the payment of dividends; and
o regulateRegulate branching activities and mergers and acquisitions.
Generally, the bank must obtain prior approval from the Banking Department
for the acquisition of shares of stock. Pursuant to Pennsylvania law, the bank
53
may purchase, sell and hold investments in the form of bonds, notes and
debentures to the extent permitted by federal law.
Pennsylvania banking law also requires that a bank obtain the approval of
the Banking Department for any merger where the surviving bank would be a
Pennsylvania-chartered bank. In reviewing the merger application, the Banking
Department considers, among other things, whether the merger would be consistent
with adequate and sound banking practices and is in the public interest, on the
basis of several factors, including the potential effect of the merger on
competition and the convenience and needs of the affected communities.
Any person intending to acquire more than 10% of outstanding voting shares
of stock in a financial institution located in Pennsylvania must obtain the
prior approval of the Banking Department.
In addition, the Banking Department conducts regular examinations of the
bank and coordinates these examinations with the FDIC.
Federal Banking LawFEDERAL BANKING LAW
The FDIC insures the bank's deposits pursuant to the system of federal
deposit insurance initially established by the Banking Act of 1933. As a
state-chartered bank which is not a member of the Federal Reserve System and
with FDIC-insured deposits, the bank's primary federal regulator is the FDIC.
The FDIC conducts regular examinations of the bank at least every 18 months.
Also, FDIC regulations require the bank to file periodic financial information.
The Federal Deposit Insurance Act of 1950 embodies the basic authority for
the operation of the FDIC and gives the FDIC the power to prohibit institutions
it regulates from engaging in any activity that would be an unsafe and unsound
banking practice. The bank must obtain the FDIC's prior approval for such
activities as the establishment and relocation of branches and offices and for
certain mergers and acquisitions. Also, FDIC regulations generally prohibit the bank
from engaging in activities and investments that are not also permissible for
national banks. Generally, any non-banking activities in which the bank engages
must be so closely related to banking as to be "incidental"incidental to banking.
50
Capital Adequacy Guidelines. The bank must comply with the FDIC's risk-
based capital guidelines. Under the Federal Deposit Insurance Corporation
Improvement Act of 1991, the FDIC has regulations defining the levels at which
an insured institution would be considered:
o wellWell capitalized
o adequatelyAdequately capitalized
o Undercapitalized
o Significantly undercapitalized
o significantly undercapitalized
o criticallyCritically undercapitalized.
To be adequately capitalized, the required minimum ratio of total capital
to risk-weighted assets, including certainsome off-balance sheet activities, such as
standby letters of credit, is 8%. To be well capitalized, this risk-based ratio
54
must be at least 10%. At least half of the total capital is required to be "TierTier
I Capital," consisting principally of common stockholders' equity, less certain
intangible assets. The remainder, "TierTier II Capital," may consist ofof:
o certainSome forms of preferred stock,
o aA limited amount of subordinated debt,
o certainSome hybrid capital instruments,
o otherOther debt securities, and
o aA limited amount of the general loan loss allowance.
The risk-based capital guidelines must take into account interest rate risk,
concentration of credit risk, and risks of nontraditional activities. As of
June
30,December 31, 1999, the bank satisfied the criteria to be classified as "wellwell
capitalized," and we do not expect the proposed reorganization to change the
bank's capitalization.
The FDIC could under certain circumstances, reclassify a "well-capitalized"well capitalized institution as "adequately capitalized"adequately
capitalized or require an "adequately capitalized"adequately capitalized or "undercapitalized"undercapitalized
institution to comply with supervisory actions as if it were in the next lower
category. A reclassification could be made if the regulatory agency determines
that the institution is in an unsafe or unsound condition, (whichwhich could include
unsatisfactory examination ratings).ratings. In the event an institution's capital
deteriorates to the undercapitalized category or below, the law prescribes an
increasing amount of regulatory intervention.
The Bankbank is also subject to rules requiring a minimum ratio of classified
assets to capital, minimum earnings necessary to absorb losses, and a minimum
ratio of market value to book value for publicly held institutions.
FDIC Insurance Assessments. The bank's deposits have the maximum insurance
coverage provided by the FDIC, currently $100,000 per account. The bank pays
insurance premiums into the Bank Insurance Fund according to rates established
by the FDIC. The FDIC has discretion to increase premiums in the future in
response to changes in the economic climate of the banking industry. As a
result, the future cost of deposit insurance for the bank is, in large part,
dependent upon the extent of future bank failures and the amount of insurance
coverage provided by the FDIC for each deposit account.
51
The FDIC has implemented a risk-related premium schedule for all insured
depository institutions that results in the assessment of premiums based on
capital and supervisory measures. Under the risk-related premium schedule, the
FDIC assigns, on a semiannual basis, each depository institution to one of three
capital groups, as follows:
o well-capitalized,Well capitalized,
o adequatelyAdequately capitalized or
o undercapitalizedUndercapitalized,
and further assigns such institutions to a subgroup within a capital group. The
institution's subgroup assignment is based upon the FDIC's judgment of the
institution's strength in light of supervisory evaluations, including
examination reports, statistical analyses and other information relevant to
measuring the risk posed by the institution. Only institutions with a total
capital to risk-adjusted assets ratio of 10% or greater, a Tier I capital to
risk-based assets ratio of 6% or greater, and a Tier I leverage ratio of 5% or
55
greater, are assigned to the well-capitalized group. As June 30,December 31, 1999, the
bank was well capitalized for purposes of calculating insurance assessments.
The Bank Insurance Fund is presently fully funded at more than the minimum
amount required by law. Accordingly, the 1999 BIF assessment rates range from
zero for those institutions with the least risk, to $0.27 for every $100 of
insured deposits for institutions deemed to have the highest risk. The bank is
in the category of institutions that presently pay nothing for deposit
insurance. The FDIC adjusts the rates every six months.
While the bank presently pays no premiums for deposit insurance, it is
subject to assessments to pay the interest on bonds issued by the Financing
Corporation, which is known as FICO. FICO was created by Congress to issue bonds
to finance the resolution of failed thrift institutions. Prior to 1997, only
thrift institutions were subject to assessments to raise funds to pay the FICO
bonds.
On September 30, 1996, as part of the Omnibus Budget Act, Congress enacted
the Deposit Insurance Funds Act of 1996, which recapitalized the Savings
Association Insurance Fund and provided that commercial banks would be subject
to 1/5 of the assessment to which savings and loan associations are subject for
FICO bond payments through 1999. Beginning in 2000, commercial banks and savings
and loan associations will be subject to the same assessment for FICO bonds.
Meeting the Needs of the Community. Under the Community Reinvestment Act of
1977, the FDIC must determine whether the bank is meeting the credit needs of
the community, including low and moderate income neighborhoods, that it serves
and must take this record into account in its evaluation of most regulatory
applications the bank files with the FDIC. The FDIC makes publicly available its
evaluation of the bank's record of meeting the credit needs of its entire
community. This evaluation includes a descriptive rating of
o outstandingOutstanding
o satisfactorySatisfactory
o needsNeeds to improve, or
52
o substantialSubstantial noncompliance.
As of June 30,December 31, 1999, the bank had a satisfactory CRA rating.
Truth-In-Savings. The Bank Enterprise Act of 1991"1991 requires
"truth-in-savings"truth-in-savings on consumer deposit accounts so that consumers can make
meaningful comparisons between the competing claims of banks with regard to
deposit accounts and products. Under this provision, the bank is required to
provide information to depositors concerning the terms of their deposit
accounts, and in particular, to disclose the annual percentage yield. There are
some operational costs of complying with this law.
56
Restrictions on Control Changes. Under the Federal Change in Banking
Control Act of 1978, no person may acquire control of the bank without giving at
least 60 days prior written notice to the FDIC. "Control" is generally presumed
to beThe law contains a presumption
that the power to vote 10% or more of the common stock of a bank confers control
of the bank. The FDIC may disapprove any such acquisition of control.
Suspicious Activities Reports. Under the bank Secrecy Act, banks must
report to the Internal Revenue Service currency transactions of more than
$10,000 or multiple transactions in any one day that aggregate in excess of
$10,000.
Interstate Banking. The Bankbank may generally engage in interstate banking, subject to
certain limitations.banking.
See "Description of the Holding Company - Supervision and Regulation - The
Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 - Interstate1994-Interstate
Banking."
SECURITIES REGULATION
Upon attaining more than 500 shareholders and $10 million in assets, a
company must register its securities under Section 12 of the Securities Regulation
DueExchange
Act of 1934. A registered company is subject to the numberGeneral Rules and
Regulations of the bank'sSEC for companies registered under the 1934 Act. These rules
and regulations relate to periodic financial reporting, reporting to
shareholders, proxy solicitation and insider trading. Banks must also register
under Section 12 if they meet the size of its assets,above described thresholds. However, banks
file their reports, proxy statements and other information with their primary
federal bank regulator, rather than the SEC.
The bank has registered its common stock under Section 12 of the Securities
Exchange Act of 1934. As a registered company, the bank is subject to the
General Rules and Regulations of the SEC and to FDIC regulations for certainrelating to
state banks registered under the 1934 Act. These rules and regulations relate to
periodic financial reporting, reporting to shareholders, proxy solicitation and
insider trading. The bank files reports, proxy
statements and other information with the FDIC. After the reorganization, the
holding company must register its stock under Section 12 of the 1934 Act and
will be subject to the obligations for registered
companies under the federal securities laws.SEC-registered companies. It will file
periodic financial and other business reports with the SEC on a consolidated
basis, including information about the bank. The bank will terminate the
registration of its common stock under the 1934 Act because it will cease to be
publicly held after the reorganization.
New Legislation53
THE GRAMM-LEACH-BLILEY FINANCIAL SERVICES MODERNIZATION ACT
On November 12, 1999, the Gramm-Leach-Bliley Financial Services
Modernization Act was signed into law. We expect the financial services reform
law to have a tremendous impact on all financial institutions, including banks.
However, the affected federal agencies have not yet fully adopted new
regulations under the law. This is expected to occur by May 2000.
The impact of the act is twofold. First, the act has swept away much of the
regulatory structure established in the 1930's under the Glass-Steagall Act. The
law creates opportunities for banks, other depository institutions, insurance
companies, and securities firms to enter into business combinations that permit
a single financial services organization to offer customers a complete array of
financial products. The result will be increased competition in the marketplace
for banks and other financial institutions, tempered by an enhanced ability to
compete in this new market. Banks, insurance companies and securities firms may
now affiliate through a financial holding company and engage in a broad range
of activities authorized by the Federal Reserve Board and the Department of
Treasury. The new activities that the act permits for financial holding
companies and their affiliates are those that are financial in nature or
incidental to financial activities, including insurance underwriting, investment
banking, investment advisory services and securities brokerage services. The
Federal Reserve maintains the authority to require that the financial holding
company remain well capitalized and well managed.
In addition, national banks are authorized to conduct these activities
through operating subsidiaries, under the supervision of the Department of
Treasury's Office of the Comptroller of the Currency, except that national bank
subsidiaries may not engage in insurance underwriting, merchant banking,
insurance company portfolio investment, or real estate investment and
development.
Secondly, the act has altered the regulatory boundaries for all financial
services organizations, including the bank. By repealing an exemption from SEC
broker/dealer registration formerly enjoyed by banks for their securities
activities, the act adds a layer of SEC regulation to the bank's regulatory
structure. For national banks, state insurance regulators will now be able to
license and regulate their insurance activities, as the act provides that state
insurance law will apply to national banks engaged in the underwriting and sale
of insurance products.
NEW LEGISLATION
Proposed legislation is introduced in almost every legislative session that
would dramatically affect the regulation of the banking industry. At this time,
we cannot predict whether or not Congress will enact legislation and what effect
the legislation might have on the bank. For example, we cannot predict the full
impact of the Gramm-Leach-Bliley Financial Services Modernization Act, signed
into law on November 12, 1999, which will allow bank holding company
subsidiariesdescribed
above under "Description of the Bank - Supervision and national bank operating subsidiaries to offer a wide rangeRegulation of new financial services, including securities underwriting. The new law also
permits bank holding company subsidiaries to engage in real estate development
and insurance underwriting.
Legal Proceedingsthe Bank."
LEGAL PROCEEDINGS
The nature of the bank's business generates a certain amount ofsome litigation involving
matters arising in the ordinary course of business. In the opinion of management
of the bank, however, no legal
54
proceedings are pending, which, if determined adversely to the bank, would
materially affect the bank's undivided profits or financial condition. There are
no proceedings pending other than ordinary routine litigation incidental to the
business of the bank. In addition, to management's knowledge, no government
authorities have initiated or contemplated any material legal actions against
the bank.
57
DirectorsDIRECTORS
The board of directors of The Fidelity Deposit and Discount Bank oversees
all business, property and affairs of the bank. The bank's board of directors
presently consists of 10 members, approximately one-third
(as nearly equal in number as possible) of whom shareholders
elect annually to serve for a term of 3 years. The same directors who serve on
the bank's board of directors currently serve on the holding company's board of
directors.
After the reorganization, the shareholders of the bank will become
shareholders of the holding company and will elect the board of directors of the
holding company. The holding company will be the sole shareholder of the bank
and will elect the bank's board of directors. We anticipate that the same
persons will serve as directors of the bank and of the holding company for the
foreseeable future. The following table provides selected information about the
directors of the bank:
Name and Director Class of Age as of
Name and Position December Director of
with Bank ____, 1999 Principal Occupation for last Five Yearsthe Bank Since ------------------ ---------- ---------------------------------------- ----------Director March 24, 2000
---------------------- -------- -------- --------------
Paul A. Barrett, Director 66 Attorney - O'Malley & Harris, P.C. 1988
Samuel C. Cali 83 Retired proprietor of S.C. Cali Agency 1958 Director (insurance agency),B 83
Chairman of the Board
The Fidelity DepositMichael F. Marranca 1976 C 67
President and Discount BankChief Executive Officer, Director
Herbert M. McDonald 1976 B 87
Vice President of the Board, Director
John F. Glinsky, Jr. 1972 A 69
Secretary, Director
Patrick A. Calvey, Jr., 71 Retired President of Calvey Enterprises, Inc. 1980 C 72
Director
(real estate holding company), Secretary and
Treasurer of American Janitor and Paper
Supply Co., Inc.Patrick J. Dempsey 1985 C 66
Director
Paul A. Barrett 1988 A 67
Director
John T. Cognetti 49 President of the Hinerfeld Realty Co. 1988 Director (licensed real estate broker), former Chief
Executive Officer of Cognetti Enterprises,
Inc. (now dissolved )
Patrick J. Dempsey, 65 President/General Manager of Dempsey 1985
Director Uniform & Supply, Inc., President/General
Manager of Gonzaga Realty, Inc.
John F. Glinsky, Jr., 68 Proprietor, Funeral Director of John F. 1972
Director, Secretary Glinsky Funeral Home
Michael F. Marranca, 67 President/Chief Executive Officer, The 1976
Director, President/ Fidelity Deposit and Discount Bank
Chief Executive Officer
Herbert M. McDonald, 87 Retired surgeon 1976A 50
Director
Michael J. McDonald 1994 A 45
Attorney - Foley, McLane, Foley, McDonald 1994
and MacGregorDirector
David L. Tressler, Sr. 1998 B 63
Executive Director/Director
55
Following is a description of each director's and nominee's background and
experience:
CURRENT CLASS A DIRECTORS (to serve until 2000)
AND
NOMINEES FOR CLASS A DIRECTOR (to serve until 2003)
Paul A. Barrett, Esquire
Mr. Barrett, age 67, has been a director of the bank since 1988. Mr.
Barrett is an attorney with the firm of O'Malley & Harris, P.C., in Scranton,
Pennsylvania.
John T. Cognetti
Mr. Cognetti, age 50, has been a director of the bank since 1988. Mr.
Cognetti is the President of The Hinerfeld Realty Co. in Scranton, Pennsylvania,
and the former Chief Executive Officer of Cognetti Enterprises, Inc., a real
estate firm, now dissolved.
John F. Glinsky, Jr.
Mr. Glinsky, age 69, has been a director of the bank since 1972. He has
served as Secretary of the board of directors since August 1981. Mr. Glinsky is
the proprietor and Funeral Director of John F. Glinsky Funeral Home in Throop,
Pennsylvania.
Michael J. McDonald, Esquire
Mr. McDonald, age 45, has been a director of the bank since 1994. He is an
attorney with the firm of Foley, McLane, Foley, McDonald and MacGregor in
Scranton, Pennsylvania.
BOARD OF DIRECTORS - CONTINUING AS DIRECTORS
CLASS C DIRECTORS (to serve until 2001)
Patrick A. Calvey, Jr.
Mr. Calvey, age 72, has been a director of the bank since 1980. He is the
retired President of Calvey Enterprises, Inc., a real estate holding company in
Scranton, Pennsylvania and the Secretary and Treasurer of American Janitor and
Paper Supply Co., Inc., a janitorial supply distributor also located in
Scranton, Pennsylvania.
Patrick J. Dempsey
Mr. Dempsey, age 66, has been a director of the bank since 1985. He is the
President and General Manager of Dempsey Uniform & Supply, Inc. and the
President and General Manager of Gonzaga Realty, Inc., both located in Dunmore,
Pennsylvania.
56
Michael F. Marranca
Mr. Marranca, age 67, has been a director of the bank since 1976. Also
since 1976, Mr. Marranca has served as the bank's President and Chief Executive
Officer. He has been employed by the bank since 1967.
CLASS B DIRECTORS (to serve until 2002)
Samuel C. Cali
Mr. Cali, age 83, serves as Chairman of the board of directors of the bank.
Mr. Cali is the retired proprietor of S.C. Cali Agency, an insurance agency
located in Dunmore, Pennsylvania. He has been a director of the bank since 1958
and has served as Chairman of the board since June 1986.
Herbert M. McDonald
Dr. McDonald, age 87, is a Vice President of the board of directors. He has
been a member of the bank's board of directors since 1976. Dr. McDonald is a
retired surgeon.
David L. Tressler, Sr.
Mr. Tressler, age 63, has been a director of the bank since 1998. He is the
Executive Director and Chief Executive Officer of 1998 Northeastern Pennsylvania
Physicians Organization in Clarks Summit, Pennsylvania, and a former Executive
Director for the Center For Public Initiatives in Scranton, Pennsylvania.
BOARD MEETINGS, COMPENSATION OF DIRECTORS
The board of directors held 38 regular meetings and one annual meeting in
1999. Each of the directors attended at least 75% of the combined total number
of meetings of the board of directors and the committees of which he or she was
a member.
During 1999, the bank paid a monthly fee of $2,000 to its non-employee
directors for participating in board and committee meetings. The bank does not
compensate employee directors for attendance at board and committee meetings.
The bank also awarded every non- employee director a bonus of $2,500 in 1999.
Directors are entitled to have up to 4 paid absences per year from scheduled
board or committee meetings. In the aggregate, the bank paid the board of
directors $238,000 for all services rendered in 1999.
NOMINATING DIRECTORS
The bank's Nominating Committee nominates individuals to be elected as
directors of the bank. Pursuant to Article III, Section 1 of the bank's by-laws,
shareholders may also make nominations for the position of director at the
annual meeting.
57
COMMITTEES OF THE BOARD OF DIRECTORS
During 1999, the bank's board of directors maintained 9 standing
committees. The function of each of these committees is described below.
EXECUTIVE: This committee acts with limited powers on behalf of the board
whenever the board is not in session. It meets only as needed and acts only by
unanimous vote. If any non- employee director wants a matter to be addressed by
the board rather than the Executive Committee, then such matter is submitted to
the board. Samuel C. Cali serves as Chairman of the committee.
LOAN: This committee oversees the lending activities of the bank to ensure
compliance with regulatory requirements. It reviews loan applications and makes
recommendations to management. Samuel C. Cali serves as Chairman of the
committee.
AUDIT/COMPLIANCE: This committee reviews auditing, accounting, financial
reporting, internal and external control functions. It recommends our
independent accountant and reviews their services. All members are non-employee
directors. Samuel C. Cali serves as Chairman of the committee.
ASSET/LIABILITY, or ALCO: This committee monitors and helps maintain the Bank's
risk position with respect to assets and liabilities and recommends allocation
of funds for interest rate sensitivity, time deposits, liquidity, federal funds,
loans, investments and tax positioning. It reviews the Asset/Liability Policy,
develops procedures, and recommends policy changes. It also serves as the Bank's
Investment Committee. Samuel C. Cali serves as Chairman of the committee.
HUMAN RESOURCES: This committee assures equitable employment exchange by
ensuring that sound human resource management systems are developed and
maintained. Samuel C. Cali serves as Chairman of the committee.
CREDIT ADMINISTRATION: This committee analyzes a comprehensive set of credit
administration reports that provide detailed information relating to the overall
quality of the loan portfolio. Samuel C. Cali serves as Chairman of the
committee.
NOMINATING: This committee nominates qualified members to the board of
directors. Samuel C. Cali serves as Chairman of the committee.
TRUST: This committee reviews the Bank Trust Department's policies, performance,
compliance and profitability. It exercises fiduciary discretion in making
decisions and advising trust management when requested. Samuel C. Cali serves as
Chairman of the committee.
EMPLOYEE STOCK INCENTIVE: This committee determines which key employees are
eligible for participation in the Bank's stock option plan. Samuel C. Cali
serves as Chairman of the committee.
58
Principal OfficersCOMMITTEES OF THE BOARD OF DIRECTORS
- -------------------------------------------------------------------------------------------------------------------------------
EMPLOYEE
AUDIT/ HUMAN CREDIT STOCK
EXEC. LOAN COMP. ALCO RESCS. ADM. NOM. TRUST INCENT.
- -------------------------------------------------------------------------------------------------------------------------------
Samuel C. Cali X X X X X X X X X
- -------------------------------------------------------------------------------------------------------------------------------
Michael F. X X X X X X X
Marranca
- -------------------------------------------------------------------------------------------------------------------------------
Herbert M. X X X X X X X X
McDonald
- -------------------------------------------------------------------------------------------------------------------------------
John F. X X X X X X
Glinsky, Jr.
- -------------------------------------------------------------------------------------------------------------------------------
Patrick A. X X X X X X X X
Calvey, Jr.
- -------------------------------------------------------------------------------------------------------------------------------
Patrick J. X X X X X X X
Dempsey
- -------------------------------------------------------------------------------------------------------------------------------
Paul A. Barrett X X X X X X
- -------------------------------------------------------------------------------------------------------------------------------
John T. X X X X X X X
Cognetti
- -------------------------------------------------------------------------------------------------------------------------------
Michael J. X X X X X X X
McDonald
- -------------------------------------------------------------------------------------------------------------------------------
David L. X X X X X X
Tressler, Sr.
- -------------------------------------------------------------------------------------------------------------------------------
MEETINGS 0 0 4 4 1 3 0 4 1
HELD IN 1999
- -------------------------------------------------------------------------------------------------------------------------------
59
PRINCIPAL OFFICERS
The following table shows selected information about the principal officers of
the bank. The board of directors elects the officers for one-year terms, and the
board has the discretionary authority to remove these individuals from office.
All of the officers have been principally employed by the bank for more than 5
years.
Age as of
Bank Number of Shares DecemberAge as of
Office and Position Held Employee Beneficially ____,March 24,
Name with the bank Since Since Owned 1999(1) 2000
---- ------------------- ----- ----------------- ---------------- -------------------
Michael F. Marranca President, Chief 19881976 1967 25,15926,068 (2) 67
Executive Officer
Joseph E. Quinnan Senior Vice 1995 1995 1,2761,285 (4) 55
President, Chief
Operating
Officer (3)
John J. Keeler Vice President 1990 1990 622668 (5) 48
Kevin R. Messett SeniorExecutive Vice 1999 1991 1991 456458 (7) 44
President (6)
Robert P. Farrell Cashier/ 1989 1987 255 46256 (8) 47
Comptroller
Executive Compensation(1) As of February 29, 2000. For definition of beneficial ownership, please
see "Information about Beneficial Ownership of the Bank's Common Stock by
Principal Shareholders and Management" above.
(2) For detailed information on the nature of Mr. Marranca's stock ownership,
please refer to "Information about Beneficial Ownership of the Bank's
Common Stock by Principal Shareholders and Management" above.
(3) Mr. Quinnan has announced his retirement, effective May 1, 2000.
(4) Figure includes 766 shares held in revocable trust by Mr. Quinnan and
521shares held in a revocable trust by Mr. Quinnan's spouse.
(5) Figure includes 45 shares held solely by Mr. Keeler, 408 shares held solely
by Mr. Keeler in an IRA, 15 shares held by Mr. Keeler's child, and 200
exercisable stock options.
(6) Mr. Messett served as Senior Vice President from 1991 through 1999.
(7) Figure includes 162 shares held jointly by Mr. Messett and his spouse, 46
shares held jointly by Mr. Messett with his spouse and children, and 250
exercisable options.
(8) Figure includes 56 shares held jointly by Mr. Farrell with his spouse, and
200 exercisable stock options.
60
EXECUTIVE COMPENSATION
The following table provides the annual compensation for services in all
capacities to the bank for the fiscal years ended December 31, 1999, 1998, 1997, and
1996,1997, for those persons who were at December 31, 1998,1999,
o theThe Chief Executive Officer, and
o theThe 4 other most highly compensated executive officers of the bank to
the extent such person's total annual salary and bonus exceeded
$100,000.
Summary Compensation TableSUMMARY COMPENSATION TABLE
Annual Compensation Long-Term Compensation
- ---------------------------------------------------------------------- ----------------------------------------------------
Awards Payouts
(a) (b) (c) (d) (e) (f) (g) (h) (i)
Securities
Other Restricted Underlying All other
Annual Stock Options/ LTIP Compen-
Name and Principal Salary Bonus Compen- Award(s) SARs Payouts sation
Position Year ($) ($) sation ($) (#) ($) ($)(1)(2)
-------- ---- --- ---------- ------ ---------------- ---------- ---------- ------- -------------------
Michael F. Marranca 1999 181,000 25,000 0 0 0 0 29,394(1)
President and Chief 1998 171,560 12,000 0 0 0 0 30,089
President and Chief31,326(1)
Executive Officer 1997 160,410 18,000 0 0 0 0 27,813
Executive Officer 1996 133,769 18,00028,473(1)
Kevin R. Messett, 1999 92,016 19,000 0 0 0 0 18,06715,744(2)
Executive Vice 1998 85,200 4,000 0 0 0 0 15,025(2)
President 1997 80,000 7,500 0 0 0 0 12,629(2)
Joseph E. Quinnan 1999 94,068 15,000 0 0 0 0 14,383(3)
Senior Vice President 1998 87,100 8,000 0 0 0 0 12,247(3)
and Chief Operating 1997 81,900 7,500 0 0 0 0 12,997(3)
Officer
- ------------------
(1) Figure includes the bank's contributions to the 401(k) and deferred profit
sharing plan of $17,113, $18,934, $17,278, and $15,312$17,278 on behalf of Mr. Marranca for
1999, 1998, 1997, and 1996,1997, respectively. It also includes membership dues of
$8,577, $9,237 and $7,710 paid on behalf of Mr. Marranca in 1999, 1998 and
1997, respectively. No membership dues were paid on behalf of
Mr. Marranca in 1996.
(2)
In addition to annual salary, Mr. Marranca receives some or all of the
following benefits: medical, dental, life and disability insurance, and
other customary benefits. Figure includes payments made by the bank, on
behalf of Mr. Marranca, of $1,918, $2,825,$3,704, $3,155 and $2,755$3,485 in 1999, 1998, and
1997, respectively.
(2) Figure includes the bank's contributions to the 401(k) and 1996,deferred profit
sharing plan of $10,854, $9,778 and $8,560 on behalf of Mr. Messett for
1999, 1998 and 1997, respectively. 59It also includes membership dues of
$2,310, $2,620 and $1,093 in 1999, 1998 and 1997 respectively.
In addition, Mr. Messett receives some or all of the following benefits:
medical, dental, life and disability insurance, and other customary
benefits. Figure includes payments made by bank on behalf of Mr. Messett,
of $2,580, $2,627 and $2,976 in 1999, 1998 and 1997, respectively.
(3) Figure includes the bank's contributions to the 401(k) and deferred profit
sharing plan of $10,112, $8,321 and $9,303 on behalf of Mr. Quinnan for
1999, 1998 and 1997, respectively. It also includes membership dues of
$1,080 and $115 in 1999 and 1998, respectively. No membership dues were
paid for Mr. Quinnan in 1997.
In addition, Mr. Quinnan receives some or all of the following benefits:
medical, dental, life and disability insurance, and other customary
benefits. Figure includes payments made by bank on behalf of Mr. Quinnan,
of $3,191, $3,811 and $3,694 in 1999, 1998 and 1997, respectively.
61
Stock Option AwardsSTOCK OPTION GRANTS IN FISCAL YEAR 1999
The following table providessets forth certain information relating to non-qualifiedfor any stock options
granted to the non-employee directors on January 4, 1999, bywhich the bank pursuant togranted the 1998 Independent Directors Stock Option Plan. No options
were granted or exercisedexecutives named in the Summary Compensation Table
during the fiscal year ended December 31, 1998.
NON-QUALIFIED STOCK OPTION GRANTS
TO NON-EMPLOYEE DIRECTORS1999:
OPTION/SAR GRANTS IN FISCAL YEAR 1999
INDIVIDUAL GRANTS
- --------------------------------------------------------------------------------------------------------------------------------
Potential Realizable Value at
Assumed Annual Rates of Stock
Price Appreciation for
Option Term(2)
Individual Grants
Number of PercentSecurities % of Total Securities Options/ Exercise or
Underlying Options/ SARs
Underlying Granted to Non- Exercise or
Options/SARs Employee Base Price
Name Granted (#) Directors ($/Sh) Expiration Date
---- ------------ ----------------- ----------- ---------------
Samuel C. Cali 250 11.11% $62.00 01/04/09
Herbert M. McDonald 250 11.11% $62.00 01/04/09
John F. Glinsky, Jr. 250 11.11% $62.00 01/04/09
Patrick A. Calvey, Jr. 250 11.11% $62.00 01/04/09
Patrick J. Dempsey 250 11.11% $62.00 01/04/09
Paul A. Barrett 250 11.11% $62.00 01/04/09
John T. Cognetti 250 11.11% $62.00 01/04/09
Michael J. McDonald 250 11.11% $62.00 01/04/09
David L. Tressler, Sr. 250 11.11% $62.00 01/04/09
The following table provides certain information relating to qualified
stock options granted to key employees on January 4, 1999, by the bank pursuant
to the 1998 Stock Incentive Plan. No options were granted or exercised during
the fiscal year ended December 31, 1998.
QUALIFIED STOCK OPTION GRANTS
TO KEY OFFICERS
Individual Grants
Number of Percent of Total
Securities Options/SARs
Underlying Granted to Exercise or
Options/SARs Employees Base Price Expiration
Name SARs Granted (#) Employees in Fiscal Year ($/Sh) Date 5%($) 10%($)
---- ----------- ------------------------ ------ ---- ----- ------
(a) (b) (c) (d) (e) (f) (g)
Michael F. Marranca
President and Chief
Executive Officer 350 (1) 23.33% $62.00 01/04/99 13,647 34,584
Kevin R. Messett,
Executive Vice
President 250 (1) 16.66% $62.00 01/04/99 9,748 24,703
Joseph E. Quinnan,
Senior Vice President
and Chief Operating
Officer 250 (1) 16.66% $62.00 01/04/99 9,748 24,703
(1) Options were granted on January 4, 1999, under the 1998 Stock Incentive
Plan, and became exercisable after July 4, 1999.
(2) Amounts represent hypothetical gains that could be achieved for the
respective options if exercised at the end the option term. These gains are
based on assumed rates of stock price appreciation of 5% and 10% compounded
annually from the date the respective options were granted to their
expiration date. The gains shown are net of the option exercise price, but
do not include deductions for taxes or other expenses associated with the
exercise of the option or the sale of the underlying shares. The actual
gain, if any, on the exercise of stock options will depend on the future
performance of the common stock, the option holder's continued employment
throughout the option period, and the date on which the options are
exercised.
62
EXERCISES OF STOCK OPTIONS IN FISCAL YEAR 1999 AND FISCAL YEAR-END OPTION VALUES
The following table sets forth certain information relating to stock
options held by the executives named in the Summary Compensation Table. As
noted below, these executives did not exercise any of their stock options in
1999.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION/SAR(1) VALUES
- ------------------------------------------------------------------------------------------------------------------------------
Number of Securities
Underlying Unexercised Value of Unexercised in-the-
Shares Options/SARs at FY-End Money Options/SARs at FY-
Acquired Value (#) End ($)
Name on Exercise (#) Realized ($) Exercisable/Unexercisable Exercisable/Unexercisable
---- --------------- ------------ -------------- ------------ ------------------------------------ -------------------------
(a) (b) (c) (d) (e)
Michael F. Marranca
350 23.33% $62.00 01/04/09President and Chief
Executive Officer 0 0 350/0(2) 2,887.50/0(3)
Kevin R. Messett,
Executive Vice 0 0 250/0(2) 2,062.50/0(3)
President
Joseph E. Quinnan,
250 16.66% $62.00 01/04/09
Kevin R. Messett 250 16.66% $62.00 01/04/09
Diane M. Wylam 250 16.66% $62.00 01/04/09
Robert P. Farrell 200 13.33% $62.00 01/04/09
John J. Keeler 200 13.33% $62.00 01/04/09Senior Vice President 0 0 250/0(2) 2,062.50/0(3)
and Chief Operating
Officer
60
Compensation(1) A "SAR" is a stock appreciation right. The bank has not granted any SAR's.
(2) Options were granted on January 4, 1999, under the 1998 Stock Incentive
Plan, and became exercisable after July 4, 1999.
(3) The exercise price for the options is $62.00 per share. The market value of
Directors
During 1998,the bank's stock as of the end of 1999 was $70.25 per share.
401(K) PROFIT SHARING PLAN
In 1995, the bank established a 401(k) profit sharing plan. The plan is a
defined contribution plan covering substantially all employees of the bank.
Participants of the plan may elect to have a portion of their annual
compensation reduced and paid to the plan on a pretax basis, pursuant to the
provisions found under Section 401(k) of the Internal Revenue Code. The bank
also contributes to the plan on behalf of each participant. The bank
contribution for each participant is based on the amount the participant's
annual compensation was reduced, subject to certain limitations. Additional
amounts may be contributed at the option of the bank's board of directors. In
1999, the bank paid
63
$71,173 in 401(k) matching contributions to participants and $135,000, including
expenses, as a monthly retainer of $2000 to non-employee bank
directors for attending and participating inprofit sharing contribution.
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
The board of director's meetingsdirectors of The Fidelity Deposit and committee meetings. The bank does not compensate employee directors for
attendance at board of directors' meetings or committee meetings. The bank
awarded every non-employee director a bonus of $2,500 in 1998. Directors are
entitled to have up to four paid absences per year from scheduled Board meetings
or committee meetings.Discount Bank governs
the bank. In the aggregate, the bank paidfulfilling its fiduciary duties, the board of directors $232,500acts in the
best interests of the bank's shareholders, customers, and the communities served
by the bank. To accomplish the strategic goals and objectives of the bank, the
board of directors engages competent persons who undertake to accomplish these
objectives with integrity and in a cost-effective manner. The compensation of
these individuals is part of the board of directors' fulfillment of its duties
to accomplish the bank's strategic mission.
The fundamental philosophy of the bank's compensation program is to offer
competitive compensation opportunities for all employees, based on the
individual's contribution and personal performance. The Human Resources
Committee, comprised of all the bank directors, administers the bank's
compensation program. The committee seeks to establish a fair compensation
policy governing executive officers' base salaries and bonuses and to attract
and motivate competent, dedicated, and ambitious managers, whose efforts will
enhance the products and services renderedof the bank, thereby improving profitability,
increasing dividends to our shareholders and, subsequently, raising the market
value of our shares.
The committee reviews and approves annually the top executives'
compensation, including the compensation for the chief executive officer and all
vice presidents. As a guideline for determining base salaries, the committee
uses information composed of a Pennsylvania bank peer group in 1998.the R.L. Webber
Salary Survey, as well as data collected by the bank from proxy statements and
annual reports of Pennsylvania-based banks. The committee used a separate peer
group of banks for compensation review purposes from the peer group it used for
the performance chart because the R.L. Webber Salary Survey permits the
committee to base its review on data collected from a much broader data base
than simply the nine institutions in the peer group reflected in the performance
graph.
Chief Executive Officer Compensation
The committee has determined that the Chief Executive Officer's 1999 total
compensation of approximately $289,394, including salary, bonuses, benefits and
401(k) matches, is appropriate in light of the bank's performance. This
determination included a review of the bank's return on assets, return on
equity, net income, and asset growth. However, no direct correlation exists
between the Chief Executive Officer's compensation, the Chief Executive
Officer's increase in compensation, and any specific performance criteria, nor
does the committee give any weight to specific individual performance criteria.
After reviewing all information, including the above, the committee subjectively
determines the Chief Executive Officer's compensation and any changes relating
to it.
Executive Officers
The committee establishes the compensation of the bank's executive officers
including increases in compensation based on its subjective analysis of the
individual's contribution to the
64
bank's strategic goals and objectives. In determining whether strategic goals
have been achieved, the committee considers, among numerous factors, the bank's
performance as measured by earnings, revenues, return on assets, return on
equity, market share, total assets, and non-performing loans. Although the
performance and increases in compensation were measured in light of these
factors, no direct correlation exists between any specific criterion and an
employee's compensation, nor does the committee attribute any specific weight to
any criteria in the analysis. After review of all information, including the
above, the committee makes a subjective determination.
In addition to base salary, executive officers of the bank may participate
in the bank's 401(k) plan, which is generally available to all employees. The
committee also awards annual bonuses at the end of the year, at its discretion.
In addition to base salary, executive officers of the bank are eligible to
receive stock option awards under the bank's 1998 Stock Incentive Plan. On
January 4, 1999, the bank awarded its officers options to purchase 1,500 shares
of common stock under the plan at an exercise price of $62.00, and on January 3,
2000, the bank awarded key officers options to purchase 1,700 shares of common
stock under the plan at an exercise price of $70.25.
In addition, under the 1998 Independent Directors Stock Option Plan,
non-employee directors are eligible to receive stock option awards. On January
4, 1999, the bank awarded its non-employee directors options to purchase 2,250
shares of common stock under the plan at an exercise price of $62.00, and on
January 3, 2000, the bank awarded its non-employee directors options to purchase
2,250 shares of common stock under the plan at an exercise price of $70.25. The
plans' purpose is to advance the development, growth and financial condition of
the bank and to align the interests of shareholders with that of management. See
"Description of the Bank's Capital Securities - Stock Option Plans" below, for
more information about these plans.
General labor market conditions, the specific responsibilities of the
individual, and the individual's contributions to the bank's success influence
total compensation opportunities available to the employees of the bank.
Individuals are reviewed annually on a calendar year basis. The bank strives to
offer compensation that is competitive with that offered by employers of
comparable size in our industry. Through these compensation policies, the bank
believes it can meet its strategic goals and objectives for its constituencies
and provide compensation that is fair and meaningful to its employees.
THE HUMAN RESOURCES COMMITTEE
Paul A. Barrett John T. Cognetti Herbert M. McDonald
Samuel C. Cali Patrick J. Dempsey Michael J. McDonald
Patrick A. Calvey, Jr. John F. Glinsky, Jr. Michael F. Marranca
David L. Tressler, Sr.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Mr. Michael F. Marranca, President and Chief Executive Officer of the bank,
is a member of the board of directors of the bank and of the Human Resources
Committee that performs the functions of a compensation committee. Mr. Marranca
neither participates in conducting his own review nor takes part in determining
his own compensation.
65
SHAREHOLDER PERFORMANCE GRAPH
We present below a graph comparing the yearly dollar change in the
cumulative total shareholder return on the bank's common stock against the
cumulative total return of the S&P Stock Index and the Peer Group Index for the
period of 5 fiscal years commencing January 1, 1995, and ending December 31,
1999. The graph shows the cumulative investment return to shareholders, based on
the assumption that a $100 investment was made on December 31, 1994, in each of
the bank's capital stock, the S&P 500 Stock Index and the Peer Group Index. The
cumulative total returns on such investments would be $193.19, $350.26 and
$203.41, respectively. All of these cumulative total returns are computed
assuming the reinvestment of dividends at the frequency that dividends were paid
during the applicable years. The shareholder return shown on the graph below is
not necessarily indicative of future performance.(1)
Comparison of Five-Year Total Cumulative Return
[GRAPHIC]
[The following is a description of the Performance Graph in tabular format:]
1995 1996 1997 1998 1999
Peer Group Index $117.53 $143.16 $197.12 $218.95 $203.41
Fidelity Deposit and
Discount Bank 104.58 108.78 129.85 166.73 193.19
S & P 500 Total
Return Index 137.45 168.92 225.21 289.43 350.26
(1) The peer group for which the above information appears includes the
following companies: ACNB Corporation, CNB Financial Corporation, Community
Bancorp, Inc., Drovers Bancshares Corporation, First West Chester
Corporation, Franklin Financial Services Corp., Juniata Valley Financial
Corp., Penseco Financial Services Corp., and Pioneer American Holding Co.
These companies were selected based on four criteria: total assets between
$80 million and $700 million; market capitalization greater than $20
million; headquarters in Pennsylvania; and, not quoted on NASDAQ.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
The regulations promulgated pursuant to the Federal Deposit Insurance Act
and Section 16(a) of the Securities Exchange Act of 1934 require the bank's
officers and directors, and persons who own more than 10% of the registered
class of the bank's equity securities to file reports of ownership and changes
in ownership with the Federal Deposit Insurance Corporation. Officers, directors
and
66
greater than 10% shareholders are required by FDIC regulation to furnish the
bank with copies of all filed Section 16(a) forms. The board of directors held 35
regular meetingsknows
of no persons who own greater than 10% of the bank's outstanding common stock.
Based solely on its review of the copies of such forms received by it, or
written representations from reporting persons that no Forms F8-A were required
to be filed with the FDIC by those persons, the bank believes that during the
period from January 1, 1999, through December 31, 1999, its officers and
directors were in 1998.
Certain Relationships between Officer and Directors and Certain Transactions
between Officer and Directors and the Bankcompliance with all filing requirements applicable to them.
CERTAIN RELATIONSHIPS BETWEEN OFFICERS AND DIRECTORS AND CERTAIN TRANSACTIONS
BETWEEN OFFICERS AND DIRECTORS AND THE BANK
Family Relationships
Dr. Herbert M. McDonald, a director and vice presidentVice President of the board of
directors, is the uncle of Michael J. McDonald, a director of the bank.
Indebtedness of Management
Except as described below, the bank has not entered into and does not
intend to enter into any material transactions with any director or executive
officer of the bank or their associates.
Some of our directors and officers and the companies with which they are
associated had banking transactions with the bank in the ordinary course of its
business during 1998,1999, and the bank expects to continue such banking transactions
in the future.
Total loans outstanding from the bank at December 31, 1998,1999, to the bank's
officers and directors as a group, members of their immediate families and
companies in which they had an ownership interest of 10% or more, amounted to
$4,337,908,$5,064,043.97 or approximately 9.75%15.76% of the total equity capital of the bank.
The Bank made these loans in the ordinary course of business on substantially
the same terms, including interest rates and collateral, as those prevailing at
the time for comparable transactions with other persons, and they did not
involve more than the normal risk of collection or present other unfavorable
features.
The largest total amount of indebtedness outstanding during 19981999 to the
above described group was approximately $5,250,468.$5,270,351.23. The aggregate amount of
indebtedness outstanding as of the latest practicable date, September 30, 1999,February 29, 2000,
to the above group was approximately $4,068,201.$4,071,191.50. This amount may not include
loans to immediate family members.
The Bankbank paid a total of $12,125$250 to Samuel Cali and Patrick Calvey, Jr. for
appraisals they performed for the bank in 1998.1999. The Bankbank paid a total of $38,807$6,930
in 19981999 to the law firmsfirm of O'Malley & Harris, P.C., and Foley, McLane, Nealon,
Foley and McDonald for legal services performed
on behalf of the bank. Further, in 1998,1999, the bank paid $346$17,533 to American
Janitor and Paper Supply Co., Inc. for janitorial supplies and $8,140 to Dempsey
Uniform & Supply, Inc. for linens for the bank. 61
FINANCIAL INFORMATION ABOUT THE REORGANIZATION
Capitalization
Set forth below isAll of these products and
services were sold or provided according the capitalization
ocustomary price or fee schedule of
the bank on September 30, 1999,
o of the interim bank at its organization on _________, 1999, and
o of the holding company at initial formation on August 10, 1999.
The Fidelity Fidelity Deposit
Deposit and and Discount Fidelity D & D
Discount Bank Interim Bank Bancorp, Inc.
------------- ---------------- --------------
Prior to Merger
- ---------------
Number of Shares Authorized,
Common Stock, par value
$1.5625 for Bank, $2.00 for Interim
Bank and without par value
for Holding Company................ 5,000,000 5,000,000 10,000,000
Number of Shares Authorized,
Preferred Stock, Holding
Company only, without
par value.......................... (Not applicable) (Not applicable) 5,000,000
Number of Shares outstanding:
Common Stock....................... 897,736 50,000(1) 5(2)
Preferred Stock.................... -- -- 0
Capital Accounts:
Common Stock....................... 1,402,713 100,000(1) 5.00(2)
Preferred Stock.................... -- -- 0
Capital Surplus.................... 7,085,723 55,000(1)
Undivided Profits.................. 27,576,055 0
Net Unrealized Holding Gains
(Losses) on Available-for-
Sale Securities................ (3,042,506) 0 0
----------- --------- ----------
Total Equity Capital..................... 33,021,984 155,000 5.00
62
Set forth below is the same information, as adjusted to reflect the
reorganization and the merger of the interim bank into the bank:
After Merger
- ------------
Number of Shares Outstanding:
Common Stock par value
$1.5625 for Bank, $2.00 for
Interim Bank and without
par value for Holding
Company.......................... 897,736 (3) 1,795,472(4)
Preferred Stock (Holding
Company only, without par
value)........................... -- -- 0
Capital Accounts:
Common Stock........................ 1,402,713 -- 1,402,713
Preferred Stock..................... -- -- 0
Capital Surplus..................... 7,085,723 -- 7,085,723
Undivided Profits................ 27,576,055 -- 27,576,055
Net Unrealized Holding Gains
(Losses) on Available-for-
Sale Securities............... (3,042,506) -- (3,042,506)
----------- --- -----------
Total Equity Capital..................... 33,021,984(5) 0 33,021,984(6)
=========== === ===========
- ----------
(1) Represents shares issued upon the initial capitalization of the interim
bank for $3.10 per share. The organizers of the interim bank subscribed for
5,000 shares, and Fidelity D & D Bancorp subscribed for 45,000 shares. At
the time the merger is completed, the organizers will transfer their 5,000
shares to Fidelity D & D Bancorp at the same purchase price, $3.10 per
share. The $55,000 in capital surplus includes a $5,000 expense fund, as
required by the Pennsylvania Banking Code of 1965.
(2) Represents 5 shares issued to the incorporators of the holding company for
$1.00 per share. At the time of the merger, Fidelity D & D Bancorp will
repurchase these shares at the same purchase price, $1.00 per share, and
retire them.
(3) Represents the merger of the interim bank into the bank. At the time of the
merger, the 50,000 shares of interim bank common stock owned by Fidelity D
& D Bancorp will be exchanged for 896,487 shares of bank common stock,
resulting in the bank's equity remaining the same.
(4) Represents the maximum number of shares to be issued to the holders of
common stock of the bank as the result of the merger. No fractional shares
of holding company common stock will be issued in the reorganization. Cash
will be paid in lieu of fractional shares. The payment of cash to
fractional shareholders and to shareholders who exercise their dissenters'
rights could reduce the number of outstanding shares the holding company
issues.
(5) Total equity capital reflects the capital accounts after payment of the
$155,000 dividend to the holding company to repay its loan to purchase the
shares that provided the funds for the initial capitalization of the
interim bank. This borrowing will be through an unaffiliated bank in
Pennsylvania at approximately prime rate. If the proposed reorganization
had occurred on January 1, 1998, the payment of the dividend to repay the
holding company's loan would have reduced interest income for the bank's
1998 fiscal year by approximately $________.
(6) Amounts after the merger are on a consolidated basis.
63
Other Financial Information
Immediately following the effective time of the reorganization, the
consolidated financial statements of Fidelity D & D Bancorp will be
substantially the same as the bank's financial statements immediately prior to
the reorganization. Prior to the closing of the reorganization, Fidelity D & D
Bancorp will not have commenced operations and will have no material assetsseller or liabilities.
For information about the financial condition of The Fidelity Deposit and
Discount Bank, please refer to "Management's Discussion and Analysis of
Financial Condition and Results of Operation." Please also refer to the
financial statements for the bank following the Index to Financial Statements at
the end of this document, starting at page F-1.
64service provider.
67
DESCRIPTION OF THE BANK'S CAPITAL SECURITIES
Common StockCOMMON STOCK
The Fidelity Deposit and Discount Bank is authorized to issue 5 million
shares of common stock, par value $1.5625 per share, of which 897,736approximately
900,541 shares were issued and outstanding as of December _____, 1999.February 29, 2000. No other
shares were issued or outstanding. The bank is not authorized to issue any other
class of stock. As of December____, 1999,February 29, 2000, the bank had approximately 1,2191,264
shareholders.
Voting Rights. Each share of common stock is entitled to one vote on all
matters that may be brought before shareholders' meetings, except that the
holders of common stock have cumulative voting rights in the election of
directors. Cumulative voting for the election of directors entitles each
shareholder to multiply the number of votes to which the shareholder is entitled
by the total number of directors to be elected, and the shareholder may cast the
whole number of these votes for one candidate or may distribute them among two
or more candidates.
Preemptive Rights. The bank's common stock does not carry preemptive
subscription rights.
Liquidation. In the event of liquidation, dissolution or winding up of the
bank, shareholders are entitled to share ratably in all assets remaining after
payment of liabilities.
Liability for Further Assessments. The bank's shareholders are not subject
to further assessments by the bank on their shares.
Sinking Fund Provision. The bank's shares do not require a "sinking fund"
which is a separate capital reserve maintained to pay shareholders with
certain
preferential rights for their investment in the event of liquidation or
redemption.
Redemption Provision. The bank's shareholders do not have a right of
redemption, which is the right to sell their shares back to the bank.
Capital Requirements under State Banking Law. Under the Pennsylvania
Banking Code of 1965, the bank must maintain capital surplus in an amount at
least equal to the amount if its capital consisting of the total par value of
its common stock. The bank must also maintain an expense fund not less than 5%
of par value capital.
Dividends. Each shareholder is entitled to receive dividends that may be
declared by the board of directors out of legally available funds. The bank has
historically paid quarterly cash dividends to its shareholders, as well as a
special dividend in the fourth fiscal quarter. Starting in March of 2000, the
board of directors has amended its dividend policy to eliminate the payment of a
special year-end dividend and to pro rate the amount paid as a special
dividend over the four regular dividend payments each year. As before, the board
of directors may increase subsequent quarterly dividends at its discretion.
Payment of dividends is subject to the restrictions in the Pennsylvania
Banking Code of 1965 and the Federal Deposit Insurance Act. The Pennsylvania
Banking Code provides that a bank may
68
declare and pay dividends only out of accumulated net earnings and only if the
bank meets certainminimum capital requirements. Directors are specifically liable for
unlawful dividends.
65
The Federal Deposit Insurance Act generally prohibits
payment of dividends that would be an "unsafeunsafe or unsound banking practice."
Further, an insured bank may not declare and pay dividends if the FDIC obtains a
cease and desist order for the bank.
The following table sets forth the dividends whichthat the bank has paid its
shareholders since January 1997.during fiscal years 1998 and 1999.
AMOUNTS OF DIVIDENDS PAID
Regular Cash Special Cash In the
Month/Year Dividend Per Share Dividend Per Share Aggregate
- ---------- ------------------ ------------------ --------------------
March 1997 $0.275 $ $228,463.59
June 1997 0.275 228,934.53
September 1997 0.275 229,309.07
December 1997 0.275 0.175 375,820.86
March 1998 0.300 251,177.84$0.30 $251,177.84
June 1998 0.3000.30 251,595.77
September 1998 0.3000.30 251,986.68
December 1998 0.300 0.2000.30 $0.20 445,649.00
March 1999 0.3000.30 268,094.36
June 1999 0.3000.30 268,493.53
September 1999 0.3000.30 268,920.69
December 1999 0.30 0.30 538,631.57
Comparative Market Prices
There has never been an organized public trading market for the bank's
outstanding common stock. The bank's common stock is traded over-the-counter
from time to time, primarily in the bank's geographic service area. As of
December ___, 1999,February 29, 2000, the highest trade price known to management for transactions
of the bank's common stock was for a trade of _______1,500 shares at $______$72.25 per share
on _________, 1999.February 15, 2000. The most recent sale price known to management as of
December___, 1999,February 29, 2000, was $_______$ 71.50 per share.share on February 24, 2000. The last reported
sale of the bank's common stock prior to the public announcement of the proposed
reorganization was a trade of 110 shares at $69.50 per share on October 5, 1999.
This price may include retail markups, markdowns or commissions. Due to the
infrequency of trading and the fact that these trades are generally private
transactions, we are unable to determine actual trading prices on any given
date.
Because the holding company has no substantial assets or liabilities, the
holding company's common stock had no market value at the time of the public
announcement. We anticipate that after the reorganization, the per share market
value of the holding company's common stock will be approximately 1/2 of the per
share market value of the bank's common stock immediately after the
reorganization, based on the 2-for-1 stock exchange ratio. Any estimate or
expectation, however, may not be realized.
6669
Trade Price High's and Low'sTRADE PRICE HIGH'S AND LOW'S
Bid price information for the bank's common stock is not available.
However, the bank does have information on trade prices. The following table
shows quarterly high and low trade prices for the bank's common stock:
Trade Prices: Bank's Common Stock
(Price per share)stock during
fiscal years 1998 and 1999.
TRADE PRICES: BANK'S COMMON STOCK
(PRICE PER SHARE)
High Low
------ ------
For Quarter Ended:
March 1997 $45.00 $44.00
June 1997 46.00 45.00
Sept. 1997 50.00 47.00
Dec. 1997 52.00 49.00FOR QUARTER ENDED:
March 1998 54.00 52.00
June 1998 62.00 60.00
Sept. 1998 60.00 60.00
Dec. 1998 62.00 60.00
March 1999 65.00 64.50
June 1999 65.00 62.00
Sept. 1999 69.50 65.00
Stock Option PlansDec. 1999 71.25 66.25
STOCK OPTION PLANS
The bank's common stock is subject to outstanding options to purchase
common stock of the bank issued to directors and key employees under the 1998
Independent Directors Stock Option Plan and the 1998 Stock Incentive Plan. As of
September 30, 1999,February 29, 2000, 7,450 shares of the bank had issued optionsbank's common stock were subject to
purchase 3,750 shares at an
exercise price of $62.00.under outstanding stock options. Shares issued under these plans may
dilute the ownership interests and voting power of existing shareholders. After
the proposed reorganization, Fidelity D & D Bancorp will assume the bank's
obligations under these plans. Further, we will adjust the number of shares
which participants may purchase under their outstanding options, the exercise
price of the options, and the number of shares which the holding company may
issue under the plans according to the 2-for-1 exchange ratio of holding company
common stock for Bank common stock. See "Information about"Proposal No. 1 Reorganization of The
Fidelity Deposit and Discount Bank as the Reorganization -Subsidiary of Fidelity D&D Bancorp,
Inc.- Stock Option Plans."
1998 Independent Directors Stock Option Plan. The bank has reserved 25,000
shares of Bank common stock for issuance under the Directors Stock Option Plan.
The purposes of the Directors Plan areare:
o toTo attract, retain and compensate, as directors of the bank, highly
qualified individuals, who are not executives or employees of the bank,
67
o toTo more significantly align the interests of the members of the board
of directors with those of the bank's shareholders by underscoring
their common interests,
70
o toTo encourage directors to have a greater personal financial stake in
the bank through the ownership of Bank common stock, and
o toTo increase the long-term value of the bank's stock.
The Directors Plan has the following significant terms:
o Duration of Plan. The Directors Plan will terminate upon the earlier of
the Board'sboard's adoption of a resolution terminating the Director Plan or
10 years from the date the Directors Plan was approved and adopted by
shareholders of the bank, which occurred on May 5, 1998.
o Shares Issued. The Bank may issue no more than 25,000 shares of common
stock under the plan, and this number may be adjusted from time to time
due to stock splits, payments of stock dividends or other changes in
the structure of the bank's capital. Also, the shares under the plan
may be exchanged for the securities of another entity, for example, if
a merger occurs.
o Eligible Participants, Annual Awards. Directors who are not employees
of either the bank or its affiliates, ("outside"outside directors"), are eligible
to receive awards under the plan. For the term of the Directors Plan,
each outside director shall annually receive a stock option to purchase
250 shares of the bank's common stock on the first business day of
January. However, prior to any such grant, the board of directors, by
majority vote, may deny the awards scheduled for the upcoming January.
In such an event, directors will not receive awards under the plan for
the year in question. However, the Board'sboard's decision to foregoforgo the
current year's awards will not affect awards scheduled for any future
years.
o Purchase Price. The purchase price of bank common stock subject to a
stock option is the fair market value at the time of grant.
o Term of Stock Options. No stock option is exercisable after 10 years
from the date of grant.
o Vesting Periods. The bank may grant stock options with varying vesting
periods, but must provide for a minimum vesting period of 6 months from
the date of grant.
o Change in Control Provisions. The Directors Plan contains certain
change in
control provisions which would permit the options granted to become
exercisable upon the occurrence of a change in control of the bank as
described in the plan.
o Plan Administration. The entire board of directors or a committee
comprised of at least 3 directors administers the Directors Plan. It is
possible for directors participating in such administration to receive
awards under the plan. The body 68
established to administer the Directors
Plan is vested with the authority and discretion to interpret the
Director Plan, and to make any rules or regulations pertaining to it.
71
Any of these interpretations and decisions of the administrative body
are final and binding.
o Death, Retirement or Disability of Director. In the event that a
participant ceases to be a director of the bank for any cause other
than retirement, death or disability, the remaining portion of a
participant's unexercised stock options shall terminate 1 year after
the date of termination as a director, subject to the 10-year
limitation on exercisability. In the event that a participant retires,
dies or becomes disabled prior to the expiration of the participant's
stock options, and without having fully exercised such stock options,
the participant or his legal representative shall have the right to
exercise the stock options during their respective terms within 12
months after the termination of Board membership, subject to the
10-year limitation on exercisability.
o Non-transferability. Except as otherwise provided by the board of
directors, awards made to directors under the Directors Plan are
non-transferrable other than by will or the laws of descent and
distribution. During the director's lifetime, only the director may
exercise his or her stock options granted under the plan, or, in the
event of his or her disability or death, a legal representative may
exercise the options.
o Capital Changes. The Directors Plan provides that, if the bank, at any
time, increases or decreases the number of its outstanding shares of
common stock or changes, in any way, the rights and privileges of such
shares through a stock dividend, or through a stock split,
reclassification or other recapitalization involving the bank's common
stock, then the bank shall increase, decrease or change, in like
manner, the numbers, rights and privileges of shares issuable under the
Directors Plan.
o Amendments. The board of directors may amend the Directors Plan at any
time without shareholder approval, provided, however, that amendment of
the Directors Plan may not materially and adversely affect any right of
a participant with respect to shares of common stock previously issued
without the participant's written consent.
1998 Stock Incentive Plan. The bank hasoriginally reserved 25,000 shares of
bank common stock for issuance under the Stock Incentive Plan. The purposes of
the Incentive Plan are
o toTo advance the development, growth and financial condition of the bank
by providing incentives through participation in the appreciation of
common stock of the bank in order to secure, retain and motivate
personnel responsible for the operation and management of the bank;
o toTo attract and retain individuals of outstanding ability as employees
of the bank;
o toTo encourage employees to acquire a proprietary interest in the bank;
and
69
o toTo encourage employees to continue their employment with the bank and
to render superior performance during such employment.
72
The Incentive Plan has the following significant terms:
o Duration of Plan. The Incentive Plan will terminate upon the earlier of
the Board'sboard's adoption of a resolution terminating the Incentive Plan or
10 years from the date the plan was approved and adopted by
shareholders of the bank, which occurred on May 5, 1998. In addition,
qualified options may not be awarded more than 10 years after February
24, 1998, the date the board of directors adopted the plan.
o Shares Issued. The bank may issue no more than 25,000 shares of common
stock under the plan, and this number may be adjusted from time to time
due to stock splits, payments of stock dividends or other changes in
the structure of the bank's capital. Also, the shares under the plan
may be exchanged for the securities of another entity, for example, if
a merger occurs.
o Eligible Participants. Key officer and other management employees of
the bank are eligible to receive an award under the Incentive Plan, as
the committee administering the plan determines.
o Awards. Awards made under the Stock Incentive Plan may be in the form
of:
o optionsOptions to purchase stock intended to qualify as incentive stock
options under Sections 421 and 422 of the Internal Revenue Code,
(orknown as "qualified options"), which means that the plan participant
will not recognize any taxable income on the exercise of the
options; or
o optionsOptions which do not so qualify, (orknown as "non-qualified options").
o Purchase Price. The purchase price of bank common stock subject to a
non-qualified stock option will be not less than the stock's par value
at the time of grant. The purchase price of stock subject to a
qualified option will be no less than the fair market value of the
stock at the time it is exercised.
o Term of Stock Options. No option is exercisable after 10 years from the
date of grant.
o Vesting Periods. The bank may grant stock options with varying vesting
periods, but must provide for a minimum vesting period of 6 months from
the date of grant.
o Change in Control Provisions. The Incentive Plan contains certain
change in
control provisions which would permit the options granted to become
exercisable upon the occurrence of a change in control of the bank as
described in the plan.
70
o Plan Administration. A committee consisting of 3 or more non-employee
directors administers the plan. Generally, recent or current
participants in the plan may not serve on this committee.
o Termination of Employment. If a recipient of a non-qualified option
ceases to be eligible under the Stock Incentive Plan before the option
lapses or before it is fully
73
exercised, the committee may permit the recipient to exercise the
option during its remaining term, to the extent that the option was
then and remains exercisable. If the bank ceases to employ the
recipient of a qualified option, the committee administering the plan
may permit the recipient to exercise his or her option during its
remaining term for a period of not more than 3 months. This period may
be extended to a 12 month12-month period if the employment cessation was due
to the recipient's disability. If the recipient dies, the committee may
permit the recipient's qualified personal representatives, or any
persons who acquire the options under his or her will or the laws of
descent and distribution, to exercise his or her option during its
remaining term for a period not to exceed 12 months after the
recipient's death.
o Non-transferability. Except as otherwise provided by the board of
directors or committee administering the plan, awards under the
Incentive Plan are non- transferrablenon-transferrable other than by will or the laws of
descent and distribution.
o Capital Changes. The Incentive Plan provides that, if the bank, at any
time, increases or decreases the number of its outstanding shares of
common stock or changes, in any way, the rights and privileges of such
shares through a stock dividend, or through a stock split,
reclassification or other recapitalization involving the bank's common
stock, then the bank shall increase, decrease or change, in like
manner, the numbers, rights and privileges of shares issuable under the
plan.
o Amendments. The board of directors may amend the plan at any time
without shareholder approval, provided, however, that amendment of the
Directors Plan may not materially and adversely affect any right of a
participant with respect to shares of common stock previously issued
without the participant's written consent.
Dividend Reinvestment PlanDIVIDEND REINVESTMENT PLAN
The bank's common stock is also subject to The Fidelity Deposit and
Discount Bank Dividend Reinvestment Plan. The purpose of this plan is to provide
shareholders a convenient method of investing cash dividends in additional
shares of bank common stock. Shareholders who elect to participate in the plan
direct any cash dividends the bank pays on their designated shares toward
automatic investment in additional shares of bank common stock. Under this plan,
the bank is authorized to issue up to 50,000 shares of its common stock, par
value $1.5626 per share. Rather than issuing new shares, the bank has the option
of using shares purchased in the open market or in negotiated transactions for
the plan. A participant may withdraw at any time, and the bank may terminate the
plan at any time. As of September 30, 1999,February 29, 2000, the bank had issued approximately
22,45525,591 new shares under the plan. The issuance of additional shares under this
71
plan may dilute the ownership interests and voting power of existing
shareholders. The bank will terminate the plan at the time the reorganization is
completed. After the proposed reorganization, Fidelity D & D Bancorp expects to
implement a dividend reinvestment plan with substantially similar terms to the
bank's plan. See "Information about"Proposal No. 1: Reorganization of The Fidelity Deposit and
Discount Bank as the ReorganizationSubsidiary of Fidelity D & D Bancorp, Inc. - Dividend
Reinvestment Plan."
74
DESCRIPTION OF THE HOLDING COMPANY'S CAPITAL SECURITIES
The authorized capital stock of Fidelity D & D Bancorp consists of 10
million shares of common stock, without par value, and 5 million shares of
preferred stock, without par value. If the reorganization had been completed on
September 30, 1999,February 29, 2000 the holding company would have about 1,795,4721,801,082 shares
outstanding, which is twice the number of shares of bank common stock
outstanding on that date. Except for the common stock issued in the
reorganization, upon completion of the reorganization, no other shares of
capital stock, common or preferred, will be issued or outstanding.
Common StockCOMMON STOCK
Voting Rights. Each share of common stock entitles its holder to one vote
on all matters upon which shareholders have the right to vote. The holders of
common stock are not entitled to cumulate votes in the election of directors.
Prior to the issuance of any preferred stock which possesses voting rights, the
holders of common stock will possess exclusive voting rights in the holding
company.
Preemptive Rights. The holding company's common stock does not carry
preemptive subscription rights.
Liquidation. In the event of liquidation, dissolution or winding up of the
holding company, the holders of common stock are entitled to share ratably in
all assets remaining after payment of liabilities and after payment of preferred
stock shareholders with liquidation priority, if any.
Liability for Further Assessments. The holding company will not subject
shareholders to further assessments on their shares of common stock.
Sinking Fund Provision. The common stock does not require a "sinking fund"
which is a separate
capital reserve maintained to pay shareholders with certain preferential rights for
their investment in the event of liquidation or redemption. However, in the
future the holding company may issue preferred shares that require such a fund,
in which case legal restrictions may require the holding company to maintain the
fund prior to paying dividends.
Redemption or Conversion Rights. The holders of common stock do not have a
right of redemption, which is the right to sell their shares back to the holding
company, nor do they have a right to convert their shares to other classes or
series of stock, such as preferred stock.
Dividends. Each shareholder is entitled to receive dividends that may be
declared by the board of directors out of legally available funds. The Bankbank has
paid continuous quarterly cash
72
dividends since 1996. We presently intend to
retain the dividend policy of paying a quarterly dividend after the
reorganization. However, further dividends depend upon future earnings,
financial condition, appropriate legal restrictions and other relevant factors.
Under the Pennsylvania Business Corporation Law, the holding company may
not pay a dividend if afterwards:
o theThe holding company would be unable to pay its debts as they become
due, or
75
o theThe holding company's total assets would be less than its total
liabilities plus an amount needed to satisfy any preferential rights of
shareholders.
Cash available for dividend distribution to shareholders of the holding
company must initially come from dividends which the bank pays the holding
company. As a result, the legal restrictions on the bank's dividend payments
also affect the ability of the holding company to pay dividends. See
"Description of the Bank's Capital Securities - Common Stock."
Stock Option Plans. The holding company will assume the bank's obligations
under its 1998 Independent Directors Plan and 1998and1998 Stock Incentive Plan. See
"Description of the Bank's Capital Securities - Stock Option Plans."
Dividend Reinvestment Plan. The holding company expects to implement a
dividend reinvestment plan with substantially the same terms as the bank's
dividend reinvestment plan. See "Description of the Bank's Capital Securities -
Dividend Reinvestment Plan." The holding company expects to be able to issue up
to 100,000 shares of its common stock under the new plan.
Preferred StockPREFERRED STOCK
The holding company's articles of incorporation authorize the board of
directors to approve the issuance of preferred stock, without prior shareholder
approval. The board will determine the rights, qualifications, limitations and
restrictions on each series of preferred stock at the time of issuance and may
include, among other things, rights to participating dividends, voting rights
and convertibility into shares of common stock. The holding company may issue
shares of preferred stock with dividend, redemption, voting and liquidation
rights taking priority over the common stock. The board may also grant preferred
shareholders the right to convert their shares of preferred stock into shares of
common stock. Provisions granting directors this type of authority are known as
"blank check" provisions.
Voting Rights. The board will determine the voting rights of preferred
shareholders upon the issuance of these shares. The issuance of preferred stock
with voting rights would dilute the voting power of common stock shareholders.
Preemptive Rights. The holding company's preferred stock does not carry
preemptive subscription rights.
Liquidation. The board will determine the specific liquidation rights of
preferred shareholders upon the issuance of these shares. In the event of
liquidation, dissolution or 73
winding up of the holding company, the holders of
preferred stock will likely rank prior to the holders of common stock for the
right to share ratably in all assets remaining after payment of liabilities. The
Boardboard may issue several series of preferred stock with different rankings with
respect to liquidation rights.
Liability for Further Assessments. The holding company will not subject
shareholders to further assessments on their shares of preferred stock, if
issued.
Sinking Fund Provision. The preferred stock may require a "sinking fund,"
which is a separate capital
reserve maintained to pay shareholders with certain
preferential rights for their
investment in
76
the event of liquidation or redemption. Pennsylvania corporate law would require
the holding company to maintain this fund prior to paying dividends.
Redemption or Conversion Rights. Upon the issuance of preferred stock, the
board of directors will determine shareholders' right of redemption, which is
the right to sell shares back to the holding company. The Boardboard will also
determine whether to grant conversation rights, which would permit the preferred
stock shareholders to convert their shares to common stock at a prescribed
ratio.
Dividends. Upon issuance, the board of directors will determine any rights
of the shareholders of a particular series of preferred stock to receive
dividends. The right to receive dividends may be cumulative or non-cumulative.
The same legal restrictions which apply to dividends payable on shares of common
stock apply to dividends payable on shares of preferred stock. See "Description
of the Holding Company's Capital Securities - Common Stock - Dividends" above.
Issuance of Additional Securities
Because theISSUANCE OF ADDITIONAL SECURITIES
The holding company has authorized common stock and preferred stock
substantially in excess of the number of shares that it will issue in connection
with the reorganization,reorganization. As a result, we will have the flexibility to raise
additional capital and to make acquisitions through the issuance of holding
company common stock or preferred stock without prior approval by the holding
company's shareholders. Issuance of these shares could dilute the book value per
share and the voting power of the prior shareholders because the holding company
has the right to issue new shares without first offering the shares to
shareholders in proportion to their current ownership percentages. Further, the
issuance of preferred stock could also affect common stock shareholders' ability
to receive dividends and their rights upon liquidation of the company. We
currently have no plans for issuing additional shares of common stock or
preferred stock.
Legal OpinionLEGAL OPINION
Shumaker Williams, P.C., 3425 Simpson Ferry Road, Camp Hill, Pennsylvania
17011, special counselSpecial Counsel to the bank and the holding company, has delivered an
opinion stating that the shares of common stock of the holding company to be
issued in connection with the reorganization will be duly authorized, fully paid
and non-assessable by the holding company. "Non-assessable" means that the
holding company will not be able to assess fees for ownership of the shares. 74
Anti-Takeover Provisions in Articles and By-lawsThe
opinion is attached as an exhibit to the Registration Statement, filed with the
SEC, of which this proxy statement/prospectus forms a part.
ANTI-TAKEOVER PROVISIONS IN ARTICLES AND BY-LAWS
The holding company's articles of incorporation and by-laws contain a
number of provisions that could be considered anti-takeover in purpose and
effect. Only a few of these are shared by the bank. For a full description of
the risks associated with these anti-takeover provisions, please refer to "Risks
- - Risks Related to the Reorganization""Risk
Factors" above.
77
Authorized Capital. The anti-takeover provisions include:
o theThe authorization of 10 million shares of common stock and 5 million
shares of preferred stock, and
o theThe lack of preemptive rights for shareholders to subscribe to purchase
additional shares of stock on a pro rata basis.
These provisions generally permit the board of directors to have as much
flexibility as possible to issue additional shares, without prior shareholder
approval, for proper corporate purposes, including financing, acquisitions,
stock dividends, stock splits, and employee incentive plans. However, these
additional shares may also be used by the board of directors to deter future
attempts to gain control over the holding company. By comparison, the bank has 5
million shares of authorized common stock and also does not guarantee preemptive
rights.
Classified Board. Like the by-laws of the bank, the by-laws of the holding
company provide for a classified or staggered board. A classified board has the
effect of moderating the pace of any change in control of the board of directors
by extending the time required to elect a majority of the directors to at least
two successive annual meetings. However, this extension of time also tends to
discourage a tender offer or takeover bid. Article 9 of the by-laws of the
holding company provides that at its 20002001 Annual Meeting of Shareholders, the
shareholders shall elect 10 directors as follows:
o 4 Class A directors to serve until the 20012003 Annual Meeting of
Shareholders,
o 3 Class B directors to serve until the 2002 Annual Meeting of
Shareholders, and
o 3 Class C directors to serve until the 20032004 Annual Meeting of
Shareholders.
Shareholders shall elect each class in a separate election. At each
following annual meeting, shareholders will elect successors to the class of
directors whose term is then expiring to hold office for a term of 3 years. The
board of directors will fill vacancies which occur during the year for the
remainder of the full term.
No Cumulative Voting. Another provision is the elimination of cumulative
voting. Cumulative voting entitles each shareholder to as many votes as equal
the number of shares owned by him or her multiplied by the number of directors
to be elected. A shareholder may cast all of these votes for one candidate or
distribute them among any two or more candidates. The 75
Bank'sbank's shareholders may
cumulate their votes in the election of directors. However, Article 8 of the
holding company's articles of incorporation eliminates cumulative voting rights
in the election of directors. We believe that each director should represent and
act in the interest of all shareholders and not any special group of
shareholders. The absence of cumulative voting means that a majority of the
outstanding shares can elect all the members of the board of directors. The
absence of cumulative voting may make it more difficult for minority
shareholders' nominees to be elected to the board of directors.
Supermajority Vote for Approval of Extraordinary Transactions. Another
anti-takeover provision is the requirement in the articles of incorporation that
the affirmative vote of the holders of at least 75% of the outstanding shares
entitled to vote must approve any merger, consolidation, dissolution or
liquidation of the holding company or the sale of all or substantially all of
its assets. However, if at least 80% of the board of directors have approved
this type of transaction, then the holders of at least 51% of the outstanding
shares entitled to vote may approve the transaction. We
78
included these provisions to ensure that any extraordinary corporate transaction
could happen only if it receives a clear mandate from the shareholders. However,
these provisions give the holding company's directors and/or the holders of a
minority of the holding company's outstanding shares a veto power over such
mergers and consolidations unless 75% of the shareholders believe that the
transaction is desirable or beneficial. By comparison, the holders of 66 2/3% of
the bank's outstanding shares may approve an extraordinary business transaction.
Authorization to Consider Various Factors in Tender Offers. Another
anti-takeover provision in the articles of incorporation enables the board of
directors to oppose a tender offer on the basis of factors other than economic
benefit to shareholders, such as:
o theThe impact the acquisition of the holding company would have on the
community,
o theThe effect of the acquisition upon shareholders, employees, depositors,
suppliers and customers, and
o theThe reputation and business practices of the tender offeror.
We included this provision in the articles of incorporation to permit
us, as directors of the holding company, to recognize our responsibilities to
these constituent groups of the holding company and its subsidiaries and to the
communities that they serve. Pennsylvania corporate law specifically authorizes
this type of provision. By comparison, banking law does not specifically
authorize this provision.
Supermajority Vote for Amendment of By-laws. The Holding Company's By-lawsholding company's by-laws
may be amended by the affirmative vote of at least 75% of the outstanding shares
entitled to vote at any regular or special meeting or by a majority vote of the
members of the board of directors, subject to the affirmative vote of at least
75% of the shares to change any amendment to the By-lawsby-laws previously approved by
the board of directors. However, the board of directors may not make or alter
any by-lawsby- laws fixing their qualification, classification or term of office. We
included these provisions in the by-laws of the holding company to make it more
difficult for a potential acquiroracquirer to change the by-laws.by- laws. By comparison, the
holders of a majority of shares may amend the bank's by-laws.
76
Supermajority Vote for Amendment of CertainSpecified Articles. A final
anti-takeoverantitakeover provision in the articles of incorporation of the holding company
requires the affirmative vote of the holders of at least 75% of the outstanding
shares entitled to vote for an amendment of the following provisions:
o theThe voting requirements for approval of mergers,
o theThe elimination of cumulative voting rights,
o theThe ability of shareholders entitled to cast 20% of votes to call
special meetings, or the board of directors, to call special meetings,
and
o theThe ability of the board of directors to consider non-economic factors
in opposing a tender offer.
79
By comparison, the holders of a majority of shares may amend the bank's
articles.
Anti-takeover Provisions Applicable to Registered Corporations
The shares that Fidelity D & D Bancorp proposes to issue in connection with
the reorganization are registered on a Registration Statement filed under the
Securities Act of 1933. Upon completion of the reorganization, Section 15(d) of
the Securities Exchange Act of 1934 requires the holding company to file
periodic reports with the SEC under Section 13. In addition, the holding company
will be required to register with the SEC under Section 12 of the Securities
Exchange Act of 1934 within 120 days of the end of the calender year 1999
because it will have more than 500 shareholders of record and $10 million in
assets.ANTI-TAKEOVER PROVISIONS APPLICABLE TO REGISTERED CORPORATIONS
Pennsylvania law gives certain strong anti-takeover provisions to corporations that
have their securities registered with the SEC under Section 12 of the Securities
Exchange Act of 1934. The law calls these "Registered
Corporations.1934, known as "registered corporations." AlthoughAfter the
reorganization, the holding company will not attain the status of
"Registered Corporation" on the day of the reorganization, upon registeringbe required to register its stock under
the Securities Exchange ActSection 12 of 1934, the holding company will obtain
"Registered Corporation" status under the Pennsylvania Business Corporation Law
and the following statutory provisions will be applicable to the holding
company.the1934 Act. These provisions are in addition to provisions
contained in the company's articles of incorporation and by-laws. These
provisions do not apply to the bank because it is not a business corporation,
although its common stock is registered under the 1934 Act.
One of these statutory provisions eliminates the rights of the shareholders
of registered corporations to call a meeting of shareholders. This provision
will not apply to the holding company because it has opted out of this
provision. Article 9 of its articles of incorporation provides that one or more
shareholders entitled to cast at least 20% of the vote that all shareholders are
entitled to cast at a particular meeting shall be entitled to call a special
meeting of shareholders. The board of directors may also call a special meeting
of shareholders. Article 9 provides shareholders of the holding company with the
same right to call a special meeting as that of the bank's shareholders.
Another of these statutory provisions eliminates the rights of the
shareholders of registered corporations to propose an amendment to the articles
of incorporation of the holding 77
company. In the opinion of the board of
directors, the elimination of this right will make the holding company less
attractive as a potential takeover target because a potential acquiroracquirer will not
be able to propose changes to the articles of incorporation simply by purchasing
shares of the holding company.
Another provision to which the holding company will be subject, upon
obtaining registered corporation status, assures that all shareholders will
receive the "fair value"fair value for their shares as the result of a "controlcontrol
transaction." "Fair Value" means not less than the highest price paid per share
by a controlling person or group at any time during the 90-day period ending on
and including the date of the control transaction. Alternatively, if a
shareholder believes the value of his or her shares is higher, he or she may
demand an appraisal procedure to receive the fair value of the shares as the
date of the control transaction, taking into account all relevant factors which
may not be reflected in the price paid for the shares. "Control Transaction"
means the acquisition by a person who has, or a group of persons acting in
concert that has, voting power over voting shares of the holding company that
would entitle the holders of the shares to cast at least 20% of the votes that
all shareholders would be entitled to cast in an election of directors of the
holding company. After the occurrence of a control transaction, any shareholder
may, within a specified time period, make written demand on the person or group
controlling at least 20% of the voting power of the shares of the holding
company for payment in an amount equal to the fair value of each voting share as
of the date on which the control transaction occurs.
It is a relatively common practice in corporate takeovers to pay cash to
acquire controlling equity in a company and then to acquire the remaining equity
interest in the company by paying the balance of the shareholders a price for
their shares which is lower than the price paid to acquire control or is in a
less desirable form of payment, such as securities of the purchaser that do not
have an established trading market. The board of directors considers these
"two-tier pricing"two-tier pricing tactics to be
80
unfair to the holding company's shareholders. By their very nature, these
tactics tend to cause concern on the part of shareholders that if they do not
act promptly, they risk either being relegated to the status of minority
shareholders in a controlled company or being forced to accept a lower price for
all of their shares. Thus, two-tier pricing unduly pressures shareholders into
selling as many of their shares as quickly as possible, either to the purchaser
or in the open market, without having genuine opportunity to make a considered
investment choice between remaining a shareholder of the company or disposing of
their shares. These sales in turn facilitate the purchaser's acquisition of a
sufficient interest in the company to enable the purchaser to force the exchange
of remaining shares for a lower price in a business combination.
While the fair price provision in Pennsylvania law is designed to help
assure fair treatment of all shareholders vis-a-vis other shareholders in the
event of a takeover, it is not the purpose of the fair price provision to assure
that shareholders will receive a premium price for their shares in a takeover.
Accordingly, the fair price provision would not preclude the board of directors'
opposition to any future takeover proposal which it believes not to be in the
best interests of the holding company and its shareholders, whether or not the
proposal satisfies the minimum price, form of payment and procedural
requirements of the fair price provision.
Another provision of Pennsylvania law relates to a "Business Combination"business combination
involving a Registered Corporation. Business Combination includesregistered corporation. These business combinations include the
following transactions involving an "Interested Shareholder":
78
interested shareholder:
o aA merger or consolidation of the holding company with an interested
shareholder;
o aA sale, lease, exchange, mortgage, pledge, transfer or other
disposition with the interested shareholder of the assets of the
holding company or certain of its subsidiaries;
o theThe issuance or transfer by the holding company or its subsidiary of
any shares of the holding company or its subsidiary which has a total
market value at least equal to 5% of the total market value of all the
company's outstanding shares to an interested shareholder;
o theThe adoption of any plan for the liquidation or dissolution of the
holding company proposed by, or under any agreement with, the
interested shareholder;
o aA reclassification of securities or recapitalization of the holding
company or any merger or consolidation of the holding company with any
subsidiary of the holding company or any other transaction proposed by,
or under any agreement with the interested shareholder which has the
effect of increasing the interested shareholder's proportionate share
of the outstanding shares of the holding company; or
o theThe interested shareholder's receipt of the benefit, directly or
indirectly, of any loans or other financial assistance or any tax
credits or other tax advantages provided by the holding company.
An "Interested Shareholder"interested shareholder is any person that is the beneficial owner,
directly or indirectly, of shares entitling that person to cast at least 20% of
the votes that all shareholders would be entitled
81
to cast in an election of directors of the holding company. The above
definitions also apply to an interested shareholder's affiliate or associate.
Under Pennsylvania law, the holding company shall not engage in a business
combination with an interested shareholder other than:
o aA business combination approved by the board of directors prior to the
date the interested shareholder acquires at least 20% of the shares or
where the board of directors of the holding company has approved the
purchase of shares by the interested shareholder;
o aA business combination approved by a majority of the votes that all
shareholders would be entitled to cast not including those shares held
by the interested shareholder, at a meeting called for that purpose
within 3 months after the interested shareholder became the beneficial
owner of shares entitling it to cast at least 80% of the votes in an
election of directors, and if the business combination satisfies
certain minimum conditions, which are discussed below;
o aA business combination approved by the affirmative vote of all of the
shareholders of the outstanding shares;
79
o aA business combination approved by a majority of the votes that all
shareholders would be entitled to cast not including those shares
beneficially owned by the interested shareholder at a meeting called
for that purpose no earlier than 5 years after the interested
shareholder's share acquisition date; and
o aA business combination approved at a shareholders' meeting called for
that purpose no earlier than 5 years after the interested shareholder's
share acquisition date and that meets certain minimum conditions, which
are discussed below.
The certain minimum conditions discussed above generally require that the total
amount of the cash and the market value of any payments other than cash, such as
stock, bonds or debentures, to the shareholders of the holding company be at
least equal to the higher of the following:
o theThe highest price paid by the interested shareholder when the
interested shareholder was the beneficial owner of shares entitling him
to cast at least 5% of the votes in an election of directors within the
5-year period immediately prior to the announcement date of the
business combination or within the 5-year period prior to time the
interested shareholder became an interested shareholder, whichever is
higher, plus interest; or
o theThe market value per common share on the announcement date of the
business combination or on the share acquisition date, whichever is
higher, plus interest.
The Pennsylvania provision relating to business combinations is designed to
help assure that if, despite the holding company's best efforts to remain
independent, the holding company is nevertheless taken over, each shareholder
will be treated fairly vis-a-vis every other shareholder and
82
that professional investors will not profit at the expense of the holding
company's long-term public shareholders. While the business combination
provision is designed to help assure fair treatment of all shareholders
vis-a-vis other shareholders in the event of a takeover, it is not the purpose
of the business combination provision to assure that shareholders will receive
premium price for their shares in a takeover. Accordingly, we believe that the
business combination provision would not preclude our opposition to any future
takeover proposal which we believe not to be in the best interests of the
holding company and its shareholders, whether or not the proposal satisfied the
requirements of the business combination provision, fair price provision or
both.
Subchapter G of Chapter 25 of the Pennsylvania Business Corporation Law
also applies to registered corporations. Under Subchapter G, the acquisition of
shares that increase the shareholder's control of the corporation above 20, 33
or 50% of the voting power able to elect the board of directors cannot be voted
until a majority of disinterested shareholders approves the restoration of the
voting rights of those shares in two separate votes:
o allAll disinterested shares of the corporation, and
o allAll voting shares of the corporation.
80
Voting rights which are restored by shareholder approval will lapse if any
proposed control-share-acquisition which is approved is not consummated within
90 days after shareholder approval is obtained. Furthermore, control-shares that
are not accorded voting rights or whose rights lapse will regain their voting
rights on transfer to another person who is not an affiliate. If the shares
constitute control-shares for the transferee, this subchapter must be applied to
that person as well. If the acquiring shareholder does not request a shareholder
meeting to approve restoration of voting rights within 30 days of the
acquisition or if voting rights are denied by the shareholders or if they lapse,
the corporation may redeem the control shares at the average of the high and low
price on the date of the notice of redemption.
Subchapter H of Chapter 25 of the BCL likewise applies to registered
corporations. Under Subchapter H, a "control person" (acontrol person -- a person who owns shares
with 20% or more voting power)power -- must disgorge to the corporation any profits
from the disposition of any equity securities if the disposition occurs within
18 months of becoming a control person, and the securities were acquired 24
months before to 18 months after becoming a control person. This provision seeks
to prevent speculative takeover attempts.
Finally, Pennsylvania law grants a registered corporation the express
authority to treat individual shareholders differently and therefore may take
advantage of "poisonpoison pills." "Poison pills" Poison pills generally consist of a shareholder
rights plan in which a corporation gives its shareholders the right to buy
common stock when certain specified events occur, such as a merger, which decreases the
value of the acquiror'sacquirer's holdings and the acquiror'sacquirer's percentage of ownership.
The overall effect of these provisions may be to deter a future offer or
other merger or acquisition proposal that a majority of the shareholders might
view to be in their best interests as the offer might include a substantial
premium over the market price of the holding company's common stock at that
time. In addition, these provisions may have the effect of assisting the holding
company's management in retaining its position and placing it in a better
position to resist changes that the shareholders may want to make if
dissatisfied with the conduct of the holding company's business.
A vote in favor of the Planplan of Reorganizationreorganization and Planplan of Mergermerger is a vote
in favor of the anti-takeover provisions contained in the holding company's
articles and by-laws and under Pennsylvania law.
8183
COMPARISON OF SHAREHOLDER RIGHTS
After the reorganization, the shareholders of the bank will become
shareholders of the holding company Fidelity D & D Bancorp. There are certainmaterial
differences in the rights of shareholders of these two entities. These
differences arise from differences in the laws that govern the two entities and
differences in their articles and by-laws. The Pennsylvania Banking Code of 1965
presently governs the rights of shareholders of the bank, but the Pennsylvania
Business Corporation Law of 1988 will govern the rights of shareholders of the
holding company. The most significant differences relate to anti-takeover
protection. For a full description of these anti-takeover provisions, including
comparisons between the holding company and the bank, please refer to
"Description of the Holding Company's Capital Securities - Anti-Takeover
Provisions in Articles and By-laws, Anti-Takeover Provisions Applicable to
Registered Corporations" above.
The following table shows the material differences between the rights of
shareholders of the bank and the rights of shareholders of the holding company:
========================================================================================================================
The Holding Company's
The Bank's Common Stock Common Stock============================================================================================================================
THE HOLDING COMPANY'S
THE BANK'S COMMON STOCK COMMON STOCK
- ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Authorized and 5,000,000 shares, par value $1.5625 per 10,000,000 shares, without par value,
Outstanding per share, authorized; of which approximately authorized; of which approximately 1,795,472
approximately 897,7361,801,082
900,541 were outstanding on February 29, shares would be outstanding if the
outstanding on September 30, 1999.2000. reorganization occurred on September 30, 1999.
(InFebruary 29, 2000.
The holding company will reserve for issuance
99,500 shares under stock option plans it will
assume from the bank.
In addition, there are 5,000,000 unauthorized
shares, without par value of preferred stock;
none are outstanding.)
- ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Voting 1 vote per share with cumulative voting 1 vote per share with no cumulative voting for
voting for directors. directors.
(BoardThe board of directors may determine the voting
rights of any preferred stock which may be
issued.)
- ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Preemptive Rights No preemptive rights to subscribe for No preemptive rights to subscribe for additional
additional shares on a pro rata basis; board shares on a pro rata basis; board of directors
board of directors may grant preemptive rights in may grant preemptive rights in stock offerings preemptive rights inif
stock offerings if it so chooses. if it so chooses.
- ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
8284
========================================================================================================================
The Holding Company's
The Bank's Common Stock Common Stock============================================================================================================================
THE HOLDING COMPANY'S
THE BANK'S COMMON STOCK COMMON STOCK
- ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Dividends As declared by the board of directors; may As declared by the board of directors; the maybank's
be paid only out of accumulated bank'snet dividend restrictions apply indirectly to netthe
earnings. Also, the bank must thehave made holding company because cash available have madefor
any required transfers of fornet earnings to dividend distributions will initially come net earnings tofrom
surplus in order to frommaintain surplus at least dividends the bank pays to the holding
maintain surplus at least equal to capital, prior to declaring the company. In addition, the holding company
capital, prior to declaring thedividend. Surplus must not be reduced. may not pay a dividend if, after issuing the
dividend. Surplus must not be dividend:
reduced. Directors are specifically liable for dividend:
unlawful dividends.
o theThe holding company would be unable
to pay its debts as they become due, or
o theThe holding company's total assets would
be less than its total liabilities plus the
amount needed to satisfy any preferential
rights of shareholders.
(The- ----------------------------------------------------------------------------------------------------------------------------
The issuance of preferred shares could affect the
holding company's ability to pay common stock
shareholders dividends.)
- ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Amendment of by-lawsby- Approval by the affirmative vote of the Approval by the affirmative vote of the holders
thelaws majority of shares represented at a legally of at least 75% of the outstanding shares legallyentitled
called meeting of shareholders, entitledor by a to vote, or by a majority vote of the or by aboard of
unanimous vote of members of the board of directors, subject to the power of the boardshareholders
of directors present at any shareholdersregular meeting to change such action of the regular meeting of the Board, subject Boardboard by the same
75% affirmative vote.of the board, subject to the power of 75% affirmative vote.
shareholders to (Note:change such action.
Note: Directors may not amend by-laws
change such action. which
fix their qualification classification or term of
office.)
- ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Shareholder Action to Approval by a vote of at least 66 2/3% of Approval by vote of at least 75% of outstanding
to Approve Mergers, of outstanding shares. shares entitled to vote; or approval of at least
Consolidations, 51% of outstanding shares if suchthe transaction has
Liquidation, Sales of has received the prior approval of at least 80% of
Substantially All Assets of the board of directors.
Assets
- ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Right to Call Special Upon request by a majority of the board of Upon request by a majority of the board of
Shareholder Meetings board of directors or one or more shareholders directors or one or more shareholders entitled to
shareholdersMeetings entitled to cast at least 20% of the votes cast at least 20% of the votes that all
20% of the votes that all shareholders are entitled to cast at shareholders are entitled to cast at a particular
are entitled to cast at a particular meeting. meeting.
- ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Increase in Capital Approval by vote of a majority of the Approval by vote of a majority of the directors.
Stock through directors.
Issuance directors. of
Additional
Outstanding shares (sharesif
shares already
authorized under
articles of
incorporation)incorporation
- ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
85
============================================================================================================================
THE HOLDING COMPANY'S
THE BANK'S COMMON STOCK COMMON STOCK
- ----------------------------------------------------------------------------------------------------------------------------
Authorization of Approval by vote of shareholders entitled Approval by vote of a majority of votes cast by
Additional Shares entitled to cast at least a majority of votes which all shareholders entitled to vote and the
(through amendment votes whichthrough Amendment all shareholders are entitled to cast and the affirmative vote of a majority of the votes cast
of articlesArticles of entitled to cast andaffirmative vote of the affirmativeholders of a in a vote of the holders of outstanding shares of
incorporation) voteIncorporation majority of the holders of a majorityoutstanding shares of the the affected class or series of stock.
outstanding shares of the affected class or series of stock.
- ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Shareholders' Right Yes No
to Propose Yes No
Amendment to
Articles
- ------------------------------------------------------------------------------------------------------------------------
83
========================================================================================================================----------------------------------------------------------------------------------------------------------------------------
Dissenters' Rights of Yes The Holding Company's
The Bank's Common Stock Common StockBusiness Corporation Law takes away
Appraisal dissenters' rights in relation to plans to transfer
corporate assets, for companies with securities
registered under Section 12 of the 1934 Act.
Dissenter's rights generally still apply to
mergers.
- ------------------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------------------
Amendment of articles Approval by of a majority of the votes which Approval by a majority of the votes cast except
articles of incorporation (other which all shareholders are entitled to cast. for certainspecified provisions, then 75% of the
than authorization of cast.incorporation, other outstanding shares entitled to vote, or 51% if
additional shares)than authorization of 80% of the directors have approved the
additional shares amendment.
- ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Indemnification of Yes Yes
Directors and
Officers
- ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Registered Under Yes - filesYes-files reports and other Yes - willinformation Yes-must register under Section 12 and file reports and other
Section 12 of the information with the FDIC reports and other information with the SEC
Securities Exchange
Act of 1934
- ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Repurchase of Shares Cannot reduce or retire any part of its Stock can be repurchased if, after the
stock without prior regulatory approvals repurchase:
approvals
and shareholder approval; surplus must
remain at least equal to the amount of o theThe holding company would still be
capital, defined as sum of par value of able to
the amount of capital (defined as sum pay its debts as they become
due or
of par value of issued and outstanding shares).shares. due or
o theThe holding company's total assets
would still be more than its total
liabilities plus an amount needed to
satisfy any preferential rights of
shareholders; no more than 10% of the
outstanding shares can be repurchased
in any 12 month period without prior
regulatory approval; the bank's
restrictions on reduction of capital will
indirectly apply to the holding
company as cash for distributions will
come from the bank.
- ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Terms of Directors Directors serve staggered terms; board is Directors serve staggered terms; board is
board is "classified."classified. Directors serve "classified."3-year terms, classified. Eventually, all directors shall
3-year terms, with approximately one-third of the serve 3-year terms, with approximately one-third
one-third of theone-
directors coming up for election each year. third of the directors coming up for election
each year.
up for election each year.
========================================================================================================================- ----------------------------------------------------------------------------------------------------------------------------
Right of Under the bank's by-laws, shareholders Under the holding company's by-laws, the
Shareholders to determine the number of directors to be board of directors determines the number of
Determine Number elected at the annual meeting. directors.
of Directors to be
Elected
============================================================================================================================
8486
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION
AND QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
On the following pages we present management's discussion and analysis of
the financial condition and results of operations of The Fidelity Deposit and
Discount Bank in two sections:
o as of December 31, 1998, and
o as of September 30, 1999. This discussion highlights the
significant changes in the results of operations, capital resources and
liquidity presented in our accompanying financial statements. Current
performance does not guarantee and may not be indicative of similar performance
in the future.
We qualify the following discussion in its entirety by the more detailed
information andYou should also refer to the financial statements and notes to the
financial statements appearing elsewhere in this proxy statement/prospectus.prospectus,
starting at page F-1. We qualify the following discussions by this more detailed
financial information.
In addition to the historical information contained in this document, the
discussion presented contains certain forward-looking statements that involve risks and
uncertainties, such as statements of our plans, objectives, expectations and
intentions. Please note that the cautionary statements made in this proxy
statement/prospectus are applicable to all forward-looking statements in this
document. Our actual results could differ materially from those discussed here.
Factors that could cause or contribute to these differences include, but are not
limited to, those discussed in this section and in "Risk Factors."
We also caution you not to place undue reliance on forward-looking
statements in this section, as they reflect management's analysis only as of
December 31, 1998, and as1999. Under the rules of September 30, 1999, respectively. We undertake no
obligationthe Securities Exchange Act of 1934,
however, we do have a duty to publiclycorrect or revise or update these forward-looking statements to
reflectmade in this proxy
statement/prospectus if the statements either have become materially misleading
by virtue of subsequent events, or circumstances.are later discovered to have been materially
false and misleading from the outset. This duty applies only if we know or
should have known that persons are continuing to rely on any material portion of
the statements.
87
The following financial review is intended to provide a comparison of our
financial performance for the years ended December 31, 1999, 1998 1997 and 1996.1997. The
information presented below should be read in conjunction with our financial
statements and accompanying notes appearing elsewhere inat the end of this document.
85
Management's Discussion and Analysis of Financial Condition and Results of
Operation And Quantitative and Qualitative Disclosures About Market Risk as of
December 31, 1998
Following is adocument,
beginning at page F-1.
A comparison of balance sheet accounts and percentage to total assets for
1999, 1998 1997 and 1996:1997.
==============================================================================================================================
(Thousands of Dollars)
------------------------------------------------------------------------- ------------------------------------------------------------------------------------------------------------------------------
1999 1998 1997
1996
--------------------- --------------------- ---------------------- ------------------------------------------------------------------------------------------------------------------------------
Amount Percent Amount Percent Amount Percent
-------- ------- -------- ------- -------- -------==============================================================================================================================
Assets:
- ------------------------------------------------------------------------------------------------------------------------------
Cash and due from banks $ 6,416 1.43 $ 3,315 0.95%0.95 $ 2,967 1.02% $ 3,154 1.17%1.02
- ------------------------------------------------------------------------------------------------------------------------------
Interest-bearing deposits with
Depository institutions 11,542 2.58 5,404 1.55 4,341 1.50
4,779 1.78- ------------------------------------------------------------------------------------------------------------------------------
Federal funds sold 0 0.00 6,500 1.87 0 0.00
3,850 1.43- ------------------------------------------------------------------------------------------------------------------------------
Investment securities 109,262 24.43 78,608 22.56 72,713 25.05
87,238 32.42- ------------------------------------------------------------------------------------------------------------------------------
Net loans 296,194 66.23 235,430 67.57 194,517 67.01
159,644 59.32- ------------------------------------------------------------------------------------------------------------------------------
Loans Available-for-sale 5,254 1.18 8,858 2.54 8,202 2.82
2,964 1.10- ------------------------------------------------------------------------------------------------------------------------------
Accrued interest receivable 3,262 0.73 2,405 0.69 2372,374 0.82
2,216 0.82- ------------------------------------------------------------------------------------------------------------------------------
Bank premises and equipment 9,506 2.13 6,449 1.85 4,138 1.43
4,378 1.63- ------------------------------------------------------------------------------------------------------------------------------
Foreclosed assets held for sale 413 0.09 201 0.06 276 0.10
0 0.00- ------------------------------------------------------------------------------------------------------------------------------
Other assets 5,362 1.20 1,434 0.36 724 0.25
914 0.33- ------------------------------------------------------------------------------------------------------------------------------
Total assets $ 447,211 100.00 $348,604 100.00%100.00 $290,252 100.00% $269,137 100.00%100.00
Liabilities:
- ------------------------------------------------------------------------------------------------------------------------------
Deposits, non-interest-bearing $ 37,575 8.40 $ 33,450 9.60%9.60 $ 25,373 8.75% $ 23,042 8.61%8.75
- ------------------------------------------------------------------------------------------------------------------------------
Certificates of deposit of $100,000 or more 66,643 14.90 49,436 14.18 47,344 16.31
45,301 16.83- ------------------------------------------------------------------------------------------------------------------------------
Other interest-bearing deposits 190,483 42.60 157,115 45.07 145,308 50.06
143,727 53.40- ------------------------------------------------------------------------------------------------------------------------------
Short-term borrowings 60,249 13.47 29,405 8.44 29,100 10.03
19,590 7.28- ------------------------------------------------------------------------------------------------------------------------------
Other borrowed funds 57,305 12.81 42,252 12.12 12,252 4.22
10,000 3.72- ------------------------------------------------------------------------------------------------------------------------------
Accrued interest payable and other liabilities 2,830 0.64 2,933 0.83 2,451 0.84
2,111 0.78- ------------------------------------------------------------------------------------------------------------------------------
Total liabilities 415,085 92.82 314,591 90.24 261,828 90.21
243,771 90.57- ------------------------------------------------------------------------------------------------------------------------------
Shareholder's equity 32,126 7.18 34,014 9.76 28,424 9.79
25,366 9.43- ------------------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholder's equity $ 447,211 100.00 $348,604 100.00%100.00 $290,252 100.00% $269,137 100.00%100.00
==============================================================================================================================
The Year 1998:
Non interest-bearing deposits,year 1999:
Personal demand deposit accounts (DDA's), maintained steady growth throughout
1998. At December 31, 1998 non interest-bearing deposits had grown $8,077,000 increased $548,000 or 31.83% from year-end 1997.
Personal DDA's increased $4,605,000 or 41.23%. Among the reasons cited by
depositors as to why they selected the bank are:
86
o Courtesy and professionalism of staff;
o Expanded branch network;
o Extended Banking hours; and
o Products and services offered.
An increase in commercial3.28% during
1999.
Commercial DDA's and Public Fund DDA's accounted for
$1,926,000 ofgrew $4,836,000 or 35.14% during the
$8,077,000 twelve-month increase in non interest-bearing
deposits.twelve- month period ending December 31, 1999. Commercial deposits grew as a
result of increased commercial lending and the successful marketing of Bankbank
products designed for the commercial segment. Commercial products include:
o Sweep accounts;
oaccounts Flex Cash Manager;
oManager
Merchant Credit Card Processing;Processing Fidelity @ Work
Lock box operation
88
Official bank checks issued and o Fidelity at Work.
In June 1998,outstanding decreased $1,259,000 from the
bank enteredprevious year-end.
As a contract to collect local taxes through a
lock box operation. Also during June 1998, the bank was appointed treasurernet result of a
local school district. These two activities accounted for 10.41% of the overall
growth inthese balance sheet changes, non interest-bearing
deposits duringgrew $4,125,000 or 12.33% from year-end 1998.
Interest-bearing deposits increased $13,899,000$50,575,000 or 7.21%24.49% from $192,652,000
at December 31, 1997 to $206,551,000
at December 31, 1998.1998 to $257,126,000 at December 31, 1999.
NOW's, Money Market Deposit Accounts and Savings accounts grew $9,135,000$23,402,000
or 16.67%36.61% during 1998.1999. The increase in these liquid interest-bearing accounts
represents 65.72%46.27% of the growth in interest-bearing deposits. The majorityintroduction
of a tiered Super Now account and the ability to attract Public Fund deposits,
account for the growth in these accounts comes from the school district and a local
municipal transit authority.accounts.
Certificates of deposit rose $4,698,000$27,143,000 or 19.19% and represent 33.80%53.67% of
the total increase in interest-bearing deposits. The growth was tempered by a $7,442,000
decline inPersonal CD's grew $16,769,000
or 13.65%. Non-personal CD's grew $3,031,000 or 33.62%. Public Fund CD's. A portionCD's
increased $7,343,000 or 76.44% over year-end 1998.
The maturity distribution of the decline in Public Funds occurredCD's $100,000 or more is as local municipal governing bodies used the proceeds of maturing CD's to fund
capital improvement projects. Other funds were transferred into liquid
interest-bearing accounts at the bank. However that decrease was offset by
growth in both personal and non-personal CD's.follows:
3 Months 3 - 6 6 - 12 Over
or less Months Months 12 months Total
-------- ------ ------ --------- -----
$23,550,847 $6,555,930 $19,910,269 $16,625,610 $66,642,656
At the end of 19981999 total deposits had grown $21,796,000$54,700,000 or 10.08%22.79% over the
amountsamount reported at December 31, 1997.1998. Among the reasons cited by depositors as
to why they selected the bank are:
o Courtesy and professionalism of staff
o Expanded branch network
o Extended Banking hours
o Products and services offered
The success at gathering new deposits by branch expansion is evidenced by
the deposit totals at the locations opened during the last twelve months. Total
deposits at the three new branches amounted to $31,979,000 at December 31, 1999.
The bank borrowed $5,000,000$5,947,000 from the Federal Home Loan Bank, (FHLB), in
19981999 to pay off a maturing obligation.obligations. The bank also borrowed $30,000,000$45,653,000, in
long-term funds and credit line draws from the FHLB to fund loan demand and for
other liquidity needs. The weighted average rate on funds borrowed in 1998at December
31, 1999 was 4.93%5.31%.
87
The weighted average rate is 345267 basis points below the tax
equivalent yield on loans for 1998at December 31, 1999 of 8.38%7.98%.
Total Assets of the bank increased $58,352,000$98,607,000 or 20.10%28.29% during 1998.1999. This
dollar growth represents the largest single year increase in the history of the
bank. The increase is the result of growth in the liability section, as
previously discussed and the retention of profits and an offering of common stock.
The common stock offering is further discussed on pages 20 through 21 under
Capital Resources.profits.
89
Total Assets by branch at December 31, 19981999 are as follows:
Main Office & KIP $265,248,790$301,798,888
Green Ridge 16,814,35117,903,355
Scranton 27,589,48230,790,516
Clarks Summit 19,228,33227,276,872
KIP 8,009,016
Pittston 17,171,73717,755,438
Financial Ctr. - Operations 2,227,875
Financial Ctr. - Retail 87,147Center 6,195,528
Moosic 14,787,652
West Pittston 22,463,579
The $236,707$230,173 difference between Branch Assets and Total Bank Assets is the
net carrying amount invested in the two residential properties in Clarks Green,
properties. See "Description ofPennsylvania, owned by the Bank - Properties." The amounts listed for the Financial Center, both
operations and retail are comprised solely of fixed assets. Approximately
$335,000 of the operations fixed assets were transferred from the Main office
during the move in September 1998.bank. Assets of the Clarks Summit State Hospital
office are included in Clarks Summit.
Despite maturities and early calls of US Government Agency Bonds and
Municipal securities, the Investment Portfolio grew $5,895,000 or 8.11%had a net increase during 1998. Significant1999 of
$37,938,000, -- $30,654,000 net growth occurredof the change in Tax Free Pennsylvania Municipal bonds. Municipal bondsthe market value of
available-for-sale investments). The increase was predicated upon the need to
pledge acceptable assets for Public Fund deposits, which increased $5,937,000 or 32.07%. Bank qualified insured Municipals$26,518,000
during 1999.
The bank entered into an agreement with FNMA whereby certain qualifying
residential mortgage loans were purchased
not onlysold to support Pennsylvania communities but alsoFNMA and immediately repurchased by the
bank as investments -- mortgage backed securities. During 1999 the bank
developed two separate pools of loans. The pools totaled $3,584,000. The purpose
of this strategy was threefold:
A) The principal and interest is guaranteed by FNMA, thereby mitigating
any potential loss of repayment.
B) The investments are eligible to reducebe pledged for Public Fund deposits.
C) The bank retained servicing rights. This means the bank's tax
liability. Callsborrower still deals
directly with the bank and the bank receives a fee for servicing the
loans.
To facilitate the increased borrowings at the FHLB, the bank was required
to purchase $3,229,900 shares of US Government Agency and Municipal bonds and paydowns of
Mortgage Backed Securities approximated $40,075,000. Proceeds from these calls
were used in part to repurchase other bonds.FHLB common stock during 1999.
In 1998,1999, the bank sold investmentsan investment from the available-for-sale category,
having a net book value of approximately
$3,838,000$200,000 at the time of sale. The security was
purchased on September 10, 1992 and was within six months of being called.
market conditions at the time of sale were favorable for the bank.
There were no sales were predicated upon the desire to
improve yields and to provide liquidity. A more detailed analysis of the
rationale behind the sales is found on page 27 in the discussion of Other
Income.from investments categorized as held-to-maturity.
Investments constituted 22.55%24.43% of Total Assets at December 31, 1998. On
October 1, 1998 the bank took advantage of a provision in Financial Accounting
Standard 133 and transferred approximately $15,477,000 from the Held-to-maturity
classification1999. The
entire portfolio is classified as available-for-sale. The decision to Available-for-sale. This was done to provideclassify
all securities as available-for-sale gives the bank greater flexibility in the
management of the investment portfolio. There are no trading securities.
90
A comparison of investments at year-end for the three previous periods is
as follows:
1999 1998 1997
Amount % Amount % Amount %
------------ ------ ----------- ------ ----------- ------
U.S. Treasury Securities $ 0 0.00% 7,055,938 8.98% $ 9,116,800 12.54%
U.S. Government Agencies 73,348,911 67.20 39,465,142 50.21 35,471,263 48.78
Mortgage Backed Securities 7,686,688 7.04 5,369,706 6.83 8,420,816 11.58
State & Municipal Subdivisions 22,556,775 20.66 24,450,358 31.10 18,513,811 25.46
Common Stock 5,569,847 5.10 2,266,716 2.88 1,190,212 1.64
- ------------------------------------------------------------------------------------------------------------------------
Total $109,162,221 100.00% $78,607,860 100.00% $72,712,902 100.00%
========================================================================================================================
The entire portfolio
is now classified as Available-for-sale.
88
Thedistribution of debt securities by stated maturity date at December 31,
1998 Investment Portfolio1999 is comprisedas follows:
1 Year 1 Through 5 Through More than
or less 5 years 10 years 10 years Total
----------- ---------- ----------- ----------- -----------
U.S. Government Agencies $ 0 $ 0 $23,961,099 $49,387,812 $ 73,348,911
Mortgage Backed Securities 0 85,787 982,100 6,618,800 7,686,687
State & Municipal Subdivisions 592,839 2,545,937 7,110,383 12,307,616 22,556,775
- ----------------------------------------------------------------------------------------------------------------------
Total debt securities $ 592,839 $2,631,724 $32,053,582 $68,314,228 $103,592,373
======================================================================================================================
Debt securities are net of the following:
U.S. Treasury Securities $ 7,055,938 8.98%
U.S. Government Agencies 39,465,142 50.21%
Mortgage-Backed Securities 5,369,706 6.83%
State & Municipal Subdivisions 24,450,358 31.10%
Restricted Common Stock 2,266,716 2.88%
----------- ------
Total $78,607,860 100.00%
=========== ======unrealized loss on available-for-sale
securities. Unrealized loss on available-for-sale debt securities at December
31, 1999 was $7,167,606. Debt securities do not include common stock, having a
market value of $5,669,848 at December 31, 1999.
The tax equivalent yield on debt securities by stated maturity date at
December 31, 1999 is as follows, yields are based on amortized cost:
1 Year 1 Through 5 Through More than
or less 5 years 10 years 10 years Total
------- ------- -------- -------- -----
U.S. Government Agencies 0.000% 0.000% 6.433% 6.923% 6.764%
Mortgage Backed Securities 0.000 7.667 5.464 6.418 6.312
State & Municipal Subdivisions 8.047 7.770 7.465 7.469 7.513
- ------------------------------------------------------------------------------------------------------------------
Total debt securities 8.047% 7.777% 6.632% 6.972% 6.894%
==================================================================================================================
Gross loans, increased $41,079,309$61,357,000 or 20.76%25.67% from $197,911,516,$238,991,000 in 19971998 to
$238,990,825,$300,348,000, in 1998.1999. Gross loans represent 68.56%67.16% of Total Assets at December
31, 1998.1999. All components of the loan portfolio grew during 1998.1999.
Commercial loans increased $18,224,695.$27,635,000. This represents 44.26%45.04% of the
growth in the entire loan portfolio. The bank increased the portfolio to improve
profitability and to better service our community. However, this strategy was
not accomplished by compromising prudent underwriting policies.
An example of this policy is the bank's use of Small Business
Administration, (SBA), guaranteed loans. At year-end 1998,1999, the outstanding
balance of SBA loans was $2,728,000.
Tax free$4,368,000, a 60.14% increase over 1998.
Tax-free loans made to local municipalities increased to $4,057,000$7,152,000 at
December 31, 1999. That amount represents a $3,096,000 or 76.31% increase over
the balance at December 31, 1998.
91
Participation in the Pennsylvania Capital Access Program (PENNCAP) is
another way in which the bank observes prudent lending practices. PENNCAP is a
small business lending program whereby the State allocates a reserve fund to be
used in the event the bank were to experience a loss on a loan registered in the
program. At December 31, 1998,1999, commercial loans having outstanding balances of
$1,735,000$2,760,000 were registered in this program. PENNCAP notified the bank that it
was the number one participant in this program in the entire state.
Some of the more notable commercial loan projects that the bank initiated
in 1999 included:
A) PEI Power Park - A Lackawanna County industrial park developed for
manufacturing
B) Tier II - 65,000 square feet of professional office space, which
recently attracted CIGNA as a tenant
C) St. Ann's Basilica Monastery
The bank continues to serve the local market with real estate loans and
consumer loan products. Real estate and consumer loans increased $22,142,000$30,260,000 or
17.14%20.00% during 1998.1999. This growth reflects national economic trends, which are
bolstered by a strong economy and low rate of unemployment.
Lease financing is also available. OutstandingBy adding staff to the lease department, outstanding lease balances grew
$713,000$3,462,000 or 46.41% in 1998.
89
Gross Loans153.92% from $2,249,000, at December 31, 1998 wereto $5,711,000 at
December 31, 1999.
A comparison of loans by amount at year-end for the five previous periods
is as follows, all loans are domestic:
1999 1998 1997 1996 1995
------------ ------------ ------------ ------------ ------------
Real estate $111,242,490 $ 99,955,640 $ 87,931,770 $ 79,936,722 $ 78,769,618
Consumer 64,998,362 47,549,512 38,673,662 31,555,744 29,605,034
Commercial 113,061,093 85,425,708 67,201,013 47,832,107 38,394,111
Direct financing leases 5,710,579 2,248,990 1,536,074 691,098 616,047
Real estate construction 5,335,753 3,810,975 2,568,997 3,590,175 1,486,982
Gross loans 300,348,277 238,990,825 197,911,516 163,605,846 148,871,792
Less:
Unearned discount 982,384 553,033 585,517 1,371,625 3,119,716
Allowance for loan loss 3,172,375 3,007,713 2,809,066 2,589,976 2,469,760
Net Loans $296,193,518 $235,430,079 $194,516,933 $159,644,245 $143,282,316
- ---------------------------------------------------------------------------------------------------------------------
Loans available-for-sale $ 5,254,316 $ 8,858,157 $ 8,202,404 $ 2,964,081 $ 2,825,634
=====================================================================================================================
92
A comparison of gross loans by percent at year-end for the five previous
periods is as follows:
Real Estate $ 99,955,640 41.82%
Consumer 47,549,512 19.90%
Commercial 85,425,708 35.75%
Direct Financing Leases 2,248,990 0.94%
R/E Construction 3,810,975 1.59%
------------ ------
Total $238,990,825 100.00%
============ ======
1999 1998 1997 1996 1995
------ ------ ------ ------ ------
Real estate 37.04% 41.82% 44.43% 48.86% 52.91%
Consumer 21.64 19.90 19.54 19.29 19.89
Commercial 37.64 35.74 33.96 29.24 25.79
Direct financing leases 1.90 0.94 0.78 0.42 0.41
Real estate construction 1.78 1.60 1.29 2.19 1.00
- ---------------------------------------------------------------------------------------------------------------
Gross loans 100.00% 100.00% 100.00% 100.00% 100.00%
===============================================================================================================
As in previous years, the bank sold Residential Real Estate Mortgage Loansresidential real estate mortgage loans
in 1998.1999. The bank sells loans for liquidity and interest rate risk
considerations. However, servicing rights are retained so that our customers
still deal directly with the bank. At December 31, 1998,1999, the outstanding balance
of sold Residential Mortgage Loansresidential mortgage loans in which the bank retained servicing rights
was $20,252,000.$29,233,000.
The following table sets forth the maturity distribution of the loan
portfolio at December 31, 1999. Excluded from the table are real estate loans,
consumer loans and direct financing leases, amounts in thousands.
1 Year 1 - 5 More than
or less Years 5 years Total
------- ----- --------- --------
Commercial loans $34,210 $30,243 $56,240 $120,693
Real estate construction 5,336 5,336
- ---------------------------------------------------------------------------------------
Total $39,546 $30,243 $56,240 $126,029
=======================================================================================
The following table sets forth the sensitivity changes in interest
rates for commercial and real estate construction loans at December 31, 1999,
amounts in thousands.
1 - 5 More than
Years 5 years Total
------- ------- -------
Fixed interest rate $16,942 $20,250 $37,192
Variable interest rate 13,301 35,990 49,291
- --------------------------------------------------------------------------------
Total $30,243 $56,240 $86,483
================================================================================
Fixed assets had a $2,312,000 or 55.87% increase, net ofincreased $3,820,000 before depreciation in 1998. The acquisition1999.
Additions to bank premise of the$1,505,000 and leasehold improvements of
$329,000 were capitalized during 1999. These funds were used to open new retail
branches, (the Financial Center, for $1,152,000 represents 49.83%Moosic, West Pittston), and improve existing
facilities, (Main, KIP). The purpose of these activities was to expand the
net increase in fixed assets. The building provides badly needed space
forbranch network to better serve the operational departments of the bank.bank's customer base and to improve general
operating efficiencies.
The bank relies on these
departments as its backbone in providing the excellent service that the bank's
customers have comecapitalized additions to expect. Another $400,000 of capital improvements for the
Financial Center was booked in 1998. Those improvements contain payments made to
remodel the first floor for the new branch.
The bank also capitalized approximately $308,000 for improvements on its
other branches. Included in that total is $260,000 for the new Pittston branch.
Furniturefurniture and fixtures had a $940,000 increase net of depreciation.$1,986,000
during 1999. Of that total approximately $285,000$474,000 was for Y2K upgrades. Another
$580,000 was used to acquire new operating systems.
One of the major acquisitions was for an imaging system that provides
on-line document retrieval. This system enhances operating efficiencies, reduces
storage considerations and eliminates the possibility of losing a document. Bank
service representatives now have immediate access to customer transactions,
thereby improving response time to inquiries. In the near future the bank will
be able to return imaged copies of paid checks in depositors' statements.
In conjunction with the imaging system, the bank acquired a state of the
art proof and deposit system which has improved operating efficiencies.
93
The remaining portion of the increase in furniture and fixtures was divided
between the new office locationsbranches and general office improvements at theall locations.
Three significant items led to a material increase in other branches.
The Year 1997:
Total Deposits and Repos increased $15,069,000 during 1997.assets in 1999.
The bank also
borrowed $2,252,000became a limited partner in the Olyphant Housing Project. The
project restored an abandoned high school into a low-income housing development
for the elderly. Run by Lackawanna County, the project has 43 units for
occupancy. In addition to CRA credits, which will help the bank with future
branch expansion, the bank benefits from material tax credits over the FHLB. Early callsnext ten
years. The investment by the bank was $873,000.
Due to the market depreciation of investment securities causedavailable-for-sale investments the portfolio to decrease $14,525,000.bank
recorded a $2,477,000 deferred tax asset.
In compliance with generally accepted accounting principles, during 1999
the bank recorded the value of mortgage servicing rights. This represents the
discounted future cash flow of income the bank will receive for servicing sold
loans. The amount of that asset was approximately $123,000.
The year 1998:
Total deposits and long-term debt increased $51,796,000 during 1998. Along
with that increase, the bank generated $2,939,000 through an issuance of common
stock. Those funds from these occurrences were used to increase investments and gross loans $34,306,000.$46,974,000
and also provided the necessary capital for branch expansion and improvements in
operations.
Total Assets of the bank increased $21,116,000$58,352,000 or 7.85% in 1997.
90
20.10% from $290,252,000
at December 31, 1997 to $348,604,000 at December 31, 1998.
Capital Resources
The bank's major source of capital has been from the retention of earnings
as reflected below:
===============================================================================
Net Dividends Earnings
Net
Income Paid Retained
---------- ---------- ----------===============================================================================
1999 $3,814,215 $1,344,141 $2,470,074
- -------------------------------------------------------------------------------
1998 $3,563,552 $1,200,409 $2,363,1433,563,552 1,200,409 2,363,143
- -------------------------------------------------------------------------------
1997 3,310,057 1,062,530 2,247,527
- -------------------------------------------------------------------------------
1996 2,824,704 906,793 1,917,911
- -------------------------------------------------------------------------------
1995 2,808,392 820,327 1,988,065
1994 2,502,036 725,519 1,776,517
On September 1, 1998, the bank initiated an offering of 50,000 shares of
Common Stock at $60.00 a share. The offering was conducted in two phases.
During the first phase shareholders of record at July 31, 1998, were
granted non-transferable rights to acquire 1 share for every 17 shares
previously owned. Those shareholders having less than 17 shares were not
eligible to participate in the initial offering.
In the second phase, the general public, including existing shareholders,
were allowed to purchase shares between a 10 share minimum and a 500 share
maximum.
The purpose of the offering was to provide funds for general bank needs
including but not limited to:
o The acquisition and renovation of the Financial Center;
o Branch expansion;
o Existing branch renovations; and
o Modification of the data processing system
The offering generated $2,939,000 net of expenses, incurred in connection
with the offering.===============================================================================
Capital was further increased in 19981999 through the Dividend Reinvestment
Plan. Stockholders reinvested $377,052$450,038 in dividends to purchase additional
shares of stock. Since the 1995 inception of the Dividend Reinvestment Plan
shareholders have reinvested dividends totaling $999,980$1,466,061 to acquire Common
Stock of the bank.
Capital was affected by changes in market rates, which caused a $91,182$4,807,581
decrease, net of deferred taxes, in the fair value of investments classified as
Available-for-sale,available-for-sale, (AFS). At December 31, 1998,1999, the bank reported a net
unrealized gainloss on AFS securities of $133,868.$4,673,713. In 1997,1998, the bank reported a
net gain of $225,050. At October 1 1998, the entire investment portfolio was
classified as Available-for-sale. Even with an increase in market rates that
cause a
91$133,868.
94
decline in the fair value of the AFS portfolio, debt investments should be paid,
in full, as both principal and interest are guaranteed.
Fluctuations in the capital markets cause frequent changes in the fair
value of AFS securities. A future decline in value should not indicate a
material weakness in the capital position of the bank. The bank monitors market
conditions closely and is prepared to take remedial action, if management deems
such action appropriate.
A yearly comparison of growth trends is as follows:
Short-Term
===================================================================================================================================
Short-term Other
Earning Deposits Borrowings Borrowings
Assets Increase % Assets Deposits Increase/ Increase/
Increase % Increase % Increase % IncreaseDecrease % --------------- -- --------------- -- ----------- -- ----------- --- ----------- --Decrease %
===================================================================================================================================
1999 $98,606,596 28% $88,199,310 26% $54,700,214 23% $30,843,747 105% $15,053,000 36%
- -----------------------------------------------------------------------------------------------------------------------------------
1998 $58,351,979 20% $54,900,356 19% $21,975,741 10% $58,351,979 20 54,900,356 19 21,975,741 10 304,848 1% $30,000,000 245%1 30,000,000 245
- -----------------------------------------------------------------------------------------------------------------------------------
1997 21,115,559 8 21,383,323 8 5,955,340 3 9,510,675 49 2,252,000 22
- -----------------------------------------------------------------------------------------------------------------------------------
1996 28,324,702 12 25,508,216 11 31,165,057 17 (1,313,756) (6) (3,000,000) (4)
- -----------------------------------------------------------------------------------------------------------------------------------
1995 12,565,964 6 11,518,372 5 11,575,369 7 (2,951,754) (12) 0 0
1994 20,702,445 10 22,323,145 11 9,655,960 6 3,577,874 18 7,000,000 17===================================================================================================================================
Earning assets are based on book value. Book value is net of unrealized
losses in the available-for-sale investment and loan portfolios. The bank offerstotal of
unrealized losses in both portfolios is $7,227,000.
Some important ratios are as follows:
=========================================================================================================
Capital to Capital to Return on Dividends to
Assets Deposits Average Capital Net Income
- ---------------------------------------------------------------------------------------------------------
1999 7.2% 10.9% 11.4% 35.2%
- ---------------------------------------------------------------------------------------------------------
1998 9.8 14.2 11.7 33.7
- ---------------------------------------------------------------------------------------------------------
1997 9.8 13.0 12.4 32.1
- ---------------------------------------------------------------------------------------------------------
1996 9.4 12.0 11.7 32.1
- ---------------------------------------------------------------------------------------------------------
1995 9.9 13.2 12.5 29.2
=========================================================================================================
If the following important ratios:
================================================================================after tax depreciation in the AFS portfolio was disallowed, (net
unrealized loss), the Capital to Capital to Return on Dividends to
Assets Deposits Average Capital Net Income
================================================================================Asset Ratios for 1999 and 1998 9.8% 14.2% 11.7% 33.7%
================================================================================
1997 9.8 13.0 12.4 32.1
================================================================================
1996 9.4 12.0 11.7 32.1
================================================================================
1995 9.9 13.2 12.5 29.2
================================================================================
1994 9.3 11.8 12.7 29.0
================================================================================would be 8.1%
and 9.7% respectively.
Capital is evaluated in relation to total assets and the risk associated
with those assets. With greater capital resources, a bank is more likely to be
able to meet its cash obligations and absorb unforeseen losses. Federal
regulatory definitions of capital adequacy take the form of minimum ratios. The
bank exceeds all minimum regulatory capital requirements, (seesee Note 14, at page
F-26 in Notes to Financial Statements).Statements.
Liquidity Management and Interest Rate Sensitivity
Liquidity for a bank is the ability to fund customers' needs for borrowings
and withdrawals. Sources of liquidity are:
95
o Asset maturities, paydowns and sales;sales
o Growth of core deposits;deposits
o Growth of Repos; andRepurchase Agreements
o Increase of other borrowed funds.funds
Bank 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 bank has instituted certain
procedures and policy guidelines to manage the rate
92
sensitive position. Those
internal rules enable the bank to react to changes in market rates and protect
net interest income from significant fluctuations.
Over the years, the bank has sold fixed rate Mortgage Loans to the
secondary market. The decision to pursue this course of action was based upon
two parameters:
o Meeting consumer demand for mortgages; andmortgages
o Mitigating the interest rate risk inherent in fixed rate loans.loans
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 bank useduses a simulation model to better understand the risks to the bank
that may be brought about by changes in market interest rates. The model
measured the impact of changing interest rates for several scenarios. The
following table illustrates the theoretical impact of interest rate changes. The
rate movements shown below represent parallel shifts in the yield curve,
occurring immediately and lasting for the twelve-month projection.
The analysis assumes that December 31, 19981999 levels of assets and
liabilities remain constant over the next twelve months. The interest rate
movements are immediate and the revenue impacts are estimated for the subsequent
twelve-month period. In the normal course of events, the bank anticipates growth
in both assets and liabilities during a given twelve-month period. Such growth
would affect both revenues and expenses.
The table below shows the increase or (decrease) from 19981999 reported figures
that would occur under these interest rate changes over a twelve-month period
beginning January 1, 1999:2000:
====================================================================================================
Basis Point Change,====================================================================================================================================
BASIS POINT CHANGE, +400 +200 +100 12/31/99 -100 -200 -400
change in thousands bps bps bps 12/31/98 bps bps bps
====================================================================================================CHANGE IN THOUSANDS BPS BPS BPS BPS BPS BPS
- ------------------------------------------------------------------------------------------------------------------------------------
Net Interest Income 11,372 11,962 12,309 11,162 12,866 13,181 12,977
====================================================================================================9,017 11,179 12,257 13,190 14,382 15,197 16,379
- ------------------------------------------------------------------------------------------------------------------------------------
Net Income 2,943 3,397 3,664 3,563 4,507 4,750 4,593
====================================================================================================498 1,117 1,742 3,814 3,890 4,517 5,428
- ------------------------------------------------------------------------------------------------------------------------------------
Present Value of Equity 43,483 39,104 36,657 34,014 31,178 28,116 32,265
====================================================================================================
====================================================================================================17,057 23,754 27,765 32,126 36,634 37,442 52,027
- ------------------------------------------------------------------------------------------------------------------------------------
PROFORMA +400 +200 +100 12/31/99 -100 -200 -400
Proforma bps bps bps 12/31/98 bps bps bps
====================================================================================================
BPS BPS BPS BPS BPS BPS
- ------------------------------------------------------------------------------------------------------------------------------------
Earnings Per Share $3.47 $4.00 $4.32 $4.20 $5.31 $5.60 $5.41
====================================================================================================$0.56 $1.25 $1.94 $4.26 $4.34 $5.04 $6.06
====================================================================================================================================
96
At January 1, 1999,2000, if there were an immediate 200 basis point increase in
all market interest rates, net interest income is projected to increasedecrease by
$800,000$2,011,000 over the next twelve 93
months, a 7% increase over 1998's15.2% decrease from 1999's net
interest income. The present value of bank capital is projected to increase 15%decrease
26.1% to $39,104,000.$23,754,000.
If there were an immediate 200 basis point decrease in rates, net interest
income is projected to increase $2,019,000$2,007,000 or 18%15.2% over twelve months. The
present value of the bank's capital is projected to be $28,116,000.increase 16.5% to
$37,442,000.
The interest rate changes described above are extreme and have occurred
only rarely in the past. These projections require a variety of assumptions and,
as such, the results should be viewed as approximations only. In addition,
should changing interest rates have a negative effect on the financial position
of the bank, prompt corrective measures would be undertaken to minimize any
adverse impact.
A comparison of the maturity and repricing ability of assets and deposits
is as follows:follows, thousands of dollars:
============================================================================================
(Thousands of Dollars)
========================================================================================================================================================================================================================
Years to Maturity ============================================================================================or Repricing
- ----------------------------------------------------------------------------------------------------------------------------
90 days 1 or less 1 to 5 5 or more Total
========================================================================================================================================================================================================================
Loans:
============================================================================================- ----------------------------------------------------------------------------------------------------------------------------
Fixed rate $ 6,2185,346 $ 6,048 $40,352 $124,381 $176,999
============================================================================================4,574 $ 61,237 $146,995 $ 218,152
- ----------------------------------------------------------------------------------------------------------------------------
Adjustable rate 44,068 12,330 12,127 961 69,486
============================================================================================57,166 12,538 15,227 1,309 86,240
- ----------------------------------------------------------------------------------------------------------------------------
Debt Securities:
============================================================================================- ----------------------------------------------------------------------------------------------------------------------------
Fixed rate 1,958 7,453 3,110 60,050 72,598
============================================================================================151 442 2,632 97,171 100,396
- ----------------------------------------------------------------------------------------------------------------------------
Adjustable rate 3,619 124 -- -- 3,743
============================================================================================3,105 91 - - 3,196
- ----------------------------------------------------------------------------------------------------------------------------
Federal funds sold 6,500 -- -- -- 6,500
============================================================================================0 - - - 0
- ----------------------------------------------------------------------------------------------------------------------------
Interest-bearing deposits 5,404 -- -- -- 5,404
============================================================================================11,542 - - - 11,542
- ----------------------------------------------------------------------------------------------------------------------------
Total $67,794 $25,955 $55,589 $185,392 $334,730
============================================================================================$ 77,310 $ 17,645 $ 79,096 $245,475 $ 419,526
============================================================================================================================
Nonaccrual loans of $1,364,102$1,210,186 at December 31, 1998,1999, and investments in
Restricted Common Stock of $2,266,717$5,669,848 at December 31, 1998,1999, are not included in the loan
maturity distribution tables. Loans include those designated as
Available-for-sale.available-for-sale.
Earning assets are based on book value. Book value is net of unrealized
losses in the available-for-sale investment and loan portfolios. The total of
unrealized losses in both portfolios before tax is $7,227,000.
============================================================================================================================
Years to Payment ======================================================================================================================or Repricing
- ----------------------------------------------------------------------------------------------------------------------------
90 Daysdays 1 or less 1 to 5 5 or more Total
======================================================================================================================- ----------------------------------------------------------------------------------------------------------------------------
Deposits, noninterest-bearingnoninterest- bearing $ 1,7561,518 $ 5,2685,019 $ 9,701 $16,72514,172 $ 33,450
======================================================================================================================16,866 $ 37,575
- ----------------------------------------------------------------------------------------------------------------------------
Certificates of deposit over $100,000 14,692 24,990 9,637 117 49,436
======================================================================================================================23,551 26,466 16,526 100 66,643
- ----------------------------------------------------------------------------------------------------------------------------
Other interest-bearing deposits 14,648 49,255 57,533 35,679 157,115
======================================================================================================================14,727 35,170 87,436 53,150 190,483
- ----------------------------------------------------------------------------------------------------------------------------
Securities sold under repurchase agreement 20,030 5,059 3,784 -- 28,873
======================================================================================================================26,412 1,589 487 - 28,488
- ----------------------------------------------------------------------------------------------------------------------------
Demand notes, U.S. Treasury 532 -- -- -- 532
======================================================================================================================31,761 - - - 31,761
- ----------------------------------------------------------------------------------------------------------------------------
Long term debt 2,252 5,000 30,000 5,000 42,252
======================================================================================================================6,305 41,000 10,000 - 57,305
- ----------------------------------------------------------------------------------------------------------------------------
Total $53,910 $89,572 $110,655 $57,521 $311,658
======================================================================================================================$104,274 $109,244 $128,621 $ 70,116 $ 412,255
============================================================================================================================
97
Assets due to mature in one year or less do not include expected
significant principal reductions on loans, leases and investments having
maturity dates exceeding one year. Fixed rate 94
investments with a par value of
$31,185,000,$73,535,000, subject to call during 1999,2000, have been scheduled by maturity dates
exceeding one year.
Liabilities not having stated maturity dates have been scheduled based upon
an aging of the liabilities. The time frames relied upon suggest that the
liabilities will either reprice or liquidate within the stated period. For
example, at December 31, 1998,1999, the one-year cumulative gap stated that
$7,024,000$6,537,000 Non Interest-bearing deposits would either reprice or payout over the
next twelve months. In reality Non Interest-bearing deposits grew $8,077,000$4,125,000
during 1998.1999. Historical data tends not to support the theory that a material
portion of these accounts will either reprice or liquidate within a twelve-month
period.
At December 31, 1999, the bank had the following additional sources of
funds which totaled $26,146,000, available to meet liquidity requirements:
o A $5,000,000 unsecured credit line from a financial institution
o Borrowing capacity at the Federal Reserve Bank of Philadelphia of
$2,795,000
o Available funding at the Federal Home Loan Bank of Pittsburgh of
$18,351,000
Management continually monitors the gaps between assets and liabilities and
makes adjustments as market rates change. Presently management believes that
there is adequate liquidity to meet normal requirements.
Results of Operations
Earnings Summary
=============================================================================================================================================================
1999 1998 1997
1996
================================================================================- -----------------------------------------------------------------------------
Net income $3,814,215 $3,563,552 $3,310,057
$2,824,704
================================================================================- -----------------------------------------------------------------------------
Earnings per share $ 4.20 $ 3.97 $ 3.43
================================================================================$4.26 $4.20 $3.97
- -----------------------------------------------------------------------------
Increase per share 1.43% 5.79% 15.74%
0.00%
=============================================================================================================================================================
The year 1999:
After lowering the Discount Rate by 75 basis points in the second half of
1998, The Federal Reserve Bank did not take any further action in the first half
of 1999. The Discount Rate is the rate at which the Federal Reserve Bank lends
overnight funds to banks. During the second half of 1999 the Fed raised the
discount rate on three separate occasions by 75 basis points. In response to
these increases, national prime rose from 7.75% to 8.50%.
There is a 37 basis point differential between the weighted average of
national prime in 1999 and 1998. The weighted average of national prime in 1999
and 1998 was 8.00% and 8.37% respectively. This difference reflects on the yield
on earning assets and the cost of funds when comparing both years.
98
The actions of the Federal Reserve Bank caused increases in the rates
charged on loans that were subject to repricing and on the rates offered on new
loans in the second half of 1999. Approximately 17% of the entire loan portfolio
is subject to immediate repricing.
During the first half of 1999 investment securities were prematurely called
and reissued at lower rates. However as rates increased investments were no
longer called, as the issuers took advantage of the lower rates.
The combination of these factors caused a 36 basis point decline in the tax
equivalent yield on earning assets.
Due to the increase in rates during 1999, the bank began to raise the
interest rates paid on deposits and Repos. Interest expense was also effected by
a rise in the rates charged on borrowed funds. In addition, the cost of funds
was increased by deposit promotions offered at the new branches and from new
products introduced during 1999. However, since market rates did not begin to
rise until the second half of 1999, the bank was able to reduce the cost of
funds by 21 basis points.
Despite a 16 basis point reduction in tax-equivalent net interest spread,
net interest income rose $2,028,000 or 18.1% during 1999. This was primarily
accomplished through volume increases in loans and investments.
The year 1998:
The Federal Reserve Bank lowered the Discount Rate by 75 basis points
during the fourth quarter of 1998.
The Discount Rate isactions of the rate at which the
Federal Reserve Bank lends overnight funds to banks. In response to these
reductions, national prime fell from 8.50% to 7.75%.
These actionsFed caused reductions in the rates charged on loans that
were subject to repricing and on the rates offered on new loans. Investment
securities were prematurely called and reissued at lower rates. The combination
of these factors caused a 15 basis point decline in the tax equivalent yield on
earning assets.
Market competition prevented the bank from proportionately lowering the
rates on NOW's, MMDA's and savings accounts. In addition, the cost of funds was
increased by deposit promotions offered late in 1997 and throughout 1998. Due to
this, the cost of funds increased 10 basis points during 1998.
Despite a 2225 basis point reduction in tax equivalenttax-equivalent net yield on earning
assets,interest
spread, net interest income rose $765,000 during 1998. This was accomplished
through a volume increase in loans and cost reduction in other interest-bearing
liabilities.
95
The year 1997:
The Federal Reserve Bank raised the Discount Rate by 25 basis points. The
bank increased its lending rates with the movement in market rates but lagged
deposit rate increases. The rate lag between loans and deposits helped the bank
to increase the tax equivalent yield on earning assetsnet interest spread by 2117 basis points. The
improvement in yield and a volume increase in lending allowed net interest
income to rise $1,164,000.
The year 1996:
During 1996, National Prime, which is the rate bank's charge to preferred
commercial borrowers, dropped 25 basis points in the first quarter. In response
to the lower interest rate, the bank reduced its cost of funds by 17 basis
points. The reduction was accomplished by refraining from aggressively bidding
on high priced deposits and the rollover of CD's and Repos into lower rates at
maturity. The decline in the average cost of funds in 1996 allowed the Tax
Equivalent Net Yield on Earning Assets to increase 15 basis points. Net Interest
Income rose due to an improvement in the margin and volume increases in
investments and loans.99
A comparison of Average Earnings Assets and the Net Tax Equivalent yields
for 1999, 1998, and 1997, and 1996in thousands, is as follows:
(In Thousands)1999 1998 1997
1996
------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Average Revenue Yield Average Revenue Yield Average Revenue Yield
Balance (Expense) (Cost) Balance (Expense) (Cost) Balance (Expense) (Cost)
-------------------------------------------------------------------------------- ------- ---- ------- ------- ---- ------- ------- ----
Earnings assets:
Earning assets
Interest-bearing deposits $ 5,212 $ 103 $ 4,141 $ 78 $ 4,846 $ 113
Investment$6,629 $89 1.34% $5,212 $103 1.98% $4,141 $78 1.88%
Investments:
US Treasuries 2,985 205 6.87 8,670 585 6.75 9,768 655 6.71
US Government Agencies 63,863 4,257 6.67 35,285 2,458 6.97 39,417 2,873 7.29
Mortgage-backed 6,946 444 6.39 6,013 376 6.25 12,927 808 6.25
securities
State & Municipal 23,698 1,649 6.96 19,867 1,404 7.07 17,126 1,254 7.32
Other 3,390 219 6.46 1,297 86 6.63 1,048 68 6.49
- -------------------------------------------------------------------------------------------------------------------------------
Total Investments 100,882 6,774 6.71 71,132 4,909 6.90 80,286 5,658 80,452 5,680
Loans and7.05
===============================================================================================================================
Loans:
Commercial 110,791 9,029 8.15 78,432 6,809 8.68 59,623 5,361 8.99
Consumer 47,588 3,996 8.40 34,948 3,025 8.66 26,706 2,444 9.15
Real estate 118,637 8,826 7.44 104,783 8,416 8.03 92,344 7,512 8.13
Direct financing leases net of
allowance for losses3,101 296 9.55 2,144 163 7.60 1,518 125 8.23
Credit cards 1,230 147 11.95 1,216 151 12.42 1,138 139 12.21
- -------------------------------------------------------------------------------------------------------------------------------
Total loans 281,347 22,294 7.92 221,523 1,85618,564 8.38 181,329 15,581 157,451 13,2428.59
===============================================================================================================================
Federal funds sold 2,682 128 4.77 7,328 394 5.38 2,816 166 8,994 4745.89
- -------------------------------------------------------------------------------------------------------------------------------
Total earning assets $391,540 $29,285 7.48% $305,195 $23,970 7.85% $268,572 $21,483 $251,743 $19,5098.00%
===============================================================================================================================
Interest-bearing accounts:
Other interest-bearing deposits $ 59,685 $(1,326) $ 57,764 $(1,245) $ 58,040 $(1,288)
Certificates of Deposit 142,862 (8,228) 129,061 (7,304) 122,333 (6,820)
Other borrowedliabilities
Deposits:
Savings $35,548 ($723) 2.03% $33,919 ($776) 2.29% $33,727 ($792) 2.35%
NOW 17,838 (333) 1.87 12,678 (178) 1.40 11,440 (165) 1.44
MMDA 14,569 (500) 3.43 12,039 (340) 2.82 11,611 (257) 2.21
CD's < $100,000 107,531 (5,685) 5.29 95,005 (5,378) 5.66 87,794 (4,948) 5.64
CD's > $100,000 66,095 (3,584) 5.42 47,856 (2,850) 5.96 41,267 (2,357) 5.71
Clubs 1,176 (33) 2.81 1,050 (32) 3.05 986 (30) 3.04
- -------------------------------------------------------------------------------------------------------------------------------
Total Deposits 242,757 (10,858) 4.47 202,547 (9,554) 4.72 186,825 (8,549) 4.58
===============================================================================================================================
Repurchase agreements 31,639 (1,519) 4.80 27,442 (1,396) 5.09 25,668 (1,351) 5.26
Borrowed funds 56,943 (2,999) 5.27 23,464 (1,359) 5.79 11,429 (740) 12,692 (767)
Securities sold under
Repurchase Agreements 27,442 (1,396) 25,668 (1,351) 18,288 (1,003)6.47
- -------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing $331,339 ($15,376) 4.64% $253,453 (12,309)($12,309) 4.86% $223,922 (10,640) $211,353 $(9,878)($10,640) 4.75%
liabilities
===============================================================================================================================
Net interest income $13,909 $11,661 $10,843 $ 9,631
Net interest margin:
Yield on average earning assets 7.85% 8.00% 7.75%
Cost of average interest-bearing
Accounts (4.85) (4.75) (4.67)
Net interest spread 2.84% 3.00% 3.25% 3.08%
Net yield on earning assets3.55% 3.82% 4.04%
3.83%assets
Total average assets $404,253 $313,924 $275,699
$259,030Average noninterest- $36,729 $27,287 $22,777
bearing deposits
96100
Interest income was adjusted to a tax equivalent basis to recognize the
income from tax exempt assets as if the interest was taxable. This treatment
allows a uniform comparison to be made between yields on assets. The
calculations were computed on a fully tax equivalent basis using the corporate
federal tax rate of 34%.
Nonaccrual loans and any related interest recorded have been included in
computing the average rate earned on the loan portfolio. All deposits are in
domestic bank offices. The average balances are based on amortized cost and do
not reflect unrealized gains or losses.
The following table reflects the change in net interest income attributable
to fluctuations in volume and rate.
===========================================================================================================================
Years Endedended December 31
-----------------------------------------------------------------------
(In Thousands)
- ---------------------------------------------------------------------------------------------------------------------------
1999 Compared to 1998 1998 Compared to 1997 1997 Compared to 1996
Increase (Decrease) Due to Increase (Decrease) Due to
--------------------------------- -------------------------------- ---------------------------------------------------------------------------------------------------------------------------
Volume Rate Total Volume Rate Total
--------------------------------- -------------------------------- ---------------------------------------------------------------------------------------------------------------------------
Interest income:
- ---------------------------------------------------------------------------------------------------------------------------
Loans and leases:
- ---------------------------------------------------------------------------------------------------------------------------
Mortgage $ 1,025 $ (615) $ 410 $ 996 $ (92) $ 904
$ 779 $ 17 $ 796- ---------------------------------------------------------------------------------------------------------------------------
Commercial 2,548 (457) 2,091 1,600 (172) 1,428
923 134 1,057- ---------------------------------------------------------------------------------------------------------------------------
Consumer 1,154 (54) 1,100 769 (138) 631
452 37 489- ---------------------------------------------------------------------------------------------------------------------------
Total loans and leases 4,727 (1,126) 3,601 3,365 (402) 2,963
2,154 188 2,342- ---------------------------------------------------------------------------------------------------------------------------
Investment securities, interest-bearinginterest- 1,628 (134) 1,494 (246) (283) (529)
bearing deposits and federal
funds sold
(246) (283) (529) (456) 40 (416)- ---------------------------------------------------------------------------------------------------------------------------
Total interest income $ 6,355 $(1,260) $ 5,095 $ 3,119 $(685)$ (685) $ 2,434
$ 1,698 $228 $ 1,926- ---------------------------------------------------------------------------------------------------------------------------
Interest expense:
- ---------------------------------------------------------------------------------------------------------------------------
Deposits:
- ---------------------------------------------------------------------------------------------------------------------------
Certificates of deposit greater than $100,000$ 1,030 $ (269) $ 761 $ 412 $ 108 $ 520
$ 123 $ 63 $ 186than $100,000
- ---------------------------------------------------------------------------------------------------------------------------
Other 567 (24) 543 424 61 485
243 12 255- ---------------------------------------------------------------------------------------------------------------------------
Total deposits 1,597 (293) 1,304 836 169 1,005
366 75 441- ---------------------------------------------------------------------------------------------------------------------------
Other interest-bearing liabilities 1,964 (201) 1,763 785 (121) 664
308 13 321- ---------------------------------------------------------------------------------------------------------------------------
Total interest expense $ 3,561 $ (494) $ 3,067 $ 1,621 $ 48 $ 1,669
$ 674 $ 88 $ 762- ---------------------------------------------------------------------------------------------------------------------------
Net interest income $ 2,794 $ (766) $ 2,028 $ 1,498 $(733)$ (733) $ 765
$ 1,024 $140 $ 1,164===========================================================================================================================
The portion of the total change attributable to both volume and rate
changes during the periods has been allocated to the volume and rate components
based upon the absolute dollar amount of the change in each component prior to
the allocation. Tax exempt income was not converted to a tax equivalent basis on
the Rate Volume Analysis.
Provision for Loan Losses
The provision is an estimated expense charged to earnings for potential
losses from uncollectible loans. Management continuously reviews the risks
inherent in the loan portfolio. Factors evaluated during this process include:
101
o Specific loans that could have loss potential;potential
o Levels of delinquent loans;loans
o Changes in risk characteristics in the portfolio; andportfolio
o Current and projected economic conditions.
97
The bank does not have significant concentrations of loans in specific
industries or outside the Northeastern Pennsylvania geographic area. There are
no significant nonperforming loans. The bank has not exceeded the ten percent,
(10%), industry and borrower threshold.
The following table sets forth loans and lease financing charge-offs and
recoveries by category for the past five years:
===============================================================================================================================
(In Thousands)
-------------------------------------------------------------------
1999 1998 1997 1996 1995
1994
------ ------ ------ ------ ------- -------------------------------------------------------------------------------------------------------------------------------
Balance at beginning of period $2,809 $2,590 $2,470 $2,357 $2,018$ 3,008 $ 2,809 $ 2,590 $ 2,470 $ 2,357
- -------------------------------------------------------------------------------------------------------------------------------
Charge-offs:
- -------------------------------------------------------------------------------------------------------------------------------
Commercial and all other 139 193 286 153 70
108- -------------------------------------------------------------------------------------------------------------------------------
Real estate 146 43 --- 20 125
61- -------------------------------------------------------------------------------------------------------------------------------
Consumer 196 258 183 218 185
130- -------------------------------------------------------------------------------------------------------------------------------
Lease financing - 86 15 0 0 4- -
- -------------------------------------------------------------------------------------------------------------------------------
Total 481 580 484 391 380
303- -------------------------------------------------------------------------------------------------------------------------------
Recoveries:
- -------------------------------------------------------------------------------------------------------------------------------
Commercial and all other 46 56 47 136 150
39- -------------------------------------------------------------------------------------------------------------------------------
Real estate 6 36 5 9 3
--- -------------------------------------------------------------------------------------------------------------------------------
Consumer 63 39 28 28 27
44- -------------------------------------------------------------------------------------------------------------------------------
Lease financing - 2 -- -- -- --- - -
- -------------------------------------------------------------------------------------------------------------------------------
Total 115 133 80 173 180
83- -------------------------------------------------------------------------------------------------------------------------------
Net charge-offs 366 447 404 218 200
220- -------------------------------------------------------------------------------------------------------------------------------
Additions charge to operations 530 646 623 338 313
559- -------------------------------------------------------------------------------------------------------------------------------
Balance at end of period $3,008 $2,809 $2,590 $2,470 $2,357$ 3,172 $ 3,008 $ 2,809 $ 2,590 $ 2,470
- -------------------------------------------------------------------------------------------------------------------------------
Net charge-offs to average loans outstanding 0.13% 0.20% 0.23% 0.13% 0.14%
0.17%- -------------------------------------------------------------------------------------------------------------------------------
Allowance for loan loss to year endnet loans 1.05% 1.23% 1.39% 1.59% 1.69%
1.61%- -------------------------------------------------------------------------------------------------------------------------------
Loans 30 - 89 days past due and accruing $ 4,914 $ 2,829 $ 3,521 $ 2,667 $ 2,804
- -------------------------------------------------------------------------------------------------------------------------------
Loans 90 days or more past due and accruing $ 2,917 $ 2,689 $ 2,189 $ 796 $ 977
- -------------------------------------------------------------------------------------------------------------------------------
Allowance for loan loss to loans 90 days or
more past due and accruing 108.74% 111.86% 128.32% 325.38% 256.22%
703.58%- -------------------------------------------------------------------------------------------------------------------------------
Nonaccruing loans $ 1,210 $ 1,364 $ 1,076 $ 1,680 $ 1,146
- -------------------------------------------------------------------------------------------------------------------------------
Allowance for loan loss to nonaccruing loans 262.15% 220.49% 261.09% 154.13% 215.53%
243.50%- -------------------------------------------------------------------------------------------------------------------------------
Allowance for loan loss to non-performing loans 76.86% 74.21% 86.03% 104.60% 117.06%
180.89%- -------------------------------------------------------------------------------------------------------------------------------
Average net loans $278,154 $218,494 178,673 151,491 $141,328
===============================================================================================================================
Non-performing loans include non-accrual loans and loans ninety (90) daysThe following table sets forth the allowance for loan losses by loan category
for the past due and still accruing. Year-endfive years:
Category December 31, 1999 December 31, 1998 December 31, 1997 December 31, 1996 December 31, 1995
-------- ----------------- ----------------- ----------------- ----------------- -----------------
Real Estate $1,165,295.00 $1,066,687.00 $877,939 $982,131 $1,031,151
Consumer 692,878.00 507,946.00 399,063 373,209 389,114
Commercial 1,196,789.00 914,305.00 678,407 569,635 505,848
Direct 62,989.00 25,397.00 19,953 0 0
financing
leases
Real estate 31,494.00 25,397.00 19,953 39,285 19,455
construction
Unallocated 22,930.00 467,981.00 813,751 625,716 524,192
- --------------------------------------------------------------------------------------------------------------------
Total $3,172,375.00 $3,007,713.00 $2,809,066 $2,589,976 $2,469,760
====================================================================================================================
102
The following table sets forth non-performing assets for the past five
years:
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
Net loans $301,448 $244,288 $202,719 $162,608 $146,108
Restructured loans 0 0 0 0 0
Loans past due 90 days or more and accruing $ 2,917 $ 2,689 $ 2,189 $ 796 $ 977
Nonaccrual loans 1,210 1,364 1,076 1,680 1,146
Non-performing loans 4,127 4,053 3,265 2,476 2,123
Foreclosed real estate 413 201 276 0 0
Restructured loans 0 0 0 0 0
Total non-performing assets $ 4,540 $ 4,254 $ 3,541 $ 2,476 $ 2,123
Nonaccrual loans to net loans 0.40% 0.56% 0.53% 1.03% 0.78%
Non-performing assets to net loans and foreclosed real estate 1.50% 1.74% 1.74% 1.52% 1.45%
Non-performing assets to total assets 1.02% 1.22% 1.22% 0.92% 0.88%
Non-performing loans to net loans 1.37% 1.66% 1.61% 1.52% 1.45%
Net loans include Loans Available-for-sale.available-for-sale. The bank is unaware of any
potential problem loans. 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. The loans are neither non-accrual nor past due 90 days
or more.
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 non-performing SBA and Student Loans was
$165,000,$183,000, at December 31, 1998.1999. Reserves set aside by the Commonwealth of
Pennsylvania for loans registered in the PENNCAP program were $56,000$127,000 at
year-end. Unrecognized gross income in 1999 due to nonaccrual loans outstanding
as of December 31, 1999 was $154,523.
The decrease in ratio of allowance for loan loss to year-end loans declined whilewas
caused by the 1998 Provision for Loan Loss increased $23,000 over 1997. Overalloverall growth in the loan portfolio caused the ratio
98
to decrease. Allocations into the Allowance for Loan Losses will continue.portfolio. The bank is confident that
the Allowance provides adequate protection against any unforeseen portfolio
loss.
Other Income
The year 1999:
The $12,000 increase in service charges on deposit accounts realized in
1999, is a result of the increase in non interest-bearing deposit accounts. The
increase is not as great as in prior years. Promotions at the new branches
whereby fees were waived for the first year on new accounts, hindered a larger
increase.
Market conditions were not favorable in terms of selling securities during
1999. Only one issue nearing call was sold. The investment was classified as
available-for-sale. The bank realized a $1,400 gain on the sale of that asset.
There were no sales of investments classified as held-to-maturity.
Market conditions again were prohibitive in the sale of loans in 1999.
Sales generated net gains of $74,000 in 1999. That amount, however, was
increased by the recognition of the discounted future value of servicing rights
on sold loans. The amount of realized income from servicing rights was
approximately $123,000.
103
In compliance with FASB Statement No. 65, the bank had to write down to
market value the loans classified as available-for-sale. Loans earmarked as
available-for-sale must be carried at the lower of cost or market. As a result
of this, $146,000 was charged against current earnings. In previous years, the
book value was below market, so no charge was made to current earnings.
The $57,980,000 increase in loans before the Allowance for Loan Loss,
helped to generate an additional $185,000 in service charges during 1999.
Service charges on loans are classified as a component of Other Operating
Income.
Some components of Other Operating Income and their related increase during
1999:
Increase
--------
Fees on sold loans $ 37,000
Reverse Mortgage fees 10,000
Merchant Credit Card income 88,000
Trust income, gross 103,000
Rental Income 23,000
Annuity & Brokerage fees 30,000
ATM service charges 31,000
Safe deposit box rentals 12,000
Fees on sold loans, Reverse Mortgage fees, Merchant Credit Card income and
Trust income rose through volume increases. The market value of Trust Assets at
December 31, 1999 was $34,693,000. Rental income increased from a full twelve
months of lease income from the Financial Center. A full-time employee dedicated
to sales only, caused the increase in Annuity and Brokerage fees. The new branch
locations helped to generate additional income over 1998 from ATM service
charges and safe deposit rentals. See "Description of the Bank - Properties."
The year 1998:
The 32% increase in service charges on deposit accounts realized in 1998,
is a result of the 32% increase in non interest-bearing deposit accounts.
Taking advantage of favorable market conditions, the bank sold three
(3)
investment securities, with aclassified as available-for-sale. The net amortized book
value of $3,838,000. Of the issues sold two (2) totaling $1,838,000 were held for one (1) year and the third
of $2,000,000securities was held for twenty-two (22) months.$3,838,000. In providing funds for loan demand,
the bank improved its yield on earning assets. The 1998 tax equivalent yield on
loans and investments was 8.38% and 6.90% respectively. The net gain on
investment sales for 1998 was $110,000. There were no sales of investments
classified as held-to-maturity.
The sale of residential mortgage loans and student loans in 1998 generated
net gains of $161,000, a $158,000 increase over 1997.
The $41,768,000 increase in loans before the Allowance for Loan Loss,
helped to generate an additional $144,000 in service charges during 1998.
Service charges on loans classified as a component of Other Operating Income.104
Some components of Other Operating Income and their related increase during
1998:
Increase
--------
Fees on sold loans $10,000
Merchant credit cardCredit Card income 40,000
Trust income, (gross)gross 60,000
Rental Income 25,000
Fees on sold loans and Merchant card income rose through volume increases.
Gross Trust income reflects the first full twelve months of operations. The
market value of Trust Assets at December 31, 1998 was $27,881,856. Rental income
increased with the acquisition of the Financial Center, (see Properties Note 2
page 14).Center.
The Year 1997:
The increase of $2,332,000 in non interest-bearing demand deposit accounts
over the twelve months ending December 31, 1997, contributed to the 19% rise in
service charges on deposit accounts.
In 1997, the bank sold investment securities classified as
available-for-sale, with a net amortized book value of approximately
$14,100,000. Of the securities sold, $3,600,000 were held
for less than one year,
99
$8,939,000 were held between one and five years and $1,561,000 were held for
more than five years. Investment sales provided liquidity not only for deposit runoff but
also funded loan demand, thereby increasing the yield on earning assets. The tax
equivalent yield on investments for 1997 was 7.05% compared to the tax
equivalent yield on loans for 1997 of 8.59%. Net gainsThe bank realized a net gain on the
salesales of $123,600. There were no sales of investments during 1997 was $123,600.classified as
held-to-maturity.
The $40,330,000 increase in loans before the Allowance for Loan Loss,
helped to generate an additional $53,000 in service charges during 1997.
In 1997, the bank instituted a surcharge on foreign depositors who used the
bank's ATM's. This charge helped increase ATM service charge income from
approximately $37,000 in 1996 to $119,000 in 1997.
Some components of Other Operating Income and their increases during 1997:
Increase
--------
Merchant credit card income $40,000
Utility bill collection fees 13,000
Fees on sold loans 4,000
Fees on mutual fund/annuity sales 12,000
These increases are all based on growth in volume.
105
Other Expense
The year 1999:
The average number of full time equivalent employees increased by 35 to 156
in 1999. The 29% average staff increase and merit pay raises caused 1999
Salaries and Employee benefits to increase $1,315,000 above the amount reported
for 1998.
The opening of the West Pittston, Financial Center and Moosic retail
branches in 1999 increased Premise and Equipment expense $523,000 over 1998.
Over 52% of the increase resulted from a $275,000 rise in depreciation.
Depreciation on building and premise was $201,000 and depreciation on furniture
and fixtures was $562,000. Furniture and fixture depreciation exceeded 1% of
gross income. Another factor contributing to the increase was the portion of the
Financial Center restricted to operations. Operations were conducted at the
Financial Center during the twelve months of 1999. The bank acquired the
Financial Center in June of 1998 and did not begin to move operations there
until September of 1998.
The bank incurred a net loss in 1998 on the sale of two residential
properties that it had foreclosed upon. The net loss amounted to $29,000.
The only item contained within other expense that exceeded 1% of gross
income was advertising. Advertising increased $115,000 over 1998 to $403,000.
The increase was caused in part, by the new branches opened during 1999.
Some components of Other Expense and their increases during 1999:
Increase
--------
Appraisals $44,000
Merchant credit card expense 91,000
Stationery and supplies 111,000
Equipment purchases 24,000
Armored transportation 37,000
Correspondent banks 36,000
Postage 22,000
Telecommunications 33,000
Consumer leasing 20,000
Donations 38,000
Miscellaneous expense 72,000
Appraisal expense rose in part because of a no-cost residential mortgage
loan promotion. Appraisal expense is reported gross and does not include
payments made by borrowers. Those fees are credited to other income. Merchant
card and consumer leasing expense rose due to volume increases. Miscellaneous
expense includes accruals for future expected expense, such as preparations for
the annual meeting. The other items rose due to the increase in the number of
bank locations and the bank's Year 2000 considerations.
106
Other areas of expense declined during 1999:
Decrease
--------
Legal services $66,000
Audit expense 18,000
Annual Meeting 17,000
The year 1998:
The average number of full time equivalent employees increased by 11 to 121
in 1998. The additional staff and merit pay increases caused 1998 Salaries and
Employee benefits to increase $421,000 above the amount reported for 1997.
With the opening of the Pittston Branch in June and the move to the
Financial Center in September, Occupancy and Equipment expenses increased
$66,000 over 1997.
The bank incurred a net loss in 1998 on the sale of two residential
properties that it had foreclosed upon. The net loss amounted to $27,000.
100
The only item contained within other expense that exceeded 1% of gross
income was advertising. Advertising increased $90,000 over 1997 to $288,000.
Branch openings during 1998 contributed to the increase.
Some components of Other Expense and their increases during 1998:
Increase
--------
Audit services $23,000
Appraisals 87,000
Legal fees 30,000
Merchant credit card expense 62,000
Directors fees 26,000
Advertising 90,000
Stationery and supplies 43,000
Sales tax 23,000
Equipment purchases 26,000
MACMac expense 26,000
Audit expense increased because of an accrual accounting change and not due
to an actual dollar expense. Actual Audit fees remained relatively unchanged in
1998. Appraisal expense rose in part because of a no-cost residential mortgage
loan promotion. Merchant card expense rose due to volume increases. Legal fees
are expensed based upon invoices received for services rendered. The addition of
a new Director contributed to the increase in directors' fees. The other items
rose due to the increase in the number of Bankbank locations and the bank's Year
2000 considerations.
Other areas of expense declined during 1998:
Decrease
--------
Outside professional services $28,000
Visa expense 16,000
Donations 31,000
107
The year 1997:1997
The average number of full time equivalent employees increased by 11 to 110
in 1997. The additional staff and merit pay increases caused 1997 Salaries and
Employee benefits to increase $400,000. Included in the $400,000 increase are
$51,000 salary and benefit costs of the new Trust Department.
During 1997 the bank retired fixed assets no longer in service at a net
book value of $11,983.
101
There were no individual components within other expense that exceeded 1%
of gross income.
Some components of Other Expense and their increases during 1997 are:were:
Increase
--------
FDIC insurance assessment $24,000
Merchant credit card and MAC 63,000
Donations 32,000
The bank's 1997 FDIC Insurance assessment was $24,000 more than its 1996
charge, even though the bank maintained a 1A rating.
Other expenses declined during 1997:
Decrease
--------
Advertising $22,000
Stationery and supplies 19,000
Other Items:
New Financial Accounting Standards:
The bank is unaware of any pending changes in accounting procedures that
could have a material effect on future presentations of the bank's financial
position and results of operations.
Year 2000:
Advances and changes in available technology can significantly impactThe bank successfully completed its preparations for the business and operationsbeginning of the
bank. A challenging problem exists as many
computernew millennium. At January 1, 2000 all automated systems worldwide do not havewere functioning
properly. During the capabilityfirst days of recognizing2000 the bank initiated and received
transmissions of electronic data without any problems. There were no
difficulties conducting business with those outside vendors upon which the bank
relies.
In preparation for the New Year holiday and in anticipation of consumer
concern, the bank increased the amount of currency it normally carries.
Subsequent to that weekend, the bank reduced its cash reserves and short-term
borrowings.
The final Y2K hurdle was February 29, 2000, the leap year 2000 or years thereafter. No easy technological "quick fix" has been developed
to address this problem.day. The bank has initiated an enterprise-wide program to prepare its computer
systems, applicationsdid
not experience any problems, and staff for the Year 2000 transition. Following
regulatory guidelines the bank's program encompasses:
Awareness - Internal recognition of Year 2000 issues
Assessment - Determination of the problem's complexity and addressing
solutions
Renovation - System upgrades and replacements
Validation - Testing and validating solutions
Monitoring - Solution implementation and result testing in actual
production environment
At December 31, 1998, the bank had entered into the Validation and
Monitoring phases of the program. Included in the process are non-information
technology items suchbusiness proceeded as security
102usual.
108
and facilities systems. Management expects the program to be completed within
regulatory time frames.
Ongoing contingency planning is also part of the Year 2000 program. Action
plans are being developed to address "what if" scenarios. These scenarios
include system failures, supply failures and liquidity. The plans are being
formulated in accordance with regulatory guidelines.
The bank expects to incur internal staff costs as well as consulting and
other expenses related to the enhancements necessary to prepare its systems for
compliance. At December 31, 1998 the bank had capitalized approximately $309,000
in testing and conversion of system applications. The bank anticipates
expenditures approximating $665,000 during 1999 to complete this project. Most
of these costs are related to the acquisition of computer hardware and software.
The costs, for the most part, will be capitalized and then depreciated over
their expected useful life.
Year 2000 also creates risk for the bank from unforeseen problems with
third parties with whom the bank deals. Failures of the bank's or third party
systems could have a material effect on the bank's ability to conduct business.
The bank is communicating with its customers through information letters,
statement inserts and FDIC newsletters. The communications are designed to
promote customer awareness and preparedness. Vendors who provide products and
services to the bank are being requested to provide written assurances of Year
2000 compliance.
The bank has a Project 2000 committee that reports to the Board of
Directors on Year 2000 issues. In addition the Federal Deposit Insurance
Corporation is closely monitoring and evaluating the bank's progress.
Federal and State Legislation:
From time to time, various types of federal and state legislation have been
proposed that could result in additional regulations and restrictions on the
business of the bank. It cannot be predicted whether such legislation will be
adopted, or if adopted, how such laws would affect the business of the bank. As
a consequence, the bank is susceptible to legislation that may increase the cost
of doing business. Management believes that the effects of the aforementioned
proposals on the liquidity, capital resources and the results of operations, of
the bank, will be immaterial.
Management is unaware of any other specific regulatory recommendations,
which if implemented, would have a material effect upon the liquidity, capital
resources or results of operations. However the general cost of compliance with
numerous federal and state laws does have, and in the future may have, a
negative impact on the bank's results of operations.
Further, the business of the bank is also affected by the state of the
financial services industry in general. As a result of legal and industry
changes, Managementmanagement predicts that the industry will continue to experience an
increase in consolidations as the financial industry strives for greater cost
efficiencies and market share. Management is optimistic that such consolidations
may enhance the bank's competitive position as a community bank.
103
On November 12, 1999 President Clinton signed into law the
Gramm-Leach-Bliley Financial Services Modernization Act. The Act has a profound
impact on the financial services industry.
o The Act repeals prior legislation to permit commercial banks to
affiliate with securities firms and insurance companies. More
importantly, the Act significantly expands the authority of each of
these financial industries to engage in a full array of financial
services. Thus, each industry may now engage in activities previously
reserved to one or the other.
o The Act authorizes bank holding companies meeting defined standards to
engage in a substantially broader range of non-banking activities than
was permissible before the legislation passed.
o A new hierarchy of existing state and federal regulators will monitor
both the bank and the proposed holding company. The Act coordinates the
efforts of these regulators. The goal is to lessen regulatory burden
and prevent duplication of examination efforts.
o Also, all financial institutions are required to take reasonable
precautions to protect the security and confidentiality of personal
customer information. The bank or holding company may only share
customer information with its affiliates under certain circumstances.
Outlook for 1999:
Management2000:
After several years of historic growth for the bank, management believes that theit
must make a concerted effort to increase net earnings. The present state of the
economy will contributemake that goal challenging as market pressure will continue to the continued growth of the balance sheet. Earnings,bear
down on the net interest margin. The bank will reassess its charges for services
provided and will explore other hand,avenues for producing revenue.
109
With the promotions for the new branches coming to an end, the bank will be pressured fromreduce
overhead as much as possible. This too will present a narrowing interest marginchallenge, as the bank
will experience a full twelve months expense on the new branches and other non interest
expenditures. Such costs will be increased by the bank's expanded branch
network. An increase in staff will be necessitated by the need to implement
services and to improve deliveryoperating
systems. Management expects the cost of
improving operating efficiencies to be impacted by Year 2000 issues. These challenges thatgoals must be successfully addressed, in order for the bank to
reach the desired performance ratios.levels.
Future Events:
In additionEvents
At the annual meeting of shareholders, to be held on Tuesday May 2, 2000,
shareholders will vote on a proposal to approve and adopt the March 1999 openingplan of
reorganization and the plan of merger. The plans provide for the reorganization
of the N. Washington Avenue Office,
Scranton, Pennsylvania,bank as a wholly owned subsidiary of Fidelity D & D Bancorp. The plans
call for the automatic exchange of each whole share of common stock of the bank
for 2 shares of the holding company. In management's opinion the formation of
the holding company will provide greater flexibility in:
o Financing;
o Engaging in non-banking activities;
o Protecting against an unfriendly takeover; and
o Responding to changes in law.
The management of the bank will not change as a result of the
reorganization. Both plans, which include a statement of risks for shareholders,
are explained in detail in the section entitled, "Proposal No. 1: Reorganization
of The Fidelity Deposit and Discount Bank as the Subsidiary of Fidelity D & D
Bancorp, Inc."
The bank will open two more Branchesa new branch during 1999:
o February - West Pittston Shopping Center2000:
Peckville Branch
801 Wyoming Avenue
West Pittston,1598 Main Street
Peckville, Pennsylvania 18643
o May - Moosic Branch
4010 Birney Avenue
Moosic, Pennsylvania 18507
Both properties18452
The property will be leased from a non-related entities.entity.
110
PROPOSAL NO. 4:
RATIFICATION OF INDEPENDENT AUDITORS
The bank is considering plans to remodel both the Main Office and KIP to
better service its customers in the future.
104
Management's Discussion and Analysisboard of Financial Condition and Results of
Operation as of September 30, 1999
Changes in Financial Condition
Total deposits increased $57,656,000 or 24.02% from $240,001,000 at
December 31, 1998 to $297,657,000 at September 30, 1999. The success at
attracting new customers and additional funds from existing depositors, can be
linked to the new branches in Pittston, West Pittston, the Financial Center in
Scranton and Moosic, competitive product pricing and an expansiondirectors of the Bank's
deposit product line.
Non interest-bearing deposits rose $1,902,000 during 1999. The increase was
5.69% above year end 1998.
Interest-bearing deposits increased $55,754,000 or 26.99%. The introduction
of the tiered balance Super NOW accounts helped to generate a $4,420,000
increase in this product line. Certificates of deposit under $100,000 grew
$9,078,000. Savings accounts and clubs increased $2,462,000. A $4,064,000 rise
in public fund MMDA's contributed to an overall increase in MMDA's of
$2,924,000.
An increase of $23,341,000 in public fund CD's of $100,000 or more, caused
CD's of $100,000 or more to increase $36,870,000 or 74.58% during 1999. The
increase in Public Fund CD's was in large measure due to the opening of the West
Pittston branch.
Short-term Borrowings, which are comprised of Repurchase Agreements
(Repos), TT&L Retained Funds and Federal Funds Purchased, increased $21,076,000
or 71.68%. Of the total increase, Fed Funds Purchased rose $14,000,000.
Long-term borrowings increased $5,000,000 or 11.83%. The borrowings were used to
purchase acceptable investments, needed as collateral for the Public Fund
deposits and to support current loan demand.
The rise in Deposits and Borrowings, an increase in Common Stock and
Surplus, through the Dividend Reinvestment Plan, and the retention of earnings,
caused Total Footings to increase $82,867,000 or 23.77% since December 31, 1998.
105
During 1999 net loans grew $51,785,000 or 21.20%. Commercial loans
increased $28,813,000, consumer loans and leases rose $14,738,000 and mortgages
had a net increase of $9,231,000. Residential mortgages and student loans
totaling $7,936,000 and $1,733,000 respectively, were sold during 1999 to
provide liquidity and improve yield. In addition, residential mortgages of
$3,584,000 were securitized and rebooked as investments. This activity provided
the Bank 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 Bankbank has classified residential mortgages of $22,149,000 as available-for-sale.
Maturities, paydowns and early calls of US Agency and Municipal bonds
totaled $22,687,000. A Municipal bond of $200,000 was sold prior to being
called. Purchases of investments, mainly US Government Agencies, were
$55,509,000. These activities combined with net accretion of $104,000 and the
addition of the $3,584,000 securitized loans less a $4,813,000 decline in the
market value of available-for-sale securities caused the investment portfolio to
increase $31,497,000. The decline in market value of AFS investments not
withstanding, debt securities should be repaid in full as both principal and
interest are guaranteed. Fluctuations in capital markets cause frequent changes
in the market value of investments. This particular decline does not indicate a
material weakness in the Bank. Market conditions are monitored daily and the
Bank is prepared to take remedial actions if deemed appropriate.
Federal Funds Sold were reduced to $0.00 during 1999 to provide liquidity
for loan demand and investment requirements. In doing so the Bank improved the
yield on earning assets.
Continued branching and improvements to both plant and equipment, including
Y2K measures have caused fixed assets to increase $2,233,000, net of
depreciation, during 1999.
106
Total assets of the Bank have grown $99,734,000 or 30.06% from $331,737,000
to $431,471,000 for the twelve months ending September 30, 1999. The increase is
a result of a $56,621,000 rise in deposits, a $41,263,000 net increase in
borrowings and a net increase in Capital of $1,471,000. Capital was increased
through the 1998 stock offering, Dividend Re-investment and the retention of
profits.
The funds accumulated through the increases in liabilities and capital were
used for loan growth of $69,001,000, an increase in investments of $36,245,000
and fixed asset expansion of $2,936,000.
Excluding the effect of the net change in the market value of AFS
Securities, Shareholders' Equity increased $2,185,000 and $2,902,000 for the
nine months ending September 30, 1999 and 1998 respectively and by $4,964,000
for the twelve-month period ending September 30, 1999. The increases are a
result of the retention of profits and the issuance of Common Stock under the
1998 stock offering and Dividend Reinvestment plan.
Changes in Results of Operations
Net Income
Net Income for the nine months ending September 30, 1999 and 1998 was
$2,724,720 and $2,466,242 respectively. The significant differences are as
follows:
1999 1998 Difference
---------- ---------- ------------
Net Interest Income $9,679,274 $8,117,955 $1,561,319(A)
Provision for Loan Loss 405,000 548,000 143,000(B)
Service Charges on Deposit
Accounts & Other Income 1,603,538 1,138,413 465,125(C)
Gain\(Loss) Security Sales 1,400 11,815 (10,415)
Gain\(Loss) Loan Sales 68,993 111,210 (42,217)
Salary & Employee Benefits 3,785,539 2,724,275 (1,061,264)(D)
Occupancy & Equipment 1,080,151 844,945 (235,206)(E)
Other Expense 2,572,895 1,962,081 (610,814)(F)
Provision for Income Tax 784,900 833,850 48,950(G)
107
A) The TE Net Yield on Average Earning Assets declined 20 basis points, from
3.80% as of September 30, 1998 to 3.60% as of September 30, 1999. Market
conditions caused higher yielding investments to be called and forced loan
rates down. At the same time competition from non-traditional sources for
deposit dollars and competitive interest rates paid for preferred accounts
and at the new branch locations, caused the cost funds to decrease at a
slower pace. The decline in TE net yield was offset by a rise in loan and
investment volume, and that enabled the Bank to increase Net Interest
Income by $1,561,319.
B) Even though there was a decrease in net charge-offs, in comparing the nine
months of 1999 to 1998, the Bank maintained the Loan Loss Provision in 1999
because of the rise in loan volume.
C) Loan service charges rose $184,000 and Merchant credit card revenue grew
$69,000 over 1998 revenues. Gross revenues from Trust were $80,000 ahead of
1998. Service fees on sold loans, reverse mortgages, annuities and ATM's
were $92,000 more in 1999.
D) Merit pay increases and additions to staff caused Personnel Expense to
increase 38.96%. At September 30, 1999 the Bank employed 164 full time
equivalent employees, a 26.00% increase over September 30, 1998. The
September 30, 1998 number of full time equivalent employees was 130.
E) Occupancy expense increased due to the opening of 3 new retail branches and
the new operation center.
F) Arise in merchant credit card volume caused 1999 related expenses to
increase $74,000. Advertising, postage, courier expense, supplies, ATM
expenses, communications and equipment purchases, all impacted by the new
locations, increased $271,000. Correspondent Bank expense rose $19,000 and
accruals for expense reserves increased $$168,000.
G) A $415,000 increase in non-taxable income allowed the Bank to reduce the
Federal Income Tax provision.
108
THE FIDELITY DEPOSIT & DISCOUNT BANK
MANAGEMENT'S DISCUSSION AND ANALYSIS
(in thousands of dollars)
TAX EQUIVALENT YIELD
====================
Average Earnings September 30, Dec. 31, September 30,
Assets 1999 1998 1998
------------- -------- -------------
Loans & Leases $272,788 $221,523 $216,940
Investments 96,142 71,132 69,880
Fed Funds 3,577 7,328 6,606
Interest Bearing
Deposits 6,803 5,212 5,108
-------- -------- --------
Total $379,310 $305,195 $298,534
======== ======== ========
Average Interest
Bearing Liabilities
Other Interest-bearing Deposits $ 66,664 $ 59,685 $ 58,469
CD's 170,499 142,862 141,894
Other Borrowed Funds 50,686 23,464 20,958
Repurchase Agreements 31,799 27,442 27,222
-------- -------- --------
Total $319,648 $253,453 $248,543
======== ======== ========
Interest Income
Loans & Leases $ 16,149 $ 18,564 $ 13,590
Investments 4,819 4,909 3,656
Fed Funds 128 394 270
Interest Bearing
Deposits 81 103 70
-------- -------- --------
Total $ 21,178 $ 23,970 $ 17,586
======== ======== ========
Interest Expense
Other Interest-bearing Deposits $ 1,101 $ 1,326 $ 958
CD's 6,787 8,228 6,156
Other Borrowed Funds 1,964 1,359 929
Repurchase Agreements 1,125 1,396 1,055
-------- -------- --------
Total $ 10,978 $ 12,309 $ 9,098
======== ======== ========
Net Interest
Income $ 10,200 $ 11,661 $ 8,488
======== ======== ========
Yield on Average
Earning Assets 7.46% 7.85% 7.88%
Cost of Avg Int
Bearing Liabilities 4.59% 4.85% 4.89%
-------- -------- --------
Interest Rate
Spread 2.87% 3.00% 2.98%
======== ======== ========
Net Yield on
Average Earning
Assets 3.60% 3.82% 3.80%
======== ======== ========
109
THE FIDELITY DEPOSIT & DISCOUNT BANK
MANAGEMENTS DISCUSSION AND ANALYSIS
Provision for Loan Losses
September 30, Dec. 31, September 30,
1999 1998 1998
------------- ----------- -------------
Net Loans 296,073,621 244,288,236 227,072,344
Allowance for
loan losses 3,195,220 3,007,713 3,107,217
Percentage to
net loans 1.08% 1.23% 1.37%
Provision for
loan losses 405,000 646,000 548,000
(Charge offs)
recoveries, net (217,493) (447,353) (249,849)
Certain loans were written off during prior years and recovered in 1999.
The volume increase in outstanding loans will necessitate an increase in the
Provision for Loan Loss to safeguard the Bank from any unforeseen future loss.
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 that are either 90 days or
more delinquent or classified as non-accrual was $146,000 at September 30, 1999.
The reserve set aside by the Commonwealth of Pennsylvania for loans registered
in the PENNCAP program was $120,000.00 at September 30, 1999.
Liquidity (in thousands of dollars)
September 30, Dec. 31, September 30,
1999 1998 1998
------------- ----------- -------------
Assets due
within one year 114,907 93,749 102,745
Liabilities due
within one year 208,182 143,482 155,483
Percent of assets
due within one
year to liabilities
due within one year 55.20% 65.34% 66.08%
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 Bank, or assets available-for-sale,
both of which could be utilized to meet liquidity needs.
110
Year 2000:
The Bank has initiated an enterprise-wide program to prepare its computer
systems, applications and staff for the Year 2000 transition. Following
regulatory guidelines the Bank's program encompasses:
Awareness - Internal recognition of Year 2000 issues
Assessment - Determination of the problem's complexity and addressing
solutions
Renovation - System upgrades and replacements
Validation - Testing and validating solutions
Monitoring - Solution implementation and result testing in actual
production environment
At September 30, 1999 the Bank had entered into the Monitoring phase of the
program. Included in the process are non-information technology items such as
security and facilities systems. Management expects the program to be completed
within regulatory time frames.
Ongoing contingency planning is part of the Year 2000 program. Action plans
are being developed to address "what if" scenarios. These scenarios include
system failures, supply failures and liquidity. The plans are being formulated
in accordance with regulatory guidelines.
The Bank expects to incur internal staff costs as well as consulting and
other expenses related to the enhancements necessary to prepare its systems for
compliance. Most of these costs are related to the acquisition of computer
hardware and software. The costs, for the most part, will be capitalized and
then depreciated over their expected useful life.
Year 2000 also creates risk for the Bank from unforeseen problems with
third parties with whom the Bank deals. Failures of the Bank's or third party
systems could have a material effect on the Bank's ability to conduct business.
The Bank is communicating with its customers through information letters,
statement inserts and FDIC newsletters. The communications are designed to
promote customer awareness and preparedness. Vendors who provide products
and services to the Bank are being requested to provide written assurances of
Year 2000 compliance.
The Bank has a Project 2000 committee that reports to the Board of
Directors on Year 2000 issues. In addition the Federal Deposit Insurance
Corporation is closely monitoring and evaluating the Bank's progress.
111
INDEPENDENT AUDITORSappointed Parente Randolph, Orlando, Carey & Associates,P.C.,
Certified Public Accountants, of Wilkes Barre,Wilkes-Barre, Pennsylvania, served asCertified Public
Accountants, to audit the bank's independent
auditorsfinancial statements of the bank for the 1998 fiscal year. In addition to performing customary audit
services,year
ending December 31, 2000. The board proposes that the shareholders ratify this
appointment. Parente Randolph assisted the bank with the preparation of its federal
and state tax returns and assisted with various regulatory matters, charging the
bank at its customary hourly billing rates. The Bank's board of directors
approved these non-audit services after due consideration of the auditors'
objectivity and after finding them to be wholly independent. Parente Randolph
has advised the bank that none of its members has any
financial interest in the bank. Parente Randolph has been engagedserved as the independent' auditorbank's
independent auditors for the 1999 fiscal year. They also assisted the bank with
the preparation of federal and state tax returns and provided assistance in
connection with regulatory matters, charging the bank for such services at its
customary hourly billing rate. The bank's board of directors approved these
non-audit services after determining that the auditors' independence and
objectivity would not be adversely affected.
The majority of shares present, in person or by proxy, and entitled to vote
at the annual meeting must vote in the affirmative to ratify the appointment of
Parente Randolph, P.C., as the bank's independent auditors for the 2000 fiscal
year. A representative of the firm will be present at the annual meeting to
answer shareholders' questions. In the event that shareholders do not ratify the
selection of Parente Randolph as the bank's independent auditors for the 2000
fiscal year, the board of directors may appoint another accounting firm to
provide independent public accounting services for the 2000 fiscal year.
The board of directors recommends that shareholders vote FOR the
ratification of Parente Randolph, P.C., as the independent auditors for the bank
for the fiscal year ending December 31, 1999.2000.
If the proposed reorganization is approved and implemented, it is
anticipated that the holding company will also select Parente Randolph as its
auditor.
SHAREHOLDER PROPOSALS
In the event the proposed reorganization is approved and the holding
company becomes the one-bank holding company for the bank, any shareholder who,
in accordance with the proxy rules of the SEC, wishes to submit a proposal for
inclusion in the holding company's proxy statement for its 2000 Annual Meeting
of Shareholders must deliver the proposal in writing to John F. Glinsky, Jr.,
Secretary, at the holding company's principal executive offices, Blakely and
Drinker Streets, Dunmore, Pennsylvania 18512, no later than _________ __,December 8, 2000.
Also, for proposals which will not be included in the holding company's
proxy statement, if the holding company does not receive notice of a shareholder
proposal by ____________, 2000,February 21, 2001, the proxy holders at the 20002001 Annual Meeting may
vote on the proposal at their discretion, as they consider in the best interests
of the holding company.
If the reorganization does not occur, then the deadline for submitting aabove deadlines relating to
shareholder proposal for inclusion inproposals shall apply to the bank's proxy statementbank for its 20002001 Annual Meeting of
Shareholders, was December 3, 1999.Shareholders.
111
OTHER MATTERS
The board of directors does not know of any matters to be presented for
consideration other than the matters described in this proxy
statement/prospectus. However, if any other matters are properly presented for
consideration and voting at the Special Meetingannual meeting of shareholders, the persons
named as proxy holders will vote the proxies in what they determine to be the
best interests of the bank. See "Where You Can Find More Information" below.
112
-----------------------------------
Where You Can Find More Information
-----------------------------------
The Holding Company's Registration Statement
Fidelity D & D Bancorp has filed with the Securities and Exchange
Commission in Washington, D.C., a registration statement under the Securities
Act of 1933 for its common stock to be issued in the proposed reorganization.
This documentproxy statement/prospectus is a part of the registration statement.
This document does not contain all of the information, exhibits and
undertakings contained in the registration statement, which is on file with the
SEC in Washington, D.C. The registration statement and exhibits may be examined
during normal business hours, or copies obtained by mail at prescribed rates, at
the SEC's public reference room located at Room 1024, Judiciary Plaza, 450 Fifth
Street, N.W., Washington, D.C. 20549. You may obtain information on the
operation of the public reference room by calling the SEC at 1-800-SEC-0330.
The registration statement maySEC also be examined at the SEC's regional offices:
o 7 World Trade Center, Suite 1300, New York, New York 10048 (telephone:
212-748-8000);
o The Curtis Center, Independence Square West, 601 Walnut Street, Suite
1005E, Philadelphia, Pennsylvania 19106 (telephone: 215-597-3100);
o and Citicorp Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661 (telephone: 312-353-7390).
The SEC maintains a Web site that contains reports, proxy and
information statements and other information regarding registrants that file
electronically with the SEC. The address of the SEC's Web site is
http://www.sec.gov. The registration statement may be accessed from this Web
site.
Prior Annual Reports Sent to Shareholders and Information Filed with the FDIC
The Fidelity Deposit and Discount Bank previously mailed a copy of the
bank's Annual Report for the fiscal year ended December 31, 1998,1999, to
shareholders with proxy materials forshareholders. The Annual Report includes the 1999bank's Annual MeetingReport on Form 10-K
filed pursuant to the Securities Exchange Act of Shareholders.1934, as described below. The
Form 10-K also serves as the bank's Annual Disclosure Statement as required by
FDIC rules and regulations. You may obtain a copy of the bank's 1996, 1997, 1998 or
19981999 Annual Report, audited in accordance with generally accepted auditing
standards and containing financial information prepared in accordance with
generally accepted accounting principles, promptly and without charge by
contacting Robert P. Farrell, Cashier and Comptroller, The Fidelity Deposit and
Discount Bank, Blakely and Drinker Streets, Dunmore, Pennsylvania 18512,
(telephone 570-342-8281).telephone 570-342-8281.
The bank is subject to the information requirements of the Securities
Exchange Act of 1934. In accordance with the 1934 Act, the bank files periodic
reports, proxy statements and other information with the FDIC, including the
bank's Annual Report on Form 10-K and
113
Quarterly Reports on Form 10-Q. You may
review or obtain copies of these documents at the public reference section of
the FDIC's Division of Supervision, located at 1776 F Street, N.W., Room F6043,
Washington, D.C. 20429, but with a mailing address of 550 17th Street, N.W.,
Washington, D.C. 20429, (telephone
202-898-8913).telephone 202-898-8913, fax 202-898-3909.
Periodic Reports and Information Filed with the SEC Following the Reorganization
Following the reorganization, Fidelity D & D Bancorp will be subject to the
information reporting requirements of the Securities Exchange Act of 1934, and
will file periodic reports, proxy statements and other information with the SEC.
The financial information filed with the SEC will be consolidated with the
bank's financial information. You may inspect and copy such reports, proxy statements and other information at
the SEC's public reference facilities described above. You may also obtain these
documents at the SEC's Web site at http://www.sec.gov. In addition, the holding
company will provide consolidated annual financial reports to shareholders.
114113
THE FIDELITY DEPOSITThe Fidelity Deposit & DISCOUNT BANK
INDEX TO FINANCIAL STATEMENTS
AND
SUPPLEMENTARY FINANCIAL INFORMATIONDiscount Bank
Index to Financial Statements and
Supplementary Financial Information
Page
----
Summary Financial Data 209
Management's Discussion and Analysis
of Financial Condition and Results of Operation
85
INTERIM FINANCIAL STATEMENTS (UNAUDITED)and Quantitative and Qualitative Disclosures about Market Risk 87
Independent Auditor's Report F-2
Financial Statements
Balance Sheet as of September 30,for the Years Ended December 31, 1999 and December 31, 1998 F-2F-3
Statement of Income for the ThreeYears Ended December 31, 1999,
1998 and Nine Months Ended
September 30, 1999, and September 30, 1998 F-3
Statement of Cash Flows for the Nine Months Ended September 30, 1999,
and September 30, 19981997 F-4
Statement of Changes in Shareholders' Equity for the Nine Months
Ended September 30, 1999, and September 30, 1998 F-5
NOTES TO INTERIM FINANCIAL STATEMENTS,
SEPTEMBER 30, 1999 (UNAUDITED) F-6
INDEPENDENT AUDITOR'S REPORT F-7
FINANCIAL STATEMENTS
Balance Sheet for Years Ended
December 31, 1999, 1998 and 1997 F-8
Statement of Income for Years Ended December 31, 1998,
1997 and 1996 F-9F-5
Statement of Cash Flows for the Years Ended December 31, 1999,
1998 F-10and 1997 and 1996
Statement of Changes in Shareholders' Equity for Years Ended
December 31, 1998, 1997 and 1996 F-11
NOTES TO FINANCIAL STATEMENTS F-12
F-1
THE FIDELITY DEPOSIT & DISCOUNT BANK
BALANCE SHEET
As of September 30, 1999 and December 31, 1998
(unaudited)
September 30, 1999 December 31, 1998
------------------ -----------------
ASSETS
Cash and due from banks $4,021,710 $3,315,306
Interest Bearing Deposits 4,100,914 5,404,438
---------- ----------
Total cash and cash equivalents 8,122,625 8,719,744
Investment Securities:
Available for sale
U.S. Treasuries & Agencies 83,135,113 51,890,785
State & Municipal 22,786,118 24,450,358
Other securities 4,184,524 2,266,717
---------- ----------
Total investment securities 110,105,754 78,607,860
Loans net of unearned income 277,120,217 238,437,792
Loans available-for-sale 22,148,624 8,858,157
Allowance for loan losses 3,195,220 3,007,713
---------- ----------
Net loans 296,073,621 244,288,236
Federal funds sold 0 6,500,000
Bank premises and equipment 8,682,258 6,449,141
Accrued interest receivable 3,919,613 2,404,480
Foreclosed assets held for sale 420,583 201,261
Other assets 4,146,662 1,433,699
---------- ----------
Total other assets 17,169,116 16,988,581
Total assets $431,471,117 $348,604,421
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits
Non Interest Bearing $35,351,831 $33,449,998
Interest Bearing 175,998,639 157,115,035
Cert. of deposit $100,000 or more 86,306,155 49,435,718
---------- ----------
Total deposits 297,656,625 240,000,751
Accrued expenses and other liabilities 3,058,739 2,932,666
Short-term borrowings 50,481,770 29,405,299
Long-term debt 47,252,000 42,252,000
---------- ----------
Total other liabilities 100,792,508 74,589,965
---------- ----------
Total liabilities 398,449,133 314,590,716
---------- ----------
Shareholders' Equity
Common stock 1,402,713 1,396,324
Surplus 7,085,722 6,826,669
Undivided profits 27,576,055 25,656,844
Accumulated other comprehensive income (3,042,506) 133,868
---------- ----------
Total capital 33,021,984 34,013,705
---------- ----------
Total liabilities & capital $431,471,117 $348,604,421
============ ============
SeeF-6
Notes to Interim Financial Statements.
F-2
THE FIDELITY DEPOSIT & DISCOUNT BANK
STATEMENT OF INCOME
Three Month and Nine Month Periods Ended September 30, 1999 and 1998
(unaudited)
Three Months Ended Nine Months Ended
September 30, September 30, September 30, September 30,
1999 1998 1999 1998
------------- ------------- ------------- --------------
Interest Income
Loans:
Taxable $5,555,212 $4,584,253 $15,385,460 $13,192,943
Nontaxable 182,189 77,431 464,291 232,310
Leases 40,975 33,145 127,275 90,675
Interest-bearing deposits with financial institutions 15,302 24,037 81,181 69,692
Investment securities:
US Treasury 0 151,319 204,705 452,659
US Government Agencies 1,413,274 678,884 3,237,504 2,093,077
States & Political Subdivisions (nontaxable) 290,690 248,400 886,496 753,576
Other Securities 62,610 23,356 141,224 60,999
Income federal funds sold 0 152,766 128,415 270,453
---------- ---------- ----------- -----------
Total interest income 7,560,252 5,973,591 20,656,550 17,216,384
---------- ---------- ----------- -----------
Interest expense
Certificates of deposit of $100,000 or more 938,401 710,322 2,504,471 2,132,321
Other Deposits 1,959,418 1,727,193 5,383,008 4,981,981
Securities sold under repurchase agreements 382,619 344,744 1,125,470 1,055,024
Other Borrowings 791,119 410,273 1,964,327 929,103
---------- ---------- ----------- -----------
Total interest expense 4,071,557 3,192,532 10,977,277 9,098,429
---------- ---------- ----------- -----------
Net interest income 3,488,695 2,781,059 9,679,274 8,117,955
Provision for loan losses 85,000 184,000 405,000 548,000
---------- ---------- ----------- -----------
Net interest income, after provision for loan losses 3,403,695 2,597,059 9,274,274 7,569,955
---------- ---------- ----------- -----------
Other income
Service charge on deposit accounts 190,920 209,414 536,443 533,515
Gain on sale of securities 1,400 0 1,400 11,815
Gain on sale of loans 9,482 37,026 68,993 111,210
Gain on sale of foreclosed assets held for sale 0 0 0 0
Other operating income 399,793 210,896 1,067,096 604,898
---------- ---------- ----------- -----------
Total other income 601,595 457,336 1,673,931 1,261,438
---------- ---------- ----------- -----------
Other expenses
Salaries and employee benefits 1,368,359 998,563 3,785,539 2,724,275
Occupancy and equipment 382,769 286,638 1,080,151 844,945
Shares Tax Expense 83,433 72,453 181,388 167,058
Loss on Sale of Securities 0 0 0 0
Loss on Sale of Loans 0 0 0 0
Loss on Disposed Assets 1,157 0 35,542 26,584
Other expenses 846,289 620,252 2,355,965 1,768,439
---------- ---------- ----------- -----------
Total other expenses 2,682,007 1,977,906 7,438,585 5,531,301
---------- ---------- ----------- -----------
Income before provision for income taxes 1,323,283 1,076,489 3,509,620 3,300,092
Provision for income taxes 303,770 270,300 784,900 833,850
---------- ---------- ----------- -----------
Net Income 1,019,513 806,189 2,724,720 2,466,242
========== ========== =========== ===========
Net income per weighted average share $1.14 $0.96 $3.04 $2.94
Diluted earnings per share $1.14 $0.96 $3.04 $2.94
See Notes to Interim Financial Statements.
F-3
THE FIDELITY DEPOSIT & DISCOUNT BANK
STATEMENT OF CASH FLOWS
For the Nine Months Ended September 30, 1999 and 1998
(unaudited)
1999 1998
------------ ------------
CASH FLOW FROM OPERATING ACTIVITIES:
Net Income $ 2,724,720 $ 2,466,242
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation 430,299 390,600
Amortization of securities (net of accretion) (103,809) (44,188)
Provision for loan loss and recoveries 405,000 548,000
Deferred Income Tax (16,800) (131,707)
Write-down of foreclosed assets held for sale 0 0
(Gain)/Loss Sale of Investment Securities (1,400) (11,815)
(Gain)/Loss on Sale of Loans (68,993) (111,210)
(Gain)/Loss on Sale of foreclosed assets held for sale 35,542 26,584
Income taxes accrued 784,900 833,850
Income taxes paid (725,500) (962,833)
(Increase)/decrease in Interest Receivable (1,515,133) (101,417)
Increase/(decrease) in accrued expenses 66,673 356,403
(Increase)/decrease in other assets (1,059,848) (667,555)
------------ ------------
Net cash provided by operating activities 955,652 2,590,954
------------ ------------
CASH FLOW FROM INVESTING ACTIVITIES:
Proceeds from maturity and call of held-to-maturity securities $ 0 $ 1,290,000
Purchase of held-to-maturity securities 0 (2,368,080)
Proceeds from sale of available-for-sale securities 201,400 1,849,435
Proceeds from maturity, call and paydown of
available-for-sale securities 22,687,019 23,059,475
Purchase of available-for-sale securities (55,509,440) (24,581,100)
(Increase)/decrease in Federal Funds Sold 6,500,000 (12,160,000)
Proceeds from sale of loans 9,738,225 11,160,469
(Increase)/decrease Loans & Leases (65,443,971) (35,950,265)
Purchase of Bank Premises and Equipment (2,663,416) (1,999,770)
Acquisition of foreclosed assets held for sale (420,583) 0
Proceeds from sale of foreclosed assets held for sale 165,718 249,247
------------ ------------
Net cash used in investing activities $(84,745,048) $(39,450,589)
------------ ------------
CASH FLOW FROM FINANCING ACTIVITIES:
Net increase(decrease) in non-int. bearing deposits $ 1,901,833 $ 5,222,907
Net increase(decrease) in interest bearing deposits 18,883,604 12,453,328
Net increase(decrease) in CD's $100,000 or more 36,870,437 5,334,383
Increase(decrease) in short term borrowings 21,076,471 118,817
Net Increase (decrease) in long term debt 5,000,000 15,000,000
Dividends paid (805,509) (754,760)
Proceeds from issuance of common stock 0 957,848
Proceeds from dividend reinvestment 265,442 232,694
------------ ------------
Net cash provided by financing activities $ 83,192,278 $ 38,565,217
------------ ------------
Net increase(decrease) in cash and due from banks $ (597,119) $ 1,705,582
Cash and cash equivalents at beginning of period 8,719,744 7,308,388
------------ ------------
Cash and cash equivalents at end of period $ 8,122,625 $ 9,013,970
============ ============
See Notes to Interim Financial Statements.
F-4
THE FIDELITY DEPOSIT & DISCOUNT BANK
STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
For the Nine Months Ended September 30, 1999 and 1998
(unaudited)
Accumulated
Capital Stock Other
---------------------- Undivided Comprehensive
Shares Amount Surplus Profits Income Total
------- ----------- ------------ ------------ ------------ -------------
Balance, Dec. 31, 1997 837,260 $ 1,308,218 $ 3,596,808 $ 23,293,701 $ 225,050 $ 28,423,777
------------
Net Income -- -- -- 2,466,242 2,466,242
Change in Net Unrealized
Available-for-sale Security Gains -- 225,401 225,401
------------
Comprehensive Income -- -- -- -- 2,691,643
------------
Cash Dividends (754,760) (754,760)
Two-for-one Stock Split -- -- -- -- -- --
Dividend Reinvestment 4,015 6,273 226,421 232,694
Issuance of Stock 16,042 25,066 932,782 -- -- 957,848
------------ ------------ ------------ ------------ ------------ ------------
Balance, September 30, 1998 857,317 $ 1,339,557 $ 4,756,011 $ 25,005,183 $ 450,451 $ 31,551,202
============ ============ ============ ============ ============ ============
Balance, December 31, 1998 893,647 $ 1,396,324 $ 6,826,669 $ 25,656,844 $ 133,868 $ 34,013,705
------------
Net Income -- -- -- 2,724,720 2,724,163
Change in Net Unrealized
Available-for-sale Security Gains -- -- -- -- (3,176,374) (3,176,374)
------------
Comprehensive Income (452,212)
------------
Cash Dividends (805,509) (805,509)
Issuance of Stock -- -- -- -- -- 0
Dividend Reinvestment 4,089 6,389 259,053 -- -- 265,442
------------ ------------ ------------ ------------ ------------ ------------
Balance, September 30, 1999 897,736 $ 1,402,713 $ 7,085,722 $ 27,576,055 ($ 3,042,506) $ 33,021,984
============ ============ ============ ============ ============ ============
See Notes to Interim Financial Statements.
F-5
NOTES TO INTERIM FINANCIAL STATEMENTS,
SEPTEMBER 30, 1999 (UNAUDITED)
The Fidelity Deposit and Discount Bank is a commercial bank charted by
the Commonwealth of Pennsylvania. Commencing operations in 1903, the Bank
provides a full range of traditional banking services and alternative financial
products to the Borough of Dunmore and the immediate surrounding communities.
Management is responsible for the fairness, integrity and objectivity
of the unaudited financial statements included in this proxy
statement/prospectus. The unaudited financial statements were prepared by
management in accordance with generally accepted accounting principles. In
meeting its responsibility for the financial statements, management depends on
the Bank's accounting systems and related internal controls. These systems and
controls are designed to provide reasonable assurance that the financial records
accurately reflect the transactions of the Bank, that Bank assets are
safeguarded and that financial statements present fairly the financial position
and results of operation of the Bank.
In the opinion of bank management, the balance sheets as of September
30, 1999 and December 31, 1998 and the related statements of income, changes in
financial position and changes in capital accounts for the nine month periods
ended September 30, 1999 and 1998 present fairly the financial position of the
Bank as of those dates and the results of its operations, changes in its
financial position and changes in its capital accounts for the period 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. There have been no retroactive adjustments during
this period.
These interim financials should be read in conjunction with the Bank's
audited financial statements for the year ended December 31, 1998 and the notes
included therein, as contained in the Bank's Form 10-K, filed with the FDIC on
March 31, 1999, and as contained in this proxy statement/prospectus. The results
of operations for interim periods are not necessarily indicative of the results
of operations to be expected for the entire year.
Basic earnings per share is computed by dividing net income by the
weighted average number of shares outstanding during the period (895,356 in 1999
and 839,493 in 1998).
Diluted earnings per share is calculated using the average shares
outstanding plus the hypothetical exercise of outstanding options (3,750), less
the hypothetical repurchase of shares at current market price ($69.50), using
the proceeds from the exercised options (3,750 x $62.00/$69.50 or 3,345 in
1999). No options were granted in 1998, so basic and diluted earnings were
identical.
Comprehensive Income Reporting was adopted as of January 1, 1998,
pursuant to SFAS No. 130. Accounting principles require that recognized revenue,
expenses, gains and losses be included in net income. Certain changes in assets
and liabilities, such as unrealized gains and losses on available- for-sale
securities, are reported as a separate component of the equity section of the
balance sheet. However, such items, along with net income, are components of
comprehensive income. The adoption of SFAS No. 130 had no effect on the Bank's
net income or shareholders' equity.
F-6Statements F-7
F-1
INDEPENDENT AUDITORS' REPORT
Board of Directors and Shareholders
Fidelity Deposit & Discount Bank
Dunmore, Pennsylvania:
We have audited the accompanying balance sheets of Fidelity Deposit & Discount
Bank as of December 31, 19981999 and 19971998 and the related statements of income,
changes in shareholders' equity and cash flows for each of the three years in
the period ended December 31, 1998.1999. These financial statements are the
responsibility of the Bank's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Fidelity Deposit & Discount
Bank as of December 31, 19981999 and 1997,1998, and the results of its operations and its
cash flows for each of the three years in the period ended December 31, 19981999 in
conformity with generally accepted accounting principles.
As discussed in Note 4 to the financial statements, the Bank adopted
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Investments and Hedging Activities," as of October 1, 1998.
PARENTE, RANDOLPH, ORLANDO,
CAREY & ASSOCIATESParente Randolph, P.C.
Wilkes-Barre, Pennsylvania
January 25, 1999
F-731, 2000
F-2
FIDELITY DEPOSIT & DISCOUNT BANK
BALANCE SHEET
DecemberDECEMBER 31, 1999 AND 1998 and 1997
- ---------------------------------------------------------------------------------------------------------------
1999 1998
1997
------------ ------------- ---------------------------------------------------------------------------------------------------------------
ASSETS:
Cash and due from banks $ 3,315,3066,415,519 $ 2,966,8423,315,306
Interest-bearing deposits with financial institutions 11,541,860 5,404,438 4,341,546
------------ ------------
Total cash and cash equivalents 17,957,379 8,719,744 7,308,388
Federal funds sold - 6,500,000 --
Available-for-sale securities 109,262,221 78,607,860 58,344,864
Held-to-maturity securities (fair value
$14,606,000 in 1997) -- 14,368,038
Loans and leases, net (allowance for loan losses of $3,172,375
and $3,007,713 in 1999 and 1998, respectively) 296,193,518 235,430,079 194,516,933
Loans available-for-sale (fair value $5,254,316 in
1999; $9,010,000 in 1998; $8,329,000 in 1997)1998) 5,254,316 8,858,157 8,202,404
Accrued interest receivable 3,262,362 2,404,480 2,374,320
Bank premises and equipment, net 9,506,308 6,449,141 4,137,459
Foreclosed assets held for sale 412,922 201,261 275,829
Other assets 5,361,991 1,433,699 724,207
------------ ------------
Total assets $447,211,017 $348,604,421 $290,252,442
============ ============
LIABILITIES:
Deposits:
Noninterest-bearing $ 33,449,99837,575,183 $ 25,373,40133,449,998
Certificates of deposit of $100,000 or more 66,642,656 49,435,718 47,343,471
Other interest-bearing deposits 190,483,126 157,115,035 145,308,138
------------ ------------
Total deposits 294,700,965 240,000,751 218,025,010
Accrued interest payable and other liabilities 2,829,770 2,932,666 2,451,204
Short-term borrowings 60,249,046 29,405,299 29,100,451
Long-term debt 57,305,000 42,252,000 12,252,000
------------ ------------
Total liabilities 415,084,781 314,590,716 261,828,665
------------ ------------
SHAREHOLDERS' EQUITY:
Capital stock authorized 1,000,000 shares with $1.5625 par value; issued
and outstanding, 893,647900,392 and 837,260893,647 shares
in 1999 and 1998, and 1997, respectively 1,406,863 1,396,324
1,308,218
Surplus 7,266,168 6,826,669 3,596,808
Undivided profits 28,126,918 25,656,844 23,293,701
Accumulated other comprehensive income (loss) (4,673,713) 133,868 225,050
------------ ------------
Total shareholders' equity 32,126,236 34,013,705 28,423,777
------------ ------------
Total liabilities and shareholders' equity $447,211,017 $348,604,421 $290,252,442
============ ============
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
F-8Statements
F-3
FIDELITY DEPOSIT & DISCOUNT BANK
STATEMENT OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 1997 AND 19961997
- -----------------------------------------------------------------------------------------------------------
1999 1998 1997
1996
---- ---- ----- -----------------------------------------------------------------------------------------------------------
INTEREST INCOME:
Loans:
Taxable 18,016,230 15,151,599 12,830,695$21,124,032 $18,016,230 $15,151,599
Nontaxable 662,857 307,265 248,111
255,377
Leases 262,452 125,227 86,496 58,357
Interest-bearing deposits with financial institutions 89,323 103,396 78,387 113,200
Investment securities:
U.S. Treasury 204,705 585,108 655,334 1,062,111
U.S. government agency and corporations 4,701,262 2,833,672 3,680,356 3,517,365
States and political subdivisions (nontaxable) 1,173,783 1,020,335 902,749
737,946
Other securities 219,256 86,333 68,217 62,995
Federal funds sold 128,415 393,806 166,364
474,141
---------- ---------- --------------------- ----------- -----------
Total interest income 28,566,085 23,471,372 21,037,613
19,112,187
---------- ---------- --------------------- ----------- -----------
INTEREST EXPENSE:
Certificates of deposit of $100,000 or more 3,558,826 2,823,061 2,329,777
2,144,117
Other deposits 7,299,315 6,730,882 6,219,283 5,963,786
Securities sold under repurchase agreements 1,519,054 1,396,244 1,350,892 1,002,832
Other short-term borrowings and long-term debt 2,973,266 1,335,896 721,007
751,501
Other 25,338 22,549 18,925
15,776
---------- ---------- --------------------- ----------- -----------
Total interest expense 15,375,799 12,308,632 10,639,884
9,878,012
---------- ---------- --------------------- ----------- -----------
NET INTEREST INCOME 13,190,286 11,162,740 10,397,729 9,234,175
PROVISION FOR LOAN LOSSES 530,000 646,000 622,800
338,000
---------- ---------- --------------------- ----------- -----------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 12,660,286 10,516,740 9,774,929
8,896,175
---------- ---------- --------------------- ----------- -----------
OTHER INCOME:
Service charges on deposit accounts 733,939 722,270 546,230 458,938
Gain on sale of:
Investment securities 1,400 109,940 123,611
6,953
Loans 196,813 160,740 3,124
27,563Loss on loans available for sale (145,847)
Fees and other service charges 1,349,476 851,864 585,960 385,931
Other operating income 92,006 57,920 41,676 42,721
Shares tax refund -- 2,869 65,000
---------- ---------- ----------44,545
----------- ----------- -----------
Total other income 2,227,787 1,902,734 1,303,470
987,106
---------- ---------- --------------------- ----------- -----------
OTHER EXPENSES:
Salaries and employee benefits 5,190,480 3,875,854 3,454,936 3,054,515
Premises and equipment 1,632,530 1,109,076 1,042,646 1,040,800
Shares tax expense 260,023 228,599 210,409 181,113
Federal Deposit Insurance Corporation assessment 29,200 26,235 26,418 2,000
Loss on sale of:
Foreclosed assets held for sale 71,413 26,584 -- ---
Bank premises and equipment --- - 11,983
--
Other 2,986,812 2,342,814 1,836,942
1,784,809
---------- ---------- --------------------- ----------- -----------
Total other expenses 10,170,458 7,609,162 6,583,334
6,063,237
---------- ---------- --------------------- ----------- -----------
INCOME BEFORE PROVISION FOR INCOME TAXES 4,717,615 4,810,312 4,495,065 3,820,044
PROVISION FOR INCOME TAXES 903,400 1,246,760 1,185,008
995,340
---------- ---------- --------------------- ----------- -----------
NET INCOME $ 3,814,215 $ 3,563,552 $ 3,310,057 $ 2,824,704
=========== =========== ===========
Per share data:
Net income $ 4.20 $ 3.97 $ 3.43$4.26 $4.20 $3.97
Diluted $4.25 $4.20 $3.97
Dividends $ 1.41 $ 1.28 $ 1.10$1.50 $1.40 $1.28
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
F-9
FIDELITY DEPOSIT & DISCOUNT BANK
STATEMENT OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
1998 1997 1996
---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 3,563,552 $ 3,310,057 $ 2,824,704
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation 488,354 491,767 467,230
Amortization of securities (net of accretion) (63,802) (21,075) 15,642
Provision of loan losses 646,000 622,800 338,000
Deferred income taxes 114,812 11,920 8,000
Gain on sale of investment securities (109,940) (123,611) (6,953)
Gain on sale of loans (160,740) (3,124) (27,563)
Loss on sale of foreclosed assets held for sale 26,584 -- --
Loss on sale of bank premises and equipment -- 11,983 --
Change in:
Accrued interest receivable (30,160) (158,443) (41,710)
Other assets (777,331) 82,806 48,063
Accrued interest payable and other liabilities 481,462 371,029 (101,276)
------------ ------------ ------------
Net cash provided by operating activities 4,178,791 4,596,109 3,524,137
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net decrease (increase) in federal funds sold (6,500,000) 3,850,000 20,000
Held-to-maturity securities:
Proceeds from maturities and calls 1,400,000 4,005,000 1,810,000
Purchases (2,368,080) (7,168,147) (4,198,658)
Available-for-sale securities:
Proceeds from sales 3,947,560 14,101,904 5,004,923
Proceeds from maturities, calls and paydowns 38,675,325 22,182,739 21,135,474
Purchases (47,514,176) (18,024,813) (40,401,186)
Proceeds from sale of loans available-for-sale 15,500,658 898,017 5,479,902
Net increase in loans and leases (57,744,631) (41,904,533) (22,290,715)
Acquisition of bank premises and equipment (2,800,036) (263,397) (610,241)
Improvements to foreclosed assets held for sale (8,146)
Proceeds from sale of foreclosed assets held for sale 245,944 -- --
------------ ------------ ------------
Net cash used in investing activities (57,165,582) (22,323,230) (34,050,501)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in noninterest-bearing deposits 8,076,597 2,331,621 2,314,719
Net increase (decrease) in certificates of deposit
of $100,000 or more 2,092,247 2,042,557 19,554,479
Net increase in other interest-bearing deposits 11,806,897 1,581,162 9,295,859
Net increase (decrease) in short-term borrowings 304,848 9,510,675 (1,313,756)
Increase (decrease) in long-term debt 30,000,000 2,252,000 (3,000,000)
Dividends paid, net of dividend reinvestment (823,357) (767,312) (679,014)
Proceeds from issuance of common stock 2,940,915 152,100 --
------------ ------------ ------------
Net cash provided by financing activities 54,398,147 17,102,803 26,172,287
------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 1,411,356 (624,318) (4,354,077)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 7,308,388 7,932,706 12,286,783
------------ ------------ ------------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 8,719,744 $ 7,308,388 $ 7,932,706
============ ============ ============
See Notes to Financial Statements.
F-10Statements
F-4
FIDELITY DEPOSIT & DISCOUNT BANK
STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 1997 AND 19961997
Accumulated
Capital Stock Other
---------------------- Undivided Comprehensive
Shares Amount Surplus Profits Income Total
-------- ---------- ---------- ----------- ------------- ------------ ------------------------------------------------------------------------------------------------------------------------------------
ACCUMULATED
OTHER
..CAPITAL STOCK.. UNDIVIDED COMPREHENSIVE
SHARES AMOUNT SURPLUS PROFITS (LOSS) INCOME TOTAL
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1995 411,210 $1,285,031 $2,944,898 $19,128,263 $433,513 $23,791,7051996 413,889 $ 1,293,402 $ 3,164,306 $21,046,174 $ (137,500) $25,366,382
-----------
Comprehensive income:
Net Income 2,824,704 2,824,704
Change in net unrealized holding
gains (losses) on available-for-
sale securities, net of
reclassification adjustment and
tax effects (571,013) (571,013)
-----------
Comprehensive Income 2,253,691
-----------
Dividends (906,793) (906,793)
Dividend reinvested 2,679 8,371 219,408 -- -- 227,779
------- ---------- ---------- ----------- --------- -----------
BALANCE, DECEMBER 31, 1996 413,889 $1,293,402 $3,164,306 $21,046,174 (137,500) 25,366,382
======= ========== ========== =========== ========= ===========
Comprehensive Income:
Net income 3,310,057 3,310,057
Change in net unrealized holding gains (losses)
on available-for-
saleavailable-for-sale securities, net of
reclassification adjustment and tax effects 362,550 362,550
-----------
Comprehensive Incomeincome 3,672,607
-----------
Issuance of Stockstock 1,690 5,281 146,819 152,100
Dividends (1,062,530) (1,062,530)
Dividends Reinvestedreinvested 4,754 9,535 285,683 295,218
Two-for-one stock split (Note 2) 416,927 -
------- ----------- ----------- ----------- ----------- -----------
BALANCE, DECEMBER 31, 1997 837,260 $1,308,218 $3,596,808 $23,293,701 ($225,050) $28,423,777
======= ========== ========== =========== ========= ===========1,308,218 3,596,808 23,293,701 225,050 28,423,777
-----------
Comprehensive Income:income:
Net income 3,563,552 3,563,552
Change in net unrealized holding gains (losses)
on available-for-
saleavailable-for-sale securities, net of
reclassification adjustment and tax effects (91,182) (91,182)
-----------
Comprehensive income 3,472,370
-----------
Issuance of stock 50,025 78,165 2,862,750 2,940,915
Dividends (1,200,409) (1,200,409)
Dividends reinvested 6,362 9,941 367,111 377,052
------- ---------- ---------- ----------- ------------------- ----------- ----------- -----------
BALANCE, DECEMBER 31, 1998 893,647 $1,396,324 $6,826,669 $25,656,844 $133,868 $34,013,7051,396,324 6,826,669 25,656,844 133,868 34,013,705
-----------
Comprehensive loss:
Net income 3,814,215 3,814,215
Change in net unrealized holding gains (losses)
on available-for-sale securities, net of
reclassification adjustment and tax effects (4,807,581) (4,807,581)
-----------
Comprehensive loss (993,366)
-----------
Dividends (1,344,141) (1,344,141)
Dividends reinvested 6,745 10,539 439,499 450,038
------- ----------- ----------- ----------- ----------- -----------
BALANCE, DECEMBER 31, 1999 900,392 $ 1,406,863 $ 7,266,168 $28,126,918 $(4,673,713) $32,126,236
======= ========== ========== =========== ==================== =========== =========== ===========
- ----------------------------------------------------------------
See Notes to Financial Statements.
F-11Statements
F-5
FIDELITY DEPOSIT & DISCOUNT BANK
STATEMENT OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
- --------------------------------------------------------------------------------------------------------------------
1999 1998 1997
- --------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 3,814,215 $ 3,563,552 $ 3,310,057
Adjustments to reconcile net income to net cash provided by
operating activities
Depreciation 762,865 488,354 491,767
Amortization of securities (net of accretion) (119,263) (63,802) (21,075)
Provision for loan losses 530,000 646,000 622,800
Deferred income taxes 258,291 114,812 11,920
Gain on sale of investment securities (1,400) (109,940) (123,611)
Gain on sale of loans (196,813) (160,740) (3,124)
Loss on sale of foreclosed assets held for sale 71,413 26,584 -
Loss on loans available for sale 145,847
Loss on sale of bank premises and equipment - - 11,983
Change in:
Accrued interest receivable (857,882) (30,160) (158,443)
Other assets (1,709,959) (777,331) 82,806
Accrued interest payable and other liabilities (102,896) 481,462 371,029
------------ ------------ ------------
Net cash provided by operating activities 2,594,418 4,178,791 4,596,109
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net decrease (increase) in federal funds sold 6,500,000 (6,500,000) 3,850,000
Held-to-maturity securities:
Proceeds from maturities and calls - 1,400,000 4,005,000
Purchases - (2,368,080) (7,168,147)
Available-for-sale securities:
Proceeds from sales 201,400 3,947,560 14,101,904
Proceeds from maturities, calls and paydowns 22,974,907 38,675,325 22,182,739
Purchases (57,409,856) (47,514,176) (18,024,813)
Proceeds from sale of loans available-for-sale 11,796,340 15,500,658 898,017
Net increase in loans and leases (73,501,527) (57,744,631) (41,904,533)
Acquisition of bank premises and equipment (3,820,032) (2,800,036) (263,397)
Improvements to foreclosed assets held for sale (33,239) (8,146)
Proceeds from sale of foreclosed assets held for sale 232,366 245,944 -
------------ ------------ ------------
Net cash used in investing activities (93,059,641) (57,165,582) (22,323,230)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in noninterest-bearing deposits 4,125,185 8,076,597 2,331,621
Net increase in certificates of deposit
of $100,000 or more 17,206,938 2,092,247 2,042,557
Net increase in other interest-bearing deposits 33,368,091 11,806,897 1,581,162
Net increase in short-term borrowings 243,747 304,848 9,510,675
Net increase in federal funds purchased 30,600,000
Increase in long-term debt 15,053,000 30,000,000 2,252,000
Dividends paid, net of dividend reinvestment (894,103) (823,357) (767,312)
Proceeds from issuance of common stock - 2,940,915 152,100
------------ ------------ ------------
Net cash provided by financing activities 99,702,858 54,398,147 17,102,803
------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 9,237,635 1,411,356 (624,318)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 8,719,744 7,308,388 7,932,706
------------ ------------ ------------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 17,957,379 $ 8,719,744 $ 7,308,388
============ ============ ============
- --------------------------------------------------------------------------------
See Notes to Financial Statements
F-6
FIDELITY DEPOSIT & DISCOUNT BANK
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1. NATURE OF OPERATIONS AND SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS
The Bank provides a variety of financial services to individuals and
corporate customers through its seven offices in Lackawanna and Luzerne Counties, Pennsylvania.
This region has a diversified and fairly stable economy. The Bank's
primary deposit products are savings accounts, NOW accounts, money
market deposit accounts, certificates of deposit and checking accounts.
Its primary lending products are single-family residential loans,
secured consumer loans, and secured loans to small businesses. In addition to
these traditional banking services, the Bank also provides annuities,
mutual funds and trust services.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles 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 reporting period. Actual results could differ
from those estimates.
Material estimates that are particularly susceptible to significant
change relate to the determination for the allowance for losses on
loans and the valuation of real estate acquired in connection with
foreclosures or in satisfaction of loans. In connection with the
determination of allowances for losses on loans and foreclosed real
estate, management obtains independent appraisals for significant
properties.
A majoritysignificant portion of the Bank's loan portfolio consists of
single-family residential loans in its market area. Although the Bank
has a diversified loan portfolio, a substantial portion of its debtor's
ability to honor their contracts is dependent on the economic sector in
which the Bank operates.
F-7
FIDELITY DEPOSIT & DISCOUNT BANK
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
While management uses available information to recognize losses on
loans and foreclosed assets, future additions to the allowances may be
necessary based on changes in local economic conditions. In addition,
regulatory agencies, as an integral part of their examination process,
periodically review the Bank's allowances for loan losses and
foreclosed assets. Such agencies may require the Bank to recognize
additions to the allowances based on their judgments about information
available to them at the time of their examination. Because of these
factors, it is reasonably possible that the allowances for loan losses
and foreclosed assets may change materially in the near future.
HELD-TO-MATURITY SECURITIES
Debt securities for which the Bank has the positive intent and ability
to hold to maturity are reported at cost, adjusted for premiums and
discounts that are recognized in interest income over the period to
maturity.
F-12
TRADING SECURITIES
Debt and equity securities held principally for resale in the near term
are recorded at their fair values. Unrealized gains and losses are
included in other income. The Bank did not have any investment
securities held for trading purposes during 1998, 1997 or 1996.
AVAILABLE-FOR-SALE SECURITIES
Available-for-sale securities consist of debt and equity securities not
classified as either held-to-maturity securities or trading securities
and are reported at fair value. Unrealized holding gains and losses,
net of deferred income taxes, on available-for-sale securities are
reported as a net amount in a separate component of shareholders'
equity until realized. These net unrealized holding gains and losses
are the sole component of accumulated other comprehensive income
(loss).
Loans Held For Sale
Mortgage loans originated and intended for sale in the secondary market
are carried at the lower of cost or estimated market value in the
aggregate. Net unrealized losses are recognized through a valuation
allowance by charges to income.
F-8
FIDELITY DEPOSIT & DISCOUNT BANK
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
LOANS
Loans that management has the intent and ability to hold for the
foreseeable future or until maturity or payoff are stated at face
value, net of unearned discount, unamortized loan fees and costs and
the allowance for loan losses. Interest on residential real estate
loans is recorded on an amortized schedule. Commercial loan interest is
accrued on the principal balance on an actual day basis. Interest on
consumer loans is determined using the actuarial method or the simple
interest method.
The accrual of interest on impaired loans is discontinued when, in the
opinion of management, there is an indication that the borrower may be
unable to meet payments as they become due. Any payments received on
impaired loans are applied, first to the outstanding loan amounts, then
to the recovery of any charged-off loan amounts. Any excess is treated
as a recovery of lost interest.
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is established through a provision for
loan losses. The allowance represents an amount which, in management's
judgment, will be adequate to absorb probable losses on existing loans
and leases that may become uncollectible. 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 changes in the nature and volume of the
loan portfolio, current economic conditions that may affect the
borrower's ability to pay, overall portfolio quality and review of
specific impaired loans. Loans considered uncollectible are charged to
the allowance. Recoveries on loans previously charged off are added to
the allowance.
A loan is considered impaired when, based on current information and
events, it is probable that the Bank will be unable to collect the
scheduled payments in accordance to the contractual terms of the loan.
Factors considered in determining impairment include payment status,
collateral value, and the probability of collecting payments when due.
The significance of payment delays and/or shortfalls, is determined on
a case by case basis. All circumstances surrounding the loan are taken
into account. Such factors include the length of the delinquency, the
underlying reasons and the borrower's prior payment record. Impairment
is measured on all loans on a loan by loan basis. The Bank does not
group homogeneous loans collectively for the purpose of determining
impairment.
LEASES
Financing of equipment and automobiles are provided to customers under
lease arrangements accounted for as direct financing leases. Income
earned is based on a constant periodic return on the net investment in
the lease.
F-13
LOAN FEES
Nonrefundable loan origination fees and certain direct loan origination
costs are recognized over the life of the related loans as an
adjustment of yield. The unamortized balance of these fees and costs
are included as part of the loan balance to which it relates.
F-9
FIDELITY DEPOSIT & DISCOUNT BANK
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
BANK PREMISES AND EQUIPMENT
Bank premises and equipment are stated at cost less accumulated
depreciation. Depreciation is computed on the straight-line and
accelerated methods over the estimated useful lives of the assets.
LOAN SERVICING AND LOAN SERVICING RIGHTS
The Bank services real estate loans for investors in the secondary
mortgage market, which are not included in the balance sheet. The cost
of mortgage servicing rights is amortized in proportion to, and over
the period of, estimated net servicing revenues. For purposes of
measuring impairment, the rights are stratified based on the present
dominant risk characteristics of the underlying loans, stated term of
the loan and interest rate. The amount of impairment recognized is the
amount by which the capitalized mortgage servicing rights for a stratum
exceed their fair value. Fair values are estimated using discounted
cash flows based on a current market interest rate.
FORECLOSED ASSETS HELD FOR SALE
Foreclosed assets held for sale are carried at the lower of carrying
amount or fair value less cost to sell. Losses from the acquisition of
property in full and partial satisfaction of debt are treated as credit
losses. Routine holding costs and subsequent declines in value are
included in other operating expenses.
TRUST FEES
Trust fees are recorded on the cash basis which is not materially
different from the accrual basis.
ADVERTISING COSTS
Advertising costs are charged to expense as incurred and were $ 403,000
in 1999 and $288,700 in 1998.
F-10
FIDELITY DEPOSIT & DISCOUNT BANK
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
FAIR VALUE OF FINANCIAL INSTRUMENTS
Cash and short-term instruments: The carrying amounts of cash and
short-term instruments approximate their fair value.
Available-for-sale and held-to-maturity securities: Fair values for
securities are based on bid prices received from securities dealers.
Restricted equity securities are carried at cost.
Loans receivable: The fair value of all loans is estimated by the net
present value of the future expected cash flows.
Loans available for sale: For loans available for sale, the fair value
is estimated using rates currently offer for similar borrowings and are
stated at the lower of cost or market.
Deposit liabilities: The fair value of demand deposits, NOW accounts,
savings accounts, and money market deposits is estimated by the net
present value of the future expected cash flows. For certificates of
deposit, the discount rates used reflect the Bank's current market
pricing. The discount rates used for nonmaturity deposits are the
current book rate of the deposits.
Short-term borrowings: For short-term borrowings, the fair value is
estimated using the rates currently offered for similar borrowings.
Long-term debt: For other borrowed funds, the fair value is estimated
using the rates currently offered for similar borrowings.
Accrued interest: The carrying amounts of accrued interest approximate
their fair values.
Off-balance-sheet instruments: Commitments to extend credit are
generally short term and are priced to market. The rates on standby
letters of credit are priced on prime. Therefore, the estimated fair
value of these financial instruments is face value.
F-14F-11
EARNINGS PER SHARE
Earnings per share (EPS) is computed using the weighted average number of
shares outstanding during the year. The weighted average number of shares
was 848,554, 832,994, and 824,450 for the years ended December 31, 1998,
1997 and 1996, respectively. The Bank's basic and diluted earnings per
share are the same since there are no dilutive shares of potential common
stock outstanding.FIDELITY DEPOSIT & DISCOUNT BANK
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
INCOME TAXES
Deferred tax assets and liabilities are reflected at currently enacted
income tax rates applicable to the period in which the deferred tax
assets or liabilities are expected to be realized or settled. As
changes in tax laws or rates are enacted, deferred tax assets and
liabilities are adjusted through the provision for income taxes.
CASH FLOWS
For purposes of reporting cash flows, cash and cash equivalents
includes cash on hand and amounts due from banks.
For the years ended December 31, 1999, 1998, 1997, and 1996,1997, the Bank paid
interest in cash for interest bearingon interest-bearing liabilities of $15,272,903,
$11,827,170 $10,299,735 and $9,979,287,$10,299,735, respectively. For the years ended December
31, 1999, 1998, 1997, and 1996,1997, the Bank paid cash for income taxes of
$725,500, $1,241,283 $1,068,646 and $995,340,$1,068,646, respectively.
Noncash investing activities related to the acquisition of foreclosed
assets held for sale amounted to $482,201, $189,814 and $275,829 in
1999, 1998, and $77,309 in 1998,
1997, and 1996, respectively. Noncash investing activities also
included transferring $3,603,841, $655,753 $6,136,340 and $5,618,349$6,136,340 from loans to
loans available-for-sale in 1999, 1998 and 1997, and 1996, respectively.
F-12
FIDELITY DEPOSIT & DISCOUNT BANK
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
OTHER COMPREHENSIVE (LOSS) INCOME
The Bank adopted SFAS No. 130, "Reporting Comprehensive Income" as of
January 1, 1998. Accounting principles require that recognized revenue,
expenses, gains and losses be included in net income. Although certain
changes in assets and liabilities, such as unrealized gains and losses on
available for sale securities, are reported as a separate component of the
equity section of the balance sheet, such items, along with net income, are
components of comprehensive income. The adoption of SFAS No. 130 had no
effect on the Bank's net income or shareholder's equity.
F-15
The components of other comprehensive (loss) income and related tax
effects are as follows:
Years Ended December 31,
1998 1997 1996
(In thousands)
YEARS ENDED DECEMBER 31,
------------------------------------
1999 1998 1997
---- ---- ----
Unrealized holding (losses) gains on
available
for saleavailable-for-sale securities $(7,282,815) $ (28,215) $549,318 $ 865,171549,318
Less reclassification adjustment for gains
realized in income (1,400) (109,940) -
----------- --------- --------
---------
Net unrealized (losses) gains (7,284,215) (138,155) 549,318
865,171
Tax effect 2,476,634 46,973 (186,768)
(294,158)----------- --------- -------- ---------
Net of tax amount $(4,807,581) $ (91,182) $362,550 $(571,013)$ 362,550
=========== ========= ======== =========
2. STOCK SPLIT
On February 26, 1997, the Bank's Board of Directors authorized a
two-for-one stock split and increased the authorized number of shares from
500,000 to 1,000,000 and decreased the par value of each share from $3.125
to $1.5625. All references in the accompanying financial statements to per
share amounts for 1997 and 1996 have been restated to reflect the stock
split.
3. RESTRICTED CASH
The Bank is required to maintain average reserve balances with the Federal
Reserve Bank based on a percentage of deposits. The average amounts of
those reserve balances for the years ended December 31, 1999 and 1998 were
$2,466,000 and 1997 were
$1,123,000, and $924,000, respectively.
Deposits with any one financial institution are insured up to $100,000.
The Bank maintains cash and cash equivalents with certain other financial
institutions in excess of the insured amount.
4. DEBT AND EQUITYF-13
FIDELITY DEPOSIT & DISCOUNT BANK
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
3. INVESTMENT SECURITIES
Amortized cost and fair value of investment securities at December 31,
19981999 and 1997,1998, are as follows (in thousands):
1997
--------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized
Cost Gains Losses Fair Value
--------- ---------- ---------- ----------.............................1999..................................
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
---- ----- ------ -----
Available-for-sale securities:
U.S. government agencies and
corporations $39,697$ 79,293 $5,945 $73,348
U.S. treasury securities
Obligations of states and political
subdivisions 23,450 $84 977 22,557
Mortgage-backed securities 8,017 2 332 7,687
-------- ---- ------ -------
Total debt securities 110,760 86 7,254 103,592
Equity securities:
Restricted 5,343 - - 5,343
Other 241 130 44 327
-------- ---- ------ --------
Total $116,344 $216 $7,298 $109,262
======== ==== ====== ========
.............................1998..................................
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
---- ----- ------ -----