As filed with the Securities and Exchange Commission on January 4, 2000
Registration No. 333-90273
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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PRE-EFFECTIVE AMENDMENT NO. 1
TO
FORM S-4
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
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FIDELITY D & D BANCORP, INC.
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(Exact name of Registrant as specified in its charter)
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Pennsylvania 6712 23-3017653
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(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
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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
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(Address, including ZIP Code, and telephone (Name, address, including ZIP Code, and
number, including area code, of registrant's telephone number, including area
principal executive offices) code, of agent for service)
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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
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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) Offering Price(1) Fee(2)
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Common Stock, without
par value 1,901,472 shares $ 18.39 $34,968,070.08 $9,722
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(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 $36.78. The 1,901,472 shares include 100,000
shares to be reserved for issuance under the bank's Independent Directors
Stock Option Plan and Stock Incentive Plan, which Registrant will assume.
(2) Fee paid prior to original filing on November 3, 1999.
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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 1,901,472 Shares of Common Stock
THE FIDELITY DEPOSIT AND DISCOUNT BANK
Proxy Statement
This document is a prospectus of Fidelity D & D Bancorp, Inc., a
Pennsylvania business corporation and the proposed holding company for The
Fidelity Deposit and Discount Bank. Fidelity D & D Bancorp proposes to issue
approximately 1,801,472 shares 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 ____, 2000, at ______ ___.m., Eastern Standard Time. 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 and the automatic
exchange of each whole share of common stock of the bank for 2 shares of common
stock of the holding company. The proposed reorganization 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."
The proposed reorganization involves elements of risk, including certain
anti-takeover strategies, which are described under "Risk Factors" beginning on
page 8.
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. 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 ____, 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.
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TABLE OF CONTENTS
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SUMMARY ............................................................................................1
Basic Information................................................................................1
Address/Telephone Number................................................................1
Type of Organization/Description of Business............................................1
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
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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...............................................................22
Time and Place of Special Meeting...............................................................22
Purpose of the Special Meeting..................................................................22
Voting Rights, Quorum and Vote Required.........................................................22
Solicitation of Proxies.........................................................................23
Voting by Proxy and Revocation of Proxies.......................................................23
Information about Beneficial Ownership of the Bank's Common Stock by
Significant Shareholders, Directors and Executive Officers......................................24
INFORMATION ABOUT THE PROPOSED REORGANIZATION.......................................................27
Description of Reorganization Procedure.........................................................27
Amendment or Termination of the Plan of Reorganization and Plan of Merger.......................27
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Exchange of Stock, 2-for-1 Exchange Ratio.......................................................28
Stock Options and Stock Option Plans............................................................28
Dividend Reinvestment Plan......................................................................29
Exchange of Stock Certificates..................................................................29
Failure to Surrender Stock Certificates.........................................................29
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......................................................................33
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.....................................................................35
Material Conditions.............................................................................35
Closing Date....................................................................................37
Tax Consequences................................................................................37
Accounting Treatment............................................................................38
Trading and Resale of Holding Company Common Stock..............................................38
DESCRIPTION OF THE HOLDING COMPANY..................................................................40
Organization and Description of Business........................................................40
Properties......................................................................................40
Management......................................................................................40
Executive and Director Compensation.............................................................41
Information about Beneficial Ownership of Significant Shareholders,
Directors and Executive Officers................................................................41
Certain Relationships and Related Transactions..................................................41
Directors' and Officers' Indemnification and Limits on Liability................................41
Supervision and Regulation of the Holding Company...............................................42
The Securities Act of 1933 - The Offer and Sale 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
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Restrictions on Extensions of Credit by Banks 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 .......................................................................................49
Description of Business.........................................................................49
Properties......................................................................................52
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 Needs 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.......................................................................................58
Principal Officers..............................................................................59
Executive Compensation..........................................................................59
Stock Option Awards.............................................................................60
Compensation of Directors.......................................................................61
Certain Relationships between Officer and Directors and Certain Transactions
between Officer and Directors and the Bank......................................................61
Family Relationships...................................................................61
Indebtedness of Management.............................................................61
FINANCIAL INFORMATION ABOUT THE REORGANIZATION......................................................62
Capitalization..................................................................................62
Other Financial Information.....................................................................64
DESCRIPTION OF THE BANK'S CAPITAL SECURITIES........................................................65
Common Stock....................................................................................65
Voting Rights..........................................................................65
Preemptive Rights......................................................................65
Liquidation............................................................................65
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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....................................................................67
Stock Option Plans..............................................................................67
1998 Independent Directors Stock Option Plan...........................................67
1998 Stock Incentive Plan..............................................................69
Dividend Reinvestment Plan......................................................................71
DESCRIPTION OF THE HOLDING COMPANY'S CAPITAL SECURITIES.............................................72
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.............................................................73
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..............................................................................74
Issuance of Additional Securities...............................................................74
Legal Opinion...................................................................................74
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...................................77
Anti-takeover Provisions Applicable to Registered Corporations..................................77
COMPARISON OF SHAREHOLDER RIGHTS....................................................................82
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATION............................................................................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.......................................................86
Management's Discussion and Analysis of Financial Condition
and Results of Operation as of September 30, 1999..............................................105
INDEPENDENT AUDITORS...............................................................................112
SHAREHOLDER PROPOSALS..............................................................................112
OTHER MATTERS......................................................................................112
Where You Can Find More Information................................................................113
The Holding Company's Registration Statement...................................................113
Prior Annual Reports Sent to Shareholders and Information Filed with the FDIC..................113
Periodic Reports and Information Filed with the SEC Following the Reorganization...............114
INDEX TO FINANCIAL STATEMENTS......................................................................F-1
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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
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Anti-Takeover Provisions
Fidelity D & D Bancorp, Inc.'s articles of incorporation and by-laws
include certain provisions that may be considered "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 a provision that provides for substantial authorized but unissued
capital stock, including both common stock and preferred stock,
o a provision that denies shareholders the right to cumulate their votes
in the election of directors,
o a provision that establishes criteria to be applied by the board of
directors in evaluating an acquisition proposal,
o a 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.
o the absence of a provision for shareholders' preemptive rights to
subscribe to purchase additional shares of stock on a pro rata basis,
and
o a supermajority provision that requires greater than a majority vote to
amend certain 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 a provision that establishes a classified board of directors, and
o a 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 as 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" and "Description of the Holding Company's Capital Securities --
Anti-Takeover Provisions in Articles and By-laws, Anti-Takeover Provisions
Applicable to Registered Corporations."
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SUMMARY
Questions and Answers
The following questions and answers are designed to help you understand
the reorganization proposal. These questions and answers and the rest of the
summary only highlight information in the proxy statement/prospectus. The
remainder of the proxy statement/prospectus and attached exhibits contain more
detailed information. We urge you to read the entire proxy statement/prospectus
and exhibits to fully understand the reorganization.
Basic 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 Fidelity D & D Bancorp and 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 directors of the bank serve
as the holding company's directors. The holding company has no operating
history.
The bank is a Pennsylvania-chartered bank and trust company. The bank
engages in a full service commercial and consumer banking business, including:
o the acceptance of time and demand deposits;
o the making of secured and unsecured commercial and consumer loans; and
o the offering of trust services.
The bank's primary service area is located in Lackawanna and Luzerne Counties,
Pennsylvania.
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Information about the Special Meeting 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 approve 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?
In our opinion, the reorganization of the bank into a holding company
structure 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.
What will happen to my stock?
Upon the completion of the Plan of Reorganization and Plan of Merger, all
shareholders of the bank, except those who exercise dissenting shareholders'
rights, will become shareholders of Fidelity D & D Bancorp and will 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. 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, the fair market value of their fractional interests in cash.
How will the 2-for-1 exchange affect the value of my stock?
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
will 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. 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
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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 stock 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 be 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
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.
Will the management of the bank change after the reorganization?
The management of the bank will not change as a result of the
reorganization. The 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. 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 happen to the bank's dividend reinvestment plan?
The bank's dividend reinvestment plan will terminate upon completion 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?
5
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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?
The proposed transaction will create certain new risks for shareholders
resulting from "anti-takeover" strategies 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 included a substantial premium
over the market price of the holding company's common stock. These provisions
may also assist 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 of the holding company are unique to the holding
company and represent changes from the bank's articles of incorporation and
by-laws:
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 the elimination of cumulative voting in the election of directors, and
o the requirement that holders of at least 75% of the outstanding shares
entitled to vote approve any merger 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% of the holders of outstanding shares entitled to
vote.)
6
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In addition 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 price of the common
stock.
Additionally, investment in the common stock of the holding company
involves a degree of risk, similar to the risk of investment in the common
stock of the bank. The FDIC will not insure investments in the common stock 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?
You will be entitled to receive cash payment of the fair value of your
shares if the reorganization is completed if you:
o do not vote in favor of the Plan of Reorganization and Plan of Merger;
and
o if you comply 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 meeting will not perfect a shareholder's
dissenter's rights. If the reorganization is approved, the bank will then mail a
further notice to all dissenters who gave due notice and who did not vote in
favor of the reorganization. This further notice will provide instructions on
how to proceed further.
7
<PAGE>
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 to the reorganization, and
o risks that apply to the 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
company
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" 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 these anti-takeover strategies, which will help
the holding company's board of directors to stop takeover attempts it does not
favor. These anti-takeover defenses constitute a risk to shareholders for the
following reasons:
o Shareholders 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 offered a substantial premium over the market price
of the holding company's common stock or if you were
dissatisfied with the current board of directors.
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 for his or her shares.
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.
8
<PAGE>
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:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
Anti-Takeover Provision Anti-Takeover Effect Risks to Shareholders
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
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).
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
9
<PAGE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
Anti-Takeover Provision Anti-Takeover Effect Risks to Shareholders
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
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.
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
10
<PAGE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
Anti-Takeover Provision Anti-Takeover Effect Risks to Shareholders
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
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.
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
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
<PAGE>
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.
Under the Business Corporation Law, certain strong anti-takeover provisions
are available to corporations that have their securities registered with the SEC
under Section 12 of the Securities Exchange Act of 1934. The holding company
will be required to register its stock 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. The 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."
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. 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 stock 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.
Shareholders 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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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.
The directors, officers and substantial investors may have sufficient
beneficial ownership of the common stock to control the holding company. As of
December ____, 1999, the directors and officers of the bank owned 19.67% 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 Beneficial Owners of the Bank's Common Stock."
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. This effect may be even more
significant for the holding company because of its anti-takeover strategies
designed to assist management in retaining control.
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
<PAGE>
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 liquid 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's common stock is not 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. This will also be the
case for the holding company's common stock. The holding company does not
presently intend to apply to the National Association of Securities Dealers to
have its common stock listed for trading 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, we cannot assure that a more liquid market for the
common stock will develop.
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.
The "Year 2000 Problem" is the result of computer programs having been
written using two digits rather than four to define the applicable year. Any 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.
Because of the interdependence of businesses, public utilities and other
entities, and the possible widespread nature of the Year 2000 problem, its
extent is difficult to determine. 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 bank is subject to the regulation and oversight of the FDIC,
whose oversight includes the provision of specific timetables, programs and
guidance regarding Year 2000 issues. Regulatory examination of the bank's Year
2000 readiness is conducted on a quarterly basis.
The worst case scenario for the bank is that the Year 2000 problem could
result in an inability to operate the bank using any computer-related systems,
services, or products for an indefinite period, as well as a loss of business
from customers affected by the Year 2000 problem. Many calculations which rely
18
<PAGE>
on date-sensitive information, such as interest and payment calculations, could
become unreliable or inoperable, and the bank could lose the ability 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.
Although we have addressed the issue of our Year 2000 readiness and will
continue to assess the situation, we cannot assure you that we have successfully
identified or resolved all year 2000 problems which may affect 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."
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.
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 forward-looking statements we make in this document are inherently
uncertain.
This proxy statement/prospectus contains forward-looking statements
including statements regarding intent, belief 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 occurs or if underlying
assumptions prove incorrect, actual results, performance or achievements in 1999
and beyond could differ materially from those stated.
19
<PAGE>
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.
<TABLE>
<CAPTION>
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
------------ ------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
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
</TABLE>
20
<PAGE>
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 Bank 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
<PAGE>
INFORMATION ABOUT THE SPECIAL MEETING
Time and Place of Special 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 Special Meeting of Shareholders
of the bank and any adjournment of the meeting. The special meeting will be held
at the main office of The Fidelity Deposit and Discount Bank, Blakely and
Drinker Streets, Dunmore, Pennsylvania 18512, on __________, January ____, 2000,
at ______ ___.m., Eastern Standard Time.
Purpose of the Special Meeting
At the special meeting, the board of directors of the bank will request
shareholders:
o to consider and act upon a proposal to approve and adopt the Plan of
Reorganization and related Plan of Merger dated __________, 1999,
providing for
o the reorganization of the 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 banking institution and subsidiary of
Fidelity D & D Bancorp, Inc.;
o and the exchange of each share of common stock of the bank for 2
shares of common stock of Fidelity D & D Bancorp, Inc.;
o to 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 Plan of Reorganization and Plan of Merger; and
o to transact any other business that may properly come before the special
meeting and any adjournment of the meeting.
Voting Rights, Quorum and Vote Required
The board of directors of the bank has fixed the close of business on
December ___, 1999, as the record date for the determination of shareholders of
the bank entitled to vote at the special meeting. On the record date, the bank
had outstanding approximately _________ shares of common stock, par value
$1.5625 per share, the only authorized class of stock, which was held by
approximately _______ shareholders. Each outstanding share of common stock
entitles the record holder to one vote.
Under Pennsylvania law and the by-laws of the bank, the presence of a
quorum is required for each matter to be acted upon at the special meeting.
Holders of a majority interest of all outstanding common stock must be present
at the meeting, either in person or by proxy, to
22
<PAGE>
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" will also be counted in determining the presence of a quorum
for the particular matter. "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 are present.
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 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 for any reasons the board of directors of the bank believes additional
time should be allowed to obtain proxies, the Board may adjourn the meeting to
another place and time with a vote of a majority of shares present at the
meeting.
Solicitation of Proxies
The Bank's board of directors is sending this proxy statement and the
enclosed proxy form to shareholders of the bank on or about January ____, 2000.
In connection with the solicitation of proxies, the bank will:
o bear the cost of soliciting proxies,
o reimburse brokerage firms and other custodians, nominees and fiduciaries
for their reasonable expenses, and
o may, if the directors so decide, solicit proxies personally or by
telephone, telegraph, facsimile transmission or electronic mail.
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 special 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 Plan of Reorganization and Plan of
Merger, and
o FOR 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
<PAGE>
The proxy holders will not vote any proxy that withholds authority or that
is voted against the merger 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 special 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 by 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 by delivering a properly executed proxy bearing a later date to John F.
Glinsky, Jr., Secretary of the bank; or
o by voting in person after giving notice to John F. Glinsky, Jr.,
Secretary of the bank.
Attendance by a shareholder at the special meeting will not itself revoke
the proxy.
Information about Beneficial Ownership of the Bank's Common Stock by Significant
Shareholders, Directors and Executive Officers
As of December _____, 1999, 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" owner.
The following table provides information, as of December _____, 1999, with
respect to the following beneficial owners of the bank's common stock:
o each executive officer of the bank,
o each director of the bank, and
o all 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 owned by or for the person's spouse, minor children or any other
relative sharing the person's home;
o of which the person shares voting power, which includes the power to
vote or to direct the voting of the stock; and
24
<PAGE>
o of 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, will be considered to own the shares, if the acquisition
of shares is either direct or indirect as a beneficial owner.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
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
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Samuel C. Cali 26,756 (2) 2.980%
Director
- ----------------------------------------------------------------------------------------------------------
Michael F. Marranca 25,159 (3) 2.802%
President and Chief Executive
Officer,
Director
- ----------------------------------------------------------------------------------------------------------
Herbert M. McDonald 44,502 (4) 4.957%
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 19,342 (10) 2.154%
Director
- ----------------------------------------------------------------------------------------------------------
David L. Tressler, Sr. 2,547 (11) .283%
Director
- ----------------------------------------------------------------------------------------------------------
Joseph E. Quinnan 1,276 (12) .142%
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 Directors, 5 Officers, 14 persons
in total)
- ----------------------------------------------------------------------------------------------------------
</TABLE>
25
<PAGE>
(1) Information furnished by the directors and the bank. Fractional shares
are rounded to the nearest whole number.
(2) Figure includes 500 shares held solely by Mr. Cali, 24,261 shares held
in the S.C. Cali Revocable Trust, 1,745 shares held in Jane Cali's
Revocable Trust, and 250 exercisable stock options.
(3) Figure includes 7,906 shares held solely by Mr. Marranca, 693 shares
held solely by Mr. Marranca in his IRA, 14,439 shares held by
Mr. Marranca's spouse, 1,771 shares held by Mr. Marranca's spouse and
grandchildren and 350 exercisable stock options.
(4) Figure includes 36,824 shares held solely by Dr. McDonald, 4,972 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 16,378 shares held solely by Mr. McDonald, 2,303 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, 447 shares held
in trust by Mr. Tressler's spouse and child, 1,698 shares held jointly
by Mr. Tressler in trust with his son, 102 shares held jointly by Mr.
Tressler in trust with his daughter, 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 161 shares held jointly by Mr. Messett and his spouse,
45 shares held jointly by Mr. Messett with his spouse and children, and
250 exercisable options.
(15) Figure includes 55 shares held jointly by Mr. Farrell with his spouse,
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.
In terms of the number of shares, as of December _____, 1999, the affirmative
votes of the holders of at least approximately 598,491 shares will result in the
approval of the proposed reorganization. The officers and directors, as a group,
own 177,214 shares, or approximately 29.6% of the shares representing
affirmative votes needed to approve the reorganization.
26
<PAGE>
INFORMATION ABOUT THE PROPOSED REORGANIZATION
Description of Reorganization Procedure
We are asking that you approve a Plan of Reorganization and related Plan of
Merger that would result in the reorganization of the bank as a subsidiary of
Fidelity D & D Bancorp, Inc. 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 banking institution. Neither the holding company nor the
interim bank will conduct any business prior to the reorganization. On December
_____, 1999, the boards of directors of the bank, the interim bank and Fidelity
D & D Bancorp unanimously approved the Plan of Reorganization and Plan of
Merger.
Next, under the terms of the Plan of Reorganization and Plan of 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, the bank's shareholders will have the right to receive
cash in the amount of the appraised value of their 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.
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 Merger
The boards of directors of the bank, the holding company and the interim
bank may amend the Plan of Reorganization and Plan of Merger 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 board of directors of the bank, the holding company and the interim
bank may terminate the Plan of Reorganization and Plan of Merger by mutual
27
<PAGE>
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 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 become 2 shares of common
stock, without par value, of the holding company. We anticipate that immediately
after the reorganization, the common stock of the holding company will have a
market value of 1/2 that 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.
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
<PAGE>
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 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 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-interest 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.
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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 Reorganization
In our opinion, the reorganization of the bank into a holding company
structure will provide greater flexibility in:
o financing,
o engaging in non-banking activities,
o protecting against an unfriendly takeover,
o responding to changes in law, and
o acquiring other banks.
Financing. The Bank 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 that the holding company will issue
approximately 1,801,472 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 approximately 8,198,528 authorized but unissued shares of
common stock and the full 5 million unissued shares of preferred stock.
Also upon the reorganization, the holding company will assume 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.
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We anticipate that the holding company will implement 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 shares 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.
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. 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 additional dividends in the form of stock splits,
o raise capital,
o provide equity incentives to employees, officers or directors,
o establish strategic relationships with other companies,
o expand the holding company's business through the acquisition of
other businesses, and
o to oppose 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.
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."
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<PAGE>
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 which the subsidiary passes through
to the holders of the trust preferred stock.
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 the
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.
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. See
section entitled "Description of the Holding Company - Permitted Activities."
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
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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."
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, the Gramm-Leach-Bliley Financial
Services Modernization Act recently became law on November 12, 1999. The law
repeals provisions in the Banking Act of 1933 (the Glass- Steagall Act) to
permit 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 allows bank holding company
subsidiaries to engage in real estate development and insurance underwriting.
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 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" of their
shares in the event we complete the reorganization. The Pennsylvania Business
Corporation Law of 1988 also grants shareholders of the bank the right to
dissent from the transaction and receive the "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. 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.
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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 file 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 special meeting;
o make no change in your beneficial ownership of stock from the date you
give notice through the day of the reorganization; and
o not vote your stock for approval of the Plan of Reorganization and Plan
of Merger.
Neither a proxy nor a vote against approval of the reorganization satisfies
the necessary written notice of intention to dissent.
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
Plan of Reorganization and Plan of 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 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 a 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 a statement of the bank's estimate of the fair value of its common
stock; and
o a notice of the right of the dissenter to demand supplemental payment,
accompanied by a copy of the law.
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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.
Valuation Proceeding. If any demands for payment remain unsettled within 60
days after the latest to occur of:
o the reorganization,
o the bank's timely receipt of any demands for payment, or
o the 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.
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 Conditions
The reorganization will not occur unless the following conditions are met:
o The holders of at least 2/3 of 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.
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. On ________,
1999, the bank filed an application to merge with the interim
bank. The Department of Banking granted its approval of the
charter for the interim bank and for the proposed merger on
___________, 2000.
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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
______________, 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. If the United States Department of Justice has issued a
challenge on anti-trust grounds, the regulators may extend this waiting period
before which the merger may not occur. 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 in time, the bank and
holding company anticipate completing the reorganization immediately after
obtaining shareholder approval, during the first fiscal quarter of 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.
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Closing Date
The reorganization and the merger of the interim bank with the bank will
take place at the time specified on the letters of official certification to be
issued by the Department of Banking and FDIC. Presently, the bank plans to
request that the Department of Banking and FDIC issue their certification for
closing the transaction by no later than ______________, 2000. The Department of
Banking approved the proposed transaction on ______________, 2000, and the FDIC
approved the proposed transaction on ______________, 2000. However, the
Department of Banking and the FDIC will not issue their letter of certification
for closing the transaction 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 Plan of
Reorganization and Plan of Merger. The regulators' approval is not an
endorsement or recommendation of the reorganization and merger.
Tax Consequences
Shumaker Williams, P.C., Special Counsel to the bank and Holding Company,
issued a tax opinion dated December ____, 1999, regarding federal tax
consequences of the proposed transaction, the contents of which are summarized
below. 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 anticipated that:
o the bank, the holding company and the interim bank will recognize no
gain or loss because of the reorganization;
o the 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 that gain or loss recognized due to the receipt of cash which is
received by any dissenting shareholder of the bank, and
o that 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 the 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 the 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 the 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 any 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.)
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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 certain shareholders as owning shares actually owned by other individuals
and entities, including certain individuals related to the shareholder and
certain 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 be
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 Treatment
We intend to treat the proposed reorganization as a pooling of interests
for financial accounting purposes. The pooling -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, immediately 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 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 established basis following the merger.
Currently, we 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" of
the bank, within the meaning of Commission Rules 144 and 145. In general terms,
any person who is an executive officer, director or 10% shareholder of the bank
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<PAGE>
at the time of the shareholders' meeting may be deemed to be an affiliate of the
bank 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 bank in connection with the
transaction.
The holding company's common stock received by persons who are deemed to be
affiliates of the bank may be resold only:
o in compliance with the resale provisions of Commission Rule 145(d);
o in compliance with the provisions of another applicable exemption from
the registration requirements of the Securities Act; or
o pursuant to an effective registration statement filed with the
Commission.
In general terms, Commission Rules 144 and 145(d) permit an affiliate of
the bank 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 or Rule 145 is subject to the
holding company's having satisfied its Exchange Act reporting requirements, if
any, for specified periods prior to the time of sale.
Finally, an affiliate of the bank may not, as a general rule and subject to
an exception in a case of certain very small sales:
o sell any shares of the holding company's common stock during the 30-day
period immediately preceding the day of the reorganization; or
o sell 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.
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DESCRIPTION OF THE HOLDING COMPANY
Organization 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 issued 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.
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 behalf
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. Please read them carefully.
Properties
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."
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 the directors of
the bank annually. The board of directors of the holding company will appoint
the officers of the holding company to serve for one-year terms.
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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.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------
Age as of
Name December __, 1999 Position
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
Michael F. Marranca 67 President and Chief Executive
Officer
- -----------------------------------------------------------------------------------------------
Kevin R. Messett 44 Senior Vice President
- -----------------------------------------------------------------------------------------------
Joseph E. Quinnan 55 Senior Vice President
- -----------------------------------------------------------------------------------------------
John F. Glinsky, Jr. 68 Secretary
- -----------------------------------------------------------------------------------------------
Robert P. Farrell 46 Treasurer
- -----------------------------------------------------------------------------------------------
</TABLE>
Executive and Director Compensation
Because the holding company was not in existence in 1998, it paid no
compensation to its directors and officers for that year. Further, the holding
company has paid no compensation to its directors or officers to date during
1999. 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.
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 its significant shareholders, directors and executive
officers will be approximately the same as the percentage ownership by the
bank's significant shareholders, directors and executive officers immediately
prior to the reorganization. See "Information about the Special Meeting -
Information about Beneficial Ownership of the Bank's Common Stock by Significant
Shareholders, Directors and Executive Officers."
Certain Relationships and Related Transactions
The information regarding certain relationships between the directors and
officers of the bank and transactions between the directors and officers of the
bank and the bank also applies to the holding company. Please refer to
"Description of the Bank - Certain Relationships and Related Transactions."
Directors' 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.
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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 Company
The Securities Act of 1933 - The Offer and Sale of Securities. Under the
1933 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 these registration
requirements. Accordingly, additional issuances of the holding company's stock
to raise capital or for dividend reinvestment, stock option and other plans will
require registration (absent any exemption from 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.
The Securities Exchange Act of 1934 - 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 or tender offers.
In accordance with the 1934 Act, the bank files reports, proxy statements and
other information with the FDIC. After the reorganization, Section 12 of the
1934 Act will require that the holding company likewise register its stock. 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 cease to
file these reports under the 1934 Act.
The Bank Holding Company Act of 1956 - 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:
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<PAGE>
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 not
o acquire 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 merge or consolidate with another bank holding company
without prior approval of the Federal Reserve Board.
In addition, a bank holding company may not
o engage in a non-banking business, or
o acquire 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.
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" provisions state generally that a bank may not
o extend credit,
o lease or sell property, or
o furnish 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.
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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 on
o any extensions of credit to the bank holding company or any of its
subsidiaries,
o investments in the stock or other securities of the bank holding
company, and
o taking 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
certain off-balance sheet activities, such as standby letters of credit,
is 8%. At least half of the total capital is required to be "Tier I
Capital," consisting principally of common stockholders' equity, less
certain intangible assets. The remainder, "Tier II Capital," may consist
of
o certain preferred stock,
o a limited amount of subordinated debt,
o certain hybrid capital instruments,
o other debt securities, and
o a 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 (as determined under the risk-based capital
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 Bank is subject
to almost identical capital requirements adopted by the FDIC.
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 be the
power to vote 10% or more of a company's voting stock. 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 by the Pennsylvania
Department of Banking. As a Pennsylvania bank holding company, the holding
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<PAGE>
company will also be subject to regulation and examination by the Pennsylvania
Department of Banking. For example, the holding company must obtain the
Department'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 law 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 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.
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 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-banking activities to improve
the competitiveness of bank holding companies. The following list includes
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:
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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 certain 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 certain 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 (including activities of a fiduciary, agency or custodial
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 serving as investment advisor to an investment company registered
under the Investment Company Act of 1940;
o furnishing general economic information and advice, general economic
statistical forecasting services, and industry studies;
o providing advice in connection with mergers,
acquisitions, divestitures, investments, joint
ventures, capital structuring, financing
transactions, and conducting financial feasibility
studies;
o providing general information, statistical
forecasting, and advice concerning any transaction in
foreign exchange, swaps and similar transactions,
commodities, and options, futures and similar
instruments;
o providing educational courses and instructional materials to
consumers on individual financial management matters; and
o providing tax planning and tax preparation services to any person.
o Agency transactional services for customer investments, including:
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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".
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 ,if the activity is conducted
through a separately incorporated subsidiary of the bank holding
company and the company satisfies certain 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 foreign exchanges, and
o forward contracts, options, futures, options on futures, swaps,
and similar contracts, with certain conditions.
o Buying and selling bullion, and related activities.
o Management consulting and counseling activities:
o Subject to certain 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 a financial organization and individuals currently employed by, or
recently displaced from, a financial organization;
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<PAGE>
o individuals who are seeking employment at a financial
organization; and
o individuals 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 certain 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 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 certain 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.
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<PAGE>
DESCRIPTION OF THE BANK
History
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's legal headquarters and main office are at Blakely and Drinker
Streets, Dunmore, Lackawanna County, Pennsylvania 18512.
Offices
The bank currently has 9 full-service offices, including its main office,
in the counties of Lackawanna and Luzerne, Pennsylvania, as follows:
o 2 in Dunmore (Main Office and Keystone Industrial Park),
o 3 in Scranton,
o 1 in Clarks Summit,
o 1 in Pittston (at Bruno's Supermarket),
o 1 in West Pittston, and
o 1 in Moosic (opened during the second fiscal quarter, 1999).
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 "money 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 Business
The bank engages in a full service commercial and consumer banking
business, including the following services:
o accepting time and demand deposits,
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<PAGE>
o providing personal and business checking accounts at competitive rates,
o making secured and unsecured commercial and consumer loans, and
o offering 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. Within the bank's
Lackawanna and Luzerne County marketplace, the bank is 1 of ___ commercial banks
and ___ savings banks 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 shares 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, 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 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 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.
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The bank offers the following support services to make financial management
more efficient and convenient for its customers:
<TABLE>
<S> <C>
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,
every office except 139 o treasury securities,
Wyoming Avenue, Scranton, o U.S. savings bonds,
PA), o individual retirement accounts, and
o utility and municipal payments.
</TABLE>
As of September 30, 1999, the bank had
o total assets of approximately $431,471,117,
o total shareholders' equity of approximately $33,021,984, and
o total liabilities of approximately $398,449,133, which includes
$297,656,625 of deposits.
Major classifications of loans and leases are summarized as follows:
<TABLE>
<CAPTION>
September 30, December 31, December 31, December 31,
1999 1998 1997 1996
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Loan and Lease Classifications:
Commercial and Industrial $__________ $ 85,425,707 $ 67,201,013 $ 47,832,107
Agricultural __________ 0 0 0
Real Estate Mortgages __________ 99,955,640 87,931,770 79,936,722
Real Estate Construction __________ 3,810,975 2,568,997 3,590,175
Loans to Individuals - Consumer __________ 47,549,512 38,673,662 31,555,744
Loans to Municipal Governments __________ 0 0 0
Direct Financing Leases __________ 2,248,990 1,536,074 691,098
Less Unearned Income __________ (553,033) (585,517) (1,371,625)
Less Allowance for Loan Losses (3,195,220) (3,007,713) (2,809,066) (2,589,976)
------------ ----------- ----------- ------------
Net Loans $296,073,621 $235,430,077 $194,516,933 $159,644,245
============ ============ ============ ============
</TABLE>
On September 30, 1999, the bank had approximately 174 employees, including
154 full-time employees and 20 part-time employees. Management considers
relations with our employees to be good.
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Properties
Below is a schedule of all the bank's properties, showing the location,
whether the property is owned or leased and its use:
<TABLE>
<CAPTION>
Type of
Property Location Ownership Use
- -------- -------- --------- ---
<S> <C> <C> <C>
1 Blakely and Drinker Streets Own Main Office
Dunmore, PA 18512
2 Keystone Industrial Park Own Dunmore Branch
Dunmore, PA 18512
3 The Fidelity Financial Center Own Scranton Branch
338 North Washington Avenue
Scranton, PA 18503
4 Green Ridge Office Lease Scranton Branch
Green Ridge Plaza
Scranton, PA 18509
5 Central City Office Lease Scranton Branch
139 Wyoming Avenue
Scranton, PA 18640
6 Abington Office Lease Clarks Summit Branch
1311 Morgan Highway
Clarks Summit, PA 18411
7 Clarks Summit State Hospital Lease Clarks Summit State
Office Hospital Limited
1451 Hillside Drive Service Branch
Clarks Summit, PA 18411
8 Pittston Office Lease Pittston Branch
403 Kennedy Boulevard (Bruno's
Pittston, PA 18640 Supermarket)
9 West Pittston Office Lease West Pittston Branch
801 Wyoming Avenue
West Pittston, PA 18640
10 Moosic Office Lease Moosic Branch
4010 Birney Avenue
Moosic, PA 18507
11 Marywood University Lease Free-standing
Nazareth Hall Money Access Center
Scranton, PA 18509
12 Montage Mountain Sky Lodge Lease Free-standing
Scranton, PA 18505 Money Access Center
13 Lackawanna County Stadium Lease Free-standing
Moosic, PA 18507 Money Access Center
</TABLE>
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<PAGE>
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-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 enter 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
from the Pennsylvania Department of Banking and the FDIC for establishing the
branch office.
Supervision and Regulation of the Bank
As an FDIC-insured, Pennsylvania-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 requirements to maintain reserves against loans and lease losses,
o restrictions on the types and amounts of loans that may be granted and
the interest that may be charged on the loans,
o limitations on the types of investments the bank may make and the types
of services the bank may offer, and
o restrictions 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 Law
The laws of Pennsylvania applicable to the bank include, among other
things, provisions that:
o limit the scope of the bank's business;
o require the maintenance of certain reserves against loans and lease
losses;
o limit 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 restrict investments and borrowings by the bank;
o limit the payment of dividends; and
o regulate 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
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<PAGE>
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 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" to banking.
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 well capitalized
o adequately capitalized
o undercapitalized
o significantly undercapitalized
o critically undercapitalized.
To be adequately capitalized, the required minimum ratio of total capital
to risk-weighted assets, including certain off-balance sheet activities, such as
standby letters of credit, is 8%. To be well capitalized, this risk-based ratio
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<PAGE>
must be at least 10%. At least half of the total capital is required to be "Tier
I Capital," consisting principally of common stockholders' equity, less certain
intangible assets. The remainder, "Tier II Capital," may consist of
o certain preferred stock,
o a limited amount of subordinated debt,
o certain hybrid capital instruments,
o other debt securities, and
o a 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, 1999, the bank satisfied the criteria to be classified as "well
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" institution as "adequately capitalized" or require an
"adequately capitalized" or "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 (which could include unsatisfactory examination
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 Bank 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.
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,
o adequately capitalized or
o undercapitalized
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
<PAGE>
greater, are assigned to the well-capitalized group. As June 30, 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 outstanding
o satisfactory
o needs to improve, or
o substantial noncompliance.
As of June 30, 1999, the bank had a satisfactory CRA rating.
Truth-In-Savings. The Bank Enterprise Act of 1991" requires
"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
<PAGE>
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 be the power to vote 10% or more of the common stock of a 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 Bank may engage in interstate banking, subject to
certain limitations. See "Description of the Holding Company - Supervision and
Regulation - The Riegle-Neal Interstate Banking and Branching Efficiency Act of
1994 - Interstate Banking."
Securities Regulation
Due to the number of the bank's shareholders and the size of its assets,
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 certain
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 the 1934 Act and will be subject to the obligations for registered
companies under the federal securities laws. 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 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
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.
Legal Proceedings
The nature of the bank's business generates a certain amount of litigation
involving matters arising in the ordinary course of business. In the opinion of
management of the bank, however, no legal 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
<PAGE>
Directors
The bank's board of directors presently consists of 10 members, 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:
<TABLE>
<CAPTION>
Age as of
Name and Position December Director of
with Bank ____, 1999 Principal Occupation for last Five Years Bank Since
------------------ ---------- ---------------------------------------- ----------
<S> <C> <C> <C>
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), Chairman of the Board,
The Fidelity Deposit and Discount Bank
Patrick A. Calvey, Jr., 71 Retired President of Calvey Enterprises, Inc. 1980
Director (real estate holding company), Secretary and
Treasurer of American Janitor and Paper
Supply Co., Inc.
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 1976
Director
Michael J. McDonald 45 Attorney - Foley, McLane, Foley, McDonald 1994
and MacGregor
David L. Tressler, Sr. 63 Executive Director/Chief Executive Officer of 1998
Northeastern Pennsylvania Physicians
Organization
</TABLE>
58
<PAGE>
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.
<TABLE>
<CAPTION>
Age as of
Bank Number of Shares December
Office and Position Held Employee Beneficially ____,
Name with the bank Since Since Owned 1999
---- ------------------- ----- --------- ---------------- ----------
<S> <C> <C> <C> <C> <C>
Michael F. Marranca President, Chief 1988 1967 25,159 67
Executive Officer
Joseph E. Quinnan Senior Vice 1995 1995 1,276 55
President, Chief
Operating Officer
John J. Keeler Vice President 1990 1990 622 48
Kevin R. Messett Senior Vice 1991 1991 456 44
President
Robert P. Farrell Cashier/ 1989 1987 255 46
Comptroller
</TABLE>
Executive Compensation
The following table provides the annual compensation for services in all
capacities to the bank for the fiscal years ended December 31, 1998, 1997, and
1996, for those persons who were at December 31, 1998,
o the Chief Executive Officer, and
o the 4 other most highly compensated executive officers of the
bank to the extent such person's total annual salary and bonus
exceeded $100,000.
Summary Compensation Table
<TABLE>
<CAPTION>
Annual Compensation Long-Term Compensation
Awards Payouts
(a) (b) (c) (d) (e) (f) (g) (h) (i)
Securities
Other Restricted Underlying All other
Annual Stock Options/ LTIP Compen-
Name and Principal Salary Bonus Compen- Award(s) SARs Payouts sation
Position Year ($) ($) sation ($) (#) ($) ($)(1)(2)
-------- ---- --- --- ------ --------- ---------- ------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Michael F. Marranca 1998 171,560 12,000 0 0 0 0 30,089
President and Chief 1997 160,410 18,000 0 0 0 0 27,813
Executive Officer 1996 133,769 18,000 0 0 0 0 18,067
</TABLE>
- ------------------
(1) Figure includes the bank's contributions to the 401(k) and deferred
profit sharing plan of $18,934, $17,278, and $15,312 on behalf of Mr.
Marranca for 1998, 1997, and 1996, respectively. It also includes
membership dues of $9,237 and $7,710 paid on behalf of Mr. Marranca in
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, and $2,755 in 1998, 1997,
and 1996, respectively.
59
<PAGE>
Stock Option Awards
The following table provides certain information relating to non-qualified
stock options granted to the non-employee directors on January 4, 1999, by the
bank pursuant to the 1998 Independent Directors Stock Option Plan. No options
were granted or exercised during the fiscal year ended December 31, 1998.
NON-QUALIFIED STOCK OPTION GRANTS
TO NON-EMPLOYEE DIRECTORS
Individual Grants
<TABLE>
<CAPTION>
Number of Percent of Total
Securities Options/SARs
Underlying Granted to Non- Exercise or
Options/SARs Employee Base Price
Name Granted (#) Directors ($/Sh) Expiration Date
---- ------------ ----------------- ----------- ---------------
<S> <C> <C> <C> <C>
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% $62.00 01/04/09
</TABLE>
The following table provides certain information relating to qualified
stock options granted to key employees on January 4, 1999, by the bank pursuant
to the 1998 Stock Incentive Plan. No options were granted or exercised during
the fiscal year ended December 31, 1998.
QUALIFIED STOCK OPTION GRANTS
TO KEY OFFICERS
Individual Grants
<TABLE>
<CAPTION>
Number of Percent of Total
Securities Options/SARs
Underlying Granted to Exercise or
Options/SARs Employees Base Price Expiration
Name Granted (#) in Fiscal Year ($/Sh) Date
- ----- ------------ -------------- ------------ -----------
<S> <C> <C> <C> <C>
Michael F. Marranca 350 23.33% $62.00 01/04/09
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 01/04/09
</TABLE>
60
<PAGE>
Compensation of Directors
During 1998, the bank paid a monthly retainer of $2000 to non-employee bank
directors for attending and participating in board of director's meetings 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. In the aggregate, the bank paid the board of directors
$232,500 for all services rendered in 1998. The board of directors held 35
regular meetings in 1998.
Certain Relationships between Officer and Directors and Certain Transactions
between Officer and Directors and the Bank
Family Relationships
Dr. Herbert M. McDonald, a director and vice 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, and the bank expects to continue such banking transactions
in the future.
Total loans outstanding from the bank at December 31, 1998, 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, or approximately 9.75% 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 1998 to the
above described group was approximately $5,250,468. The aggregate amount of
indebtedness outstanding as of the latest practicable date, September 30, 1999,
to the above group was approximately $4,068,201.
The Bank paid a total of $12,125 to Samuel Cali and Patrick Calvey, Jr. for
appraisals they performed for the bank in 1998. The Bank paid a total of $38,807
in 1998 to the law firms 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, the bank paid $346 to Dempsey Uniform & Supply, Inc. for linens for the
bank.
61
<PAGE>
FINANCIAL INFORMATION ABOUT THE REORGANIZATION
Capitalization
Set forth below is the capitalization
o 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.
<TABLE>
<CAPTION>
The Fidelity Fidelity Deposit
Deposit and and Discount Fidelity D & D
Discount Bank Interim Bank Bancorp, Inc.
------------- ---------------- --------------
<S> <C> <C> <C>
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
</TABLE>
62
<PAGE>
Set forth below is the same information, as adjusted to reflect the
reorganization and the merger of the interim bank into the bank:
<TABLE>
<S> <C> <C> <C>
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)
=========== === ===========
</TABLE>
- ----------
(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
<PAGE>
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.
64
<PAGE>
DESCRIPTION OF THE BANK'S CAPITAL SECURITIES
Common 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 897,736 shares
were issued and outstanding as of December _____, 1999. No other shares were
issued or outstanding. The bank is not authorized to issue any other class of
stock. As of December____, 1999, the bank had approximately 1,219 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. 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
declare and pay dividends only out of accumulated net earnings and only if the
bank meets certain capital requirements. Directors are specifically liable for
unlawful dividends.
65
<PAGE>
The Federal Deposit Insurance Act generally prohibits payment of dividends
that would be an "unsafe 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 which the bank has paid its
shareholders since January 1997.
<TABLE>
<CAPTION>
AMOUNTS OF DIVIDENDS PAID
Regular Cash Special Cash In the
Month/Year Dividend Per Share Dividend Per Share Aggregate
- ---------- ------------------ ------------------ -----------
<S> <C> <C> <C>
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
June 1998 0.300 251,595.77
September 1998 0.300 251,986.68
December 1998 0.300 0.200 445,649.00
March 1999 0.300 268,094.36
June 1999 0.300 268,493.53
September 1999 0.300 268,920.69
</TABLE>
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, the highest trade price known to management for transactions
of the bank's common stock was for a trade of _______ shares at $______ per
share on _________, 1999. The most recent sale price as of December___, 1999,
was $_______ per share. 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.
66
<PAGE>
Trade 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)
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 49.00
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 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, the bank had issued options to purchase 3,750 shares at an
exercise price of $62.00. 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 the Reorganization -
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 are
o to attract, retain and compensate, as directors of the bank, highly
qualified individuals, who are not executives or employees of the
bank,
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<PAGE>
o to 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,
o to encourage directors to have a greater personal financial stake in
the bank through the ownership of Bank common stock, and
o to 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'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 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's decision
to forego 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
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<PAGE>
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. 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 has reserved 25,000 shares of bank
common stock for issuance under the Stock Incentive Plan. The purposes of the
Incentive Plan are
o to 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 to attract and retain individuals of outstanding ability as employees
of the bank;
o to encourage employees to acquire a proprietary interest in the bank;
and
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o to encourage employees to continue their employment with the bank and
to render superior performance during such employment.
The Incentive Plan has the following significant terms:
o Duration of Plan. The Incentive Plan will terminate upon the earlier
of the Board'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 options to purchase stock intended to qualify as incentive stock
options under Sections 421 and 422 of the Internal Revenue Code
(or "qualified options"), which means that the plan participant
will not recognize any taxable income on the exercise of the
options; or
o options which do not so qualify (or "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.
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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 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 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- 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 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, the bank had issued approximately
22,455 new shares under the plan. The issuance of additional shares under this
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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 the Reorganization - Dividend Reinvestment Plan."
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, the holding company would have about 1,795,472 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 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 Bank has
paid continuous quarterly cash
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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 the holding company would be unable to pay its debts as they become
due, or
o the 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 1998 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 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
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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 Board 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 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 Board 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 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, 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 Opinion
Shumaker Williams, P.C., 3425 Simpson Ferry Road, Camp Hill, Pennsylvania
17011, special 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 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.
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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" above.
Authorized Capital. The anti-takeover provisions include:
o the authorization of 10 million shares of common stock and 5 million
shares of preferred stock, and
o the 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 2000 Annual Meeting of Shareholders, the
shareholders shall elect 10 directors as follows:
o 4 Class A directors to serve until the 2001 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 2003 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
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Bank'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 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 the impact the acquisition of the holding company would have on the
community,
o the effect of the acquisition upon shareholders, employees,
depositors, suppliers and customers, and
o the 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-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-laws previously approved by
the board of directors. However, the board of directors may not make or alter
any by-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 acquiror to change the by-laws. By comparison, the
holders of a majority of shares may amend the bank's by-laws.
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Supermajority Vote for Amendment of Certain Articles. A final anti-takeover
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 the voting requirements for approval of mergers,
o the elimination of cumulative voting rights,
o the ability of shareholders entitled to cast 20% of votes to call
special meetings, or the board of directors, to call special meetings,
and
o the ability of the board of directors to consider non-economic factors
in opposing a tender offer.
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.
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." Although the holding company will not attain the status of
"Registered Corporation" on the day of the reorganization, upon registering its
stock under the Securities Exchange Act 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. 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
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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 acquiror 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" for their shares as the result of a "control
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" tactics to be 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"
involving a Registered Corporation. Business Combination includes the following
transactions involving an "Interested Shareholder":
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o a merger or consolidation of the holding company with an interested
shareholder;
o a 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 the 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 the adoption of any plan for the liquidation or dissolution of the
holding company proposed by, or under any agreement with, the
interested shareholder;
o a 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 the 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" 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 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 a 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 a 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 a business combination approved by the affirmative vote of all of the
shareholders of the outstanding shares;
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o a 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 a 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 the 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 the 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 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 all disinterested shares of the corporation, and
o all voting shares of the corporation.
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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" (a person who owns shares
with 20% or more voting 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 "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's holdings and the acquiror'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 Plan of Reorganization and Plan of Merger is a vote
in favor of the anti-takeover provisions contained in the holding company's
articles and by-laws and under Pennsylvania law.
81
<PAGE>
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 certain
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:
<TABLE>
<CAPTION>
========================================================================================================================
The Holding Company's
The Bank's Common Stock Common Stock
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Authorized and 5,000,000 shares, par value $1.5625 10,000,000 shares, without par value,
Outstanding per share, authorized; of which authorized; of which approximately 1,795,472
approximately 897,736 were shares would be outstanding if the
outstanding on September 30, 1999. reorganization occurred on September 30, 1999.
(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 1 vote per share with no cumulative voting for
voting for directors. directors.
(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; shares on a pro rata basis; board of directors
board of directors may grant may grant preemptive rights in stock offerings
preemptive rights in stock offerings if it so chooses.
if it so chooses.
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
82
<PAGE>
<TABLE>
<CAPTION>
========================================================================================================================
The Holding Company's
The Bank's Common Stock Common Stock
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Dividends As declared by the board of directors; As declared by the board of directors; the
may be paid only out of accumulated bank's dividend restrictions apply indirectly to
net earnings. Also, the bank must the holding company because cash available
have made any required transfers of for dividend distributions will initially come
net earnings to surplus in order to from dividends the bank pays to the holding
maintain surplus at least equal to company. In addition, the holding company
capital, prior to declaring the may not pay a dividend if, after issuing the
dividend. Surplus must not be dividend:
reduced. Directors are specifically
liable for unlawful dividends. o the holding company would be unable to pay
its debts as they become due, or
o the holding company's total assets would be less
than its total liabilities plus the amount
needed to satisfy any preferential rights of
shareholders.
(The issuance of preferred shares could affect the
holding company's ability to pay common stock
shareholders dividends.)
- ------------------------------------------------------------------------------------------------------------------------
Amendment of by-laws Approval by the affirmative vote of Approval by the affirmative vote of the holders
the majority of shares represented at a of at least 75% of the outstanding shares
legally called meeting of shareholders, entitled to vote, or by a majority vote of the
or by a unanimous vote of members of board of directors, subject to the power of
the board of directors present at any shareholders to change such action of the
regular meeting of the Board, subject Board by the same 75% affirmative vote.
to the power of shareholders to (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% Approval by vote of at least 75% of outstanding
Approve Mergers, of outstanding shares. shares entitled to vote; or approval of at least
Consolidations, 51% of outstanding shares if such transaction
Liquidation, Sales of has received the prior approval of at least 80%
Substantially All Assets of the board of directors.
- ------------------------------------------------------------------------------------------------------------------------
Right to Call Special Upon request by a majority of the Upon request by a majority of the board of
Shareholder Meetings board of directors or one or more directors or one or more shareholders entitled to
shareholders entitled to cast at least cast at least 20% of the votes that all
20% of the votes that all shareholders 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 Issuance directors.
of Additional
Outstanding shares
(shares already authorized
under articles of
incorporation)
- ------------------------------------------------------------------------------------------------------------------------
Authorization of Approval by vote of shareholders Approval by vote of a majority of votes cast by
Additional Shares entitled to cast at least a majority of all shareholders entitled to vote and the
(through amendment votes which all shareholders are affirmative vote of a majority of the votes cast
of articles of entitled to cast and the affirmative in a vote of the holders of outstanding shares of
incorporation) vote of the holders of a majority of the the affected class or series of stock.
outstanding shares of the affected
class or series of stock.
- ------------------------------------------------------------------------------------------------------------------------
Right to Propose Yes No
Amendment to Articles
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
83
<PAGE>
<TABLE>
<CAPTION>
========================================================================================================================
The Holding Company's
The Bank's Common Stock Common Stock
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Amendment of articles Approval by a majority of the votes Approval by a majority of the votes cast except
of incorporation (other which all shareholders are entitled to for certain provisions, then 75% of the
than authorization of cast. outstanding shares entitled to vote, or 51% if
additional shares) 80% of the directors have approved the amendment.
- ------------------------------------------------------------------------------------------------------------------------
Indemnification of Yes Yes
Directors and Officers
- ------------------------------------------------------------------------------------------------------------------------
Registered Under Yes - files reports and other Yes - will register and file reports and other
Section 12 of the information with the FDIC 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 repurchase:
approvals and shareholder approval;
surplus must remain at least equal to o the holding company would still be 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). o the 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; Directors serve staggered terms; board is
board is "classified." Directors serve "classified." Eventually, all directors shall
3-year terms, with approximately serve 3-year terms, with approximately one-third
one-third of the directors coming of the directors coming up for election each year.
up for election each year.
========================================================================================================================
</TABLE>
84
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION
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 and the financial statements and notes to the financial statements
appearing elsewhere in this proxy statement/prospectus. 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 as of September 30, 1999, respectively. We undertake no
obligation to publicly revise or update these forward-looking statements to
reflect subsequent events or circumstances.
The following financial review is intended to provide a comparison of our
financial performance for the years ended December 31, 1998, 1997 and 1996. The
information presented below should be read in conjunction with our financial
statements and accompanying notes appearing elsewhere in this document.
85
<PAGE>
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 a comparison of balance sheet accounts and percentage to total
assets for 1998, 1997 and 1996:
<TABLE>
<CAPTION>
(Thousands of Dollars)
------------------------------------------------------------------------
1998 1997 1996
--------------------- --------------------- ---------------------
Amount Percent Amount Percent Amount Percent
-------- ------- -------- ------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
Assets:
Cash and due from banks $ 3,315 0.95% $ 2,967 1.02% $ 3,154 1.17%
Interest-bearing deposits with
Depository institutions 5,404 1.55 4,341 1.50 4,779 1.78
Federal funds sold 6,500 1.87 0 0.00 3,850 1.43
Investment securities 78,608 22.56 72,713 25.05 87,238 32.42
Net loans 235,430 67.57 194,517 67.01 159,644 59.32
Loans Available-for-sale 8,858 2.54 8,202 2.82 2,964 1.10
Accrued interest receivable 2,405 0.69 237 0.82 2,216 0.82
Bank premises and equipment 6,449 1.85 4,138 1.43 4,378 1.63
Foreclosed assets held for sale 201 0.06 276 0.10 0 0.00
Other assets 1,434 0.36 724 0.25 914 0.33
Total assets $348,604 100.00% $290,252 100.00% $269,137 100.00%
Liabilities:
Deposits, non-interest-bearing $ 33,450 9.60% $ 25,373 8.75% $ 23,042 8.61%
Certificates of deposit of
$100,000 or more 49,436 14.18 47,344 16.31 45,301 16.83
Other interest-bearing deposits 157,115 45.07 145,308 50.06 143,727 53.40
Short-term borrowings 29,405 8.44 29,100 10.03 19,590 7.28
Other borrowed funds 42,252 12.12 12,252 4.22 10,000 3.72
Accrued interest payable and
other liabilities 2,933 0.83 2,451 0.84 2,111 0.78
Total liabilities 314,591 90.24 261,828 90.21 243,771 90.57
Shareholder's equity 34,014 9.76 28,424 9.79 25,366 9.43
Total liabilities and shareholder's equity $348,604 100.00% $290,252 100.00% $269,137 100.00%
</TABLE>
The Year 1998:
Non interest-bearing deposits, (DDA's), maintained steady growth throughout
1998. At December 31, 1998 non interest-bearing deposits had grown $8,077,000 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
<PAGE>
o Courtesy and professionalism of staff;
o Expanded branch network;
o Extended Banking hours; and
o Products and services offered.
An increase in commercial DDA's and Public Fund DDA's accounted for
$1,926,000 of the $8,077,000 twelve-month increase in non interest-bearing
deposits. Commercial deposits grew as a result of increased commercial lending
and the successful marketing of Bank products designed for the commercial
segment. Commercial products include:
o Sweep accounts;
o Flex Cash Manager;
o Merchant Credit Card Processing; and
o Fidelity at Work.
In June 1998, the bank entered a contract to collect local taxes through a
lock box operation. Also during June 1998, the bank was appointed treasurer of a
local school district. These two activities accounted for 10.41% of the overall
growth in non interest-bearing deposits during 1998.
Interest-bearing deposits increased $13,899,000 or 7.21% from $192,652,000
at December 31, 1997 to $206,551,000 at December 31, 1998.
NOW's, Money Market Deposit Accounts and Savings accounts grew $9,135,000
or 16.67% during 1998. The increase in these liquid interest-bearing accounts
represents 65.72% of the growth in interest-bearing deposits. The majority of
the growth in these accounts comes from the school district and a local
municipal transit authority.
Certificates of deposit rose $4,698,000 and represent 33.80% of the total
increase in interest-bearing deposits. The growth was tempered by a $7,442,000
decline in Public Fund CD's. A portion of the decline in Public Funds occurred
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.
At the end of 1998 total deposits had grown $21,796,000 or 10.08% over the
amounts reported at December 31, 1997.
The bank borrowed $5,000,000 from the Federal Home Loan Bank in 1998 to pay
off a maturing obligation. The bank also borrowed $30,000,000 from the FHLB to
fund loan demand and for other liquidity needs. The weighted average rate on
funds borrowed in 1998 was 4.93%.
87
<PAGE>
The weighted average rate is 345 basis points below the tax equivalent on loans
for 1998 of 8.38%.
Total Assets of the bank increased $58,352,000 or 20.10% during 1998. 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, 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.
Total Assets by branch at December 31, 1998 are as follows:
Main Office & KIP $265,248,790
Green Ridge 16,814,351
Scranton 27,589,482
Clarks Summit 19,228,332
Pittston 17,171,737
Financial Ctr. - Operations 2,227,875
Financial Ctr. - Retail 87,147
The $236,707 difference between Branch Assets and Total Bank Assets is the
net carrying amount invested in the Clarks Green properties. See "Description of
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. Assets of the Clarks Summit State Hospital
office are included in Clarks Summit.
Despite early calls of US Government Agency Bonds and Municipal securities,
the Investment Portfolio grew $5,895,000 or 8.11% during 1998. Significant net
growth occurred in Tax Free Pennsylvania Municipal bonds. Municipal bonds
increased $5,937,000 or 32.07%. Bank qualified insured Municipals were purchased
not only to support Pennsylvania communities but also to reduce the bank's tax
liability. Calls 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.
In 1998, the bank sold investments having a net book value of approximately
$3,838,000 at the time of sale. The 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.
Investments constituted 22.55% 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
classification to Available-for-sale. This was done to provide the bank greater
flexibility in the management of the investment portfolio. The entire portfolio
is now classified as Available-for-sale.
88
<PAGE>
The December 31, 1998 Investment Portfolio is comprised 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%
=========== ======
Gross loans, increased $41,079,309 or 20.76% from $197,911,516, in 1997 to
$238,990,825, in 1998. Gross loans represent 68.56% of Total Assets at December
31, 1998. All components of the loan portfolio grew during 1998.
Commercial loans increased $18,224,695. This represents 44.26% 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, the outstanding
balance of SBA loans was $2,728,000.
Tax free loans made to local municipalities increased to $4,057,000 at
December 31, 1998.
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, commercial loans of $1,735,000 were registered in
this program.
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 or
17.14% during 1998. This growth reflects national economic trends, which are
bolstered by a strong economy and low rate of unemployment.
Lease financing is also available. Outstanding lease balances grew $713,000
or 46.41% in 1998.
89
<PAGE>
Gross Loans at December 31, 1998 were 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%
============ ======
As in previous years, the bank sold Residential Real Estate Mortgage Loans
in 1998. 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, the outstanding balance
of sold Residential Mortgage Loans in which the bank retained servicing rights
was $20,252,000.
Fixed assets had a $2,312,000 or 55.87% increase, net of depreciation in
1998. The acquisition of the Financial Center for $1,152,000 represents 49.83%
of the net increase in fixed assets. The building provides badly needed space
for the operational departments of the bank. The bank relies on these
departments as its backbone in providing the excellent service that the bank's
customers have come 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.
Furniture and fixtures had a $940,000 increase net of depreciation. Of that
total approximately $285,000 was for Y2K upgrades. The remaining portion was
divided between the new office locations and general office improvements at the
other branches.
The Year 1997:
Total Deposits and Repos increased $15,069,000 during 1997. The bank also
borrowed $2,252,000 from the FHLB. Early calls of investment securities caused
the portfolio to decrease $14,525,000. The funds from these occurrences were
used to increase loans $34,306,000.
Total Assets of the bank increased $21,116,000 or 7.85% in 1997.
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<PAGE>
Capital Resources
The bank's major source of capital has been from the retention of earnings
as reflected below:
Dividends Earnings
Net Income Paid Retained
---------- ---------- ----------
1998 $3,563,552 $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 1998 through the Dividend Reinvestment
Plan. Stockholders reinvested $377,052 in dividends to purchase additional
shares of stock. Since the 1995 inception of the Dividend Reinvestment Plan
shareholders have reinvested dividends totaling $999,980 to acquire Common Stock
of the bank.
Capital was affected by changes in market rates, which caused a $91,182
decrease, net of deferred taxes, in the fair value of investments classified as
Available-for-sale, (AFS). At December 31, 1998, the bank reported a net
unrealized gain on AFS securities of $133,868. In 1997, 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
<PAGE>
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:
<TABLE>
Short-Term Other
Earning Deposits Borrowings Borrowings
Assets Increase % Assets Increase % Increase % Increase % Increase %
--------------- -- --------------- -- ----------- -- ----------- --- ----------- --
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1998 $58,351,979 20% $54,900,356 19% $21,975,741 10% $ 304,848 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
</TABLE>
The bank offers the following important ratios:
================================================================================
Capital to Capital to Return on Dividends to
Assets Deposits Average Capital Net Income
================================================================================
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
================================================================================
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, (see Note 14, in Notes
to Financial 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:
o Asset maturities, paydowns and sales;
o Growth of core deposits;
o Growth of Repos; and
o Increase of other borrowed 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
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<PAGE>
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; and
o Mitigating the interest rate risk inherent in fixed rate 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 used 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, 1998 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 1998 reported figures
that would occur under these interest rate changes over a twelve-month period
beginning January 1, 1999:
<TABLE>
<CAPTION>
====================================================================================================
Basis Point Change, +400 +200 +100 -100 -200 -400
change in thousands bps bps bps 12/31/98 bps bps bps
====================================================================================================
<S> <C> <C> <C> <C> <C> <C> <C>
Net Interest Income 11,372 11,962 12,309 11,162 12,866 13,181 12,977
====================================================================================================
Net Income 2,943 3,397 3,664 3,563 4,507 4,750 4,593
====================================================================================================
Present Value of Equity 43,483 39,104 36,657 34,014 31,178 28,116 32,265
====================================================================================================
</TABLE>
<TABLE>
<CAPTION>
====================================================================================================
+400 +200 +100 -100 -200 -400
Proforma bps bps bps 12/31/98 bps bps bps
====================================================================================================
<S> <C> <C> <C> <C> <C> <C> <C>
Earnings Per Share $3.47 $4.00 $4.32 $4.20 $5.31 $5.60 $5.41
====================================================================================================
</TABLE>
At January 1, 1999, if there were an immediate 200 basis point increase in
all market interest rates, net interest income is projected to increase by
$800,000 over the next twelve
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<PAGE>
months, a 7% increase over 1998's net interest income. The present value of bank
capital is projected to increase 15% to $39,104,000.
If there were an immediate 200 basis point decrease in rates, net interest
income is projected to increase $2,019,000 or 18% over twelve months. The
present value of the bank's capital is projected to be $28,116,000.
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:
<TABLE>
<CAPTION>
============================================================================================
(Thousands of Dollars)
============================================================================================
Years to Maturity
============================================================================================
90 days 1 or less 1 to 5 5 or more Total
============================================================================================
<S> <C> <C> <C> <C> <C>
Loans:
============================================================================================
Fixed rate $ 6,218 $ 6,048 $40,352 $124,381 $176,999
============================================================================================
Adjustable rate 44,068 12,330 12,127 961 69,486
============================================================================================
Debt Securities:
============================================================================================
Fixed rate 1,958 7,453 3,110 60,050 72,598
============================================================================================
Adjustable rate 3,619 124 -- -- 3,743
============================================================================================
Federal funds sold 6,500 -- -- -- 6,500
============================================================================================
Interest-bearing deposits 5,404 -- -- -- 5,404
============================================================================================
Total $67,794 $25,955 $55,589 $185,392 $334,730
============================================================================================
</TABLE>
Nonaccrual loans of $1,364,102 at December 31, 1998, and investments in
Restricted Common Stock of $2,266,717 at December 31, 1998, are not included in
the loan maturity distribution tables. Loans include those designated as
Available-for-sale.
<TABLE>
<CAPTION>
Years to Payment
======================================================================================================================
90 Days 1 or less 1 to 5 5 or more Total
======================================================================================================================
<S> <C> <C> <C> <C> <C>
Deposits, noninterest-bearing $ 1,756 $ 5,268 $ 9,701 $16,725 $ 33,450
======================================================================================================================
Certificates of deposit over $100,000 14,692 24,990 9,637 117 49,436
======================================================================================================================
Other interest-bearing deposits 14,648 49,255 57,533 35,679 157,115
======================================================================================================================
Securities sold under repurchase agreement 20,030 5,059 3,784 -- 28,873
======================================================================================================================
Demand notes, U.S. Treasury 532 -- -- -- 532
======================================================================================================================
Long term debt 2,252 5,000 30,000 5,000 42,252
======================================================================================================================
Total $53,910 $89,572 $110,655 $57,521 $311,658
======================================================================================================================
</TABLE>
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
<PAGE>
investments with a par value of $31,185,000, subject to call during 1999, 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, the one-year cumulative gap stated that
$7,024,000 Non Interest-bearing deposits would either reprice or payout over the
next twelve months. In reality Non Interest-bearing deposits grew $8,077,000
during 1998. 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.
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
================================================================================
1998 1997 1996
================================================================================
Net income $3,563,552 $3,310,057 $2,824,704
================================================================================
Earnings per share $ 4.20 $ 3.97 $ 3.43
================================================================================
Increase per share 5.79% 15.74% 0.00%
================================================================================
The year 1998:
The Federal Reserve Bank lowered the Discount Rate by 75 basis points
during the fourth quarter of 1998. The Discount Rate is 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 actions 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 22 basis point reduction in tax equivalent net yield on earning
assets, 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
<PAGE>
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 assets by 21 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.
A comparison of Average Earnings Assets and the Net Tax Equivalent yields
for 1998, 1997, and 1996 is as follows:
<TABLE>
<CAPTION>
(In Thousands)
1998 1997 1996
-------------------------------------------------------------------------
Average Yield Average Yield Average Yield
Balance (Cost) Balance (Cost) Balance (Cost)
-------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Earnings assets:
Interest-bearing deposits $ 5,212 $ 103 $ 4,141 $ 78 $ 4,846 $ 113
Investment securities 71,132 4,909 80,286 5,658 80,452 5,680
Loans and leases, net of
allowance for losses 221,523 1,856 181,329 15,581 157,451 13,242
Federal funds sold 7,328 394 2,816 166 8,994 474
Total $305,195 $23,970 $268,572 $21,483 $251,743 $19,509
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 borrowed funds 23,464 (1,359) 11,429 (740) 12,692 (767)
Securities sold under
Repurchase Agreements 27,442 (1,396) 25,668 (1,351) 18,288 (1,003)
Total $253,453 (12,309) $223,922 (10,640) $211,353 $(9,878)
Net interest income $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 3.00% 3.25% 3.08%
Net yield on earning assets 3.82% 4.04% 3.83%
Total average assets $313,924 $275,699 $259,030
</TABLE>
96
<PAGE>
The following table reflects the change in net interest income attributable
to fluctuations in volume and rate.
<TABLE>
<CAPTION>
Years Ended December 31
-----------------------------------------------------------------------
(In Thousands)
1998 Compared to 1997 1997 Compared to 1996
Increase (Decrease) Due to Increase (Decrease) Due to
--------------------------------- -------------------------------
Volume Rate Total Volume Rate Total
--------------------------------- -------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest income:
Loans and leases:
Mortgage $ 996 $ (92) $ 904 $ 779 $ 17 $ 796
Commercial 1,600 (172) 1,428 923 134 1,057
Consumer 769 (138) 631 452 37 489
Total loans and leases 3,365 (402) 2,963 2,154 188 2,342
Investment securities, interest-bearing
deposits and federal funds sold (246) (283) (529) (456) 40 (416)
Total interest income $ 3,119 $(685) $ 2,434 $ 1,698 $228 $ 1,926
Interest expense:
Deposits:
Certificates of deposit greater
than $100,000 $ 412 $ 108 $ 520 $ 123 $ 63 $ 186
Other 424 61 485 243 12 255
Total deposits 836 169 1,005 366 75 441
Other interest-bearing liabilities 785 (121) 664 308 13 321
Total interest expense $ 1,621 $ 48 $ 1,669 $ 674 $ 88 $ 762
Net interest income $ 1,498 $(733) $ 765 $ 1,024 $140 $ 1,164
</TABLE>
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:
o Specific loans that could have loss potential;
o Levels of delinquent loans;
o Changes in risk characteristics in the portfolio; and
o Current and projected economic conditions.
97
<PAGE>
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:
<TABLE>
<CAPTION>
(In Thousands)
1998 1997 1996 1995 1994
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Balance at beginning of period $2,809 $2,590 $2,470 $2,357 $2,018
Charge-offs:
Commercial and all other 193 286 153 70 108
Real estate 43 -- 20 125 61
Consumer 258 183 218 185 130
Lease financing 86 15 0 0 4
Total 580 484 391 380 303
Recoveries:
Commercial and all other 56 47 136 150 39
Real estate 36 5 9 3 --
Consumer 39 28 28 27 44
Lease financing 2 -- -- -- --
Total 133 80 173 180 83
Net charge-offs 447 404 218 200 220
Additions charge to operations 646 623 338 313 559
Balance at end of period $3,008 $2,809 $2,590 $2,470 $2,357
Net charge-offs to average loans outstanding 0.20% 0.23% 0.13% 0.14% 0.17%
Allowance for loan loss to year end loans 1.23% 1.39% 1.59% 1.69% 1.61%
Allowance for loan loss to loans 90 days or
more past due and accruing 111.86% 128.32% 325.38% 256.22% 703.58%
Allowance for loan loss to nonaccruing loans 220.49% 261.09% 154.13% 215.53% 243.50%
Allowance for loan loss to non-performing loans 74.21% 86.03% 104.60% 117.06% 180.89%
</TABLE>
Non-performing loans include non-accrual loans and loans ninety (90) days
past due and still accruing. Year-end loans include Loans Available-for-sale.
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, at December 31, 1998. Reserves set aside by the Commonwealth of
Pennsylvania for loans registered in the PENNCAP program were $56,000 at
year-end.
The ratio of allowance for loan loss to year-end loans declined while the
1998 Provision for Loan Loss increased $23,000 over 1997. Overall growth in the
loan portfolio caused the ratio
98
<PAGE>
to decrease. Allocations into the Allowance for Loan Losses will continue. The
bank is confident that the Allowance provides adequate protection against any
unforeseen portfolio loss.
Other Income
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 a 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 $2,000,000 was held for twenty-two (22) months. 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.
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.
Some components of Other Operating Income and their related increase during
1998:
Increase
--------
Fees on sold loans $10,000
Merchant credit card income 40,000
Trust income, (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).
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 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
<PAGE>
$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 gains on the sale of
investments during 1997 was $123,600.
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.
Other Expense
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
<PAGE>
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
MAC 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 Bank 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
The year 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
<PAGE>
Some components of Other Expense and their increases during 1997 are:
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 impact the
business and operations of the bank. A challenging problem exists as many
computer systems worldwide do not have the capability of recognizing the year
2000 or years thereafter. No easy technological "quick fix" has been developed
to address this problem.
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 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 such as security
102
<PAGE>
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, Management 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
<PAGE>
Outlook for 1999:
Management believes that the present state of the economy will contribute
to the continued growth of the balance sheet. Earnings, on the other hand, will
be pressured from a narrowing interest margin 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 delivery systems. Management expects the cost of
improving operating efficiencies to be impacted by Year 2000 issues. These
challenges that must be addressed, in order for the bank to reach the desired
performance ratios.
Future Events:
In addition to the March 1999 opening of the N. Washington Avenue Office,
Scranton, Pennsylvania, the bank will open two more Branches during 1999:
o February - West Pittston Shopping Center Branch
801 Wyoming Avenue
West Pittston, Pennsylvania 18643
o May - Moosic Branch
4010 Birney Avenue
Moosic, Pennsylvania 18507
Both properties will be leased from non-related entities.
The bank is considering plans to remodel both the Main Office and KIP to
better service its customers in the future.
104
<PAGE>
Management's Discussion and Analysis 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 expansion 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
<PAGE>
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 Bank
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
<PAGE>
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)
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<PAGE>
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
<PAGE>
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
<PAGE>
THE FIDELITY DEPOSIT & DISCOUNT BANK
MANAGEMENTS DISCUSSION AND ANALYSIS
Provision for Loan Losses
<TABLE>
<CAPTION>
September 30, Dec. 31, September 30,
1999 1998 1998
------------- ----------- -------------
<S> <C> <C> <C>
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)
</TABLE>
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)
<TABLE>
<CAPTION>
September 30, Dec. 31, September 30,
1999 1998 1998
------------- ----------- -------------
<S> <C> <C> <C>
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%
</TABLE>
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
<PAGE>
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
<PAGE>
INDEPENDENT AUDITORS
Parente, Randolph, Orlando, Carey & Associates, Certified Public
Accountants, of Wilkes Barre, Pennsylvania, served as the bank's independent
auditors for the 1998 fiscal year. In addition to performing customary audit
services, 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 engaged as the independent' auditor for the
fiscal year ending December 31, 1999. 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 _________ __, 2000.
Also, if the holding company does not receive notice of a shareholder
proposal by ____________, 2000, the proxy holders at the 2000 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 a
shareholder proposal for inclusion in the bank's proxy statement for its 2000
Annual Meeting of Shareholders, was December 3, 1999.
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 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
<PAGE>
-----------------------------------
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 document 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 may 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, to
shareholders with proxy materials for the 1999 Annual Meeting of Shareholders.
You may obtain a copy of the bank's 1996, 1997 or 1998 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).
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
<PAGE>
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).
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.
114
<PAGE>
THE FIDELITY DEPOSIT & DISCOUNT BANK
INDEX TO FINANCIAL STATEMENTS
AND
SUPPLEMENTARY FINANCIAL INFORMATION
Page
Summary Financial Data 20
Management's Discussion and Analysis
of Financial Condition and Results of Operation 85
INTERIM FINANCIAL STATEMENTS (UNAUDITED)
Balance Sheet as of September 30, 1999, and December 31, 1998 F-2
Statement of Income for the Three 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, 1998 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, 1998 and 1997 F-8
Statement of Income for Years Ended December 31, 1998,
1997 and 1996 F-9
Statement of Cash Flows for Years Ended December 31, 1998, F-10
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
<PAGE>
THE FIDELITY DEPOSIT & DISCOUNT BANK
BALANCE SHEET
As of September 30, 1999 and December 31, 1998
(unaudited)
<TABLE>
<CAPTION>
September 30, 1999 December 31, 1998
------------------ -----------------
<S> <C> <C>
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
============ ============
</TABLE>
See Notes to Interim Financial Statements.
F-2
<PAGE>
THE FIDELITY DEPOSIT & DISCOUNT BANK
STATEMENT OF INCOME
Three Month and Nine Month Periods Ended September 30, 1999 and 1998
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30, September 30, September 30,
1999 1998 1999 1998
------------- ------------- ------------- --------------
<S> <C> <C> <C> <C>
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
</TABLE>
See Notes to Interim Financial Statements.
F-3
<PAGE>
THE FIDELITY DEPOSIT & DISCOUNT BANK
STATEMENT OF CASH FLOWS
For the Nine Months Ended September 30, 1999 and 1998
(unaudited)
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
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
============ ============
</TABLE>
See Notes to Interim Financial Statements.
F-4
<PAGE>
THE FIDELITY DEPOSIT & DISCOUNT BANK
STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
For the Nine Months Ended September 30, 1999 and 1998
(unaudited)
<TABLE>
<CAPTION>
Accumulated
Capital Stock Other
---------------------- Undivided Comprehensive
Shares Amount Surplus Profits Income Total
------- ----------- ------------ ------------ ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
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
============ ============ ============ ============ ============ ============
</TABLE>
See Notes to Interim Financial Statements.
F-5
<PAGE>
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-6
<PAGE>
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, 1998 and 1997 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. 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, 1998 and 1997, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1998 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 & ASSOCIATES
Wilkes-Barre, Pennsylvania
January 25, 1999
F-7
<PAGE>
FIDELITY DEPOSIT & DISCOUNT BANK
BALANCE SHEET
December 31, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
ASSETS:
Cash and due from banks $ 3,315,306 $ 2,966,842
Interest-bearing deposits with financial institutions 5,404,438 4,341,546
------------ ------------
Total cash and cash equivalents 8,719,744 7,308,388
Federal funds sold 6,500,000 --
Available-for-sale securities 78,607,860 58,344,864
Held-to-maturity securities (fair value
$14,606,000 in 1997) -- 14,368,038
Loans and leases, net 235,430,079 194,516,933
Loans available-for-sale (fair value
$9,010,000 in 1998; $8,329,000 in 1997) 8,858,157 8,202,404
Accrued interest receivable 2,404,480 2,374,320
Bank premises and equipment, net 6,449,141 4,137,459
Foreclosed assets held for sale 201,261 275,829
Other assets 1,433,699 724,207
------------ ------------
Total assets $348,604,421 $290,252,442
============ ============
LIABILITIES:
Deposits:
Noninterest-bearing $ 33,449,998 $ 25,373,401
Certificates of deposit of $100,000 or more 49,435,718 47,343,471
Other interest-bearing deposits 157,115,035 145,308,138
------------ ------------
Total deposits 240,000,751 218,025,010
Accrued interest payable and other liabilities 2,932,666 2,451,204
Short-term borrowings 29,405,299 29,100,451
Long-term debt 42,252,000 12,252,000
------------ ------------
Total liabilities 314,590,716 261,828,665
------------ ------------
SHAREHOLDERS' EQUITY:
Capital stock authorized 1,000,000 shares
with $1.5625 par value; issued and
outstanding, 893,647 and 837,260 shares
in 1998 and 1997, respectively 1,396,324 1,308,218
Surplus 6,826,669 3,596,808
Undivided profits 25,656,844 23,293,701
Accumulated other comprehensive income 133,868 225,050
------------ ------------
Total shareholders' equity 34,013,705 28,423,777
------------ ------------
Total liabilities and shareholders' equity $348,604,421 $290,252,442
============ ============
</TABLE>
See Notes to Financial Statements.
F-8
<PAGE>
FIDELITY DEPOSIT & DISCOUNT BANK
STATEMENT OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
INTEREST INCOME:
Loans:
Taxable 18,016,230 15,151,599 12,830,695
Nontaxable 307,265 248,111 255,377
Leases 125,227 86,496 58,357
Interest-bearing deposits with financial institutions 103,396 78,387 113,200
Investment securities:
U.S. Treasury 585,108 655,334 1,062,111
U.S. government agency and corporations 2,833,672 3,680,356 3,517,365
States and political subdivisions (nontaxable) 1,020,335 902,749 737,946
Other securities 86,333 68,217 62,995
Federal funds sold 393,806 166,364 474,141
---------- ---------- ----------
Total interest income 23,471,372 21,037,613 19,112,187
---------- ---------- ----------
INTEREST EXPENSE:
Certificates of deposit of $100,000 or more 2,823,061 2,329,777 2,144,117
Other deposits 6,730,882 6,219,283 5,963,786
Securities sold under repurchase agreements 1,396,244 1,350,892 1,002,832
Other short-term borrowings and long-term debt 1,335,896 721,007 751,501
Other 22,549 18,925 15,776
---------- ---------- ----------
Total interest expense 12,308,632 10,639,884 9,878,012
---------- ---------- ----------
NET INTEREST INCOME 11,162,740 10,397,729 9,234,175
PROVISION FOR LOAN LOSSES 646,000 622,800 338,000
---------- ---------- ----------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 10,516,740 9,774,929 8,896,175
---------- ---------- ----------
OTHER INCOME:
Service charges on deposit accounts 722,270 546,230 458,938
Gain on sale of:
Investment securities 109,940 123,611 6,953
Loans 160,740 3,124 27,563
Fees and other service charges 851,864 585,960 385,931
Other operating income 57,920 41,676 42,721
Shares tax refund -- 2,869 65,000
---------- ---------- ----------
Total other income 1,902,734 1,303,470 987,106
---------- ---------- ----------
OTHER EXPENSES:
Salaries and employee benefits 3,875,854 3,454,936 3,054,515
Premises and equipment 1,109,076 1,042,646 1,040,800
Shares tax expense 228,599 210,409 181,113
Federal Deposit Insurance Corporation assessment 26,235 26,418 2,000
Loss on sale of:
Foreclosed assets held for sale 26,584 -- --
Bank premises and equipment -- 11,983 --
Other 2,342,814 1,836,942 1,784,809
---------- ---------- ----------
Total other expenses 7,609,162 6,583,334 6,063,237
---------- ---------- ----------
INCOME BEFORE PROVISION FOR INCOME TAXES 4,810,312 4,495,065 3,820,044
PROVISION FOR INCOME TAXES 1,246,760 1,185,008 995,340
---------- ---------- ----------
NET INCOME $ 3,563,552 $ 3,310,057 $ 2,824,704
=========== =========== ===========
Per share data:
Net income $ 4.20 $ 3.97 $ 3.43
Dividends $ 1.41 $ 1.28 $ 1.10
</TABLE>
See Notes to Financial Statements.
F-9
<PAGE>
FIDELITY DEPOSIT & DISCOUNT BANK
STATEMENT OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
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
============ ============ ============
</TABLE>
See Notes to Financial Statements.
F-10
<PAGE>
FIDELITY DEPOSIT & DISCOUNT BANK
STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
Accumulated
Capital Stock Other
---------------------- Undivided Comprehensive
Shares Amount Surplus Profits Income Total
-------- ---------- ---------- ----------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1995 411,210 $1,285,031 $2,944,898 $19,128,263 $433,513 $23,791,705
-----------
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-
sale securities, net of
reclassification adjustment and
tax effects 362,550 362,550
-----------
Comprehensive Income 3,672,607
-----------
Issuance of Stock 1,690 5,281 146,819 152,100
Dividends (1,062,530) (1,062,530)
Dividends Reinvested 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
======= ========== ========== =========== ========= ===========
Comprehensive Income:
Net income 3,563,552 3,563,552
Change in net unrealized holding
gains (losses) on available-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 $34,013,705
======= ========== ========== =========== ========= ===========
</TABLE>
See Notes to Financial Statements.
F-11
<PAGE>
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,
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 majority 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.
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
<PAGE>
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.
LOANS
Loans 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.
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
<PAGE>
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.
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.
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.
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.
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-14
<PAGE>
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.
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, 1998, 1997, and 1996, the Bank paid cash
for interest bearing liabilities of $11,827,170, $10,299,735 and
$9,979,287, respectively. For the years ended December 31, 1998, 1997, and
1996, the Bank paid cash for income taxes of $1,241,283, $1,068,646 and
$995,340, respectively.
Noncash investing activities related to the acquisition of foreclosed
assets held for sale amounted to $189,814, $275,829 and $77,309 in 1998,
1997, and 1996, respectively. Noncash investing activities also included
transferring $655,753, $6,136,340 and $5,618,349 from loans to loans
available-for-sale in 1998, 1997 and 1996, respectively.
COMPREHENSIVE 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
<PAGE>
The components of other comprehensive income and related tax effects are as
follows:
Years Ended December 31,
1998 1997 1996
(In thousands)
<TABLE>
<S> <C> <C> <C>
Unrealized holding gains on available
for sale securities $ (28,215) $549,318 $ 865,171
Less reclassification adjustment for
gains realized in income (109,940)
--------- -------- ---------
Net unrealized gains (138,155) 549,318 865,171
Tax effect 46,973 (186,768) (294,158)
--------- -------- ---------
Net of tax amount $ (91,182) $362,550 $(571,013)
========= ======== =========
</TABLE>
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, 1998 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 EQUITY SECURITIES
Amortized cost and fair value of investment securities at December 31, 1998
and 1997, are as follows (in thousands):
<TABLE>
<CAPTION>
1997
--------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized
Cost Gains Losses Fair Value
--------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Available-for-sale securities:
U.S. government agencies and corporations $39,697 $ 48 $280 $39,465
U.S. treasury securities 6,994 62 - 7,056
Obligations of states and political subdivisions 24,215 449 213 24,451
Mortgage-backed securities 5,380 41 52 5,369
------- ----- ---- -------
Total debt securities 76,286 600 545 76,341
Equity securities:
Restricted 2,113 - - 2113
Other 6 148 - 154
------- ----- ---- -------
Total $78,405 $ 748 $545 $78,608
======= ===== ==== =======
</TABLE>
F-16
<PAGE>
<TABLE>
<CAPTION>
1997
--------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized
Cost Gain Losses Fair Value
--------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Held-to-maturity securities:
Obligations of states and political subdivisions $14,368 $241 $ 3 $14,606
======= ==== ==== =======
Available-for-sale securities:
U.S. government agencies and corporations $35,500 $ 73 $102 $35,471
U.S. treasury securities 8,980 137 - 9,117
Obligations of states and political subdivisions 4,051 97 1 4,147
Mortgage-backed securities 8,402 60 42 8,420
------- ----- ---- -------
Total debt securities 56,933 367 145 57,155
Equity securities:
Restricted 1,065 - - 1,065
Other 6 119 - 125
------- ----- ---- -------
Total $58,004 $486 $145 $58,345
======= ==== ==== =======
</TABLE>
There are no significant concentrations of investments (greater than 10
percent of shareholders' equity) in any individual security issuer
other than securities of the United States government and agencies.
Most of the Bank's debt and equity securities are pledged to secure
public deposits, short-term borrowings, lines of credit, Federal Home
Loan Bank of Pittsburgh ("FHLB") borrowings and certain other deposits
as required by law. U.S. government securities pledged on repurchase
agreements are under the Bank's control.
The amortized cost and fair value of debt securities at December 31,
1998 by contractual maturity are shown below. Expected maturities will
differ from contractual maturities because borrowers may have the right
to call or repay obligations with or without call or repayment
penalties.
Amortized Fair
Cost Value
--------- --------
(In thousands)
------------------------
Available-for-sale securities:
Due in one year or less $ 9,389 $ 9,438
Due after one year through five years 2,915 2,992
Due after five years through ten years 20,644 20,803
Due after ten years 37,958 37,739
------- -------
70,906 70,972
Mortgage-backed securities 5,380 5,369
------- -------
Total $76,286 $76,341
======= =======
F-17
<PAGE>
Gross realized gains and losses on sales of available-for-sale
securities, determined using specific identification of the securities
in 1998, 1997 and 1996, were as follows:
1998 1997 1996
-------- -------- ------
Gross realized gains $109,940 $143,518 $8,938
Gross realized losses -- $ 19,907 $1,985
In June 1998, the Financial Accounting Standards Board issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities."
This statement established accounting and reporting standards for
derivative instruments, including certain derivative instruments
embedded in other contracts, (collectively referred to as
"derivatives") and for hedging activities. It requires that an entity
recognize all derivatives as either assets or liabilities in the
balance sheet and measure those instruments at fair value. The
accounting for changes in the fair value of a derivative depends on the
intended use of the derivative and the resulting designation. If
certain conditions are met, a derivative may be specifically designated
as: (a) a hedge of the exposure to changes in the fair value of a
recognized asset or liability or an unrecognized firm commitment; (b) a
hedge of the exposure to variable cash flows of a forecasted
transaction; or (c) a hedge of certain foreign currency exposures. On
October 1, 1998, the Bank transferred certain held-to-maturity
securities to the available- for-sale investment portfolio. The
amortized cost of the securities was approximately $15,476,690 with an
unrealized gain, net of taxes of approximately $266,363. This transfer
was in accordance with special reassessment provision contained within
SFAS No. 133 which was adopted by the Bank as of October 1, 1998.
5. LOANS AND LEASES
The major classifications of loans and leases at December 31, 1998 and
1997 are summarized as follows:
1998 1997
------------ ------------
Real estate $ 99,955,640 $ 87,931,770
Consumer 47,549,512 38,673,662
Commercial 85,425,708 67,201,013
Direct financing leases 2,248,990 1,536,074
Real estate construction 3,810,975 2,568,997
------------ ------------
Total 238,990,825 197,911,516
Less:
Unearned income 553,033 585,517
Allowance for loan losses 3,007,713 2,809,066
------------ ------------
Loans and leases, net $235,430,079 $194,516,933
============ ============
The Bank has no concentration of loans to borrowers engaged in similar
businesses or activities which exceed 5 percent of total assets at
December 31, 1998 or 1997.
F-18
<PAGE>
Net unearned loan fees and costs of $67,285 and $227,845 have been
deducted from the carrying value of loans at December 31, 1998 and
1997, respectively.
Impaired loans which are past due 90 days or more and still accruing
interest are $2,688,867 and $2,189,162 at December 31, 1998 and 1997,
respectively.
Impaired loans on which the accrual of interest has been discontinued
amounted to $1,364,102 and $1,075,908 at December 31, 1998 and 1997,
respectively. The total allowance for loan losses related to these
loans was $707,391 and $630,887 at December 31, 1998 and 1997,
respectively. Cash payments of $114,655 and $206,696, received during
1998 and 1997, respectively, on these impaired loans were all applied
to principal. The Bank is not committed to lend additional funds to
debtors whose loans have been modified.
Changes in the allowance for loan losses for the years ended December
31, 1998, 1997, and 1996 are as follows:
1998 1997 1996
---------- ---------- ----------
Balance, beginning $2,809,066 $2,589,976 $2,469,760
Recoveries 132,649 80,462 173,547
Provision for loan losses 646,000 622,800 338,000
Losses charged to allowance (580,002) (484,172) (391,331)
---------- ---------- ----------
Balance, ending $3,007,713 $2,809,066 $2,589,976
========== ========== ==========
For federal income tax purposes, the allowance for loan losses is
$315,958 at December 31, 1998, 1997, and 1996. The amounts deducted for
loan losses in the federal income tax returns were $447,353 in 1998,
$403,710 in 1997 and $205,466 in 1996. These amounts were the maximum
allowable deduction.
The Bank services real estate loans, which are not included in the
accompanying balance sheet, for investors in the secondary mortgage
market. The approximate amount of mortgages serviced amounted to
$20,252,000 and $13,304,000 at December 31, 1998 and 1997,
respectively.
F-19
<PAGE>
6. PREMISES AND EQUIPMENT
Components of premises and equipment at December 31, 1998 and 1997 are
summarized as follows:
1998 1997
----------- ----------
Land $ 855,330 $ 605,330
Bank premises 4,401,551 3,074,258
Furniture, fixtures and equipment 3,957,005 3,010,018
Leasehold improvements 964,104 681,573
----------- ----------
Total 10,177,990 7,371,179
Less accumulated depreciation and amortization 3,728,849 3,233,720
----------- ----------
Premises and equipment, net $ 6,449,141 $4,137,459
=========== ==========
The Bank leases its Green Ridge, Scranton, Pittston and Clarks Summit
branches under the terms of operating leases. Rental expense was
$157,434 for 1998, $142,960 for 1997 and $138,417 for 1996. The future
minimum rental payments under these leases are as follows:
YEAR AMOUNT
---- --------
1999 $160,000
2000 160,000
2001 161,000
2002 161,000
2003 147,000
--------
Total $789,000
========
Amortization of leasehold improvements is included in depreciation
expense.
7. DEPOSITS
At December 31, 1998, the scheduled maturities of certificates of
deposit are as follows:
YEAR AMOUNT
---- -------------
1999 $ 97,149,580
2000 17,185,014
2001 18,156,882
2002 3,775,257
2003 and thereafter 5,678,410
------------
$141,945,143
============
F-20
<PAGE>
8. SHORT-TERM BORROWINGS
Short-term borrowings are as follows at December 31:
1998 1997
----------- -----------
Securities sold under repurchase agreements $28,872,826 $28,067,069
Demand note, U.S. Treasury 532,473 1,033,382
----------- -----------
Total $29,405,299 $29,100,451
=========== ===========
The maximum and average amounts of short-term borrowings outstanding
and related interest rates for the years ended December 31, 1998 and
1997 are as follows:
<TABLE>
<CAPTION>
Maximum Weighted
Outstanding Average
At Any Average Rate During Rate at
1998 Month End Outstanding The Year Year End
---- ----------- ----------- ----------- --------
<S> <C> <C> <C>
Federal funds purchased $ 6,000,000 $ 224,658 5.50%
Securities sold under repurchase agreements 29,011,874 27,442,189 5.09% 4.76%
Demand note, U.S. Treasury 1,257,747 617,226 6.07% 4.12%
----------- -----------
Total $36,269,621 $28,284,073
=========== ===========
</TABLE>
<TABLE>
<CAPTION>
Maximum Weighted
Outstanding Average
At Any Average Rate During Rate at
1997 Month End Outstanding The Year Year End
---- ----------- ----------- ----------- --------
<S> <C> <C> <C>
Federal funds purchased $ 2,000,000 $ 389,973 6.07%
Securities sold under repurchase agreements 29,302,059 25,667,956 5.26% 5.21%
Demand note, U.S. Treasury 1,345,162 584,644 6.13% 5.27%
----------- -----------
Total $32,647,221 $26,642,573
=========== ===========
</TABLE>
At December 31, 1998, the Bank has $5,000,000 available on an unsecured
line of credit from a financial institution.
At December 31, 1998, the Bank has available approximately $3,750,000
that it can borrow at the discount window from the Federal Reserve Bank
of Philadelphia, which is secured by certain investments.
At December 31, 1998, the Bank also has a $10,000,000 line of credit
with the FHLB, which is secured by certain investments, and expires
April 21, 1999.
There were no borrowings on any of these lines at December 31, 1998 or
1997.
F-21
<PAGE>
9. LONG-TERM DEBT
Long-term debt consists of advances from the FHLB with interest rates
ranging from 3.81% to 6.15%. These advances are secured by unencumbered
U.S. government agency securities, mortgage-backed securities, U.S.
Treasury notes and certain residential mortgages.
At December 31, 1998, the maturities of long-term debt are as follows:
YEAR ENDING DECEMBER 31
-----------------------
1999 $ 5,947,000
2000 1,305,000
2003 10,000,000
2008 25,000,000
-----------
$42,252,000
===========
10. STOCK OPTION PLANS
The Bank has reserved 50,000 shares of its unissued capital stock for
issuance under a dividend reinvestment plan. Shares issued under this
plan are valued at fair value as of the dividend payment date. At
December 31, 1998, 30,675 shares are available for future issuance.
The Bank has established the 1998 Independent Directors Stock Option
Plan and has reserved 25,000 shares of its unissued capital stock for
issuance under the plan. Under the 1998 Independent Directors Stock
Option Plan, each outside director will be awarded stock options to
purchase 250 shares of the Bank's common stock on the first business
day of January, each year, at the fair market value on date of grant.
No stock options were awarded in 1998.
The Bank has established the 1998 Stock Incentive Plan and has reserved
25,000 shares of its unissued capital stock for issuance under the
plan. Under the 1998 Stock Incentive Plan, key officers and certain
other employees are eligible to be awarded qualified options to
purchase the Bank's common stock at the fair market value on the date
of grant. No qualified options were awarded in 1998.
F-22
<PAGE>
11. INCOME TAXES
The following temporary differences gave rise to the deferred tax asset at
December 31, 1998 and 1997:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Deferred tax assets:
Provision for loan losses $ 915,197 $ 847,657
Deferred compensation 90,104 72,714
----------- -----------
Total 1,005,301 920,371
----------- -----------
Deferred tax liabilities:
Leasing (350,340) (243,864)
Loan fees and costs (133,250) (39,984)
Unrealized gain on available-for-sale securities (68,962) (115,935)
----------- -----------
Total (552,552) (399,783)
-----------
Deferred tax asset, net $ 452,749 $ 520,588
=========== ===========
</TABLE>
The provision for income taxes is as follows:
1998 1997 1996
---- ---- ----
Current $1,131,948 $1,173,088 $ 987,340
Deferred 114,812 11,920 8,000
---------- ---------- ----------
Total provision $1,246,760 $1,185,008 $ 995,340
========== ========== ==========
A reconciliation between the expected statutory income tax and the actual
provision for income taxes is as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Expected provision at the statutory rate $ 1,635,506 $ 1,528,322 $ 1,298,815
Tax-exempt income (437,820) (383,916) (336,064)
Nondeductible interest expense 66,618 54,659 45,772
Other, net (17,544) (14,057) (13,183)
----------- ----------- -----------
Actual provision for income taxes $ 1,246,760 $ 1,185,008 $ 995,340
=========== =========== ===========
</TABLE>
12. RETIREMENT PLAN
The Bank has a defined contribution 401(k) plan covering substantially all
employees of the Bank. It is subject to the provisions of the Employee
Retirement Income Security Act of 1974 (ERISA). Contributions to the Plan
for 1998, 1997 and 1996 were $200,140, $177,529 and $157,073, respectively.
F-23
<PAGE>
13. FINANCIAL INSTRUMENTS
The Bank is a party to financial instruments with off-balance-sheet risk in
the normal course of business to meet the financing needs of its customers
and to reduce its own exposure to fluctuations in interest rates. These
financial instruments include commitments to extend credit and standby
letters of credit. Those instruments involve, to varying degrees, elements
of credit and interest rate risk in excess of the amount recognized in the
balance sheet. The contract or notional amounts of those instruments
reflect the extent of the Bank's involvement in particular classes of
financial instruments.
The Bank's exposure to credit loss from nonperformance by the other party
to the financial instruments for commitments to extend credit and standby
letters of credit is represented by the contractual amount of those
instruments. The Bank uses the same credit policies in making commitments
and conditional obligations as it does for on-balance-sheet instruments.
Commitments to extend credit are legally binding agreements to lend to
customers. Commitments generally have fixed expiration dates or other
termination clauses and may require payment of fees. Since commitments may
expire without being drawn upon, the total commitment amounts do not
necessarily represent future liquidity requirements. The Bank evaluates
each customer's credit-worthiness on a case-by-case basis. The amount of
collateral obtained, if considered necessary by the Bank on extension of
credit, is based on management's credit assessment of the customer.
Standby letters of credit written are conditional commitments issued by the
Bank guaranteeing performance by a customer to a third party. The credit
risk involved in issuing letters of credit is essentially the same as that
involved in extending loan facilities to customers.
The Bank has not incurred any losses on its commitments in either 1998 or
1997.
F-24
<PAGE>
The carrying or notional amount and estimated fair values of the Bank's
financial instruments were as follows at December 31, 1998 and 1997:
<TABLE>
<CAPTION>
1998 1997
----------------------------------------------------
Carrying Carrying
Or Or
Notional Estimated Notional Estimated
Amount Fair Value Amount Fair Value
------ ---------- ------ ----------
<S> <C> <C> <C> <C>
Financial assets:
Cash and cash equivalents $ 8,720 $ 8,720 $ 7,308 $ 7,308
Federal funds sold 6,500 6,500 -- --
Available-for-sale securities 78,608 78,608 58,345 58,345
Held-to-maturity securities -- -- 14,368 14,606
Loans and leases 238,438 240,072 197,326 199,091
Loans available for sale 8,858 9,010 8,202 8,329
Accrued interest 2,404 2,404 2,374 2,374
Financial liabilities:
Deposit liabilities $240,001 $240,551 $218,025 $218,211
Accrued interest 2,742 2,742 2,451 2,451
Short-term borrowings 29,405 29,411 29,100 29,100
Long-term debt 42,252 42,256 12,252 12,255
Off-balance sheet liabilities:
Commitments to extend credit $ 75,070 $ 75,070 $ 33,798 $ 33,798
Standby letters of credit 1,443 1,443 1,239 1,239
</TABLE>
14. REGULATORY MATTERS
The Bank is subject to various regulatory capital requirements administered
by the federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory-and possible additional
discretionary-actions by regulators that, if undertaken, could have a
direct material effect on the Bank's financial statements. Under capital
adequacy guidelines and the regulatory framework for prompt corrective
action, the Bank must meet specific capital guidelines that involve
quantitative measures of the Bank's assets, liabilities, and certain
off-balance-sheet items as calculated under regulatory accounting
practices. The Bank's capital amounts and classification are also subject
to qualitative judgments by the regulators about components, risk
weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in the
table below) of total and Tier I capital (as defined in the regulations) to
risk-weighted assets (as defined), and of Tier I capital (as defined) to
average assets (as defined). As of December 31, 1998, the Bank meets all
capital adequacy requirements to which it is subject.
To be categorized as well capitalized the Bank must maintain minimum total
risk-based, Tier I risk-based, and Tier I leverage ratios as set forth in
the table. The Bank's actual capital amounts and ratios are also presented
in the table. No amounts were deducted from capital for interest-rate risk
in either 1998 or 1997.
F-25
<PAGE>
<TABLE>
<CAPTION>
To Be Well Capitalized
For Capital Under Prompt Corrective
Actual Adequacy Purposes Action Provisions
------------------------------------------------------------------------------
Amount Ratio Amount Ratio Amount Ratio
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1998:
Total Capital
(to Risk Weighted Assets) $36,493,000 17.5% $16,695,000 >8.0% 20,869,000 >10.0%
- -
Tier I Capital
(to Risk Weighted Assets) $33,880,000 16.2% $ 8,347,000 >4.0% 12,521,000 > 6.0%
- -
Tier I Capital
(to Average Assets) 33,880,000 9.7% $12,557,000 >4.0% 15,696,000 > 5.0%
- -
As of December 31, 1997:
Total Capital
(to Risk Weighted Assets) $30,317,000 16.8% >$13,502,000 >8.0% >16,877,000 >10.0%
- - - -
Tier I Capital
(to Risk Weighted Assets) $28,199,000 16.7% > $6,751,000 >4.0% >10,126,000 > 6.0%
- - - -
Tier I Capital
(to Average Assets) $28,199,000 10.2% >$11,396,000 >4.0% >14,245,000 > 5.0%
- - - -
</TABLE>
15. RELATED PARTY TRANSACTIONS
During the ordinary course of business, loans are made to executive
officers, directors, shareholders and associates of such persons. These
transactions were made on substantially the same terms and at those rates
prevailing at the time for comparable transactions with others. A summary
of loan activity with officers, directors, shareholders and associates of
such persons is as follows:
1998 1997 1996
---- ---- ----
Balance, beginning $ 4,261,755 $ 3,910,681 $ 4,282,657
Additions 1,597,121 2,266,427 921,081
Collections (1,520,968) (1,915,353) (1,293,057)
----------- ----------- -----------
Balance, ending $ 4,337,908 $ 4,261,755 $ 3,910,681
=========== =========== ===========
Aggregate loans to directors and associates exceeding 2.5% of
shareholders' equity included in the table above are as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Number of persons 2 3 2
Balance, beginning $ 3,511,442 $ 2,616,784 $ 3,444,448
Additions 590,547 2,088,447 341,250
Collections (926,111) (1,807,055) (539,877)
Prior loan balance now above threshold 613,266
Adjustment for loans no longer exceeding 2.5% of
shareholder's equity (728,351) (629,037)
----------- ----------- -----------
Balance, ending $ 2,447,527 $ 3,511,442 $ 2,616,784
=========== =========== ===========
</TABLE>
16. SUBSEQUENT EVENT
F-26
<PAGE>
In January 1999, the Bank granted 2,250 options to purchase the Bank's
capital stock at $62 per share under the terms of its 1998 Independent
Directors Stock Option Plan. In January 1999, the Bank also granted 1,500
options to purchase the Bank's capital stock at $62 per share under the
1998 Stock Incentive Plan.
17. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
The following is a summary of quarterly results of operations for the years
ended December 31, 1998, 1997 and 1996:
<TABLE>
<CAPTION>
First Second Third Fourth
1998 Quarter Quarter Quarter Quarter Total
---- ------- ------- ------- ------- -----
(In Thousands, Except Per Share Amounts)
<S> <C> <C> <C> <C> <C>
Interest income $ 5,530 $ 5,712 $ 5,974 $ 6,255 $ 23,471
Interest expense (2,915) (2,990) (3,193) (3,210) (12,308)
-------- -------- -------- -------- --------
Net interest income 2,615 2,722 2,781 3,045 11,163
Provision for loan losses (182) (182) (184) (98) (646)
Other income 389 415 457 641 1,902
Other expenses (1,711) (1,842) (1,978) (2,078) (7,609)
-------- -------- -------- -------- --------
Income before provision for
income taxes 1,111 1,113 1,076 1,510 4,810
Provision for income taxes (284) (280) (270) (413) (1,247)
-------- -------- -------- -------- --------
Net income $ 827 $ 833 $ 806 $ 1,097 $ 3,563
======== ======== ======== ======== ========
Net income per share $ .98 $ .98 $ .95 $ 1.29 $ 4.20
======== ======== ======== ======== ========
<CAPTION>
First Second Third Fourth
1997 Quarter Quarter Quarter Quarter Total
---- ------- ------- ------- ------- -----
(In Thousands, Except Per Share Amounts)
<S> <C> <C> <C> <C> <C>
Interest income $ 5,073 $ 5,188 $ 5,207 $ 5,569 $ 21,037
Interest expense (2,570) (2,617) (2,627) (2,825) (10,639)
-------- -------- -------- -------- --------
Net interest income 2,503 2,571 2,580 2,744 10,398
Provision for loan losses (90) (176) (138) (219) (623)
Other income 298 351 343 311 1,303
Other expenses (1,605) (1,648) (1,706) (1,624) (6,583)
-------- -------- -------- -------- --------
Income before provision for
income taxes 1,106 1,098 1,079 1,212 4,495
Provision for income taxes (290) (289) (284) (322) (1,185)
-------- -------- -------- -------- --------
Net income $ 816 $ 809 $ 795 $ 890 $ 3,310
======== ======== ======== ======== ========
Net income per share $ .98 $ .97 $ .95 $ 1.07 $ 3.97
======== ======== ======== ======== ========
</TABLE>
F-27
<PAGE>
<TABLE>
<CAPTION>
First Second Third Fourth
1996 Quarter Quarter Quarter Quarter Total
---- ------- ------- ------- ------- -----
(In Thousands, Except Per Share Amounts)
<S> <C> <C> <C> <C> <C>
Interest income $ 4,536 $ 4,674 $ 4,842 $ 5,060 $ 19,112
Interest expense (2,409) (2,382) (2,467) (2,620) (9,878)
-------- -------- -------- -------- --------
Net interest income 2,127 2,292 2,375 2,440 9,234
Provision for loan losses (90) (91) (93) (64) (338)
Other income 228 288 228 243 987
Other expenses (1,459) (1,502) (1,540) (1,562) (6,063)
-------- -------- -------- -------- --------
Income before provision for
income taxes 806 987 970 1,057 3,820
Provision for income taxes (199) (260) (255) (281) (995)
-------- -------- -------- -------- --------
Net income $ 607 $ 727 $ 715 $ 776 $ 2,825
======== ======== ======== ======== ========
Net income per share $ .74 $ .88 $ .87 $ .94 $ 3.43
======== ======== ======== ======== ========
</TABLE>
F-28
<PAGE>
ANNEX A
PLAN OF REORGANIZATION
AND EXHIBIT A, PLAN OF MERGER
A-1
<PAGE>
PLAN OF REORGANIZATION
THIS AGREEMENT made as of this ____ day of _______, 1999, among FIDELITY D
& D BANCORP, INC., a Pennsylvania business corporation (the "Holding Company"),
THE FIDELITY DEPOSIT AND DISCOUNT BANK, Dunmore, Pennsylvania, a
Pennsylvania-chartered bank and trust company (the "Bank"), and THE FIDELITY
DEPOSIT AND DISCOUNT INTERIM BANK (In Organization), a Pennsylvania-chartered
banking institution and a subsidiary of the Holding Company (the "Interim
Bank"),
WITNESSETH:
WHEREAS, the Holding Company, the Bank and the Interim Bank desire to
effect the formation of a bank holding company whereby Bank and the Interim Bank
will be merged, the surviving bank will become a wholly-owned subsidiary of the
Holding Company, and the present shareholders of the Bank (except for those who
perfect dissenters' rights) will become shareholders of the Holding Company, on
the terms and conditions hereinafter set forth;
NOW, THEREFORE, in consideration of the mutual covenants and agreements
contained herein, and intending to be legally bound hereby, the parties agree as
follows:
SECTION 1. MERGER.
1.1. Agreement to Merge. Subject to the terms and conditions hereinafter
set forth, the parties hereto agree to effect a merger of the Bank and the
Interim Bank (the "Merger") pursuant to the provisions of the Pennsylvania
Banking Code of 1965, as amended, (the "Banking Code") in accordance with the
Plan of Merger attached hereto as Exhibit A and made a part hereof (the "Plan of
Merger").
1.2. Holding Company Common Stock. The Holding Company shall make available
to the Bank and the Interim Bank a sufficient number of shares of the Holding
Company's Common Stock to effect the Merger pursuant to the Plan of Merger.
SECTION 2. SHARES OF THE HOLDING COMPANY AND OF THE SURVIVING BANK.
2.1. Conversion of Shares. The manner of converting the shares of Common
Stock of the Bank into shares of Common Stock of the Holding Company and the
shares of Common Stock of the Interim Bank into shares of Common Stock of the
surviving bank in the Merger shall be as set forth in Section 2 of the Plan of
Merger.
SECTION 3. REPRESENTATIONS AND WARRANTIES OF THE HOLDING COMPANY.
The Holding Company represents, warrants and agrees as follows:
A-2
<PAGE>
3.1. Organization and Standing. The Holding Company is a corporation duly
organized and validly existing under the Pennsylvania Business Corporation Law
of 1988, as amended.
3.2. Capitalization. The Holding Company is authorized to issue Ten Million
(10,000,000) shares of Common Stock, without par value, of which five (5) shares
are issued and outstanding, and Five Million (5,000,000) shares of Preferred
stock, without par value, of which no shares are issued and outstanding. There
are no outstanding options, warrants, calls, convertible securities,
subscriptions or other commitments or rights of any nature with respect to the
Common Stock of the Holding Company.
3.3. Authority Relative to this Agreement. The execution, delivery and
performance of this Agreement have been duly authorized by the Board of
Directors of the Holding Company. Subject to appropriate shareholder and
regulatory approvals, neither the execution and delivery of this Agreement nor
the consummation of the transactions provided for herein will violate any
agreement to which the Holding Company is a party or by which it is bound or any
law, order or decree or any provision of its Articles of Incorporation or
By-laws.
3.4. Absence of Liabilities. Prior to the effective time of the Merger, the
Holding Company will have engaged only in the transactions contemplated by this
Agreement and the Plan of Merger, will have no material liabilities and will
have incurred no material obligations except in connection with its performance
of the transactions provided for in this Agreement and in the Plan of Merger.
SECTION 4. REPRESENTATIONS AND WARRANTIES OF THE BANK.
The Bank represents, warrants and agrees as follows:
4.1. Organization and Standing. The Bank is a state-chartered bank and
trust company duly organized and validly existing under the Pennsylvania Banking
Code of 1965, as amended (the "Banking Code").
4.2. Capitalization. The Bank is authorized to issue Five Million
(5,000,000) shares of Common Stock, par value $1.5625 per share, of which
897,736.20888 shares are issued and outstanding. As of the date of this
Agreement, the Bank has issued 3,750 options at an exercise price of $62.00 per
share under its 1998 Independent Directors Stock Option Plan and 1998 Stock
Incentive Plan. Each such option is exercisable for one share of Common Stock of
the Bank. The Bank may issue up to 25,000 shares of Common Stock under each of
these stock option plans. The Bank also has a Dividend Reinvestment Plan by
which participants' dividends are invested in additional shares of Common Stock.
The Bank may issue up to 50,000 shares of Common Stock under the Dividend
Reinvestment Plan. Other than as disclosed in this Section 4.2, there are no
other outstanding options, warrants, calls, convertible securities,
subscriptions or other commitments or rights of any nature with respect to the
Common Stock of Bank.
4.3. Authority Relative to this Agreement. The execution, delivery and
performance of this Agreement and the Plan of Merger have been duly authorized
by the Board of Directors of the Bank. Subject to appropriate shareholder and
regulatory approvals, neither the execution and delivery of this Agreement or
the Plan of Merger nor the consummation of the transactions provided for herein
A-3
<PAGE>
or therein will violate any agreement to which the Bank is a party or by which
it is bound or any law, order, or decree or any provision of its Articles of
Incorporation or Bylaws.
SECTION 5. REPRESENTATIONS AND WARRANTIES OF THE INTERIM BANK.
The Interim Bank represents, warrants and agrees as follows:
5.1. Organization and Standing. The Interim Bank is a state-chartered
banking institution in the process of formation under the Banking Code.
5.2. Capitalization. Upon formation, the Interim Bank will be authorized to
issue Five Million (5,000,000) shares of Common Stock, par value $2.00 per
share, of which 50,000 shares will be issued and outstanding and owned by the
Holding Company and ten organizers immediately prior to the Merger.
5.3. Authority Relative to this Agreement. The execution, delivery and
performance of this Agreement and the Plan of Merger have been duly authorized
by the Board of Directors of the Interim Bank. Subject to appropriate
shareholder and regulatory approvals, neither the execution and delivery of this
Agreement or the Plan of Merger nor the consummation of the transactions
provided for herein or therein will violate any agreement to which the Interim
Bank is a party or by which it is bound or any law, order, decree or any
provision of its Articles of Incorporation or By-laws.
5.4. Absence of Liabilities. Prior to the effective time of the Merger, the
Interim Bank will have engaged only in the transactions contemplated by this
Agreement and the Plan of Merger, will have no material liabilities and will
have incurred no material obligations except in connection with its performance
of the transactions provided for in this Agreement and in the Plan of Merger.
SECTION 6. COVENANTS OF THE HOLDING COMPANY.
The Holding Company agrees that between the date hereof and the effective
time of the Merger:
6.1. Capitalization of the Interim Bank. The Holding Company shall purchase
a total of 45,000 shares of Common Stock, par value $2.00 per share, of Interim
Bank for $3.10 per share, and shall cause the Interim Bank to do all things
necessary to obtain a charter as a state banking institution pursuant to the
Banking Code so as to permit the consummation of the Merger provided for in the
Plan of Merger. The Holding Company shall also purchase the 5,000 shares of
Common Stock of the Organizers of the Interim Bank upon consummation of the
Merger for $3.10 per share.
6.2. Approval of Merger. The Holding Company, as a shareholder of the
Interim Bank, shall approve this Agreement and the Plan of Merger in accordance
with applicable law.
6.3. Assumption of Stock Options and Stock Option Plans. The Holding
Company shall assume the obligations of the Bank under all stock options
outstanding as of the date of this Agreement to purchase 3,750 shares of Common
Stock of the Bank, to the extent that such options remain unexercised on the
effective date of this Agreement, as set forth in Section 2.4 of the Plan
A-4
<PAGE>
of Merger. The Holding Company shall also assume the obligations of the Bank
under the Bank's 1998 Independent Directors Stock Option Plan and 1998 Stock
Incentive Plan, as set forth in Section 2.4 of the Plan of Merger.
6.4. Best Efforts. The Holding Company will use its best efforts to take,
or cause to be taken, all actions or do, or cause to be done, all things
necessary, proper or advisable under applicable laws and regulations to
consummate and make effective the transactions contemplated by this Agreement
and the Plan of Merger, subject, however, to the requisite vote of the
shareholders of the Bank in accordance with the requirements of the Banking Code
and applicable law.
SECTION 7. COVENANTS OF THE BANK.
The Bank agrees that between the date hereof and the effective time of the
Merger:
7.1. Shareholders' Meeting. The Bank shall submit this Agreement and the
Plan of Merger to the vote of its shareholders as provided by the Banking Code
and other applicable laws at a meeting of shareholders to be held as soon as
practicable, and any adjournment or postponement thereof.
7.2. Best Efforts. The Bank will use its best efforts to take, or cause to
be taken, all actions or do, or cause to be done, all things necessary, proper
or advisable under applicable laws and regulations to consummate and make
effective the transactions contemplated by this Agreement and the Plan of
Merger, subject, however, to the requisite vote of the shareholders of the Bank
in accordance with the requirements of the Banking Code and applicable law.
SECTION 8. COVENANTS OF THE INTERIM BANK.
The Interim Bank agrees that between the date hereof and the effective time
of the Merger:
8.1. Shareholder Approval. The Interim Bank shall submit this Agreement and
the Plan of Merger to its shareholder(s) for approval and adoption as provided
by the Banking Code and other applicable laws.
8.2. Best Efforts. The Interim Bank will use its best efforts to take, or
cause to be taken, all actions or do, or cause to be done, all things necessary,
proper or advisable under applicable laws and regulations to consummate and make
effective the transactions contemplated by this Agreement and the Plan of
Merger, subject, however, to the requisite approval of the shareholder(s) of the
Interim Bank in accordance with the requirements of the Banking Code and
applicable law.
SECTION 9. CONDITIONS TO OBLIGATIONS OF THE PARTIES.
The obligations of the parties to consummate this Agreement and the Plan of
Merger shall be subject to the following conditions:
9.1. Representations and Warranties: Performance of Covenants. The
representations and warranties and covenants contained in Sections 3, 4, 5, 6, 7
and 8 hereof shall be true as of and
A-5
<PAGE>
at the effective time of the Merger, and each party shall have performed all
obligations required hereby to be performed by it prior to the effective time
of the Merger.
9.2. Bank Shareholder Approval. The shareholders of Bank shall have duly
approved this Agreement and the Plan of Merger in accordance with applicable
laws.
9.3. Regulatory Approvals. Any federal or state regulatory agency having
jurisdiction (banking or otherwise), to the extent that any consent or approval
is required by applicable laws or regulations for the consummation of this
Agreement and the Plan of Merger, shall have granted any necessary consent or
approval.
9.4. Registration Statement. The registration statement (the "Registration
Statement") filed by the Holding Company, if required pursuant to the Securities
Act of 1933, as amended, covering the shares of the Holding Company's Common
Stock to be issued pursuant to the Plan of Merger shall have been declared
effective by the Securities and Exchange Commission; and no stop order
suspending the effectiveness of the Registration Statement shall have been
issued and no proceeding for that purpose shall have been initiated or, to the
knowledge of the Holding Company, shall be contemplated or threatened by the
Securities and Exchange Commission.
9.5. Litigation. There shall be no litigation or proceeding pending or
threatened for the purpose of enjoining, restraining or preventing the
consummation of the Merger, this Agreement or the Plan of Merger or otherwise
claiming that such consummation is improper.
9.6. Tax Opinion. A tax opinion shall have been obtained from Shumaker
Williams, P.C. of Camp Hill, Pennsylvania, Special Counsel to the Bank that the
conversion of Bank's Common Stock into the Holding Company's Common Stock will
be tax free for federal income tax purposes; provided, however, that the
requirements of this Section 9.6 may be waived by the affirmative vote of a
majority of the Board of Directors of each of the parties hereto.
SECTION 10. TERMINATION, WAIVER AND AMENDMENT.
10.1. Circumstances of Termination. Anything herein or elsewhere to the
contrary notwithstanding, this Agreement and the Plan of Merger may be
terminated at any time before the effective time of the Merger (whether before
or after action with respect thereto by the Bank's shareholders) only:
(a) by the mutual consent of the Board of Directors of the Bank, the
Interim Bank and the Holding Company evidenced by an instrument in writing
signed on behalf of each by any two of their respective officers; or
(b) by the Board of Directors of the Bank if in its sole judgment the
Merger would be inadvisable because of the number of shareholders of the
Bank who perfect their dissenter's rights in accordance with applicable law
and the Plan of Merger, or if, in the sole judgment of such Board, the
Merger would not be in the best interests of the Bank or its employees,
depositors or shareholders for any reason whatsoever.
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<PAGE>
10.2. Effect of Termination. In the event of the termination and
abandonment hereof, this Agreement and the Plan of Merger shall become void and
have no effect, without any liability on the part of any of the parties, their
directors, officers or shareholders, except as set forth in Section 11 hereof.
10.3. Waiver. Any of the terms or conditions of this Agreement and the Plan
of Merger may be waived in writing at any time by the Bank by action taken by
its Board of Directors, whether before or after action by the Bank's
shareholders; provided, however, that such action shall be taken only if, in the
judgment of the Board of Directors, such waiver will not have a materially
adverse effect on the benefits intended to be granted hereunder to the
shareholders of the Bank.
10.4. Amendment. Anything herein or elsewhere to the contrary
notwithstanding, to the extent permitted by law, this Agreement and the Plan of
Merger may be amended at any time by the affirmative vote of a majority of the
Board of Directors of each of the Bank, the Holding Company and the Interim
Bank, whether before or after action with respect thereto by the Bank's
shareholders and without further approval of such amendment by the shareholders
of the parties hereto; provided, however, that Section 2.1 of this Agreement and
Section 2 of the Plan of Merger may not be amended after the meeting of the
Bank's shareholders referred to in Section 7.1 hereof except by the vote of Bank
shareholders required for the approval of the Merger by such shareholders.
SECTION 11. EXPENSES.
11.1. General. Each party hereto will pay its own expenses incurred in
connection with this Agreement and the Plan of Merger, whether or not the
transactions contemplated herein are effected.
11.2. Special Dividend. Upon the effective time of the Merger, the
surviving bank shall pay a special dividend to the Holding Company in an amount
equal to the sum of:
(a) the expenses of the Holding Company in connection with the
transactions contemplated herein, if any;
(b) the principal amount of any loan that the Holding Company shall
have obtained to purchase shares of Common Stock of the Interim Bank as
provided in 6.1 hereof; and
(c) the amount of any interest incurred by the Holding Company on
account of any loans obtained by it for the purchase of shares of Common
Stock of the Interim Bank as provided in Section 6.1 hereof.
SECTION 12. MISCELLANEOUS.
12.1. Restrictions on Affiliates. The Holding Company may cause stock
certificates representing any shares issued to any shareholder who may be deemed
to be an affiliate of the Bank, within the meaning of Rule 145 under the
Securities Act of 1933, as amended, to bear a legend setting forth any
applicable restrictions on transfer thereof under Rule 145 and may cause
stop-transfer orders to be entered with its transfer agent with respect to any
such certificates.
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<PAGE>
12.2. No Brokers. Each of the parties represents to the other that it has
not incurred and will not incur any liability for brokerage fees or agents'
commissions in connection with this Agreement, the Plan of Merger and the
transactions contemplated hereby.
12.3. Right to Withhold Dividends. The Board of Directors of the Holding
Company reserves the right to withhold dividends from any former shareholder of
the Bank who fails to exchange certificates representing the shares of the Bank
for certificates representing the shares of the Holding Company in accordance
with Section 2 of the Plan of Merger.
12.4. Failure to Surrender Certificates. Shareholders of the Holding
Company shall surrender certificates representing the shares of the Bank for
certificates representing the shares of the Holding Company within two (2) years
of the date of the letter of transmittal as provided in Section 2 of the Plan of
Merger. In the event that any certificates are not surrendered for exchange
within such two (2) year period, the shares, represented by appropriate
certificates of the Holding Company that would otherwise have been delivered in
exchange for the unsurrendered certificates, may be sold and the net proceeds of
the sale shall be held for the shareholders of the unsurrendered certificates to
be paid to them upon surrender of their outstanding certificates. From and after
such sale, the sole right of the holders of the unsurrendered outstanding
certificates shall be the right to collect the net sales proceeds held for their
account.
12.5. Entire Agreement. This Agreement (including the Plan of Merger
attached as an exhibit hereto) contains the entire agreement among the parties
with respect to the subject matter hereof and supersedes all prior agreements,
written or oral, with respect thereto.
12.6. Captions. Descriptive headings are for convenience only and shall not
control or affect the meaning or construction of any provisions of this
Agreement or the Plan of Merger.
12.7. Applicable Law. This Agreement and the Plan of Merger shall be
governed by the laws of the Commonwealth of Pennsylvania applicable to contracts
executed in and to be performed exclusively within the Commonwealth of
Pennsylvania, regardless of where they are executed.
12.8. Counterparts. This Agreement may be executed in any number of
counterparts, and each such counterpart shall be deemed to be an original
instrument, but all such counterparts together shall constitute but one
agreement.
A-8
<PAGE>
IN WITNESS WHEREOF, this Agreement has been executed as of the day and year
first above mentioned.
(SEAL)
ATTEST: FIDELITY D & D BANCORP, INC.
By:
- ---------------------------------- ---------------------------------
John F. Glinsky, Jr., Secretary Michael F. Marranca, President
(SEAL)
ATTEST: THE FIDELITY DEPOSIT AND
DISCOUNT BANK
By:
- ---------------------------------- ---------------------------------
John F. Glinsky, Jr., Secretary Michael F. Marranca, President
(SEAL)
ATTEST: THE FIDELITY DEPOSIT AND
DISCOUNT INTERIM BANK
(In Organization)
By:
- ---------------------------------- ---------------------------------
John F. Glinsky, Jr., Secretary Michael F. Marranca, President
A-9
<PAGE>
EXHIBIT A
PLAN OF MERGER
THE FIDELITY DEPOSIT AND DISCOUNT INTERIM BANK
with, into and under the charter of
THE FIDELITY DEPOSIT AND DISCOUNT BANK
THIS PLAN OF MERGER made between The Fidelity Deposit and Discount Bank
(the "Bank"), a Pennsylvania-chartered bank and trust company, located at
Blakely and Drinker Streets, Dunmore, County of Lackawanna, in the Commonwealth
of Pennsylvania, and The Fidelity Deposit and Discount Interim Bank (in
organization) (the "Interim Bank"), a Pennsylvania-chartered bank, located at
Blakely and Drinker Streets, Dunmore, County of Lackawanna, in the Commonwealth
of Pennsylvania (the two parties being sometimes collectively referred to herein
as the "Constituent Banks").
WHEREAS, Bank, Interim Bank and Fidelity D&D Bancorp, Inc. (the "Holding
Company"), a Pennsylvania business corporation of which Interim Bank is a
subsidiary, have entered into a Plan of Reorganization of even day herewith (the
"Plan of Reorganization"), providing for, among other things, the execution of
the Plan of Merger and for the merger (the "Merger") of Bank and Interim Bank in
accordance with the terms and conditions hereinafter set forth;
NOW, THEREFORE, the Constituent Banks, intending to be legally bound
hereby, agree to effect the Merger in accordance with the terms and conditions
hereinafter set forth.
Section 1. General.
1.1 The Merger. On the Effective Date, as hereinafter defined, Interim Bank
shall be merged with, into and under the charter of the bank under the
Pennsylvania Banking Code of 1965, as amended (the "Banking Code"), the
separate existence of Interim Bank shall cease, and Bank shall be the
surviving Bank (the "Surviving Bank"), in accordance with this Plan of
Merger.
1.2 Name. The name of the surviving Bank shall be The Fidelity Deposit and
Discount Bank, and the location of its principal office shall be Blakely
and Drinker Streets, Dunmore, Pennsylvania 18512.
1.3 Articles of Incorporation. At the Effective Date, the Articles of
Incorporation of the bank, as in effect immediately prior to the Effective
Date, shall be the Articles of Incorporation of the Surviving Bank.
1.4 By-laws. At the Effective Date, the by-laws of the bank, as in effect
immediately prior to the Effective Date, shall be the by-laws of the
Surviving Bank.
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<PAGE>
1.5 Effect of Merger. On the Effective Date, the Surviving Bank shall succeed,
without further act or deed, to all of the property, rights, powers, duties
and obligations of the Constituent Banks in accordance with the banking
Code. Any claim existing or action pending by or against either of the
Constituent Banks may be prosecuted to judgment as if the Merger had not
taken place, and the Surviving Bank may be substituted in its place.
1.6 Continuation in Business. The Surviving Bank shall continue in business
with the assets and liabilities of each of the Constituent Banks. The
Surviving Bank shall be a bank and trust company organized and having
perpetual existence under the laws of the Commonwealth of Pennsylvania. Any
branch offices of the Surviving Bank shall consist of the bank's present
branch offices and any other branch office or offices that Bank may be
authorized to have as of the Effective Date.
1.7 Board of Directors. The Board of Directors of Bank immediately prior to the
consummation of the Merger shall serve as the Board of Directors of the
Surviving Bank from and after the Effective Date and until such time as
their successors have been duly elected and qualified.
1.8 Officers. The persons who are executive or other officers of Bank
immediately prior to the consummation of the Merger shall serve as the
officers of the Surviving Bank from and after the Effective Date and until
such time as the Board of Directors of the Surviving Bank shall otherwise
determine.
1.9 Employees. On the Effective Date, all persons who are employees of Bank and
of Interim Bank shall become employees of the Surviving Bank.
Section 2. Conversion of Shares. The manner and basis of converting shares of
Common Stock of the Constituent Banks shall be as follows:
2.1 Stock of Interim Bank. The shares of Common Stock, par value $2.00 per
share, of Interim Bank issued and outstanding immediately prior to the
Effective Date shall be converted into fully paid and non-assessable shares
of Common Stock of the Surviving Bank so that the number of outstanding
shares of Common Stock of the Surviving Bank at and after the Effective
Date shall equal the number of outstanding shares of Common Stock of the
bank prior to the Effective Date and resulting in all outstanding shares of
Common Stock of the Surviving Bank being held by the holding company at and
after the Effective Date.
2.2 Stock of the bank. Each share of Common Stock, par value $1.5625 per share,
of Bank issued and outstanding immediately prior to the Effective Date
(except for shares owned by shareholders who shall have duly perfected
dissenters' rights in accordance with this Plan of Merger and applicable
law and except for fractional shares) shall, on the Effective Date, by
virtue of the Merger and without any action on the part of the holder
thereof, be converted into and become two (2) shares of fully paid and
nonassessable Common Stock, without par value, of the holding company. No
fractional shares of Common Stock and no scrip or certificates therefor,
shall be issued in connection with the Merger. In lieu of the issuance of
any fractional share to which a shareholder would otherwise be entitled,
each former shareholder of Bank shall receive, in cash, an amount equal to
the fair market value of his or her fractional interest. From
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<PAGE>
and after the Effective Date, each certificate which, prior to the
Effective Date, represented shares of Common Stock of the bank shall
evidence ownership of shares of Common Stock of the holding company on the
basis set forth herein.
2.3 Treasury Stock. Each share of Common Stock, par value $1.5625 per share, of
Bank held as a treasury share immediately prior to the Effective Date, if
any, shall thereupon and without notice be canceled.
2.4 Assumption of Stock Options. Holding Company shall assume the obligations
of Bank under stock options outstanding to the extent that such options
remain unexercised on the Effective Date, and further shall assume the
obligations of Bank under the bank's 1998 Independent Directors Stock
Option Plan and 1998 Stock Incentive Plan (the "Plans"). Such outstanding
stock options shall automatically be converted into the right to purchase
double the number of shares at half of the option exercise price per share,
had the option or warrant been exercised prior to the Merger, and in
accordance with the terms of the Plans. No fractional shares of Holding
Company Common Stock, and no scrip or certificates therefor, shall be
issued in connection with the assumption or exercise of such stock options.
The obligations of the bank, as assumed by the holding company, under the
Plans will automatically be adjusted to reflect the two-for-one exchange
ratio of Holding Company Common Stock for the bank's Common Stock.
Similarly, the number of shares which may be issued under the Plans will
automatically be adjusted.
2.5 Exchange Agent. Bank shall designate the Secretary or another officer of
the holding company or Bank to act as exchange agent to receive from the
holders thereof, certificates that, immediately prior to the Effective
Date, represented Bank's Common Stock and to exchange such certificates for
Common Stock of the holding company, as provided herein and, if applicable,
to pay cash for fractional shares of Bank Common Stock pursuant to Section
2.2 above.
2.6 Exchange Procedure. If appointed pursuant to Section 2.5 hereof, the
exchange agent shall promptly mail to each record holder as of the date of
exchange of an outstanding certificate or certificates that, prior to the
Effective Date, represented shares of Bank's Common Stock, a letter of
transmittal (which shall specify how delivery shall be effected, and that
risk of loss and title to such certificate or certificates shall pass only
upon proper delivery of such certificate or certificates, together with a
properly executed letter of transmittal to the exchange agent at is address
stated therein) and instructions for use in effecting the surrender of such
certificate or certificates for exchange therefor. Upon surrender to the
exchange agent of such certificate or certificates, together with such
letter of transmittal, properly executed, the exchange agent shall exchange
such certificate or certificates for shares of common stock of the holding
company, as provided herein.
2.7 Failure to Surrender Certificates. Shareholders will be required to
surrender certificates representing shares of the bank for certificates
representing shares of the holding company. All Bank Common Stock
certificates must be surrendered within two (2) years after notice that
surrender will be required. In the event that any former shareholder of
Bank shall not have properly surrendered his Common Stock certificates
within two (2) years after such notice, the
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<PAGE>
shares of Holding Company Common Stock that would otherwise have been
issued to him may, at the option of the holding company, be sold, and the
net proceeds of such sale, together with the cash (if any) to which he is
entitled in lieu of the issuance of a fractional share and any previously
accrued dividends, shall be held in a noninterest bearing account for his
benefit. From and after any such sale, the sole right of such former
shareholder of Bank shall be right to collect such net proceeds, cash and
accumulated dividends. Subject to all applicable laws of escheat, such net
proceeds, cash and accumulated dividends shall be paid to such former
shareholder of Bank, without interest, upon proper surrender of his Common
Stock certificates.
2.8 Dissenters' Rights. Shareholders of Bank shall be entitled to exercise the
rights provided in Subchapter D of Chapter 15 of the Pennsylvania Business
Corporation Law of 1988, as amended, (15 PA C.S.A. ss.1571 et. seq.)
("Dissenters' Rights") with respect to the Plan of Merger.
Section 3. Miscellaneous.
3.1 Conditions. The obligations of Bank and Interim Bank to effect the Merger
shall be subject to all of the terms and conditions contained in the Plan
of Reorganization.
3.2 Termination and Agreement. This Plan of Merger may be terminated or amended
prior to the Effective Date in the manner and upon the conditions set forth
in the Plan of Reorganization. If the Plan of Reorganization is terminated
pursuant to the terms thereof, this Plan of Merger shall terminate
simultaneously, and the Merger shall be abandoned without further action of
the parties hereto.
WITNESS the signatures and seals of said merging banks this _____ day of
______________, 1999, each hereunto set by its President or a Vice President and
attested by its Cashier or Secretary, pursuant to a resolution of its Board of
Directors, acting by a majority thereof.
ATTEST: THE FIDELITY DEPOSIT AND
DISCOUNT BANK
By:
- ------------------------------------ --------------------------------
John F. Glinsky, Jr., Secretary Michael F. Marranca, President
ATTEST: THE FIDELITY DEPOSIT AND
DISCOUNT INTERIM BANK
By:
- ------------------------------------ --------------------------------
John F. Glinsky, Jr., Secretary Michael F. Marranca, President
A-13
<PAGE>
ANNEX B
AMENDED AND RESTATED
ARTICLES OF INCORPORATION
OF
FIDELITY D & D BANCORP, INC.
B-1
<PAGE>
AMENDED AND RESTATED
ARTICLES OF INCORPORATION
OF
FIDELITY D & D BANCORP, INC.
1. The name of the Corporation is Fidelity D & D Bancorp, Inc.
2. The address, including street and number, if any, of this Corporation's
initial registered office in the Commonwealth of Pennsylvania is Blakely &
Drinker Streets, Dunmore, Pennsylvania 18512, and the county of venue is
Lackawanna.
3. The Corporation is incorporated under the provisions of the Pennsylvania
Business Corporation Law of 1988 (15 PA C.S.A. ss.1101 et seq.), as the same may
be amended.
4. The purpose or purposes of the Corporation are to have unlimited power
to engage in and to do any lawful act concerning any or all business for which
corporations may be incorporated under the provisions of the Pennsylvania
Business Corporation Law of 1988, as the same may be amended.
5. (a) The aggregate number of shares that the Corporation shall have
authority to issue is Fifteen Million (15,000,000) shares, without par
value, divided into a class of Ten Million (10,000,000) shares of common
stock, without par value, and a class of Five Million (5,000,000) shares
of preferred stock, without par value. The preferred stock shall be
divided into one or more series as the Board of Directors may determine
as provided herein.
(b) The holders of common stock shall have one vote per share. The
common stock shall be subject to the prior rights of holders of any
series of preferred stock outstanding, according to the preferences, if
any, of such series.
(c) Each series of preferred stock may have full, limited, multiple or
fractional or no voting rights, and such designations, preferences,
limitations, and special rights as determined by the board of directors
as provided herein. The division of the preferred stock into series, the
determination of the designation and the number of shares of any such
series and the determination of the voting rights, preferences,
limitations, and special rights of the shares of any such series may be
accomplished by an amendment to this Article 5, which amendment may be
made solely by action of the board of directors, which shall have the
full authority permitted by law to make such division and
determinations.
(d) Unless otherwise provided in a resolution or resolutions
establishing any particular series of preferred stock, the aggregate
number of authorized shares of preferred stock may be increased by an
amendment to the articles
B-2
<PAGE>
approved solely by the holders of the common stock and of any preferred
stock who are entitled under voting rights designated by the board to
vote thereon, if at all, voting together as a class.
6. The name and address, including street and number, if any, of each of
the Incorporators, and the number and class of shares subscribed to by each
Incorporator is:
<TABLE>
<CAPTION>
Number and
Name Address Class of Shares
---- ------- ---------------
<S> <C> <C>
Paul A. Barrett 2209 Jefferson Ave. 1 share of
Dunmore, PA 18509 common stock
Samuel C. Cali 303 W. Elm Street 1 share of
Dunmore, PA 18512 common stock
Patrick J. Dempsey 100 Swinck Drive 1 share of
Dunmore, PA 18512 common stock
Michael F. Marranca 119 Johnson Street 1 share of
Pittston, PA 18640 common stock
Michael J. McDonald 2016 Green Ridge Street 1 share of
Dunmore, PA 18512 common stock
</TABLE>
7. No merger, consolidation, liquidation or dissolution of the Corporation,
nor any action that would result in the sale or other disposition of all or
substantially all of the assets of the Corporation shall be valid unless first
approved by the affirmative vote of:
(a) the holders of at least seventy-five percent (75%) of the
outstanding shares of stock of the Corporation entitled to vote thereon;
or
(b) the holders of at least fifty-one percent (51%) of the outstanding
shares of stock of the Corporation entitled to vote thereon, provided
that such transaction has received the prior approval of at least eighty
percent (80%) of all of the members of the Board of Directors.
8. Cumulative voting rights shall not exist with respect to the election of
directors.
9. A majority of the Board of Directors of this Corporation, or one or more
shareholders entitled to cast at least twenty percent (20%) of the votes that
all shareholders are entitled to cast at a particular meeting, shall be entitled
to call special meetings of the shareholders.
10. (a) The Board of Directors may, if it deems advisable, oppose a tender
or other offer for the corporation's securities, whether the offer is
in cash or in the securities of a corporation or otherwise. When
considering whether to
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<PAGE>
oppose an offer, the Board of Directors may, but is not legally
obligated to, in considering the best interests of the corporation,
consider any relevant, germane or pertinent issue to the extent the
Directors deem appropriate; by way of illustration, but not to be
considered any limitation on the power of the Board of Directors to
oppose a tender or other offer for this Corporation's securities, the
Board of Directors may, but shall not be legally obligated to, consider
any or all of the following:
(i) Whether the offer price is acceptable based on the historical
and present operating results or financial condition of the
Corporation;
(ii) Whether a more favorable price could be obtained for this
corporation's securities in the future;
(iii) The social and economic effects of the offer or transaction on
this Corporation and any of its subsidiaries, employees,
depositors, loan and other customers, creditors, shareholders
and other elements of the communities in which this Corporation
and any of its subsidiaries operate or are located;
(iv) The reputation and business practice of the offeror and its
management and affiliates as they would affect the shareholders,
employees, depositors and customers of the Corporation and its
subsidiaries and the future value of the Corporation's stock;
(v) The value of the securities (if any) which the offeror is
offering in exchange for the Corporation's securities, based on
an analysis of the worth of the Corporation or other entity
whose securities are being offered;
(vi) The business and financial conditions and earnings prospects of
the offeror, including, but not limited to, debt service and
other existing or likely financial obligations of the offeror,
and the possible effect of such conditions upon this Corporation
and any of its subsidiaries and the other elements of the
communities in which this Corporation and any of its
subsidiaries operate or are located;
(vii) Any antitrust or other legal and regulatory issues that are
raised by the offer.
(b) If the Board of Directors determines that an offer should be
rejected, it may take any lawful action to accomplish its purpose
including, but not limited to, any or all of the following: advising
shareholders not to accept that offer; litigation against the offeror;
filing complaints with all governmental and regulatory authorities;
acquiring the offeror corporation's securities; selling or otherwise
issuing authorized but unissued securities or treasury stock or
B-4
<PAGE>
granting options with respect thereto; acquiring a company to create an
antitrust or other regulatory problem for the offeror; and obtaining a
more favorable offer from another individual or entity.
11. Articles 7, 8, 9, 10 and 11 shall not be amended unless first approved
by the affirmative vote of:
(a) the holders of at least seventy-five percent (75%) of the
outstanding shares of stock of the Corporation entitled to vote
thereon; or
(b) the holders of at least fifty-one percent (51%) of the outstanding
shares of stock of the Corporation entitled to vote thereon, provided
that such amendment has received the prior approval of at least eighty
percent (80%) of all of the members of the Board of Directors.
B-5
<PAGE>
ANNEX C
BY-LAWS OF FIDELITY D & D BANCORP, INC.
C-1
<PAGE>
BY-LAWS
of
FIDELITY D & D BANCORP, INC.
Article 1
CORPORATION OFFICE
Section 1.1 The Corporation shall have and continuously maintain in
Pennsylvania a registered office. The registered office shall be Blakely and
Drinker Streets, Dunmore, Pennsylvania 18512. The principal place of business of
the Corporation may be, but need not be, the same as the registered office. The
address of the registered office may be changed from time to time by the Board
of Directors.
Section 1.2 The Corporation may also have offices at such other places as
the Board of Directors may from time to time designate or the business of the
Corporation may require.
Article 2
SHAREHOLDERS MEETINGS
Section 2.1 All meetings of the shareholders shall be held at the
registered office of the Corporation or at such other place as may be fixed from
time to time by the Board of Directors, and such meetings shall be held at such
time as may be fixed from time to time by the Board of Directors.
Section 2.2 The annual meeting of the shareholders shall be held no later
than the thirty-first day of May in each year, when the shareholders shall elect
members to the Board of Directors and transact such other business as may
properly be brought before the meeting.
Section 2.3 Special meetings of the shareholders may be called at any time
by a majority of the Board of Directors or by one or more shareholders entitled
to cast at least twenty percent (20%) of the votes which all shareholders are
entitled to cast at a particular meeting. At any time, upon written request of
any person who has called a special meeting, it shall be the duty of the
Secretary to fix the time of the meeting which, if the meeting is called
pursuant to a statutory right, shall be held not more than sixty (60) days after
the receipt of the request. If the Secretary refuses to fix the time of the
meeting or neglects to fix the time of the meeting within thirty (30) days after
the receipt of such a request, the person or persons making the request may
issue the call.
Section 2.4 Written notice of all shareholder meetings (other than
adjourned meetings of shareholders), shall state the place, date, hour, the
purpose thereof and shall be served upon, or mailed, postage prepaid, or
telegraphed, charges prepaid, at least ten (10) days before such meeting, unless
a greater period of notice is required by statute or by these By-laws, to each
shareholder entitled to vote thereat at such address as appears on the transfer
books for shares of the Corporation.
C-2
<PAGE>
Section 2.5 When a meeting of shareholders is adjourned, it shall not be
necessary to give any notice of the adjourned meeting or of the business to be
transacted at an adjourned meeting, other than by announcement at the meeting at
which the adjournment is taken, unless the Board of Directors fixes a new record
date for the adjourned meeting.
Article 3
QUORUM OF SHAREHOLDERS
Section 3.1 The presence, in person or by proxy, of shareholders entitled
to cast at least a majority of the votes which all shareholders are entitled to
cast on the particular matter shall constitute a quorum for purposes of
considering such matter, and unless otherwise provided by statute the acts of
such shareholders at a duly organized meeting shall be the acts of the
shareholders.
Section 3.2 If, however, any meeting of shareholders cannot be organized
because of lack of a quorum, those present, in person or by proxy, shall have
the power, except as otherwise provided by statute, to adjourn the meeting to
such time and place as they may determine, without notice other than an
announcement at the meeting, until the requisite number of shareholders for a
quorum shall be present, in person or by proxy, except that those shareholders
entitled to vote who attend a meeting of shareholders:
(1) At which directors are to be elected that has been previously adjourned
for lack of a quorum, although less than a quorum, shall nevertheless
constitute a quorum for the purpose of electing directors;
(2) That has been previously adjourned for one or more periods aggregating
at least fifteen (15) days because of an absence of a quorum, although
less than a quorum, shall nevertheless constitute a quorum for the
purpose of acting upon any matter set forth in the notice of the
meeting if the notice states that those shareholders who attend the
adjourned meeting shall nevertheless constitute a quorum for the
purpose of acting upon the matter.
Section 3.3 At any adjourned meeting at which a quorum shall be present or
so represented, any business may be transacted which might have been transacted
at the original meeting if a quorum had been present. The shareholders present,
in person or by proxy, at a duly organized meeting can continue to do business
until adjournment, notwithstanding the withdrawal of enough shareholders to
leave less than a quorum.
Article 4
VOTING RIGHTS
Section 4.1 Except as may be otherwise provided by statute or by the
Articles of Incorporation, at every shareholders meeting, every shareholder
entitled to vote thereat shall have the right to one vote for every share having
voting power standing in his name on the transfer books for shares of the
Corporation on the record date fixed for the meeting.
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Section 4.2 When a quorum is present at any meeting the voice vote of the
holders of a majority of the stock having voting power, present, in person or by
proxy, shall decide any question brought before such meeting except as provided
differently by statute or by the Articles of Incorporation.
Section 4.3 Upon demand made by a shareholder entitled to vote at any
election for directors before the voting begins, the election shall be by
ballot.
Article 5
PROXIES
Section 5.1 Every shareholder entitled to vote at a meeting of shareholders
or to express consent or dissent to corporate action in writing without a
meeting may authorize another person or persons to act for him by proxy. Every
proxy shall be executed in writing by the shareholder or his duly authorized
attorney in fact and filed with the Secretary of the Corporation.
Section 5.2 A proxy, unless coupled with an interest, shall be revocable at
will, notwithstanding any other agreement or any provision in the proxy to the
contrary, but the revocation of a proxy shall not be effective until notice
thereof has been given to the Secretary of the Corporation. No unrevoked proxy
shall be valid after eleven (11) months from the date of its execution, unless a
longer time is expressly provided therein, but in no event shall a proxy, unless
coupled with an interest, be voted after three (3) years from the date of its
execution. A proxy shall not be revoked by the death or incapacity of the maker,
unless before the vote is counted or the authority is exercised, written notice
of such death or incapacity is given to the Secretary of the Corporation.
Article 6
RECORD DATE
Section 6.1 The Board of Directors may fix a time, not more than ninety
(90) days prior to the date of any meeting of shareholders, or the date fixed
for the payment of any dividend or distribution, or the date for the allotment
of rights, or the date when any change or conversion or exchange of shares will
be made or go into effect, as a record date for the determination of the
shareholders entitled to notice of, and to vote at, any such meeting, or
entitled to receive payment of any such dividend or distribution, or to receive
any such allotment of rights, or to exercise the rights in respect to any such
change, conversion or exchange of shares. In such case, only such shareholders
as shall be shareholders of record on the date so fixed shall be entitled to
notice of, or to vote at, such meeting or to receive payment of such dividend or
distribution or to receive such allotment of rights or to exercise such rights,
as the case may be, notwithstanding any transfer of any shares on the transfer
books for shares of the Corporation after any record date fixed as aforesaid.
Section 6.2 The Board of Directors may close the transfer books for shares
of the Corporation against transfers of shares during the whole or any part of
such period, and in such case written or printed notice thereof shall be mailed
at least ten (10) days before closing thereof to each
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shareholder of record at the address appearing on the records of the Corporation
or supplied by him to the Corporation for the purpose of notice. While the
transfer books for shares of the Corporation are closed, no transfer of shares
shall be made thereon. If no record date is fixed by the Board of Directors for
the determination of shareholders entitled to receive notice of, and vote at, a
shareholders meeting, transferees of shares which are transferred on the books
of the Corporation within ten (10) days next preceding the date of such meeting
shall not be entitled to notice of or to vote at such meeting.
Article 7
VOTING LISTS
Section 7.1 The Secretary shall have charge of the transfer books for
shares of the Corporation and shall make a complete list of the shareholders
entitled to vote at any meeting of shareholders, arranged in alphabetical order,
with the address of and the number of shares held by each. The list shall be
produced and kept open at the time and place of the meeting and shall be subject
to the inspection of any shareholder during the whole time of the meeting for
the purposes thereof.
Section 7.2 Failure to comply with the requirements of Section 7.1 shall
not affect the validity of any action taken at a meeting prior to a demand at
the meeting by any shareholder entitled to vote thereat to examine the list. The
original share register or transfer book, or a duplicate thereof kept in the
Commonwealth of Pennsylvania shall be prima facie evidence as to who are the
shareholders entitled to examine the list or share register or transfer book or
to vote an any meeting of shareholders.
Article 8
JUDGES OF ELECTION
Section 8.1 In advance of any meeting of shareholders, the Board of
Directors may appoint judges of election, who need not be shareholders, to act
at the meeting or any adjournment thereof. If judges of election are not so
appointed, the presiding officer of the meeting may, and on the request of any
shareholder shall, appoint judges of election at the meeting. The number of
judges shall be one or three. A person who is a candidate for office to be
filled at the meeting shall not act as a judge.
Section 8.2 In case any person appointed as a judge fails to appear or
fails or refuses to act, the vacancy may be filled by appointment made by the
Board of Directors in advance of the convening of the meeting or at the meeting
by the presiding officer thereof.
Section 8.3 The judges of election shall determine the number of shares
outstanding and the voting power of each, the shares represented at the meeting,
the existence of a quorum, the authenticity, validity and effect of proxies,
receive votes or ballots, hear and determine all challenges and questions in any
way arising in connection with the right to vote, count and tabulate all votes,
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determine the result and do such acts as may be proper to conduct the election
or vote with fairness to all shareholders. The judges of election shall perform
their duties impartially, in good faith, to the best of their ability and as
expeditiously as is practical. If there are three judges of election, the
decision, act or certificate of a majority shall be effective in all respects as
the decision, act or certificate of all.
Section 8.4 On request of the presiding officer of the meeting, or of any
shareholder, the judges of election shall make a report in writing of any
challenge or question or matter determined by them, and execute a certificate of
any fact found by them. Any report or certificate made by them shall be prima
facie evidence of the facts stated therein.
Article 9
DIRECTORS
Section 9.1 Nominations for election to the Board of Directors may be made
by the Board of Directors or by any shareholder of any outstanding class of
capital stock of the Corporation entitled to vote for the election of directors.
Any shareholder who intends to nominate or to cause to have nominated any
candidate for election to the Board of Directors (other than any candidate
proposed by the Corporation's then existing Board of Directors) shall so notify
the Secretary of the Corporation in writing not less than sixty (60) days prior
to the date of any meeting of shareholders called for the election of directors.
Such notification shall contain the following information to the extent known by
the notifying shareholder.
(a) the name and address of each proposed nominee;
(b) the age of each proposed nominee;
(c) the principal occupation of each proposed nominee;
(d) the number of shares of the Corporation owned by
each proposed nominee;
(e) the total number of shares that to the knowledge of
the notifying shareholder will be voted for each
proposed nominee;
(f) the name and residence address of the notifying
shareholder; and
(g) the number of shares of the Corporation owned by the
notifying shareholder.
Any nomination for director not made in accordance with this Section shall
be disregarded by the presiding officer of the meeting, and votes cast for each
such nominee shall be disregarded by the judges of election. In the event that
the same person is nominated by more than one
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shareholder, if at least one nomination for such person complies with this
Section, the nomination shall be honored and all votes cast for such nominee
shall be counted.
Section 9.2 The number of directors that shall constitute the whole Board
of Directors shall be not less than three (3). The Board of Directors shall be
classified into three (3) classes, each class to be elected for a term of three
(3) years. The terms of the respective classes shall expire in successive years
as provided in Section 9.3 hereof. Within the foregoing limits, the Board of
Directors may from time to time fix the number of directors and their respective
classifications.
Section 9.3 At the 2000 annual meeting of shareholders of the Corporation,
the shareholders shall elect ten (10) directors as follows: four (4) Class A
directors to serve until the 2001 annual meeting of shareholders, three (3)
Class B directors to serve until the 2002 annual meeting of shareholders, and
three (3) Class C directors to serve until the 2003 annual meeting of
shareholders. Each class shall be elected in a separate election. At each annual
meeting of shareholders thereafter, successors to the class of directors whose
term shall then expire shall be elected to hold office for a term of three (3)
years, so that the term of office of one class of directors shall expire in each
year. The Board of Directors shall have the sole discretion to increase the
number of Directors that shall constitute the whole Board of Directors; provided
however, that the total number of Directors in each class remains relatively
proportionate to the others.
Section 9.4 The Board of Directors may declare vacant the office of a
director who has been judicially declared of unsound mind or who has been
convicted of an offense punishable by imprisonment for a term of more than one
year or for any other proper cause which these By-laws may specify or if, within
sixty (60) days or such other time as these By-laws may specify after notice of
his selection, he does not accept the office either in writing or by attending a
meeting of the Board of Directors and fulfill such other requirements of
qualification as these By-laws may specify.
Section 9.5 Upon application of any shareholder or director, the court may
remove from office any director in case of fraudulent or dishonest acts, or
gross abuse of authority or discretion with reference to the Corporation, or for
any other proper cause, and may bar from office any director so removed for a
period prescribed by the court. The Corporation shall be made a party to the
action and, as a prerequisite to the maintenance of an action under this Section
9.5, a shareholder shall comply with Section 1782 of the Business Corporation
Law of 1988, and any amendments or supplements thereto.
Section 9.6 An act of the Board of Directors done during the period when a
director has been suspended or removed for cause shall not be impugned or
invalidated if the suspension or removal is thereafter rescinded by the
shareholders or by the Board of Directors or by the final judgment of a court.
Section 9.7 The Board of Directors may appoint a person who previously
held the position of Director to be a Director Emeritus. A Director Emeritus may
attend meetings of the Board of Directors and shall have such other rights and
privileges as may be determined from time to time by resolution of the Board of
Directors.
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Article 10
VACANCIES ON BOARD OF DIRECTORS
Article 10.1 Vacancies on the Board of Directors, including vacancies
resulting from an increase in the number of directors, shall be filled by a
majority of the remaining members of the Board of Directors, or by a sole
remaining director, though less than a quorum, and each person so appointed
shall be a director until the expiration of the term of office of the class of
directors to which he was appointed.
Article 11
POWERS OF BOARD OF DIRECTORS
Section 11.1 The business and affairs of the Corporation shall be managed
by its Board of Directors, which may exercise all such powers of the Corporation
and do all such lawful acts and things as are not by statute or by the Articles
of Incorporation or by these By-laws directed or required to be exercised and
done by the shareholders.
Section 11.2 A director shall stand in a fiduciary relation to the
Corporation and shall perform his duties as a director, including his duties as
a member of any committee of the Board of Directors upon which he may serve, in
good faith, in a manner he reasonably believes to be in the best interests of
the Corporation and with such care, including reasonable inquiry, skill and
diligence, as a person of ordinary prudence would use under similar
circumstances. In performing his duties, a director shall be entitled to rely in
good faith on information, opinions, reports or statements, including financial
statements and other financial data, in each case prepared or presented by any
of the following:
(a) One or more officers or employees of the Corporation whom the director
reasonably believes to be reliable and competent in the matters presented.
(b) Counsel, public accountants or other persons as to matters which the
director reasonably believes to be within the professional or expert competence
of such persons.
(c) A committee of the Board of Directors upon which he does not serve,
duly designated in accordance with law, as to matters within its designated
authority, which committee the director reasonably believes to merit confidence.
A director shall not be considered to be acting in good faith if he has
knowledge concerning the matter in question that would cause his reliance to be
unwarranted.
In assessing whether the standard set forth herein has been satisfied,
there shall not be any greater obligation to justify, or higher burden of proof
with respect to, any act as the board of directors, any committee of the board
or any individual director relating to or affecting an acquisition or potential
or proposed acquisition of control of the corporation than is applied to any
other act as a board of directors, any committee of the board or any individual
director.
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Section 11.3 In discharging the duties of their respective positions, the
Board of Directors, committees of the Board of Directors and individual
directors may, in considering the best interests of the Corporation, consider
the effects of any action upon employees, upon suppliers, upon creditors and
customers of the Corporation and upon communities in which offices or other
establishments of the Corporation are located, and all other pertinent factors.
The consideration of those factors shall not constitute a violation of Section
11.2.
Section 11.4 Absent breach of fiduciary duty, lack of good faith or
self-dealing, actions taken as a director or any failure to take any action
shall be presumed to be in the best interests of the Corporation.
Section 11.5 A director shall not be personally liable, as such, for
monetary damages for any action taken, or any failure to take any action,
unless:
(a) the director has breached or failed to perform the duties of his office
under this Article 11; and
(b) the breach or failure to perform constitutes self-dealing, willful
misconduct or recklessness.
Section 11.6 The provisions of Section 11.5 shall not apply to:
(a) the responsibility or liability of a director pursuant to any criminal
statute; or
(b) the liability of a director for the payment of taxes pursuant to local,
State or Federal law.
Section 11.7 A director of the Corporation who is present at a meeting of
the Board of Directors, or of a committee of the Board of Directors, at which
action on any corporate matter is taken shall be presumed to have assented to
the action taken unless his dissent is entered in the minutes of the meeting or
unless he files his written dissent to the action with the Secretary of the
Corporation before the adjournment thereof or transmits the dissent in writing
to the Secretary of the Corporation immediately after the adjournment of the
meeting. The right to dissent shall not apply to a director who voted in favor
of the action. Nothing in this Section 11.7 shall bar a director from asserting
that minutes of any meeting incorrectly omitted his dissent if, promptly upon
receipt of a copy of such minutes, he notifies the Secretary of the Corporation,
in writing, of the asserted omission or inaccuracy.
Article 12
COMMITTEES OF THE BOARD OF DIRECTORS
Section 12.1 The Board of Directors may, by resolution adopted by a
majority of the directors in office, establish one or more committees to consist
of one or more directors of the Corporation. Any committee, to the extent
provided in the resolution of the Board of Directors or in these By-laws, shall
have and may exercise all of the powers and authority of the Board of Directors,
except that a committee shall not have any power or authority as to the
following:
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(a) The submission to shareholders of any action requiring approval of
shareholders under applicable law, the Articles of Incorporation or
these By-laws.
(b) The creation or filling of vacancies in the Board of Directors.
(c) The adoption, amendment or repeal of these By-laws.
(d) The amendment or repeal of any resolution of the Board of Directors
that by its terms is amendable or repealable only by the Board of
Directors.
(e) Action on matters committed by these By-laws or resolution of the Board
of Directors to another committee of the Board of Directors.
Section 12.2 The Board of Directors may designate one or more directors as
alternate members of any committee who may replace any absent or disqualified
member at any meeting of the committee or for the purposes of any written action
by the committee. In the absence or disqualification of a member and alternate
member or members of a committee, the member or members thereof present at any
meeting and not disqualified from voting, whether or not he or they constitute a
quorum, may unanimously appoint another director to act at the meeting in the
place of the absent or disqualified member.
Section 12.3 Each committee of the Board of Directors shall serve at the
pleasure of the Board of Directors. The term "Board of Directors," when used in
any provision of this Article 12 relating to the organization or procedures of
or the manner of taking action by the Board of Directors, shall be construed to
include and refer to any executive or other committee of the Board of Directors.
Any provision of this Article 12 relating or referring to action to be taken by
the Board of Directors or the procedure required therefor shall be satisfied by
the taking of corresponding action by a committee of the Board of Directors to
the extent authority to take the action has been delegated to the committee
pursuant to this Article 12.
Article 13
MEETINGS OF THE BOARD OF DIRECTORS
Section 13.1 An organization meeting may be held immediately following the
annual shareholders meeting without the necessity of notice to the directors to
constitute a legally convened meeting, or the directors may meet at such time
and place as may be fixed by either a notice or waiver of notice or consent
signed by all of such directors.
Section 13.2 Regular meetings of the Board of Directors shall be held not
less often than semi-annually at a time and place determined by the Board of
Directors at the preceding meeting. One or more directors may participate in any
meeting of the Board of Directors, or of any committee thereof, by means of a
conference telephone or similar communications equipment by means of which all
persons participating in the meeting can hear one another.
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Section 13.3 Special meetings of the Board of Directors may be called by
the President on one (1) day's notice to each director, either personally or in
the manner set forth under Article 32 hereof; special meetings shall be called
by the President in like manner and on like notice upon the written request of
three (3) directors.
Section 13.4 At all meetings of the Board of Directors, a majority of the
directors shall constitute a quorum for the transaction of business, and the
acts of a majority of the directors present at a meeting in person or by
conference telephone or similar communications equipment at which a quorum is
present in person or by such communications equipment shall be the acts of the
Board of Directors, except as may be otherwise specifically provided by statute
or by the Articles of Incorporation or by these By-laws. If a quorum shall not
be present in person or by communications equipment at any meeting of the
directors, the directors present may adjourn the meeting from time to time,
without notice other than announcement at the meeting, until a quorum shall be
present or as permitted herein.
Article 14
INFORMAL ACTION BY THE BOARD OF DIRECTORS
Section 14.1 Any action required or permitted to be taken at a meeting of
the directors may be taken without a meeting if, prior or subsequent to the
action, a consent or consents thereto by all of the directors in office is filed
with the Secretary of the Corporation.
Article 15
COMPENSATION OF DIRECTORS
Section 15.1 Directors, as such, may receive a stated salary for their
services or a fixed sum and expenses for attendance at regular and special
meetings, or any combination of the foregoing as may be determined from time to
time by resolution of the Board of Directors, and nothing contained herein shall
be construed to preclude any director from serving the Corporation in any other
capacity and receiving compensation therefor.
Article 16
OFFICERS
Section 16.1 The officers of the Corporation shall be elected by the Board
of Directors at its organizational meeting and shall be a President, Secretary
and Treasurer. The Board of Directors may elect one of its members as Chairman
of the Board. The Board of Directors may also elect one or more Vice Presidents
and such other officers and appoint such agents as it shall deem necessary, who
shall hold their offices for such terms, have such authority and perform such
duties as may from time to time be prescribed by the Board of Directors. Any
number of offices may be held by the same person, except that the offices of
President, Treasurer and Chief Financial Officer, if any, shall not be held by
the same person or persons.
Section 16.2 The compensation of all officers of the Corporation shall be
fixed by the Board of Directors.
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Section 16.3 Each officer shall hold office for a term of one year and
until his successor has been selected and qualified or until his earlier death,
resignation or removal. Any officer may resign at any time upon written notice
to the Corporation. The resignation shall be effective upon receipt thereof by
the Corporation or at such subsequent time as may be specified in the notice of
resignation. The Corporation may secure the fidelity of any or all of the
officers by bond or otherwise.
Section 16.4 Any officer or agent of the Corporation may be removed by the
Board of Directors with or without cause. The removal shall be without prejudice
to the contract rights, if any, of any person so removed. Election or
appointment of an officer or agent shall not of itself create contract rights.
Section 16.5 An officer shall perform his duties as an officer in good
faith, in a manner he reasonably believes to be in the best interests of the
Corporation and with such care, including reasonable inquiry, skill and
diligence, as a person of ordinary prudence would use under similar
circumstances. A person who so performs his duties shall not be liable by reason
of having been an officer of the Corporation.
Article 17
THE PRESIDENT
Section 17.1 The Board of Directors shall appoint one of its members to be
President. He shall be the chief executive officer of the Corporation. He shall
supervise the carrying out of the policies adopted or approved by the Board of
Directors; shall have general and active management of the business of the
Corporation; shall see that all orders and resolutions of the Board of Directors
are put into effect, subject, however, to the right of the Board of Directors to
delegate any specific powers, except such as may be by statute exclusively
conferred on any particular officer or officers of the Corporation. The
President shall execute bonds, mortgages and other contracts requiring a seal
under the seal of the Corporation, except where required or permitted by law to
be otherwise signed and executed and except where the signing and execution
thereof shall be expressly delegated by the Board of Directors to some other
officer or agent of the Corporation. He shall have general executory powers in
addition to those specific powers conferred by these by-laws. He shall also have
and may exercise such further powers and duties as from time to time may be
conferred upon or assigned to him by the Board of Directors. In the absence or
incapacity of the Chairman of the Board, the President shall preside at meetings
of the shareholders and the directors.
Article 18
THE CHAIRMAN OF THE BOARD
Section 18.1 The Board of Directors may appoint one of its members to be
the Chairman of the Board. If elected, he shall preside at all meetings of the
shareholders and directors; shall supervise the carrying out of the policies
adopted or approved by the Board; shall have general executory powers in
addition to those specific powers conferred by these by-laws; and shall also
have and may exercise such further powers and duties as from time to time may be
conferred upon or assigned to him by the Board of Directors.
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Article 19
THE VICE PRESIDENT
Section 19.1 The Vice President or, if more than one, the Vice Presidents
in the order established by the Board of Directors shall, in the absence or
incapacity of the President, exercise all powers and perform the duties of the
President. The Vice Presidents, respectively, shall also have such other
authority and perform such other duties as may be provided in these By-laws or
as shall be determined by the Board of Directors or the President. Any Vice
President may, in the discretion of the Board of Directors, be designated as
"executive," "senior," or by departmental or functional classification.
Article 20
THE SECRETARY
Section 20.1 The Secretary shall attend all meetings of the Board of
Directors and of the shareholders and keep accurate records thereof in one or
more minute books kept for that purpose, shall attend to the giving of all
notices required by these by-laws to be given, and shall perform the duties
customarily performed by the secretary of a corporation and such other duties as
may be assigned to him by the Board of Directors or the President.
Article 21
THE TREASURER
Section 21.1 The Treasurer shall have the custody of the corporate funds
and securities; shall keep full and accurate accounts of receipts and
disbursements in books belonging to the Corporation and shall perform such other
duties as may be assigned to him by the Board of Directors or the President. He
shall give bond in such sum and with such surety as the Board of Directors may
from time to time direct.
Article 22
ASSISTANT OFFICERS
Section 22.1 Each assistant officer shall assist in the performance of the
duties of the officer to whom he is assistant and shall perform such duties in
the absence of the officer. He shall perform such additional duties as the Board
of Directors, the President, the Chairman of the Board or the officer to whom he
is assistant may from time to time assign him. Such officers may be given such
functional titles as the Board of Directors shall from time to time determine.
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Article 23
INDEMNIFICATION
Section 23.1 (Third Party Actions) The Corporation shall have power to
indemnify any person who was or is a party or is threatened to be made a party
to any threatened, pending or completed action or proceeding, whether civil,
criminal, administrative or investigative (other than an action by or in the
right of the corporation), by reason of the fact that he is or was a
representative of the Corporation, or is or was serving at the request of the
Corporation as a representative of another domestic or foreign corporation for
profit or not-for-profit, partnership, joint venture, trust or other enterprise,
against expenses (including attorneys' fees), judgments, fines and amounts paid
in settlement actually and reasonably incurred by him in connection with the
action or proceeding if he acted in good faith and in a manner he reasonably
believed to be in, or not opposed to, the best interests of the Corporation and,
with respect to any criminal proceeding, had no reasonable cause to believe his
conduct was unlawful. The termination of any action or proceeding by judgment,
order, settlement or conviction or upon a plea of nolo contendere or its
equivalent shall not of itself create a presumption that the person did not act
in good faith and in a manner that he reasonably believed to be in, or not
opposed to, the best interests of the Corporation and, with respect to any
criminal proceeding, had no reasonable cause to believe that his conduct was
unlawful.
Section 23.2 (Derivative Actions) The Corporation shall have power to
indemnify any person who was or is a party, or is threatened to be made a party,
to any threatened, pending or completed action by or in the right of the
Corporation to procure a judgment in its favor by reason of the fact that he is
or was a representative of the Corporation or is or was serving at the request
of the Corporation as a representative of another domestic or foreign
corporation for profit or not-for-profit, partnership, joint venture, trust or
other enterprise, against expenses (including attorneys' fees) actually and
reasonably incurred by him in connection with the defense or settlement of the
action if he acted in good faith and in a manner he reasonably believed to be
in, or not opposed to, the best interests of the Corporation. Indemnification
shall not be made under this section in respect of any claim, issue or matter as
to which the person has been adjudged to be liable to the Corporation unless and
only to the extent that the court of common pleas of the judicial district
embracing the county in which the registered office of the Corporation is
located or the court in which the action was brought determines upon application
that, despite the adjudication of liability but in view of all the circumstances
of the case, the person is fairly and reasonably entitled to indemnity for the
expenses that the court of common pleas or other court deems proper.
Section 23.3 (Mandatory Indemnification) To the extent that a
representative of the Corporation has been successful on the merits or otherwise
in defense of any action or proceeding referred to in Sections 23.1 (relating to
third party actions) or 23.2 (relating to derivative actions) or in defense of
any claim, issue or matter therein, he shall be indemnified against expenses
(including attorneys' fees) actually and reasonably incurred by him in
connection therewith.
Section 23.4 (Procedure for Effecting Indemnification) Unless ordered by a
court, any indemnification under Sections 23.1 (relating to third party actions)
or 23.2 (relating to derivative actions) shall be made by the Corporation only
as authorized in the specific case upon a
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determination that indemnification of the person is proper in the circumstances
because he has met the applicable standard of conduct set forth in those
sections. The determination shall be made:
(a) by the Board of Directors by a majority vote of a quorum consisting of
directors who were not parties to the action or proceeding;
(b) if such a quorum is not obtainable or if obtainable and a majority vote
of a quorum of disinterested directors so directs, by independent legal counsel
in a written opinion; or
(c) by the shareholders.
Section 23.5 (Advancing Expenses) Expenses (including attorneys' fees)
incurred in defending any action or proceeding referred to in this Article 23
may be paid by the Corporation in advance of the final disposition of the action
or proceeding upon receipt of an undertaking by or on behalf of the person to
repay the amount if it is ultimately determined that he is not entitled to be
indemnified by the Corporation as authorized in this Article 23 or otherwise.
Section 23.6 (Supplementary Coverage) (a) The indemnification and
advancement of expenses provided by, or granted pursuant to, the other sections
of this Article 23 shall not be deemed exclusive of any other rights to which a
person seeking indemnification or advancement of expenses may be entitled under
any By-law, agreement, vote of shareholders or disinterested directors or
otherwise, both as to action in his official capacity and as to action in
another capacity while holding that office. The Corporation may create a fund of
any nature, which may, but need not be, under the control of a trustee, or
otherwise secure or insure in any manner its indemnification obligations,
whether arising under or pursuant to this Section 23.6 or otherwise.
(b) Indemnification pursuant to subsection (a) of this Section 23.6 shall
not be made in any case where the act or failure to act giving rise to the claim
for indemnification is determined by a court to have constituted willful
misconduct or recklessness.
(c) Indemnification pursuant to subsection (a) of this Section 23.6 under
any By-law, agreement, vote of shareholders or directors or otherwise, may be
granted for any action taken or any failure to take any action and may be made
whether or not the Corporation would have the power to indemnify the person
under any other provision of law except as provided in this Section 23.6 and
whether or not the indemnified liability arises or arose from any threatened,
pending or completed action by or in the right of the Corporation.
Section 23.7 (Power to Purchase Insurance) The Corporation shall have power
to purchase and maintain insurance on behalf of any person who is or was a
representative of the Corporation or is or was serving at the request of the
Corporation as a representative of another domestic or foreign corporation for
profit or not-for-profit, partnership, joint venture, trust or other enterprise
against any liability asserted against him and incurred by him in any such
capacity, or arising out of his status as such, whether or not the Corporation
would have the power to indemnify him against that liability under the
provisions of this Article 23.
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Section 23.8 (Application to Surviving or New Corporations) For the purpose
of this Article 23, references to "the Corporation" include all constituent
corporations absorbed in a consolidation, merger or division, as well as the
surviving or new corporations surviving or resulting therefrom, so that any
person who is or was a representative of the constituent, surviving or new
corporation, or is or was serving at the request of the constituent, surviving
or new corporation as a representative of another domestic or foreign
corporation for profit or not-for-profit, partnership, joint venture, trust or
other enterprise, shall stand in the same position under the provisions of this
Article 23 with respect to the surviving or new corporation as he would if he
had served the surviving or new corporation in the same capacity.
Section 23.9 (Application to Employee Benefit Plans) For purposes of this
Article 23:
(a) References to "other enterprises" shall include employee benefit plans
and references to "serving at the request of the Corporation" shall include any
service as a representative of the Corporation that imposes duties on, or
involves services by, the representative with respect to an employee benefit
plan, its participants or beneficiaries.
(b) Excise taxes assessed on a person with respect to an employee benefit
plan pursuant to applicable law shall be deemed "fines."
(c) Action with respect to an employee benefit plan taken or omitted in
good faith by a representative of the Corporation in a manner he reasonably
believed to be in the interest of the participants and beneficiaries of the plan
shall be deemed to be action in a manner that is not opposed to the best
interests of the Corporation.
Section 23.10 (Duration and Extent of Coverage) The indemnification and
advancement of expenses provided by, or granted pursuant to, this Article 23
shall, unless otherwise provided when authorized or ratified, continue as to a
person who has ceased to be a representative of the Corporation and shall inure
to the benefit of the heirs and personal representative of that person.
Article 24
SHARE CERTIFICATES
Section 24.1 The share certificates of the Corporation shall be numbered
and registered in a share register as they are issued; shall bear the name of
the registered holder, the number and class of shares represented thereby, the
par value of each share or a statement that such shares are without par value,
as the case may be; shall be signed by the Chairman of the Board or the
President and the Secretary or the Treasurer or any other person properly
authorized by the Board of Directors, and shall bear the corporate seal, which
seal may be a facsimile engraved or printed. Where the certificate is signed by
a transfer agent or a registrar, the signature of any corporate officer on such
certificate may be a facsimile engraved or printed. In case any officer who has
signed, or whose facsimile signature has been placed upon, any share certificate
shall have ceased to be such officer because of death, resignation or otherwise
before the certificate is issued, it may be issued by the Corporation with the
same effect as if the officer had not ceased to be such at the date of its
issue.
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Article 25
TRANSFER OF SHARES
Section 25.1 Upon surrender to the Corporation of a share certificate duly
endorsed by the person named in the certificate or by attorney duly appointed in
writing and accompanied where necessary by proper evidence of succession,
assignment or authority to transfer, a new certificate shall be issued to the
person entitled thereto and the old certificate cancelled and the transfer
recorded upon the transfer books for shares of the Corporation. No transfer
shall be made if it would be inconsistent with the provisions of Article 8 of
the Pennsylvania Uniform Commercial Code.
Article 26
LOST CERTIFICATES
Section 26.1 Where a shareholder of the Corporation alleges the loss, theft
or destruction of one or more certificates for shares of the Corporation and
requests the issuance of a substitute certificate therefor, the Board of
Directors may direct a new certificate of the same tenor and for the same number
of shares to be issued to such person upon such person's making of an affidavit
in form satisfactory to the Board of Directors setting forth the facts in
connection therewith, provided that prior to the receipt of such request the
Corporation shall not have either registered a transfer of such certificate or
received notice that such certificate has been acquired by a bona fide
purchaser. When authorizing such issue of a new certificate the Board of
Directors may, in its discretion and as a condition precedent to the issuance
thereof, require the owner of such lost, stolen or destroyed certificate, or his
heirs or legal representatives, as the case may be, to advertise the same in
such manner as it shall require and/or give the Corporation a bond in such form
and with surety or sureties, with fixed or open penalty, as shall be
satisfactory to the Board of Directors, as indemnity for any liability or
expense which it may incur by reason of the original certificate remaining
outstanding.
Article 27
DIVIDENDS
Section 27.1 The Board of Directors may, from time to time, at any duly
convened regular or special meeting or by unanimous consent in writing, declare
and pay dividends upon the outstanding shares of capital stock of the
Corporation in cash, property or shares of the Corporation, so long as any
dividend shall not be in violation of law and the Articles of Incorporation.
Section 27.2 Before payment of any dividend, there may be set aside out of
any funds of the Corporation available for dividends such sum or sums as the
Board of Directors from time to time, in their absolute discretion, think proper
as a reserve fund to meet contingencies, or for equalizing dividends, or for
repairing or maintaining any property of the Corporation, or for such other
purposes as the Board of Directors shall believe to be for the best interests of
the Corporation, and the Board of Directors may reduce or abolish any such
reserve in the manner in which it was created.
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Article 28
FINANCIAL REPORT TO SHAREHOLDERS
Section 28.1 The President and the Board of Directors shall present prior
to each annual meeting of the shareholders a full and complete statement of the
business and affairs of the Corporation for the preceding year.
Article 29
INSTRUMENTS
Section 29.1 Any note, mortgage, evidence of indebtedness, contract or
other document, or any assignment or endorsement thereof, executed or entered
into between the Corporation and any other person, when signed by one or more
officers or agents having actual or apparent authority to sign it, or by the
President or the Vice President and Secretary or Assistant Secretary or
Treasurer or Assistant Treasurer of the Corporation, shall be held to have been
properly executed for and in behalf of the Corporation.
Section 29.2 The affixation of the corporate seal shall not be necessary to
the valid execution, assignment or endorsement by the Corporation of any
instrument or other document.
Article 30
FISCAL YEAR
Section 30.1 The fiscal year of the Corporation shall be the calendar year.
Article 31
SEAL
Section 31.1 The President, the Treasurer, the Secretary and any Assistant
Treasurer or Assistant Secretary, or any other officer designated by the Board
of Directors, shall have the authority to affix the corporate seal to any
document requiring such seal and to attest the same. The corporate seal shall
have inscribed thereon the name of the Corporation, the year of its organization
and the words "Corporate Seal, Pennsylvania." Such seal may be used by causing
it or a facsimile thereof to be impressed or affixed in any manner reproduced.
Article 32
NOTICES AND WAIVERS THEREOF
Section 32.1 Whenever written notice is required to be given to any person
under the provisions of applicable law, by the Articles of Incorporation or of
these By-laws, it may be given to the person either personally or by sending a
copy thereof by first class or express mail, postage
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prepaid, or by telegram (with messenger service specified), telex or TWX (with
answer-back received) or courier service, charges prepaid, or by telecopier, to
his address (or to his telex, TWX, telecopier or telephone number) appearing on
the books of the Corporation or, in the case of directors, supplied by him to
the Corporation for the purpose of notice. If the notice if sent by mail,
telegraph or courier service, it shall be deemed to have been given to the
person entitled thereto when deposited in the United States mail or with a
telegraph office or courier service for delivery to that person or, in the case
of telex or TWX, when dispatched. A notice of meeting shall specify the place,
day and hour of the meeting and any other information required by any other
provision of these By-laws.
Section 32.2 Whenever any written notice is required to be given under the
provisions of applicable law, the Articles of Incorporation or of these By-laws,
a waiver thereof in writing, signed by the person or persons entitled to the
notice, whether before or after the time stated therein, shall be deemed
equivalent to the giving of the notice. Except as otherwise required by these
By-laws, neither the business to be transacted at, nor the purpose of, a meeting
need be specified in the waiver of notice of the meeting. In the case of a
special meeting of shareholders, the waiver of notice shall specify the general
nature of the business to be transacted.
Section 32.3 Attendance of a person at any meeting shall constitute a
waiver of notice of the meeting except where a person attends a meeting for the
express purpose of objecting, at the beginning of the meeting, to the
transaction of any business because the meeting was not lawfully called or
convened.
Section 32.4 Whenever any notice or communication is required to be given
to any person under the provisions of applicable law, the Articles of
Incorporation, these By-laws, the terms of any agreement and any other
instrument or as a condition precedent to taking any corporate action, and
communication with that person is then unlawful, the giving of the notice or
communication to that person shall not be required and there shall be no duty to
apply for a license or other permission to do so. Any action or meeting that is
taken or held without notice or communication to that person shall have the same
validity as if the notice or communication had been duly given. If the action
taken is such as to require the filing of any document with respect thereto
under any provision of law or any agreement or other instrument, it shall be
sufficient, if such is the fact and if notice or communication in required, to
state therein that notice or communication was given to all persons entitled to
receive notice or communication except persons with whom communication was
unlawful.
Section 32.5 Section 32.4 shall also be applicable to any shareholder with
whom the Corporation has been unable to communicate for more than twenty-four
(24) consecutive months because communications to the shareholder are returned
unclaimed or the shareholder has otherwise failed to provide the Corporation
with a current address. Whenever the shareholder provides the Corporation with a
current address, Section 32.4 shall cease to be applicable to the shareholder
under this Section 32.5.
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Article 33
EMERGENCIES
Section 33.1 The Board of Directors may adopt emergency By-laws, subject to
repeal or change by action of the shareholders, which shall, notwithstanding any
different provisions of law, of the Articles of Incorporation or of these
By-laws, be effective during any emergency resulting from an attack on the
United States, a nuclear disaster or another catastrophe as a result of which a
quorum of the Board of Directors cannot readily be assembled. The emergency
By-laws may make any provision that may be appropriate for the circumstances of
the emergency including, procedures for calling meetings of the Board of
Directors, quorum requirements for meetings and procedures for designating
additional or substitute directors.
Section 33.2 The Board of Directors, either before or during any emergency,
may provide, and from time to time modify, lines of succession in the event that
during the emergency any or all officers or agents of the Corporation shall for
any reason be rendered incapable of discharging their duties and may, effective
in the emergency, change the head offices or designate several alternative head
offices or regional offices of the Corporation or authorize the officers to do
so.
Section 33.3 A representative of the Corporation acting in accordance with
any emergency By-laws shall not be liable except for willful misconduct and
shall not be liable for any action taken by him in good faith in an emergency in
furtherance of the ordinary business affairs of the Corporation even though not
authorized by the emergency or other By-laws then in effect.
Section 33.4 To the extent not inconsistent with any emergency By-laws so
adopted, the By-laws of the Corporation shall remain in effect during any
emergency and, upon its termination, the emergency By-laws shall cease to be
effective.
Section 33.5 Unless otherwise provided in emergency By-laws, notice of any
meeting of the Board of Directors during an emergency shall be given only to
those directors to whom it is feasible to reach at the time and by such means as
are feasible at the time, including publication, radio or television. To the
extent required to constitute a quorum at any meeting of the Board of Directors
during any emergency, the officers of the Corporation who are present shall,
unless otherwise provided in emergency By-laws, be deemed, in order of rank and
within the same rank in order of seniority, directors for the meeting.
Article 34
AMENDMENTS
Section 34.1 These By-laws may be altered, amended or repealed by the
affirmative vote of the holders of at least seventy-five percent (75%) of the
outstanding shares of Common Stock at any regular or special meeting duly
convened after notice to the shareholders of that purpose, or by a majority vote
of the members of the Board of Directors at any regular or special meeting
thereof duly convened after notice to the directors of that purpose (except that
the directors shall not make or alter any by-laws fixing their qualification,
classification or term of office), subject always to the power of the
shareholders to change such action of the Board of Directors by the affirmative
vote of the holders of seventy-five percent (75%) of the outstanding shares of
Common Stock.
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ANNEX D
STATUTES REGARDING
DISSENTERS' RIGHTS
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PENNSYLVANIA BANKING CODE OF 1965, AS AMENDED
Excerpt from Chapter 12
Section 1222. Rights of Dissenting Shareholders.
If a shareholder of an institution shall object to a proposed plan of
action of the institution authorized under a section of this act and such
section provides that the shareholder shall be entitled to rights and remedies
of a dissenting shareholder, the rights and remedies of such shareholder shall
be governed by the provisions of the Business Corporation Law1 applicable to
dissenting shareholders and shall be subject to the limitations on such rights
and remedies under those provisions. Shares acquired by an institution as a
result of the exercise of such rights by a dissenting shareholder may be held
and disposed of as treasury shares, or, in the case of a merger or
consolidation, as otherwise provided in the plan of merger or consolidation.
Excerpt from Chapter 16
Section 1607. Rights of Dissenting Shareholders.
(a) A shareholder of an institution which is a party to a plan in which the
proposed merger or consolidation will result in an institution subject to this
act who objects to the plan shall be entitled to the rights and remedies of a
dissenting shareholder provided under, and subject to compliance with, the
provisions of section 1222 of this act.
THE PENNSYLVANIA BUSINESS CORPORATION LAW OF 1988, AS AMENDED
Excerpt from Subchater 19C
Section 1930. Dissenters Rights
(a) General Rule. If any shareholder of a domestic business corporation
that is to be a party to a merger or consolidation pursuant to a plan
of merger or consolidation objects to the plan of merger or
consolidation and complies with the provisions of Subchapter D of
Chapter 15 (relating to dissenters rights), the shareholder shall be
entitled to the rights and remedies of dissenting shareholders therein
provided, if any. See also section 1906(c) (relating to dissenters
rights upon special treatment).
Subchapter 15D - Dissenters Rights
Section 1571. Application and effect of subchapter.
(a) General rule. Except as otherwise provided in subsection (b), any
shareholder of a business corporation shall have the right to dissent from, and
to obtain payment of the fair value
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(1) 15 Pa. C.S.A. ss. 1001 et seq.
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of his shares in the event of, any corporate action, or to otherwise obtain fair
value for his shares, where this part expressly provides that a shareholder
shall have the rights and remedies provided in this subchapter. See:
Section 1906(c) (relating to dissenters rights upon special treatment).
Section 1930 (relating to dissenters rights).
Section 1931(d) (relating to dissenters rights in share exchanges).
Section 1932(c) (relating to dissenters rights in asset transfers).
Section 1952(d) (relating to dissenters rights in division).
Section 1962(c) (relating to dissenters rights in conversion).
Section 2104(b) (relating to procedure).
Section 2324 (relating to corporation option where a restriction on
transfer of a security is held invalid).
Section 2325(b) (relating to minimum vote requirement).
Section 2704(c) (relating to dissenters rights upon election).
Section 2705(d) (relating to dissenters rights upon renewal of election).
Section 2907(a) (relating to proceedings to terminate breach of
qualifying conditions).
Section 7104(b)(3) (relating to procedure).
(b) Exceptions.
(1) Except as otherwise provided in paragraph (2), the holders of the
shares of any class or series of shares that, at the record date fixed
to determine the shareholders entitled to notice of and to vote at the
meeting at which a plan specified in any of section 1930, 1931(d),
1932(c) or 1952(d) is to be voted on, are either:
(i) listed on a national securities exchange; or
(ii) held of record by more than 2,000 shareholders; shall not have
the right to obtain payment of the fair value of any such
shares under this subchapter.
(2) Paragraph (1) shall not apply to and dissenters rights shall be
available without regard to the exception provided in that paragraph in
the case of:
(i) shares converted by a plan if the shares are not converted
solely into shares of the acquiring, surviving, new or other
corporation or solely into such shares and money in lieu of
fractional shares;
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(ii) shares of any preferred or special class unless the articles,
the plan or the terms of the transaction entitle all
shareholders of the class to vote thereon and require for the
adoption of the plan or the effectuation of the transaction
the affirmative vote of a majority of the votes cast by all
shareholders of the class;
(iii) shares entitled to dissenters rights under section 1906(c)
(relating to dissenters rights upon special treatment).
(3) The shareholders of a corporation that acquires by purchase, lease,
exchange or other disposition all or substantially all of the shares,
property or assets of another corporation by the issuance of shares,
obligations or otherwise, with or without assuming the liabilities of
the other corporation and with or without the intervention of another
corporation or other person, shall not be entitled to the rights and
remedies of dissenting shareholders provided in this subchapter
regardless of the fact, if it be the case, that the acquisition was
accomplished by the issuance of voting shares of the corporation to be
outstanding immediately after the acquisition sufficient to elect a
majority or more of the directors of the corporation.
(c) Grant of optional dissenters rights. The bylaws or a resolution of the
board of directors may direct that all or a part of the shareholders shall have
dissenters rights in connection with any corporate action or other transaction
that would otherwise not entitle such shareholders to dissenters rights.
(d) Notice of dissenters rights. Unless otherwise provided by statute, if a
proposed corporate action that would give rise to dissenters rights under this
subpart is submitted to a vote at a meeting of shareholders, there shall be
included in or enclosed with the notice of meeting:
(1) a statement of the proposed action and a statement that the
shareholders have a right to dissent and obtain payment of the fair
value of their shares by complying with the terms of this subchapter;
and
(2) a copy of this subchapter.
(e) Other statutes. The procedures of this subchapter shall also be
applicable to any transaction described in any statute other than this part that
makes reference to this subchapter for the purpose of granting dissenters
rights.
(f) Certain provisions of articles ineffective. This subchapter may not be
relaxed by any provision of the articles.
(g) Cross references. See sections 1105 (relating to restriction on
equitable relief), 1904 (relating to de facto transaction doctrine abolished)
and 2512 (relating to dissenters rights procedure).
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Section 1572. Definitions.
The following words and phrases when used in this subchapter shall have the
meanings given to them in this section unless the context clearly indicates
otherwise:
"Corporation." The issuer of the shares held or owned by the dissenter
before the corporate action or the successor by merger, consolidation,
division, conversion or otherwise of that issuer. A plan of division may
designate which of the resulting corporations is the successor corporation
for the purposes of this subchapter. The successor corporation in a
division shall have sole responsibility for payments to dissenters and
other liabilities under this subchapter except as otherwise provided in the
plan of division.
"Dissenter." A shareholder or beneficial owner who is entitled to and
does assert dissenters rights under this subchapter and who has performed
every act required up to the time involved for the assertion of those
rights.
"Fair value." The fair value of shares immediately before the
effectuation of the corporate action to which the dissenter objects taking
into account all relevant factors, but excluding any appreciation or
depreciation in anticipation of the corporate action.
"Interest." Interest from the effective date of the corporate action
until the date of payment at such rate as is fair and equitable under all
of the circumstances, taking into account all relevant factors including
the average rate currently paid by the corporation on its principal bank
loans.
Section 1573. Record and beneficial holders and owners.
(a) Record holders of shares. A record holder of shares of a business
corporation may assert dissenters rights as to fewer than all of the shares
registered in his name only if he dissents with respect to all the shares
beneficially owned by any one person and discloses the name and address of the
person or persons on whose behalf he dissents. In that event, his rights shall
be determined as if the shares as to which he has dissented and his other shares
were registered in the names of different shareholders.
(b) Beneficial owners of shares. A beneficial owner of shares of a business
corporation who is not the record holder may assert dissenters rights with
respect to shares held on his behalf and shall be treated as a dissenting
shareholder under the terms of this subchapter if he submits to the corporation
not later than the time of the assertion of dissenters rights a written consent
of the record holder. A beneficial owner may not dissent with respect to some
but less than all shares of the same class or series owned by the owner, whether
or not the shares so owned by him are registered in his name.
Section 1574. Notice of intention to dissent.
If the proposed corporate action is submitted to a vote at a meeting of
shareholders of a business corporation, any person who wishes to dissent and
obtain payment of the fair value of his shares must file with the corporation,
prior to the vote, a written notice of intention to demand
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that he be paid the fair value of his shares if the proposed action is
effectuated, must effect no change in the beneficial ownership of his shares
from the date of such filing continuously through the effective date of the
proposed action and must refrain from voting his shares in approval of such
action. A dissenter who fails in any respect shall not acquire any right to
payment of the fair value of his shares under this subchapter. Neither a proxy
nor a vote against the proposed corporate action shall constitute the written
notice required by this section.
Section 1575. Notice to demand payment.
(a) General rule. If the proposed corporate action is approved by the
required vote at a meeting of shareholders of a business corporation, the
corporation shall mail a further notice to all dissenters who gave due notice of
intention to demand payment of the fair value of their shares and who refrained
from voting in favor of the proposed action. If the proposed corporate action is
to be taken without a vote of shareholders, the corporation shall send to all
shareholders who are entitled to dissent and demand payment of the fair value of
their shares a notice of the adoption of the plan or other corporate action. In
either case, the notice shall:
(1) State where and when a demand for payment must be sent and
certificates for certificated shares must be deposited in order to
obtain payment.
(2) Inform holders of uncertificated shares to what extent transfer of
shares will be restricted from the time that demand for payment is
received.
(3) Supply a form for demanding payment that includes a request for
certification of the date on which the shareholder, or the person on
whose beneficial shareholder dissents, acquired beneficial ownership of
the shares.
(4) Be accompanied by a copy of this subchapter.
(b) Time for receipt of demand for payment. The time set for receipt of the
demand and deposit of certificated shares shall be not less than 30 days from
the mailing of the notice.
Section 1576. Failure to comply with notice to demand payment, etc.
(a) Effect of failure of shareholder to act. A shareholder who fails to
timely demand payment, or fails (in the case of certificated shares) to timely
deposit certificates, as required by a notice pursuant to section 1575 (relating
to notice to demand payment) shall not have any right under this subchapter to
receive payment of the fair value of his shares.
(b) Restriction on uncertificated shares. If the shares are not represented
by certificates, the business corporation may restrict their transfer from the
time of receipt of demand for payment until effectuation of the proposed
corporate action or the release of restrictions under the terms of section
1577(a) (relating to failure to effectuate corporate action).
(c) Rights retained by shareholder. The dissenter shall retain all other
rights of a shareholder until those rights are modified by effectuation of the
proposed corporate action.
Section 1577. Release of restrictions or payment for shares.
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(a) Failure to effectuate corporate action. Within 60 days after the date
set for demanding payment and depositing certificates, if the business
corporation has not effectuated the proposed corporate action, it shall return
any certificates that have been deposited and release uncertificated shares from
any transfer restrictions imposed by reason of the demand for payment.
(b) Renewal of notice to demand payment. When uncertified shares have been
released from transfer restrictions and deposited certificates have been
returned, the corporation may at any later time send a new notice conforming to
the requirements of section 1575 (relating to notice to demand payment), with
like effect.
(c) Payment of fair value of shares. Promptly after effectuation of the
proposed corporate action, or upon timely receipt of demand for payment if the
corporate action has already been effectuated, the corporation shall either
remit to dissenters who have made demand and (if their shares are certificated)
have deposited their certificates the amount that the corporation estimates to
be the fair value of the shares, or give written notice that no remittance under
this section will be made. The remittance or notice shall be accompanied by:
(1) The closing balance sheet and statement of income of the issuer of
the shares held or owned by the dissenter or a fiscal year ending not
more than 16 months before the date of remittance or notice together
with the latest available interim financial statements.
(2) A statement of the corporation's estimate of the fair value of the
shares.
(3) A notice of the right of the dissenter to demand payment or
supplemental payment, as the case may be, accompanied by a copy of this
subchapter.
(d) Failure to make payment. If the corporation does not remit the amount
of its estimate of the fair value of the shares as provided by subsection (c),
it shall return any certificates that have been deposited and release
uncertificated shares from any transfer restrictions imposed by reason of the
demand for payment. The corporation may make a notation on any such certificate
or on the records of the corporation relating to any such uncertificated shares
that such demand has been made. If shares with respect to which notation has
been so made shall be transferred, each new certificate issued therefor or the
records relating to any transferred uncertificated shares shall bear a similar
notation, together with the name of the original dissenting holder or owner of
such shares. A transferee of such shares shall not acquire by such transfer any
rights in the corporation other than those which the original dissenter had
after making demand for payment of their fair value.
Section 1578. Estimate by dissenter of fair value of shares.
(a) General rule. If the business corporation gives notice of its estimate
of the fair value of the shares, without remitting such amount, or remits
payment of its estimate of the fair value of a dissenter's shares as permitted
by section 1577(c) (relating to payment of fair value of shares) and the
dissenter believes that the amount stated or remitted is less than the fair
value of his shares, he may send to the corporation his own estimate of the fair
value of the shares, which shall be deemed a demand for payment of the amount or
the deficiency.
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(b) Effect of failure to file estimate. Where the dissenter does not file
his own estimate under subsection (a) within 30 days after the mailing by the
corporation of its remittance or notice, the dissenter shall be entitled to no
more than the amount stated in the notice or remitted to him by the corporation.
Section 1579. Valuation proceedings generally.
(a) General rule. Within 60 days after the latest of:
(1) effectuation of the proposed corporate action;
(2) timely receipt of any demands for payment under Section 1575
(relating to notice to demand payment); or
(3) timely receipt of any estimates pursuant to Section 1578 (relating
to estimate by dissenter of fair value of shares).
If any demands for payment remain unsettled, the business corporation may
file in court an application for relief requesting that the fair value of the
shares be determined by the court.
(b) Mandatory joinder of dissenters. All dissenters, wherever residing,
whose demands have not been settled shall be made parties to the proceeding as
in an action against their shares. A copy of the application shall be served on
each such dissenter. If a dissenter is a nonresident, the copy may be served on
him in the manner provided or prescribed by or pursuant to 42 Pacs Ch. 53
(relating to bases of jurisdiction and interstate and international procedure).
(c) Jurisdiction of the court. The jurisdiction of the court shall be
plenary and exclusive. The court may appoint an appraiser to receive evidence
and recommend a decision on the issue of fair value. The appraiser shall have
such power and authority as may be specified in the order of appointment or in
any amendment thereof.
(d) Measure of recovery. Each dissenter who is made a party shall be
entitled to recover the amount by which the fair value of his shares is found to
exceed the amount, if any, previously remitted, plus interest.
(e) Effect of corporation's failure to file application. If the corporation
fails to file an application as provided in subsection (a), any dissenter who
made a demand and who has not already settled his claim against the corporation
may do so in the name of the corporation at any time within 30 days after the
expiration of the 60-day period. If a dissenter does not file an application
within the 30-day period, each dissenter entitled to file an application shall
be paid the corporation's estimate of the fair value of the shares and no more,
and may bring an action to recover any amount not previously remitted.
Section 1580. Costs and expenses of valuation proceedings.
(a) General rule. The costs and expenses of any proceeding under section
1579 (relating to valuation proceedings generally) including the reasonable
compensation and expenses of the
D-8
<PAGE>
appraiser appointed by the court, shall be determined by the court and assessed
against the business corporation except that any part of the costs and expenses
may be apportioned and assessed as the court deems appropriate against all or
some of the dissenters who are parties and whose action in demanding
supplemental payment under section 1578 (relating to estimate by dissenter of
fair value of shares) the court finds to be dilatory, obdurate, arbitrary,
vexatious or in bad faith.
(b) Assessment of counsel fees and expert fees where lack of good faith
appears. Fees and expenses of counsel and of experts for the respective parties
may be assessed as the court deems appropriate against the corporation and in
favor of any or all dissenters if the corporation failed to comply substantially
with the requirements of this subchapter and may be assessed against either the
corporation or a dissenter, in favor of any other party, if the court finds that
the party against whom the fees and expenses arc assessed acted in bad faith or
in a dilatory, obdurate, arbitrary or vexatious manner in respect to the rights
provided by this subchapter.
(c) Award of fees for benefits to other dissenters. If the court finds that
the services of counsel for any dissenter were of substantial benefit to other
dissenters similarly situated and should not be assessed against the
corporation, it may award to those counsel reasonable fees to be paid out of the
amounts awarded to the dissenters who were benefitted.
D-9
<PAGE>
PART II. INFORMATION NOT REQUIRED IN PROSPECTUS
Item 20. Indemnification of Directors and Officers.
Subchapter D of Chapter 17 of the Pennsylvania Business Corporation Law of
1988, as amended (15 PA. C.S.A. Sections 1741-1750) provides that a business
corporation shall have the power under certain circumstances to indemnify
directors, officers, employees and agents against certain expenses incurred by
them in connection with any threatened, pending or completed action, suit or
proceeding. The full text of Subchapter D of Chapter 17 of the Pennsylvania
Business Corporation Law of 1988 is attached as Exhibit 99.4.
Section 1741 (relating to third party actions) provides that a business
corporation shall have the power to indemnify any person who was or is a party,
or is threatened to be made a party to any threatened, pending or completed
action or proceeding, whether civil, criminal, administrative or investigative
(other than an action by or in the right of the corporation), by reason of the
fact that such person is or was a representative of the corporation, against
expenses (including attorneys' fees), judgments, fines and amounts paid in
settlement actually and reasonably incurred by such person in connection with
the action or proceeding if such person acted in good faith and in a manner he
reasonably believed to be in, or not opposed to, the best interests of the
corporation, and, with respect to any criminal proceeding, had no reasonable
cause to believe his conduct was unlawful. The termination of any action or
proceeding by judgment, order, settlement or conviction or upon a plea of nolo
contendere or its equivalent shall not of itself create a presumption that the
person did not act in good faith and in a manner that he reasonably believed to
be in, or not opposed to, the best interests of the corporation, and with
respect to any criminal proceeding, had reasonable cause to believe that his
conduct was not unlawful.
Section 1742 (relating to derivative actions) provides that a business
corporation shall have the power to indemnify any person who was or is a party,
or is threatened to be made a party, to any threatened, pending or completed
action by or in the right of the corporation to procure a judgment in its favor
by reason of the fact that such person is or was a representative of the
corporation, against expenses (including attorneys' fees) actually and
reasonably incurred by such person in connection with the defense or settlement
of the action if such person acted in good faith and in a manner he reasonably
believed to be in, or not opposed to the best interests of the corporation.
Indemnification shall not be made under this section in respect of any claim,
issue or matter as to which such person has been adjudged to be liable to the
corporation unless, and only to the extent that, the court of common pleas of
the judicial district embracing the county in which the registered office of the
corporation is located or the court in which such action was brought determines
upon application that, despite the adjudication of liability but in view of all
the circumstances of the case, such person is fairly and reasonably entitled to
indemnity for such expenses which the court of common pleas or such other court
shall deem proper.
Section 1743 (relating to mandatory indemnification) provides for mandatory
indemnification of directors and officers such that to the extent that a
representative of the business corporation has been successful on the merits or
otherwise in defense of any action or proceeding referred to in Sections 1741
(relating to third party actions) or 1742 (relating to derivative actions), or
in defense of any claim, issue or matter therein, such person shall be
II-1
<PAGE>
indemnified against expenses (including attorneys' fees) actually and reasonably
incurred by such person in connection therewith.
Section 1744 (relating to procedure for effecting indemnification) provides
the procedure for effecting indemnification. Under this section unless ordered
by a court, any indemnification under Section 1741 (relating to third party
actions) or 1742 (relating to derivative actions) shall be made by the business
corporation only as authorized in the specific case upon a determination that
indemnification of the representative is proper in the circumstances because
such person has met the applicable standard of conduct set forth in those
sections. The determination shall be made:
1. by the Board of Directors by a majority vote of a quorum consisting
of directors who were not parties to the action or proceeding;
2. if such quorum is not obtainable, or, if obtainable and a majority
vote of a quorum of disinterested directors so directs, by independent
legal counsel in a written opinion; or
3. by the shareholders.
Section 1745 (relating to advancing expenses) provides that expenses
(including attorneys' fees) incurred in defending any action or proceeding
referred to above may be paid by the business corporation in advance of the
final disposition of the action or proceeding upon receipt of an undertaking by
or on behalf of the representative to repay such amount if it is ultimately
determined that such person is not entitled to be indemnified by the
corporation.
Section 1746 (relating to supplementary coverage) provides that the
indemnification and advancement of expenses provided by or granted pursuant to
the other sections of the BCL shall not be deemed exclusive of any other rights
to which a person seeking indemnification or advancement of expenses may be
entitled under any other by-law, agreement, vote of shareholders or
disinterested directors or otherwise, both as to action in such person's
official capacity and as to action in another capacity while holding such
office.
Section 1746 also provides that indemnification referred to above shall not
be made in any case where the act or failure to act giving rise to the claim for
indemnification is determined by a court to have constituted willful misconduct
or recklessness.
Section 1746 further declares that indemnification under any bylaw,
agreement, vote of shareholders or directors or otherwise, may be granted for
any action taken or any failure to take any action and may be made whether or
not the corporation would have the power to indemnify the person under any other
provision of law except as provided in this section and whether or not the
indemnified liability arises or arose from any threatened, pending or completed
action by or in the right of the corporation. Such indemnification is declared
to be consistent with the public policy of the Commonwealth of Pennsylvania.
Section 1747 (relating to the power to purchase insurance) provides that a
business corporation shall have power to purchase and maintain insurance on
behalf of any person who is or was a representative of the corporation against
any liability asserted against him and incurred
II-2
<PAGE>
by him in any such capacity, or arising out of his status as such, whether or
not the corporation would have the power to indemnify him against that liability
under the provisions of the Business Corporation Law. Such insurance is declared
to be consistent with the public policy of the Commonwealth of Pennsylvania.
Article 23 of the By-laws of the Registrant provides for the
indemnification of its directors, officers, employees and agents in accordance
with, and to the maximum extent permitted by, the provision of Subchapter D of
Chapter 17 of the Pennsylvania Business Corporation Law of 1988, as amended. In
addition, Registrant intends to purchase and maintain insurance against
liability for acts by these persons, as permitted by law.
Item 21. Exhibits and Financial Statement Schedules.
- -------- -------------------------------------------
(a) Exhibits:
2.1 Plan of Reorganization dated as of __________, 1999,
among Registrant, The Fidelity Deposit and Discount
Bank and The Fidelity Deposit and Discount Interim
Bank (included as Annex A to the Proxy
Statement/Prospectus contained herein).
2.2 Plan of Merger dated as of ____________, 1999,
between The Fidelity Deposit and Discount Bank and
The Fidelity Deposit and Discount Interim Bank
(included as Exhibit A to the Plan of Reorganization,
which is included in Annex A to the Proxy
Statement/Prospectus contained herein).
3(i) Amended and Restated Articles of Incorporation of
Registrant (included as Annex B to the Proxy
Statement/Prospectus contained herein).
3(ii) By-laws of Registrant (included as Annex C to the
Proxy Statement/Prospectus contained herein).
5 Opinion of Shumaker Williams, P.C. of Camp Hill,
Pennsylvania, Special Counsel to Registrant, dated
____________, 1999, as to the legality of the shares
of Registrant's stock being registered.
8 Opinion of Shumaker Williams, P.C. of Camp Hill,
Pennsylvania, Special Counsel to Registrant, dated
__________, 1999, as to the tax treatment of the
proposed transactions.
10.1 1998 Independent Directors Stock Option Plan of The
Fidelity Deposit and Discount Bank.
10.2 1998 Stock Incentive Plan of The Fidelity Deposit and
Discount Bank.
10.3 The Fidelity Deposit and Discount Bank Dividend
Reinvestment Plan.
23.1 Consent of Shumaker Williams, P.C. of Camp Hill,
Pennsylvania, Special Counsel to Registrant (included
in Opinion Letter as Exhibit 5).
II-3
<PAGE>
23.2 Consent of Parente, Randolph, Orlando, Carey and
Associates, Certified Public Accountants.
24 Power of Attorney given by the Officers and Directors
of the Registrant (included on Signature Page of the
Registration Statement).
99.1 Letter to Shareholders of The Fidelity Deposit and
Discount Bank.
99.2 Notice of Special Meeting of Shareholders of The
Fidelity Deposit and Discount Bank.
99.3 Form of Proxy for use by the Shareholders of The
Fidelity Deposit and Discount Bank.
99.4 Subchapter D of Chapter 17 of the Pennsylvania
Business Corporation Law of 1988, as amended,
(15 PA. C.S.A. Sections 1741-1750) relating to
indemnification.
99.5 Statutes Relating to Dissenters' Rights (included as
Annex D to the Proxy Statement/Prospectus contained
herein).
(b) Financial Statement Schedules:
None required.
(c) Opinions:
The opinions of Shumaker Williams, P.C., Special Counsel to Registrant, are
included as Exhibits 5 and 8.
Item 22. Undertakings.
(a) Undertakings furnished pursuant to Item 512 of Regulation S-K:
(1) The undersigned Registrant hereby undertakes:
(A) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement:
(i) To include any prospectus required by section 10(a)(3) of
the Securities Act of 1933;
(ii) To reflect in the Proxy Statement/Prospectus any facts or
events arising after the effective date of the registration
statement (or the most recent post-effective amendment thereof)
which, individually or in the aggregate, represent a
fundamental change in the information set forth in the
registration statement. Notwithstanding the foregoing, any
increase or decrease in volume
II-4
<PAGE>
of securities offered (if the total dollar value of securities
offered would not exceed that which was registered) and any
deviation from the low or high end of the estimated maximum
offering range may be reflected in the form of prospectus filed
with the Commission pursuant to Rule 424(b) (Section 230.424(b)
of this chapter) if, in the aggregate, the changes in volume
and price represent no more than a 20% change in the maximum
aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective registration
statement;
(iii) To include any material information with respect to the
plan of distribution not previously disclosed in the
registration statement or any material change to such
information in the registration statement;
(B) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be
deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at
that time shall be deemed to be the initial bona fide offering
thereof.
(C) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain
unsold at the termination of the offering.
(b) The undersigned Registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing
of the Registrant's annual report pursuant to Section 13(a) or Section
15(d) of the Securities Exchange Act of 1934 (and, where applicable,
each filing of an employee benefit plan's annual report pursuant to
Section 15(d) of the Securities Exchange Act of 1934) that is
incorporated by reference in this registration statement shall be
deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall
be deemed to be the initial bona fide offering thereof.
(c) Not applicable.
(d) Not applicable.
(e) Not applicable.
(f) Not applicable.
(g) (1) The undersigned Registrant hereby undertakes as follows: That prior
to any public reoffering of the securities registered hereunder through
use of a prospectus which is a part of this registration statement, by
any person or party who is deemed to be an underwriter within the
meaning of Rule 145(c), the issuer undertakes that such reoffering
prospectus will contain the information called for by the applicable
II-5
<PAGE>
registration form with respect to reofferings by persons who may be
deemed underwriters, in addition to the information called for by the
other Items of the applicable form.
(2) The Registrant undertakes that every prospectus (i) that is filed
pursuant to paragraph (1) immediately preceding, or (ii) that purports
to meet the requirements of section 10(a)(3) of the Act and is used in
connection with an offering of securities subject to Rule 415
(ss.230.415 of this chapter), will be filed as part of an amendment to
the registration statement and will not be used until such amendment is
effective, and that, for the purposes of determining any liability
under the Securities Act of 1933, each such post-effective amendment
shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
(b) Undertakings furnished pursuant to Item 22(b) and (c):
(1) The undersigned Registrant hereby undertakes to respond to requests
for information that is incorporated by reference into the Proxy
Statement/ Prospectus pursuant to Items 4, 10(b), 11, or 13 of this
Form, within one business day of receipt of such request, and to send
the incorporated documents by first class mail or other equally prompt
means. This includes information contained in documents filed
subsequent to the effective date of the registration statement through
the date of responding to the request.
(2) The undersigned Registrant hereby undertakes to supply by means of
a post-effective amendment all information concerning a transaction,
and the company being acquired involved therein, that was not the
subject of and included in the registration statement when it became
effective.
II-6
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment No. 1 to the Registration Statement No.
333-90273, on Form S-4, to be signed on its behalf by the undersigned, thereunto
duly authorized, in Dunmore, Lackawanna County, Commonwealth of Pennsylvania, on
the 30th day of December, 1999.
FIDELITY D & D BANCORP, INC.
(Registrant)
By: /s/ Michael F. Marranca
------------------------------
Michael F. Marranca,
President and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this amendment
to the Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature and Capacity Date
---------------------- ----
<S> <C>
Michael F. Marranca, President and December 30, 1999
Chief Executive Officer, Director
(Principal Executive Officer)
Robert P. Farrell, Treasurer December 30, 1999
(Principal Financial and Accounting Officer)
Samuel C. Cali, December 30, 1999
Chairman of the Board, Director
Paul A. Barrett, Director December 30, 1999
Patrick A. Calvey, Jr., Director December 30, 1999
John T. Cognetti, Director December 30, 1999
Patrick J. Dempsey, Director December 30, 1999
John F. Glinsky, Jr., Secretary, Director December 30, 1999
Herbert M. McDonald, Director December 30, 1999
Michael J. McDonald, Director December 30, 1999
David L. Tressler, Sr., Director December 30, 1999
</TABLE>
II-7
<PAGE>
<TABLE>
<S> <C>
/s/ Michael F. Marranca December 30, 1999
- -----------------------------------------------------
Michael F. Marranca
(Attorney-in-Fact)
</TABLE>
II-8
<PAGE>
INDEX TO EXHIBITS
Exhibit
Number
-------
2.1 Plan of Reorganization dated as of __________, 1999, among
Registrant, The Fidelity Deposit and Discount Bank and The
Fidelity Deposit and Discount Interim Bank (included as Annex A
to the Proxy Statement/Prospectus contained herein).
2.2 Plan of Merger dated as of ____________, 1999, between The
Fidelity Deposit and Discount Bank and The Fidelity Deposit and
Discount Interim Bank (included as Exhibit A to the Plan of
Reorganization, which is included in Annex A to the Proxy
Statement/Prospectus contained herein).
3(i) Amended and Restated Articles of Incorporation of Registrant
(included as Annex B to the Proxy Statement/Prospectus contained
herein).
3(ii) By-laws of Registrant (included as Annex C to the Proxy
Statement/Prospectus contained herein).
5 Opinion of Shumaker Williams, P.C. of Camp Hill, Pennsylvania,
Special Counsel to Registrant, dated ____________, 1999, as to
the legality of the shares of Registrant's stock being
registered.**
8 Opinion of Shumaker Williams, P.C. of Camp Hill, Pennsylvania,
Special Counsel to Registrant, dated __________, 1999, as to the
tax treatment of the proposed transactions.**
10.1 1998 Independent Directors Stock Option Plan of The Fidelity
Deposit and Discount Bank.*
10.2 1998 Stock Incentive Plan of The Fidelity Deposit and Discount
Bank.*
10.3 The Fidelity Deposit and Discount Bank Dividend Reinvestment
Plan.*
23.1 Consent of Shumaker Williams, P.C. of Camp Hill, Pennsylvania,
Special Counsel to Registrant (included in Opinion Letter as
Exhibit 5).**
23.2 Consent of Parente, Randolph, Orlando, Carey and Associates,
Certified Public Accountants.
<PAGE>
24 Power of Attorney given by the Officers and Directors of the
Registrant (included on Signature Page of the Registration
Statement).*
99.1 Letter to Shareholders of The Fidelity Deposit and Discount
Bank.
99.2 Notice of Special Meeting of Shareholders of The Fidelity
Deposit and Discount Bank.
99.3 Form of Proxy for use by the Shareholders of The Fidelity
Deposit and Discount Bank.
99.4 Subchapter D of Chapter 17 of the Pennsylvania Business
Corporation Law of 1988, as amended, (15 PA C.S.A. Sections
1741-1750) relating to indemnification.*
99.5 Statutes Relating to Dissenters' Rights (included as Annex D to
the Proxy Statement/Prospectus contained herein).
*Previously filed.
** Unsigned, undated form previously filed. Signed, dated opinions/consents to
be filed by amendment.
EXHIBIT 23.2
CONSENT OF PARENTE, RANDOLPH, ORLANDO, CAREY AND ASSOCIATES,
CERTIFIED PUBLIC ACCOUNTANTS
<PAGE>
Parente, Randolph, Orlando, Carey & Associates
46 Public Square, Suite 400
Wilkes-Barre, Pennsylvania 18701-2681
We hereby consent to the inclusion in the Registration Statement on Form
S-4 of Fidelity D & D Bancorp, Inc., filed with the U.S. Securities and Exchange
Commission in connection with the registration of 1,901,472 shares of common
stock, without par value, of our report dated January 25, 1999, on The Fidelity
Deposit & Discount Bank's financials statements as of December 31, 1998 and
1997, and for each of the years in the three-year period ending December 31,
1998. We also consent to the reference to our firm under the caption
"Independent Auditors" in the related Proxy Statement/Prospectus.
/s/ PARENTE, RANDOLPH, ORLANDO, CAREY & ASSOCIATES
----------------------------------------------
PARENTE, RANDOLPH, ORLANDO, CAREY & ASSOCIATES
Wilkes-Barre, Pennsylvania
December 17, 1999
EXHIBIT 99.1
LETTER TO SHAREHOLDERS OF
THE FIDELITY DEPOSIT AND DISCOUNT BANK
<PAGE>
THE FIDELITY DEPOSIT AND DISCOUNT BANK
Blakely and Drinker Streets
Dunmore, Pennsylvania 18512
(570) 342-8281
------------------------------------------------------------------------------
January ____, 2000
TO OUR SHAREHOLDERS:
The Board of Directors of The Fidelity Deposit and Discount Bank cordially
invites you to attend a Special Meeting of Shareholders at ______ ___.m.,
Eastern Standard Time, on __________, January ____, 2000, at the main office of
The Fidelity Deposit and Discount Bank, Blakely and Drinker Streets, Dunmore,
Pennsylvania 18512.
At this Special Meeting of Shareholders, the Board of Directors recommends
that you vote in favor of the proposal to approve and adopt a Plan of
Reorganization and related Plan of Merger that will reorganize the bank into a
bank holding company. The Board of Directors believes that the formation of a
bank holding company at this time is an important and necessary part of the
bank's plans for the future.
Under the proposed Plan of Reorganization, we will exchange each share of
common stock of the bank presently held by you into 2 shares of common stock of
Fidelity D & D Bancorp, Inc., a bank holding company whose only substantial
asset will be all of the common stock of the bank. If you approve and adopt the
Plan of Reorganization, the bank's shareholders will automatically become
shareholders of the holding company. The holding company will own all of the
outstanding shares of the bank.
Therefore, your interest in the bank after the reorganization will remain
essentially the same, except that it will be an indirect interest rather than a
direct interest. The exchange of common stock of the bank into common stock of
the holding company will be tax free for federal income tax purposes.
To facilitate the reorganization, we established an interim bank as a
subsidiary of the holding company. The interim bank will merge with the bank as
provided for by the Plan of Merger. The proposal does NOT involve a merger
between the bank and another bank or company already in operation. After the
proposed reorganization, the bank will continue its banking business
substantially unchanged and under the same management.
The Board of Directors believes that the Plan of Reorganization and Plan of
Merger are in the best interests of the bank and its shareholders and urges you
to vote in favor of these agreements and the reorganization they provide. The
approval and adoption of the Plan of Reorganization and Plan of Merger requires
an affirmative vote of the holders of at least 2/3 of the outstanding shares of
the bank's common stock.
1
<PAGE>
You are, of course, welcome to attend this Special Meeting, but we
understand that this may not be possible. It is important that your shares be
represented and voted at the meeting whether or not you plan to attend. If
enough shareholders do not return their proxies, the company may have to incur
the expense of additional solicitation. Please take a moment to sign, date and
promptly mail the enclosed proxy in the pre-addressed and stamped envelope
supplied for your convenience.
We urge you to carefully review the enclosed proxy statement/prospectus
that describes the reorganization proposal in detail. The reorganization
involves elements of risk that are described under "Risk Factors" beginning on
page 8.
Again, the Board of Directors strongly recommends that you vote FOR the
proposal. On behalf of the Board of Directors, thank you for your cooperation
and continued support.
Very truly yours,
Michael F. Marranca, President and
Chief Executive Officer
2
EXHIBIT 99.2
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS OF
THE FIDELITY DEPOSIT AND DISCOUNT BANK
<PAGE>
-----------------------------------------
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON JANUARY ____, 2000
-----------------------------------------
TO THE SHAREHOLDERS OF THE FIDELITY DEPOSIT AND DISCOUNT BANK:
The Board of Directors will hold a Special Meeting of Shareholders of The
Fidelity Deposit and Discount Bank will be at ______ ___.m., Eastern Standard
Time, on __________, January ____, 2000, at the bank's main office at Blakely
and Drinker Streets, Dunmore, Pennsylvania 18512, for the following purposes:
1. To consider and act upon a proposal to approve and adopt the Plan
of Reorganization and Plan of Merger, providing for:
o the reorganization of the 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 banking institution and subsidiary
of Fidelity D & D Bancorp, Inc.;
o and the exchange of each share of common stock of the bank for 2
shares of common stock of Fidelity D & D Bancorp, Inc.;
2. Adjournment of the 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 Plan of
Reorganization and Plan of Merger; and
3. To transact any other business that lawfully comes before the
meeting and any adjournment of the meeting.
We describe the reorganization to be voted upon at the meeting more fully
in the attached proxy statement/prospectus. Annex A is a copy of the Plan of
Reorganization and Plan of Merger.
Approval and adoption of the Plan of Reorganization and Plan of Merger
requires an affirmative vote of the holders of at least 2/3 of the bank's
outstanding shares. Only those shareholders of record at the close of business
on December ___, 1999, will be entitled to vote at the meeting.
Whether or not you expect to attend the meeting in person, you are urged to
sign, date and promptly return the enclosed proxy. We enclose a self-addressed
stamped envelope for your convenience. The prompt return of your signed proxy,
regardless of the number of shares you hold, will aid the bank in reducing the
expense of additional proxy solicitation. Signing and
1
<PAGE>
returning the proxy does not affect your right to vote in person if you attend
the meeting and give notice to the Secretary of the bank.
By Order of the Board of Directors,
Michael F. Marranca, President and
Chief Executive Officer
January ____, 2000
2
EXHIBIT 99.3
FORM OF PROXY FOR USE BY THE SHAREHOLDERS OF
THE FIDELITY DEPOSIT AND DISCOUNT BANK
<PAGE>
THE FIDELITY DEPOSIT AND DISCOUNT BANK
PROXY
FOR SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON JANUARY ___, 2000
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS.
The undersigned hereby constitutes and appoints _______________________ and
_____________________ and each or any of them, proxies of the undersigned, with
full power of substitution, to vote all of the shares of The Fidelity Deposit
and Discount Bank (the "Bank") that the undersigned may be entitled to vote at
the Special Meeting of Shareholders of the bank to be held at the Bank's main
office at Blakely and Drinker Streets, Dunmore, Pennsylvania 18512 on
__________, January ____, 2000, at ______ ___.m., Eastern Standard Time, and at
any adjournment or postponement thereof as follows:
1. To consider and act upon a proposal to approve and adopt the Plan of
Reorganization and Plan of Merger, providing for:
o the reorganization of the 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 banking institution and subsidiary of
Fidelity D & D Bancorp, Inc.;
o and the Exchange of each share of common stock of the Bank for 2
Shares of common stock of Fidelity D & D Bancorp, Inc.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
The Board of Directors recommends a vote FOR this proposal.
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2. Proposal to adjourn the special meeting of shareholders to a later date
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 Plan of
Reorganization and Plan of Merger.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
The Board of Directors recommends a vote FOR this proposal.
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3. In their discretion, the proxy holders are authorized to vote upon such
other business as may properly come before the Special Meeting of Shareholders
and any adjournment.
This proxy, when properly signed, will be voted in the manner directed
herein by the undersigned shareholder(s). If no direction is made, this proxy
will be voted FOR proposals 1 and 2.
Dated:------------------------------, 1999
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Signature
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Signature
Number of Shares Held of Record on December ___, 1999:
- ----------------
This proxy must be dated, signed by the shareholder(s) and returned
promptly to the Bank in the enclosed envelope. When signing as attorney,
executor, administrator, trustee or guardian, please give full title. If more
than one trustee, all should sign. If stock is held jointly, each owner should
sign.
