As filed with the Securities and Exchange Commission on September 12, 2000
Registration No. _________
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
FIDELITY D & D BANCORP, INC.
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(Exact name of registrant as specified in its charter)
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Pennsylvania 6021 23-3017653
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(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of incorporation or organization) Classification Code Number) Identification No.)
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Michael F. Marranca, President
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, (Name, address, including zip code,
and telephone number, including and telephone number, including area
area code, of registrant's code, of agent for service)
principal executive offices)
With A Copy To:
Nicholas Bybel, Jr., Esquire
Cheryl A. Zeman, Esquire
Shumaker Williams, P.C.
Post Office Box 88
Harrisburg, Pennsylvania 17108
Telephone: (717) 763-1121
Approximate date of commencement of the proposed sale of the securities to the
public: As soon as practicable after this Registration Statement becomes
effective.
If any the securities being registered on this form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. |X|
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration number of the earlier effective
registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
CALCULATION OF REGISTRATION FEE
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Title of Each Amount Proposed Maximum Proposed Maximum Amount of
Class of Securities to be Offering Price Aggregate Registration
Being Registered Registered Per Unit Offering Price Fee
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Common Stock,
without par value 100,000 $36.50 (1) $ 3,650,000 $ 963.60
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(1) Computed in accordance with Rule 457(c), solely for the purpose of
calculating the registration fee.
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.
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Prospectus
FIDELITY D & D BANCORP, INC.
2000 Dividend Reinvestment Plan
100,000 Shares of Common Stock
Trading Symbol: FDBC
This prospectus relates to 100,000 shares of common stock of Fidelity D & D
Bancorp, Inc., a Pennsylvania corporation, that the company may issue, from time
to time, under the Fidelity D & D Bancorp, Inc. 2000 Dividend Reinvestment Plan.
The plan offers holders of shares of common stock of Fidelity D & D an
opportunity to automatically reinvest their cash dividends in shares of the
company's common stock.
The plan administrator will purchase shares acquired for the plan directly
from Fidelity D & D Bancorp at fair market value, in the open market, or in
negotiated transactions, as described in the plan. As of September 1, 2000, the
market price of the common stock was $36.50 per share. The common stock is
traded on the Over-the-Counter Bulletin Board under the symbol "FDBC."
See "Risk Factors" beginning on page 7 for information that prospective
participants in the 2000 Dividend Reinvestment Plan should consider before
joining the plan.
Neither the Securities and Exchange Commission, the Federal Deposit
Insurance Corporation, the Pennsylvania Department of Banking nor any state
securities commission has approved or disapproved these securities or passed
upon the accuracy or adequacy of this prospectus. Any representation to the
contrary is a criminal offense.
The shares of common stock offered in this prospectus are not savings
accounts, deposits, or other obligations of a bank or savings association and
are not insured by the FDIC or any other governmental agency. Neither Fidelity D
& D Bancorp, Inc. nor its wholly owned subsidiary, The Fidelity Deposit and
Discount Bank, has guaranteed the shares being offered. 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 prospectus is September __, 2000.
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Table of Contents
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Page
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Summary...........................................................................................................1
General ................................................................................................1
The Company..............................................................................................1
Administration of the Plan...............................................................................2
Eligibility..............................................................................................2
Purchases................................................................................................2
Reports ................................................................................................2
Termination of Participation.............................................................................2
Withdrawal of Shares.....................................................................................3
Selected Financial Information....................................................................................5
Risk Factors......................................................................................................7
2000 Dividend Reinvestment Plan..................................................................................12
Purpose ...............................................................................................12
Advantages..............................................................................................12
Administration..........................................................................................12
Participation...........................................................................................13
Purchases...............................................................................................14
Reports to Participants.................................................................................15
Share Certificates; Safekeeping.........................................................................16
Withdrawal of Shares in Plan Accounts...................................................................16
Termination of Participation in Dividend Reinvestment Plan..............................................17
Federal Tax Information.................................................................................18
Other Information.......................................................................................19
Market Prices and Dividends......................................................................................21
Use of Proceeds..................................................................................................22
Management's Discussion and Analysis of Consolidated Financial Condition and Results of
Operation and Quantitative and Qualitative Disclosures about Market Risk................................23
Management's Discussion and Analysis of Financial
Condition for the Fiscal Years 1999, 1998 and 1997......................................................24
Management's Discussion and Analysis of Consolidated Financial
Condition for the Six Months Ended June 30, 2000 and 1999...............................................50
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Business ........................................................................................................60
The Company.............................................................................................60
The Bank ...............................................................................................60
Employees...............................................................................................63
Properties..............................................................................................63
Supervision and Regulation.......................................................................................64
Securities Regulation...................................................................................64
Bank and Bank Holding Company Regulation................................................................64
Regulation of Bank Holding Companies....................................................................65
Regulation of the Bank..................................................................................68
Regulatory Restrictions on Dividends....................................................................72
New Legislation.........................................................................................73
Legal Proceedings.......................................................................................73
Management.......................................................................................................73
Compensation of Directors...............................................................................76
Principal Officers of the Company.......................................................................77
Principal Officers of the Bank..........................................................................77
Executive Compensation..................................................................................78
Stock Option Plans......................................................................................79
Stock Option Grants in Fiscal Year 1999.................................................................81
Exercises of Stock Options in Fiscal Year 1999 and Fiscal Year-End Option Values........................82
401(k) Profit Sharing Plan..............................................................................82
Compensation Committee Report on Executive Compensation.................................................83
Compensation Committee Interlocks and Insider Participation.............................................85
Shareholder Performance Graph...........................................................................85
Family Relationships and Transactions with Management...................................................87
Beneficial Ownership of Shares...................................................................................88
Description of Securities........................................................................................91
Common Stock............................................................................................91
Preferred Stock.........................................................................................92
Issuance of Additional Securities.......................................................................93
Legal Opinion...........................................................................................93
Anti-Takeover Provisions in Articles and By-laws........................................................93
Anti-takeover Provisions Applicable to Registered Corporations..........................................96
Experts.........................................................................................................100
Available Information...........................................................................................100
Index to Financial Statements...................................................................................F-1
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iii
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SUMMARY
General
Fidelity D & D Bancorp, Inc. has filed a Registration Statement on Form S-1
under the Securities Act of 1933 with the Securities and Exchange Commission to
register securities offered by this prospectus under the terms of the company's
2000 Dividend Reinvestment Plan. The plan offers the company's shareholders an
opportunity to automatically reinvest their cash dividends in shares of the
company's common stock.
The plan administrator will automatically reinvest cash dividends on shares
registered in a participant's name or that are kept in a participant's account
under the plan in additional shares of common stock. The administrator will
purchase shares directly from the company, in the open market, or in negotiated
transactions. The purchase price of the shares purchased from the company will
be the fair market value per share on the date of purchase. The purchase price
of shares purchased in the open market or in negotiated transactions will be the
weighted average of the prices actually paid for the shares, excluding all fees,
brokerage commissions and expenses. Shareholders who do not elect to participate
in the plan will receive dividends, as declared and paid, by check or advice of
credit to their account.
The plan does not represent a change in the company's dividend policy or a
guarantee of future dividends. The board's declaration of dividends continues to
depend on earnings, financial requirements and other factors. Any holder of
record of common stock is eligible to participate in the plan. We recommend that
beneficial owners interested in participating in the plan directly contact their
brokers or nominee holders to determine whether and to what extent indirect
participation is available to them.
An investment in common stock held in the plan account has the same market
risks as an investment in common stock held in certificate form. Participants
bear the risk of loss, and receive the benefit of gain, occurring by reason of
fluctuations in the market price of the common stock held in the participants'
plan account. The following summary is qualified in its entirety by, and subject
to, the more detailed information and financial statements and the notes the
financial statements included in this prospectus. We encourage each investor to
read this entire prospectus. Investors should carefully consider the information
discussed under the caption "Risk Factors."
The Company
Fidelity D & D Bancorp, Inc. is a one-bank holding company, incorporated on
August 10, 1999, and headquartered in Dunmore, Pennsylvania. The company became
a bank holding company on June 30, 2000, when it acquired all of the outstanding
shares of The Fidelity Deposit and Discount Bank. Through its sole, wholly-owned
subsidiary, The Fidelity Deposit and
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Discount Bank, the company is primarily engaged in commercial and retail banking
services and in related services.
The principal executive offices of the bank and Fidelity D & D Bancorp,
Inc. are located at Blakely and Drinker Streets, Dunmore, Pennsylvania 18512,
and the telephone number is (570) 342-8281.
Administration of the Plan
The Fidelity D & D Bancorp will administer the plan. Fidelity D & D
Bancorp, Inc. is its own stock transfer agent. The administrator, among other
things, keeps the records and sends detailed statements of account to
participants.
Eligibility
Generally, all record and beneficial owners are eligible to participate in
the plan. Shareholders who hold more than 50 shares may participate with respect
to a portion of their shares. An eligible shareholder may join the plan by
completing and signing an authorization form appointing the Fidelity D & D
Bancorp as his or her agent to reinvest the dividends paid on some or on all
shares of common stock.
Purchases
The number of shares purchased date depends upon a number of factors
including:
o The amount of dividends payable on shares in the plan; and
o The purchase price of the common stock for the payment period.
The administrator will use the cash dividends to purchase common stock as
soon as reasonably practicable after the dividend payment date, but not more
than thirty (30) days after the dividend payment date.
Reports
The administrator will send each participant a statement of account after
each dividend payment date. The statement will describe cash dividends received,
the number of shares purchased, the price per share and the total number of
shares accumulated under the plan.
Termination of Participation
A participant may terminate participation under the plan by sending written
notice to the administrator. The administrator will issue a certificate for
whole shares credited to the
2
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participant's account and a check representing the value of any fractional
shares based on the then current market value per share of the company's common
stock.
Withdrawal of Shares
A participant may withdraw some or all of the shares credited to his or her
account by completing a withdrawal notification specifying the number of shares
to be withdrawn. A participant may also request that the administrator sell
shares withdrawn from his or her account. If selling shares, participants are
responsible for fees, brokerage commissions, and service charges incurred in
connection with the sale.
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SELECTED FINANCIAL INFORMATION
Please read the following selected financial data in conjunction with the
company's consolidated financial statements, related notes, other financial
information and Management's Discussion and Analysis of Financial Condition and
Results of Operations in this prospectus.
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As of June 30, 2000, June 30, 1999 and for the Years Ended December 31, 1999 through 1995
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As of June 30, As of June 30,
2000 1999 1999 1998 1997
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(unaudited) (unaudited) (audited) (audited) (audited)
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Assets, Deposits and Capital
Total assets $ 485,441,491 $ 407,371,595 $ 447,211,017 $ 348,604,421 $290,252,442
Total investment securities 113,871,957 104,454,621 109,262,221 78,607,860 72,712,902
Net loans 327,687,105 259,463,214 296,193,518 235,430,079 194,516,933
Loans Available-for-sale 10,588,245 19,075,120 5,254,316 8,858,157 8,202,404
Total deposits 332,995,639 279,729,042 294,700,965 240,000,751 218,025,010
Total shareholders' equity 33,315,498 32,578,029 32,126,236 34,013,705 28,423,777
Operating Results
Total interest income 16,896,335 13,359,425 28,566,085 23,471,372 21,037,613
Total interest expense (9,809,064) (6,905,720) (15,375,799) (12,308,632) (10,639,884)
Net interest income 7,087,270 6,453,705 13,190,286 11,162,740 10,397,729
Provision for loan losses (243,000) (320,000) (530,000) (646,000) (622,800)
Net interest income after
provision for loan losses 6,844,270 6,133,705 12,660,286 10,516,740 9,774,929
Other income 1,136,622 779,573 2,227,787 1,902,734 1,303,470
Other expense (5,908,999) (4,726,941) (10,170,458) (7,609,162) (6,583,334)
Income before provision
for income taxes 2,071,893 2,186,337 4,717,615 4,810,312 4,495,065
Provision for income taxes (363,700) (481,130) (903,400) (1,246,760) (1,185,008)
Net Income 1,708,193 1,705,207 3,814,215 3,563,552 3,310,057
Dividends paid $ 676,026 $ 536,589 $ 1,344,140 $ 1,200,409 $ 1,062,530
Actual shares outstanding 1,804,011 1,800,784 1,800,784 1,787,294 1,674,520
Dividend payout ratio 39.58% 31.47% 35.24% 33.69% 32.10%
Return on average assets 0.75% 0.92% 0.94% 1.14% 1.20%
Return on average equity 10.61% 10.04% 11.38% 11.77% 12.40%
Equity to assets 7.74% 9.88% 7.18% 9.76% 9.79%
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1996 1995
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(audited) (audited)
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Assets, Deposits and Capital
Total assets $269,136,881 $240,812,179
Total investment securities 87,237,566 71,461,979
Net loans 159,644,245 143,282,316
Loans Available-for-sale 2,964,081 2,825,634
Total deposits 212,069,670 180,904,613
Total shareholders' equity 25,366,382 23,791,705
Operating Results
Total interest income 19,112,187 17,546,782
Total interest expense (9,878,012) (9,471,983)
Net interest income 9,234,175 8,074,799
Provision for loan losses (338,000) (313,000)
Net interest income after
provision for loan losses 8,896,175 7,761,799
Other income 987,106 1,246,713
Other expense (6,063,236) (5,283,320)
Income before provision
for income taxes 3,820,044 3,725,192
Provision for income taxes (995,340) (916,800)
Net Income 2,824,704 2,808,392
Dividends paid $ 906,793 $ 820,327
Actual shares outstanding 1,655,556 1,644,840
Dividend payout ratio 32.10% 29.21%
Return on average assets 1.09% 1.17%
Return on average equity 11.69% 12.54%
Equity to assets 9.43% 9.88%
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The following information for the years 1999-1995 has been adjusted for the
two-for-one stock exchange on June 30, 2000, by which Fidelity D & D Bancorp,
Inc. became the holding company for The Fidelity Deposit and Discount Bank.
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As of June 30, 2000, June 30, 1999 and for the Years Ended December 31, 1999 through 1995
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As of June 30, As of June 30,
2000 1999 1999 1998 1997 1996 1995
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(unaudited)
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Net income per share
(adjusted for stock split and $ .95 $ .95 $ 2.13 $ 2.10 1.985 $ 1.715 $ 1.715
stock exchange)
Dividends per share (adjusted
for stock split and stock $ .375 $ .30 $ .75 $ .70 .6375 $ .55 $ .50
exchange)
Weighted average number of
shares outstanding (adjusted
for stock split and stock 1,803,017 1,789,339 1,792,232 1,697,108 1,665,988 1,648,900 1,640,540
exchange)
Book value per share $ 18.48 $ 18.17 $ 17.925 $ 20.04 17.06 $ 15.385 $ 14.50
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RISK FACTORS
Before you invest in Fidelity D & D's common stock or participate in the
dividend reinvestment plan, you should be aware that an investment in our common
stock involves a variety of risks, including those described below. You should
carefully read and consider these risks factors, together with all the other
information contained in this prospectus, before you decide whether to
participate in the dividend reinvestment plan.
Our profitability is dependent on the profitability of our subsidiary bank.
Our profitability is dependent on the financial results of our operating
subsidiary, The Fidelity Deposit and Discount Bank. Adverse results or events at
the bank would have a significant impact on our profitability. Although the
bank's operations have been profitable recently, we cannot assure you that the
bank will be as profitable or profitable at all in the future.
A downturn in the economic conditions in our market areas may adversely affect
our business.
Currently, our lending and deposit-gathering activities are concentrated
primarily in northeastern Pennsylvania. Our success depends in large part on
general economic conditions in northeastern Pennsylvania and its surrounding
areas. Adverse changes in the northeastern Pennsylvania economy could reduce our
growth rate, impair our ability to collect loans and generally affect our
financial condition and results of operations.
You will have a minimal influence on shareholder decisions.
Together, our directors and executive officers hold 359,375 shares,
representing 19.76% of the total number of shares outstanding as of June 30,
2000. See "Beneficial Ownership of Shares." Our directors and officers are able
to significantly influence our management policies and decisions as well as
issues which require a shareholder vote. If our directors and executive officers
vote together, they could influence the outcome of certain corporate actions
requiring shareholder approval, including the election of directors and the
approval or non-approval of significant corporate transactions, such as the
merger or sale of all of substantially all of our assets. Their interests may
differ from the interests of other shareholders with respect to management
issues.
Possible future sales of our common stock by our directors and executive
officers could cause the market value of our common stock to decline.
Sales of additional shares of our stock, or the perception that shares may
be sold, could negatively affect the market price of our stock. In addition, the
potential subsequent sale of the shares being offered under our 2000 Dividend
Reinvestment Plan could reduce the market price for our common stock and result
in a dilution to our shareholders.
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Our issuance of additional shares of common stock or preferred stock could
dilute or depress the value of your shares of our common stock.
Fidelity D & D Bancorp's articles of incorporation authorize the issuance
of up to 10 million shares of common stock and 5 million shares of preferred
stock. The issuance of additional stock within these limits will not require
prior shareholder approval. Sales of additional shares of stock, or the
perception that shares may be sold, could negatively affect the market price of
the holding company's stock. The issuance of additional shares could also dilute
the percentage ownership interest and corresponding voting power of the prior
shareholders.
Regulatory restrictions on dividend payments from our subsidiary bank may affect
our ability to pay dividends to our shareholders.
We conduct our principle business operations through the bank, and the cash
that we use to pay dividends is derived from dividends paid to us by the bank.
The bank's ability to pay dividends to us and our ability to pay dividends to
our shareholders are also subject to and limited by certain legal and regulatory
restrictions. See "Supervision and Regulation -- Regulatory Restrictions on
Dividends."
The issuance of preferred stock could limit our ability to pay dividends to
common stock shareholders.
Our issuance of preferred stock could limit our ability to pay dividends to
common stock shareholders if the company granted the preferred shares
preferential dividend rights. Fidelity D & D Bancorp may issue preferred stock
and determine the rights of preferred stock shareholders without prior approval
by the holders of common stock.
The trading market for our common stock is not active.
There is a very limited public market for the common stock of Fidelity D &
D Bancorp, Inc. We cannot assure you that a more liquid or active trading market
will develop. In a less active market, you may not be able to sell your shares
when you would like to sell them.
Anti-takeover provisions in our articles of incorporation and bylaws and certain
provisions of Pennsylvania law may discourage or prevent a takeover of our
company and result in a lower market price for our common stock.
Our articles of incorporation and by-laws contain certain provisions that
enhance the ability of our board of directors to deal with attempts to acquire
control of our company. In addition, Pennsylvania law contains certain
anti-takeover provisions that apply to us. While these provisions may provide us
with flexibility in managing our business, they could discourage or make a
merger, tender offer or proxy contest more difficult, even though certain
shareholders may wish to participate in the transaction. These provisions could
also potentially adversely affect the market price of the common stock. See
"Description of Securities -- Anti-Takeover
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Provisions in Articles and By-laws, Anti-Takeover Provisions Applicable to
Registered Corporations."
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. Within the
bank's Lackawanna and Luzerne County marketplace, the bank is 1 of approximately
28 commercial banks and savings associations competing for customers. As of June
30, 1999, the bank held 7.44% of FDIC- insured deposits in Lackawanna County and
1.00% of FDIC-insured deposits in Luzerne County. See "Business-- The Bank."
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.
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.
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.
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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.
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.
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The forward-looking statements we make in this document are inherently
uncertain.
This prospectus contains forward-looking statements, including statements
regarding intent, belief, anticipation or current expectations about matters
that may or may not occur in the future. A forward-looking statement is any
statement that is not an 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 occur or if underlying assumptions prove incorrect, actual
results, performance or achievements in 2000 and beyond could differ materially
from those stated.
Please read the following warnings as to limitations on the information covered
by this prospectus.
o This prospectus does not cover resales of shares of Fidelity D & D
Bancorp common stock after issuance under the 2000 Dividend
Reinvestment Plan, and no person is authorized to make use of this
prospectus in connection with any resale.
o No person has been authorized to give any information or to make any
representation not contained in this prospectus, and you should not
rely on any such information or representation.
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2000 DIVIDEND REINVESTMENT PLAN
The Fidelity D & D Bancorp, Inc. 2000 Dividend Reinvestment Plan follows.
We present the plan in a question and answer format. Shareholders who do not
chose to participate in the plan will continue to receive cash dividend
payments, if and when dividends are declared and paid.
Purpose
1. What is the purpose of the plan?
The plan provides shareholders with a convenient and economical method of
investing cash dividends to purchase additional shares. Participants pay no
brokerage commissions or service charges when they acquire additional shares of
common stock through the plan.
Advantages
2. What are the advantages of the Dividend Reinvestment Plan?
Shareholders may:
o Reinvest cash dividends in additional shares of common stock, without
paying service charges or brokerage commissions;
o Invest the full amount of all dividends in shares of common stock
including fractional shares, which also earn dividends under the plan;
o Avoid safekeeping and record keeping costs through the free custodial
and reporting services under the plan; and
o Regularly receive a detailed statement of account transactions in book
entry form.
Administration
3. Who administers the plan for participants?
Fidelity D & D Bancorp, Inc. will initially serve as plan administrator and
will act as the agent for the participants. As agent for participants, the
administrator will:
o Hold shares in the name of its nominee as agent for plan participants;
o Keep and maintain records;
o Provide detailed statements of account to participants; and
12
<PAGE>
o Perform other duties related to the plan.
Any notices, questions, or other communications relating to the plan should
include the participant's account number and tax identification number and
should be addressed to:
Fidelity D & D Bancorp, Inc.
Attention: Dividend Reinvestment Plan
Blakely and Drinker Streets
Dunmore, Pennsylvania 18512
(570) 342-8281
Fidelity D & D Bancorp, Inc. has the right to terminate and appoint in its
place another plan administrator to serve as plan agent at any time.
Participation
4. Who is eligible to participate?
All common stock shareholders are eligible to participate in the plan.
Shareholders may participate in the plan with respect to all of their shares, or
with respect to a portion of their shares if the shareholder holds of record
more than 50 shares. Record holders of common stock are eligible to participate
in the plan directly. Beneficial owners of the common stock, whose shares are
registered in names other than their own (e.g., in the name of a broker, bank
nominee or trustee), must either become shareholders of record by having all or
a portion of their shares transferred into their own names. Shareholders will
not be eligible to participate in the plan if they reside in a jurisdiction in
which it is unlawful under state or local securities or "blue sky" laws for the
company to permit their participation. Further, the company may determine, at
its discretion, that the number of shareholders or number of shares held in a
particular state where registration of the shares is required, or where the
registration as broker of any of the company's officers or employees is
required, do not justify the expense of registration.
5. How does an eligible shareholder become a participant?
All eligible shareholders may join the plan at any time by completing and
signing the accompanying authorization form and returning it to the
administrator. Additional authorization forms may be obtained from Fidelity D &
D Bancorp, Inc.
6. What does the authorization form provide?
The authorization form appoints the administrator as the agent to reinvest
dividends on the shares registered under the plan.
13
<PAGE>
7. When may a shareholder join the plan?
A shareholder may join the plan at any time. If the administrator receives
a properly completed authorization form at least 5 business days before a
dividend record date, the administrator will reinvest the dividends payable on
that date. Historically, the Board of Directors has declared and paid dividends
on a quarterly basis. The Board of Directors reserves the right to change the
dividend record and payment dates.
8. Is partial participation possible under the plan?
Yes, but a partial participant must enroll at least 50 shares in the plan.
As a result, a participant with 50 or less shares held of record in his or her
name must enroll all of his or her shares in the plan.
9. Is the right to participate in the plan transferable?
No. The right to participate in the plan is not transferable. A
shareholder, participating in the plan, continues as a participant until the
plan is terminated or until the shareholder gives notice of withdrawal or
termination to the administrator.
Purchases
10. What is the source for shares of common stock purchased under the plan?
The administrator purchases shares at the company's discretion, directly
from Fidelity D & D Bancorp, in the open market, in negotiated transactions, or
using a combination of these methods.
11. How many shares of common stock will the administrator purchase for a
participant under the plan?
The number of shares depends on:
o The amount of dividends to be reinvested; and
o The applicable purchase price of the common stock.
The administrator will credit each participant's account with that number
of shares, including any fractional shares computed to four decimal places,
equal to the total amount to be invested divided by the applicable purchase
price. All dividends on shares held in a participant's account are automatically
reinvested in additional shares of common stock.
14
<PAGE>
12. When will shares of common stock be purchased for a participant under the
plan?
The administrator will use cash dividends to purchase common stock as soon
as reasonably possible after the applicable dividend payment date, but not more
than 30 business days after the payment date. The administrator will allocate
full and fractional shares to each participant's account after the administrator
has purchased shares of common stock sufficient to cover the purchases for all
participants under the plan for the applicable dividend date.
13. At what price will shares of common stock be purchased under the plan?
When the administrator purchases shares of common stock from the company,
the purchase price will be the fair market value of the common stock on the
relevant date. The fair market value of the common stock will be the average of
the low bid and high asked quotations for the shares purchased by the plan
administrator on the purchase date. If no bid and asked prices are quoted on
that date, the fair market value will be the average of the low bid and high
asked quotations on the most recent prior date on which quotations are
available.
When the administrator purchases shares of common stock in the open market
or in negotiated transactions, the purchase price will be the weighted average
of the prices actually paid for shares purchased for the relevant date,
excluding all fees, brokerage commissions and expenses. Fidelity D & D Bancorp
will bear the cost of all brokerage fees and commissions on purchases under the
plan. However, the plan administrator may deduct a $3.00 service charge from a
participant's account at the time of his or her termination or withdrawal of
shares from the plan.
Reports to Participants
14. What kind of reports will be sent to participants in the plan?
Each participant in the plan will receive a statement of account subsequent
to each dividend payment date describing cash dividends received, the number of
shares purchased, the price per share and the total shares accumulated under the
plan. These statements will provide a record of the dates and costs of purchases
on a quarterly basis. Participants should retain the statements for income tax
purposes. Participants will also receive Fidelity D & D Bancorp's annual and
quarterly reports to shareholders, notices of shareholder meetings, prospectus,
and Internal Revenue Service information for reporting dividends received and
commission expenses paid on their behalf. Participants will also receive any
supplements or updates to Fidelity D & D Bancorp's Registration Statement for
shares issued under the plan, as filed with the Securities and Exchange
Commission (SEC).
15
<PAGE>
Share Certificates; Safekeeping
15. Will the plan administrator issue certificates for shares of common stock
purchased?
Unless requested in writing by a participant, the plan administrator will
not issue certificates for shares of common stock purchased under the plan. The
number of shares credited to a participant's account under the plan will be
shown on the participant's periodic statements of account. This safekeeping
feature protects against loss, theft or destruction of stock certificates. The
plan administrator will issue certificates for whole shares withdrawn from the
plan. All certificates delivered for safekeeping must be enrolled in the plan.
The plan administrator will cancel certificates delivered for safekeeping and
will issue new certificates in the name of the plan administrator. Upon
withdrawal, the plan administrator will cancel the plan administrator's
certificates and issue new certificates in the name of the participant. Fidelity
D & D Bancorp will not issue certificates for fractional shares under any
circumstance.
16. In whose name will certificates be registered when issued to participants?
Unless the participant directs otherwise, upon withdrawal from the plan,
the plan administrator will issue shares in the name in which the participant
maintains the dividend reinvestment account. If a participant requests that a
certificate be issued in a different name, the request must bear the
participant's own signature. If the account is registered in multiple names, all
signatures must appear on the request. In both cases, a financial institution or
broker or dealer must guarantee the signature(s). Upon a participant's death,
the plan administrator will follow the instructions of the decedent's personal
representative upon submission of appropriate proof of authority.
Withdrawal of Shares in Plan Accounts
17. How may participants withdraw shares purchased under the plan?
Participants may withdraw all or any portion of the shares credited to
their account by completing the withdrawal notification information set forth on
the reverse side of their account statement and specifying the number of shares
to be withdrawn. The participant should mail the request for withdrawal to the
plan administrator at the address provided on the account statement. The plan
administrator may deduct a $3.00 service charge from a participant's account at
the time of his or her withdrawal from the plan.
The plan administrator will register certificates for whole shares so
withdrawn in the name of the participant. Fractional shares that are withdrawn
will be paid in cash based on the average of the low bid and high asked
quotations on the day the plan administrator receives written notice of
termination or the day of termination of the plan by Fidelity D & D Bancorp. If
no bid and asked prices are quoted on that date, the low bid and high asked
quotations from the most recent prior date on which quotations are available
will be used.
16
<PAGE>
If the administrator receives any request for withdrawal of all shares
credited to a participant's account less than 5 business days before the record
date, the administrator will not effect the withdrawal until after the dividends
are reinvested and the shares are credited to the participant's account. The
administrator will effect any other request for withdrawal of a portion of the
shares credited to a participant's account upon receipt of the request by the
plan administrator. The administrator will continue to reinvest dividends on
shares remaining in the participant's account, unless the participant withdraws
all of the whole and fractional shares from the account, which will terminate
participation in the plan.
18. May participants elect to sell withdrawn shares?
Yes. Participants may request in writing that the plan administrator sell
withdrawn shares. If the plan administrator receives a request to sell all
shares credited to a participant's account after, or during the five business
days prior to, the record date for a dividend, the plan administrator will not
effect the request until it reinvests the participant's dividends for the
applicable record date and credits the shares to the participant's account. Upon
receipt, the plan administrator will declare a request to sell a portion of the
shares credited to a participant's account effective. Participants should
specify the number of shares to be sold in their request for withdrawal.
The plan administrator will arrange for the sale of the shares within 10
business days after receipt of the notice, and deliver a check for the net
proceeds of the sale to the participant. The proceeds of the sale will be
applied first to pay fees, brokerage commissions, applicable withholding taxes
and transfer taxes, if any, incurred in connection with the sale. The plan
administrator charges a fee of $10 (but not more than the proceeds of the sale
of a fractional share) for the sale of shares held under the plan. All persons
in whose names the account appears must sign a request for shares to be sold.
The signatures must be guaranteed as specified in No. 16 above.
Termination of Participation in Dividend Reinvestment Plan
19. How does a participant withdraw from the plan?
Participation in the plan is entirely voluntary. Participants may terminate
their participation at any time by sending written notice to the plan
administrator. When a participant terminates from the plan or upon termination
of the plan by Fidelity D & D Bancorp, the plan administrator will deliver a
certificate for the number of whole shares credited to the participant's
account, and a check representing the value of any fractional shares, based on
the then current market value per share as described under No. 17 above, to the
participant. The plan administrator may deduct a $3.00 service charge from a
participant's account at the time of his or her withdrawal from the plan.
Thereafter, all dividends will be paid in cash, or in stock dividends, if so
declared by the Board of Directors, to the shareholder who withdraws from the
plan.
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<PAGE>
Any notice of termination received less than 5 business days prior to the
record date for a dividend will not be effective until the administrator has
reinvested dividends and the shares have been credited to the participant's
account. A shareholder may elect to re-enroll in the plan at any time.
Federal Tax Information
20. What are the federal income tax consequences of participation in the plan?
We summarize the general current federal income tax consequences of
participation in the plan in this response. Please consult your own tax advisor
as to the specific tax consequences of particular account transaction, including
the state tax consequences.
Reinvestment of Dividends. A participant in the plan is treated as having
received, with respect to the cash dividend and reinvestment, a distribution to
which Section 301 of the Internal Revenue Code applies. The amount of the
distribution is the fair market value of the stock received on the date the
stock is purchased. The amount of the distribution that the participant includes
in income, as a dividend, is the amount that is paid out of the company's
current and/or accumulated earnings and profits. Most regular quarterly cash
dividends paid from earnings will be treated as a contribution subject to
ordinary income. The distribution, to the extent it exceeds the company's
earnings and profits, is a return of capital and reduces the adjusted basis of
the stock. The portion of the distribution that exceeds the company's earnings
and profits and the adjusted basis of the stock is treated as gain from the sale
or exchange of property.
Brokerage Commissions. A participant who receives a distribution, as
discussed above, is also treated as receiving a distribution to which Section
301 of the Code applies in an amount equal to a pro rata share of any brokerage
commission or other related charges paid by the company in connection with the
purchase of stock on behalf of the shareholder. The federal income tax treatment
of any the distribution depends upon the amount of the company's current and/or
accumulated earnings and profits as discussed above. Most brokerage commissions
paid by the company will be treated as taxable ordinary income.
Additional Information. A participant's tax basis in the stock acquired
under the plan will generally equal the total amount of the distribution that
the shareholder is treated as receiving, as discussed above. A shareholder's
holding period in stock acquired under the plan generally begins on the date
following the date on which the stock is credited to the participant's plan
account. In the case of any shareholder as to whom federal income tax
withholding on distributions is required, and in the case of any foreign
shareholder whose taxable income under the plan is subject to federal income tax
withholding, dividends will be reinvested net of the required amount of tax
withheld.
18
<PAGE>
Other Information
21. What happens if Fidelity D & D Bancorp declares a stock dividend or effects
a stock split?
The administrator credits any shares issued in connection with a stock
split or stock dividend on common stock held under the plan to the participant's
plan account. Similarly, the number of shares available under the plan will be
adjusted pro rata to give effect to any stock split.
22. If Fidelity D & D Bancorp has a rights offering, how will a participant's
entitlement be computed?
A participant's entitlement in a rights offering is based upon his or her
total holdings, in the same manner as dividends are computed currently. The
company will issue rights certificates for the number of whole shares only,
however, and sell rights based on the fractional shares held in a participant's
account. We will mail the proceeds of the sale of fractional certificates, less
commissions and taxes, if any, directly to the participant.
23. How are shares in a participant's account voted at a meeting of the
shareholders?
If, on a record date for a meeting of shareholders, there are shares in a
participant's plan account, the administrator will send proxy materials for the
meeting to the participant. A participant is entitled to vote all shares of
common stock credited to his or her account. The participant may also vote his
or her shares at the meeting in person or by proxy.
24. What are the responsibilities and liabilities of Fidelity D & D Bancorp and
the plan administrator?
Fidelity D & D Bancorp and the plan administrator shall not be liable for
any act taken in good faith or for any good faith omission to act, including
without limitation, any claims of liability:
o Arising out of a failure to terminate a participant's account upon his
or her death;
o With respect to the prices at which shares of Fidelity D & D Bancorp's
common stock are purchased or sold:
o The times when or the manner in which purchases or sales are
made;
o The decision whether to purchase shares of common stock on the
open market, from Fidelity D & D Bancorp or in private
transactions; or
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<PAGE>
o Fluctuations in the market value of the common stock; and
o Any matters relating to the operation or management of the plan.
Fidelity D & D Bancorp cannot assure that participants will make a profit
on, or protect participants against a loss from, the common stock purchased by
or for participants under the plan.
All transactions in connection with the plan will be governed by the laws
of the Commonwealth of Pennsylvania, and are subject to all applicable federal
tax or securities laws.
25. May the plan be amended, modified or discontinued?
Yes. The Board of Directors of Fidelity D & D Bancorp, at its discretion,
may amend, modify, suspend or terminate the plan and will endeavor to notify
participants of any amendment, modification, suspension or termination. The
Board of Directors may, for whatever reason, at any time, as it may determine in
its sole discretion, terminate a participant's participation in the plan after
mailing a notice of intention to terminate to the participant at the
participant's address as it appears on the plan administrator's records. In
addition, the Board of Directors of Fidelity D & D Bancorp and the plan
administrator may each adopt reasonable procedures for the administration of the
plan. The Board of Directors has the sole authority to interpret the plan in the
manner that it deems appropriate in its absolute discretion.
26. Who will bear the costs of the purchases made under the plan?
Fidelity D & D Bancorp will pay all costs of administration of the plan.
Participants will incur no brokerage commissions or other charges for purchases
made under the plan. However, a participant who requests that the plan
administrator sell shares of common stock held in the plan will incur brokerage
fees incurred in connection with the sale, in addition to a $10 service fee.
27. May a participant pledge shares purchased under the plan?
No. A participant who wishes to pledge shares credited to a plan account
must request the withdrawal of the shares in accordance with the procedures
outlined in response to Question No. 17, above.
20
<PAGE>
MARKET PRICES AND DIVIDENDS
The company's common stock is not actively traded. The principal market
area for the company's stock is northeastern Pennsylvania. Fidelity D & D
Bancorp, Inc. is listed in the Over-The-Counter Bulletin Board under the symbol
"FDBC." Quarterly market highs and lows and dividends paid for each of the past
two years and the first two quarters in 2000, prior to the reorganization of the
bank as the subsidiary of Fidelity D & D Bancorp on June 30, 2000, are presented
below for The Fidelity Deposit and Discount Bank. The prices have been adjusted
to reflect the 2-for-1 exchange ratio of holding company common stock for bank
common stock in the reorganization. These prices do not necessarily represent
actual transactions and may include retail markups, markdowns or commissions.
The company expects that comparable cash dividends will be paid in the future.
<TABLE>
<CAPTION>
Dividends Paid
Per Share (As
Trade Prices: Bank's Common Stock Adjusted for 2- Dividends Paid,
(Price per share, for-1 Stock In the
As Adjusted for 2-for-1 Stock Exchange) Exchange) Aggregate
--------------------------------------- --------------- ---------------
High Low
<S> <C> <C> <C> <C> <C>
For Quarter Ended:
------------------
March 1998 $27.00 $25.50 $0.15 $251,178
June 1998 31.00 30.00 0.15 251,596
Sept. 1998 30.00 30.00 0.15 251,987
Dec. 1998 31.00 31.00 0.25 445,649
March 1999 32.50 32.25 0.15 268,094
June 1999 32.50 31.00 0.15 268,494
Sept. 1999 34.75 32.50 0.15 268,921
Dec. 1999 35.625 33.125 0.30 538,632
March 2000 36.125 35.75 0.1875 337,703
June 2000 37.375 35.75 0.1875 338,323
</TABLE>
As of June 30, 2000, there were approximately 1,292 holders of record of
the bank's common stock and 1,804,011 shares of common stock were issued and
outstanding. The latter amount has been adjusted to reflect the June 30, 2000
stock exchange.
The Fidelity D & D Bancorp board of directors reviews its dividend policy
at least annually. The amount of the dividend, while in the sole discretion of
the board, depends upon the performance of the bank. The company's ability to
pay dividends is also subject to the
21
<PAGE>
restrictions imposed by Pennsylvania law. Generally, under the Pennsylvania
Business Corporation Law, the company may not pay a dividend if it is insolvent
or if afterwards:
o The company would be unable to pay its debts as they became due, or
o The company's total assets would be less than its total liabilities
plus an amount needed to satisfy any preferential rights of
shareholders.
We cannot assure you that dividends will be declared in the future or the rate
of dividends, if any.
Fidelity D & D is also subject to the dividend restrictions applicable to
Pennsylvania-chartered, FDIC-insured banks because its only source of income is
from the dividends paid by the bank to the holding company. The Pennsylvania
Banking Code of 1965 provides that a bank may declare and pay dividends only out
of accumulated net earnings and only if the bank meets minimum capital
requirements. Directors are specifically liable for unlawful dividends. 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.
USE OF PROCEEDS
Fidelity D & D knows neither the number of shares that will ultimately be
purchased under the plan nor the prices at which the shares will be purchased.
The company intends to use the proceeds from purchases, when and as received,
for working capital and general corporate purposes, which may include
contributions to the bank to increase the bank's capital and to permit
additional growth in the bank's assets. A change in the use of proceeds or
timing of the use of proceeds will be at the company's discretion.
22
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
CONSOLIDATED FINANCIAL CONDITION AND RESULTS OF OPERATION
AND QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
On the following pages we present management's discussion and analysis of
the consolidated financial condition and results of operations of The Fidelity
Deposit and Discount Bank at December 31, 1999, and of Fidelity D & D Bancorp,
Inc. and its subsidiary at June 30, 2000. The reorganization of The Fidelity
Deposit and Discount Bank as the wholly owned subsidiary of Fidelity D & D
Bancorp, Inc. occurred on June 30, 2000. Prior to the reorganization, Fidelity D
& D Bancorp had no operations. The following 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.
You should also refer to the financial statements and notes to the
financial statements appearing elsewhere in this prospectus, starting at page
F-1. We qualify the following discussions by this more detailed financial
information.
In addition to the historical information contained in this document, the
discussion presented contains 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 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, 1999, or as of June 30, 2000. Under the rules of the Securities
Exchange Act of 1934, however, we do have a duty to correct or revise statements
made in this prospectus if the statements either have become materially
misleading by virtue of subsequent events, or are later discovered to have been
materially false and misleading from the outset. This duty applies only if we
know or should have known that persons are continuing to rely on any material
portion of the statements.
23
<PAGE>
Management's Discussion and Analysis of Financial Condition for the Fiscal
Years 1999, 1998 and 1997
The following financial review is intended to provide a comparison of our
financial performance for the years ended December 31, 1999, 1998 and 1997. This
review is derived from management's discussion and analysis included in The
Fidelity Deposit and Discount Bank's Annual Report on Form 10-K for the 1999
Fiscal Year, as filed with the Federal Deposit Insurance Corporation on March
30, 2000. The information presented below should be read in conjunction with our
financial statements and accompanying notes appearing at the end of this
document, beginning at page F-1.
A comparison of balance sheet accounts and percentage to total assets at
December 31, 1999, 1998 and 1997:
<TABLE>
<CAPTION>
(Thousands of Dollars)
----------------------------------------------------------------------
1999 1998 1997
-------------------- -------------------- ---------------------
Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ -------
<S> <C> <C> <C> <C> <C> <C>
Assets:
Cash and due from banks $ 6,416 1.43 $ 3,315 0.95 $ 2,967 1.02
Interest-bearing deposits with
Depository institutions 11,542 2.58 5,404 1.55 4,341 1.50
Federal funds sold 0 0.00 6,500 1.87 0 0.00
Investment securities 109,262 24.43 78,608 22.56 72,713 25.05
Net loans 296,194 66.23 235,430 67.57 194,517 67.01
Loans Available-for-sale 5,254 1.18 8,858 2.54 8,202 2.82
Accrued interest receivable 3,262 0.73 2,405 0.69 2,374 0.82
Bank premises and equipment 9,506 2.13 6,449 1.85 4,138 1.43
Foreclosed assets held for sale 413 0.09 201 0.06 276 0.10
Other assets 5,362 1.20 1,434 0.36 724 0.25
Total assets $ 447,211 100.00 $348,604 100.00 $290,252 100.00
Liabilities:
Deposits, non-interest-bearing $ 37,575 8.40 $ 33,450 9.60 $ 25,373 8.75
Certificates of deposit of $100,000 or more 66,643 14.90 49,436 14.18 47,344 16.31
Other interest-bearing deposits 190,483 42.60 157,115 45.07 145,308 50.06
Short-term borrowings 60,249 13.47 29,405 8.44 29,100 10.03
Other borrowed funds 57,305 12.81 42,252 12.12 12,252 4.22
Accrued interest payable and other liabilities 2,830 0.64 2,933 0.83 2,451 0.84
Total liabilities 415,085 92.82 314,591 90.24 261,828 90.21
Shareholder's equity 32,126 7.18 34,014 9.76 28,424 9.79
Total liabilities and shareholder's equity $ 447,211 100.00 $348,604 100.00 $290,252 100.00
</TABLE>
The year 1999:
Personal demand deposit accounts (DDA's) increased $548,000 or 3.28% during
1999.
24
<PAGE>
Commercial DDA's and Public Fund DDA's grew $4,836,000 or 35.14% during the
twelve-month period ending December 31, 1999. 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:
Sweep accounts Flex Cash Manager
Merchant Credit Card Processing Fidelity @ Work
Lock box operation
Official bank checks issued and outstanding decreased $1,259,000 from the
previous year-end.
As a net result of these balance sheet changes, non interest-bearing
deposits grew $4,125,000 or 12.33% from year-end 1998.
Interest-bearing deposits increased $50,575,000 or 24.49% from $206,551,000
at December 31, 1998 to $257,126,000 at December 31, 1999.
NOW's, Money Market Deposit Accounts and Savings accounts grew $23,402,000
or 36.61% during 1999. The increase in these liquid interest-bearing accounts
represents 46.27% of the growth in interest-bearing deposits. The introduction
of a tiered Super Now account and the ability to attract Public Fund deposits,
account for the growth in these accounts.
Certificates of deposit rose $27,143,000 or 19.19% and represent 53.67% of
the total increase in interest-bearing deposits. Personal CD's grew $16,769,000
or 13.65%. Non-personal CD's grew $3,031,000 or 33.62%. Public Fund CD's
increased $7,343,000 or 76.44% over year- end 1998.
The maturity distribution of CD's $100,000 or more is as follows:
3 Months 3 - 6 6 - 12 Over
or less Months Months 12 months Total
-------- ------ ------ --------- -----
$23,550,847 $6,555,930 $19,910,269 $16,625,610 $66,642,656
At the end of 1999 total deposits had grown $54,700,000 or 22.79% over the
amount reported at December 31, 1998. Among the reasons cited by depositors as
to why they selected the bank are:
o Courtesy and professionalism of staff
o Expanded branch network
o Extended Banking hours
o Products and services offered
25
<PAGE>
The success at gathering new deposits by branch expansion is evidenced by
the deposit totals at the locations opened during the last twelve months. Total
deposits at the three new branches amounted to $31,979,000 at December 31, 1999.
The bank borrowed $5,947,000 from the Federal Home Loan Bank, (FHLB), in
1999 to pay off maturing obligations. The bank also borrowed $45,653,000, in
long-term funds and credit line draws from the FHLB to fund loan demand and for
other liquidity needs. The weighted average rate on funds borrowed at December
31, 1999 was 5.31%. The weighted average rate is 267 basis points below the tax
equivalent yield on loans at December 31, 1999 of 7.98%.
Total Assets of the bank increased $98,607,000 or 28.29% during 1999. This
dollar growth represents the largest single year increase in the history of the
bank. The increase is the result of growth in the liability section, as
previously discussed and the retention of profits.
Total Assets by branch at December 31, 1999 are as follows:
Main Office $301,798,888
Green Ridge 17,903,355
Scranton 30,790,516
Clarks Summit 27,276,872
KIP 8,009,016
Pittston 17,755,438
Financial Center 6,195,528
Moosic 14,787,652
West Pittston 22,463,579
The $230,173 difference between Branch Assets and Total Bank Assets is the
net carrying amount invested in the two residential properties in Clarks Green,
Pennsylvania, owned by the bank. Assets of the Clarks Summit State Hospital
office are included in Clarks Summit.
Despite maturities and early calls of US Government Agency Bonds and
Municipal securities, the Investment Portfolio had a net increase during 1999 of
$37,938,000, -- $30,654,000 net of the change in the market value of
available-for-sale investments). The increase was predicated upon the need to
pledge acceptable assets for Public Fund deposits, which increased $26,518,000
during 1999.
The bank entered into an agreement with FNMA whereby certain qualifying
residential mortgage loans were sold to FNMA and immediately repurchased by the
bank as investments -- mortgage backed securities. During 1999 the bank
developed two separate pools of loans. The pools totaled $3,584,000. The purpose
of this strategy was threefold:
26
<PAGE>
A) The principal and interest is guaranteed by FNMA, thereby mitigating
any potential loss of repayment.
B) The investments are eligible to be pledged for Public Fund deposits.
C) The bank retained servicing rights. This means the borrower still
deals directly with the bank and the bank receives a fee for servicing
the loans.
To facilitate the increased borrowings at the FHLB, the bank was required
to purchase $3,229,900 shares of FHLB common stock during 1999.
In 1999, the bank sold an investment from the available-for-sale category,
having a net book value of $200,000 at the time of sale. The security was
purchased on September 10, 1992 and was within six months of being called.
Market conditions at the time of sale were favorable for the bank.
There were no sales from investments categorized as held-to-maturity.
Investments constituted 24.43% of Total Assets at December 31, 1999. The
entire portfolio is classified as available-for-sale. The decision to classify
all securities as available-for-sale gives the bank greater flexibility in the
management of the investment portfolio. There are no trading securities.
A comparison of investments at December 31 for the three previous periods
is as follows:
<TABLE>
<CAPTION>
1999 1998 1997
-------------------------- ------------------------ ---------------------------
Amount % Amount % Amount %
------------ ------- ----------- ------- ----------- -------
<S> <C> <C> <C> <C> <C> <C>
U.S. Treasury Securities $ 0 0.00% 7,055,938 8.98% 9,116,800 12.54%
U.S. Government Agencies 73,348,911 67.20 39,465,142 50.21 35,471,263 48.78
Mortgage Backed Securities 7,686,688 7.04 5,369,706 6.83 8,420,816 11.58
State & Municipal Subdivisions 22,556,775 20.66 24,450,358 31.10 18,513,811 25.46
Common Stock 5,569,847 5.10 2,266,716 2.88 1,190,212 1.64
---------------------------------------------------------------------------------------------------------------------------
Total $109,162,221 100.00% $78,607,860 100.00% $72,712,902 100.00%
===========================================================================================================================
</TABLE>
The distribution of debt securities by stated maturity date at December 31,
1999 is as follows:
<TABLE>
<CAPTION>
1 Year 1 Through 5 Through More than
or less 5 years 10 years 10 years Total
-------- ---------- ------------ ----------- ------------
<S> <C> <C> <C> <C> <C>
U.S. Government Agencies $ 0 $ 0 $ 23,961,099 $49,387,812 $ 73,348,911
Mortgage Backed Securities 0 85,787 982,100 6,618,800 7,686,687
State & Municipal Subdivisions 592,839 2,545,937 7,110,383 12,307,616 22,556,775
------------------------------------------------------------------------------------------------------------------
Total debt securities $592,839 $2,631,724 $ 32,053,582 $68,314,228 $103,592,373
==================================================================================================================
</TABLE>
27
<PAGE>
Debt securities are net of unrealized loss on available-for-sale
securities. Unrealized loss on available-for-sale debt securities at December
31, 1999 was $7,167,606. Debt securities do not include common stock, having a
market value of $5,669,848 at December 31, 1999.
The tax equivalent yield on debt securities by stated maturity date at
December 31, 1999 is as follows, yields are based on amortized cost:
<TABLE>
<CAPTION>
1 Year 1 Through 5 Through More than
or less 5 years 10 years 10 years Total
------- ------- -------- -------- -----
<S> <C> <C> <C> <C> <C>
U.S. Government Agencies 0.000% 0.000% 6.433% 6.923% 6.764%
Mortgage Backed Securities 0.000 7.667 5.464 6.418 6.312
State & Municipal Subdivisions 8.047 7.770 7.465 7.469 7.513
-------------------------------------------------------------------------------------------------------------
Total debt securities 8.047% 7.777% 6.632% 6.972% 6.894%
=============================================================================================================
</TABLE>
Gross loans, increased $61,357,000 or 25.67% from $238,991,000 in 1998 to
$300,348,000, in 1999. Gross loans represent 67.16% of Total Assets at December
31, 1999. All components of the loan portfolio grew during 1999.
Commercial loans increased $27,635,000. This represents 45.04% of the
growth in the entire loan portfolio. The bank increased the portfolio to improve
profitability and to better service our community. However, this strategy was
not accomplished by compromising prudent underwriting policies.
An example of this policy is the bank's use of Small Business
Administration, (SBA), guaranteed loans. At year-end 1999, the outstanding
balance of SBA loans was $4,368,000, a 60.14% increase over 1998.
Tax-free loans made to local municipalities increased to $7,152,000 at
December 31, 1999. That amount represents a $3,096,000 or 76.31% increase over
the balance at December 31, 1998.
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, 1999, commercial loans having outstanding balances of
$2,760,000 were registered in this program. PENNCAP notified the bank that it
was the number one participant in this program in the entire state.
Some of the more notable commercial loan projects that the bank initiated
in 1999 included:
A) PEI Power Park - A Lackawanna County industrial park developed for
manufacturing
28
<PAGE>
B) Tier II - 65,000 square feet of professional office space, which
recently attracted CIGNA as a tenant
C) St. Ann's Basilica Monastery
The bank continues to serve the local market with real estate loans and
consumer loan products. Real estate and consumer loans increased $30,260,000 or
20.00% during 1999. This growth reflects national economic trends, which are
bolstered by a strong economy and low rate of unemployment.
By adding staff to the lease department, outstanding lease balances grew
$3,462,000 or 153.92% from $2,249,000, at December 31, 1998 to $5,711,000 at
December 31, 1999.
A comparison of loans by amount at December 31 for the five previous
periods is as follows; all loans are domestic:
<TABLE>
<CAPTION>
1999 1998 1997 1996 1995
------------ ------------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Real estate $111,242,490 $ 99,955,640 $ 87,931,770 $ 79,936,722 $ 78,769,618
Consumer 64,998,362 47,549,512 38,673,662 31,555,744 29,605,034
Commercial 113,061,093 85,425,708 67,201,013 47,832,107 38,394,111
Direct financing leases 5,710,579 2,248,990 1,536,074 691,098 616,047
Real estate construction 5,335,753 3,810,975 2,568,997 3,590,175 1,486,982
---------------------------------------------------------------------------------------------------------------------
Gross loans 300,348,277 238,990,825 197,911,516 163,605,846 148,871,792
Less:
Unearned discount 982,384 553,033 585,517 1,371,625 3,119,716
Allowance for loan loss 3,172,375 3,007,713 2,809,066 2,589,976 2,469,760
---------------------------------------------------------------------------------------------------------------------
Net Loans $296,193,518 $235,430,079 $194,516,933 $159,644,245 $143,282,316
---------------------------------------------------------------------------------------------------------------------
=====================================================================================================================
Loans available-for-sale $ 5,254,316 $ 8,858,157 $ 8,202,404 $ 2,964,081 $ 2,825,634
=====================================================================================================================
</TABLE>
A comparison of gross loans by percent at December 31 for the five previous
periods is as follows:
<TABLE>
<CAPTION>
1999 1998 1997 1996 1995
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Real estate 37.04% 41.82% 44.43% 48.86% 52.91%
Consumer 21.64 19.90 19.54 19.29 19.89
Commercial 37.64 35.74 33.96 29.24 25.79
Direct financing leases 1.90 0.94 0.78 0.42 0.41
Real estate construction 1.78 1.60 1.29 2.19 1.00
----------------------------------------------------------------------------------------------------------------------
Gross loans 100.00% 100.00% 100.00% 100.00% 100.00%
======================================================================================================================
</TABLE>
As in previous years, the bank sold residential real estate mortgage loans
in 1999. The bank sells loans for liquidity and interest rate risk
considerations. However, servicing rights are retained so that our customers
still deal directly with the bank. At December 31, 1999, the outstanding balance
of sold residential mortgage loans in which the bank retained servicing rights
was $29,233,000.
29
<PAGE>
The following table sets forth the maturity distribution of the loan
portfolio at December 31, 1999. Excluded from the table are real estate loans,
consumer loans and direct financing leases, amounts in thousands.
<TABLE>
<CAPTION>
1 Year 1 - 5 More than
or less Years 5 years Total
------- ------- --------- --------
<S> <C> <C> <C> <C>
Commercial loans $34,210 $30,243 $56,240 $120,693
Real estate construction 5,336 5,336
-----------------------------------------------------------------------------------
Total $39,546 $30,243 $56,240 $126,029
===================================================================================
</TABLE>
The following table sets forth the sensitivity changes in interest rates
for commercial and real estate construction loans at December 31, 1999, amounts
in thousands.
1 - 5 More than
Years 5 years Total
------- ------- -------
Fixed interest rate $16,942 $20,250 $37,192
Variable interest rate 13,301 35,990 49,291
------------------------------------------------------------------------
Total $30,243 $56,240 $86,483
========================================================================
Fixed assets increased $3,820,000 before depreciation in 1999.
Additions to the bank premise of $1,505,000 and leasehold improvements of
$329,000 were capitalized during 1999. These funds were used to open new retail
branches (the Financial Center, Moosic, West Pittston) and improve existing
facilities (Main, KIP). The purpose of these activities was to expand the branch
network to better serve the bank's customer base and to improve general
operating efficiencies.
The bank capitalized additions to furniture and fixtures of $1,986,000
during 1999. Of that total, approximately $474,000 was for Y2K upgrades. Another
$580,000 was used to acquire new operating systems.
One of the major acquisitions was for an imaging system that provides
on-line document retrieval. This system enhances operating efficiencies, reduces
storage considerations and eliminates the possibility of losing a document. Bank
service representatives now have immediate access to customer transactions,
thereby improving response time to inquiries. In the near future, the bank will
be able to return imaged copies of paid checks in depositors' statements.
In conjunction with the imaging system, the bank acquired a state of the
art proof and deposit system which has improved operating efficiencies.
The remaining portion of the increase in furniture and fixtures was divided
between the new branches and general improvements at all locations.
Three significant items led to a material increase in other assets in 1999.
30
<PAGE>
The bank became a limited partner in the Olyphant Housing Project. The
project restored an abandoned high school into a low-income housing development
for the elderly. Run by Lackawanna County, the project has 43 units for
occupancy. In addition to CRA credits, which will help the bank with future
branch expansion, the bank benefits from material tax credits over the next ten
years. The investment by the bank was $873,000.
Due to the market depreciation of available-for-sale investments the bank
recorded a $2,477,000 deferred tax asset.
In compliance with generally accepted accounting principles, during 1999
the bank recorded the value of mortgage servicing rights. This represents the
discounted future cash flow of income the bank will receive for servicing sold
loans. The amount of that asset was approximately $123,000.
The year 1998:
Total deposits and long-term debt increased $51,796,000 during 1998. Along
with that increase, the bank generated $2,939,000 through an issuance of common
stock. Those funds were used to increase investments and gross loans $46,974,000
and also provided the necessary capital for branch expansion and improvements in
operations.
Total Assets of the bank increased $58,352,000 or 20.10% from $290,252,000
at December 31, 1997 to $348,604,000 at December 31, 1998.
Capital Resources
The bank's major source of capital has been from the retention of earnings
as reflected below:
==========================================================================
Net Dividends Earnings
December 31, Income Paid Retained
==========================================================================
1999 $3,814,215 $1,344,141 $2,470,074
--------------------------------------------------------------------------
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
==========================================================================
31
<PAGE>
Capital was further increased in 1999 through the Dividend Reinvestment
Plan. Stockholders reinvested $450,038 in dividends to purchase additional
shares of stock. Since the 1995 inception of the Dividend Reinvestment Plan
shareholders have reinvested dividends totaling $1,466,061 to acquire Common
Stock of the bank.
Capital was affected by changes in market rates, which caused a $4,807,581
decrease, net of deferred taxes, in the fair value of investments classified as
available-for-sale, (AFS). At December 31, 1999, the bank reported a net
unrealized loss on AFS securities of $4,673,713. In 1998, the bank reported a
net gain of $133,868.
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>
<CAPTION>
===================================================================================================================================
Short-term Other
Earning Borrowings Borrowings
Dec. Assets Assets Deposits Increase/ Increase/
31 Increase % Increase % Increase % Decrease % Decrease %
===================================================================================================================================
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1999 $98,606,596 28% $88,199,310 26% $54,700,214 23% $30,843,747 105% $15,053,000 36%
-----------------------------------------------------------------------------------------------------------------------------------
1998 58,351,979 20 54,900,356 19 21,975,741 10 304,848 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
===================================================================================================================================
</TABLE>
Earning assets are based on book value. Book value is net of unrealized
losses in the available-for-sale investment and loan portfolios. The total of
unrealized losses in both portfolios is $7,227,000.
Some important ratios are as follows:
<TABLE>
<CAPTION>
===============================================================================================================
Capital to Capital to Return on Dividends to
December 31 Assets Deposits Average Capital Net Income
===============================================================================================================
<S> <C> <C> <C> <C> <C>
1999 7.2% 10.9% 11.4% 35.2%
---------------------------------------------------------------------------------------------------------------
1998 9.8 14.2 11.7 33.7
---------------------------------------------------------------------------------------------------------------
1997 9.8 13.0 12.4 32.1
---------------------------------------------------------------------------------------------------------------
1996 9.4 12.0 11.7 32.1
---------------------------------------------------------------------------------------------------------------
1995 9.9 13.2 12.5 29.2
===============================================================================================================
</TABLE>
If the after tax depreciation in the AFS portfolio was disallowed, (net
unrealized loss), the Capital to Asset Ratios for 1999 and 1998 would be 8.1%
and 9.7% respectively.
32
<PAGE>
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, at page
F-26 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 Repurchase Agreements
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 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
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 uses a simulation model to better understand the risks to the bank
that may be brought about by changes in market interest rates. The model
measured the impact of changing interest rates for several scenarios. The
following table illustrates the theoretical impact of interest rate changes. The
rate movements shown below represent parallel shifts in the yield curve,
occurring immediately and lasting for the twelve-month projection.
33
<PAGE>
The analysis assumes that December 31, 1999 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 1999 reported figures
that would occur under these interest rate changes over a twelve-month period
beginning January 1, 2000:
<TABLE>
<CAPTION>
=========================================================================================================================
Basis Point Change, +400 +200 +100 12/31/99 -100 bps -200 bps -400
change in thousands bps bps bps bps
-------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Net Interest Income 9,017 11,179 12,257 13,190 14,382 15,197 16,379
-------------------------------------------------------------------------------------------------------------------------
Net Income 498 1,117 1,742 3,814 3,890 4,517 5,428
-------------------------------------------------------------------------------------------------------------------------
Present Value of Equity 17,057 23,754 27,765 32,126 36,634 37,442 52,027
=========================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
=========================================================================================================================
Pro forma +400 +200 +100 12/31/99 -100 bps -200 bps -400
bps bps bps bps
-------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Earnings Per Share $0.56 $1.25 $1.94 $4.26 $4.34 $5.04 $6.06
=========================================================================================================================
</TABLE>
At January 1, 2000, if there were an immediate 200 basis point increase in
all market interest rates, net interest income is projected to decrease by
$2,011,000 over the next twelve months, a 15.2% decrease from 1999's net
interest income. The present value of bank capital is projected to decrease
26.1% to $23,754,000.
If there were an immediate 200 basis point decrease in rates, net interest
income is projected to increase $2,007,000 or 15.2% over twelve months. The
present value of the bank's capital is projected to increase 16.5% to
$37,442,000.
The interest rate changes described above are extreme and have occurred
only rarely in the past. These projections require a variety of assumptions and,
as such, the results should be viewed as approximations only. In addition,
should changing interest rates have a negative effect on the financial position
of the bank, prompt corrective measures would be undertaken to minimize any
adverse impact.
34
<PAGE>
A comparison of the maturity and repricing ability of assets and deposits
at December 31, 1999, is as follows, in thousands of dollars:
<TABLE>
<CAPTION>
===================================================================================================================
Years to Maturity or Repricing
-------------------------------------------------------------------------------------------------------------------
90 days 1 or less 1 to 5 5 or more Total
===================================================================================================================
<S> <C> <C> <C> <C> <C>
Loans:
-------------------------------------------------------------------------------------------------------------------
Fixed rate $ 5,346 $ 4,574 $ 61,237 $146,995 $ 218,152
-------------------------------------------------------------------------------------------------------------------
Adjustable rate 57,166 12,538 15,227 1,309 86,240
-------------------------------------------------------------------------------------------------------------------
Debt Securities:
-------------------------------------------------------------------------------------------------------------------
Fixed rate 151 442 2,632 97,171 100,396
-------------------------------------------------------------------------------------------------------------------
Adjustable rate 3,105 91 - - 3,196
-------------------------------------------------------------------------------------------------------------------
Federal funds sold 0 - - - 0
-------------------------------------------------------------------------------------------------------------------
Interest-bearing deposits 11,542 - - - 11,542
-------------------------------------------------------------------------------------------------------------------
Total $ 77,310 $ 17,645 $ 79,096 $245,475 $ 419,526
===================================================================================================================
</TABLE>
Nonaccrual loans of $1,210,186 at December 31, 1999, and investments in
Common Stock of $5,669,848 at December 31, 1999, are not included in the loan
maturity distribution tables. Loans include those designated as
available-for-sale.
Earning assets are based on book value. Book value is net of unrealized
losses in the available-for-sale investment and loan portfolios. The total of
unrealized losses in both portfolios before tax is $7,227,000.
<TABLE>
<CAPTION>
========================================================================================================================
Years to Payment or Repricing
------------------------------------------------------------------------------------------------------------------------
90 days 1 or less 1 to 5 5 or more Total
========================================================================================================================
<S> <C> <C> <C> <C> <C>
Deposits, noninterest-bearing $ 1,518 $ 5,019 $ 14,172 $ 16,866 $ 37,575
------------------------------------------------------------------------------------------------------------------------
Certificates of deposit over $100,000 23,551 26,466 16,526 100 66,643
------------------------------------------------------------------------------------------------------------------------
Other interest-bearing deposits 14,727 35,170 87,436 53,150 190,483
------------------------------------------------------------------------------------------------------------------------
Securities sold under repurchase agreement 26,412 1,589 487 - 28,488
------------------------------------------------------------------------------------------------------------------------
Demand notes, U.S. Treasury 31,761 - - - 31,761
------------------------------------------------------------------------------------------------------------------------
Long term debt 6,305 41,000 10,000 - 57,305
------------------------------------------------------------------------------------------------------------------------
Total $104,274 $109,244 $128,621 $ 70,116 $ 412,255
========================================================================================================================
</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 investments with a par value of
$73,535,000, subject to call during 2000, have been scheduled by maturity dates
exceeding one year.
Liabilities not having stated maturity dates have been scheduled based upon
an aging of the liabilities. The time frames relied upon suggest that the
liabilities will either reprice or liquidate within the stated period. For
example, at December 31, 1999, the one-year cumulative gap stated that
$6,537,000 Non Interest-bearing deposits would either reprice or payout over the
next twelve months. In reality Non Interest-bearing deposits grew $4,125,000
during 1999. Historical data tends not to support the theory that a material
portion of these accounts will either reprice or liquidate within a twelve-month
period.
35
<PAGE>
At December 31, 1999, the bank had the following additional sources of
funds which totaled $26,146,000, available to meet liquidity requirements:
o A $5,000,000 unsecured credit line from a financial institution
o Borrowing capacity at the Federal Reserve Bank of Philadelphia of
$2,795,000
o Available funding at the Federal Home Loan Bank of Pittsburgh of
$18,351,000
Management continually monitors the gaps between assets and liabilities and
makes adjustments as market rates change. Presently management believes that
there is adequate liquidity to meet normal requirements.
Results of Operations
Earnings Summary
===============================================================================
December 31 1999 1998 1997
===============================================================================
Net income $3,814,215 $3,563,552 $3,310,057
-------------------------------------------------------------------------------
Earnings per share $4.26 $4.20 $3.97
-------------------------------------------------------------------------------
Increase per share 1.43% 5.79% 15.74%
===============================================================================
The year 1999:
After lowering the Discount Rate by 75 basis points in the second half of
1998, the Federal Reserve Bank did not take any further action in the first half
of 1999. The Discount Rate is the rate at which the Federal Reserve Bank lends
overnight funds to banks. During the second half of 1999 the Federal Reserve
raised the discount rate on three separate occasions by 75 basis points. In
response to these increases, national prime interest rate rose from 7.75% to
8.50%.
There is a 37 basis point differential between the weighted average of
national prime in 1999 and 1998. The weighted average of national prime in 1999
and 1998 was 8.00% and 8.37% respectively. This difference reflects on the yield
on earning assets and the cost of funds when comparing both years.
The actions of the Federal Reserve Bank caused increases in the rates
charged on loans that were subject to repricing and on the rates offered on new
loans in the second half of 1999. Approximately 17% of the entire loan portfolio
is subject to immediate repricing.
During the first half of 1999 investment securities were prematurely called
and reissued at lower rates. However as rates increased investments were no
longer called, as the issuers took advantage of the lower rates.
The combination of these factors caused a 36 basis point decline in the tax
equivalent yield on earning assets.
36
<PAGE>
Due to the increase in rates during 1999, the bank began to raise the
interest rates paid on deposits and Repos. Interest expense was also effected by
a rise in the rates charged on borrowed funds. In addition, the cost of funds
was increased by deposit promotions offered at the new branches and from new
products introduced during 1999. However, since market rates did not begin to
rise until the second half of 1999, the bank was able to reduce the cost of
funds by 21 basis points.
Despite a 16 basis point reduction in tax-equivalent net interest spread,
net interest income rose $2,028,000 or 18.1% during 1999. This was primarily
accomplished through volume increases in loans and investments.
The year 1998:
The Federal Reserve Bank lowered the Discount Rate by 75 basis points
during the fourth quarter of 1998.
The actions of the Federal Reserve 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 25 basis point reduction in tax-equivalent net interest spread,
net interest income rose $765,000 during 1998. This was accomplished through a
volume increase in loans and cost reduction in other interest-bearing
liabilities.
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 net interest spread by 17 basis points. The
improvement in yield and a volume increase in lending allowed net interest
income to rise $1,164,000.
A comparison of Average Earnings Assets and the Net Tax Equivalent yields
at December 31, 1999, 1998, and 1997, in thousands, is as follows:
37
<PAGE>
<TABLE>
<CAPTION>
1999 1998 1997
---------------------------------------------------------------------------------------------------
Average Revenue Yield Average Revenue Yield Average Revenue Yield
Balance (Expense) (Cost) Balance (Expense) (Cost) Balance (Expense) (Cost)
------- ------- ---- ------- ------- ---- ------- ------- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Earning assets
Interest-bearing deposits $6,629 $89 1.34% $5,212 $103 1.98% $4,141 $78 1.88%
Investments:
US Treasuries 2,985 205 6.87 8,670 585 6.75 9,768 655 6.71
US Government Agencies 63,863 4,257 6.67 35,285 2,458 6.97 39,417 2,873 7.29
Mortgage-backed 6,946 444 6.39 6,013 376 6.25 12,927 808 6.25
securities
State & Municipal 23,698 1,649 6.96 19,867 1,404 7.07 17,126 1,254 7.32
Other 3,390 219 6.46 1,297 86 6.63 1,048 68 6.49
------------------------------------------------------------------------------------------------------------------------------
Total Investments 100,882 6,774 6.71 71,132 4,909 6.90 80,286 5,658 7.05
==============================================================================================================================
Loans:
Commercial 110,791 9,029 8.15 78,432 6,809 8.68 59,623 5,361 8.99
Consumer 47,588 3,996 8.40 34,948 3,025 8.66 26,706 2,444 9.15
Real estate 118,637 8,826 7.44 104,783 8,416 8.03 92,344 7,512 8.13
Direct financing leases 3,101 296 9.55 2,144 163 7.60 1,518 125 8.23
Credit cards 1,230 147 11.95 1,216 151 12.42 1,138 139 12.21
------------------------------------------------------------------------------------------------------------------------------
Total loans 281,347 22,294 7.92 221,523 18,564 8.38 181,329 15,581 8.59
==============================================================================================================================
Federal funds sold 2,682 128 4.77 7,328 394 5.38 2,816 166 5.89
------------------------------------------------------------------------------------------------------------------------------
Total earning assets $391,540 $29,285 7.48% $305,195 $23,970 7.85% $268,572 $21,483 8.00%
==============================================================================================================================
Interest-bearing liabilities
Deposits:
Savings $35,548 ($723) 2.03% $33,919 ($776) 2.29% $33,727 ($792) 2.35%
NOW 17,838 (333) 1.87 12,678 (178) 1.40 11,440 (165) 1.44
MMDA 14,569 (500) 3.43 12,039 (340) 2.82 11,611 (257) 2.21
CD's < $100,000 107,531 (5,685) 5.29 95,005 (5,378) 5.66 87,794 (4,948) 5.64
CD's > $100,000 66,095 (3,584) 5.42 47,856 (2,850) 5.96 41,267 (2,357) 5.71
Clubs 1,176 (33) 2.81 1,050 (32) 3.05 986 (30) 3.04
------------------------------------------------------------------------------------------------------------------------------
Total Deposits 242,757 (10,858) 4.47 202,547 (9,554) 4.72 186,825 (8,549) 4.58
==============================================================================================================================
Repurchase agreements 31,639 (1,519) 4.80 27,442 (1,396) 5.09 25,668 (1,351) 5.26
Borrowed funds 56,943 (2,999) 5.27 23,464 (1,359) 5.79 11,429 (740) 6.47
------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing $331,339 ($15,376) 4.64% $253,453 ($12,309) 4.86% $223,922 ($10,640) 4.75%
liabilities
==============================================================================================================================
Net interest income $13,909 $11,661 $10,843
Net interest spread 2.84% 3.00% 3.25%
Net yield on earning 3.55% 3.82% 4.04%
assets
Total average assets $404,253 $313,924 $275,699
Average noninterest- $36,729 $27,287 $22,777
bearing deposits
</TABLE>
38
<PAGE>
Interest income was adjusted to a tax equivalent basis to recognize the
income from tax exempt assets as if the interest was taxable. This treatment
allows a uniform comparison to be made between yields on assets. The
calculations were computed on a fully tax equivalent basis using the corporate
federal tax rate of 34%.
Nonaccrual loans and any related interest recorded have been included in
computing the average rate earned on the loan portfolio. All deposits are in
domestic bank offices. The average balances are based on amortized cost and do
not reflect unrealized gains or losses.
The following table reflects the change in net interest income attributable
to fluctuations in volume and rate.
<TABLE>
<CAPTION>
==========================================================================================================================
Years ended December 31
(In Thousands)
--------------------------------------------------------------------------------------------------------------------------
1999 Compared to 1998 1998 Compared to 1997
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 $ 1,025 $ (615) $ 410 $ 996 $ (92) $ 904
--------------------------------------------------------------------------------------------------------------------------
Commercial 2,548 (457) 2,091 1,600 (172) 1,428
--------------------------------------------------------------------------------------------------------------------------
Consumer 1,154 (54) 1,100 769 (138) 631
--------------------------------------------------------------------------------------------------------------------------
Total loans and leases 4,727 (1,126) 3,601 3,365 (402) 2,963
--------------------------------------------------------------------------------------------------------------------------
Investment securities, interest- 1,628 (134) 1,494 (246) (283) (529)
bearing deposits and federal
funds sold
--------------------------------------------------------------------------------------------------------------------------
Total interest income $ 6,355 $(1,260) $ 5,095 $ 3,119 $ (685) $ 2,434
--------------------------------------------------------------------------------------------------------------------------
Interest expense:
--------------------------------------------------------------------------------------------------------------------------
Deposits:
--------------------------------------------------------------------------------------------------------------------------
Certificates of deposit greater $ 1,030 $ (269) $ 761 $ 412 $ 108 $ 520
than $100,000
--------------------------------------------------------------------------------------------------------------------------
Other 567 (24) 543 424 61 485
--------------------------------------------------------------------------------------------------------------------------
Total deposits 1,597 (293) 1,304 836 169 1,005
--------------------------------------------------------------------------------------------------------------------------
Other interest-bearing liabilities 1,964 (201) 1,763 785 (121) 664
--------------------------------------------------------------------------------------------------------------------------
Total interest expense $ 3,561 $ (494) $ 3,067 $ 1,621 $ 48 $ 1,669
--------------------------------------------------------------------------------------------------------------------------
Net interest income $ 2,794 $ (766) $ 2,028 $ 1,498 $ (733) $ 765
==========================================================================================================================
</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:
39
<PAGE>
o Specific loans that could have loss potential
o Levels of delinquent loans
o Changes in risk characteristics in the portfolio
o Current and projected economic conditions.
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,
industry and borrower threshold.
40
<PAGE>
The following table sets forth loans and lease financing charge-offs and
recoveries by category at December 31 for the past five years:
<TABLE>
<CAPTION>
==============================================================================================================================
(In Thousands)
-------------------------------------------------------------------
1999 1998 1997 1996 1995
------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at beginning of period $ 3,008 $ 2,809 $ 2,590 $ 2,470 $ 2,357
------------------------------------------------------------------------------------------------------------------------------
Charge-offs:
------------------------------------------------------------------------------------------------------------------------------
Commercial and all other 139 193 286 153 70
------------------------------------------------------------------------------------------------------------------------------
Real estate 146 43 - 20 125
------------------------------------------------------------------------------------------------------------------------------
Consumer 196 258 183 218 185
------------------------------------------------------------------------------------------------------------------------------
Lease financing - 86 15 - -
------------------------------------------------------------------------------------------------------------------------------
Total 481 580 484 391 380
------------------------------------------------------------------------------------------------------------------------------
Recoveries:
------------------------------------------------------------------------------------------------------------------------------
Commercial and all other 46 56 47 136 150
------------------------------------------------------------------------------------------------------------------------------
Real estate 6 36 5 9 3
------------------------------------------------------------------------------------------------------------------------------
Consumer 63 39 28 28 27
------------------------------------------------------------------------------------------------------------------------------
Lease financing - 2 - - -
------------------------------------------------------------------------------------------------------------------------------
Total 115 133 80 173 180
------------------------------------------------------------------------------------------------------------------------------
Net charge-offs 366 447 404 218 200
------------------------------------------------------------------------------------------------------------------------------
Additions charge to operations 530 646 623 338 313
------------------------------------------------------------------------------------------------------------------------------
Balance at end of period $ 3,172 $ 3,008 $ 2,809 $ 2,590 $ 2,470
------------------------------------------------------------------------------------------------------------------------------
Net charge-offs to average loans outstanding 0.13% 0.20% 0.23% 0.13% 0.14%
------------------------------------------------------------------------------------------------------------------------------
Allowance for loan loss to net loans 1.05% 1.23% 1.39% 1.59% 1.69%
------------------------------------------------------------------------------------------------------------------------------
Loans 30 - 89 days past due and accruing $ 4,914 $ 2,829 $ 3,521 $ 2,667 $ 2,804
------------------------------------------------------------------------------------------------------------------------------
Loans 90 days or more past due and accruing $ 2,917 $ 2,689 $ 2,189 $ 796 $ 977
------------------------------------------------------------------------------------------------------------------------------
Allowance for loan loss to loans 90 days or 108.74% 111.86% 128.32% 325.38% 256.22%
more past due and accruing
------------------------------------------------------------------------------------------------------------------------------
Nonaccruing loans $1,210 $ 1,364 $ 1,076 $ 1,680 $ 1,146
------------------------------------------------------------------------------------------------------------------------------
Allowance for loan loss to nonaccruing loans 262.15% 220.49% 261.09% 154.13% 215.53%
------------------------------------------------------------------------------------------------------------------------------
Allowance for loan loss to non-performing loans 76.86% 74.21% 86.03% 104.60% 117.06%
------------------------------------------------------------------------------------------------------------------------------
Average net loans $278,154 $218,494 178,673 151,491 $141,328
==============================================================================================================================
</TABLE>
The following table sets forth the allowance for loan losses by loan
category for the past five years:
<TABLE>
<CAPTION>
Category December 31, 1999 December 31, 1998 December 31, 1997 December 31, 1996 December 31, 1995
-------- ----------------- ----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C> <C>
Real Estate $1,165,295.00 $1,066,687.00 $877,939 $982,131 $1,031,151
Consumer 692,878.00 507,946.00 399,063 373,209 389,114
Commercial 1,196,789.00 914,305.00 678,407 569,635 505,848
Direct financing leases 62,989.00 25,397.00 19,953 0 0
Real estate construction 31,494.00 25,397.00 19,953 39,285 19,455
Unallocated 22,930.00 467,981.00 813,751 625,716 524,192
---------------------------------------------------------------------------------------------------------------------------
Total $3,172,375.00 $3,007,713.00 $2,809,066 $2,589,976 $2,469,760
===========================================================================================================================
</TABLE>
41
<PAGE>
The following table sets forth non-performing assets for the past five
years:
<TABLE>
<CAPTION>
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Net loans $301,448 $244,288 $202,719 $162,608 $146,108
Restructured loans 0 0 0 0 0
Loans past due 90 days or more and accruing $ 2,917 $ 2,689 $ 2,189 $ 796 $ 977
Nonaccrual loans 1,210 1,364 1,076 1,680 1,146
-------- -------- -------- -------- --------
Non-performing loans 4,127 4,053 3,265 2,476 2,123
Foreclosed real estate 413 201 276 0 0
Restructured loans 0 0 0 0 0
-------- -------- -------- -------- --------
Total non-performing assets $ 4,540 $ 4,254 $ 3,541 $ 2,476 $ 2,123
======== ======== ======== ======== ========
Nonaccrual loans to net loans 0.40% 0.56% 0.53% 1.03% 0.78%
Non-performing assets to net loans and foreclosed real estate 1.50% 1.74% 1.74% 1.52% 1.45%
Non-performing assets to total assets 1.02% 1.22% 1.22% 0.92% 0.88%
Non-performing loans to net loans 1.37% 1.66% 1.61% 1.52% 1.45%
</TABLE>
Net loans include Loans available-for-sale. The bank is unaware of any
potential problem loans. Potential problem loans are those where there is known
information that leads the bank to believe repayment of principal and/or
interest is in jeopardy. The loans are neither non-accrual nor past due 90 days
or more.
In addition to the allowance for loan loss, there are other reserves not
recorded on the bank's records that are available to mitigate potential loan
loss. The guaranteed portion of non- performing SBA and Student Loans was
$183,000, at December 31, 1999. Reserves set aside by the Commonwealth of
Pennsylvania for loans registered in the PENNCAP program were $127,000 at
year-end. Unrecognized gross income in 1999 due to nonaccrual loans outstanding
as of December 31, 1999 was $154,523.
The decrease in ratio of allowance for loan loss to year-end loans was
caused by the overall growth in the loan portfolio. The bank is confident that
the Allowance provides adequate protection against any unforeseen portfolio
loss.
Other Income
The year 1999:
The $12,000 increase in service charges on deposit accounts realized in
1999, is a result of the increase in non interest-bearing deposit accounts. The
increase is not as great as in prior years. Promotions at the new branches
whereby fees were waived for the first year on new accounts, hindered a larger
increase.
Market conditions were not favorable in terms of selling securities during
1999. Only one issue nearing call was sold. The investment was classified as
available-for-sale. The bank
42
<PAGE>
realized a $1,400 gain on the sale of that asset. There were no sales of
investments classified as held-to-maturity.
Market conditions again were prohibitive in the sale of loans in 1999.
Sales generated net gains of $74,000 in 1999. That amount, however, was
increased by the recognition of the discounted future value of servicing rights
on sold loans. The amount of realized income from servicing rights was
approximately $123,000.
In compliance with FASB Statement No. 65, the bank had to write down to
market value the loans classified as available-for-sale. Loans earmarked as
available-for-sale must be carried at the lower of cost or market. As a result
of this, $146,000 was charged against current earnings. In previous years, the
book value was below market, so no charge was made to current earnings.
The $57,980,000 increase in loans before the Allowance for Loan Loss,
helped to generate an additional $185,000 in service charges during 1999.
Service charges on loans are classified as a component of Other Operating
Income.
Some components of Other Operating Income and their related increase during
1999:
Increase
--------
Fees on sold loans $ 37,000
Reverse Mortgage fees 10,000
Merchant Credit Card income 88,000
Trust income, gross 103,000
Rental Income 23,000
Annuity & Brokerage fees 30,000
ATM service charges 31,000
Safe deposit box rentals 12,000
Fees on sold loans, Reverse Mortgage fees, Merchant Credit Card income and
Trust income rose through volume increases. The market value of Trust Assets at
December 31, 1999 was $34,693,000. Rental income increased from a full twelve
months of lease income from the Financial Center. A full-time employee dedicated
to sales only, caused the increase in Annuity and Brokerage fees. The new branch
locations helped to generate additional income over 1998 from ATM service
charges and safe deposit rentals. See "Description of the Bank - Properties."
The year 1998:
The 32% increase in service charges on deposit accounts realized in 1998,
is a result of the 32% increase in non interest-bearing deposit accounts.
Taking advantage of favorable market conditions, the bank sold three
investment securities, classified as available-for-sale. The net amortized book
value of the sold securities
43
<PAGE>
was $3,838,000. In providing funds for loan demand, the bank improved its yield
on earning assets. The 1998 tax equivalent yield on loans and investments was
8.38% and 6.90% respectively. The net gain on investment sales for 1998 was
$110,000. There were no sales of investments classified as held-to-maturity.
The sale of residential mortgage loans and student loans in 1998 generated
net gains of $161,000, a $158,000 increase over 1997.
The $41,768,000 increase in loans before the Allowance for Loan Loss,
helped to generate an additional $144,000 in service charges during 1998.
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.
The Year 1997:
The increase of $2,332,000 in non interest-bearing demand deposit accounts
over the twelve months ending December 31, 1997, contributed to the 19% rise in
service charges on deposit accounts.
In 1997, the bank sold investment securities classified as
available-for-sale, with a net amortized book value of approximately
$14,100,000. 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%. The bank realized a net gain on the
sales of $123,600. There were no sales of investments classified as
held-to-maturity.
The $40,330,000 increase in loans before the Allowance for Loan Loss,
helped to generate an additional $53,000 in service charges during 1997.
In 1997, the bank instituted a surcharge on foreign depositors who used the
bank's ATM's. This charge helped increase ATM service charge income from
approximately $37,000 in 1996 to $119,000 in 1997.
44
<PAGE>
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 1999:
The average number of full time equivalent employees increased by 35 to 156
in 1999. The 29% average staff increase and merit pay raises caused 1999
Salaries and Employee benefits to increase $1,315,000 above the amount reported
for 1998.
The opening of the West Pittston, Financial Center and Moosic retail
branches in 1999 increased Premise and Equipment expense $523,000 over 1998.
Over 52% of the increase resulted from a $275,000 rise in depreciation.
Depreciation on building and premise was $201,000 and depreciation on furniture
and fixtures was $562,000. Furniture and fixture depreciation exceeded 1% of
gross income. Another factor contributing to the increase was the portion of the
Financial Center restricted to operations. Operations were conducted at the
Financial Center during the twelve months of 1999. The bank acquired the
Financial Center in June of 1998 and did not begin to move operations there
until September of 1998.
The bank incurred a net loss in 1998 on the sale of two residential
properties that it had foreclosed upon. The net loss amounted to $29,000.
The only item contained within other expense that exceeded 1% of gross
income was advertising. Advertising increased $115,000 over 1998 to $403,000.
The increase was caused in part, by the new branches opened during 1999.
45
<PAGE>
Some components of Other Expense and their increases during 1999:
Increase
--------
Appraisals $44,000
Merchant credit card expense 91,000
Stationery and supplies 111,000
Equipment purchases 24,000
Armored transportation 37,000
Correspondent banks 36,000
Postage 22,000
Telecommunications 33,000
Consumer leasing 20,000
Donations 38,000
Miscellaneous expense 72,000
Appraisal expense rose in part because of a no-cost residential mortgage
loan promotion. Appraisal expense is reported gross and does not include
payments made by borrowers. Those fees are credited to other income. Merchant
card and consumer leasing expense rose due to volume increases. Miscellaneous
expense includes accruals for future expected expense, such as preparations for
the annual meeting. The other items rose due to the increase in the number of
bank locations and the bank's Year 2000 considerations.
Other areas of expense declined during 1999:
Decrease
--------
Legal services $66,000
Audit expense 18,000
Annual Meeting 17,000
The year 1998:
The average number of full time equivalent employees increased by 11 to 121
in 1998. The additional staff and merit pay increases caused 1998 Salaries and
Employee benefits to increase $421,000 above the amount reported for 1997.
With the opening of the Pittston Branch in June and the move to the
Financial Center in September, Occupancy and Equipment expenses increased
$66,000 over 1997.
The bank incurred a net loss in 1998 on the sale of two residential
properties that it had foreclosed upon. The net loss amounted to $27,000.
The only item contained within other expense that exceeded 1% of gross
income was advertising. Advertising increased $90,000 over 1997 to $288,000.
Branch openings during 1998 contributed to the increase.
46
<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
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.
There were no individual components within other expense that exceeded 1%
of gross income.
47
<PAGE>
Some components of Other Expense and their increases during 1997 were:
Increase
--------
FDIC insurance assessment $24,000
Merchant credit card and MAC 63,000
Donations 32,000
The bank's 1997 FDIC Insurance assessment was $24,000 more than its 1996
charge, even though the bank maintained a 1A rating.
Other expenses declined during 1997:
Decrease
--------
Advertising $22,000
Stationery and supplies 19,000
Other Items:
New Financial Accounting Standards:
The bank is unaware of any pending changes in accounting procedures that
could have a material effect on future presentations of the bank's financial
position and results of operations.
Year 2000:
The bank successfully completed its preparations for the beginning of the
new millennium. At January 1, 2000 all automated systems were functioning
properly. During the first days of 2000 the bank initiated and received
transmissions of electronic data without any problems. There were no
difficulties conducting business with those outside vendors upon which the bank
relies.
In preparation for the New Year holiday and in anticipation of consumer
concern, the bank increased the amount of currency it normally carries.
Subsequent to that weekend, the bank reduced its cash reserves and short-term
borrowings.
The final Y2K hurdle was February 29, 2000, the leap year day. The bank did
not experience any problems, and business proceeded as usual.
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
48
<PAGE>
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.
On November 12, 1999 President Clinton signed into law the
Gramm-Leach-Bliley Financial Services Modernization Act. The Act has a profound
impact on the financial services industry.
o The Act repeals prior legislation to permit commercial banks to
affiliate with securities firms and insurance companies. More
importantly, the Act significantly expands the authority of each of
these financial industries to engage in a full array of financial
services. Thus, each industry may now engage in activities previously
reserved to one or the other.
o The Act authorizes bank holding companies meeting defined standards to
engage in a substantially broader range of non-banking activities than
was permissible before the legislation passed.
o A new hierarchy of existing state and federal regulators will monitor
both the bank and the proposed holding company. The Act coordinates
the efforts of these regulators. The goal is to lessen regulatory
burden and prevent duplication of examination efforts.
o Also, all financial institutions are required to take reasonable
precautions to protect the security and confidentiality of personal
customer information. The bank or holding company may only share
customer information with its affiliates under certain circumstances.
49
<PAGE>
Outlook for 2000:
After several years of historic growth for the bank, management believes it
must make a concerted effort to increase net earnings. The present state of the
economy will make that goal challenging as market pressure will continue to bear
down on the net interest margin. The bank will reassess its charges for services
provided and will explore other avenues for producing revenue. With the
promotions for the new branches coming to an end, the bank will reduce overhead
as much as possible. This too will present a challenge, as the bank will
experience a full twelve months expense on the new branches and operating
systems. These goals must be successfully addressed, in order for the bank to
reach the desired performance levels.
Management's Discussion and Analysis of Consolidated Financial Condition for the
Six Months Ended June 30, 2000 and 1999
The following discussion is derived from management's discussion and
analysis of consolidated financial condition included in Fidelity D & D Bancorp,
Inc.'s Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 2000,
as filed with the SEC on August 14, 2000. The information presented below should
be read in conjunction with our financial statements and accompanying notes
appearing at the end of this document, beginning at page F-1.
Changes in Financial Condition
Total deposits increased $38,295,000 or 12.99% from $294,701,000 at
December 31, 1999 to $332,996,000 at June 30, 2000. The success at attracting
new customers and additional funds from existing depositors can be linked to the
new and renovated branches and competitive product pricing.
Non interest-bearing deposits rose $4,303,000 or 11.45% during 2000.
Interest-bearing deposits increased $33,992,000 or 13.22%. The introduction
of the tiered balance Super NOW accounts helped to generate a $16,740,000
overall increase in NOW accounts. An increase of $24,805,000 in public fund CD's
of $100,000 or more, caused CD's of $100,000 or more to increase $28,969,000 or
43.47% during 2000. Withdrawals from savings and money market accounts,
particularly public funds, reduced the amount of the increases.
Short-term Borrowings, which are comprised of Repurchase Agreements
(Repos), Treasury, Tax and Loan Retained Funds and Federal Funds Purchased,
decreased $1,655,000 or 2.75%. Of the total decrease, Fed Funds Purchased was
reduced $5,850,000. The reduction in Fed Funds Purchased was due, in part, to
reductions in currency, which had been increased for Year 2000 considerations.
Repos increased $4,321,000, due in part to real estate tax collections from
local municipalities.
50
<PAGE>
The rise in Deposits less the decrease in Short-term Borrowings, the
increase in Common Stock and Surplus, through the Dividend Reinvestment Plan,
and the retention of earnings, caused Total Liabilities and Shareholders' Equity
to increase $38,230,000 or 8.55% since December 31, 1999.
During 2000, net loans grew $31,494,000 or 10.63%. Commercial loans
increased $26,036,000 and consumer loans and leases increased $9,845,000.
Residential mortgages and student loans totaling $2,592,000 were sold during
2000 to provide liquidity and improve yield. In addition, residential mortgages
of $5,994,000 were securitized and reclassified as investments. This activity
provided the company with a FNMA guarantee on the loans within the investment
pools, thereby reducing the potential for loss due to delinquency. The
investment pools became an acceptable asset to pledge as collateral for Public
Fund deposits. The company has classified residential mortgages, student loans
and SBA guaranteed loans of $10,588,000 as available-for-sale.
The following table reflects the composition of the loan portfolio:
June 30, 2000 December 31, 1999
------------- -----------------
Real estate $109,365,985 $111,242,490
Consumer 71,046,462 64,998,362
Commercial 139,097,491 113,061,093
Direct financing leases 9,507,935 5,710,579
Real estate construction 3,594,052 5,335,753
------------ ------------
Gross Loans 332,611,925 300,348,277
Less:
Unearned discount 1,630,630 982,384
Allowance for loan loss 3,294,190 3,172,375
------------ ------------
Net Loans $327,687,105 $296,193,518
============ ============
Paydowns and early calls of US Agency and Municipal bonds totaled $574,000.
Municipal bonds of $4,790,000, classified as available-for-sale, were sold prior
to being called. A $2,000,000 US Government Agency bond and municipal bonds
totaling $1,896,000 were purchased during the first half of 2000. These
activities and the addition of the $5,994,000 securitized loans, plus a $32,000
increase in the market value of available-for-sale securities were the major
changes in the investment portfolio.
Fluctuations in capital markets cause frequent changes in the market value
of investments. This particular decline does not indicate a material weakness in
the company. Market conditions are monitored daily and the bank is prepared to
take remedial actions if deemed appropriate.
51
<PAGE>
Securities held-to-maturity and available-for-sale, at June 30, 2000,
consist of the following:
<TABLE>
<CAPTION>
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------------ -------- ---------- ------------
<S> <C> <C> <C> <C>
Held-to-maturity
Mortgage backed securities $ 5,960,630 $ 0 $ 340,877 $ 5,619,753
------------ -------- ---------- ------------
Total held-to-maturity $ 5,960,630 $ 0 $ 340,877 $ 5,619,753
------------ -------- ---------- ------------
Available-for-sale
Agencies $ 81,294,133 $ 0 $5,975,273 $ 75,318,861
State and municipal 20,394,695 82,510 804,853 19,672,352
Mortgage backed securities 7,684,088 7,863 373,665 7,318,286
------------ -------- ---------- ------------
Sub total 109,372,916 90,374 7,153,791 102,309,499
Stock 5,571,126 111,270 80,568 5,601,828
------------ -------- ---------- ------------
Total available-for-sale $114,944,042 $201,644 $7,234,359 $107,911,326
============ ======== ========== ============
Grand total $120,904,672 $201,644 $7,575,236 $113,531,080
============ ======== ========== ============
</TABLE>
We list below the contractual maturities of securities held-to-maturity and
securities available-for-sale at June 30, 2000. Mortgage backed securities,
which are subject to monthly principal reductions, are listed in total. Equity
securities have no stated maturity dates and are listed in total.
<TABLE>
<CAPTION>
Book Market
Held-to-maturity Value Value
------------ ------------
<S> <C> <C>
Mortgage backed securities $ 5,960,630 $ 5,619,753
------------ ------------
Total held-to maturity $ 5,960,630 $ 5,619,753
============ ============
Available-for-sale
One year or less $ 200,087 $ 200,156
One through five years 2,950,000 2,846,047
Five through ten years 31,118,029 29,417,863
Over ten years 67,420,712 62,527,147
------------ ------------
Sub total 101,688,828 94,991,213
Mortgage backed securities 7,684,088 7,318,286
Equity securities 5,571,126 5,601,828
============ ============
Total available-for-sale $114,944,042 $107,911,327
============ ============
Grand total $120,904,672 $113,531,080
============ ============
</TABLE>
Continued branching and improvements to both plant and equipment caused
bank premises and equipment to increase $1,667,000, net of depreciation, in
2000. During the first quarter of 2000 the company opened a new branch at 1598
Main Street, Peckville, Pennsylvania. The property is leased from a non-related
entity.
52
<PAGE>
The company purchased a commercial property at 116-118 N. Blakely Street,
Dunmore, Pennsylvania, during the first quarter of 2000. The building is
currently occupied by the United States Postal Service and will continue to be
under a lease expiring January 31, 2005. The Post Office has an option to renew
that is scheduled to expire on January 31, 2010. The property was acquired for
future expansion.
Total assets of the company have grown $78,070,000 or 19.16% from
$407,371,000 to $485,441,000 for the twelve months ending June 30, 2000. The
increase is a result of a $53,267,000 rise in deposits, a $23,530,000 net
increase in borrowings and a net increase in Capital of $737,000.
The funds accumulated through the increases in liabilities were used for
net loan growth of $59,737,000, an increase in investments of $9,417,000 and
fixed asset expansion of $3,153,000.
Excluding the effect of the net change in the market value of
available-for-sale securities, Shareholders' Equity increased $1,157,000 for the
six months ending June 30, 2000 and by $2,731,000 for the twelve-month period
ending June 30, 2000. The increases are a result of the retention of profits and
the issuance of common stock under the Dividend Reinvestment plan.
Changes in Results of Operations
Net Income
Net Income for the six months ending June 30, 2000 and 1999 was $1,708,193
and $1,705,207 respectively. The significant differences are as follows:
<TABLE>
<CAPTION>
June 30, 2000 June 30, 1999 Difference
------------- ------------- ----------
<S> <C> <C> <C>
Net interest income $7,087,270 $6,453,705 $633,566 A
Provision for loan losses 243,000 320,000 77,000
Deposit service charges and other income 958,283 718,799 239,484 B
Gain on sale of assets 99,276 60,774 38,502
AFS loan appreciation 79,063 0 79,063
Salaries and employee benefits 2,690,746 2,311,747 (378,999) C
Occupancy and equipment 982,831 667,745 (315,086) D
Other expense 2,235,422 1,747,449 (487,973) E
Provision for income tax 363,700 481,130 117,430 F
</TABLE>
A) The tax equivalent, ("TE"), yield on Average Earning Assets increased
28 basis points, from 7.45% at June 30, 1999 to 7.73% at June 30,
2000. This action was caused by changes in National Prime, which had a
direct effect on loans subject to immediate repricing. Approximately
18% of the loan portfolio is subject to immediate repricing. At the
same time competition from non-traditional sources for deposit dollars
and competitive interest rates paid for preferred accounts and
accounts at the new branch locations, caused the cost of funds to
increase 61 basis points. The
53
<PAGE>
decline in TE net yield was offset by a rise in loan and investment
volume, and that enabled the company to increase Net Interest Income
by $633,566.
B) Service charges on deposit accounts increased $134,000 due to volume
increases and a new fee structure. Gross fees from the Trust
Department and merchant credit cards increased $84,000.
C) Merit pay increases and additions to staff caused Personnel expense to
increase 16.39%. At June 30, 2000, the company employed 171 full time
equivalent employees and at June 30, 1999, the company employed 161.
On average, the number of full time equivalent employees increased 12%
since June 30, 1999.
D) Occupancy and equipment expense increased due to the opening of the
new branches. Included in the increase is a $141,000 increase in
depreciation expense.
E) Included in Other Expense, at June 30, 2000, are charges of $150,000
related to organization of Fidelity D&D Bancorp, Inc. A rise in
merchant credit card volume caused related expenses to increase
$48,000. Advertising, postage, courier expense, supplies, ATM expenses
and communications, all impacted by the bank's new locations,
increased $134,000. Correspondent bank expense increased $13,000,
capital shares expense increased $18,000 and state banking charges and
the bank's FDIC assessment increased $20,000.
F) The difference between the expected and actual provision for income
taxes is primarily the result of tax-free interest income. Also, for
the six months ended June 30, 2000, the provision has been reduced by
approximately $61,000 of low income housing credits.
54
<PAGE>
FIDELITY D & D BANCORP, INC. and SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS
(in thousands of dollars)
<TABLE>
<CAPTION>
TAX EQUIVALENT YIELD
Average Earnings As of June 30, As of December 31, As of June 30,
2000 1999 1999
-------------- ------------------ --------------
<S> <C> <C> <C>
Assets
Loans & Leases $315,688 $281,347 $262,805
Investments 120,053 100,882 88,372
Fed Funds 0 2,682 5,365
Interest Bearing
Deposits 7,081 6,629 6,809
-------- -------- --------
Total $442,822 $391,540 $363,351
======== ======== ========
Average Interest
Bearing Liabilities
Other Interest-bearing Deposits $ 85,312 $ 69,131 $ 64,890
CD's 186,517 173,626 161,767
Other Borrowed Funds 75,622 56,943 46,055
Repurchase Agreements 33,300 31,639 31,699
-------- -------- --------
Total $380,751 $331,339 $304,411
======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
Six months ended Year ended Six months ended
June 30, 2000 December 31, 1999 June 30, 1999
---------------- ----------------- ----------------
<S> <C> <C> <C>
Interest Income
Loans & Leases $ 12,925 $22,294 $10,309
Investments 4,080 6,774 2,227
Fed Funds 0 128 128
Interest Bearing
Deposits 18 89 66
-------- -------- --------
Total $ 17,023 $29,285 $13,430
======== ======== ========
Interest Expense
Other Interest-bearing Deposits 1,366 $ 1,589 $ 702
CD's 5,322 9,269 4,288
Other Borrowed Funds 2,217 2,999 1,173
Repurchase Agreements 904 1,519 743
-------- -------- --------
Total $ 9,809 $15,376 $ 6,906
======== ======== ========
Net Interest Income $ 7,214 $13,909 $ 6,524
======== ======== ========
Yield on Average
Earning Assets 7.73% 7.48% 7.45%
</TABLE>
55
<PAGE>
<TABLE>
<CAPTION>
Six months ended Year ended Six months ended
June 30, 2000 December 31, 1999 June 30, 1999
---------------- ----------------- ----------------
<S> <C> <C> <C>
Cost of Average Interest-bearing 5.18% 4.64% 4.57%
Liabilities
-- -- --
Interest Rate Spread 2.55% 2.84% 2.88%
-- -- --
Net Yield on Average Earning 3.28% 3.55% 3.62%
Assets
</TABLE>
FIDELITY D & D BANCORP, INC. and SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS
Provision for Loan Losses
<TABLE>
<CAPTION>
June 30, 2000 Dec. 31, 1999 June 30, 1999
------------- ------------- -------------
<S> <C> <C> <C>
Net Loans 338,275,350 301,447,834 278,538,334
Allowance for loan losses 3,294,190 3,172,375 3,205,142
Percentage to net loans 0.97% 1.05% 1.15%
Provision for loan losses
Year ended 530,000
Six months ended 243,000 320,000
Three months ended 136,500 140,000
(Charge offs)/recoveries, net
Year ended (365,338)
Six months ended (121,185) (122,571)
Three months ended 11,696 (75,952)
</TABLE>
In addition to the Allowance for Loan Loss, there are other reserves not
recorded on the bank's records that are available to mitigate potential loan
loss. The guaranteed portion of SBA and Student Loans, which are either 90 days
or more delinquent or classified as non-accrual, was $182,000 at June 30, 2000.
The reserve set aside by the Commonwealth of Pennsylvania for loans registered
in the PENNCAP program was $215,000 at June 30, 2000.
The allowance for loan loss is established through a provision for loan
losses. The allowance represents an amount, which, in management's judgement
will be adequate to absorb possible losses on existing loans and leases.
Management's judgment in determining the adequacy of the allowance is based on
evaluations of the collectibility of the loans. These evaluations take into
consideration such factors as:
o changes in the nature and volume of the loan portfolio,
o current economic conditions that may affect the borrower's ability to
repay,
o overall portfolio quality, and
o review of specific impaired loans.
56
<PAGE>
Loans considered uncollectible are charged to the allowance. Recoveries on
charged-off loans are added to the allowance.
A loan is considered impaired when, based on current information, it is
probable that the company will be unable to collect the scheduled payments.
Factors considered in determining impairment include payment status and
collateral value. The significance of payment shortfalls is determined on a
case-by-case basis. Such factors include the length of the delinquency, the
underlying reasons and the borrowers prior payment record. Impairment is
measured on a case-by-case basis. The company does not group homogeneous loans
collectively for the purpose of determining impairment.
The company carefully monitors potential problem loans. Potential problem
loans are those where there is known information that leads the company to
believe repayment is in jeopardy. The loans are either non-accrual or past due
90 days or more. Non-accrual loans and loans that were past due 90 days or more,
at June 30, 2000, were $1,535,000 and $2,934,000, respectively. At June 30,
2000, the allowance for loan loss represents 214.65% of non-accrual loans and
112.27% of loans 90 days or more past due.
Interest rate risk management is an integral part of the Asset Liability
Management Process. Interest rate risk is defined as the degree to which
interest rate movements may affect net Interest Income and the Balance Sheet.
Fluctuations in rates can affect income through the balance of repricing assets
and source funds. If more assets reprice than liabilities, the Balance Sheet is
positively gapped. This position contributes favorably to net interest income in
a rising interest rate environment. Conversely, if the Balance Sheet has more
liabilities repricing than assets, the Balance Sheet is liability sensitive and
negatively gapped. In a declining rate environment, net interest income would
improve.
The company uses a simulation model to better understand the risks to the
company that may be brought about by changes in market interest rates. At June
30, 2000, the company simulated the effects on net interest income given an
immediate parallel shift in the yield curve of 200 basis points in either
direction. The results of the simulation were within established policy limits
for changes in net interest income.
Liquidity for a bank is the ability to fund customers' needs for borrowings
and withdrawals. Sources of liquidity are:
o Asset maturities, paydowns and sales,
o Growth of core deposits,
o Growth of Repurchase Agreements, and
o Increase of other borrowed funds.
57
<PAGE>
Management monitors asset and liability maturities to match anticipated
cash flow requirements. These cash flow requirements are reviewed with the use
of internally generated reports. The company has instituted certain procedures
and policy guidelines to manage the rate sensitive position. Those internal
rules enable the company to react to changes in market rates and protect net
interest income from significant fluctuations.
Liquidity (in thousands of dollars)
<TABLE>
<CAPTION>
June 30, 2000 Dec. 31, 1999 June 30, 1999
------------- ------------- -------------
<S> <C> <C> <C>
Assets due within one year $131,574 $117,952 $105,656
Liabilities due within one year $235,471 $210,598 $186,496
Percent of assets due within one year to liabilities
due within one year 55.88% 56.01% 56.65%
</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 company, or assets available-for-sale, both of which could be
used to meet liquidity needs.
The bank's capital amounts and ratios are as follows:
<TABLE>
<CAPTION>
To be Well Capitalized
For Capital Adequacy Under Prompt Corrective
Actual Purposes Action Provisions
---------------------- --------------------- -----------------------
Amount Ratio Amount Ratio Amount Ratio
----------- ----- ----------- ----- ------------ ------
<S> <C> <C> <C> <C> <C> <C>
As of June 30, 2000
Total Capital
(to Risk Weighted Assets) $41,199,497 12.64% $26,071,512 8.00% $32,589,391 10.00%
Tier 1 Capital
(to Risk Weighted Assets) $37,905,307 11.63% $13,035,756 4.00% $19,553,634 6.00%
Tier 1 Capital
(to Average Assets) $37,905,307 8.30% $18,275,427 4.00% $22,844,283 5.00%
</TABLE>
The ratios for the company are not materially different from those of the
bank.
58
<PAGE>
[This Page Left Intentionally Blank]
59
<PAGE>
BUSINESS
The Company
Fidelity D & D Bancorp, Inc. is a Pennsylvania corporation, incorporated in
1999. The company is registered as a bank holding company under the Bank Holding
Company Act of 1956. The company became an active bank holding company on June
30, 2000, when it acquired all of the outstanding shares of The Fidelity Deposit
and Discount Bank. The bank is a wholly-owned subsidiary of the company.
The company's primary activity consists of owning and operating the bank,
which provides customary retail and commercial banking services to individuals
and businesses. The bank provides practically all of the company's earnings as a
result of its banking services.
The Bank
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.
The bank currently has 10 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 Peckville,
o 1 in Pittston -- at Bruno's Supermarket,
o 1 in West Pittston, and
o 1 in Moosic.
The bank also has a limited service branch at the Clarks Summit State
Hospital, Clarks Summit, Pennsylvania. The Clarks Summit State Hospital facility
provides patients and employees of the hospital with check cashing and deposit
taking services, as well as offering for sale money orders and cashier's checks.
The bank has 2 stand-alone automatic tellers, or money access centers, in
Scranton, and a third in Moosic.
60
<PAGE>
The bank engages in a full service commercial and consumer banking
business, including the following services:
o Accepting time and demand deposits,
o Providing personal and business checking accounts at competitive
rates,
o Making secured and unsecured commercial and consumer loans, and
o Providing 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 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 County marketplace, the bank is one of at
least 14 commercial banks and two savings associations competing for customers.
Our Luzerne County offices in Pittston and West Pittston share many of the same
competitors we face in Lackawanna County. As of June 30, 1999, The Fidelity
Deposit and Discount Bank held 7.44% of FDIC-insured deposits in Lackawanna
County and 1.00% of FDIC-insured deposits in Luzerne County. Within the bank's
Luzerne County marketplace, the bank is one of at least 22 commercial banks and
one savings association competing for customers. The bank also competes with
other types of financial institutions, including credit unions, finance
companies, brokerage firms, insurance companies and retailers. Deposit
deregulation has intensified the competition for deposits among banks in recent
years.
The bank's acceptance of time demand and savings deposits includes passbook
accounts, statement savings accounts, NOW accounts, money market accounts,
regular savings accounts, certificates of deposit and club accounts. The bank
also offers overdraft protection to its checking customers. The bank has a trust
department offering a wide range of trust and fiduciary services, including
investment services.
The bank makes secured and unsecured commercial, consumer, installment and
construction loans. Residential mortgages and small business loans have always
been at the core of the bank's portfolio. Consumer loans include revolving
credit lines and commercial lending.
61
<PAGE>
The bank offers the following support services to make financial management
more efficient and convenient for its customers:
o on-line home and business banking,
o Internet banking for deposits,
o telephone banking,
o direct deposit, drive-in banking,
o discount brokerage services,
o federal tax depository,
o money access centers -- at every office except 139 Wyoming Avenue,
Scranton, Pennsylvania,
o MasterCard/Visa credit card services,
o night deposit services,
o notary public services,
o payroll deduction plan,
o safe deposit boxes,
o signature guarantees,
o travelers checks,
o treasury securities,
o U.S. savings bonds,
o individual retirement accounts, and
o utility and municipal payments.
At June 30, 2000, the bank had deposits totaling $332,995,639.
Major classifications of loans and leases are summarized as follows:
<TABLE>
<CAPTION>
June 30, December 31, December 31, December 31, December 31,
2000 1999 1998 1997 1996
------------ ------------ ------------ ------------ -------------
<S> <C> <C> <C> <C> <C>
Loan and Lease
Classifications:
Commercial and $139,097,491 $113,061,093 $ 85,425,708 $ 67,201,013 $ 47,832,107
Industrial
Agricultural 0 0 0 0 0
Real Estate Mortgages 109,365,985 111,242,490 99,955,640 87,931,770 79,936,722
Real Estate 3,594,052 5,335,753 3,810,975 2,568,997 3,590,175
Construction
Loans to Individuals - 71,046,462 64,998,362 47,549,512 38,673,662 31,555,744
Consumer
Loans to Municipal 0 0 0 0 0
Governments
Direct Financing 9,507,935 5,710,579 2,248,990 1,536,074 691,098
Leases
Less Unearned (1,630,630) (982,384) (553,033) (585,517) (1,371,625)
Income
Less Allowance for (3,294,190) (3,172,375) (3,007,713) (2,809,066) (2,589,976)
------------ ------------ ------------ ------------ -------------
Loan Losses
Net Loans $327,687,105 $296,193,518 $235,430,079 $194,516,933 $ 159,644,245
============ ============= ============ ============ =============
</TABLE>
62
<PAGE>
Employees
On June 30, 2000, the bank had approximately 184 employees, including 159
full-time employees and 23 part-time employees. Management considers relations
with our employees to be good.
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
2 116-118 Blakely Street Own For future expansion, currently
Dunmore, PA 18512 leased by United States Post
Office
3 Keystone Industrial Park Own Dunmore Branch
Dunmore, PA 18512
4 The Fidelity Financial Center Own Scranton Branch
338 North Washington Avenue Scranton, PA
18503
5 Green Ridge Office Lease Scranton Branch
Green Ridge Plaza
Scranton, PA 18509
6 Central City Office Lease Scranton Branch
139 Wyoming Avenue
Scranton, PA 18640
7 Abington Office Lease Clarks Summit Branch
1311 Morgan Highway
Clarks Summit, PA 18411
8 Clarks Summit State Hospital Office Lease Clarks Summit State Hospital
1451 Hillside Drive Limited Service Branch
Clarks Summit, PA 18411
9 Peckville Office Lease Peckville Branch
1598 Main Street
Peckville, PA 18452
10 Pittston Office Lease Pittston Branch--
403 Kennedy Boulevard Bruno's Supermarket
Pittston, PA 18640
11 West Pittston Office Lease West Pittston Branch
801 Wyoming Avenue
West Pittston, PA 18640
</TABLE>
63
<PAGE>
<TABLE>
<CAPTION>
Type of
Property Location Ownership Use
-------- -------- --------- ---
<S> <C> <C> <C>
Type of
12 Moosic Office Lease Moosic Branch
4010 Birney Avenue
Moosic, PA 18507
13 Marywood University Lease Free-standing
Nazareth Hall Money Access Center
Scranton, PA 18509
14 Montage Mountain Sky Lodge Lease Free-standing
Scranton, PA 18505 Money Access Center
15 Lackawanna County Stadium Lease Free-standing
Moosic, PA 18507 Money Access Center
</TABLE>
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.
The bank recently purchased a right-of-way easement located at the corner
of Keystone Industrial Park Road and O'Neill Highway, adjacent to the bank's
Keystone Industrial Park branch, from the Pennsylvania Department of
Transportation. The bank also recently constructed a new building to better
serve the customers of this branch. The property will provide additional
parking.
SUPERVISION AND REGULATION
Securities Regulation
The company is under the jurisdiction of the Securities and Exchange
Commission and of state securities commission for matters relating to the
offering and sale of its securities. In addition, the company is subject to the
Securities and Exchange Commission's rules and regulations relating to periodic
reporting, proxy solicitation, and insider trading.
Bank and Bank Holding Company Regulation
Fidelity D & D and the bank are extensively regulated under federal and
state laws applicable to bank holding companies and banks. Generally, these laws
are intended to protect depositors, not shareholders. Following is a summary of
certain provisions of laws affecting the regulation of bank holding companies
and banks.
64
<PAGE>
Regulation of Bank Holding Companies
The company is subject to the provisions of the Bank Holding Company Act of
1956 and to supervision by the Federal Reserve Board.
o Supervision by the Federal Reserve Board. As a bank holding company,
our activities are 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 company stand
ready to provide adequate capital funds to its bank subsidiary 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 tie-in arrangements in connection with any extension
of credit or provision of any property or services. These anti-tie-in
provisions state generally that a bank may not:
o Extend credit,
o Lease or sell property, or
65
<PAGE>
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.
o Restrictions on Extensions of Credit by Banks to their Holding
Companies. Subsidiary banks of a bank holding company are also subject
to 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 some 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 Some types of preferred stock,
o A limited amount of subordinated debt,
o Some 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. The law
66
<PAGE>
contains a presumption that the power to vote 10% or more of voting
stock confers control of the bank or bank holding company. The Federal
Reserve Board is responsible for reviewing changes in control of bank
holding companies. In doing so, the Federal Reserve Board reviews the
financial position, experience and integrity of the acquiring person
and the effect on the financial condition of the bank holding company,
relevant markets and federal deposit insurance funds.
Supervision by the Pennsylvania Department of Banking. As a Pennsylvania
bank holding company, the company is also subject to regulation and examination
by the Pennsylvania Department of Banking. For example, the company must obtain
the Department of Banking's approval to acquire any additional banks located in
Pennsylvania.
Permitted Activities for Financial Holding Companies. The
Gramm-Leach-Bliley Act, signed into law on November 12, 1999, amends the Bank
Holding Company Act of 1956 to create a new category of holding company - the
financial holding company. To be designated as a financial holding company, a
bank holding company must file an application with the Federal Reserve Board.
The holding company must be well capitalized and well managed, as determined by
Federal Reserve Board regulations. Once a bank holding company becomes a
financial holding company, the holding company or its affiliates may engage in
any financial activities that are financial in nature or incidental to financial
activities. Furthermore, the Federal Reserve may approve a proposed activity if
it is complementary to financial activities and does not threaten the safety and
soundness of banking. The act provides an initial list of activities that
constitute activities that are financial in nature, including:
o Lending and deposit activities,
o Insurance activities, including underwriting, agency and brokerage,
o Providing financial investment advisory services,
o Underwriting in, and acting as a broker or dealer in, securities,
o Merchant banking, and
o Insurance company portfolio investment.
The primary tool granted the Federal Reserve under the Act is the authority
to require that the financial holding company remain well capitalized and well
managed.
Because the new law creates opportunities for banks, other depository
institutions, insurance companies, and securities firms to enter into business
combinations that permit a single financial services organization to offer
customers a complete array of financial products, we anticipate that competition
in the marketplace among banks and other financial institutions will increase
but cannot predict the full impact of this law.
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
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<PAGE>
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 laws of that other state
permits the acquisition, subject to 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.
Finally, 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.
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. 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 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 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.
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<PAGE>
Generally, the bank must obtain prior approval from the Banking Department
for the acquisition of shares of stock. Pursuant to Pennsylvania law, the bank
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.
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
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/Prompt Corrective Action Rules. 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, and
o Critically undercapitalized.
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<PAGE>
To be adequately capitalized, the required minimum ratio of total capital
to risk-weighted assets, including some off-balance sheet activities, such as
standby letters of credit, is 8%. To be well capitalized, this risk-based ratio
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 Some forms of preferred stock,
o A limited amount of subordinated debt,
o Some 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
December 31, 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 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.
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<PAGE>
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
greater, are assigned to the well-capitalized group. As December 31, 1999, the
bank was well capitalized for purposes of calculating insurance assessments.
The Bank Insurance Fund is presently fully funded at more than the minimum
amount required by law. Accordingly, the 1999 BIF assessment rates range from
zero for those institutions with the least risk, to $0.27 for every $100 of
insured deposits for institutions deemed to have the highest risk. The bank is
in the category of institutions that presently pay nothing for deposit
insurance. The FDIC adjusts the rates every six months.
While the bank presently pays no premiums for deposit insurance, it is
subject to assessments to pay the interest on bonds issued by the Financing
Corporation, which is known as FICO. FICO was created by Congress to issue bonds
to finance the resolution of failed thrift institutions. Prior to 1997, only
thrift institutions were subject to assessments to raise funds to pay the FICO
bonds.
On September 30, 1996, as part of the Omnibus Budget Act, Congress enacted
the Deposit Insurance Funds Act of 1996, which recapitalized the Savings
Association Insurance Fund and provided that commercial banks would be subject
to 1/5 of the assessment to which savings and loan associations are subject for
FICO bond payments through 1999. Beginning in 2000, commercial banks and savings
and loan associations will be subject to the same assessment for FICO bonds.
Community Reinvestment Act Compliance. Under the Community Reinvestment Act
(CRA) 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.
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This evaluation includes a descriptive rating of
o Outstanding
o Satisfactory
o Needs to improve, or
o Substantial noncompliance.
As of June 30, 2000, 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.
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. The law contains a presumption
that the power to vote 10% or more of the common stock of a bank confers control
of the bank. The FDIC may disapprove any such acquisition of control.
Suspicious Activities Reports. Under the Bank Secrecy Act, banks must
report to the Internal Revenue Service currency transactions of more than
$10,000 or multiple transactions in any one day that aggregate in excess of
$10,000.
Regulatory Restrictions on Dividends
Cash available for dividend distribution to shareholders of the company
must initially come from dividends which the bank pays the company. As a result,
the legal restrictions on the bank's dividend payments also affect the ability
of the company to pay dividends. The payment of dividends by the bank is subject
to the restrictions of 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; surplus must not
be reduced. In addition, prior to declaring the dividend, the bank must have
made any required transfers of net earnings to surplus, in order to maintain
surplus at least equal to the capital. Directors are specifically liable for
unlawful dividends.
The Federal Reserve Board and the FDIC have formal and informal policies
which provide that insured banks and bank holding companies should generally pay
dividends only out of current operating earnings, with some exceptions. The
Prompt Corrective Action Rules, described above, further limit the ability of
banks to pay dividends, because banks which are not classified as well
capitalized or adequately capitalized may not pay dividends.
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In addition, under the Pennsylvania Business Corporation Law, the holding
company may not pay a dividend if afterwards:
o The company would be unable to pay its debts as they become due, or
o The company's total assets would be less than its total liabilities
plus an amount needed to satisfy any preferential rights of
shareholders.
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 company and the bank.
Legal Proceedings
Neither the company nor the bank is a party to, nor is any of their
property the subject of, any material pending legal proceedings incidental to
the business of the company other than those arising in the ordinary course of
business. In the opinion of management, no such proceeding will have a material
adverse effect on the financial position or results of the company or the bank.
MANAGEMENT
The board of directors of Fidelity D & D Bancorp, Inc. ("the company")
oversees all business, property and affairs of the company. The board of
directors presently consists of 10 members, approximately one-third of whom
shareholders elect annually to serve for a term of 3 years. The same directors
who serve on the company's board of directors also serve on the bank's board of
directors.
The following table provides selected information about the directors of
the company and the bank:
<TABLE>
<CAPTION>
Name and Director Class of Age as of
Position with the Company Since Director June 30, 2000
------------------------- ----- -------- -------------
<S> <C> <C> <C>
Samuel C. Cali 1999 B 83
Chairman of the Board
Michael F. Marranca 1999 C 68
President and Chief Executive Officer, Director
Herbert M. McDonald 1999 B 87
Director
John F. Glinsky, Jr. 1999 A 69
Secretary, Director
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
Name and Director Class of Age as of
Position with the Company Since Director June 30, 2000
------------------------- ----- -------- -------------
<S> <C> <C> <C>
Patrick A. Calvey, Jr. 1999 C 72
Director
Patrick J. Dempsey 1999 C 66
Director
Paul A. Barrett 1999 A 67
Director
John T. Cognetti 1999 A 50
Director
Michael J. McDonald 1999 A 45
Director
David L. Tressler, Sr. 1999 B 64
Director
</TABLE>
Following is a description of each director's background and experience:
Class A Directors (to serve until 2003)
Paul A. Barrett, Esquire
Mr. Barrett, age 67, has been a director of the company since 1999. Mr.
Barrett has served as a member of the bank's board of directors since 1988. Mr.
Barrett is an attorney with the firm of O'Malley & Harris, P.C., in Scranton,
Pennsylvania.
John T. Cognetti
Mr. Cognetti, age 50, has been a director of the company since 1999. Mr.
Cognetti has served as a member of the bank's board of directors since 1988. Mr.
Cognetti is the President of The Hinerfeld Realty Co. in Scranton, Pennsylvania,
and the former Chief Executive Officer of Cognetti Enterprises, Inc., a real
estate firm, now dissolved.
John F. Glinsky, Jr.
Mr. Glinsky, age 69, has been the secretary and a director of the company
since 1999. Mr. Glinsky has served as a member of the bank's board of directors
since 1972. He has served as Secretary of the bank's board of directors since
August 1981. Mr. Glinsky is the proprietor and Funeral Director of John F.
Glinsky Funeral Home in Thorpe, Pennsylvania.
Michael J. McDonald, Esquire
Mr. McDonald, age 45, has been a director of the company since 1999. Mr.
McDonald has served as a member of the bank's board of directors since 1994. He
is an attorney with the firm of Foley, McLane, Foley, McDonald and MacGregor in
Scranton, Pennsylvania.
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<PAGE>
Class B Directors (to serve until 2002)
Samuel C. Cali
Mr. Cali, age 83, has served as the company's Chairman of the board of
directors since 1999. Mr. Cali is the retired proprietor of S.C. Cali Agency, an
insurance agency located in Dunmore, Pennsylvania. He has been a director of the
bank since 1958 and has served as Chairman of the bank's board of directors
since June 1986.
Herbert M. McDonald
Dr. McDonald, age 87, has been a director of the company since 1999. He has
been a member of the bank's board of directors since 1976 and also serves as a
Vice President of the bank's board of directors. Dr. McDonald is a retired
surgeon.
David L. Tressler, Sr.
Mr. Tressler, age 64, has been a director of the company since 1999. Mr.
Tressler has been a member of the bank's board of directors since 1998. He is
the Executive Director and Chief Executive Officer of Northeastern Pennsylvania
Physicians Organization in Clarks Summit, Pennsylvania, and a former Executive
Director for the Center For Public Initiatives in Scranton, Pennsylvania.
Class C Directors (to serve until 2001)
Patrick A. Calvey, Jr.
Mr. Calvey, age 72, has been a director of the company since 1999. Mr.
Calvey has served as a member of the bank's board of directors since 1980. He is
the retired President of Calvey Enterprises, Inc., a real estate holding company
in Scranton, Pennsylvania and the Secretary and Treasurer of American Janitor
and Paper Supply Co., Inc., a janitorial supply distributor also located in
Scranton, Pennsylvania.
Patrick J. Dempsey
Mr. Dempsey, age 66, has been a director of the company since 1999. Mr.
Dempsey has also served as a member of the bank's board of directors since 1985.
He is the President and General Manager of Dempsey Uniform & Supply, Inc. and
the President and General Manager of Gonzaga Realty, Inc., both located in
Dunmore, Pennsylvania.
Michael F. Marranca
Mr. Marranca, age 68, has been a director of the company and the company's
President and Chief Executive Officer since 1999. He has been a member of the
bank's board of directors since
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1976. He has been employed by the bank since 1967 and has served as the bank's
President and Chief Executive Officer since 1988.
Compensation of Directors
Directors receive no remuneration for attendance at meetings of the board
of directors of the company. However, the bank pays each non-employee member of
the bank's board of directors a regular monthly fee. During 1999 and the first
half of 2000, the bank paid a monthly fee of $2,000 to its non-employee
directors for participating in board and committee meetings. The bank does not
compensate employee directors for attendance at board and committee meetings.
The bank also awarded every non-employee director a bonus of $2,500 in 1999.
Directors are entitled to have up to 4 paid absences per year from scheduled
board or committee meetings. In the aggregate, the bank paid the board of
directors $238,000 for all services rendered in 1999.
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<PAGE>
Principal Officers of the Company
The following table provides information about the current executive
officers of the holding company. All of these officers also serve as officers of
the bank and are employees of the bank. Further information about their business
experience may be found below under "Principal Officers of the Bank."
<TABLE>
<CAPTION>
Office and Position Age as of
Name with the Company Held Since June 30, 2000
---- ------------------- ---------- -------------
<S> <C> <C> <C>
Michael F. Marranca President and Chief Executive Officer 1999 68
Kevin R. Messett Senior Vice President 1999 45
Robert P. Farrell Treasurer 1999 47
</TABLE>
Principal Officers of the Bank
The following table shows selected information about the principal officers
of the bank. The board of directors elects the officers for one-year terms, and
the board has the discretionary authority to remove these individuals from
office. All of the officers have been principally employed by the bank for more
than 5 years.
<TABLE>
<CAPTION>
Office and Bank Age as of
Position Held Employee June 30,
Name with the Bank Since Since 2000
---- ------------- ----- ----- ----
<S> <C> <C> <C> <C>
Michael F. Marranca President, Chief 1976 1967 68
Executive Officer
Kevin R. Messett Executive Vice 1999 1991 45
President (1)
Robert P. Farrell Cashier/ 1989 1987 47
Comptroller
John J. Keeler Vice President 1990 1990 49
Joel W. Gillick Vice President 2000 1996 32
</TABLE>
(1) Mr. Messett served as Senior Vice President of the bank from 1991 through
1999.
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<PAGE>
Executive Compensation
The following table provides the annual compensation for services in all
capacities to the bank for the fiscal years ended December 31, 1999, 1998, and
1997, for those persons who were at December 31, 1999,
o The Chief Executive Officer, and
o The four other most highly compensated executive officers of the bank
to the extent such person's total annual salary and bonus exceeded
$100,000.
Summary Compensation Table
<TABLE>
<CAPTION>
Annual Compensation Long-Term Compensation
------------------- ----------------------
Awards Payouts
------ -------
(a) (b) (c) (d) (e) (f) (g) (h) (i)
Securities
Other Restricted Underlying All other
Annual Stock Options/ LTIP Compen-
Name and Principal Salary Bonus Compen- Award(s) SARs Payouts sation
Position with Bank Year ($) ($) sation ($) (#) ($) ($)
------------------ ---- ------- ------ ------ ---------- ---------- ------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Michael F. 1999 181,000 25,000 0 0 0 0 29,394(1)
Marranca 1998 171,560 12,000 0 0 0 0 31,326(1)
President and Chief 1997 160,410 18,000 0 0 0 0 28,473(1)
Executive Officer
Kevin R. Messett, 1999 92,016 19,000 0 0 0 0 15,744(2)
Executive Vice 1998 85,200 4,000 0 0 0 0 15,025(2)
President 1997 80,000 7,500 0 0 0 0 12,629(2)
Joseph E. Quinnan 1999 94,068 15,000 0 0 0 0 14,383(3)
Senior Vice 1998 87,100 8,000 0 0 0 0 12,247(3)
President and Chief 1997 81,900 7,500 0 0 0 0 12,997(3)
Operating
Officer(4)
</TABLE>
(1) Figure includes the bank's contributions to the 401(k) and deferred profit
sharing plan of $17,113, $18,934, and $17,278 on behalf of Mr. Marranca for
1999, 1998, and 1997, respectively. It also includes membership dues of
$8,577, $9,237 and $7,710 paid on behalf of Mr. Marranca in 1999, 1998 and
1997, respectively.
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 $3,704, $3,155 and $3,485 in 1999, 1998, and
1997, respectively.
(2) Figure includes the bank's contributions to the 401(k) and deferred profit
sharing plan of $10,854, $9,778 and $8,560 on behalf of Mr. Messett for
1999, 1998 and 1997, respectively. It also includes membership dues of
$2,310, $2,620 and $1,093 in 1999, 1998 and 1997 respectively.
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<PAGE>
In addition, Mr. Messett receives some or all of the following benefits:
medical, dental, life and disability insurance, and other customary
benefits. Figure includes payments made by bank on behalf of Mr. Messett,
of $2,580, $2,627 and $2,976 in 1999, 1998 and 1997, respectively.
(3) Figure includes the bank's contributions to the 401(k) and deferred profit
sharing plan of $10,112, $8,321 and $9,303 on behalf of Mr. Quinnan for
1999, 1998 and 1997, respectively. It also includes membership dues of
$1,080 and $115 in 1999 and 1998, respectively. No membership dues were
paid for Mr. Quinnan in 1997.
In addition, Mr. Quinnan receives some or all of the following benefits:
medical, dental, life and disability insurance, and other customary
benefits. Figure includes payments made by bank on behalf of Mr. Quinnan,
of $3,191, $3,811 and $3,694 in 1999, 1998 and 1997, respectively.
(4) Mr. Quinnan retired on May 1, 2000, and is no longer employed by the bank.
Stock Option Plans
The company assumed the bank's obligations under the 1998 Independent
Directors Plan and1998 Stock Incentive Plan. Under the Independent Directors
Plan, the company has reserved 50,000 shares for issuance, and under the Stock
Incentive Plan, the company has reserved 50,000 shares for issuance, as adjusted
for the two-for-one stock exchange on June 30, 2000. The plans will terminate
upon the earlier of the board's adoption of a resolution terminating the plan or
10 years from the date the plan was approved and adopted by shareholders of the
bank, on May 5, 2008.
1998 Independent Directors Plan
Under the Independent Directors Plan, directors who are not employees of
either the company or its affiliates, "outside directors," are eligible to
receive awards under the plan. For the term of the Independent Directors Plan,
each outside director shall annually receive a stock option to purchase 500
shares of the bank's common stock on the first business day of January. However,
prior to the grant, the board may deny the awards scheduled for the upcoming
January by a majority vote. In this event, the directors will not receive awards
under the plan for the year in question. However, the board's decision to forgo
the current year's awards will not affect awards scheduled for any future years.
The purchase price of the stock subject to a stock option is the fair
market value at the time of grant. No stock option is exercisable after 10 years
from the date of grant. The company may grant stock options with varying vesting
periods, but must provide for a minimum vesting period of 6 months from the date
of grant. The plan also contains provisions that would permit the options
granted to be exercised upon the occurrence of a change of control of the
company. The entire board of directors, or a committee comprised of at least
three directors, administers the plan. In the event a participant ceases to be a
director of the company, the remaining portion of a participant's unexercised
stock options shall terminate one year after the date of termination as a
director, subject to the 10-year limitation on exercisability.
At June 30, 2000, options to purchase 9,000 shares of the company's common
stock, as
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<PAGE>
adjusted for the two-for-one stock exchange, were outstanding under the
Independent Directors Plan.
1998 Stock Incentive Plan
Under the 1998 Stock Incentive Plan, key officers and other management
employees of the company or bank are eligible to receive an award, as determined
by the committee administering the plan, which consists of three or more
non-employee directors. Awards made under the 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, known
as "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, known as "non-qualified options."
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. 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.
No stock option is exercisable after 10 years from the date of grant. The
company may grant stock options with varying vesting periods, but must provide
for a minimum vesting period of six months from the date of grant. The plan also
contains provisions that would permit the options to be exercised upon the
occurrence of a change in control of the company.
If a recipient of a non-qualified option ceases to be eligible under the
plan before the option lapses or 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 company or 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 three 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.
At June 30, 2000, options to purchase 2,900 shares of the company's common
stock, as adjusted for the two-for-one stock exchange, were outstanding under
the Stock Incentive Plan.
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Stock Option Grants in Fiscal Year 1999
The following table sets forth certain information for any stock options
which the bank granted the executives named in the Summary Compensation Table
during 1999:
Option/SAR Grants in Fiscal Year 1999
Individual Grants
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Potential Realizable
Value at Assumed
Annual Rates of Stock
Price Appreciation for
Individual Grants Option Term(3)
----------------- ----------------------
Number of
Securities Exercise
Underlying % of Total Options/ or Base
Name and Principal Options/ SARs SARs Granted to Price Expiration
Position with Bank Granted (#) Employees in Fiscal Year ($/Sh) Date 5%($) 10%($)
------------------ ----------- ------------------------ ------ ---- ----- ------
(a) (b) (c) (d) (e) (f) (g)
<S> <C> <C> <C> <C> <C> <C>
Michael F. Marranca,
President and Chief
Executive Officer 700 (1) 23.33% $31.00(2) 01/04/99 13,647 34,584
Kevin R. Messett,
Executive Vice President
500 (1) 16.66% $31.00(2) 01/04/99 9,748 24,703
Joseph E. Quinnan,
Senior Vice President
and Chief Operating
Officer(4) 500(1) 16.66% $31.00(2) 01/04/99 9,748 24,703
</TABLE>
(1) Options were granted on January 4, 1999, under the 1998 Stock
Incentive Plan, and became exercisable after July 4, 1999. The
securities have been adjusted for the two-for-one stock exchange on
June 30, 2000.
(2) The exercise or base price per share has been adjusted to reflect the
two-for-one stock exchange on June 30, 2000.
(3) Amounts represent hypothetical gains that could be achieved for the
respective options if exercised at the end the option term. These
gains are based on assumed rates of stock price appreciation of 5% and
10% compounded annually from the date the respective options were
granted to their expiration date. The gains shown are net of the
option exercise price, but do not include deductions for taxes or
other expenses associated with the exercise of the option or the sale
of the underlying shares. The actual gain, if any, on the exercise of
stock options will depend on the future performance of the common
stock, the option holder's continued employment throughout the option
period, and the date on which the options are exercised.
(4) Mr. Quinnan retired on May 1, 2000, and is no longer employed by the
bank.
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Exercises of Stock Options in Fiscal Year 1999 and Fiscal Year-End Option Values
The following table sets forth certain information relating to stock
options held by the executives named in the Summary Compensation Table. As noted
below, these executives did not exercise any of their stock options in 1999.
Aggregated Option/SAR Exercises in Last Fiscal Year
and Fiscal Year-end Option/SAR(1) Values
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Number of Securities
Underlying Unexercised Value of Unexercised
Shares Options/SARs in-the-Money
Name and Principal Acquired Value at FY-End (#) Options/SARs at FY-End ($)
Position with Bank on Exercise (#) Realized ($) Exercisable/Unexercisable Exercisable/Unexercisable
------------------ --------------- ------------ ------------------------- -------------------------
(a) (b) (c) (d) (e)
<S> <C> <C> <C> <C>
Michael F. Marranca,
President and Chief
Executive Officer 0 0 700 / 0(2) 2,887.50 / 0(3)
Kevin R. Messett,
Executive Vice 0 0 500 / 0(2) 2,062.50 / 0(3)
President
Joseph E. Quinnan,
Senior Vice President 0 0 500 / 0(2) 2,062.50 / 0(3)
and Chief Operating
Officer(4)
</TABLE>
(1) A "SAR" is a stock appreciation right. The bank has not granted any
SAR's.
(2) Options were granted on January 4, 1999 under the 1998 Stock Incentive
Plan, and became exercisable after July 4, 1999. The options have been
adjusted to reflect the two-for-one stock exchange that occurred on
June 30, 2000.
(3) The stock-exchange adjusted exercise price for the options is $31.00.
The market value of the bank's stock, adjusted for the two-for-one
stock exchange, was $35.125 per share as of December 31, 1999.
(4) Mr. Quinnan retired on May 1, 2000, and is no longer employed by the
bank.
401(k) Profit Sharing Plan
In 1995, the bank established a 401(k) profit sharing plan. The plan is a
defined contribution plan covering substantially all employees of the bank.
Participants of the plan may elect to have a portion of their annual
compensation reduced and paid to the plan on a pretax basis, pursuant to the
provisions found under Section 401(k) of the Internal Revenue Code. The bank
also contributes to the plan on behalf of each participant. The bank
contribution for each participant is based on the amount the participant's
annual compensation was reduced, subject to
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certain limitations. Additional amounts may be contributed at the option of the
bank's board of directors. In 1999, the bank paid $71,173 in 401(k) matching
contributions to participants and $135,000, including expenses, as a profit
sharing contribution.
Compensation Committee Report on Executive Compensation
The board of directors of Fidelity D & D Bancorp, Inc. governs the company.
In fulfilling its fiduciary duties, the board of directors acts in the best
interests of the company's shareholders, customers, and the communities served
by the company and the bank. To accomplish the strategic goals and objectives of
the company, the board of directors engages competent persons who undertake to
accomplish these objectives with integrity and in a cost-effective manner. The
compensation of these individuals is part of the board of directors' fulfillment
of its duties to accomplish the bank's strategic mission.
The fundamental philosophy of the company's and the bank's compensation
program is to offer competitive compensation opportunities for all employees,
based on the individual's contribution and personal performance. The Human
Resources Committee, comprised of all the directors, administers the company's
and the bank's compensation program. The committee seeks to establish a fair
compensation policy governing executive officers' base salaries and bonuses and
to attract and motivate competent, dedicated, and ambitious managers, whose
efforts will enhance the products and services of the company and the bank,
thereby improving profitability, increasing dividends to our shareholders and,
subsequently, raising the market value of our shares.
The committee reviews and approves annually the top executives'
compensation, including the compensation for the chief executive officer and all
vice presidents. As a guideline for determining base salaries, the committee
uses information composed of a Pennsylvania bank peer group in the R.L. Webber
Salary Survey, as well as data collected by the bank from prospectus and annual
reports of Pennsylvania-based banks. The committee used a separate peer group of
banks for compensation review purposes from the peer group it used for the
performance chart because the R.L. Webber Salary Survey permits the committee to
base its review on data collected from a much broader data base than simply the
nine institutions in the peer group reflected in the performance graph.
Prior to the reorganization of the bank into a holding company structure,
the board of directors of the bank constituted the Human resources Committee and
operated under the same philosophy as the board of directors of the company in
determining executive compensation.
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Chief Executive Officer Compensation
The committee has determined that the Chief Executive Officer's 1999 total
compensation of approximately $235,394, including salary, bonuses, benefits and
401(k) matches, is appropriate in light of the bank's performance. This
determination included a review of the bank's return on assets, return on
equity, net income, and asset growth. However, no direct correlation exists
between the Chief Executive Officer's compensation, the Chief Executive
Officer's increase in compensation, and any specific performance criteria, nor
does the committee give any weight to specific individual performance criteria.
After reviewing all information, including the above, the committee subjectively
determines the Chief Executive Officer's compensation and any changes relating
to it.
Executive Officers
The committee establishes the compensation of the bank's executive officers
including increases in compensation based on its subjective analysis of the
individual's contribution to the bank's strategic goals and objectives. In
determining whether strategic goals have been achieved, the committee considers,
among numerous factors, the bank's performance as measured by earnings,
revenues, return on assets, return on equity, market share, total assets, and
non-performing loans. Although the performance and increases in compensation
were measured in light of these factors, no direct correlation exists between
any specific criterion and an employee's compensation, nor does the committee
attribute any specific weight to any criteria in the analysis. After review of
all information, including the above, the committee makes a subjective
determination.
In addition to base salary, executive officers of the bank may participate
in the bank's 401(k) plan, which is generally available to all employees. The
committee also awards annual bonuses at the end of the year, at its discretion.
In addition to base salary, executive officers of the bank are eligible to
receive stock option awards under the bank's 1998 Stock Incentive Plan. On
January 4, 1999, the bank awarded its officers options to purchase 3,000 shares
of common stock under the plan at an exercise price of $31.00, and on January 3,
2000, the bank awarded key officers options to purchase 3,400 shares of common
stock under the plan at an exercise price of $35.13, as adjusted for the
two-for-one stock exchange upon the bank's reorganization into a holding company
structure.
In addition, under the 1998 Independent Directors Stock Option Plan,
non-employee directors are eligible to receive stock option awards. On January
4, 1999, the bank awarded its non-employee directors options to purchase 4,500
shares of common stock under the plan at an exercise price of $31.00, and on
January 3, 2000, the bank awarded its non-employee directors options to purchase
4,500 shares of common stock under the plan at an exercise price of $35.13, as
adjusted for the two-for-one stock exchange upon the bank's reorganization into
a holding company structure. The purpose of these stock options plans is to
advance the development, growth and financial condition of the bank and to align
the interests of shareholders with that of management. See "Stock Option Plans"
above for more information about these plans.
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General labor market conditions, the specific responsibilities of the
individual, and the individual's contributions to the bank's success influence
total compensation opportunities available to the employees of the bank.
Individuals are reviewed annually on a calendar year basis. The bank strives to
offer compensation that is competitive with that offered by employers of
comparable size in our industry. Through these compensation policies, the bank
believes it can meet its strategic goals and objectives for its constituencies
and provide compensation that is fair and meaningful to its employees.
The Human Resources Committee
Paul A. Barrett John T. Cognetti Herbert M. McDonald
Samuel C. Cali Patrick J. Dempsey Michael J. McDonald
Patrick A. Calvey, Jr. John F. Glinsky, Jr. Michael F. Marranca
David L. Tressler, Sr.
Compensation Committee Interlocks and Insider Participation
Mr. Michael F. Marranca, President and Chief Executive Officer of the bank,
is a member of the board of directors of the bank and of the Human Resources
Committee that performs the functions of a compensation committee. Mr. Marranca
neither participates in conducting his own review nor takes part in determining
his own compensation.
Shareholder Performance Graph
We present below a graph comparing the yearly dollar change in the
cumulative total shareholder return on the bank's common stock against the
cumulative total return of the S&P Stock Index and the Peer Group Index for the
period of 5 fiscal years commencing January 1, 1995, and ending December 31,
1999. The graph shows the cumulative investment return to shareholders, based on
the assumption that a $100 investment was made on December 31, 1994, in each of
the bank's capital stock, the S&P 500 Stock Index and the Peer Group Index. The
cumulative total returns on such investments would be $193.19, $350.26 and
$203.41, respectively. All of these cumulative total returns are computed
assuming the reinvestment of dividends at the frequency that dividends were paid
during the applicable years. The shareholder return shown on the graph below is
not necessarily indicative of future performance.(1)
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Comparison of Five-Year Total Cumulative Return
[GRAPHIC]
[The following is a description of the Performance Graph in tabular format:]
<TABLE>
<CAPTION>
1995 1996 1997 1998 1999
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Peer Group Index $117.53 $143.16 $197.12 $218.95 $203.41
Fidelity Deposit and
Discount Bank 104.58 108.78 129.85 166.73 193.19
S & P 500 Total
Return Index 137.45 168.92 225.21 289.43 350.26
</TABLE>
(1) The peer group for which the above information appears includes the
following companies: ACNB Corporation, CNB Financial Corporation,
Community Bancorp, Inc., Drovers Bancshares Corporation, First West
Chester Corporation, Franklin Financial Services Corp., Juniata Valley
Financial Corp., Penseco Financial Services Corp., and Pioneer
American Holding Co. These companies were selected based on four
criteria: total assets between $80 million and $700 million; market
capitalization greater than $20 million; headquarters in Pennsylvania;
and, not quoted on NASDAQ.
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<PAGE>
Family Relationships and Transactions with Management
Family Relationships
Family relationships exist within the company between directors. Dr.
Herbert M. McDonald, a director of the company and the bank and Vice President
of the board of directors of the bank, is the uncle of Michael J. McDonald, a
director of the company and the bank.
Indebtedness of Management
Except as described below, the company and the bank have not entered into
and do not intend to enter into any material transactions with any director or
executive officer of the company 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 1999 and the first two quarters of 2000, and the company expects
to continue these and similar banking transactions in the future.
Total loans outstanding from the bank at December 31, 1999, to the
company's and 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 $4,125,035, or approximately 12.84% of the total equity
capital of the bank. As of June 30, 2000, the amount of such total loans
outstanding was $8,616,609.49, or approximately 25.86% of the company's total
equity capital. 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 1999 to the
above described group was approximately $5,270,351.23.
Other Transactions
The bank paid a total of $250 to Samuel Cali and Patrick Calvey, Jr. for
appraisals they performed for the bank in 1999. The bank paid a total of $3,406
to the law firm of O'Malley & Harris, P.C. for legal services performed on
behalf of the bank during the first half of 2000. Further, for the calendar year
ending June 30, 2000, the bank paid $10,112 to American Janitor and Paper Supply
Co., Inc. for janitorial supplies and $6,758.49 to Dempsey Uniform & Supply,
Inc. for linens for the bank. All of these products and services were sold or
provided according to the customary price or fee schedule of the seller or
service provider.
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<PAGE>
BENEFICIAL OWNERSHIP OF SHARES
As of June 30, 2000, we know of no shareholder who owns more than 5% of the
company's outstanding common stock, either on the company's records or
indirectly as a beneficial owner.
The following table provides information, as of June 30, 2000, with respect
to the following beneficial owners of the company's common stock:
o Each director of the company, and
o All 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
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
June 30, 2000, will be considered to own the shares. As of June 30, 2000, the
number of common stock issued and outstanding was approximately 1,804,011. The
calculation of percentages is based upon this number, plus 14,400 shares of
common stock subject to exercisable options.
<TABLE>
<CAPTION>
Amount and Nature of Percentage of Company's
Name of Individual and Beneficial Ownership of Common Stock
Position with Company Company's Common Stock (1) Beneficially Owned
---------------------- -------------------------- -----------------------
<S> <C> <C>
Paul A. Barrett 36,921 (2) 2.03%
Director
Samuel C. Cali 54,112 (3) 2.98%
Chairman of the Board
Patrick A. Calvey, Jr 5,504 (4) *
Director
John T. Cognetti 6,542 (5) *
Director
Patrick J. Dempsey 32,018 (6) 1.76%
Director
John F. Glinsky, Jr 34,705 (7) 1.91%
Secretary, Director
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
Amount and Nature of Percentage of Company's
Name of Individual and Beneficial Ownership of Common Stock
Position with Company Company's Common Stock (1) Beneficially Owned
---------------------- -------------------------- -----------------------
<S> <C> <C>
Michael F. Marranca 51,112 (8) 2.81%
President and Chief Executive Officer,
Director
Herbert M. McDonald 89,554 (9) 4.93%
Director
Michael J. McDonald 40,382 (10) 2.16%
Director
David L. Tressler, Sr. 6,137 (11) *
Director
Robert P. Farrell 912 (12) *
Treasurer
Kevin R. Messett 1,476 (13) *
Senior Vice President
All Officers and Directors as a Group (10 359,375 19.76%
Directors, 4 Officers, 12 persons in total)
</TABLE>
* Represents beneficial ownership of less than 1% of the company's common stock.
(1) Information furnished by the directors and the bank.
(2) Figure includes 976 shares held solely by Mr. Barrett, 9,120 shares
held solely by Mr. Barrett in an IRA, 2,005 shares held jointly by Mr.
Barrett and his spouse, 2,124 shares held by Mr. Barrett's spouse,
21,696 shares held as Trustee and co-owner of the Estate of Mildred
Barrett, and 1,000 exercisable options.
(3) Figure includes 1,000 shares held jointly by Mr. Cali and his spouse,
48,522 shares held in the S.C. Cali Revocable Trust, 3,590 shares held
in Jane Cali's Revocable Trust, and 1,000 exercisable stock options.
(4) Figure includes 4,234 shares held solely by Mr. Calvey, 270 shares
held by Calvey Enterprises Inc. of which Mr. Calvey is the former
President, and 1,000 exercisable stock options.
(5) Figure includes 200 shares held solely by Mr. Cognetti in an IRA,
2,771 shares held jointly by Mr. Cognetti and his spouse, 1,028 shares
held by Mr. Cognetti's spouse, 1,543 shares held by Mr. Cognetti's
spouse and child, and 1,000 exercisable stock options.
(6) Figure includes 4,000 shares held solely by Mr. Dempsey, 21,096 shares
held by Mr. Dempsey's spouse, 5,922 shares held by Mr. Dempsey's
children, and 1,000 exercisable stock options.
(7) Figure includes 12,408 shares held solely by Mr. Glinsky, 19,997
shares held jointly by Mr. Glinsky and his spouse, 1,300 shares held
jointly by Mr. Glinsky and his children, and 1,000 exercisable stock
options.
(8) Figure includes 15,812 shares held solely by Mr. Marranca, 1,456
shares held solely by Mr. Marranca in an IRA, 28,902 shares held by
Mr. Marranca's spouse, 3,542 shares held by Mr. Marranca's spouse and
grandchildren and 1,400 exercisable stock options.
(9) Figure includes 73,648 shares held solely by Dr. McDonald, 9,994
shares held jointly by Dr. McDonald and his spouse, 712 shares held by
Dr. McDonald's spouse, 4,200 shares held jointly by Dr. McDonald and
his sister, and 1,000 exercisable stock options.
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(10) Figure includes 33,265 shares held solely by Mr. McDonald, 5,296
shares held by Mr. McDonald's spouse, 800 shares held by Mr.
McDonald's spouse and children, 21 shares held by Mr. McDonald's
children, and 1,000 exercisable stock options.
(11) Figure includes 100 shares held solely by Mr. Tressler, 372 shares
held jointly by Mr. Tressler and his spouse, 906 shares held in trust
by Mr. Tressler's spouse and child, 3,443 shares held jointly by Mr.
Tressler in trust with his son, 266 shares held jointly by Mr.
Tressler and his daughter, 50 shares held jointly by Mr. Tressler and
his grandchildren, and 1,000 exercisable stock options.
(12) Figure includes 112 shares held jointly by Mr. Farrell with his spouse
and 800 exercisable stock options.
(13) Figure includes 386 shares held jointly by Mr. Messett and his spouse,
90 shares held jointly by Mr. Messett with his spouse and children,
and 1,000 exercisable stock options.
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DESCRIPTION OF SECURITIES
The company is authorized to issue up to 10 million shares of common stock,
without par value, and up to 5 million shares of preferred stock, without par
value. As of June 30, 2000, immediately following the reorganization of The
Fidelity Deposit and Discount Bank as the wholly owned subsidiary of Fidelity D
& D Bancorp, Inc., the company had 1,804,011 shares of common stock issued and
outstanding. No other shares of stock are 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 company's common stock does not carry preemptive
subscription rights.
Liquidation. In the event of liquidation, dissolution or winding up of the
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 company will not subject
shareholders to further assessments on their shares of common stock.
Sinking Fund Provision. The common stock does not require a separate
capital reserve maintained to pay shareholders with preferential rights for
their investment in the event of liquidation or redemption. However, in the
future the company may issue preferred shares that require such a fund, in which
case legal restrictions may require the 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
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 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.
See ""Supervision and Regulation -- Regulatory Restrictions on Dividends" above.
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Stock Option Plans. The company assumed the bank's obligations under its
1998 Independent Directors Plan and1998 Stock Incentive Plan. Under the
Independent Directors Plan, the company has reserved 50,000 shares for issuance,
and under the Stock Incentive Plan, the company has reserved 50,000 shares for
issuance, as adjusted for the two-for-one stock exchange. Please see "Management
-- Executive Compensation - Stock Option Plans" above for more detailed
information about the stock option plans.
Preferred Stock
The 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 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 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 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 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 separate capital
reserve maintained to pay shareholders with 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
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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 ""Supervision
and Regulation -- Regulatory Restrictions on Dividends" above.
Issuance of Additional Securities
The company has authorized common stock and preferred stock substantially
in excess of the number of outstanding shares. As a result, we have the
flexibility to raise additional capital and to make acquisitions through the
issuance of common stock or preferred stock without prior approval by the
company's shareholders. Issuance of these shares could dilute the book value per
share and the voting power of the prior shareholders because the 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 shares of common stock, except under the Dividend Reinvestment
Plan, nor shares of preferred stock.
Legal Opinion
Shumaker Williams, P.C., 3425 Simpson Ferry Road, Camp Hill, Pennsylvania,
Special Counsel to the company and bank, has delivered an opinion stating that
the shares of common stock to be issued in connection with the plan will be,
when issued and delivered pursuant to the terms of the plan, fully paid and
non-assessable by the company.
Anti-Takeover Provisions in Articles and By-laws
The company's articles of incorporation and by-laws contain a number of
provisions that could be considered anti-takeover in purpose and effect.
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.
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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 company.
Classified Board. The by-laws of the 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 company provides that at its 2001
Annual Meeting of Shareholders, the shareholders shall elect 10 directors as
follows:
o 4 Class A directors to serve until the 2003 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 2004 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. Article 8 of the 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
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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.
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 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 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.
Supermajority Vote for Amendment of By-laws. The 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 company to make it more
difficult for a potential acquirer to change the by-laws.
Supermajority Vote for Amendment of Specified Articles. A final
antitakeover provision in the articles of incorporation of the 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.
95
<PAGE>
Anti-takeover Provisions Applicable to Registered Corporations
Pennsylvania law gives strong anti-takeover provisions to corporations that
have their securities registered with the SEC under Section 12 of the Securities
Exchange Act of 1934, known as "registered corporations." The company's common
stock is registered under Section 12 of the1934 Act. These provisions are in
addition to provisions contained in the company's articles of incorporation and
by-laws.
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 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 acquirer 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
96
<PAGE>
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. These business combinations include the
following transactions involving an interested shareholder:
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 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
97
<PAGE>
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 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;
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 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
98
<PAGE>
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.
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.
99
<PAGE>
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 specified events occur, such as a merger, which decreases the
value of the acquirer's holdings and the acquirer'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.
EXPERTS
The financial statements of The Fidelity Deposit and Discount Bank,
consisting of the balance sheets of the bank as of December 31, 1999 and 1998,
and related statements of income, changes in shareholders' equity and cash flows
for each of the three years in the period ended December 31, 1999, have been
audited by Parente Randolph, P.C., independent certified public accountants.
They are included in this prospectus in reliance upon the authority of the firm
as experts in accounting and auditing. The interim consolidated financial
statements of Fidelity D & D Bancorp, Inc. for the six months ended June 30,
2000, are unaudited.
AVAILABLE INFORMATION
Fidelity D & D is subject to the informational requirements of the
Securities Exchange Act of 1934, and in accordance therewith, files reports,
prospectus and other information with the Securities and Exchange Commission.
The reports, prospectus and other information filed by Fidelity D & D can be
inspected and copied, or copies obtained by mail at prescribed rates, at the
public reference facilities maintained by the SEC at 450 Fifth Street, N.W.,
Room 1024, 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.
100
<PAGE>
The SEC also 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.
Fidelity D & D has filed a registration statement on Form S-1 under the
Securities Act of 1933 with the Commission, with respect to the securities
offered by this prospectus. This prospectus, which constitutes part of the
registration statement, omits certain of the information contained in the
registration statement and the exhibits to the registration statement on file
with the SEC pursuant to the Securities Act and the SEC's rules and regulations.
The entire registration statement may be accessed from the SEC's Web site or
copies obtained at its public reference facilities described above.
101
<PAGE>
FIDELITY D & D BANCORP, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND
SUPPLEMENTAL FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Page
----
<S> <C>
Summary Financial Data 5
Management's Discussion and Analysis of Consolidated Financial Condition
and Results of Operation and Quantitative Disclosures about Market Risk 23
CONSOLIDATED INTERIM FINANCIAL STATEMENTS (UNAUDITED)
Consolidated Balance Sheet as of June 30, 2000 and December 31, 1999 F-2
Consolidated Statement of Income for the Three and Six Months
Ended June 30, 2000 and June 30, 1999 F-3
Consolidated Statement of Changes in Shareholders' Equity
for the Six Months Ended June 30, 2000 and June 30, 1999 F-4
Consolidated Statement of Cash Flows for the Six Months
Ended June 30, 2000 and June 30, 1999 F-5
Notes to Consolidated Interim Financial Statements,
June 30, 2000 (Unaudited) F-6
INDEPENDENT AUDITORS' REPORT F-9
FINANCIAL STATEMENTS OF THE FIDELITY DEPOSIT AND DISCOUNT
BANK (Prior to the June 30, 2000, Reorganization as Subsidiary of
Fidelity D & D Bancorp, Inc.)
Balance Sheet for the Years Ended December 31, 1999 and 1998 F-10
Statement of Income for the Years Ended December 31, 1999, 1998, and 1997 F-11
Statement of Changes in Shareholders' Equity for Years Ended
December 31, 1999, 1998, and 1997 F-12
Statement of Cash Flows for the Years Ended December 31, 1999, 1998, and 1997 F-13
Notes to Financial Statements F-14
</TABLE>
F-1
<PAGE>
FIDELITY D & D BANCORP, INC. and SUBSIDIARY
CONSOLIDATED BALANCE SHEET
As of June 30, 2000 and December 31, 1999
June 30, 2000 December 31, 1999
(unaudited) (audited)
------------- -----------------
ASSETS
Cash and due from banks $ 5,992,396 $ 6,415,519
Interest-bearing deposits with financial
institutions 6,675,713 11,541,860
------------ ------------
Total cash and cash equivalents 12,668,109 17,957,379
Investment Securities:
Held to maturity
U.S. Treasuries & Agencies 5,960,630 0
Available for sale
U.S. Treasuries & Agencies 82,637,147 81,035,599
State & Municipal 19,672,352 22,556,775
Other securities 5,601,828 5,669,848
------------ ------------
Total investment securities 113,871,957 109,262,221
Loans net of unearned income 330,981,295 299,365,893
Allowance for loan losses 3,294,190 3,172,375
------------ ------------
Net loans 327,687,105 296,193,518
Loans available-for-sale 10,588,245 5,254,316
Bank premises and equipment, net 11,173,080 9,506,308
Accrued interest receivable 3,592,632 3,262,362
Foreclosed assets held for sale 214,321 412,922
Other assets 5,646,042 5,361,991
------------ ------------
Total assets $485,441,491 $447,211,017
============ ============
LIABILITIES
Deposits
Noninterest-bearing $ 41,878,518 $ 37,575,183
Cert. of deposit $100,000 or more 95,611,396 66,642,656
Other interest-bearing deposits 195,505,725 190,483,126
------------ ------------
Total deposits 332,995,639 294,700,965
Accrued expenses and other liabilities 3,231,136 2,829,770
Short-term borrowings 58,594,218 60,249,046
Long-term debt 57,305,000 57,305,000
------------ ------------
Total liabilities 452,125,993 415,084,781
------------ ------------
Shareholders' Equity
Common stock, 10,000,000 shares 1,409,679 1,406,863
authorized with out par value
Surplus 7,388,325 7,266,168
Undivided profits 29,159,086 28,126,918
Accumulated other comprehensive income
(loss) (4,641,592) (4,673,713)
------------ ------------
Total shareholders' equity 33,315,498 32,126,236
------------ ------------
Total liabilities and shareholders'
equity $485,441,491 $447,211,017
============ ============
See Notes to Consolidated Financial Statements.
F-2
<PAGE>
FIDELITY D & D
BANCORP, INC. and SUBSIDIARY
CONSOLIDATED STATEMENT OF INCOME
Three & Six Month Periods Ended June 30, 2000 and 1999
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
----------------------------- -------------------------------
06/30/00 06/30/99 06/30/00 06/30/99
---------------- ---------- ----------- ------------------
<S> <C> <C> <C> <C>
Interest Income
Loans:
Taxable $6,417,767 $5,177,384 $12,429,630 $10,093,095
Nontaxable 154,635 151,336 302,216 282,101
Leases 171,016 48,004 296,416 86,580
Interest-bearing deposits with financial institutions 7,905 33,034 18,447 65,879
Investment securities:
US Treasury 0 85,104 0 204,705
US Government Agencies 1,581,843 1,122,197 3,106,670 1,824,230
States & Political Subdivisions (nontaxable) 272,487 295,967 557,804 595,806
Other Securities 94,232 45,135 185,151 78,614
Income federal funds sold 0 56,419 0 128,415
---------- ---------- ----------- -----------
Total interest income 8,699,885 7,014,580 16,896,335 13,359,425
---------- ---------- ----------- -----------
Interest expense
Certificates of deposit of $100,000 or more 1,291,749 923,427 2,419,174 1,566,070
Other Deposits 2,185,353 1,752,095 4,268,767 3,423,590
Securities sold under repurchase agreements 463,107 366,557 903,769 742,852
Other Borrowings 1,202,264 628,211 2,217,354 1,173,208
Total interest expense 5,142,473 3,670,290 9,809,064 6,905,720
---------- ---------- ----------- -----------
Net interest income 3,557,412 3,344,290 7,087,270 6,453,705
Provision for loan losses 136,500 140,000 243,000 320,000
---------- ---------- ----------- -----------
Net interest income, after
provision for loan losses 3,420,912 3,204,290 6,844,270 6,133,705
---------- ---------- ----------- -----------
Other income
Service charge on deposit accounts 298,670 220,557 553,312 419,487
Gain on sale of securities 9,023 0 20,123 0
Gain on sale of loans and leases 30,791 40,597 79,153 60,774
Gain on loans available-for-sale 53,690 0 79,063 0
Other income 223,584 166,911 404,971 299,312
---------- ---------- ----------- -----------
Total other income 615,758 428,065 1,136,622 779,573
---------- ---------- ----------- -----------
Other expenses
Salaries and employee benefits 1,322,134 1,136,270 2,690,746 2,311,747
Occupancy and equipment 484,925 363,312 982,831 667,745
Shares Tax Expense 47,314 48,303 116,221 97,955
FDIC assessment 14,937 7,382 30,347 14,564
Advertising 112,326 120,331 229,543 216,597
(Gain)/loss on sale of foreclosed assets
held for sale 69,035 (1,184) 69,035 27,945
Other expenses 967,103 795,204 1,790,277 1,390,389
---------- ---------- ----------- -----------
Total other expenses 3,017,774 2,469,618 5,908,999 4,726,941
---------- ---------- ----------- -----------
Income before income taxes 1,018,896 1,162,737 2,071,893 2,186,337
Provision for income taxes 176,900 260,830 363,700 481,130
---------- ---------- ----------- -----------
Net Income $ 841,996 $ 901,907 $ 1,708,193 $ 1,705,207
========== ========== =========== ===========
Net income per weighted average share $ 0.47 $0.50 $ 0.95 $0.95
Diluted earnings per share $ 0.47 $0.50 $ 0.95 $0.95
Dividends per weighted average share $0.188 $0.15 $0.375 $0.30
</TABLE>
See Notes to Consolidated Financial Statements.
F-3
<PAGE>
FIDELITY D & D BANCORP, INC. and SUBSIDIARY
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
For the Six Months Ended June 30, 2000 and 1999
<TABLE>
<CAPTION>
Accumulated
Capital Stock Other
------------------------ Undivided Comprehensive
Shares Amount Surplus Profits Income(Loss) Total
------- ---------- ---------- ----------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balance, Dec. 31, 1998 893,647 $1,396,324 $6,826,669 $25,656,844 $133,868 $34,013,705
-----------
Comprehensive income:
Net income 1,705,207 1,705,207
Change in net unrealized holding
gains/(losses) on available-for-sale
securities, net of reclassification
adjustment and tax effects (2,782,375) (2,782,375)
-----------
Comprehensive income (1,077,168)
-----------
Cash dividends (536,589) (536,589)
Dividend reinvestment 2,839 4,437 173,644 178,082
--------- ---------- ---------- ----------- ----------- -----------
Balance, June 30, 1999 896,486 $1,400,761 $7,000,313 $26,825,462 ($2,648,507) $32,578,029
========= ========== ========== =========== =========== ===========
Balance, Dec. 31, 1999 900,392 $1,406,863 $7,266,168 $28,126,918 ($4,673,713) $32,126,236
-----------
Comprehensive income:
Net income 1,708,193 1,708,193
Change in net unrealized
holding gains/(losses) on
available-for-sale
securities, net of reclassification
adjustment and tax effects 32,121 32,121
-----------
Comprehensive income 1,740,314
-----------
Cash dividends (676,026) (676,026)
Stock options exercised 250 391 15,109 15,500
Dividend reinvestment 1,553 2,425 107,048 109,473
Stock exchange 901,816
--------- ---------- ---------- ----------- ----------- -----------
Balance June 30, 2000 1,804,011 $1,409,679 $7,388,325 $29,159,085 ($4,641,592) $33,315,498
========= ========== ========== =========== =========== ===========
</TABLE>
See Consolidated Notes to Financial Statements.
F-4
<PAGE>
FIDELITY D & D BANCORP, INC. and SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
For the Six Months Ended June 30, 2000 and 1999
<TABLE>
<CAPTION>
2000 1999
------------- ------------
<S> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES:
Net income $ 1,708,193 $ 1,705,207
Adjustments to reconcile net income to net
cash provided by, (used in), by operating activities:
Depreciation 427,800 286,866
Amortization of securities
(net of accretion) (34,184) (80,967)
Provision for loan losses 243,000 320,000
Deferred income tax 107,000 (23,000)
Amortization of mortgage servicing rights 9,527 0
(Gain)/loss sale of investment securities (20,123) 0
(Gain)/loss on sale of loans (79,153) (59,511)
(Gain)/loss on sale of foreclosed assets held for sale 69,035 34,384
(Appreciation)/depreciation available-for-sale loans (79,063) 0
(Increase)/decrease in interest receivable (330,270) (698,338)
Increase/(decrease) in accrued expenses 611,701 (237,591)
(Increase)/decrease in other assets (610,913) (1,317,178)
------------- ------------
Net cash provided by, (used in), operating activities 2,022,550 (70,128)
------------- ------------
CASH FLOW FROM INVESTING ACTIVITIES:
Proceeds from paydown of held-to-maturity securities 33,580 0
Proceeds from sale of available-for-sale securities 4,809,783 0
Proceeds from maturity, call and paydown
of available-for-sale securities 540,334 20,793,361
Purchase of available-for-sale securities (3,896,249) (48,755,890)
(Increase)/decrease in federal funds sold 0 6,500,000
Proceeds from sale of loans 2,671,002 7,389,669
(Increase)/decrease in loans and leases (45,678,916) (44,246,300)
Purchase of bank premises and equipment (2,094,572) (1,858,095)
Capital expenditures on foreclosed assets held for sale 0 (327,060)
Proceeds from sale of foreclosed assets held for sale 214,425 167,707
------------- ------------
Net cash used in investing activities (43,400,613) (60,009,548)
------------- ------------
CASH FLOW FROM FINANCING ACTIVITIES:
Net increase (decrease) in non interest-bearing deposits 4,303,335 2,433,510
Net increase (decrease) in interest-bearing deposits 5,022,599 8,924,546
Net increase (decrease) in CD's $100,000 or more 28,968,740 28,370,234
Increase(decrease) in short term borrowings (1,654,828) 20,712,151
Dividends paid (676,026) (536,589)
Proceeds from stock options exercised 15,500 0
Proceeds from dividend reinvestment 109,473 178,082
------------- ------------
Net cash provided by financing activities 36,088,793 60,081,934
------------- ------------
Net increase (decrease) in cash and cash equivalents (5,289,270) 2,258
Cash and cash equivalents at beginning of period 17,957,379 8,719,744
------------- ------------
Cash and cash equivalents at end of period $ 12,668,109 $ 8,722,002
============= ============
</TABLE>
See Notes to Consolidated Financial Statements.
F-5
<PAGE>
FIDELITY D & D BANCORP, INC. and SUBSIDIARY
DUNMORE, PA 18512
FORM 10-Q JUNE 30, 2000
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
On August 10, 1999 Fidelity D&D Bancorp, Inc., was incorporated. Effective
June 30, 2000, by operation of law, one share of The Fidelity Deposit & Discount
Bank stock became the right to receive two shares of Fidelity D&D Bancorp, Inc.
common stock. Fidelity D&D Bancorp, Inc., is not issuing fractional shares. Cash
will be paid at the fair market value for the fractional shares of The Fidelity
Deposit & Discount Bank stock after June 30, 2000.
The accompanying unaudited financial statements of Fidelity D&D Bancorp,
Inc., and subsidiary, The Fidelity Deposit & Discount Bank, (collectively, the
"Company"), have been prepared in accordance with generally accepted accounting
principals ("GAAP") for interim financial information and with the instructions
to Form 10-Q and Article 10-01 of Regulation S-X. In the opinion of management,
all normal recurring adjustments necessary for a fair presentation of the
financial position and results of operations for the periods have been included.
All significant inter-company balances and transactions have been eliminated in
the consolidation. Prior period amounts are reclassified when necessary to
conform to the current year's presentation.
The preparation of financial statements in conformity with GAAP requires
management to make estimates and assumptions that effect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reported periods. Actual results could differ from those
estimates. For additional information and disclosures required under GAAP,
please see the bank's Annual Report on Form 10-K for the period ended December
31, 1999.
The bank is a commercial bank chartered by the Commonwealth of
Pennsylvania. Commencing operations in 1903, the bank provides a full range of
traditional banking services and alternative financial products from its main
office located in Dunmore and other branches throughout Lackawanna and Luzerne
counties.
Management is responsible for the fairness, integrity and objectivity of
the unaudited financial statements included in this report. Management in
accordance with GAAP prepared the unaudited financial statements. In meeting its
responsibility for the financial statements, management depends on the company's
accounting systems and related internal controls. These systems and controls are
designed to provide reasonable, but not absolute, assurance that the financial
records accurately reflect the transactions of the company, that company assets
are safeguarded and that financial statements present fairly the financial
position and results of operations of the company.
F-6
<PAGE>
In the opinion of management, the balance sheets as of June 30, 2000 and
December 31, 1999 present fairly the financial position of the company as of
those dates and the related statements of income, changes in shareholders'
equity and cash flows for the six month periods ended June 30, 2000 and 1999
present fairly the results of its operations and its cash flows for the periods
then ended. All material adjustments required for fair presentation have been
made, and there have been no material changes in accounting principles,
practices or in the method of application and there have been no retroactive
adjustments during this period. These adjustments are of a normal reoccurring
nature.
The accompanying unaudited financial statements should be read in
conjunction with the bank's audited financial statements for the year ended
December 31, 1999 and the notes included therein, in the bank's Annual Report on
Form 10-K, filed with the FDIC on March 31, 2000. These audited financial
statements are located at pages F-9 through F-37 of this prospectus. The results
of operations for interim periods are not necessarily indicative of the results
of operations to be expected for the entire year.
In addition to historical information, this prospectus may contain
forward-looking statements. Forward-looking statements are subject to certain
risks and uncertainties that could cause actual results to differ materially
from those projected in the forward-looking statements. Important factors that
might cause such a difference include but are not limited to; those discussed in
the section entitled, "Management's Discussion and Analysis of Financial
Condition and Results of Operations." Readers are cautioned not to place undue
reliance on these forward-looking statements, which reflect Management's
analysis only as of the date hereof. The company undertakes no obligation to
publicly revise or update these forward-looking statements to reflect events or
circumstances that arise after the date hereof.
F-7
<PAGE>
Basic earnings per common share are computed by dividing net income by the
weighted average number of common shares outstanding during the period,
(1,803,017 in 2000 and 1,789,339 in 1999).
Diluted earnings per share is similar to the computation of basic earnings
per common share except that the denominator is increased to include the number
of additional common shares that would have been outstanding if the dilutive
potential common shares had been issued.
The following data shows the amounts used in computing earnings per share
and the effects on income and the weighted average number of shares of dilutive
potential common stock for the periods ended June 30, 2000 and 1999:
<TABLE>
<CAPTION>
Common Earnings
Income Shares per
June 30, 2000 Numberator Denominator Share
---------- ----------- -------
<S> <C> <C> <C>
Basic EPS $1,708,193 1,803,017 $0.95
=====
Dilutive effect of potential common stock
Stock options;
Exercise of outstanding options 14,400
Hypothetical share repurchase at $35.75 (13,341)
---------- ---------
Diluted EPS $1,708,193 1,804,076 $0.95
========== ========= =====
June 30, 1999
Basic EPS $1,705,207 1,789,339 $0.95
=====
Dilutive effect of potential common stock
Stock options;
Exercise of outstanding options 7,500
Hypothetical share repurchase at $31.00 (7,500)
---------- ---------
Diluted EPS $1,705,207 1,789,339 $0.95
========== ========= =====
</TABLE>
Diluted earnings per share have been restated for the 2000 two-for-one
stock exchange.
F-8
<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, 1999 and 1998 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, 1999. These financial statements are the
responsibility of the Bank's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Fidelity Deposit & Discount
Bank as of December 31, 1999 and 1998, and the results of its operations and its
cash flows for each of the three years in the period ended December 31, 1999 in
conformity with generally accepted accounting principles.
Parente Randolph, P.C.
Wilkes-Barre, Pennsylvania
January 31, 2000
F-9
<PAGE>
FIDELITY DEPOSIT & DISCOUNT BANK
BALANCE SHEET
DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------
1999 1998
---------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS:
Cash and due from banks $ 6,415,519 $ 3,315,306
Interest-bearing deposits with financial institutions 11,541,860 5,404,438
------------ ------------
Total cash and cash equivalents 17,957,379 8,719,744
Federal funds sold - 6,500,000
Available-for-sale securities 109,262,221 78,607,860
Loans and leases, net (allowance for loan losses of $3,172,375
and $3,007,713 in 1999 and 1998, respectively) 296,193,518 235,430,079
Loans available-for-sale (fair value $5,254,316 in
1999; $9,010,000 in 1998) 5,254,316 8,858,157
Accrued interest receivable 3,262,362 2,404,480
Bank premises and equipment, net 9,506,308 6,449,141
Foreclosed assets held for sale 412,922 201,261
Other assets 5,361,991 1,433,699
------------ ------------
Total assets $447,211,017 $348,604,421
============ ============
LIABILITIES:
Deposits:
Noninterest-bearing $ 37,575,183 $ 33,449,998
Certificates of deposit of $100,000 or more 66,642,656 49,435,718
Other interest-bearing deposits 190,483,126 157,115,035
------------ ------------
Total deposits 294,700,965 240,000,751
Accrued interest payable and other liabilities 2,829,770 2,932,666
Short-term borrowings 60,249,046 29,405,299
Long-term debt 57,305,000 42,252,000
------------ ------------
Total liabilities 415,084,781 314,590,716
------------ ------------
SHAREHOLDERS' EQUITY:
Capital stock authorized 1,000,000 shares with $1.5625 par value; issued
and outstanding, 900,392 and 893,647 shares
in 1999 and 1998, respectively 1,406,863 1,396,324
Surplus 7,266,168 6,826,669
Undivided profits 28,126,918 25,656,844
Accumulated other comprehensive income (loss) (4,673,713) 133,868
------------ ------------
Total shareholders' equity 32,126,236 34,013,705
------------ ------------
Total liabilities and shareholders' equity $447,211,017 $348,604,421
============ ============
</TABLE>
--------------------------------------------------------------------------------
See Notes to Financial Statements
F-10
<PAGE>
FIDELITY DEPOSIT & DISCOUNT BANK
STATEMENT OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------
1999 1998 1997
-----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
INTEREST INCOME:
Loans:
Taxable $21,124,032 $18,016,230 $15,151,599
Nontaxable 662,857 307,265 248,111
Leases 262,452 125,227 86,496
Interest-bearing deposits with financial institutions 89,323 103,396 78,387
Investment securities:
U.S. Treasury 204,705 585,108 655,334
U.S. government agency and corporations 4,701,262 2,833,672 3,680,356
States and political subdivisions (nontaxable) 1,173,783 1,020,335 902,749
Other securities 219,256 86,333 68,217
Federal funds sold 128,415 393,806 166,364
----------- ----------- -----------
Total interest income 28,566,085 23,471,372 21,037,613
----------- ----------- -----------
INTEREST EXPENSE:
Certificates of deposit of $100,000 or more 3,558,826 2,823,061 2,329,777
Other deposits 7,299,315 6,730,882 6,219,283
Securities sold under repurchase agreements 1,519,054 1,396,244 1,350,892
Other short-term borrowings and long-term debt 2,973,266 1,335,896 721,007
Other 25,338 22,549 18,925
----------- ----------- -----------
Total interest expense 15,375,799 12,308,632 10,639,884
----------- ----------- -----------
NET INTEREST INCOME 13,190,286 11,162,740 10,397,729
PROVISION FOR LOAN LOSSES 530,000 646,000 622,800
----------- ----------- -----------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 12,660,286 10,516,740 9,774,929
----------- ----------- -----------
OTHER INCOME:
Service charges on deposit accounts 733,939 722,270 546,230
Gain on sale of:
Investment securities 1,400 109,940 123,611
Loans 196,813 160,740 3,124
Loss on loans available for sale (145,847)
Fees and other service charges 1,349,476 851,864 585,960
Other operating income 92,006 57,920 44,545
----------- ----------- -----------
Total other income 2,227,787 1,902,734 1,303,470
----------- ----------- -----------
OTHER EXPENSES:
Salaries and employee benefits 5,190,480 3,875,854 3,454,936
Premises and equipment 1,632,530 1,109,076 1,042,646
Shares tax expense 260,023 228,599 210,409
Federal Deposit Insurance Corporation assessment 29,200 26,235 26,418
Loss on sale of:
Foreclosed assets held for sale 71,413 26,584 -
Bank premises and equipment - - 11,983
Other 2,986,812 2,342,814 1,836,942
----------- ----------- -----------
Total other expenses 10,170,458 7,609,162 6,583,334
----------- ----------- -----------
INCOME BEFORE PROVISION FOR INCOME TAXES 4,717,615 4,810,312 4,495,065
PROVISION FOR INCOME TAXES 903,400 1,246,760 1,185,008
----------- ----------- -----------
NET INCOME $ 3,814,215 $ 3,563,552 $ 3,310,057
=========== =========== ===========
Per share data:
Net income $4.26 $4.20 $3.97
Diluted $4.25 $4.20 $3.97
Dividends $1.50 $1.40 $1.28
</TABLE>
--------------------------------------------------------------------------------
See Notes to Financial Statements
F-11
<PAGE>
FIDELITY DEPOSIT & DISCOUNT BANK
STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
ACCUMULATED
OTHER
..CAPITAL STOCK.. UNDIVIDED COMPREHENSIVE
SHARES AMOUNT SURPLUS PROFITS (LOSS) INCOME TOTAL
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
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
-----------
Comprehensive loss:
Net income 3,814,215 3,814,215
Change in net unrealized holding gains (losses)
on available-for-sale securities, net of
reclassification adjustment and tax effects (4,807,581) (4,807,581)
-----------
Comprehensive loss (993,366)
-----------
Dividends (1,344,141) (1,344,141)
Dividends reinvested 6,745 10,539 439,499 450,038
------- ----------- ----------- ----------- ----------- -----------
BALANCE, DECEMBER 31, 1999 900,392 $ 1,406,863 $ 7,266,168 $28,126,918 $(4,673,713) $32,126,236
======= =========== =========== =========== =========== ===========
</TABLE>
----------------------------------------------------------------
See Notes to Financial Statements
F-12
<PAGE>
FIDELITY DEPOSIT & DISCOUNT BANK
STATEMENT OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------------
1999 1998 1997
--------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 3,814,215 $ 3,563,552 $ 3,310,057
Adjustments to reconcile net income to net cash provided by
operating activities
Depreciation 762,865 488,354 491,767
Amortization of securities (net of accretion) (119,263) (63,802) (21,075)
Provision for loan losses 530,000 646,000 622,800
Deferred income taxes 258,291 114,812 11,920
Gain on sale of investment securities (1,400) (109,940) (123,611)
Gain on sale of loans (196,813) (160,740) (3,124)
Loss on sale of foreclosed assets held for sale 71,413 26,584 -
Loss on loans available for sale 145,847
Loss on sale of bank premises and equipment - - 11,983
Change in:
Accrued interest receivable (857,882) (30,160) (158,443)
Other assets (1,709,959) (777,331) 82,806
Accrued interest payable and other liabilities (102,896) 481,462 371,029
------------ ------------ ------------
Net cash provided by operating activities 2,594,418 4,178,791 4,596,109
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net decrease (increase) in federal funds sold 6,500,000 (6,500,000) 3,850,000
Held-to-maturity securities:
Proceeds from maturities and calls - 1,400,000 4,005,000
Purchases - (2,368,080) (7,168,147)
Available-for-sale securities:
Proceeds from sales 201,400 3,947,560 14,101,904
Proceeds from maturities, calls and paydowns 22,974,907 38,675,325 22,182,739
Purchases (57,409,856) (47,514,176) (18,024,813)
Proceeds from sale of loans available-for-sale 11,796,340 15,500,658 898,017
Net increase in loans and leases (73,501,527) (57,744,631) (41,904,533)
Acquisition of bank premises and equipment (3,820,032) (2,800,036) (263,397)
Improvements to foreclosed assets held for sale (33,239) (8,146)
Proceeds from sale of foreclosed assets held for sale 232,366 245,944 -
------------ ------------ ------------
Net cash used in investing activities (93,059,641) (57,165,582) (22,323,230)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in noninterest-bearing deposits 4,125,185 8,076,597 2,331,621
Net increase in certificates of deposit
of $100,000 or more 17,206,938 2,092,247 2,042,557
Net increase in other interest-bearing deposits 33,368,091 11,806,897 1,581,162
Net increase in short-term borrowings 243,747 304,848 9,510,675
Net increase in federal funds purchased 30,600,000
Increase in long-term debt 15,053,000 30,000,000 2,252,000
Dividends paid, net of dividend reinvestment (894,103) (823,357) (767,312)
Proceeds from issuance of common stock - 2,940,915 152,100
------------ ------------ ------------
Net cash provided by financing activities 99,702,858 54,398,147 17,102,803
------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 9,237,635 1,411,356 (624,318)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 8,719,744 7,308,388 7,932,706
------------ ------------ ------------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 17,957,379 $ 8,719,744 $ 7,308,388
============ ============ ============
</TABLE>
--------------------------------------------------------------------------------
See Notes to Financial Statements
F-13
<PAGE>
FIDELITY DEPOSIT & DISCOUNT BANK
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
1. NATURE OF OPERATIONS AND SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS
The Bank provides a variety of financial services to individuals and
corporate customers in Lackawanna and Luzerne Counties, Pennsylvania.
This region has a diversified and fairly stable economy. The Bank's
primary deposit products are savings accounts, NOW accounts, money
market deposit accounts, certificates of deposit and checking accounts.
Its primary lending products are single-family residential loans,
secured consumer loans, and secured loans to 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 significant portion of the Bank's loan portfolio consists of
single-family residential loans in its market area. Although the Bank
has a diversified loan portfolio, a substantial portion of its debtor's
ability to honor their contracts is dependent on the economic sector in
which the Bank operates.
F-14
<PAGE>
FIDELITY DEPOSIT & DISCOUNT BANK
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
While management uses available information to recognize losses on
loans and foreclosed assets, future additions to the allowances may be
necessary based on changes in local economic conditions. In addition,
regulatory agencies, as an integral part of their examination process,
periodically review the Bank's allowances for loan losses and
foreclosed assets. Such agencies may require the Bank to recognize
additions to the allowances based on their judgments about information
available to them at the time of their examination. Because of these
factors, it is reasonably possible that the allowances for loan losses
and foreclosed assets may change materially in the near future.
HELD-TO-MATURITY SECURITIES
Debt securities for which the Bank has the positive intent and ability
to hold to maturity are reported at cost, adjusted for premiums and
discounts that are recognized in interest income over the period to
maturity.
TRADING SECURITIES
Debt and equity securities held principally for resale in the near term
are recorded at their fair values. Unrealized gains and losses are
included in other income. The Bank did not have any investment
securities held for trading purposes during 1998, 1997 or 1996.
AVAILABLE-FOR-SALE SECURITIES
Available-for-sale securities consist of debt and equity securities not
classified as either held-to-maturity securities or trading securities
and are reported at fair value. Unrealized holding gains and losses,
net of deferred income taxes, on available-for-sale securities are
reported as a net amount in a separate component of shareholders'
equity until realized. These net unrealized holding gains and losses
are the sole component of accumulated other comprehensive income
(loss).
Loans Held For Sale
Mortgage loans originated and intended for sale in the secondary market
are carried at the lower of cost or estimated market value in the
aggregate. Net unrealized losses are recognized through a valuation
allowance by charges to income.
F-15
<PAGE>
FIDELITY DEPOSIT & DISCOUNT BANK
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
LOANS
Loans that management has the intent and ability to hold for the
foreseeable future or until maturity or payoff are stated at face
value, net of unearned discount, unamortized loan fees and costs and
the allowance for loan losses. Interest on residential real estate
loans is recorded on an amortized schedule. Commercial loan interest is
accrued on the principal balance on an actual day basis. Interest on
consumer loans is determined using the actuarial method or the simple
interest method.
The accrual of interest on impaired loans is discontinued when, in the
opinion of management, there is an indication that the borrower may be
unable to meet payments as they become due. Any payments received on
impaired loans are applied, first to the outstanding loan amounts, then
to the recovery of any charged-off loan amounts. Any excess is treated
as a recovery of lost interest.
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is established through a provision for
loan losses. The allowance represents an amount which, in management's
judgment, will be adequate to absorb probable losses on existing loans
and leases that may become uncollectible. Management's judgment in
determining the adequacy of the allowance is based on evaluations of
the collectibility of the loans. These evaluations take into
consideration such factors as changes in the nature and volume of the
loan portfolio, current economic conditions that may affect the
borrower's ability to pay, overall portfolio quality and review of
specific impaired loans. Loans considered uncollectible are charged to
the allowance. Recoveries on loans previously charged off are added to
the allowance.
A loan is considered impaired when, based on current information and
events, it is probable that the Bank will be unable to collect the
scheduled payments in accordance to the contractual terms of the loan.
Factors considered in determining impairment include payment status,
collateral value, and the probability of collecting payments when due.
The significance of payment delays and/or shortfalls, is determined on
a case by case basis. All circumstances surrounding the loan are taken
into account. Such factors include the length of the delinquency, the
underlying reasons and the borrower's prior payment record. Impairment
is measured on all loans on a loan by loan basis. The Bank does not
group homogeneous loans collectively for the purpose of determining
impairment.
LEASES
Financing of equipment and automobiles are provided to customers under
lease arrangements accounted for as direct financing leases. Income
earned is based on a constant periodic return on the net investment in
the lease.
LOAN FEES
Nonrefundable loan origination fees and certain direct loan origination
costs are recognized over the life of the related loans as an
adjustment of yield. The unamortized balance of these fees and costs
are included as part of the loan balance to which it relates.
F-16
<PAGE>
FIDELITY DEPOSIT & DISCOUNT BANK
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
BANK PREMISES AND EQUIPMENT
Bank premises and equipment are stated at cost less accumulated
depreciation. Depreciation is computed on the straight-line and
accelerated methods over the estimated useful lives of the assets.
LOAN SERVICING AND LOAN SERVICING RIGHTS
The Bank services real estate loans for investors in the secondary
mortgage market, which are not included in the balance sheet. The cost
of mortgage servicing rights is amortized in proportion to, and over
the period of, estimated net servicing revenues. For purposes of
measuring impairment, the rights are stratified based on the present
dominant risk characteristics of the underlying loans, stated term of
the loan and interest rate. The amount of impairment recognized is the
amount by which the capitalized mortgage servicing rights for a stratum
exceed their fair value. Fair values are estimated using discounted
cash flows based on a current market interest rate.
FORECLOSED ASSETS HELD FOR SALE
Foreclosed assets held for sale are carried at the lower of carrying
amount or fair value less cost to sell. Losses from the acquisition of
property in full and partial satisfaction of debt are treated as credit
losses. Routine holding costs and subsequent declines in value are
included in other operating expenses.
TRUST FEES
Trust fees are recorded on the cash basis which is not materially
different from the accrual basis.
ADVERTISING COSTS
Advertising costs are charged to expense as incurred and were $ 403,000
in 1999 and $288,700 in 1998.
F-17
<PAGE>
FIDELITY DEPOSIT & DISCOUNT BANK
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
FAIR VALUE OF FINANCIAL INSTRUMENTS
Cash and short-term instruments: The carrying amounts of cash and
short-term instruments approximate their fair value.
Available-for-sale and held-to-maturity securities: Fair values for
securities are based on bid prices received from securities dealers.
Restricted equity securities are carried at cost.
Loans receivable: The fair value of all loans is estimated by the net
present value of the future expected cash flows.
Loans available for sale: For loans available for sale, the fair value
is estimated using rates currently offer for similar borrowings and are
stated at the lower of cost or market.
Deposit liabilities: The fair value of demand deposits, NOW accounts,
savings accounts, and money market deposits is estimated by the net
present value of the future expected cash flows. For certificates of
deposit, the discount rates used reflect the Bank's current market
pricing. The discount rates used for nonmaturity deposits are the
current book rate of the deposits.
Short-term borrowings: For short-term borrowings, the fair value is
estimated using the rates currently offered for similar borrowings.
Long-term debt: For other borrowed funds, the fair value is estimated
using the rates currently offered for similar borrowings.
Accrued interest: The carrying amounts of accrued interest approximate
their fair values.
Off-balance-sheet instruments: Commitments to extend credit are
generally short term and are priced to market. The rates on standby
letters of credit are priced on prime. Therefore, the estimated fair
value of these financial instruments is face value.
F-18
<PAGE>
FIDELITY DEPOSIT & DISCOUNT BANK
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
INCOME TAXES
Deferred tax assets and liabilities are reflected at currently enacted
income tax rates applicable to the period in which the deferred tax
assets or liabilities are expected to be realized or settled. As
changes in tax laws or rates are enacted, deferred tax assets and
liabilities are adjusted through the provision for income taxes.
CASH FLOWS
For purposes of reporting cash flows, cash and cash equivalents
includes cash on hand and amounts due from banks.
For the years ended December 31, 1999, 1998, and 1997, the Bank paid
interest in cash on interest-bearing liabilities of $15,272,903,
$11,827,170 and $10,299,735, respectively. For the years ended December
31, 1999, 1998, and 1997, the Bank paid cash for income taxes of
$725,500, $1,241,283 and $1,068,646, respectively.
Noncash investing activities related to the acquisition of foreclosed
assets held for sale amounted to $482,201, $189,814 and $275,829 in
1999, 1998, and 1997, respectively. Noncash investing activities also
included transferring $3,603,841, $655,753 and $6,136,340 from loans to
loans available-for-sale in 1999, 1998 and 1997, respectively.
F-19
<PAGE>
FIDELITY DEPOSIT & DISCOUNT BANK
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
OTHER COMPREHENSIVE (LOSS) INCOME
The components of other comprehensive (loss) income and related tax
effects are as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Unrealized holding (losses) gains on
available-for-sale securities $(7,282,815) $ (28,215) $ 549,318
Less reclassification adjustment for gains
realized in income (1,400) (109,940) -
----------- --------- --------
Net unrealized (losses) gains (7,284,215) (138,155) 549,318
Tax effect 2,476,634 46,973 (186,768)
----------- --------- ---------
Net of tax amount $(4,807,581) $ (91,182) $ 362,550
=========== ========= =========
</TABLE>
2. RESTRICTED CASH
The Bank is required to maintain average reserve balances with the Federal
Reserve Bank based on a percentage of deposits. The average amounts of
those reserve balances for the years ended December 31, 1999 and 1998 were
$2,466,000 and $1,123,000, 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.
F-20
<PAGE>
FIDELITY DEPOSIT & DISCOUNT BANK
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
3. INVESTMENT SECURITIES
Amortized cost and fair value of investment securities at December 31,
1999 and 1998, are as follows (in thousands):
<TABLE>
<CAPTION>
.............................1999..................................
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
---- ----- ------ -----
<S> <C> <C> <C> <C>
Available-for-sale securities:
U.S. government agencies and
corporations $ 79,293 $5,945 $73,348
U.S. treasury securities
Obligations of states and political
subdivisions 23,450 $84 977 22,557
Mortgage-backed securities 8,017 2 332 7,687
-------- ---- ------ -------
Total debt securities 110,760 86 7,254 103,592
Equity securities:
Restricted 5,343 - - 5,343
Other 241 130 44 327
-------- ---- ------ --------
Total $116,344 $216 $7,298 $109,262
======== ==== ====== ========
<CAPTION>
.............................1998..................................
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES 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 - - 2,113
Other 6 148 - 154
-------- ---- ------ --------
Total $ 78,405 $748 $ 545 $ 78,608
======== ==== ====== ========
</TABLE>
F-21
<PAGE>
FIDELITY DEPOSIT & DISCOUNT BANK
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
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 trust
funds, public deposits, short-term borrowings, 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, 1999
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.
<TABLE>
<CAPTION>
AMORTIZED FAIR
COST VALUE
---- -----
(IN THOUSANDS)
<S> <C> <C>
Available-for-sale securities:
Due in one year or less $ 590 $ 593
Due after one year through five years 2,525 2,546
Due after five years through ten years 32,811 31,071
Due after ten years 66,817 61,695
-------- --------
102,743 95,905
Mortgage-backed securities 8,017 7,687
-------- --------
Total $110,760 $103,592
======== ========
</TABLE>
Gross realized gains and losses on sales of available-for-sale securities,
determined using specific identification of the securities in 1999, 1998
and 1997, were as follows:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Gross realized gains $1,400 $109,940 $143,518
Gross realized losses - - $ 19,907
</TABLE>
F-22
<PAGE>
FIDELITY DEPOSIT & DISCOUNT BANK
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
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 $15,477,000 with an unrealized
gain, net of taxes of approximately $266,000. 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.
The Bank does not have any derivative financial instruments requiring
disclosure under SFAS No. 133. The adoption of this statement did not
affect operating results of the Bank.
4. LOANS AND LEASES
The major classifications of loans and leases at December 31, 1999 and
1998 are summarized as follows:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Real estate $111,242,490 $ 99,955,640
Consumer 64,998,362 47,549,512
Commercial 113,061,093 85,425,708
Direct financing leases 5,710,579 2,248,990
Real estate construction 5,335,753 3,810,975
------------ ------------
Total 300,348,217 238,990,825
Less:
Unearned income 982,384 553,033
Allowance for loan losses 3,172,375 3,007,713
------------ ------------
Loans and leases, net $296,193,518 $235,430,079
============ ============
</TABLE>
F-23
<PAGE>
FIDELITY DEPOSIT & DISCOUNT BANK
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
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, 1999 or 1998.
Net unearned loan fees and costs of $144,781 and $67,285 have been
deducted from the carrying value of loans at December 31, 1999 and 1998,
respectively.
Impaired loans which are past due 90 days or more and still accruing
interest are $2,917,464 and $2,688,867 at December 31, 1999 and 1998,
respectively.
Impaired loans on which the accrual of interest has been discontinued
amounted to $1,210,186 and $1,364,102 at December 31, 1999 and 1998,
respectively. The average balance of total impaired loans was $3,709,119
in 1999 and $3,723,024 in 1998. The total allowance for loan losses
related to these loans was $883,866 and $707,391 at December 31, 1999 and
1998, respectively. Cash payments of $66,837 and $114,655, received during
1999 and 1998, 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,
1999, 1998, and 1997 are as follows:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Balance, beginning $3,007,713 $2,809,066 $2,589,976
Recoveries 115,623 132,649 80,462
Provision for loan losses 530,000 646,000 622,800
Losses charged to allowance (480,961) (580,002) (484,172)
---------- ---------- ----------
Balance, ending $3,172,375 $3,007,713 $2,809,066
========== ========== ==========
</TABLE>
For federal income tax purposes, the allowance for loan losses is $315,958
at December 31, 1999, 1998, and 1997. The amounts deducted for loan losses
in the federal income tax returns were $365,338 in 1999, $447,353 in 1998
and $403,710 in 1997. 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
$29,234,000 and $20,252,000 at December 31, 1999 and 1998, respectively.
Mortgage servicing rights were $122,564 at December 31, 1999 and are
included in other assets. There were no mortgage servicing rights at
December 31, 1998.
F-24
<PAGE>
FIDELITY DEPOSIT & DISCOUNT BANK
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
5. PREMISES AND EQUIPMENT
Components of premises and equipment at December 31, 1999 and 1998 are
summarized as follows:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Land $ 855,330 $ 855,330
Bank premises 5,906,164 4,401,551
Furniture, fixtures and equipment 5,920,656 3,957,005
Leasehold improvements 1,293,050 964,104
----------- -----------
Total 13,975,200 10,177,990
Less accumulated depreciation and amortization 4,468,892 3,728,849
----------- -----------
Premises and equipment, net $ 9,506,308 $ 6,449,141
=========== ===========
</TABLE>
The Bank leases its Green Ridge, Scranton, Pittston, West Pittston,
Moosic and Clarks Summit branches under the terms of operating leases.
Rental expense was $223,281 for 1999, $157,434 for 1998 and $142,960
for 1997. The future minimum rental payments under these leases are as
follows:
YEAR AMOUNT
---- ------
2000 $ 288,000
2001 289,000
2002 286,000
2003 279,000
2004 254,000
----------
Total $1,396,000
==========
Amortization of leasehold improvements is included in depreciation
expense.
F-25
<PAGE>
FIDELITY DEPOSIT & DISCOUNT BANK
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
6. DEPOSITS
At December 31, 1999, the scheduled maturities of certificates of deposit
are as follows:
2000 $ 88,242,709
2001 55,446,969
2002 15,978,304
2003 4,824,950
2004 and thereafter 4,595,595
------------
$169,088,527
============
7. SHORT-TERM BORROWINGS
Short-term borrowings are as follows at December 31:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Federal funds purchased $30,600,000 $ -
Securities sold under repurchase agreements 28,487,585 28,872,826
Demand note, U.S. Treasury 1,161,461 532,473
----------- -----------
Total $60,249,046 $29,405,299
=========== ===========
</TABLE>
The maximum and average amounts of short-term borrowings outstanding
and related interest rates for the years ended December 31, 1999 and
1998 are as follows:
<TABLE>
<CAPTION>
MAXIMUM WEIGHTED
OUTSTANDING AVERAGE
AT ANY AVERAGE RATE DURING RATE AT
1999 MONTH END OUTSTANDING THE YEAR YEAR END
---- --------- ----------- -------- --------
<S> <C> <C> <C> <C>
Federal funds purchased $30,600,000 $10,581,431 5.06% 4.05%
Securities sold under repurchase
agreements 35,865,050 31,634,056 4.80% 5.04%
Demand note, U. S. Treasury 1,189,861 549,438 7.17% 4.54%
----------- -----------
Total $67,654,911 $42,764,925
=========== ===========
</TABLE>
F-26
<PAGE>
FIDELITY DEPOSIT & DISCOUNT BANK
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
<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> <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>
At December 31, 1999, the Bank has $5,000,000 available on an unsecured
line of credit from a financial institution.
At December 31, 1999, the Bank has available approximately $2,795,000 that
it can borrow at the discount window from the Federal Reserve Bank of
Philadelphia, which is secured by certain investments.
There were no borrowings on these lines at December 31, 1999 or 1998.
At December 31, 1999, the Bank has a $40,000,000 open repo plus with the
FHLB, which is secured by certain mortgage loans, and expires April 21,
2000. The borrowings at December 31, 1999 were $30,600,000.
At December 31, 1999, the Bank also has a $9,545,000 Y2K line of credit
which expires May 15, 2000. This line is secured by certain mortgage
loans. There were no borrowings at December 31, 1999.
8. LONG-TERM DEBT
Long-term debt consists of advances from the FHLB with interest rates
ranging from 4.69% to 6.33% in 1999 and 3.81% to 6.15% in 1998. 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, 1999, the maturities of long-term debt are as follows:
YEAR ENDING DECEMBER 31
-----------------------
2000 $ 1,305,000
2003 10,000,000
2004 21,000,000
2008 20,000,000
2009 5,000,000
-----------
$57,305,000
===========
F-27
<PAGE>
FIDELITY DEPOSIT & DISCOUNT BANK
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
9. 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,
1999, 24,280 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. 2,250 stock options with
a ten-year life were awarded in 1999. 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. 1,500
qualified stock options with a ten-year life were awarded in 1999. No
qualified options were awarded in 1998.
The Bank applies Accounting Principles Board Opinion No. 25 and related
interpretations in accounting for the Option Plans. Accordingly, no
compensation expense has been recognized for the Option Plans. Had
compensation cost for the Option Plans been determined based on fair
values at the grant date for awards consistent with the method of SFAS No.
123, the Bank's net income and earnings per share would have been adjusted
to the pro forma amounts indicated below for the year ended December 31,
1999:
AS REPORTED PRO FORMA
----------- ---------
Net income (in thousands) $3,814 $3,790
Earnings per share - Basic 4.26 4.23
- Diluted 4.25 4.23
F-28
<PAGE>
FIDELITY DEPOSIT & DISCOUNT BANK
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
For purposes of the pro forma calculations, the fair value of each option
is estimated using the Black-Scholes option pricing model with the
following weighted-average assumptions for grants issued in 1999:
Dividend yield 2.48%
Expected volatility 6.85%
Risk-free interest rate 5.50%
Expected lives 5 years
A summary of the status of the Bank's option Plans as of December 31, 1999
and changes during the year ended is presented below:
WEIGHTED AVERAGE
SHARES EXERCISE PRICE
------ --------------
Outstanding, beginning of year -
Granted 3,750 $62.00
Exercised -
Forfeited -
---- ------
Outstanding, end of year 3,750 $62.00
===== ======
F-29
<PAGE>
FIDELITY DEPOSIT & DISCOUNT BANK
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
10. INCOME TAXES
The following temporary differences gave rise to the deferred tax asset at
December 31, 1999 and 1998:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Deferred tax assets:
Provision for loan losses $ 971,182 $ 915,197
Deferred compensation 104,244 90,104
Unrealized losses on available-for-sale loans 49,588 -
Other tax assets 14,395 -
Unrealized gain on available-for-sale securities 2,407,670 (68,962)
---------- ---------
Total 3,547,079 936,339
---------- ---------
Deferred tax liabilities:
Leasing (686,734) (350,340)
Loan fees and costs (187,171) (133,250)
---------- ---------
Total (873,905) (483,590)
---------- ---------
Deferred tax asset, net $2,673,174 $ 452,749
========== =========
</TABLE>
The provision for income taxes is as follows:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Current $645,109 $1,131,948 $1,173,088
Deferred 258,291 114,812 11,920
-------- ---------- ----------
Total provision $903,400 $1,246,760 $1,185,008
======== ========== ==========
</TABLE>
A reconciliation between the expected statutory income tax and the actual
provision for income taxes is as follows:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Expected provision at the statutory rate $1,603,989 $1,635,506 $1,528,322
Tax-exempt income (660,622) (437,820) (383,916)
Nondeductible interest expense 95,891 66,618 54,659
Low income housing tax credits (73,910) - -
Other, net (61,948) (17,544) (14,057)
---------- ---------- ----------
Actual provision for income taxes $ 903,400 $1,246,760 $1,185,008
========== ========== ==========
</TABLE>
F-30
<PAGE>
FIDELITY DEPOSIT & DISCOUNT BANK
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
11. 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 1999, 1998 and 1997 were $212,898, $200,140 and $177,529,
respectively.
12. 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 1999,
1998 or 1997.
F-31
<PAGE>
FIDELITY DEPOSIT & DISCOUNT BANK
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
The carrying or notional amount and estimated fair values of the Bank's
financial instruments were as follows at December 31, 1999 and 1998:
<TABLE>
<CAPTION>
............1999........... ...........1998............
CARRYING CARRYING
OR OR
NOTIONAL ESTIMATED NOTIONAL ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
------ ---------- ------ ----------
(IN THOUSANDS) (IN THOUSANDS)
<S> <C> <C> <C> <C>
Financial assets:
Cash and cash equivalents $ 17,957 $ 17,957 $ 8,720 $ 8,720
Federal funds sold - - 6,500 6,500
Available-for-sale securities 109,262 109,262 78,608 78,608
Loans and leases 299,366 295,628 238,438 240,072
Loans available for sale 5,254 5,254 8,858 9,010
Accrued interest 3,262 3,262 2,404 2,404
Financial liabilities:
Deposit liabilities $294,701 $294,649 $240,001 $240,551
Accrued interest 1,767 1,767 2,742 2,742
Short-term borrowings 60,249 60,249 29,405 29,411
Long-term debt 57,305 56,805 42,252 42,256
Off-balance sheet liabilities:
Commitments to extend credit $56,018 $ 56,018 $ 75,070 $ 75,070
Standby letters of credit 4,398 4,398 1,443 1,443
</TABLE>
13. EARNINGS PER SHARE
Earnings per share (EPS) is computed using the weighted-average number of
shares of common stock outstanding after giving effect to the assumed
exercise of stock options.
The following data shows the amounts used in computing earnings per share
and the effects on income and the weighted average number of shares of
dilutive potential common stock for the years ended December 31, 1999, 1998
and 1997.
<TABLE>
<CAPTION>
INCOME COMMON SHARES
NUMBERATOR DENOMINATOR EPS
---------- ----------- ---
<S> <C> <C> <C>
1999
----
Basic EPS $3,814,215 896,116 $4.26
=====
Dilutive effect of potential common stock
-----------------------------------------
Stock options:
Exercise of options outstanding 3,750
Hypothetical share repurchase at $70.25 (3,310)
---------- -------
Diluted EPS $3,814,215 896,556 $4.25
----------- ========== ======= =====
</TABLE>
F-32
<PAGE>
FIDELITY DEPOSIT & DISCOUNT BANK
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
INCOME COMMON SHARES
NUMBERATOR DENOMINATOR EPS
---------- ----------- ---
1998
Basic and diluted EPS $3,563,552 848,554 $4.20
========== ======= =====
INCOME COMMON SHARES
NUMBERATOR DENOMINATOR EPS
---------- ----------- ---
1997
Basic and diluted EPS $3,310,057 832,994 $3.97
========== ======= =====
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, 1999, 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 1999 or 1998.
F-33
<PAGE>
FIDELITY DEPOSIT & DISCOUNT BANK
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
<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, 1999:
Total Capital
(to Risk Weighted Assets) $39,972,000 14.0% >$23,073,000 >8.0% >$28,841,000 >10.0%
- - - -
Tier I Capital
(to Risk Weighted Assets) $36,800,000 12.8% >$11,536,000 >4.0% >$17,304,000 >10.0%
- - - -
Tier I Capital
(to Average Assets) $36,800,000 8.2% >$16,170,000 >4.0% >$20,213,000 > 5.0%
- - - -
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 >10.0%
- - - -
Tier I Capital
(to Average Assets) $33,880,000 9.7% >$12,557,000 >4.0% >$15,696,000 > 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. These
loans do not involve more than the normal risk of collectability or
present other unfavorable features. A summary of loan activity with
officers, directors, shareholders and associates of such persons is as
follows:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Balance, beginning $ 4,337,908 $ 4,261,755 $ 3,910,681
Additions 1,981,163 1,597,121 2,266,427
Collections (2,194,036) (1,520,968) (1,915,353)
----------- ----------- -----------
Balance, ending $ 4,125,035 $ 4,337,908 $ 4,261,755
=========== =========== ===========
</TABLE>
F-34
<PAGE>
FIDELITY DEPOSIT & DISCOUNT BANK
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
Aggregate loans to directors and associates exceeding 2.5% of
shareholders' equity included in the table above are as follows:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Number of persons 1 2 3
Balance, beginning $2,447,527 $3,511,442 $ 2,616,784
Additions 689,343 590,547 2,088,447
Collections (375,165) (926,111) (1,807,055)
Prior loan balance now above threshold 613,266
Adjustment for loans no longer
exceeding 2.5% of shareholder's equity (890,347) (728,351) -
---------- ---------- -----------
Balance, ending $1,871,358 $2,447,527 $ 3,511,442
========== ========== ===========
</TABLE>
16. SUBSEQUENT EVENT
In January 2000, the Bank granted 2,250 options to purchase the Bank's
capital stock at $70.25 per share under the terms of its 1998 Independent
Directors Stock Option Plan. In January 2000, the Bank also granted 1,700
options to purchase the Bank's capital stock at $70.25 per share under the
1998 Stock Incentive Plan.
F-35
<PAGE>
FIDELITY DEPOSIT & DISCOUNT BANK
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
17. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
The following is a summary of quarterly results of operations for the
years ended December 31, 1999, 1998
and 1997:
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
1999 QUARTER QUARTER QUARTER QUARTER TOTAL
---- ------- ------- ------- ------- -----
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
Interest income $ 6,213 $ 6,883 $ 7,560 $ 7,949 $ 28,605
Interest expense (3,235) (3,670) (4,072) (4,399) (15,376)
------- ------- ------- ------- --------
Net interest income 2,978 3,213 3,488 3,550 13,229
Provision for loan losses (180) (140) (85) (125) (530)
Other income 498 574 602 431 2,105
Other expenses (2,272) (2,484) (2,683) (2,648) (10,087)
------- ------- ------- ------- --------
Income before provision for
income taxes 1,024 1,163 1,322 1,208 4,717
Provision for income taxes (220) (261) (303) (119) (903)
------- ------- ------- ------- --------
Net income $ 804 $ 902 $ 1,019 $ 1,089 $ 3,814
======= ======= ======= ======= ========
Net income per share $ .90 $ 1.00 $ 1.14 $ 1.22 $ 4.26
======= ======= ======= ======= ========
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
======= ======= ======= ======= ========
</TABLE>
F-36
<PAGE>
FIDELITY DEPOSIT & DISCOUNT BANK
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
<TABLE>
<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 $ 21,038
Interest expense (2,570) (2,617) (2,627) (2,825) (10,640)
------- ------- ------- ------- --------
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-37
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution.
Management estimates that the expenses payable by the company in connection
with the sale of securities registered on the Registration Statement will be as
follows:
Registration Fee $ 964
Accounting Fees and Expenses $ 1,500
Legal Fees and Expenses $ 12,000
Printing and EDGAR Filing Expenses $ 10,000
Miscellaneous $ 1,000
========
TOTAL $ 25,464
Item 14. Indemnification of Directors and Officers.
Subchapter D of Chapter 17 of the Pennsylvania Business Corporation Law of
1988, as amended (15 Pa. C.S. Sections 1741-1750) provides that a business
corporation has 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.
We qualify the following discussion, in its entirety, by the full text of
Subchapter D of Chapter 17 of the Pennsylvania Business Corporation Law of 1988,
as amended, is attached as Exhibit 99.
Section 1721 of the Pennsylvania Business Corporation Law of 1988, which
relates to the Board of Directors, declares that, unless otherwise provided by
statute or in a bylaw adopted by the shareholders, all powers enumerated in
section 1502, which relates to general powers, and elsewhere in the corporation
law or otherwise vested by law in a business corporation must be exercised by or
under the authority of, and the business and affairs of every business
corporation shall be managed under the direction of, a board of directors. If a
provision is made in the by-laws, the powers and duties conferred or imposed
upon the board of directors under the corporation law are exercised or performed
to the extent and by a person or persons as provided in the by-laws.
Section 1712 provides that a director of a business corporation stands in a
fiduciary relation to the corporation and must perform his duties as a director,
including his duties as a member of any committee of the board, in good faith,
in a manner he reasonably believes to be in the best interests of the
corporation and with the care, including reasonable inquiry, skill and
diligence, as a person of ordinary prudence would use under similar
circumstances. In performing his duties, a director is 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:
II-1
<PAGE>
o one or more officers or employees of the corporation whom the director
reasonably believes to be reliable and competent in the matters
presented;
o counsel, public accountants or other persons as to matters which the
director reasonably believes to be within the professional or expert
competence of such person; or
o a committee of the board 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 is 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.
Section 1716 states that in discharging the duties of their respective
positions, the board of directors, committees of the board and individual
directors of a business corporation may, in considering the best interests of
the corporation, consider the effects of any action upon employees, upon
suppliers 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 does not constitute a violation of
the preceding paragraph. In addition, absent breach of fiduciary duty, lack of
good faith or self-dealing, actions taken as a director or any failure to take
any action are presumed to be in the best interests of the corporation.
Moreover, Section 1721 addresses the personal liability of directors and
states that if a bylaw adopted by the shareholders so provides, a director is
not personally liable, as such, for monetary damages for any action taken, or
any failure to take any action, unless:
o the director has breached or failed to perform the duties of his
office under this section; and
o the breach or failure to perform constitutes self-dealing, willful
misconduct or recklessness.
The provisions discussed above shall not apply to:
o the responsibility or liability of a director pursuant to any criminal
statute; or
o the liability of a director for the payment of taxes pursuant to
local, state or federal law.
Section 1714 states that a director of a business corporation who is
present at a meeting of its board of directors, or of a committee of the board,
at which action on any corporate matter is
II-2
<PAGE>
taken on which the director is generally competent to act, is 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 meeting before the adjournment of the meeting or transmits the dissent in
writing to the secretary of the corporation immediately after the adjournment of
the meeting. The right to dissent does not apply to a director who voted in
favor of the action. Nothing in Section 1714 bars a director from asserting that
minutes of the meeting incorrectly omitted his dissent if, promptly upon receipt
of a copy of the minutes, he notifies the secretary, in writing, of the asserted
omission or inaccuracy.
Section 1741 which relates to third party actions, provides that unless
otherwise restricted in its by-laws, a business corporation has 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 the person 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 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, which relates to derivative actions, provides that unless
otherwise restricted in its by-laws, a business corporation has 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, 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 the person in connection with the defense or
settlement of the action if the 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 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
II-3
<PAGE>
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, which relates to mandatory indemnification, provides for
mandatory indemnification of directors and officers 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, the person is indemnified
against expenses (including attorneys' fees) actually and reasonably incurred by
such person in connection therewith.
Section 1744, which relates 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) is 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 the
person has met the applicable standard of conduct set forth in those sections.
The determination shall be made:
o by the Board of Directors by a majority vote of a quorum consisting of
directors who were not parties to the action or proceeding;
o if 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
o by the shareholders.
Section 1745, which relates 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 the person is not entitled to be indemnified by the corporation
as authorized by Pennsylvania law or otherwise.
Section 1746, which relates to supplementary coverage, provides that the
indemnification and advancement of expenses provided by or granted pursuant to
the other sections of Pennsylvania law are 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.
II-4
<PAGE>
Section 1746 also provides that indemnification referred to above is 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. This indemnification is declared
to be consistent with the public policy of the Commonwealth of Pennsylvania.
Section 1747, which relates to the power to purchase insurance, provides
that unless otherwise restricted in its by-laws, a business corporation has the
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 that 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
corporation law. This insurance is declared to be consistent with the public
policy of the Commonwealth of Pennsylvania.
Section 1748, which relates to application to surviving or new
corporations, provides that for the purposes of Pennsylvania law, 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 Pennsylvania law 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 1749, which applies to employee benefit plans, states that for the
purposes of Pennsylvania law:
o 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 business corporation
that imposes duties on, or involves services by, the representative
with respect to an employee benefit plan, its participants or
beneficiaries;
II-5
<PAGE>
o excise taxes assessed on a person with respect to an employee benefit
plan pursuant to applicable law shall be deemed "fines"; and
o 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 1750, which relates to duration and extent of coverage, declares
that the indemnification and advancement of expenses provided by, or granted
pursuant to Pennsylvania law, unless otherwise provided when authorized or
ratified, continue as to a person who has ceased to be a representative of the
corporation and inure to the benefit of the heirs and personal representative of
that person.
Article 23 of the company's By-laws provides for indemnification to the
full extent authorized by Pennsylvania law.
Insofar as indemnification for liabilities arising under the 1933 Act may
be permitted to directors, officers and controlling persons of the Registrant
pursuant to the foregoing provisions or otherwise, the Registrant has been
advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the 1933 Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by Registrant of expenses incurred or
paid by a director, officer of controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by a director,
officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the manner
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the 1933 Act and will be governed by the final
adjudication of such issue.
Item 15. Recent Sales of Unregistered Securities.
None.
II-6
<PAGE>
Item 16. Exhibits and Financial Statement Schedules
(a) Exhibits:
3(i) Registrant's Amended and Restated Articles of
Incorporation. (Incorporated by reference to Exhibit 3(i) to
Registrant's Registration Statement No. 333-90273 on Form
S-4, filed with the Commission on November 3, 1999, and
as amended on January 4, March 21, March 24 and April 6,
2000.)
3(ii) Registrant's Bylaws. (Incorporated by reference to Exhibit
3(ii) to Registrant's Registration Statement No. 333-90273,
filed with the Commission on November 3, 1999, and as
amended on January 4, March 21, March 24 and April 6,
2000.)
4 Registrant's 2000 Dividend Reinvestment Plan. (Included in
the prospectus.)
5 Form Opinion of Shumaker Williams, P.C. re: Legality of
Shares.
10.1 1998 Independent Directors Stock Option
Plan of The Fidelity Deposit and
Discount Bank (Incorporated by
reference to Exhibit 10.1 to
Registrant's Registration Statement No.
333-90273, filed with the Commission on
November 3, 1999, and as amended on
January 4, March 21, March 24 and April
6, 2000.)
10.2 1998 Stock Incentive Plan of the Fidelity Deposit and
Discount Bank (Incorporated by reference to Exhibit 10.2 to
Registrant's Registration Statement No. 333-90273, filed
with the Commission on November 3, 1999, and as amended
on January 4, March 21, March 24 and April 6, 2000.)
10.3 The Fidelity Deposit and Discount Bank Form of Deferred
Compensation Plan
11 Statement re: Computation of Earnings Per Share. (Included
at page F-32 of the prospectus contained herein.)
21 Subsidiaries of Registrant.
23.1 Consent of Shumaker Williams, P.C. (Included as part of
Exhibit 5.)
II-7
<PAGE>
23.2 Consent of Parente Randolph, P.C.
24 Power of Attorney. (Included on Signature Page.)
99.1 Indemnification Provisions.
99.2 Enrollment Form.
99.3 Letter to Shareholders.
(b) Financial Statement Schedules:
None required.
Item 17. Undertakings.
(a)
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:
o to include any prospectus required by Section 10(a)(3) of the
Securities Act;
o to reflect in the 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; and
o 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, 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.
II-8
<PAGE>
(b) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and
controlling persons of the registrant pursuant to the foregoing
provisions, or otherwise, the registrant has been advised that in the
opinion of the Securities and Exchange Commission such indemnification
is against public policy as expressed in the Act and is, therefore,
unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of
expenses, incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit
or proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the
registrant will, unless in the opinion of its counsel the matter has
been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by
it is against public policy as expressed in the Act and will be
governed by the final adjudication of such issue.
II-9
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Registration Statement on Form S-1 to be signed on its
behalf by the undersigned, thereunto duly authorized, in the Borough of Dunmore,
Lackawanna County, Commonwealth of Pennsylvania on September 8, 2000.
FIDELITY D & D BANCORP, INC.
(Registrant)
By: /s/ Michael F. Marranca
----------------------------------------
Michael F. Marranca,
President and Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Michael F. Marranca and Robert P. Farrell, and
each of them, his true and lawful attorneys-in-fact and agents, with full power
of substitution and resubstitution, for him and in his name, place and stead, in
any and all capacities, to sign any and all amendments (including post-effective
amendments) to this Registration Statement, and to file the same, with all
exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents, and each of them, full power and authority to do and perform each and
every act and thing requisite and necessary to be done, as fully to all intents
and purposes as he might or could do in person, hereby ratifying and confirming
all that said attorneys-in-fact and agents or either of them, or their or his
substitutes, may lawfully do or cause to be done by virtue thereof.
Pursuant to the requirements of the Securities Act of 1933, this
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>
/s/ Michael F. Marranca September 8, 2000
-----------------------------------------------
Michael F. Marranca, President and
Chief Executive Officer, Director
(Principal Executive Officer)
/s/ Robert P. Farrell September 8, 2000
-----------------------------------------------
Robert P. Farrell, Treasurer
(Principal Financial and Accounting Officer)
</TABLE>
II-10
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
/s/ Samuel C. Cali September 8, 2000
-----------------------------------------------
Samuel C. Cali, Chairman of the Board,
Director
/s/ Paul A. Barrett September 8, 2000
-----------------------------------------------
Paul A. Barrett, Director
/s/ Patrick A. Calvey, Jr. September 8, 2000
-----------------------------------------------
Patrick A. Calvey, Jr., Director
/s/ John T. Cognetti September 8, 2000
-----------------------------------------------
John T. Cognetti, Director
/s/ Patrick J. Dempsey September 8, 2000
-----------------------------------------------
Patrick J. Dempsey, Director
/s/ John F. Glinsky, Jr. September 8, 2000
-----------------------------------------------
John F. Glinsky, Jr., Secretary, Director
/s/ Herbert M. McDonald September 8, 2000
-----------------------------------------------
Herbert M. McDonald, Director
/s/ Michael J. McDonald September 8, 2000
-----------------------------------------------
Michael J. McDonald, Director
/s/ David L. Tressler, Sr. September 8, 2000
-----------------------------------------------
David L. Tressler, Sr., Director
</TABLE>
II-11
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Page Number in
Sequential Number
Number Title System
------ ----- -----------------
<S> <C> <C>
3(i) Registrant's Amended and Restated Articles of
Incorporation. (Incorporated by reference to Exhibit 3(i)
to Registrant's Registration Statement No. 333-90273,
filed with the Commission on November 3, 1999, and as
amended on January 4, March 21, March 24 and April 6,
2000.)
3(ii) Registrant's Bylaws. (Incorporated by reference to
Exhibit 3(ii) to Registrant's Registration Statement No.
333-90273, filed with the Commission on November 3,
1999, and as amended on January 4, March 21, March 24
and April 6, 2000.)
4 Registrant's 2000 Dividend Reinvestment Plan.
(Included in the prospectus.)
5 Form Opinion of Shumaker Williams, P.C. re: Legality
of Shares
10.1 1998 Independent Directors Stock Option Plan of The
Fidelity Deposit and Discount Bank (Incorporated by
reference to Exhibit 10.1 to Registrant's Registration
Statement No. 333-90273, filed with the Commission on
November 3, 1999, and as amended on January 4, March 21,
March 24 and April 6, 2000.)
10.2 1998 Stock Incentive Plan of the Fidelity Deposit and
Discount Bank (Incorporated by reference to Exhibit 10.2 to
Registrant's Registration Statement No. 333- 90273, filed
with the Commission on November 3, 1999, and as amended on
January 4, March 21, March 24 and April 6, 2000.)
10.3 The Fidelity Deposit and Discount Bank Form of
Deferred Compensation Plan
11 Statement re: Computation of Earnings Per Share.
(Included at page F-32 of the prospectus contained
herein.)
21 Subsidiaries of Registrant.
</TABLE>
II-12
<PAGE>
<TABLE>
<CAPTION>
Page Number in
Sequential Number
Number Title System
------ ----- -----------------
<S> <C> <C>
23.1 Consent of Shumaker Williams, P.C. (Included as part
of Exhibit 5.)
23.2 Consent of Parente Randolph, P.C.
24 Power of Attorney. (Included on Signature Page.)
99.1 Indemnification Provisions.
99.2 Enrollment Form.
99.3 Letter to Shareholders.
</TABLE>
II-13
