SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM S-4
REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933
FULTON FINANCIAL CORPORATION
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(Exact name of registrant as specified in its charter)
Pennsylvania
---------------------------------
(State or other jurisdiction of
incorporation or organization)
6711 23-2195389
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(Primary SIC Code Number) (I.R.S. Employer
Identification Number)
One Penn Square
P.O. Box 4887
Lancaster, Pennsylvania 17604
(717) 291-2411
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(Address and telephone number of registrant's principal executive offices)
Rufus A. Fulton, Jr., President and Chief Executive Officer
Fulton Financial Corporation
One Penn Square
P.O. Box 4887
Lancaster, Pennsylvania 17604
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(Name, address and telephone number of agent for service)
Copy To: Copy To:
Paul G. Mattaini, Esquire Leonard S. Volin,F. Douglas Raymond,III, Esquire
Barley, Snyder, Senft & Cohen, LLP Housley KantarianDrinker Biddle & Bronstein, P.C.Reath, LLP
126 East King Street 1220 19th1345 Chestnut Street N.W., Suite 700
Lancaster, PA 17602-2893 Washington, D.C. 20036Philadelphia, PA 19107-3496
(717) 299-5201 (202) 822-9611(610) 993-2233
Calculation of Registration Fee
-------------------------------
================================================================================
Title of each Amount Proposed Proposed Amount
class of to be maximum maximum of
securities registered offering aggregate registration
to be registered price per unit* offering price* fee
- --------------------------------------------------------------------------------
Common Stock 7,411,341 $53.25 $211,202,759.25 $64,000.84
$2.50 par value
per share
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*Determined, in accordance with Rule 457(c) and (f), upon the basis of the
average of the high and low prices reported on the American Stock Exchange as of
November 26, 1997, of the 3,966,249 shares of common stock, $5.00 par value per
share, of Keystone Heritage Group, Inc., to be received in exchange for the
securities hereby registered.
Approximate date of commencement of proposed sale of the securities to the
public: As soon as practicable after the effective date of this Registration
Statement.
If the securities being registered on this form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [_]
Calculation of Registration Fee
-------------------------------
================================================================================
Title of each Amount Proposed Proposed Amount
class of securities to be maximum offering maximum of
to be registered registered price per unit* aggregate registration
offering price* fee
- --------------------------------------------------------------------------------
Common Stock 958,818 $42.82 $9,873,656 $2,993
$2.50 par value
per share
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*Determined in accordance with Rule 457(f)(2), upon the basis of the book
value as of March 31, 1997 of 230,596 shares of common stock, $10.00 par value
per share, of The Peoples Bank of Elkton, to be received in exchange for the
securities hereby registered.
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 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
June ___,__________, 1997
Dear Shareholder:
You are cordially invited to a Special Meeting of Shareholders (the
"Meeting") of The Peoples Bank of ElktonKeystone Heritage Group, Inc. ("PBE"KHG") to be held on
July ___, 1997,January 23, 1998, at [Time]________ a.m., at [Place]._______________________________.
At the Meeting, holders of all outstanding shares of Common Stock of KHG,
par value $10.00$5.00 per share (the "Shares""KHG Common Stock"), of PBE will be asked to consider
and vote upon a proposal to approve the merger (the "Merger") of PBEKHG and a subsidiary of Fulton
Financial Corporation ("FFC"), in accordance with the terms of the Affiliation and Merger
Agreement dated March 18, 1997, as amended as of May 20,August 15, 1997, between PBEKHG and FFC (the "Merger Agreement").
Following the Merger, the
resulting bank will operate as a wholly-owned subsidiary of FFC under the name
"The Peoples Bank of Elkton." Pursuant to the Merger Agreement, each Shareshare of KHG Common Stock outstanding at
the effective date of the Merger will automatically be converted into the right
to receive 4.1581.83 shares of FFC's Common Stock, and cash will be paid in lieu of
fractional shares. Consummation of the Merger is subject to certain conditions,
including the approval of the merger by various regulatory agencies and approval
of the PBEKHG shareholders as described below.
The Board of Directors of PBEKHG has unanimously approved and declared the
Merger advisable and recommends that the shareholders of PBEKHG vote in favor of
the Merger Agreement.
It is very important that your shares be represented at the Meeting,
regardless of whether you plan to attend in person. The affirmative vote of
two-thirds of the outstanding shares of PBEKHG Common Stock will be required to
approve the Merger Agreement. Consequently, your failure to vote would have the
same effect as a vote against the Merger. You are therefore urged to execute
and return the enclosed proxy card in the enclosed postage-paid envelope as soon
as possible to ensure your shares will be voted at the Meeting.
Sincerely yours,
David K. Williams, Sr.
ChairmanAlbert B. Murry
President and Chief
Executive Officer
The Peoples Bank of Elkton
130 NorthKeystone Heritage Group, Inc.
555 Willow Street
Elkton, Maryland 21921Lebanon, Pennsylvania 17046
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
To be Held July ___, 1997January 23, 1998
To the Shareholders of
The Peoples Bank of Elkton:Keystone Heritage Group, Inc.:
NOTICE IS HEREBY GIVEN that a Special Meeting of Shareholders of The Peoples
Bank of ElktonKeystone
Heritage Group, Inc. ("PBE"KHG") will be held at [Place],_________________________________
on July ___, 1997,January 23, 1998, at [Time]_____ a.m. local time, for the following purposes:
(1) To consider and vote upon a proposal to approve the merger (the
"Merger") of PBEKHG and a subsidiary of Fulton Financial Corporation ("FFC"), in accordance with
the terms of the Affiliation and Merger Agreement dated March
18,August 15, 1997 as amended as of May 20, 1997,(the "Merger
Agreement"), between PBEKHG and FFC (a copy of which, without exhibits or
schedules, is attached to the accompanying Proxy Statement/Prospectus as Exhibit
A). In the Merger, each of the outstanding shares of Common Stock of KHG, par
value $10.00$5.00 per share (the "Shares"("KHG Common Stock"), of PBE will automatically be converted into
the right to receive 4.1581.83 shares of FCC's Common Stock. Following the Merger, the resulting bank will operate as a wholly-
owned subsidiary of FFC under the name "The Peoples Bank of Elkton." The Merger is more
fully described in the accompanying Proxy Statement/Prospectus; and
(2) To transact such other business as may properly come before the
Special Meeting or any adjournments thereof, including, without limitation, a
motion to adjourn or postpone the Meeting to another time and place for the
purpose of soliciting additional proxies in favor of the Merger Agreement or
otherwise.
The Board of Directors has fixed the close of business on June 6,_________, 1997,
as the record date (the "Record Date") for the Special Meeting. Only those
persons who are record holders of PBEKHG Common Stock at such date will be entitled
to notice of, and to vote at, the Special Meeting and any adjournment thereof.
The attached Proxy Statement/Prospectus forms a part of this Notice and is
incorporated herein by reference.
Appraisal rights will be available to shareholders of record as of the
Record Date who vote against the Merger and continuously hold their shares
through the effective date of the Merger and otherwise comply with the
provisions of FI Sections 3-718 through 3-721 of the Maryland Banking Laws, a
copy of which is attached as Exhibit D to the accompanying Proxy
Statement/Prospectus.
THE AFFIRMATIVE VOTE OF THE HOLDERS OF TWO-THIRDS OF THE OUTSTANDING SHARES
OF KHG COMMON STOCK OF PBE ENTITLED TO VOTE THEREON WILL BE REQUIRED TO ADOPT THE
MERGER AGREEMENT PROVIDING FOR THE MERGER OF PBEKHG WITH A SUBSIDIARY OF FFC. WHETHER OR NOT YOU
PLAN TO ATTEND THE SPECIAL MEETING, THE BOARD OF DIRECTORS URGES YOU TO MARK,
SIGN, DATE AND RETURN AS SOON AS POSSIBLE THE ENCLOSED PROXY IN THE ENCLOSED
ENVELOPE. GIVING THE PROXY WILL NOT AFFECT YOUR RIGHT TO VOTE IN PERSON IF YOU
ATTEND THE MEETING.
By order of the Board of Directors
Cathy C. DunnPeggy Y. Layser
Secretary
Elkton, Maryland
June ___,Lebanon, Pennsylvania
______________, 1997
PROXY STATEMENT/PROSPECTUS
--------------------------
FULTON FINANCIAL CORPORATION
ONE PENN SQUARE
P.O. BOX 4887
LANCASTER, PENNSYLVANIA 17604
(717) 291-2411
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THE PEOPLES BANK OF ELKTON
130 NORTHKEYSTONE HERITAGE GROUP, INC.
555 WILLOW STREET
ELKTON, MARYLAND 21921
(410) 398-3900LEBANON, PENNSYLVANIA 17046
(717) 274-6800
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This Proxy Statement/Prospectus relates to (i) the Special Meeting of
Shareholders (the "Special Meeting") of The Peoples Bank of ElktonKeystone Heritage Group, Inc. ("PBE"KHG") to
be held on [Date], 1997,January 23, 1998, and (ii) the issuance of up to 958,8187,411,341 shares of
the $2.50 par value common stock of Fulton Financial Corporation ("FFC") to be
issued in connection with, and conditioned upon, the effectiveness of the merger
of PBEKHG with a subsidiary of FFC (the "Merger"). The Merger is described more fully in this
Proxy Statement/Prospectus.
----------------------------------
No person has been authorized to give any information or to make any
representation not contained in this Proxy Statement/Prospectus and, if given or
made, such information or representation must not be relied upon as having been
authorized. This Proxy Statement/Prospectus does not constitute an offer to any
person to exchange or sell, or a solicitation from any person of an offer to
exchange or purchase, the securities offered by this Proxy Statement/Prospectus,
or the solicitation of a proxy from any person, in any jurisdiction in which it
is unlawful to make such an offer or solicitation. Neither the delivery of this
Proxy Statement/Prospectus nor any distribution of the securities to which this
Proxy Statement/Prospectus relates shall under any circumstances create any
implication that the information contained herein is correct at any time
subsequent to the date hereof.
----------------------------------
This Proxy Statement/Prospectus does not cover resales of shares of FFC
Common Stock issued to affiliates of PBEKHG in connection with the Merger described
herein. No such person is authorized to make use of this Proxy
Statement/Prospectus in connection with any such resale.
----------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROXY STATEMENT/PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
----------------------------------
THESE SECURITIES OFFERED HEREBY ARE NOT SAVINGS ACCOUNTS, DEPOSITS OR OTHER
OBLIGATIONS OF A BANK OR SAVINGS ASSOCIATION AND ARE NOT INSURED BY THE FEDERAL
DEPOSIT INSURANCE CORPORATION OR ANY OTHER GOVERNMENTAL AGENCY.
----------------------------------
The date of this Proxy Statement/Prospectus is June ___,_____________, 1997.
AVAILABLE INFORMATION
---------------------
FFC isand KHG are subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "1934 Act"), and in accordance therewith
FFC filesand KHG file periodic reports, proxy statements and other information with
the Securities and Exchange Commission (the "SEC"). Such periodic reports,
proxy statements and other information may be inspected and copied at the public
reference facilities maintained by the SEC at Judicial Plaza, 450 Fifth Street,
N.W., Washington, D.C. 20549, and also at the Regional Offices of the SEC
located at Seven World Trade Center, Suite 1300, New York, New York 10048;
Curtis Center, 601 Walnut Street, Suite 1005E, Philadelphia, Pennsylvania 19106;
and Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois
60661. Copies of such material may be obtained, at prescribed rates, by
delivering a request to the Public Reference Section of the SEC at Judicial
Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549. In addition, the SEC
maintains a web site (http://www.sec.gov) that contains periodic reports, proxy
and information statements and other information regarding companies which are
subject to the reporting requirements of the 1934 Act. FFC Common Stock is
listed on the Nasdaq Stock Market and material as to FFC can also be inspected
at the offices of the National Association of Securities Dealers, Inc., 1735 K
Street, N.W., Washington, D.C. 20006. KHG Common Stock is listed on the
American Stock Exchange and material as to KHG can be inspected at _____________
___________________________________________.
THIS PROXY STATEMENT/PROSPECTUS DOES NOT CONTAIN ALL OF THE INFORMATION SET
FORTH IN THE REGISTRATION STATEMENT AND THE RELATED EXHIBITS THAT FFC HAS FILED
WITH THE SEC (CERTAIN PARTS OF WHICH ARE OMITTED IN ACCORDANCE WITH THE RULES
AND REGULATIONS OF THE SEC), AND TO WHICH REFERENCE IS HEREBY MADE. THIS PROXY
STATEMENT/PROSPECTUS IS PART OF THE REGISTRATION STATEMENT AND SUCH REGISTRATION
STATEMENT, INCLUDING EXHIBITS, CAN BE INSPECTED AND COPIED AT THE PUBLIC
REFERENCE FACILITIES MAINTAINED BY THE SEC LISTED ABOVE. THIS PROXY
STATEMENT/PROSPECTUS INCORPORATES DOCUMENTS BY REFERENCE WHICH ARE NOT PRESENTED
HEREIN OR DELIVERED HEREWITH. THESE DOCUMENTS ARE AVAILABLE UPON REQUEST FROM
WILLIAM R. COLMERY, SECRETARY, FULTON FINANCIAL CORPORATION, ONE PENN SQUARE,
P.0. BOX 4887, LANCASTER, PENNSYLVANIA 17604, TELEPHONE: (717) 291-2852. IN
ORDER TO ENSURE TIMELY DELIVERY OF SUCH DOCUMENTS, ANY SUCH REQUEST SHOULD BE
MADE BY _______________, 1997.JANUARY 9, 1998.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
-----------------------------------------------
The following documents and information are hereby incorporated by
reference into this Proxy Statement/Prospectus:
1. FFC's Annual Report on Form 10-K for the year ended December 31,
1996;
2. FFC's Quarterly ReportReports on Form 10-Q for the quarterquarters ended March 31,
1997; June 30, 1997; and September 30, 1997;
3. FFC's Current Reports on Form 8-K dated March 7, 1997 (as amended by
Form 8-K/A dated May 12, 1997); March 31, 1997; August 28, 1997; and September
15, 1997;
4. KHG's Annual Report on Form 10-K for the year ended December 31,
1996;
5. KHG's Quarterly Reports on Form 10-Q for the quarters ended March 31,
1997; June 30, 1997; and September 30, 1997; and
6. KHG's Current Report on Form 8-K dated September 10, 1997.
All documents filed by FFC and KHG pursuant to Sections 13(a), 13(c), 14,
or 15(d) of the 1934 Act after the date of this Proxy Statement/Prospectus and
prior to the Special Meeting are hereby incorporated by reference into this
Proxy Statement/Prospectus and shall be deemed a part hereof from the date of
filing of each such document. Any statement contained in a document incorporated
by reference herein shall be deemed to be modified or superseded for purposes of
this Proxy Statement/Prospectus to the extent that a statement contained herein
or in any other subsequently filed document which is also incorporated by
reference herein modifies or supersedes such statement. Any statement so
modified or superseded shall not be deemed, except as so modified or superseded,
to constitute a part of this Proxy Statement/Prospectus.
TABLE OF CONTENTS
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Page
SUMMARY.....................................................................SUMMARY ................................................................................................. 1
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The PBEKHG Special Meeting.................................................Meeting.......................................................................... 1
Purpose of the Meeting..................................................Meeting........................................................................... 1
The Parties.............................................................Parties...................................................................................... 1
Required Vote...........................................................Vote.................................................................................... 2
Terms of the Merger.....................................................Merger.............................................................................. 3
Conversion and Exchange of Shares of PBEKHG Common Stock...................Stock............................................ 3
Reasons for the Merger..................................................Merger........................................................................... 3
Opinion of PBE'sKHG's Financial Advisor......................................Advisor............................................................... 4
Management and Operations Following the Merger.......................... 4Merger................................................... 5
Effective Date..........................................................Date................................................................................... 5
Termination of the Merger Agreement..................................... 5Agreement.............................................................. 6
Comparison of Shareholder Rights........................................ 5Rights................................................................. 6
Restrictions on Resales by Affiliates...................................Affiliates............................................................ 6
Federal Income Tax Consequences.........................................Consequences.................................................................. 6
Accounting Treatment.................................................... 6
Dissenters' Rights...................................................... 6Treatment............................................................................. 7
Limitations on Negotiations; Warrant Granted to FFC..................... 6FFC.............................................. 7
Conditions and Amendments............................................... 7Amendments........................................................................ 8
Comparative Stock Prices................................................ 7Prices......................................................................... 8
Selected Historical and Pro Forma Combined Per Share Data............... 8Data........................................ 9
Selected Historical Financial Data......................................Data............................................................... 14
Introduction............................................................GENERAL INFORMATION--SPECIAL MEETING OF KHG SHAREHOLDERS................................................. 19
- --------------------------------------------------------
Introduction..................................................................................... 19
Date, Time and Place of Special Meeting.................................Meeting.......................................................... 19
Shareholders Entitled to Vote...........................................Vote.................................................................... 19
Purpose of Meeting......................................................Meeting............................................................................... 19
Solicitation of Proxies.................................................Proxies.......................................................................... 19
Quorum and Required Vote................................................Vote......................................................................... 19
Revocation and Voting of Proxies........................................Proxies................................................................. 20
Shares Outstanding and Principal Holders Thereof........................Thereof................................................. 20
Interests of Certain Persons in Matters To Be Acted Upon................ 21Upon......................................... 20
Recommendation of the Board of Directors of PBE.........................KHG.................................................. 22
THE MERGER..................................................................MERGER............................................................................................... 23
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General Information.....................................................Information.............................................................................. 23
The Restructuring................................................................................ 23
Background of the Merger................................................Merger......................................................................... 23
Reasons forChanges in the Merger; RecommendationBanking Industry.................................................................. 24
Benefits of the Board of Directors........ 25
Additional Reasons for the Merger.......................................Merger to KHG and FFC............................................................ 25
Opinion of Financial Advisor to The Peoples BankKHG.............................................................. 25
Recommendation of Elkton.............. 27the Board of Directors of KHG.................................................. 28
Conversion and Exchange of Shares.......................................Shares................................................................ 29
Treatment of Outstanding Options................................................................. 30
Business Pending The Effective Date..................................... 32Date.............................................................. 30
Conditions, Amendment and Termination................................... 34Termination............................................................ 32
Effective Date of the Merger............................................ 35Merger..................................................................... 33
Management and Operations Following the Merger.......................... 35Merger................................................... 34
Federal Income Tax Consequences.........................................Consequences.................................................................. 35
Accounting Treatment............................................................................. 36
Accounting Treatment.................................................... 37
Rights of Dissenting Shareholders....................................... 37Shareholders................................................................ 36
Restrictions on Resale of FFC Common Stock Held By Affiliates of
PBE.... 39KHG....................................................................................... 36
Warrant Agreement....................................................... 39Agreement................................................................................ 37
COMPARATIVE STOCK PRICES AND DIVIDENDS - --------------------------------------
AND RELATED SHAREHOLDER MATTERS.......................................... 42
-------------------------------MATTERS................................... 40
- ----------------------------------------------------------------------
Common Stock of FFC..................................................... 42FFC.............................................................................. 40
Common Stock of PBE..................................................... 42KHG.............................................................................. 40
i
PRO FORMA COMBINED FINANCIAL INFORMATION................................................................. 41
- ----------------------------------------
Pro Forma Combined Balance Sheet (Unaudited)..................................................... 42
Pro Forma Combined Condensed Statement of Income (Unaudited)..................................... 48
INFORMATION CONCERNING FULTON FINANCIAL CORPORATION - ---------------------------------------------------
AND DESCRIPTION OF FFC COMMON STOCK...................................... 44
-----------------------------------
General................................................................. 44STOCK.................. 53
- ---------------------------------------------------------------------------------------
General.......................................................................................... 53
Loan Policies and Portfolio Quality..................................... 45Quality.............................................................. 54
Computer System Adaptation for Year 2000......................................................... 54
Legal Proceedings....................................................... 45Proceedings................................................................................ 54
General Description of FFC Common Stock................................. 45
Dividends............................................................... 46Stock.......................................................... 55
Dividends........................................................................................ 55
Dividend Reinvestment Plan.............................................. 47Plan....................................................................... 56
Securities Laws......................................................... 47Laws.................................................................................. 56
Antitakeover Provisions................................................. 47
Indemnification......................................................... 49Provisions.......................................................................... 56
Indemnification.................................................................................. 58
Comparison of Shareholder Rights........................................ 49Rights................................................................. 58
INFORMATION CONCERNING THE PEOPLES BANK OF ELKTON........................... 52KEYSTONE HERITAGE GROUP, INC...................................................... 60
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Description of Business and Property.................................... 52
PBEProperty............................................................. 60
KHG Common Stock Market Price and Dividends............................. 52Dividends...................................................... 60
Information About Directors and Executive Officers...................... 53
Selected Historical Financial Data...................................... 54
Management's Discussion and Analysis of Financial Condition and
Results of Operations
Additional Statistical Disclosure....................................... 70
EXPERTS..................................................................... 75Officers............................................... 61
EXPERTS ................................................................................................. 62
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LEGAL MATTERS............................................................... 75MATTERS............................................................................................ 62
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ADDITIONAL INFORMATION...................................................... 75INFORMATION................................................................................... 62
- ----------------------
OTHER MATTERS............................................................... 75MATTERS............................................................................................ 62
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EXHIBITS
- --------
Exhibit A - Affiliation and Merger Agreement...........................Agreement .................................................................... A-1
Exhibit B - Opinion of Berwind Financial, L.P..........................Danielson Associates, Inc................................................. B-1
Exhibit C - Warrant Agreement and Warrant..............................Warrant ....................................................... C-1
Exhibit D - Statute Relating to Dissenters' Rights..................... D-1
Exhibit E - Financial Statements for The Peoples Bank of Elkton........ E-1
ii
SUMMARY
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The following is a summary of certain information set forth in this Proxy
Statement/Prospectus regarding the Merger between PBEKHG and a subsidiary of FFC. This summary is
provided for convenience only and does not set forth completely all material
features of the Merger. This summary should be read in conjunction with and is
qualified in its entirety by the more detailed information which is set forth
elsewhere in this Proxy Statement/Prospectus and the attached Exhibits or which
is incorporated herein by reference.
The PBEKHG Special Meeting
-----------------------
A Special Meeting of the shareholders of PBEKHG will be held on [Date], 1997,January 23,
1998, at [Time]_______ a.m., local time, at the [Place].____________________________________
Lebanon, Pennsylvania. Only those shareholders of record at the close of
business on June 6,_____________, 1997, will be entitled to receive notice of and to
vote at the meeting. As of the record date, there were outstanding 230,5963,966,249
shares of the common stock, par value $10.00$5.00 per share, of PBEKHG ("PBEKHG Common
Stock"), each of which is entitled to one vote. See GENERAL INFORMATION--SPECIAL
MEETING OF PBEKHG SHAREHOLDERS.
Purpose of the Meeting
----------------------
The shareholders of PBEKHG will be asked at the Special Meeting to consider and
vote upon a proposal to approve and adopt the Affiliation and Merger Agreement, dated March 18, 1997, as amended as of May 20,August 15,
1997 (the "Merger Agreement") between FFC and PBE,KHG, under the terms of which (i)
FFC will organize a Maryland
bank ("PBE Interim Bank") as a wholly-owned subsidiary of FFC and cause PBE
Interim Bank to become a party to the Merger Agreement, (ii) PBEKHG will be merged with and into PBE Interim Bank, (iii) PBE Interim BankFFC, (ii) FFC will survive the Merger, and
operate as a wholly-owned subsidiary of FFC after the Merger under the name
"The Peoples Bank of Elkton" (all references to PBE in this Prospectus/Proxy
Statement with respect to matters after the Merger shall be deemed to refer to
such resulting bank), and (iv)(iii) each of the outstanding shareshares of PBEKHG Common Stock, par value $10.00$5.00 per
share, will be converted into 4.1581.83 (the "Conversion Ratio") shares of the common
stock of FFC, par value $2.50 per share ("FFC Common Stock").
PBE's shareholders will receive cash in lieu of fractional
shares of FFC Common Stock. The Conversion Ratio and all pro forma and FFC
historical per share information herein have been adjusted to reflect a 10%
stock dividend declared by FFC on May 1, 1997, payable on June 13, 1997, to
shareholders of record on May 23, 1997. On February 28, 1997, FFC completed the previously announced acquisition of
The Woodstown National Bank & Trust Company ("WNB"), and on August 31, 1997, FFC
completed the previously announced acquisition of The Peoples Bank of Elkton
("PBE"). TheEach transaction was accounted for as a pooling of interest. All of
the financial information contained herein has been restated to reflect the
financial conditionconditions and results of operations of WNB.WNB and PBE. In addition, all
pro forma and FFC historical per share information have been adjusted to reflect
a ten percent stock dividend paid by FFC on June 13, 1997. See THE MERGER. The
Merger Agreement, without exhibits or schedules, is attached as Exhibit A to
this Proxy Statement/Prospectus.
The Parties
-----------
Fulton Financial Corporation: Fulton Financial Corporation is a
----------------------------
Pennsylvania
---------------------------- business corporation and a registered bank holding company that
maintains its headquarters in Lancaster, Pennsylvania. As a bank holding
company, FFC engages in a general commercial and retail banking and trust
business, and also in related financial businesses, through its fourteenfifteen
directly-held bank and nonbank subsidiaries. FFC's bank subsidiaries currently
operate eighty-foureighty-six banking offices in Pennsylvania, fifteensixteen banking offices in
Maryland, sixseven banking offices in Delaware, and twelvefourteen banking offices in New
Jersey. As of March 31,September 30, 1997, FFC had consolidated total assets of
approximately $4.1$4.4 billion.
1
The principal assets of FFC are the following teneleven wholly-owned bank
subsidiaries, each of which is a bank whose deposits are insured by the Federal
Deposit Insurance Corporation ("FDIC"): (i) Fulton Bank, a Pennsylvania bank
and trust company which is not a member of the Federal Reserve System, (ii)
Farmers Trust Bank, a Pennsylvania bank and trust company which is a member of
the Federal Reserve System, (iii) Swineford National Bank, a national banking
association which is a member of the Federal Reserve System, (iv) Lafayette
Bank, a Pennsylvania bank and trust
1
company which is not a member of the Federal Reserve System, (v) FNB Bank,
National Association, a national banking association which is a member of the
Federal Reserve System, (vi) Great Valley Savings Bank, a Pennsylvania stock
savings bank which is not a member of the Federal Reserve System, (vii)
Hagerstown Trust Company, a Maryland trust company which is not a member of the
Federal Reserve System, (viii) Delaware National Bank, a national banking
association which is a member of the Federal Reserve System, (ix) The Bank of
Gloucester County, a New Jersey bank which is not a member of the Federal
Reserve System, and (x) The Woodstown National Bank & Trust Company, a national
banking association which is a member of the Federal Reserve System, and (xi)
The Peoples Bank of Elkton, a Maryland bank which is not a member of the Federal
Reserve System. In addition, FFC has four wholly-owned nonbank direct
subsidiaries: (1) Fulton Financial Realty Company, which holds title to or
leases certain properties onupon which facilities of Fulton Bank and Farmers Trust
Bank maintain
branch offices or other facilities,are located, (2) Fulton Life Insurance Company, which engages in the
business of reinsuring credit life, accident and health insurance that is
directly related to extensions of credit by FFC's bank subsidiaries, (3) Central
Pennsylvania Financial Corp., which owns certain non-banking
subsidiaries holding interests in real estate andholds certain limited partnership interests in partnerships invested
in low and moderate income housing projects and certain subsidiaries which, in
turn, hold either interests in real estate (these subsidiaries are, for the most
part, inactive, in the process of liquidation and immaterial to FFC) or
securities, and (4) FFC Management, Inc., which ownsholds certain securities.
The principal executive offices of FFC are located at One Penn Square, P.O.
Box 4887, Lancaster, Pennsylvania 17604, and FFC's telephone number is (717)
291-2411.
The Peoples Bank of Elkton: The Peoples Bank of ElktonKeystone Heritage Group, Inc.: Keystone Heritage Group, Inc. ("PBE"KHG") is a
Maryland
--------------------------
chartered commercial bank-----------------------------
Pennsylvania business corporation and one-bank holding company registered under
the Bank Holding Company Act of 1956, as amended, that maintains its
headquarters in Elkton, Maryland.
PBE operates twoLebanon, Pennsylvania. KHG's sole banking offices in Cecil County, Maryland. PBEsubsidiary is an FDIC-
insured bankLebanon
Valley National Bank ("LVNB"), which is a national banking association and is not a
member of the Federal Reserve System.System and whose deposits are insured by the FDIC.
As of March 31,September 30, 1997, PBEKHG had total assets of approximately $92$646 million,
and LVNB held total deposits of approximately $80$548 million. In addition, KHG
has one direct, wholly-owned subsidiary, Keystone Heritage Life Insurance
Corporation ("KHLIC"), an Arizona insurance company which engages in the
business of reinsuring credit life, accident and health insurance that is
directly related to extensions of credit by LVNB.
The principal executive offices of PBEKHG are located at 130 North555 Willow Street,
Elkton, Maryland 21921,Lebanon, Pennsylvania 17046, and PBE'sKHG's telephone number is
(410) 398-3900.(717) 274-6800.
Required Vote
-------------
The affirmative vote of shareholders holding at least two-thirds of the issued and
outstanding shares of PBEKHG Common Stock given at a duly convened meeting of the
shareholders of PBEKHG is required in order to approve the Merger Agreement. As of
[Date],February, 1997, the directors and executive officers of PBEKHG and their affiliates
owned beneficially approximately 28,015223,376 of the outstanding shares (12.15%) of PBEKHG Common
Stock. It is anticipated that the executive officers and directors of PBEKHG will
vote (in their respective capacities as shareholders of PBE)KHG) their shares of PBEKHG
Common Stock in favor of the proposal to adopt the Merger Agreement. As of
[Date],September 30, 1997, the directors and executive officers of FFC and their
affiliates did not own anyowned beneficially approximately 1,833 shares of PBEKHG Common Stock.
FFC owns 2,666 shares of KHG Common Stock in its portfolio. See GENERAL
INFORMATION--SPECIAL MEETING OF PBEKHG SHAREHOLDERS--Shares Outstanding and
Principal Holders Thereof; and INFORMATION CONCERNING THE PEOPLES BANK OF
ELKTON.KEYSTONE HERITAGE GROUP,
INC.
2
Terms of the Merger
-------------------
Under the terms of the Merger Agreement: (i) FFC will organize a Maryland
bank ("PBE Interim Bank") as a wholly-owned subsidiary of FFC and cause PBE
Interim Bank to become a party to the Merger Agreement, (ii) PBEKHG will be merged with and
into PBE Interim Bank, (iii) PBE Interim BankFFC, (ii) FFC will survive the Merger, and operate as a wholly-owned subsidiary of FFC after the Merger under the name
"The Peoples Bank of Elkton," and (iv)(iii) each of the outstanding
shares of PBEKHG Common Stock will be converted into 4.1581.83 shares of FFC Common
Stock PBE'sStock. KHG's shareholders will receive cash in lieu of fractional shares of FFC
Common Stock. See THE MERGER.
Conversion and Exchange of Shares of PBEKHG Common Stock
-----------------------------------------------------
On the effective date of the Merger (the "Effective Date"), which is
expected to occur during the thirdfirst or fourthsecond quarter of 1997,1998, each share of PBEKHG
Common Stock then issued and outstanding will be converted into the right to
receive 4.1581.83 shares of FFC Common Stock.
The Conversion Ratio and all pro forma and FFC historical per share
information herein have been adjusted to reflect a 10% stock dividend declared
by FFC on May 1, 1997, payable on June 13, 1997, to shareholders of record on
May 23, 1997. The Conversion Ratio is subject to further adjustment in the event of a stock
dividend or similar transaction involving FFC Common Stock prior to the
Effective Date. No fractional shares of FFC Common Stock will be issued in
connection with the Merger. In lieu of the issuance of any fractional share to
which any former PBEKHG shareholder would otherwise be entitled, each such former
shareholder of PBEKHG will receive in cash an amount equal to the fair market value
of his or her fractional interest, which shall be determined by multiplying such
fraction by the Closing Market Price. The Closing Market Price is defined in
the Merger Agreement as the average of the per share closing bid and asked
prices for FFC Common Stock, rounded up to the nearest $.125, for the ten (10)
trading days immediately preceding the date which is two (2) business days
before the Effective Date of the Merger, as reported on the Nasdaq National Market.Market
System of the National Association of Securities Dealers Automated Quotation
System ("NASDAQ"). See THE MERGER.
Each former shareholder of PBEKHG will be required to surrender to FFC the
certificates representing PBEKHG Common Stock held by him or her in accordance with
the instructions which will be sent to him or her immediately following the
Effective Date. Upon proper surrender of his or her PBEKHG Common Stock
certificates, each such former shareholder of PBEKHG will be promptly issued a
stock certificate representing the whole number of shares of FFC Common Stock
into which such shareholder's shares of PBEKHG Common Stock shall have been
converted, together with a check in the amount of any cash, without interest, to
which he or she is entitled in lieu of the issuance of a fractional share. FFC
may withhold dividends payable after the Effective Date to any former
shareholder of PBEKHG who has received written instructions from FFC but has not at
that time surrendered his or her PBEKHG Common Stock certificates. Any dividends
so withheld will be paid, without interest, to any such former shareholder of
PBEKHG upon the proper surrender of his or her PBEKHG Common Stock certificates. See
THE MERGER--Conversion and Exchange of Shares, and the Merger Agreement attached
as Exhibit A to this Proxy Statement/Prospectus. PLEASE DO NOT SEND ANY STOCK
CERTIFICATES AT THIS TIME.
Reasons for the Merger
----------------------
The BoardsIn early 1997, the Board of Directors of FFC and PBE haveKHG determined thatto investigate (i)
whether the Merger is in
the best interests of both organizations. In the caseshareholders of FFC,KHG were best served by the
acquisitioncontinuation of PBE will enable FFCKHG as an independent institution, or (ii) by taking steps to
expand its operations in Maryland. FFC considers
Marylandposition KHG to be sold to another institution in two to three years, or (iii)
by seeking a sale of KHG to another institution immediately. The Board engaged
Danielson Associates Inc. ("Danielson Associates"), an attractive area for expansioninvestment banking firm
experienced in these matters, to evaluate the situation and to make a
recommendation to the Board.
Based on the subsequent recommendation of its business and believes
that the acquisition of PBE will result in a
3
favorable diversification of FFC's assets and earnings. FFC believes PBE's
market is similar to many of the markets that FFC's subsidiary banks currently
serve, i.e., markets with strong small business and agriculture components.
PBE's market area is also a natural extension of the market of one of FFC's
banking subsidiaries, Fulton Bank; Fulton Bank's Oxford, Pennsylvania branch
office is approximately fifteen miles from Elkton, Maryland.
PBE'sDanielson Associates, KHG's Board
of Directors has concluded that, in the rapidly changing and increasingly
competitive market for financial services, it can compete more
effectively aswould be preferable to be part of
a larger banking organization with more resources and a wider range of products
and services than those which PBEKHG currently offers.offers or could
3
reasonably expect to offer in the near future. After exploring possible
acquisition candidates, the Board of Directors concluded that, of the possible
acquirers, FFC provided the best overall benefit to the KHG shareholders and to
the communities it serves and to its employees. Through the Merger, PBEKHG
believes it can expand its resources and its range of
productsservices to customers and servicescommunities can be
expanded on an accelerated timetable as compared to reliance solely on internal
growth. In general, PBE is entering into the Merger because it
believes it can better maximize its shareholders' return through an affiliation
with a larger, more diversified financial institution. PBE'sKHG's Board of Directors believes that FFC's greater resources will
enable PBE to remain competitive and
to offerprovide expanded services to its customers and the communities it serves. In
particular, PBEKHG believes FFC's strong small business services will further
enhance PBE'sKHG's reputation in this area.
In addition,From a financial perspective, the KHG directors concluded that FFC's strong
record of financial performance would give KHG shareholders a security issued by
a company with historically strong financial performance. The directors also
concluded that the premium offered by FFC over the market value of shares of KHG
Common Stock at the time the Merger withAgreement was announced in August reflected
an appropriate recognition by FFC will increase the liquidity of the stock
held by PBE's shareholders by exchanging it for stock in a larger banking
organization that is listedvalue of the KHG business. Based on
the Nasdaq National Market.agreed upon exchange ratio of 1.83 shares of FFC anticipates that
PBE willCommon Stock for each share
of KHG Common Stock, and the market prices of KHG shares and FFC shares at
August 14, 1997, each share of KHG would be exchanged for shares of FFC Common
Stock having a market value of $52.84. Immediately prior to the announcement of
the agreement, the market price for a share of KHG Common Stock was $36.75.
This represented a premium of 44% over the then market price. Since August 15,
1997, the market price of KHG Common Stock has risen to reflect the FFC Merger
Agreement. Based on the market value of FFC Common Stock on December ___, 1997,
the shares of FFC Common Stock to be issued would have a value of $____ for each
share of KHG Common Stock.
The directors also evaluated the effect of the Merger on employees and the
communities served by KHG. As discussed elsewhere in this Proxy
Statement/Prospectus, FFC expects to continue to operate a majority of the
branches of LVNB (under its new name of Lebanon Valley Farmers Bank after merger
with Farmers Trust Bank, a subsidiary of FFC, or as branches of Fulton Bank,
another FFC subsidiary), and has agreed to use its best efforts to retain a strong degreeall
present full-time employees of autonomy which will enable it to preserve its
commitment to community-oriented banking.
InLVNB.
Finally, in considering the Merger, PBE'sKHG's Board of Directors considered,
among other things, the financialother terms of and the Merger, thelegal structure of the
transaction, the
historic and financial performance of FFC, and the opinion of its financial advisors as toadvisor that the fairness of the transaction was
fair, from a financial point of view, to PBEKHG shareholders. SeeMore information
about the matters considered by the board and about the analysis of Danielson
Associates is contained in THE MERGER--Background of the Merger; Reasons forChanges in the
Merger;Banking Industry; Benefits of the Merger to KHG and FFC; Opinion of Financial
Adviser to KHG; and Recommendations of the PBE Board;KHG Board.
Based on these considerations, the Board of Directors of KHG approved the
Merger as in the best interests of the KHG shareholders, and Additional Reasons forrecommends that
shareholders vote FOR the Merger.transaction.
Opinion of PBE'sKHG's Financial Advisor
----------------------------------
PBEKHG engaged Berwind Financial, L.P.Danielson Associates, Inc. ("Berwind"Danielson Associates") to act as
its financial advisor for the purpose of evaluating the financial terms of the
Merger. BerwindDanielson Associates has delivered to PBE'sKHG's Board of Directors an
opinion stating that as of the date of the opinion, the financial terms of the
Merger are fair to the shareholders of PBEKHG from a financial point of view. A
copy of Berwind'sDanielson Associates' opinion is attached to this Proxy
Statement/Prospectus as Exhibit B and should be read
4
in its entirety with respect to the assumptions made and the other matters
considered by BerwindDanielson Associates in rendering its opinion. See THE MERGER--OpinionMERGER--
Opinion of Financial Advisor.Advisor to KHG.
Management and Operations Following the Merger
----------------------------------------------
Under the terms of the Merger Agreement, PBEKHG will merge with and into PBE
Interim Bank and PBE Interim BankFFC,
FFC will survive the Merger, and operate asLVNB will become a wholly-owned banking
subsidiary of FFC. Simultaneously with the effectiveness of the Merger (or
shortly thereafter), FFC anticipates effecting the following transactions (the
"Restructuring"): (i) LVNB and Farmers Trust Bank ("Farmers"), a wholly-owned
FFC subsidiary, will merge; (ii) the surviving bank in such a merger, operating
under the name "The Peoples"Lebanon Valley Farmers Bank", would immediately transfer branch
offices of LVNB located in Dauphin and Lancaster Counties and the assets and
deposit liabilities related to such branch offices to Fulton Bank ("FB", another
wholly-owned FFC subsidiary); (iii) subject to regulatory considerations and/or
to the extent determined advisable by FFC, FFC may close or sell existing
branches of LVNB, Farmers, FB or other subsidiaries of FFC which may overlap
geographically with other branches of FFC's subsidiary banks. Lebanon Valley
Farmers Bank, as a wholly-owned FFC subsidiary, would operate all Lebanon County
branch offices now operated by LVNB and Farmers, and in addition, the Womelsdorf
and Pine Grove branches of LVNB; and (iv) Fulton Life Insurance Company ("FLIC")
and KHLIC will merge. FFC is filing applications for approval of the
Restructuring with the Federal Reserve Bank of Elkton."Philadelphia, the Federal Deposit
Insurance Corporation, the Pennsylvania Banking Department and the Arizona
Insurance Department. See THE MERGER -- Management and Operations following the
Merger.
Following the Merger, the Board of Directors of FFC will consist of (i) the
same persons who are members of the Board of Directors of FFC immediately before
the Merger, each of whom will serve until his or her successor is elected and
has qualified.
4
Immediately followingqualified, and (ii) two of KHG's current directors (designated, subject to
the Merger, thereasonable approval of FFC, by vote of KHG's Board of Directors of PBEprior to the
Effective Date) who will consist
of the same persons who are members of thebe appointed to FFC's Board of Directors following the
Merger. It is currently anticipated that KHG's initial designees to FFC's Board
of PBE immediatelyDirectors will be Charles V. Henry, III and Donald W. Lesher, Jr., current
directors of KHG.
For a period from the Effective Date through a date determined by FFC (not
to be before five years after the Merger, eachEffective Date), FFC shall offer appointments
to all present directors of whom will serve until his or her successor is elected
and has qualified.LVNB to the board of directors of Lebanon Valley
Farmers Bank who indicate their desire to continue to serve.
Effective Date
--------------
The Merger will become effective on the date of issuancefiling of the CertificateArticles of Merger
issued bywith the Maryland CommissionerPennsylvania Department of Financial Regulation,State, or on such later date specified in
the CertificateArticles of Merger, and will occur as soon as reasonably practicable after
all applicable conditions to the consummation of the Merger have been met or
waived. FFC and PBEKHG presently intend to consummate the Merger during the thirdfirst
or fourthsecond quarter of 1997,1998, assuming that PBE'sKHG's shareholders adopt the Merger
Agreement, all required regulatory approvals are obtained, all applicable
waiting periods have expired, and all other conditions have been met or waived
as of the closing of the Merger. See THE MERGER--
Effective Date.MERGER--Effective Date of the Merger.
5
Termination of the Merger Agreement
-----------------------------------
Either FFC or PBEKHG may terminate the Merger Agreement and cancel the Merger
if (i) the other party has committed a material breach of any representation,
warranty or material failure to comply with any covenant containedset forth in the Merger
Agreement whichand such breach results in a
material and adverse change as to the other party and has not been cured such breach within thirty (30) days after
receiving written notice thereof, or (ii) all applicable conditions have not
been satisfied by JanuaryAugust 31, 1998. KHG may also terminate the Merger Agreement
if the Closing Market Price (as adjusted appropriately for events such as stock
dividend, etc. and assuming the Effective Date is thirty (30) days after receipt
of the last required approval) is both (a) less than or equal to $23.82 per
share (82.5% of the closing bid price of FFC Common Stock on August 14, 1997)
and (b) less than or equal to an amount per share equal to (i) $28.875 (the
closing bid price of FFC Common Stock on August 14, 1997) multiplied by (ii)
0.825 multiplied by (iii) the quotient obtained by dividing the average NASDAQ
Bank Index for the Price Determination Period by the NASDAQ Bank Index on August
14, 1997 (the "Market Test"). Thus, for example, assuming the average NASDAQ
Bank Index for the Price Determination Period reflects a decline of 10% from
August 14,1997, (a) would be $23.82 and (b) would be $21.44 ($28.875 x 0.825 x
0.90) and the Closing Market Price would be required to be $21.44 or lower for
KHG to terminate the Merger Agreement. FFC and PBEKHG may also terminate the
Merger Agreement and cancel the Merger by mutual consent in writing. See THE
MERGER--Conditions, Amendment and Termination.
Comparison of Shareholder Rights
--------------------------------
Upon consummation of the Merger, the shareholders of PBEKHG will become
shareholders of FFC. There are differences between the rights of holders of PBEKHG
Common Stock and FFC Common Stock. These differences arise from (i) differences
between the respective state and federal laws applicable to PBE and FFC, and
(ii) differences
between the Articles of Incorporation and Bylaws of PBEKHG and the Articles of
Incorporation and Bylaws of FFC. The material differences between PBEKHG Common
Stock and FFC Common Stock include the following: (i) FFC has adopted a
Shareholder Rights Plan, which provides FFC's shareholders with certain stock-
related rights in the event of a hostile takeover, but may also have the effect
of discouraging such a takeover, while PBEKHG has not adopted any such plan; (ii)
FFC Common Stock is registered under the 1934 Act and is traded on the Nasdaq
National Market,NASDAQ, while
PBEKHG Common Stock is not registered under the 1934 Act and is not actively traded in an organized market;on the American
Stock Exchange; and (iii) the Articles of
Incorporation of FFC do not grant preemptive rights while PBE shareholders,
pursuant to Maryland law, have such rights (with exceptions); (iv) shareholders
of FFC are not entitled to dissenters' or appraisal rights in the event of a
business combination, while the shareholders of PBE are entitled to such rights;
(v) the Bylaws of FFC establish a Board of Directors divided into three classes,
with members of each class elected for a three-year term that is staggered with
the terms of the members of the other two classes, while PBE's directors are all
elected for one-year terms; and (vi) the Articles of Incorporation of FFC provide for
substantial amounts of authorized but unissued capital stock, including a class
of preferred stock whose rights and privileges may be determined prior to
issuance by FFC's Board of Directors, while PBEKHG authorized capital stock only
includes common stock. See INFORMATION CONCERNING FULTON FINANCIAL CORPORATION
AND
5
DESCRIPTION OF FFC COMMON STOCK--Antitakeover Provisions; Comparison of
Shareholder Rights.
Restrictions on Resales by Affiliates
-------------------------------------
The resale of shares of FFC Common Stock received in connection with the
Merger by persons who are executive officers, directors or ten percent
shareholders of PBEKHG will be subject to certain restrictions. See THE MERGER--
Restrictions on Resale of FFC Common Stock Held by Affiliates of PBE.KHG.
Federal Income Tax Consequences
-------------------------------
The Merger is structured to qualify as a tax-free reorganization under
Section 368 of the Internal Revenue Code of 1986, as amended. Accordingly, no
taxable gain or loss will be recognized by the shareholders of PBEKHG upon their
receipt of FFC Common Stock in exchange for PBEKHG Common Stock, except
6
to the extent that any shareholders of PBEKHG receive cash in lieu of the issuance
of fractional shares of FFC Common Stock or elect to exercise dissenters' rights of
appraisal.Stock. An opinion has been provided by
Barley, Snyder, Senft & Cohen, LLP, counsel for FFC, confirming these and
certain other federal income tax consequences of the Merger. However, each
shareholder of PBEKHG is urged to consult his or her own tax advisor concerning the
particular tax consequences of the Merger as they affect his or her individual
circumstances. See THE MERGER--
FederalMERGER--Federal Income Tax Consequences.
Accounting Treatment
--------------------
Consummation of the Merger is subject to the condition that the Merger can
be treated as a pooling-of-interests for financial accounting purposes. FFC
currently intends to exercise its right to cancel the Merger if such condition
could not be satisfied. Neither FFC nor PBEKHG is presently aware of any reason
why the Merger would not qualify for pooling-of-interests accounting treatment.
See THE MERGER--Accounting Treatment.
Dissenters' Rights
------------------
The shareholders of PBE are entitled to exercise dissenters' rights,
assuming the Merger is consummated, in accordance with the provisions of FI,
Sections 3-718 through 3-721 of the Maryland Banking Laws. FFC has the right to
terminate the Merger Agreement if PBE shareholders exercise dissenters' rights
with respect to 10% or more of the PBE Common Stock. Additionally, the exercise
of such rights by holders of an aggregate of 10% or more of the PBE Common Stock
could affect the ability of FFC to use "pooling-of-interests" accounting
treatment. See THE MERGER--Rights of Dissenting Shareholders and Exhibit D -
Statute Relating to Dissenters' Rights.
Limitations on Negotiations; Warrant Granted to FFC
---------------------------------------------------
The Merger Agreement provides that PBEKHG shall not, nor shall it permit any
officer, director, employee, agent, consultant or representative to: (a)
solicit, initiate or encourage any proposal for a merger with or other
acquisition of PBE,KHG, or any material portion of its assets or properties, with or
by any person other than FFC; or (b) cooperate with, or furnish any non-public
information concerning PBEKHG to, any person in connection with such a proposal;
provided, however, that the PBEKHG Board of Directors shall be free to take such
action as the Board of Directors determines, in good 6
faith and after
consultation with outside counsel, is not legally inconsistent with its
fiduciary duty.
On the day followingFollowing the execution of the Merger Agreement, PBEKHG and FFC entered into a
Warrant Agreement, dated March 19,August 15, 1997 (the "Warrant Agreement"), a copy of
which is attached hereto as Exhibit C. Pursuant to the Warrant Agreement, PBEKHG
has issued to FFC a warrant (the "Warrant") to purchase an aggregate of up to
45,888 shares of PBE Common Stock981,740 fully paid and non-
assessablenon-assessable shares of PBEKHG Common Stock, representing
approximately 19.9% of the issued and outstanding shares of the PBEKHG Common Stock
after giving effect to the exercise of the Warrant, at a price per share equal
to $80.00,$36.75, subject to adjustment as provided for in the Warrant Agreement and
the Warrant. The Warrant is exercisable only upon the occurrence of specified
events relating generally to the support by PBEKHG of a proposal to acquire PBEKHG by
a party other than FFC, an acquisition by a third party or group of 25% or more
of the outstanding shares of PBEKHG Common Stock, or the failure of PBE'sKHG's
shareholders to approve the Merger following the announcement by any party other
than FFC of an offer or proposal to acquire 25% or more of the outstanding
shares of PBEKHG Common Stock, or to acquire, merge or consolidate with KHG, or to
purchase all or substantially all of LVNB's assets and, within 12 months fromten business days
after such announcement, the dateBoard of Directors of KHG either fails to recommend
against acceptance of such meeting,
PBE engages inoffer by KHG's shareholders or enters into an agreementtakes no position with
respect to an Acquisition
Transaction (as such term is defined in the Warrant Agreement).thereto. To the knowledge of PBE,KHG, no event giving rise to the right to
exercise the Warrant has occurred as of the date of this Proxy Statement/Prospectus. The execution of the Warrant Agreement was required by FFC as a
condition to its execution of the Merger Agreement, and the effect of the
Warrant Agreement is to increase the likelihood that the Merger will occur by
making it more difficult and expensive for another party to acquire PBE.KHG. See
THE MERGER--Warrant Agreement.
The foregoing provisions may have the effect of discouraging competing
offers to acquire or merge with PBE.KHG.
7
Conditions and Amendments
-------------------------
Consummation of the Merger is subject to various conditions and
contingencies, including, among others, approval by the shareholders of PBE,KHG,
approval by the Federal Reserve Board, approval by the Federal Deposit Insurance
Corporation, approval byPennsylvania Department
of Banking, notice to the Maryland State Bank Commissioner, of Financial Regulation, and the absence of
an injunction issued by a court of competent jurisdiction enjoining the
performance by FFC or PBEKHG of any of their obligations under the Merger
Agreement.
To the extent permitted by law, the Merger Agreement may be amended at any
time before the Effective Date by a written instrument duly authorized, executed
and delivered by FFC and PBE;KHG; provided, however, that any amendment to the
Conversion Ratio shall not take effect until such amendment has been approved,
adopted or ratified by the shareholders of PBEKHG in accordance with applicable law
(other than pursuant to the terms of the Merger Agreement in the event of a
stock dividend or similar transaction by FFC), and PBE Interim Bank shall be
permitted to join as a party to the Merger Agreement upon its formation without
execution of such joinder by FFC or PBE.. See THE MERGER--Conditions,
Amendment and Termination.
Comparative Stock Prices
------------------------
On March 17,August 14, 1997, the last trading day before public announcement of the
Merger Agreement, the per share closing bid price for FFC Common Stock was
$21.82$28.875 as reported on the NasdaqNASDAQ National Market System ("Nasdaq"NASDAQ"). Based on
such closing bid price for such date and the Conversion Ratio of 4.1581.83 shares of
FFC Common Stock for each share of PBEKHG Common Stock, the pro
7
forma value of the
shares of FFC Common Stock to be received in exchange for each share of PBEKHG
Common Stock was $90.73.
There is currently no$52.84.
On August 14, 1997, the last trading day before public marketannouncement of the
Merger Agreement, the per share closing bid price for the PBEKHG Common Stock nor any
uniformly quoted price.was
$36.75 as reported on the American Stock Exchange.
The foregoing historical and pro forma equivalent per share market
information is summarized in the following table:
Pro Forma
Historical Equivalent
Price Per Share/1/Share Price Per Share/2/
------------------ ------------------
1/
--------------- ---------------
FFC Common Stock
- ----------------
03/17/
08/14/97 Bid Price $21.82$28.88 $ -
03/17/08/14/97 Asked Price $22.27$29.38 $ -
PBEKHG Common Stock/3/Stock
- ----------------
03/17/08/14/97 Bid Price $36.75 $ - 90.73
03/17/52.84
08/14/97 Asked Price $36.75 $ - 92.6053.76
- ------------------------------------------------------------------
/1/ The per share information has been adjusted to reflect a 10% stock dividend
declared by FFC on May 1, 1997, payable on June 13, 1997, to shareholders of
record on May 23, 1997.
/2/ Based upon the product of the Conversion Ratio (4.158)(1.83) and the closing pricebid
and asked prices of FFC Common Stock on March 17,August 14, 1997.
/3/ There is currently no public market for the PBE Common Stock nor any
uniformly quoted price.
The closing bid and asked quotations on NasdaqNASDAQ for FFC Common Stock on
[Date],______________, 1997, were $_____$______ and $_____,$_______, respectively, per share,.share. Based
on such closing bid price for such date and the Conversion Ratio of 4.1581.83 shares
of FFC Common Stock for each share of PBEKHG Common Stock, the pro forma value of
the shares of FFC Common Stock to be received in exchange
8
for each share of PBEKHG Common Stock was $_______.$________. More detailed information
concerning comparative stock prices is set forth elsewhere in this Proxy
Statement/Prospectus. See COMPARATIVE STOCK PRICES AND DIVIDENDS AND RELATED
SHAREHOLDER MATTERS.
Selected Historical and Pro Forma Combined Per Share Data
---------------------------------------------------------
The following tables set forth, at the dates and for the periods indicated,
financial information relating to FFC Common Stock and PBEKHG Common Stock on a per
share historical and pro forma combined basis. The pro forma and equivalent per
share information is presented on the basis of an exchange ratio of 4.1581.83 shares
of FFC Common Stock for each share of PBEKHG Common Stock. The Conversion Ratio
and all pro forma and FFC historical per share information herein have been
adjusted to reflect a 10% stock dividend declared by FFC on May 1, 1997, payable
on June 13, 1997, to shareholders of record on May 23, 1997. On February 28, 1997,
FFC completed the previously announced acquisition of The Woodstown National
Bank & Trust Company ("WNB"), and on August 31, 1997, FFC completed the
previously announced acquisition of The Peoples Bank of Elkton ("PBE"). TheEach
transaction was accounted for as a 8
pooling of interest.interests. All of the financial
information contained herein has been restated to reflect the financial
condition and results of operations of WNB.WNB and PBE. In addition, all pro forma
and historical per share information have been adjusted to reflect a ten percent
stock dividend paid by FFC on June 13, 1997.
The information set forth in the tables below should be read in conjunction
with the pro forma combined financial information, including the notes thereto,
set forth elsewhere in this Proxy Statement/Prospectus, the financial statements
of FFC, including the notes thereto, which are incorporated herein by reference,
and the financial statements of PBE,KHG, including the notes thereto, which are
set forth elsewhere in this Proxy
Statement/Prospectus.incorporated herein by reference. See PRO FORMA COMBINED FINANCIAL INFORMATION;
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE;
INFORMATION CONCERNING THE PEOPLES BANK OF ELKTON. Pro forma financial
information for FFC giving effect to the proposed acquisition of PBE is not
presented in this Proxy Statement/Prospectus due to the fact that PBE would not
qualify as a "significant subsidiary" of FFC under the accounting rules of the
SEC.REFERENCE.
9
Selected Historical and Pro Forma
Combined Per Share Data (A)
As of or for ThreeNine Months Ended March 31
------------------------------------------September 30
-------------------------------------------
FULTON FINANCIAL CORPORATION (FFC)
- ----------------------------------
1997 1996
---------------------------
Historical Per Common Share:
- ---------------------------
Average Shares Outstanding 39,543,051 39,348,88740,548,961 40,355,919
Book Value $10.59 $9.73$11.28 $10.10
Cash Dividends $0.155 $0.138$0.499 $0.441
Net Income $0.39 $0.35$1.19 $1.02
FFC, PBEKHG Combined Pro Forma Per Common Share:
- -------------------------------------------------------------------------------------------
Average Shares Outstanding 40,501,869 40,307,70547,790,421 47,790,916
Book Value $10.58 $9.73$10.98 $9.83
Cash Dividends $0.156 $0.137$0.485 $0.425
Net Income $0.39 $0.35$1.17 $1.00
- ------------------
(A) The above combined pro forma per share equivalent information is based on
average shares outstanding during the period except for the book value per
share which is based on period end shares outstanding. The number of shares
in each case has been adjusted for stock dividends and stock splits by each
institution through the periods including the 10% stock dividend of FFC declared May 1, 1997,
payable June 13, 1997, to shareholders of record on May 23, 1997.periods.
10
Selected Historical and Pro Forma Combined
Per Share Data (A)
FULTON FINANCIAL CORPORATION (FFC)
- ----------------------------------
As of or for the Year Ended December 31
--------------------------------------------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
---------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Historical Per Common Share:
- ---------------------------
Historical Per Common Share:
- ---------------------------
Average Shares Outstanding 39,417,210 39,378,584 39,130,772 38,793,747 38,401,02440,371,748 40,333,127 40,085,339 39,748,350 39,355,667
Book Value $10.38$10.39 $9.58 $8.63 $8.14 $7.37
Cash Dividends $0.590 $0.503 $0.445 $0.407 $0.339
Income From Operations:
Income Before Cumulative Effect
of Changes in Accounting
Principles $1.39 $1.28 $1.17 $1.06 $0.78
Effect of Changes in Accounting
Principles -- -- -- ($0.09) --
Net Income $1.39 $1.28 $1.17 $0.97 $0.78
FFC, PBE Combined Pro Forma
- ---------------------------
Per Common Share:
----------------
Average Shares Outstanding 40,376,028 40,337,402 40,089,590 39,752,565 39,359,842
Book Value $10.37 $9.60 $8.65 $8.16$8.71 $8.19 $7.39
Cash Dividends $0.594 $0.502 $0.443$0.444 $0.405 $0.338
Income From Operations:
Income Before Cumulative
Effect of Changes in
Accounting Principles $1.38 $1.28 $1.16 $1.05 $0.78
Cumulative Effect of Changes
in Accounting Principles -- -- --- - - ($0.09) ---
Net Income $1.38 $1.28 $1.16 $0.96 $0.78
FFC, KHG Combined Pro Forma
- ---------------------------
Per Common Share:
----------------
Average Shares Outstanding 47,784,756 47,773,026 47,518,098 47,176,078 46,757,184
Book Value $10.11 $9.32 $8.45 $7.96 $7.22
Cash Dividends $0.573 $0.484 $0.428 $0.395 $0.338
Income From Operations:
Income Before Cumulative
Effect of Changes in
Accounting Principles $1.35 $1.24 $1.12 $1.00 $0.77
Cumulative Effect of
Changes in Accounting - - - ($0.07) -
Principles
Net Income $1.35 $1.24 $1.12 $0.92 $0.77
(A) The above combined pro forma per share information is based on average
shares outstanding during the period except for the book value per share
which is based on period end shares outstanding. The number of shares in
each case has been adjusted for stock dividends and stock splits by each
institution through the periods, including the 10% stock dividend of FFC
declared May 1, 1997, payable June 13, 1997, to shareholders of record on
May 23, 1997.periods.
11
Selected Historical and Pro Forma Combined Per Share Data (A)
As of or for the ThreeNine Months Ended March 31
--------------------------------------------
The Peoples Bank of Elkton (PBE)September 30
-----------------------------------------------
Keystone Heritage Group, Inc. (KHG) 1997 1996
- -------------------------------- ------------------------------------------------------------------------------- -----------------------------------------------
Historical Per Common Share:
Average Shares Outstanding 230,596 230,5963,959,748 4,065,506
Book Value $42.82 $42.02$16.99 $15.28
Cash Dividends $0.900 $0.500$0.750 $0.621
Net Income $1.32 $1.25
PBE,$1.94 $1.55
KHG, FFC Combined Pro Forma Per
Common Share:
Book Value $44.00 $40.48$20.09 $17.99
Cash Dividends $0.60 $0.57$0.89 $0.78
Net Income $1.61 $1.45$2.14 $1.82
(A) The above combined pro forma per-share equivalent information is based on
average shares outstanding during the period except for the book value per share
which is based on period end shares outstanding. The number of shares in each
case has been adjusted for stock dividends and stock splits by each institution
through the periods including the 10% stock dividend of FFC declared May 1,
1997, payable June 13, 1997, to shareholders of record on May 23, 1997.periods.
12
Selected Historical and Pro Forma Combined Per Share Data (A)
As of or for the Years Ended December 31
------------------------------------------------------------------------------
The Peoples Bank of Elkton--------------------------------------------------------------------------------
Keystone Heritage Group, Inc. 1996 1995 1994 1993 1992
- -------------------------- ----------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------
Historical Per Common Share:
Average Shares Outstanding 230,596 230,596 230,596 230,596 230,5964,053,490 4,066,936 4,061,617 4,058,868 4,044,545
Book Value $42.94 $41.85 $38.43 $37.27 $34.60$15.65 $14.46 $12.83 $12.27 $11.51
Cash Dividends $ 3.20 $ 1.89 $ 1.55 $ 1.36 $ 1.21$0.841 $0.705 $0.633 $0.624 $0.624
Income From Operations:
Income Before Cumulative Effect Of
Changes In Accounting Principles $4.53 $4.39 $3.88 $3.71 $3.17$2.15 $1.88 $1.67 $1.29 $1.26
Cumulative Effect Ofof Changes Inin
Accounting Principles - - - -($0.05) -
Net Income $4.53 $4.39 $3.88 $3.71 $3.17
PBE,$2.15 $1.88 $1.67 $1.24 $1.26
KHG, FFC Combined Pro Forma Per
Common Share:
Book Value $43.14 $39.90 $35.95 $33.93 $30.72$18.50 $17.05 $15.46 $14.56 $13.21
Cash Dividends $2.47 $2.09 $1.84 $1.68 $1.41$1.05 $0.89 $0.78 $0.72 $0.62
Income From Operations:
Income Before Cumulative Effect Of
Changes In Accounting Principles $5.75 $5.32 $4.83 $4.37 $3.29$2.47 $2.27 $2.05 $1.81 $1.40
Cumulative Effect of Changes in
Accounting Principles - - - ($0.36)0.13) -
Net Income $5.75 $5.32 $4.83 $4.01 $3.29$2.47 $2.27 $2.05 $1.68 $1.40
(A) The above combined pro forma per-share equivalent information is based on
average shares outstanding during the period except for the book value per share
which is based on period end shares outstanding. The number of shares in each
case has been adjusted for stock dividends and stock splits by each institution
through the periods including the 10% stock dividend of FFC declared May 1,
1997, payable June 13, 1997, to shareholders of record on May 23, 1997.periods.
13
Selected Historical Financial Data
----------------------------------
The following tables present selected unaudited historical financial data
for FFC and PBE.KHG. The following information should be read in conjunction with
the pro forma combined financial information, including the notes thereto, set
forth elsewhere in this Proxy Statement/Prospectus, the financial statements of
FFC, including the notes thereto, which are incorporated herein by reference and
the financial statements of PBE,KHG, including the notes thereto, which are
set forth elsewhere in this Proxy
Statement/Prospectus.incorporated herein by reference. See PRO FORMA COMBINED FINANCIAL INFORMATION;
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE;
INFORMATION CONCERNING THE PEOPLES BANK OF ELKTON.REFERENCE.
14
Fulton Financial Corporation
Selected Historical Financial Data
(In Thousands)
As of or for the ThreeNine Months Ended March 31
------------------------------------------------------September 30
-------------------------------------------------------------------------
Summary of Operations -------------------------------------------------------------------------
- --------------------- 1997 1996
-------------------------------------------------------------------------------------------------------------------------------
Summary of Operations
- ---------------------
Net interest income $42,757 $39,584$135,526 $125,873
Provision for loan losses 1,794 721
------------------------------------------------------5,389 3,442
-------------------------------------------------------------------------
Net interest income after provision
for loan losses 40,963 38,863130,137 122,431
Other operating income 10,193 8,48630,838 25,266
Other operating expense 29,249 27,768expenses 90,988 88,744
Income tax expense 6,512 5,839
------------------------------------------------------taxes 21,703 17,666
-------------------------------------------------------------------------
Net Income $15,395 $13,742
======================================================
Average Balance Sheet Totalsincome $ 48,284 $ 41,287
=========================================================================
AVERAGE BALANCES
- ---------------------------------------------
Total assets $4,004,262 $3,750,7704,197,288 3,923,685
Investment securities and
money market investments 727,189 796,911783,969 823,481
Loans and leases, (netnet of unearned income) 2,998,288 2,681,718
Total deposits 3,281,289 3,134,186income 3,129,086 2,811,590
Deposits 3,449,856 3,267,484
Long-term debt and lease obligations 55,897 32,24458,284 29,624
Shareholders' equity 415,103 380,144
Actual Balance at Period End435,424 397,391
ENDING BALANCES
- -------------------------------------------
Total assets $4,097,922 $3,827,4774,412,722 4,088,145
Long-term debt and lease obligations 58,648 28,75156,613 23,074
15
Fulton Financial Corporation
Selected Historical Financial Data
(In Thousands)
As of or for the Year Ended December 31
------------------------------------------------------------------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
------------------------------------------------------------------------------------------------------------------------------------------------------
Summary of Operations
- ---------------------
Summary of Operations
- ---------------------
Net interest income $165,510 $153,386 $141,679 $129,840 $120,069$169,672 $157,014 $144,984 $133,016 $123,010
Provision for loan losses 5,227 3,923 2,954 6,148 16,113
----------------------------------------------------------------5,561 3,998 3,074 6,311 16,234
--------------------------------------------------------------------------------------
Net interest income after provision
for loan losses 160,283 149,463 138,725 123,692 103,956164,111 153,016 141,910 126,705 106,776
Other operating income 34,544 31,265 27,595 31,097 26,58034,983 31,691 28,018 31,508 26,929
Other operating expense 116,995 110,506 103,431 100,056 91,575expenses 119,883 112,878 105,616 102,101 93,602
Income tax expense 23,012 19,623 17,219 13,786 8,844
----------------------------------------------------------------taxes 23,464 20,217 17,747 14,310 9,255
--------------------------------------------------------------------------------------
Income before cumulative effect 54,820 50,599 45,670 40,947 30,117 of
changes in accounting principles 55,747 51,612 46,565 41,802 30,848
Cumulative effect of changes in
--- --- ---accounting principles 0 0 0 (3,457) (131)
accounting principles
------------------------------------------------------------------------------------------------------------------------------------------------------
Net Income $54,820 $50,599 $45,670 $37,490 $29,986
================================================================
Average Balance Sheet Totals$55,747 $51,612 $46,565 $38,345 $30,717
======================================================================================
AVERAGE BALANCES
- -------------------------------------------------
Total assets $3,872,744 $3,625,178 $3,312,198 $3,096,368 $2,973,2103,960,409 3,706,137 3,385,613 3,165,658 3,039,765
Investment securities and
money market investments 798,573 796,929 845,852 856,508 744,138807,131 819,718 867,761 880,392 772,197
Loans and leases, (netnet of unearned income) 2,795,460 2,558,467 2,213,677 2,008,439 1,923,662
Total deposits 3,206,648 3,041,509 2,772,683 2,679,832 2,612,580income 2,854,139 2,612,420 2,255,614 2,050,988 1,957,994
Deposits 3,282,689 3,109,287 2,833,573 2,740,007 2,670,254
Long-term debt and lease obligations 29,067 31,643 17,750 11,54531,407 34,643 20,750 12,761 15,636
Shareholders' equity 391,161 357,093 327,636 295,575 276,501
Actual Balance at Period End401,072 366,388 336,312 303,827 284,219
ENDING BALANCES
- -------------------------------------------------
Total assets $4,021,514 $3,768,851 $3,568,247 $3,167,077 $3,103,6694,111,323 3,851,897 3,645,453 3,239,002 3,173,517
Long-term debt and lease obligations 49,560 34,689 27,283 13,05151,560 37,689 30,283 16,051 16,764
16
The Peoples Bank of ElktonKeystone Heritage Group, Inc.
Selected Historical Financial Data
(In Thousands)
As of or for the ThreeNine Months Ended March 31
--------------------------------------------September 30
-------------------------------------------------
1997 1996
-------------------------------------------------------------------------------------------------------
SUMMARY OF OPERATIONS
- -------------------------------
Summary of Operations
- ---------------------
Net interest income $1,074 $ 997$20,167 $18,807
Provision for loan losses 24 21
--------------------------------------------0 0
-------------------------------------------------
Net interest income after provision for loan losses 1,050 97620,167 18,807
Other operating income 115 1105,643 4,265
Other operating expense 716 642expenses 14,717 13,977
Income tax expense 145 155
--------------------------------------------taxes 3,393 2,795
-------------------------------------------------
Net Income $304 $289
============================================
Average Balance Sheet Totalsincome $7,700 $6,300
=================================================
AVERAGE BALANCES
- -----------------------------------------------------------
Total assets $91,139 $84,150623,339 574,569
Investment securities and
money market investments 21,012 23,531147,650 138,382
Loans and leases, (netnet of unearned income) 65,458 56,730
Total deposits 78,509 70,828income 436,150 403,776
Deposits 532,408 485,357
Long-term debt and lease obligations 1,683 2,6926,017 9,620
Shareholders' equity 10,249 9,811
Actual Balance at Period End63,992 60,342
ENDING BALANCES
- -----------------------------------------------------------
Total assets $92,197 $85,261646,336 586,814
Long-term debt and lease obligations 1,500 2,5003,388 4,417
17
The Peoples Bank of ElktonKeystone Heritage Group, Inc.
Selected Historical Financial Data
(In Thousands)
As of or for the Year Ended December 31
--------------------------------------------------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
--------------------------------------------------------------------------------------------------------------------------------------
SUMMARY OF OPERATIONS
- -----------------------------
Summary of Operations
- ---------------------
Net interest income $4,212 $3,627 $3,306 $3,177 $2,941$25,480 $24,163 $23,164 $21,886 $21,716
Provision for loan losses 334 75 120 163 121
-------------------------------------------------0 0 300 2,400 3,600
-------------------------------------------------------------------------------------
Net interest income after provision
for loan losses 3,878 3,552 3,186 3,014 2,82025,480 24,163 22,864 19,486 18,116
Other operating income 444 427 422 411 3495,931 5,411 4,819 5,084 4,366
Other operating expense 2,756 2,372 2,185 2,046 2,027expenses 18,812 18,389 17,633 17,213 15,400
Income tax expense 520 594 528 524 411
-------------------------------------------------taxes 3,879 3,528 3,283 2,115 1,977
-------------------------------------------------------------------------------------
Income before cumulative effect of
changes in accounting principles 8,720 7,657 6,767 5,242 5,105
Cumulative effect of changes in
accounting principles 0 0 0 (200) 0
-------------------------------------------------------------------------------------
Net Income $1,046 $1,013 $895 $855 $731
=================================================
Average Balance Sheet Totalsincome $ 8,720 $ 7,657 $ 6,767 $ 5,042 $ 5,105
=====================================================================================
AVERAGE BALANCES
- ---------------------------------------------------------
Total assets $87,687 $80,959 $73,431 $70,218 $66,174580,456 556,793 535,148 535,364 536,233
Investment securities and
money market investments 24,356 22,789 21,909 23,884 28,059136,734 138,593 130,574 126,606 123,146
Loans and leases, (netnet of unearned income) 58,560 53,953 47,937 42,549 34,332
Total deposits 74,435 67,778 60,890 60,175 57,674income 409,049 381,939 371,467 367,898 375,478
Deposits 491,503 471,256 451,885 456,420 462,813
Long-term debt and lease
obligations 2,340 3,000 3,000 1,216 08,763 11,636 10,259 10,551 5,970
Shareholders' equity 9,912 9,295 8,802 8,273 7,721
Actual Balance at Period End60,738 55,300 50,910 47,689 45,108
ENDING BALANCES
- ---------------------------------------------------------
Total assets $91,962 $84,146 $77,206 $71,925 $69,848616,307 577,777 548,194 533,774 540,038
Long-term debt and lease
obligations 2,000 3,000 3,000 3,000 06,438 14,009 9,926 10,325 10,371
18
GENERAL INFORMATION--SPECIAL MEETING OF PBEKHG SHAREHOLDERS
--------------------------------------------------------
Introduction
- ------------
This Proxy Statement/Prospectus is being furnished to the holders of PBEKHG
Common Stock in connection with the solicitation by PBE'sKHG's Board of Directors of
proxies to be voted at the Special Meeting to be held on [Date], 1997.January 23, 1998. The
purpose of the meeting is to consider and vote upon a proposal adopted by the
Board of Directors of PBEKHG to approve and adopt the Merger Agreement between FFC
and PBE,KHG, the terms of which are described herein.
All information set forth in this Proxy Statement/Prospectus which relates
to FFC has been provided or verified by FFC, and all information which relates
to PBEKHG has been provided or verified by PBE.KHG.
Date, Time and Place of Special Meeting
- ---------------------------------------
The Special Meeting of the shareholders of PBEKHG will be held on
July ___,
1997,January 23, 1998, at [Time]______ a.m., local time, at [Place].____________________________.
Shareholders Entitled to Vote
- -----------------------------
The Board of Directors of PBEKHG has fixed the close of business on June 6,________,
1997, as the record date (the "Record Date") for the determination of holders of
PBEKHG Common Stock entitled to receive notice of and to vote at the Special
Meeting.
Purpose of Meeting
- ------------------
The shareholders of PBEKHG will be asked at the Special Meeting to consider and
vote upon: (i) a proposal to approve and adopt the Merger Agreement, and (ii)
such other matters as may properly be brought before the meeting and any
adjournments thereof, including without limitation, a motion to adjourn or
postpone the Special Meeting to another time and place for the purpose of
soliciting proxies in favor of the Merger Agreement or otherwise.
Solicitation of Proxies
- -----------------------
This Proxy Statement/Prospectus is furnished in connection with the
solicitation of proxies, in the accompanying form, by the Board of Directors of
PBEKHG for use at the Special Meeting and at any adjournments thereof. The
expenses to be incurred in soliciting proxies will be borne by PBE.KHG. In addition
to the use of the mails, the directors, officers and employees of PBEKHG may,
without additional compensation, solicit proxies personally or by telephone or
telegram.
Quorum and Required Vote
- ------------------------
Each share of PBEKHG Common Stock is entitled to one vote on all matters
submitted to a vote of the shareholders. The holders of two-thirdsa majority of the
outstanding shares of PBEKHG Common Stock, present either in person or by proxy,
will constitute a quorum for the transaction of business at the Special Meeting.
The inspectors of election will treat shares of PBEKHG Common Stock represented by
a properly signed and returned proxy as present at the Special Meeting for
purposes of determining a quorum, without regard to whether the proxy is marked
as casting a vote or abstaining. Likewise, the inspectors of election will
treat shares of PBEKHG Common Stock represented by "broker non-votes" (i.e., shares
of PBEKHG Common Stock held in record name by brokers or nominees as to which (i)
instructions have not been received from the
19
beneficial owners or persons
entitled to vote, (ii) the broker or nominee does not have discretionary voting
power under applicable rules of the National
19
Association of Securities Dealers, Inc. or the instrument under which it serves
in such capacity, and (iii) over which the record holder has indicated on the
proxy card or otherwise notified PBEKHG that it does not have authority to vote
such shares on that matter) as present for purposes of determining a quorum.
The affirmative vote of shareholders holding at least two-thirds of the issued and
outstanding shares of PBEKHG Common Stock at the Special Meeting is required in
order to approve the Merger Agreement. Abstentions and broker non-
votesnon-votes will be
counted as shares of PBEKHG Common Stock that are outstanding, but will not be
counted as votes in favor of adoption of the Merger Agreement. Consequently,
abstentions and broker non-votes will have the same effect as a vote against
adoption of the Merger Agreement.
Revocation and Voting of Proxies
- --------------------------------
The execution and return of the enclosed proxy form will not affect a
shareholder's right to attend the Special Meeting and to vote in person. Any
proxy given pursuant to this solicitation may be revoked at any time before the
proxy is voted at the Special Meeting, by (i) delivering notice of revocation or
a later-dated proxy to [Name]Albert B. Murry, President and Chief Executive Officer,
Keystone Heritage Group, Inc., [Title], The Peoples Bank of Elkton, 130 North555 Willow Street, Elkton, Maryland 21921,Lebanon, Pennsylvania 17046,
or (ii) appearing at the meeting and notifying the person in charge thereof that
the shareholder wishes to vote his or her shares of PBEKHG Common Stock in person.
Unless revoked, any proxy given pursuant to this solicitation will be voted at
the Special Meeting in accordance with the instructions thereon of the
shareholder giving the proxy. In the absence of instructions, all proxies will
be voted FOR the proposal to approve the Merger Agreement between PBEKHG and FFC.
Although the Board of Directors knows of no other business to be presented at
the Special Meeting, in the event that any other matters are properly brought
before the meeting and in the absence of instructions to the contrary, any proxy
given pursuant to this solicitation will be voted in accordance with the
recommendations of the managementBoard of PBE.Directors of KHG.
Shares Outstanding and Principal Holders Thereof
- ------------------------------------------------
As of the close of business on the Record Date, PBEKHG had outstanding
230,5963,966,249 shares of PBEKHG Common Stock, which shares were held by ____ holders of
record. PBEKHG has no other stock issued or outstanding. There are 45,888981,740
shares of PBEKHG Common Stock reserved for issuance upon exercise of the Warrant.
As of the Record Date, the directors and executive officers of PBEKHG and their
affiliates owned beneficially a total of 28,015_________ shares of PBEKHG Common Stock
(representing approximately 12.15seven percent of such shares issued and
outstanding). The executive officers and each of the directors intend to vote
their shares in favor of the proposal to approve the Merger Agreement.
To the knowledge of PBE'sKHG's management, as of the Record Date, the following
personsno person owned
of record or beneficially more than five percent of the outstanding shares of
PBEKHG Common Stock:
20
================================================================================
Name & Address Number of Shares Percent
of Beneficial Owner Position Beneficially Owned of Class
------------------- -------- ------------------ ---------
================================================================================
Charles F. Sposato Director 21,084/(1)/ 9.14%
209 Oldfield Point Circle
Elkton, Maryland 21921
================================================================================
Anthony F. Sposato - 19,386/(2)/ 8.41%
80 Molitor Road
Elkton, Maryland 21921
================================================================================
Anchar, a Maryland General Partnership - 13,809/(3)/ 5.99%
209 Oldfield Point Circle
Elkton, Maryland 21921
================================================================================
- --------------------------------------------------------------------------------
/(1)/ Includes 13,809 shares held by Anchar, a Maryland General Partnership, a
partnership jointly owned with his brother, Anthony F. Sposato and 1,810
shares owned by relatives of Mr. Sposato.
/(2)/ Includes 13,809 shares held by Anchar, a Maryland General Partnership, a
partnership jointly owned with his brother, Charles F. Sposato and 5,577
shares owned by relatives of Mr. Sposato.
/(3)/ Shares owned have been included in shares beneficially owned by Mr.
Charles F. Sposato and Mr. Anthony F. Sposato.Stock.
Interests of Certain Persons in Matters To Be Acted Upon
- --------------------------------------------------------
Except as described in this section, the directors and executive officers of
PBEKHG have no substantial interest in the Merger, other than in their capacity as
shareholders of PBE.KHG. As shareholders, the directors and executive officers of
PBEKHG will be entitled to receive FFC Common Stock in exchange for their PBEKHG
Common Stock in the same proportion and on the same terms and of the conditions
as all other shareholders of PBE.
Upon completionKHG.
20
On the date of the Merger Agreement, KHG and its subsidiaries caused the
existing employment agreements with Albert B. Murry and Kurt A. Phillips (the
"KHG Senior Executives") to be terminated and entered into new employment
agreements (the "Employment Agreements") with the KHG Senior Executives. The
termination of the existing employment agreements and the replacement of such
agreements with the Employment Agreements shall become effective on the
Effective Date. KHG and its subsidiaries may not modify the terms of the
Employment Agreements without the prior written consent of FFC, and may not
create any new employment obligations related to the KHG Senior Executives.
Simultaneously with the effectiveness of the Merger, FFC has agreed foranticipates
effecting a restructuring as follows: (i) LVNB and Farmers Trust Bank
("Farmers"), a wholly-owned FFC subsidiary, will merge; (ii) the surviving bank
in such merger, operating under the name "Lebanon Valley Farmers Bank", would
immediately transfer branch offices of LVNB located in Dauphin and Lancaster
Counties and the assets and deposit liabilities related to such branch offices
to Fulton Bank ("FB"), another wholly-owned FFC subsidiary; and (iii) subject to
regulatory considerations and/or to the extent determined advisable by FFC, FFC
may close or sell existing branches of LVNB, Farmers, FB or other subsidiaries
of FFC which may overlap geographically with other branches of FFC's subsidiary
banks. Lebanon Valley Farmers Bank, as a wholly-owned FFC subsidiary, would
operate all Lebanon County branch offices now operated by LVNB and Farmers, and,
in addition, the Womelsdorf and Pine Grove branches of LVNB.
In addition, FFC shall merge its wholly owned nonbanking subsidiary, Fulton
Life Insurance Company ("FLIC") with KHLIC.
For a period offrom the Effective Date through a date determined by FFC (not
to be before five years after the Effective DateDate), FFC shall (subject to continue in office the
right of FFC to terminate such obligations as a result of regulatory
considerations, safe and sound banking practices, or their fiduciary duties by
FFC's directors): Offer appointment to all present directors of PBELVNB to the
board of directors of Lebanon Valley Farmers Bank who indicate their desire to
serve. Eachserve (the "LVNB Continuing Directors"), provided, that (A) each non-employee
director of PBELVNB Continuing Director shall continue
to receive director's fees from PBE onLebanon Valley
Farmers Bank in the same basis as prior to the Merger,
i.e., a quarterly stipendform of $1,250an annual retainer of $9,000 and meeting fees of $100 per Board of
Directors meeting and $50 per committee meeting (provided that FFC may direct
PBE to reduce the frequency of such meetings) and shall continue to receive such
other incidental benefits as he or she was receiving from PBE prior to the
Effective Date. Each PBE director who continues in office(B) each LVNB
Continuing Director shall be subject to FFC's mandatory retirement rules for
directors. KHG intends to dissolve the Pine Grove, Womelsdorf and Eastern
Lebanon County advisory committees. The Agricultural advisory committee of LVNB
would be retained by Lebanon Valley Farmers Bank. Albert B. Murry is to be
appointed chairman of the board and chief executive officer of Lebanon Valley
Farmers Bank. The LVNB Continuing Directors, in their exercise of their
fiduciary duty as to the best interests of LVNB and FFC, may, by a majority vote
of such directors, modify or waive any or all of the foregoing provisions.
FFC has agreed to appoint to FFC's Board of Directors on or promptly after
the Effective Date, two of KHG's current directors (designated, subject to the
reasonable approval of FFC, by vote of KHG's Board of Directors prior to the
Effective Date) to serve as directors of FFC. It is currently anticipated that
KHG's initial designees to FFC's Board will be Charles V. Henry, III, and Donald
W. Lesher, Jr., current directors of KHG. During the five-year period after the
Effective Date, the FFC Board of Directors shall nominate such designees for
election, and support their election, at each annual meting of shareholders of
FFC at which such designees' terms expires. During such period, in the event
either of such designees shall cease to serve as a director of FFC, the LVNB
Continuing Directors shall have the right to designate one other person then
serving on the Board of Directors of Lebanon Valley Farmers Bank to serve as a
director of FFC (subject to the reasonable concurrence of FFC as to the person
designated.)
21
FFC has agreed, following the Merger and for at least three years
thereafter to cause PBEKHG's subsidiaries and/or
Lebanon Valley Farmers Bank to use their best efforts (i) to retain each present
full-time employee of LVNB at such employee's current position (or, if offered
to and accepted by, an employee, a position for which the employee is qualified
with FFC or an FFC subsidiary bank at a salary commensurate with the position),
(ii) to pay compensation to each person who was employed by PBEKHG as of the
Effective Date and who continues to be employed by PBEKHG on orand after the
Effective Date, that is at least equal to the aggregate compensation that such
person was receiving from PBEKHG or one of its subsidiaries prior to the Effective
Date (unless there is a material change in the duties and responsibilities of
such employee), (ii)and (iii) to provide employee benefits including under benefit plans of PBE, to each such person who
is a full-timean employee, on and after the Effective Date, that are substantially
equivalent in the aggregate to the employee benefits that such person was
receiving from PBE as a full-time employeeKHG or one of its subsidiaries prior to the Effective Date and
(iii) to providethat are no less favorable than employee benefits 21
afforded to each such person who is a part-time employee, on or after the Effective
Date, that are the same as the employee benefits that are being received at the
applicable time by part-time employees of other banking subsidiaries owned by
FFC. In addition, FFC has agreed to cause PBE to honor PBE's obligations under
existing PBE employee agreements and benefit plans and FFC and PBE have agreed
that, after the Effective Date of the Merger, FFC shall cause PBE (and any
successor to PBE) to indemnify, defend, and hold harmless any person who, prior
to the Effective Date of the Merger, was an officer, director or employee of
PBE against claims (actual or threatened) brought against such person for
matters occurring prior to the Effective Date to the extent the claim is
related to the person's position and service with PBE. FFC will cause PBE to
provide such indemnification to the full extent permitted under applicable law
and the Articles of Incorporation and Bylaws of PBE and PBE shall pay expenses
in advance of the final disposition of any claim or proceeding to an
indemnified party to the full extent permitted by applicable law and the
Articles of Incorporation and Bylaws of PBE as in effect as of the date of the
Merger Agreement. However, FFC and PBE have retained the right to direct the
defense of any action and to retain counsel of FFC's choice, subject to the
right of indemnified persons to obtain other counsel under the circumstances,
and in the manner, set forth in the Merger Agreement in the event of a conflict
between the positions of PBE and an indemnified party.
FFC has also agreed to use reasonable efforts, with the cooperation of PBE,
to obtain tail coverage relating to PBE's existing directors and officers
liability insurance policy for claims arising from facts or circumstances which
occur prior to the Effective Date for those persons who are covered by such
insurance immediately prior to the Effective Date. FFC may substitute for PBE's
existing directors and officers liability insurance policy a policy or policies
of at least the same coverage and amounts containing terms and conditions that
are substantially no less advantageous.
After the Effective Date, the directors, officers and employees of PBE who
become directors, officers orsimilarly situated
employees of FFC shall have indemnification
rights with prospective application only, except for the indemnification rights
described above. Prospective coverage will be provided, to the extent
permitted under FFC's Articles of Incorporation and applicable law and under
FFC's directors and officers liability insurance policy on a basis at least
equal to the coverage provided to persons in similar positions at FFC.its subsidiaries.
Except as described above, the directors and officers of FFC do not have any
special interest in the Merger (other than in their capacity as shareholders of
FFC) and will not receive any special consideration or compensation in
connection with its consummation.
Recommendation of the Board of Directors of PBEKHG
- -----------------------------------------------
For the reasons stated in this Proxy Statement/Prospectus, the Board of
Directors of PBEKHG has unanimously approved the Merger Agreement and believes the
Merger is in the best interests of the shareholders of PBE.KHG. Accordingly, the
Board of Directors recommends that the shareholders vote in favor of the
proposal to approve the Merger Agreement. See THE MERGER--Background of the
Merger, Reasons for the Merger; Recommendation of the Board of Directors of PBE,KHG,
and Additional Reasons for the Merger.
Certain of the directors and officers of PBEKHG have personal interests in the
consummation of the Merger in addition to their interests as shareholders of
PBE.KHG. See Interests of Certain Persons in Matters To Be Acted Upon.
22
THE MERGER
----------
General Information
- -------------------
The shareholders of PBEKHG will be asked at the Special Meeting to consider and
vote upon a proposal to approve the Merger Agreement between FFC and PBE.KHG. Under
the Merger Agreement: (i) FFC will organize PBE Interim Bank as an interim
Maryland bank and a wholly-owned subsidiary of FFC and cause PBE Interim Bank to
become a party to the Merger Agreement, (ii) PBEKHG will be merged with and into PBE Interim Bank, (iii) PBE Interim BankFFC, (ii) FFC will
survive the Merger, and operate as
a wholly-owned subsidiary of FFC after the Merger under the name "The Peoples
Bank of Elkton", and (iv)(iii) each of the outstanding shares of PBEKHG Common
Stock, par value $10.00$5.00 per share, will be converted into 4.1581.83 shares of FFC
Common Stock .
PBEStock. The wholly-owned subsidiaries of KHG, LVNB and KHLIC, will become
wholly-owned subsidiaries of FFC.
KHG is a Maryland bank.Pennsylvania corporation and one-bank holding company. FFC is a
Pennsylvania bank holding company.corporation with eleven banking subsidiaries. Following the
Merger, PBEKHG will be a wholly-owned subsidiary ofcease to exist and FFC without any
change in its present management or board of directors. FFC will be the parent
company of PBE, and will continue to be a registered bank
holding company that is regulated by the Federal Reserve Board.
The precise terms and conditions of the Merger are set forth in the Merger
Agreement, which is attached as Exhibit A to this Proxy Statement/Prospectus and
is incorporated herein by reference. THE DISCUSSION WHICH FOLLOWS IS INTENDED
ONLY AS A SUMMARY OF CERTAIN TERMS OF THE MERGER AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO THE FULL TEXT OF THE MERGER AGREEMENT ATTACHED AS
EXHIBIT A TO THIS PROXY STATEMENT/PROSPECTUS.
The Restructuring
- -----------------
Simultaneously with the effectiveness of the Merger, FFC anticipates
effecting a restructuring as follows: (i) LVNB and Farmers, a wholly-owned FFC
subsidiary, will merge; (ii) the surviving bank in such merger, operating under
the name "Lebanon Valley Farmers Bank", would immediately transfer (A) branch
offices of LVNB located in Dauphin and Lancaster Counties and the assets and
deposit liabilities related to such branch offices to Fulton Bank ("FB"),
another wholly-owned FFC subsidiary, and (iii) subject to regulatory
considerations and/or to the extent determined advisable by FFC, FFC may close
or sell existing branches of LVNB, Farmers, FB or other subsidiaries of FFC
which may overlap geographically with other branches of FFC's subsidiary banks.
Lebanon Valley Farmers Bank, as a wholly-owned FFC subsidiary, would operate all
Lebanon County branch offices now operated by LVNB and Farmers, and, in
addition, the Womelsdorf and Pine Grove branches of LVNB. In addition, KHLIC
would merge with and into FLIC.
Background of the Merger
- ------------------------
From time to time since the mid 1980s PBE has been contacted by various
financial institutions regarding a possible affiliation. Generally, such
contacts had been informal in nature and did not result in the making of a
formal offer to acquire PBE.
Beginning in 1995, PBE began consulting with a financial advisor to review
withIn early 1997, the Board of Directors possible transactions to enhance stockholder value.
Based upon advice of the financial advisor, the BoardKHG determined to investigate
whether the possibilityinterests of affiliating withthe shareholders of KHG would be best served by the
continuation of KHG as an independent banking institution, or by taking steps to
position KHG for a larger bank holding company. Formal
discussions took place duringsale to another institution in two to three years, or by
immediately seeking a sale of KHG to another institution. The Board engaged
Danielson Associates Inc. ("Danielson Associates"), an investment banking firm
experienced in these matters, to evaluate the first half of 1996 with respectsituation and to make a
recommendation to the affiliation of PBE with a larger, out-of-state financial institution holding
company, but these discussions were eventually terminated. During the summer of
1996, PBE had a preliminary inquiry from another bank holding company although
no offer was ever made. At that time,Board. Danielson Associates thereafter reported to the
Board also reaffirmed its decision to
investigate an affiliation and determined to engage an investment banker to
assist in the process of selecting an affiliation partner. To facilitate the
process, the Board also established an Acquisition Committee consisting of
Directors Williams, Herman, Manlove and Sposato. After interviewing several
firms, the Board opted to engage Berwind. Berwind, after consultations with both
the Board of Directors and the Acquisition Committee, contacted several
financial institution companies to determine the level of interest in an
affiliation with Peoples. Following receipt of expressions of interest from
several companies and conduct of a due diligence review of PBE by certain of
these companies, FFC and another out-of-state bank holding company submitted
"best and final" proposals.
A special meeting of the Board of Directors was convened on February 25,
1997 and held over to February 28, 1997, to consider the two proposals.
Representatives of Berwind and special counsel also attended this meeting. In
the course of its review of these proposals, the Board authorized Berwind to
23
approach each party in an effort to improve the terms of the proposals. As a
result, each party revised its proposal in certain respects. Both proposals
contemplated a tax-free, stock-for-stock exchange. As revised, FFC proposed a
fixed exchange ratio of 3.78 shares of FFC common stock for each share of PBE
common stock (the Conversion Ratio was subsequently adjusted due to the
declaration by FFC of a 10% stock dividend) which based on the closing price of
FFC's common stock on the day prior to the February 25 meeting date had a value
of $96.39 per share. The proposal of the other party contemplated an exchange
ratio to be determined within a range depending on the closing market price of
its common stock and based upon the closing price of such party's common stock
on such same date had a value of $97.56 per share. Based on their respective
closing prices on February 27, 1997 the value of the FFC transaction was $94.50
while the value of the other party's proposal was $94.98.
The Board of Directors proceeded to discuss the merits of each of the two
proposals. All of the directors, with the exception of one director, initially
indicated a preference for the other party's proposal due to a number of factors
including the greater per share pro forma equivalent dividend payment to be
received by PBE's shareholders under the other party's proposal and the marginal
difference in the per share value of the two proposals. The other director
objected to the other party's proposal due primarily to concerns regarding the
application of and basis for the range of the exchange ratio, the need for the
other party to perform due diligence and objections to terms in the proposed
form of definitive agreement. That director then informed the Boardconclusion that he
could not vote to approve a transaction with the other party either as a
director or as a stockholder and, if the Board approved such a transaction, he
stated his intention to exercise his dissenters' rights of appraisal if such a
proposal was presented to the stockholders for a vote. Berwind advised the
Board that the other party would not proceed to negotiate a definitive agreement
with PBE under such circumstances.
The Board then continued its discussion regarding the proposals and noted
that, based on the position of the other party regarding the exercise of
dissenters rights, negotiation of a definitive agreement with that party would
not be possible. The directors confirmed their belief that an affiliation of PBE
with a large financial institution would be in the best interests of the stockholders, customersshareholders would be served
by seeking an immediate sale.
Danielson Associates advised the Board that in its opinion, KHG would find
it increasingly difficult to prosper for the indefinite future in a market that
would become increasingly competitive, and employeesin which competitors would have
substantially greater resources than KHG. Danielson Associates concluded that
KHG's 166-year history as a regional bank in southcentral Pennsylvania, and its
record of PBE. The directors agreedgood financial performance, would not be enough in the new competitive
environment to sustain it as an independent institution. Danielson Associates
also advised the Board that in its opinion,
23
there was a significant risk that KHG would be less attractive as an acquisition
candidate in two to three years, because the number of institutions which might
be interested in a bank of KHG's size was expected to decline as consolidation
in the banking industry continued. Danielson Associates' recommendation was
that the proposalsbest interests of the KHG shareholders would be served by pursuing an
immediate sale.
After careful consideration of the recommendation, the Board authorized
Danielson Associates to identify the most likely possible acquirers, each of
which were approached as to their possible interest in acquiring KHG. With the
assistance of Danielson Associates, the directors determined that the most
attractive offer had been received from FFC. Negotiations were commenced, the
financial and other aspects of FFC were investigated, and an agreement was
reached for the other party were generally comparableMerger which was presented to each other
with there being little difference in the pricing. The directors further agreed
that the FFC proposal as structured generally contemplated PBE's continued
existence following consummation of the acquisition which would be beneficial to
PBE customers and employees. The Board of Directors then unanimously authorized
negotiation of a definitive agreement with FFC based upon the terms of its
written proposal.
On March 18, 1997, the Board of Directors heldof KHG,
together with a special meeting at which
the terms of the proposed agreementsupporting analysis and warrant agreement were reviewed. Legal
counsel and representatives of Berwind were present at this meeting. Berwind
reviewed withfairness opinion by Danielson
Associates. The Merger Agreement was approved by the Board the results of its due diligenceat a meeting held on
FFC and rendered its
opinion that the proposed transaction was fair to shareholders from a financial
point of view. Counsel reviewed the terms of the definitive Merger Agreement,
the Warrant Agreement and Warrant with the Board and responded to questions
posed by the directors. The Board of Directors unanimously approved the
execution of the definitive Merger Agreement and Warrant Agreement.
24
Reasons for the Merger; Recommendation of the Board of Directors
- ----------------------------------------------------------------
The Board of Directors of PBE has determined that the Merger isAugust 15, 1997.
Changes in the best
interests of PBE and its shareholders. In evaluating the Merger Agreement, the
Board of Directors, with the assistance of legal counsel and Berwind, considered
a variety of factors including; (i) the value being offered to shareholders by
FFC in relation to the market value, book value and earnings per share of PBE's
common stock, (ii) information concerning the financial condition, results of
operations and prospects of FFC and PBE, including the long term equity growth
potential of PBE as compared to FFC, (iii) FFC's dividend yield, earnings per
share and stock price history; (iv) the competitive environment for financial
institutions generally, (v) the financial terms of other recent business
combinations in the local financial services industry, (vi) FFC's ability to
provide comprehensive financial services in PBE's market, (vii) FFC's financial
resources to serve the lending and deposit needs of the local communities served
by PBE, thereby enhancing the related long term customer service potential for
PBE's customer service base, (viii) the fact that FFC intends to maintain PBE as
a community-oriented institution for a period of five years following the
merger, and (ix) the opinion of Berwind that the consideration to be received by
PBE's shareholders is fair from a financial point of view.
The Board of Directors of PBE unanimously recommends that the holders of
PBE Common Stock vote "FOR" approval of the Merger Agreement and the Merger.
Additional Reasons for the MergerBanking Industry
- ----------------------------------------------------------------
Recent changes in federal and state banking laws and regulations have had a
major impact upon the banking industry in Pennsylvania Maryland and throughout the United
States. For example, due to changes in Pennsylvania law that became effective
in March, 1990, Pennsylvania banks may establish banking offices throughout the
state, and bank holding companies located in a number of other states may
acquire Pennsylvania banks. Similarly, Maryland law permits
statewide branching by Maryland banks and also permits bank holding companies
located in other states to acquire Maryland banks under specified conditions.
In response to these and other recent changes, many
mergers and consolidations involving Pennsylvania and Maryland banks and bank holding
companies have occurred.
PBEKHG and FFC believe that further merger activity within Pennsylvania and
Marylandother states is likely to occur in the future, resulting in increased
concentration levels in banking markets within Pennsylvania and Maryland and other
significant changes in the competitive environment. Mergers between Pennsylvania and
Maryland banks are currently authorized under federal law as embodied in the
Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (the
"Riegle-Neal Act"). The Riegle-Neal Act allows adequately capitalized and
managed bank holding companies to acquire banks in any state starting one year
after enactment (September 29, 1995). In addition, the Reigle-Neal Act allows
interstate bank merger transactions beginning June 1, 1997, or on any earlier
date that the relevant states pass legislation authorizing mergers with out-of-
state banks.
Both Maryland and Pennsylvania have enacted laws that permit interstate
bank mergers pursuant to the Reigle-Neal Act. Therefore, Maryland and
Pennsylvania banks currently are permitted to merge with each other. Through
interstate merger transactions, banks can acquire branches of out-of-state banks
by converting their offices into branches of the resulting bank. Under current
Maryland and Pennsylvania law, an acquiring bank in an interstate merger may
purchase individual branches (i.e., less than all of the branches) of the
selling bank.
25
Under the Riegle-Neal Act, banks may also establish and operate a "de novo
branch" in any state that "opts-in" to de novo branching. Pennsylvania has
adopted a law permitting out-of-state banks to open de novo branches in
Pennsylvania, as long as the home state of each such bank would offer reciprocal
de novo branching opportunities to Pennsylvania banks. Maryland, allows out-of-
state banks to establish de novo branches within its borders. The Riegle-Neal Act
permits foreign banks to establish branches, either de novo or by merger, to the
same extent as similarly situated domestic banks. In other words, a foreign
bank may establish and operate interstate branches to the same extent that the
establishment and operation of such branches would be permitted if the foreign
bank were a national bank or state bank. All of the foregoing changes made by
the Reigle-Neal Act are expected to intensify competition in local, regional and
national banking markets.
In addition, recent changes in federal banking laws have significantly
increased the severity and complexity of federal banking regulations, as well as
the costs that banks must incur in complying with those regulations. For
example, pursuant to the Federal Deposit Insurance Corporation Improvement Act
of 1991 ("FDICIA"), the federal banking agencies have established guidelines for
real estate lending by FDIC-insured banks, including maximum loan-to-value
ratios for various types of real estate loans. FDICIA requires each FDIC-
insured bank to comply with a number of administrative standards (including
audit requirements) that are designed to enhance the bank's safety and
soundness. FDICIA also contains "Truth in Savings" provisions that require
extensive disclosures regarding the rates of interest paid and the fees charged
by FDIC-insured banks with respect to their deposit accounts. FDICIA further
provides greatly expanded authority to the federal banking agencies to impose
administrative enforcement sanctions (including cease-and-desist orders, civil
money penalties, and officer removal or
24
suspension orders) against FDIC-insured banks that fail to maintain adequate
capital levels or that engage in unsafe or unsound banking practices. These
changes in federal law have added significantly to the cost and complexity of
operating a bank and have made it
more difficult for smaller independent banks like PBE to compete with large
banking organizations.
From the standpointbank.
Benefits of PBE, the Merger presents an attractive opportunity
for PBE to gain accessKHG and FFC
- -------------------------------------
The benefits of the Merger to KHG include the managerial expertiseretention of a majority of its
branches in its primary service area and specialized services
offered by FFC, thereby permitting PBE's banking officesgreatly enhanced resources with which
to provide a broader
range ofoffer services to their customers incustomers. In a competitive environment, the facefinancial
resources of increasing competition from
larger financial institutions. FFC will operate PBE, followingare expected to improve KHG's ability to compete. In addition,
the proposed
Merger, as a separate subsidiary bankundertaking of FFC to use its best efforts to offer employment to all full-
time employees of KHG, and expects to retain PBE's current
executive officers and directors. While FFC will exercise an oversight role and
provide financial backing, administrative support services and other resources
to PBE, it is expected that PBE, like FFC's other subsidiary banks, will operate
as a semi-autonomous community bank. Accordingly, it is anticipated, following
the Merger, that PBE will continue to follow substantially the same policies
regarding interest rates and other terms and conditions for its deposits and
loans.
FFC believes that PBE is already satisfactorily meeting the banking needsretention of the community which it serves. PBE will continue to operate as a community
bank in a market which has experienced considerable consolidation.
However, FFC expects that PBE will be able to expand its banking
activities as a result of the acquisition. PBE will be encouraged to offer such
new products and services as bank-by-phone and debit cards. In addition, FFC
expects that PBE will be able to offer additional cash management services for
its business customers and expand indirect automobile lending programs. PBE is
expected to offer bi-weekly mortgage loans and, as a result of FFC's secondary
mortgage market program, fixed rate mortgage loans. PBE will also
26
be able to extend larger commercial loans in its market area by granting
participation interests in such loans to other subsidiary banks of FFC. Because
FFC shares PBE's philosophy of community banking, PBE's offices will maintain
their community orientation after the Merger. Thus,Senior Executives effective upon
the Merger will enhanceprovide continuity of service to KHG customers and the
abilitycommunities it serves.
For the KHG shareholders, the benefits of PBE's officesthe Merger include the receipt of
a significant premium in the value of FFC Common Stock to remain competitivebe issued for each
share of KHG Common Stock over the market price for KHG Common Stock immediately
prior to the public announcement of the Merger, and an increase in their
effective dividend rate. KHG shareholders will also indirectly receive the
benefits as FFC shareholders of the future efficiencies, benefits and synergies
to satisfy local customers'
financial needs.be realized from the combination with FFC, and will receive the securities of
an institution with a significant history of good performance.
The Merger will benefit FFC by establishing a market presence in Cecil
County, Maryland and by increasing FFC's current market presence in
Maryland.
FFC's acquisition of PBE will represent its second banking operationLebanon, Lancaster, Dauphin and Berks Counties in Maryland. FFC's senior management has selected Maryland as a strategic area for
expansion of its business and believes that the Merger will result in a
favorable diversification of FFC's banking operations. FFC believes PBE's market
is similar to many of the markets that FFC's subsidiary banks currently serve,
i.e., community-oriented markets with strong potential for attracting business
from consumers, small businesses and agricultural concerns. PBE's market area is
also a natural extension of the market of one of FFC's banking subsidiaries,
Fulton Bank; Fulton Bank's Oxford, Pennsylvania branch office is approximately
15 miles from Elkton, Maryland. In sum, the Merger will benefit both parties by
allowing FFC to achieve a broader geographic diversification of its operations
and by enabling PBE to affiliate with a larger multi-bank holding company that
has a significant presence in central and northeastern Pennsylvania, western
Maryland, southern Delaware and southwestern New Jersey.Pennsylvania. The Merger will
thereby
place PBE in a better positionalso extend FFC's market into Schuylkill County. In addition, FFC expects to
compete effectively inbenefit from the rapidly changing
market for financial services.agricultural lending expertise of KHG.
As described above, the Boards of Directors of FFC and PBEKHG have approved the
terms of the Merger Agreement. The Board of Directors of PBEKHG believes that the
terms of the Merger are fair to and in the best interests of PBEKHG and its
shareholders. PBE'sKHG's Board of Directors also believes that the Merger will
enhance the ability of PBE'sKHG's offices to satisfy the financial needs of their
customers and the communities which they serve.
Opinion of Financial Advisor to The Peoples Bank of ElktonKHG
- ----------------------------------------------------------
PBE-----------------------------------
KHG retained BerwindDanielson Associates to act as its financial advisor and to
render a fairness opinion in connection with the Merger. BerwindDanielson Associates
rendered its opinion to the Board of Directors of PBEKHG that, based upon and
subject to the various considerations set forth herein, as of March 18,August 15, 1997
(the "March"August Opinion"), and as of the date of this Proxy Statement/Prospectus
(the "Proxy Opinion"), the financial terms of the Merger are fair, from a
financial point of view, to the holders of PBEKHG Common Stock.
The full text of Berwind'sDanielson Associates' Proxy Opinion, which sets forth the
assumptions made, matters considered and limitations of the review undertaken,
is attached as Exhibit B to this Proxy Statement/Prospectus, is incorporated
herein by reference, and should be read in its entirety in connection with this
Proxy Statement/Prospectus. The summary of the opinion of BerwindDanielson Associates
set forth herein is qualified in its entirety by reference to the full text of
such opinion attached as Exhibit B to this Proxy Statement/Prospectus.
BerwindDanielson Associates was selected to act as PBE'sKHG's financial advisor in
connection with the Merger based upon its qualifications, expertise and
experience. BerwindDanielson Associates has knowledge of, and experience with Maryland and
surrounding banking markets as well as banking organizations operating in those
markets and was selected by PBEKHG because of its knowledge of, experience with,
and reputation in the financial services industry. Berwind,Danielson
25
Associates, as part of its investment banking business, is engaged regularly in
the valuation of assets, securities and companies in connection with various
types of asset and security transactions, including mergers, acquisitions,
private placements, and 27
valuations for various other purposes and in the
determination of adequate consideration in such transactions.
On March 18,August 15, 1997, PBE'sKHG's Board of Directors approved and executed the
Merger Agreement. Prior to such approval, BerwindDanielson Associates delivered its
MarchAugust Opinion to PBE'sKHG's Board of Directors stating that, as of such date, the
financial terms of the Merger were fair to the shareholders of PBEKHG from a
financial point of view. BerwindDanielson Associates reached the same opinion as of
the date of its Proxy Opinion. No limitations were imposed by PBE'sKHG's Board of
Directors upon BerwindDanielson Associates with respect to the investigations made or
procedures followed by BerwindDanielson Associates in rendering the MarchAugust Opinion or
the Proxy Opinion.
In rendering its Proxy Opinion, Berwind:Danielson Associates: (i) reviewed the
historical financial performances, current financial positions and general
prospects of PBEKHG and FFC; (ii) reviewed the Merger Agreement; (iii) reviewed and
analyzed the stock market performance of PBEKHG and FFCFFC; (iv) studied and analyzed
the consolidated financial and operating data of PBEKHG and FFC; (v) considered the
terms and conditions of the proposed Merger as compared with the terms and
conditions of comparable bank and bank holding company mergers and acquisitions;
(vi) met and/or communicated with certain members of PBE'sKHG's and FFC's senior
management to discuss their respective operations, historical financial
statements, and future prospects; (vii) reviewed this Proxy
Statement/
Prospectus,Prospectus; and (viii) conducted such other financial analysis,
studies and investigations as BerwindDanielson Associates deemed appropriate.
In delivering its MarchAugust Opinion and Proxy Opinion, BerwindDanielson Associates
assumed that in the course of obtaining the necessary regulatory and
governmental approvals for the Merger, no restriction will be imposed on FFC
that will have a material adverse effect on the contemplated benefits of the
Merger. BerwindDanielson Associates also assumed that there would not occur any change
in applicable law or regulation that would cause a material adverse change in
the prospects or operations of FFC after the Merger.
BerwindDanielson Associates relied without independent verification upon the
accuracy and completeness of all of the financial and other information reviewed
by and discussed with it for purposes of its opinion. With respect to PBE'sKHG's
financial forecasts reviewed by BerwindDanielson Associates in rendering its opinion,
BerwindDanielson Associates assumed that such financial forecasts were reasonably
prepared on bases reflecting the best currently available estimates and
judgments of the management of PBEKHG as to the future financial performance of
PBE. BerwindKHG. Danielson Associates did not make an independent evaluation or appraisal
of the assets (including loans) or liabilities of PBEKHG or FFC nor was it
furnished with any such appraisal. BerwindDanielson Associates also did not
independently verify and has relied on and assumed that all allowances for loan
and lease losses set forth in the balance sheets of PBEKHG and FFC were adequate
and complied fully with applicable law, regulatory policy and sound banking
practice as of the date of such financial statements.
The following is a summary of selected analyses prepared by BerwindDanielson
Associates and presented to PBE'sKHG's Board in connection with the MarchAugust Opinion
and analyzed by BerwindDanielson Associates in connection with the MarchAugust and Proxy
Opinions. In connection with delivering its Proxy Opinion, BerwindDanielson Associates
updated certain analyses described above to reflect current market conditions
and events occurring since the date of the MarchAugust Opinion. Such reviews and
updates led BerwindDanielson Associates to conclude that it was not necessary to change
the conclusions it had reached in connection with rendering the August Opinion.
26
Pro Forma Merger Analyses. Danielson Associates analyzed the changes in the
-------------------------
amount of earnings and book value of FFC on a pro forma basis as a result of the
Merger, and the issuance of FFC Common Stock having a value at August 14, 1997
of about $211.7 million for all of the outstanding shares of KHG Common Stock.
The analysis evaluated, among other things, possible dilution in earnings and
capital per share for FFC Common Stock.
Comparable Companies. Danielson Associates compared KHG's (a) tangible
--------------------
capital of 10.30% of assets as of June 30, 1997, (b) .28% of nonperforming
assets as of June 30, 1997, and (c) net operating income of 2.19% of average
assets for the trailing twelve month period ending March Opinion.
Comparable Companies31, 1997, with the
medians for selected Pennsylvania banks which Danielson Associates deemed
comparable. These banks included ACNB Corporation, Drovers Bancshares
Corporation, Franklin Financial Service Corporation, Hanover Bancorp, Inc.,
PennRock Financial Services Corporation and Comparable Acquisition Transaction Analyses.
BerwindSterling Financial Corporation.
Their medians were (a) tangible capital of 9.15% of assets, (b) .43% of assets
nonperforming, and (c) net operating income of 1.77% of average assets.
Danielson Associates also compared selected financialFFC's (a) stock price as of August 13,
1997, of 19.5 times earnings and operating data265% of book, (b) dividend yield based on
trailing four quarters as of June 30, 1997, and stock price as of August 13,
1997 of 2.13%, (c) tangible capital as of June 30, 1997 of 9.98% of assets, (d)
nonperforming assets as of June 30, 1997 equal to .65% of total assets, (e)
return on average assets during the trailing four quarters ended June 30, 1997
of 1.54% and (f) return on average equity during the same period of 14.84%, with
the medians for PBE with those of a
peer group of selected banks and bank holding companies withthat Danielson
Associates deemed to be comparable to FFC. The selected institutions included
BT Financial Corporation, F.N.B. Corporation, First Commonwealth Financial
Corporation, First Western Bancorp., Inc., Harleysville National Corporation,
JeffBanks, Inc., National Penn Bancshares, Inc., Omega Financial Corporation,
S&T Bancorp, Inc. and USBANCORP, Inc. The comparable medians were (a) stock
price of 16.1 times earnings and 202% of book, (b) dividend yield of 2.35%, (c)
tangible capital of 8.61% of assets, between
28
$50 million and $150 million, as(d) .73% of the most recent financial period publicly
available, headquartered in Cecil and surrounding Maryland, Delaware,
Pennsylvania and New Jersey counties. Financial data and operating ratios
compared in the analysis of the PBE peer group included but were not limited to:assets nonperforming, (e)
return on average assets of 1.27% and (f) return on average equity shareholders' equity to
assets ratio and certain asset quality ratios.
Berwindof 14.04%.
Danielson Associates also compared selected financial, operatingother income, expense, and stock market databalance sheet
information of such companies with similar information about FFC.
Comparable Transaction Analysis. Danielson Associates compared the
-------------------------------
consideration to be paid in the merger to the latest twelve months earnings and
equity capital of KHG with earnings and capital multiples paid in acquisitions
of midAtlantic banks in 1996 and 1997 through the opinion date. Of these, the
most applicable recent transactions included Allied Irish Banks, PLC/Dauphin
Deposit Corporation, Wachovia Corporation/Jefferson Bancshares, Inc. and
Keystone Financial, Inc./Financial Trust Corp. At the time Danielson Associates
made its analysis, the consideration to be paid in the merger was 320% of KHG's
June 30, 1997 book value and 20.8 (adjusted to exclude a one time gain) times
KHG's earnings for FFC with those of a peer group of selected commercial banks with assets
between $2.5 billion and $10.0 billion,the trailing four quarters as of June 30, 1997. This
compares to the most recent period publicly
available, located in Delaware, Maryland, New Jersey and Pennsylvania.
Financial, operating and stock market data, ratios andmedian multiples compared in the
analysis of the FFC peer group included but were not limited to: return on
average assets, return on average equity, shareholders' equity to asset ratios,
certain asset quality ratios, price to book value, price to tangible book value,
price to earnings (latest twelve months) and dividend yield.
Berwind also compared the multiples200% of book value tangible book value and latest twelve months' earning inherent22.0 times earnings
for the comparable acquisitions.
The transaction price also was compared to the Mergerprices paid for eight sales
involving banks from New York, New Jersey, Pennsylvania and the New England
region with assets over $100 million during 1997. The median comparable deal
prices in these transactions were 197% of book and 19.6 times earnings.
Other Analysis. In addition to performing the multiples paid in
recent acquisitionsanalyses summarized above,
--------------
Danielson Associates also considered the general market for bank and thrift
mergers, the historical financial performance of KHG and FFC, the deposit market
shares of both banks, and bank holding companies that Berwind deemed
comparable. The transactions deemed comparable by Berwind included both
interstatethe general economic conditions and intrastate acquisitions announced during the twelve month period
ended asprospects of the date of its opinion, in which the selling institution's assets
were between $50 million and $150 million.these
banks.
27
No company or transaction however,
used in this composite analysis is identical to
PBE, FFCKHG or the Merger.FFC. Accordingly, an analysis of the resultresults of the foregoing is not
mathematical; rather it involves complex considerationsconsideration and judgments concerning
differences in financial and operating characteristics of the companies and
other factors that wouldcould affect the public trading values of the companiescompany or
companycompanies to which they are being compared.
Discounted Dividend Analysis. Using discounted dividend analyses, Berwind
estimated the present valueThe summary set forth above does not purport to be a complete description of
the future dividend streams that PBE could
produce over a five year period under various earnings growth assumptions.
Berwind also estimated the terminal value for PBE's Common Stock after the five
year periodanalyses and procedures performed by applying a range of earnings multiples of PBE terminal year
earnings. The range of multiples used reflected a variety of scenarios
regarding the growth and profitability prospects of PBE. The dividend streams
and terminal values were then discounted to present value using discount rates,
reflecting different assumptions regarding the rates of return required by
holders or prospective buyers of PBE's Common Stock.
Pro Forma Contribution Analysis. Berwind analyzed the changesDanielson Associates in the amountcourse of
earnings, book value and dividends represented by one share of PBE stock
priorarriving at its opinions. For its services as the financial advisor to the Merger and 4.158 shares of FFC stock after the Merger. The analysis
considered, among other things, the changes that the Merger would cause to PBE'
earnings per share, book value per share, tangible book value per share and
indicated dividends. In reviewing the pro forma combined earnings, equity and
assets of FFC based on the Merger with PBE, Berwind analyzed the contribution
that PBE would have made to the combined company's earnings, equity and assets
as of and for the period ended March 31, 1997. Berwind also reviewed the
percentage ownership that PBE shareholders would hold in the combined company.
In connection with rendering its March Opinion and Proxy Opinion, Berwind
performed a variety of financial analyses. Although the evaluation of the
fairness, from a financial point of view, of the considerationKHG,
Danielson Associates is to be paid in the
Merger was to some extent a subjective one based on the experience and judgmentan estimated fee of Berwind and not merely the result of mathematical analysis of financial data,
Berwind principally relied on the previously discussed
29
financial valuation methodologies in its determinations. Berwind believes its
analysis must be considered as a whole and that selecting portions of such
analyses and factors considered by Berwind without considering all such analyses
and factors could create an incomplete view of the process underlying Berwind's
opinion. In its analysis, Berwind made numerous assumptions with respect to
business, market, monetary and economic conditions, industry performance and
other matters, many of which are beyond PBE's and FFC's control. Any estimates
contained in Berwind's analyses are not necessarily indicative of future results
or values, which may be significantly more or less favorable than such
estimates.
In reaching its opinion as to fairness, none of the analyses performed by
Berwind was assigned a greater or lesser weighting by Berwind than any other
analysis. As a result of its consideration of the aggregate of all factors
present and analyses performed, Berwind reached the conclusion, and opined, that
the consideration to be received in the Merger as set forth in the Merger
Agreement, is fair from a financial point of view to PBE and its shareholders.
Berwind's Proxy Opinion was based solely upon the information available to
it and the economic, market and other circumstances as they existed as of the
date its Proxy Opinion was delivered; events occurring after the date of its
Proxy Opinion could materially affect the assumptions used in preparing its
Proxy Opinion. Berwind has not undertaken to reaffirm and revise its Proxy
Opinion or otherwise comment upon any events occurring after the date thereof.
Pursuant to the terms of the engagement letter dated October 16, 1996, PBE
has paid Berwind $30,000 for acting as financial advisor in connection with the
Merger including delivering its March and Proxy Opinions. In addition, PBE has
also agreed to pay Berwind approximately $213,000 upon the consummation of the
Merger. Whether or not the Merger is consummated, PBE has also agreed to
indemnify Berwind and certain related persons against certain liabilities
relating to or arising out of its engagement.about $1,059,000.
The full text of the Proxy Opinion of Berwind dated as of the date of this
Proxy Statement/Prospectus,Danielson Associates, which sets forth
assumptions made and matters considered, is attached hereto as Exhibit B. PBE'KHG's
shareholders are urged to read the Proxy Opinion in its entirety. Berwind'sDanielson
Associates' Proxy Opinion is directed only to the consideration to be received
by PBE'sKHG's shareholders in the Merger and does not constitute a recommendation to
any holder of PBEKHG Common Stock as to how such holder should vote at the PBEKHG
Special Meeting.
THE FOREGOING PROVIDES ONLY A SUMMARY OF THE PROXY OPINION OF BERWINDDANIELSON AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE FULL TEXT OF THAT OPINION,
WHICH IS SET FORTH IN EXHIBIT B TO THIS PROXY STATEMENT/PROSPECTUS.
Recommendation of the Board of Directors of KHG
- -----------------------------------------------
The Board of Directors of KHG considered the various factors described
above, which involved a review of the competitive environment; the impact of the
proposed Merger on the communities served by KHG and on the KHG employees; the
value being offered by FFC in relation to book value and earnings per share of
KHG and the financial condition, earnings, dividend yield and prospects of FFC;
and a comparison of the proposed financial terms with other recent comparable
transactions. The Board consulted with and sought the advice of Danielson
Associates and of its counsel. Among the factors the Board took into account in
reaching its decision to approve the Merger were (i) the historical and recent
market prices of shares of KHG Common Stock and the fact that the Merger would
enable the holders of such shares to realize a significant premium over the
prices at which such shares were trading immediately before the public
announcement of the Merger Agreement; (ii) the historical and recent market
prices of FFC Common Stock, as well as its prominence as an industry leader;
FFC's historical performance compared to the historical performance of other
competitors in the industry; the favorable comparison of the long-term growth
opportunity for KHG shareholders from a Merger with FFC over a business
combination with one of FFC's competitors; (iii) the efficiencies, operating
benefits and commercial and other synergies from the Merger that would benefit
KHG and its customers, and the prospect that KHG shareholders would also benefit
from such efficiencies, benefits and synergies through their continued interest
in the combined company; (iv) the efficiencies, benefits and synergies resulting
from the Merger would better meet the needs of KHG's several constituencies than
would combinations with other potential suitors; (v) the benefits that the
Merger would provide to the customers of both KHG and FFC, including enhanced
services and the benefits that can be provided by a combined company with
increased financial strength; (vi) the benefits provided generally to the
communities served by KHG by maintaining a majority of KHG's existing branches;
(vii) the intended tax treatment of the Merger as a tax-free reorganization;
(viii) the friendly and professional working relationships that have existed
between KHG and FFC; and (ix) the opinion of Danielson Associates to the effect
that the Merger is fair to the KHG shareholders from a financial point of view.
The Board of Directors of KHG unanimously recommends that the holders of KHG
Common Stock vote "FOR" approval of the Merger Agreement and the Merger.
28
Conversion and Exchange of Shares
- ---------------------------------
On the Effective Date of the Merger, each share of PBEKHG Common Stock then
issued and outstanding will automatically be converted into and become the right
to receive 4.1581.83 shares (subject to adjustment for stock dividends, stock splits
and similar transactions) of FFC Common Stock. The Conversion Ratio and all pro
forma and FFC historical per share information herein have been adjusted to
reflect a 10% stock dividend declared by FFC on May 1, 1997, payable on June 13,
1997, to shareholders of record on May 23, 1997.
No fractional shares of FFC Common Stock will be issued in connection with
the Merger. In lieu of the issuance of any fractional share to which he or she
would otherwise be entitled, each former shareholder of PBEKHG will receive cash in
an amount equal to the fair market value of his or her
30
fractional interest,
determined by multiplying such fractional interest by the Closing Market Price
of FFC Common Stock.
The Closing Market Price is defined in the Merger Agreement as the average
of the per share closing bid and asked prices for FFC Common Stock, rounded up
to the nearest $.125, for the ten (10) trading days immediately preceding the
date which is two (2) business days before the Effective Date (the "Price
Determination Period"), as reported on the NasdaqNASDAQ National Market.Market System. If
NasdaqNASDAQ fails to report a closing bid price for FFC Common Stock for any trading
day during the Price Determination Period, the closing bid prices for that day
shall be equal to the average of the closing bid prices and the average of the
closing asked prices as quoted by F.J. Morrissey & Company, Inc. and by Ryan,
Beck & Co., or if these two firms are not then making a market in FFC Common
Stock, by two brokerage firms who are then making a market in FFC Common Stock
to be selected by FFC and approved by PBE.KHG.
As soon as practicable following the Effective Date, PBEKHG shareholders will
exchange their PBEKHG Common Stock certificates for FFC Common Stock certificates
in accordance with the procedures described below in this section. FFC and PBEKHG
anticipate that the Effective Date will occur during the thirdfirst or fourthsecond quarter
of 1997,1998, assuming no difficulties are encountered in obtaining the required
regulatory approvals and all other conditions to closing are satisfied without
unexpected delay.
Following the Effective Date, each former shareholder of PBEKHG will be obliged
to surrender to FFC the PBEKHG Common Stock certificates held by him or her.
Detailed instructions concerning the procedure for surrendering PBEKHG Common Stock
certificates will be sent by Fulton Bank, acting as exchange agent (the
"Exchange Agent"), to each former shareholder of PBEKHG on or promptly after the
Effective Date. Upon proper surrender of his or her PBEKHG Common Stock
certificates, each former shareholder of PBEKHG will be issued a stock certificate
representing the number of whole shares of FFC Common Stock into which his or
her shares of PBEKHG Common Stock have been converted, together with a check in the
amount of any cash, without interest, to which he or she is entitled in lieu of
the issuance of any fractional share of FFC Common Stock. SHAREHOLDERS OF PBEKHG
SHOULD NOT SURRENDER THEIR PBEKHG COMMON STOCK CERTIFICATES FOR EXCHANGE UNTIL THEY
RECEIVE WRITTEN INSTRUCTIONS TO DO SO FROM THE EXCHANGE AGENT. PLEASE DO NOT
SEND ANY STOCK CERTIFICATES AT THIS TIME.
Following the Effective Date, and until properly surrendered, each PBEKHG
Common Stock certificate will be deemed for all corporate purposes to represent
the number of whole shares of FFC Common Stock which the holder would be
entitled to receive upon its surrender and the corresponding number of rights
associated with the Shareholder Rights Plan dated June 20, 1989 between FFC and
Fulton Bank (the "Rights Plan"), except that FFC may withhold dividends payable
after the Effective Date to any former shareholder of PBEKHG who has received
written instructions from FFC but has not at that time surrendered his or her
PBEKHG Common Stock certificates. Any dividends so withheld will be paid, without
interest, to any such former shareholder of PBEKHG upon the proper surrender of his
or her PBEKHG Common Stock certificates.
29
All PBEKHG Common Stock certificates must be surrendered to FFC within two
years after the Effective Date. In the event that any former shareholder of PBEKHG
does not properly surrender his or her PBEKHG Common Stock certificates within that
time, the shares of FFC Common Stock that would otherwise have been issued to
him or her may, at the option of FFC, be sold and the net proceeds of such sale,
together with the cash (if any) to which he or she is entitled in lieu of the
issuance of a fractional share and any previously accrued and unpaid dividends,
will be held in a non-interest bearing account for his or her benefit. From and
after any such sale, the sole right of such 31
former shareholder of PBEKHG will be
the right to collect such net proceeds, cash and accumulated dividends. Subject
to all applicable laws of escheat, such net proceeds, cash and accumulated
dividends will be paid to such former shareholder of PBE,KHG, without interest, upon
proper surrender of his or her PBEKHG Common Stock certificates.
In the event that a former PBEKHG shareholder is unable to surrender his or
her PBEKHG Common Stock certificates due to loss or mutilation thereof, he or she
may make a constructive surrender by following procedures comparable to those
customarily followed by FFC in issuing replacement certificates to FFC
shareholders whose FFC Common Stock certificates have been lost or mutilated.
Instructions for making a constructive surrender of lost or mutilated PBEKHG Common
Stock certificates will be included in the written instructions to be sent by
the Exchange Agent to former PBEKHG shareholders after the Effective Date of the
Merger.
THE FOREGOING DISCUSSION RELATING TO THE CONVERSION AND EXCHANGE OF PBEKHG
COMMON STOCK IS ONLY A SUMMARY WHICH IS PROVIDED FOR CONVENIENCE. THE FOREGOING
DISCUSSION SHOULD BE READ IN CONJUNCTION WITH, AND IS QUALIFIED IN ITS ENTIRETY
BY, THE TERMS OF ARTICLE II OF THE MERGER AGREEMENT.
Treatment of Outstanding Options
- --------------------------------
As of October 31, 1997, there were KHG options outstanding to purchase
83,664 shares of KHG Common Stock. Under the terms of the Merger Agreement,
each holder of a KHG option that is outstanding at the Effective Date, has been
granted pursuant to the 1994 Stock Incentive Plan and the 1996 Independent
Directors Stock Option Plan (collectively the "KHG Stock Option Plans") and
would otherwise survive the Effective Date, will receive from FFC an option (an
"FFC Option") to acquire shares of FFC Common Stock. The number of shares of
FFC Common Stock which may be acquired pursuant to such FFC Option shall be
equal to the product of the number of shares of KHG Common Stock covered by the
KHG option multiplied by the Conversion Ratio, provided that any fractional
share of FFC Common Stock resulting from such multiplication shall be rounded to
the nearest whole share. The exercise price per share of FFC Common Stock shall
be equal to the exercise price per share of KHG Common Stock of such KHG option,
divided by the Conversion Ratio, provided that such exercise price shall be
rounded to the nearest whole cent. The duration and other terms of such KHG
option shall be unchanged except that all references to KHG shall be deemed
references to FFC, and each such FFC Option shall be exercisable at least until
the stated expiration date of the corresponding KHG option. FFC shall assume
such stock options as contemplated by Section 424(a) of the Internal Revenue
Code of 1986, as amended (the "Code"), and to the extent KHG options qualify as
incentive stock options under Section 422 of the Code, the FFC Options exchanged
therefor shall also so qualify. Subject to these terms and conditions, the KHG
Stock Option Plans and all options or other rights to acquire KHG Common Stock
issued thereunder shall terminate on the Effective Date.
Business Pending The Effective Date
- -----------------------------------
Pursuant to the Merger Agreement, PBE isKHG and its subsidiaries are required,
pending the Effective Date, to conduct its businesstheir respective businesses in the
30
usual, regular and ordinary manner and consistent with past practice. PBE isKHG and
its subsidiaries are also required to use itstheir best efforts to preserve itstheir
present business organization,organizations, retain the services of itstheir present officers
and employees, and maintain existing relationships with persons having business
dealings with it.them. In general, PBEKHG and its subsidiaries may not take any
action outside the ordinary course of business without the prior written consent
of FFC.
Pending the Effective Date, PBEKHG is not permitted to declare or pay a cash
dividend on the PBEKHG Common Stock; provided, however, that PBEKHG may declare and
pay a dividend of up to $.90$.25 per share of PBEKHG Common Stock on each of (i)
June 15, 1997;November 10, 1997 (which has already been paid); (ii) September 15, 1997,February 10, 1998,
provided that the Effective Date does not occur (or is not expected to occur) on
or before the record date for the dividend on the FFC Common Stock scheduled to
be paid on OctoberApril 15, 1997;1998; (iii) December 15, 1997,May 10, 1998, provided that the Effective Daterecord date for
the dividend does not occur (or is not expected to occur) on or before the
record date for the dividend on the FFC Common Stock scheduled to be paid on
JanuaryJuly 15, 1998; and (iv) August 10, 1998, provided further, ifthat the customary paymentEffective Date does
not occur (and is not expected to occur) on or before the record date for the
next regular cash dividend payable after the
Effective Date on the FFC Common Stock which is eligible to be received by the
former holders of PBE is more than ninety (90) days after the payment date of
the last regular cash dividend paid orscheduled to be paid on October 15, 1998 (it
being the PBEintention of FFC and KHG that KHG be permitted to pay a dividend on
the KHG Common Stock prior
toon the Effective Date (such number of days over ninety (90) days being the
"Dividend Lag Period")dates indicated in subsections (ii), then PBE may declare(iii) and set aside immediately prior to
the Effective Date, and may pay at a date it may select in its discretion, a
special pro-rata dividend (the "Special Pro-Rata Dividend"). Any such Special
Pro-Rata Dividend shall be payable in cash, and may not exceed an amount per
share which is the product of (i)its regular quarterly dividend ($0.90) times
(ii) a fraction, the numerator of which the Dividend Lag Period and the
denominator of which is ninety (90) days. Thus, for example,(iv)
above only if the Merger is
to be consummated on August 1, 1997 and the dividend payment datesshareholders of PBE andKHG, upon becoming shareholders of FFC, are October 15, 1997 and November 15, 1997, respectively, the Dividend Lag
Period would
be 31 days and thus PBE wouldnot be entitled to declare and pay,
immediately prior toreceive a dividend on the Effective Date, a Special Pro-Rata DividendFFC Common Stock on the payment
dates indicated in each such subsection.
Under the terms of $.31 per
share (its regular quarterly dividend ($.90) multiplied by .344 (31 days/90
days)).
32
PBE has agreed that,the Merger Agreement, pending the Effective Date, unless
FFC otherwise consents in writing, itKHG and its subsidiaries shall (i) use all
reasonable efforts to carry on its
businesstheir respective businesses in, and only in, the
ordinary course of business; (ii) to the extent consistent with prudent business
judgment, use all reasonable efforts to preserve itstheir present business
organization,organizations, to retain the services of itstheir present officers and employees,
and to maintain itstheir relationships with customers, suppliers and others having
business dealings with PBE;KHG or either of its subsidiaries; (iii) maintain all of
itstheir structures, equipment and other real property and tangible personal
property in good repair, order and condition, except for ordinary wear and tear
and damage by unavoidable casualty; (iv) use all reasonable efforts to preserve
or collect all material claims and causes of action belonging to PBE;KHG or any of
its subsidiaries; (v) keep in full force and effect all insurance policies now
carried by PBE;KHG or either of its subsidiaries; (vi) perform in all material
respects each of itstheir obligations under all material contracts to which PBE isKHG or
either of its subsidiaries are a party or by which PBEany of them may be bound or
which relate to or affect itstheir properties, assets and business; (vii) maintain
itstheir books of account and other records in the ordinary course of business;
(viii) comply in all material respects with all statutes, laws, ordinances,
rules and regulations, decrees, orders, consent agreements, memoranda of
understanding and other federal, state, and local governmental directives
applicable to PBEKHG or either of its subsidiaries and to the conduct of its business;their
businesses; (ix) not amend PBE's ArticlesKHG's or any of Incorporation orthe KHG subsidiaries' Bylaws; (x) not
enter into or assume any material contract, incur any material liability or
obligation, or make any material commitment, except in the ordinary course of
business; (xi) not make any material acquisition or disposition of any
properties or assets or subject any of itstheir properties or assets to any
material lien, claim, charge, or encumbrance of any kind whatsoever; (xii) not
knowingly take or permit to be taken any action which would cause any representation or
warranty to be materially inaccurate as of the date of such action or constitute a material breach
of any representation, warranty or covenant set forth in the Merger Agreement; (xiii)
except as permitted otherwise in the Merger Agreement, not declare, set aside or
pay any dividend or make any other distribution in respect of PBEKHG Common Stock;
(xiv) not authorize, purchase, redeem, issue (except upon the exercise of
outstanding options under the KHG Stock Option Plans) or sell (or grant options
or rights to purchase or sell) any shares of PBEKHG Common Stock or any other
equity or
31
debt securities of PBE other thanKHG except to the Warrant;extent necessary to follow participants'
investment directions under the KHG pension plans; (xv) not increase the rate of
compensation of, pay a bonus or severance compensation to, establish or amend
any PBEKHG benefit plan except as required by law for, or enter into or amend any
employment obligation with, any officer, director, employee or consultant of PBE,KHG
or its subsidiaries, except that PBEKHG or either of its subsidiaries may grant
reasonable salary increases and bonuses to itstheir officers and employees in the
ordinary course of business to the extent consistent with itstheir past practice;
(xvi) not enter into any related party transaction except in the ordinary course
of business consistent with past practice; (xvii) in determining the additions
to loan loss reserves and the loan write-offs, writedowns and other adjustments
that reasonably should be made by PBELVNB during the fiscal year ending December
31, 1997, PBEKHG and its subsidiaries shall consult with FFC and shall act in
accordance with generally accepted accounting principles and PBE'sKHG's and its
subsidiaries' customary business practices; (xviii) file with appropriate
federal, state, local and other governmental agencies all tax returns and other
material reports required to be filed, pay in full or make adequate provisions
for the payment of all taxes, interest, penalties, assessments or deficiencies
shown to be due on tax returns or by any taxing authorities and report all
information on such returns truthfully, accurately and completely; (xix) not
renew any existing contract for services, goods, equipment or the like or enter
into, amend in any material respect or terminate any contract or agreement
(including without limitation any settlement agreement with respect to
litigation) that is or may reasonably be expected to have a material adverse
effect on PBEKHG and its subsidiaries except in the ordinary course of business
consistent with past practice (provided that FFC may not unreasonably withhold
or delay its consent to such transactions); (xx) not make any capital
expenditures other than in the ordinary course of business or as necessary to
maintain existing assets in good repair; (xxi) not make 33
application for the
opening or closing of any, or open or close any, branches or automated banking
facility, except with respect to the establishment of anfor one automated banking facility at Union Hospital;to be installed in
Myerstown, Pennsylvania; (xxii) not make any equity investment or commitment to
make such an investment in real estate or in any real estate development
project, other than in connection with foreclosures, settlements in lieu of
foreclosure or troubled loan or debt restructuring in the ordinary course of
business consistent with customary banking practice; (xxiii)
not make purchases of securities for its investment portfolio without prior
consultation with FFC; (xxiv) not extend or amend PBE's lease relating to its
"Crossroads Shopping Center" branch office without FFC's prior written consent;
or (xxv)(xx) not take any other
action similar to the foregoing which would have the effect of frustrating the
purposes of the Merger Agreement or the Merger or cause the Merger not to
qualify for pooling-of-interests accounting treatment or as a tax-free
reorganization under Section 368 of the Internal Revenue Code.
The Merger Agreement provides that PBEKHG shall not, nor shall it permit any
officer, director, employee, agent, consultant or representative to: (a)
solicit, initiate or encourage any proposal for a merger with or other
acquisition of PBE,KHG or either of its subsidiaries, or any material portion of its
assets or properties, with or by any person other than FFC; or (b) cooperate
with, or furnish any non-public information concerning PBEKHG or either of its
subsidiaries, to, any person in connection with such a proposal; provided,
however, that the Board of Directors areis free to take such action as the PBE Board of
Directors determines, in good faith and after consultation with outside counsel,
is not legally inconsistent with its fiduciary duty. PBEKHG is required to notify
FFC immediately if any discussions or negotiations are sought to be initiated,
any inquiry or proposals are made, or any such information is requested with
respect to an acquisition proposal or potential acquisition proposal or if any
such proposal is received or indicated to be forthcoming.
Conditions, Amendment and Termination
- -------------------------------------
The obligations of FFC and PBEKHG to consummate the Merger are subject to a
number of conditions and contingencies set forth in the Merger Agreement,
32
including, without limitation, the following: (i) approval of the Merger by the
shareholders of PBE;KHG; (ii) approval of the Merger by the Federal Reserve Board,
the Federal Deposit Insurance Corporation (the "FDIC"), and bythe Pennsylvania
Department of Banking, delivery of notice of the Merger to the Office of the
Comptroller of the Currency, and delivery of notice of the Merger to the
Maryland Commissioner of Financial Regulation;State Bank Commissioner; (iii) the authorization for listing on the
Nasdaq National MarketNASDAQ
of the shares of the FFC Common Stock to be issued in the Merger; (iv) the
absence of an injunction issued by a court of competent jurisdiction enjoining
the performance by FFC or PBEKHG of any of their obligations under the Merger
Agreement; (v) the receipt of a favorable opinion of counsel with respect to
certain federal income tax consequences relating to the Merger, which are
discussed below under THE MERGER--Federal Income Tax Consequences; (vi) the
continuing accuracy in all material respects of the representations, warranties
and covenants made by FFC and PBEKHG in the Merger Agreement; (vii) the receipt by
FFC of satisfactory agreements from shareholders of PBEKHG who are affiliates of
PBEKHG or FFC regarding certain actions which could affect pooling-of-interests
accounting for the Merger; (viii) the receipt of opinions from counsel for PBEKHG
and counsel for FCC regarding certain legal matters; (ix) the effectiveness of a
registration statement relating to the FFC Common Stock with the SEC; (x)
confirmation by FFC and its accountants that the Merger can be accounted for as
a pooling-of-interests for financial reporting purposes; (xi) amendmentall holders of KHG
options shall have delivered documentation reasonably satisfactory to FFC
canceling the leaseKHG options in exchange for the "Crossroads Shopping Center" branch office of PBE
to the reasonable satisfaction of FFC;FFC Options; (xii) confirmation that,
since December 31, 1996, there has been no material and adverse change in the
condition (financial or otherwise), assets, liabilities, business or operations
or future prospects of PBE;KHG; (xiii) appraisal rightsthe Closing Market Price of FFC Common Stock
shall have been exercised with respectbe either in excess of $23.82 per share or in excess of an amount per
share equal to less than 10% of(A) $28.875 (the closing bid price on August 14, 1997) multiplied
by (B) 0.825 multiplied by (C) the outstanding
34
shares of PBE Common Stock; andquotient obtained by dividing the average
NASDAQ Bank Index for the price determination period by the NASDAQ Bank Index on
August 14, 1997; (xiv) the delivery of certificates at the closing by officers
of FFC and PBEKHG confirming satisfaction of certain of the foregoing conditions.conditions;
(xv) FFC and its counsel shall have determined that all applicable securities
and antitrust laws of the federal government and any state government having
jurisdiction over the transaction shall have been complied with; and (xvi) the
existing employment agreements between LVNB and the KHG Senior Executives shall
have been terminated and replaced with the Employment Agreements, effective as
of the Effective Date.
To the extent permitted by law, the Merger Agreement may be amended by
mutual consent and any term or condition thereof may be waived by the party
entitled to its benefit at any time before the Effective Date, whether before or
after the approval of the Merger Agreement by PBE'sKHG's shareholders and without
seeking further shareholder approval; provided, however, that the Conversion
Ratio may not be waived or amended until such amendment has been approved,
adopted or ratified by the shareholders of PBEKHG in accordance with applicable law
(other than pursuant to the terms of the Merger Agreement in the event of a
stock dividend or similar transaction by FFC), and PBE Interim Bank shall be
permitted to join as a party to the Merger Agreement upon its formation without
execution of such joinder by FFC or PBE..
The Merger Agreement may be terminated at any time prior to the Effective
Date by the mutual written consent of FFC and PBE.KHG. In addition, the Merger
Agreement may be terminated unilaterally by either FFC or PBEKHG if (A) any
condition to the Merger has not been satisfied by JanuaryAugust 31, 1998, or (B) the
other party has committed a material breach of any representation, warranty or
covenant contained in the Merger Agreement which breach results in a material
and adverse change as to the other party and has not cured such breach within
thirty (30) days after receiving written notice thereof.
Effective Date of the Merger
- ----------------------------
The Merger will become effective on the date of issuance offiling the CertificateArticles of
Merger issued bywith the Maryland CommissionerPennsylvania Department of Financial Regulation.State, or on such later date
33
specified in the Articles of Merger. FFC and PBEKHG presently intend to consummate
the Merger during the thirdfirst or fourthsecond quarter of 1997,1998, assuming that the Merger
has been approved by PBE'sKHG's shareholders, all required regulatory approvals have
been obtained, and all other conditions to closing have been satisfied or waived
by that time. The Merger Agreement provides that the closing of the Merger
shall be held within thirty (30) days after the receipt of all required
regulatory approvals and the expiration of all applicable waiting periods. See
THE MERGER--Conditions, Amendment and Termination.
Management and Operations Following the Merger
- ----------------------------------------------
On the Effective Date, PBEKHG will merge with and into PBE Interim Bank, a
newly created wholly-owned subsidiary of FFC. PBE Interim BankFFC will survive
the Merger and operate as a wholly-owned subsidiary of FFC after the Merger under
the name "The Peoples Bank of Elkton," and the shareholders of PBEKHG will become shareholders of FFC. TheLVNB
and KHLIC will become wholly-owned subsidiaries of FFC.
Simultaneously with the effectiveness of the Merger, Agreement provides that, forFFC anticipates
effecting a restructuring as follows: (i) LVNB and Farmers Trust Bank
("Farmers"), a wholly-owned FFC subsidiary, will merge; (ii) the surviving bank
in such merger, operating under the name "Lebanon Valley Farmers Bank", would
immediately transfer branch offices of LVNB located in Dauphin and Lancaster
Counties and the assets and deposit liabilities related to such branch offices
to Fulton Bank ("FB"), another wholly-owned FFC subsidiary, and (iii) subject to
regulatory considerations and/or to the extent determined advisable by FFC, FFC
may close or sell existing branches of LVNB, Farmers, FB or other subsidiaries
of FFC which may overlap geographically with other branches of FFC's subsidiary
banks. Lebanon Valley Farmers Bank, as a wholly-owned FFC subsidiary, would
operate all Lebanon County branch offices now operated by LVNB and Farmers, and,
in addition, the Sinking Spring, Womelsdorf and Pine Grove branches of LVNB.
In addition, KHLIC will be merged with Fulton Life Insurance Company
("FLIC"), a wholly-owned nonbanking subsidiary of FFC.
For a period offrom the Effective Date through a date determined by FFC (not
to be before five (5) years after the Effective Date,Date), FFC shall (subject to the
right of FFC and the directors of
PBE to terminate such obligations as a result of regulatory
considerations, safe and sound banking practices, or the exercise of their
fiduciary duties by FFC's directors, the failure of PBEdirectors): Offer appointment to substantially achieve budget goals established
for FFC's banking subsidiaries in any fiscal year in which FFC achieves such
goals on a consolidated basis, or FFC's acquisition of a financial institution
located in Maryland) (i) preserve the business structure of PBE as a Maryland
bank; (ii) preserve the present name of PBE; and (iii) continue in office theall present
directors of PBELVNB to the board of directors of Lebanon Valley Farmers Bank who
indicate their desire to serve (the "PBE"LVNB Continuing Directors"), provided, that
--------
(A) each non-employee PBELVNB Continuing Director shall
continue to receive director's fees
from PBE onLebanon Valley Farmers Bank in the same basis as prior to the
Merger, i.e., a quarterly stipendform of $1,250 and meeting feesan annual retainer of $100 per Board
of Directors meeting and $50 per committee
35
meeting (provided that FFC may direct PBE to reduce the frequency of such
meetings) and shall continue to receive such other incidental benefits as he or
she was receiving from PBE prior to the Effective Date (such benefits being
previously disclosed to FFC),$9,000 and
(B) each PBELVNB Continuing Director shall be subject to FFC's mandatory retirement
rules for directors. Notwithstanding
anything inKHG intends to dissolve the Merger Agreement toPine Grove, Womelsdorf and
Eastern Lebanon County advisory committees as of the contrary,Effective Date. The
Agricultural advisory committee of LVNB would be retained by Lebanon Valley
Farmers Bank. Albert B. Murry would be appointed chairman of the PBEboard and
chief executive officer of Lebanon Valley Farmers Bank. The LVNB Continuing
Directors, in their exercise of their fiduciary duty as to the best interests of
PBELVNB and FFC, may, by a majority vote of such directors, modify or waive any or
all of the foregoing provisions.
On the date of the Merger Agreement, KHG and its subsidiaries caused the
existing employment agreements with Albert B. Murry and Kurt A. Phillips (the
"KHG Senior Executives") to be terminated and entered into new employment
agreements (the "Employment Agreements") with the KHG Senior Executives. The
termination of the existing employment agreements and the Employment Agreements
shall become effective on the Effective Date. KHG and its subsidiaries may not
modify the terms of the Employment Agreements without the prior written consent
of FFC, and may not create any new employment obligations related to the KHG
Senior Executives.
34
FFC has agreed, following the Merger, to cause PBEKHG to honor its employment
obligations and to honor its obligations under PBE'sKHG's existing employee benefit
plans.
Federal Income Tax Consequences
- -------------------------------
The following is a summary of the material anticipated federal income tax
consequences of the Merger. This summary is based on the federal income tax
laws as now in effect and as currently interpreted; it does not take into
account possible changes in such laws or interpretations, including amendments
to applicable statutes or regulations or changes in judicial or administrative
rulings, some of which may have retroactive effect. This summary does not
purport to address all aspects of the possible federal income tax consequences
of the Merger. In particular, and without limiting the foregoing, this summary
does not address the federal income tax consequences of the Merger to
shareholders in light of their particular circumstances or status (for example,
as foreign persons, tax-exempt entities, dealers in securities, insurance
companies and corporations, among others). Nor does this summary address any
consequences of the Merger under any state, local, or foreign income tax laws.
Shareholders, therefore, are urged to consult their own tax advisors as to the
specific tax consequences to them of the Merger, including tax-return-reporting
requirements, the application and effect of federal, foreign, state, local, and
other tax laws, and the implications of any proposed changes in the tax laws.
Pursuant to the Merger Agreement, an opinion has been provided to PBEKHG and
FFC by Barley, Snyder, Senft & Cohen, LLP, counsel for FFC, which states that,
for federal income tax purposes:
1. The Merger will constitute a reorganization within the meaning of
Section 368(a)(1)(A) and (a)(2)(D) of the Internal Revenue Code of 1986, as
amended;
2. No gain or loss will be recognized by FFC PBE Interim Bank or PBEKHG by reason of the
Merger;
3. The bases of the assets of PBE immediately afterKHG in the Mergerhands of FFC will be the same
as the bases of such assets in the hands of KHG immediately prior to
the Merger;
4. The holding period of the assets of PBE immediately afterKHG in the hands of FFC following
the Merger will include the period during which such assets were held
by PBEKHG prior to the Merger;
5. A holderNo gain or loss will be recognized by the KHG shareholders on the
exchange of PBEshares of KHG Common Stock who receivessolely for shares of FFC
Common Stock (including fractional shares); income, gain or loss will
be recognized, however, to each such shareholder upon the receipt of
cash by such shareholders on the exchange. The receipt of cash by KHG
shareholders will have the effect of treating the shareholder as
having received solely shares of FFC Common Stock in exchange for his or her PBE Common Stock pursuant to the
reorganization (including fractionalexchange and then having received a cash payment from
FFC in a hypothetical redemption of that number of shares of FFC
Common Stock deemed
issued as described below) will not recognize any gain or loss upon
the exchange;
36
6.equal in value to such cash payment. A holder of PBE Common StockKHG shareholder
who receives cash in lieu of a fractional
share of FFC Common Stock will be treated as if he or she received a
fractional share of FFC Common Stock pursuant to the reorganization
and FFC then redeemed such fractional share for the cash. The holder
of PBE Common Stock willtherefore recognize capital gain or loss on
the constructive redemption of the fractional sharesuch shares in an amount equal to the
difference between the cash received and the adjusted basis of the
fractional share;
7.in such
shares;
6. The tax basis of the shares of FFC Common Stock to be received by PBEKHG
shareholders pursuant to the Merger Agreement will be equal to the taxsame as the
basis ofin the shares of PBEKHG Common Stock surrendered in the
35
reorganization exchange,
therefor, decreased by the amount of cash received and
increased by the amount of any gain (and by the amount of any
dividend income) recognized on the exchange; and
8.7. The holding period of the shares of FFC Common Stock to be received
by the shareholders of PBEKHG will include the period during which they
held the shares of PBEKHG Common Stock surrendered, provided the shares
of PBEKHG Common Stock are held as a capital asset on the date of the
exchange.
THE FOREGOING IS INTENDED ONLY AS A GENERAL SUMMARY OF CERTAIN FEDERAL
INCOME TAX CONSEQUENCES OF THE MERGER UNDER PRESENT LAW. EACH SHAREHOLDER OF
PBEKHG IS URGED TO CONSULT HIS OR HER OWN TAX ADVISOR CONCERNING THE PARTICULAR TAX
CONSEQUENCES OF THE MERGER AS THEY AFFECT HIS OR HER INDIVIDUAL CIRCUMSTANCES,
INCLUDING THE IMPACT OF ANY APPLICABLE ESTATE, GIFT, STATE, LOCAL, FOREIGN OR
OTHER TAX.
Accounting Treatment
- --------------------
The Merger Agreement contemplates that the Merger will be treated as a
pooling-of-interests for financial accounting purposes. If FFC would be
required to purchase more than ten percent of the outstanding shares of PBEKHG
Common Stock for cash or if other conditions arise which would prevent the
Merger from being treated as a pooling-of-interests for financial accounting
purposes, FFC has the right to terminate the Merger Agreement and to cancel the
Merger. FFC presently intends to exercise its right of termination if the
Merger could not be treated as a pooling-of-interests for financial accounting
purposes.
Although it has no intention of doing so, FFC could choose to waive its
right of termination and go forward with the proposed merger even if the merger
could not be treated as a pooling-of-interests for financial accounting
purposes. In that event, the following would occur: (i) the merger between PBEKHG
and a subsidiary of FFC would be treated as a purchase transaction under financial accounting
principles; (ii) FFC would file a post-effective amendment, presenting revised
financial disclosures and updated information, to the registration statement of
which this Proxy Statement/Prospectus is a part; and (iii) PBE'sKHG's management
would resolicit proxies from PBE'sKHG's shareholders.
Rights of Dissenting Shareholders
- ---------------------------------
Under Maryland banking law,Because KHG Common Stock is listed on a shareholder of a bank is generally entitled
to demand and receive payment ofnational securities exchange, the fair value of his or her stock if, among
other things, the bank merges with another bank. If the Merger between PBE and a
subsidiary of FFC is approved,
holders of PBEKHG Common Stock who vote against the
Merger and who comply with the provisions of Maryland banking law regarding
dissenters'do not have dissenters rights will be entitled to receive the fair value of
37
their shares of PBE Common Stock, in cash, if the transaction becomes effective.
Maryland law provides that FFC, as the successor in the merger between PBE
and a subsidiary of FFC, may offer to pay in cash to the shareholders of PBE who
object to the merger, not more than what FFC considers to be the fair value of
the shares of PBE Common Stock as of the date of the Special Meeting. Any PBE
shareholder who accepts such an offer by FFC is barred under Maryland law from
receiving the appraised value of his or her PBE shares.
In accordance with the provisions of Financial Institutions, Sections 3-718
through 3-721 of the Maryland Banking Laws, attached as Exhibit D to this Proxy
Statement/Prospectus, any shareholder of PBE who voted his or her shares against
the Merger and wishes to exercise dissenters' rights with respect to the Merger
must, within thirty days of the Effective Date, make a written demand for
payment on FFC, as the successor in the Merger, and surrender his or her PBE
stock certificates.
Such written demand should be addressed to [Name], [Title], The Peoples
Bank of Elkton, 130 North Street, Elkton, Maryland 21921. The objecting
shareholder must vote against the Merger.
The fair value of the shares of PBE Common Stock surrendered shall be
determined as of the date of the Special Meeting of PBE shareholders approving
the Merger. The determination of fair value shall be made by three appraisers,
chosen as follows: (i) one chosen by the owners of two-thirds of the shares
involved, (ii) one chosen by the Board of Directors of FFC, and (iii) one chosen
by the other two appraisers. The fair value to which any two appraisers agree
shall govern. The appraisers shall give notice of the fair value determination
to FFC and to each shareholder who has made demand for the determination.
Under Maryland banking law, a shareholder who is dissatisfied with the fair
value determination of the appraisers may notify the Maryland State Bank
Commissioner within five days after the notice of the appraisers has been given.
The Commissioner shall have the shares reappraised, and such reappraisal shall
be final and binding as to the value of the shares of PBE Common Stock of the
dissatisfied shareholder.
If the appraisal to be made by the three appraisers is not completed within
ninety days of the Effective Date of the Merger, the Commissioner shall have an
appraisal made, and this appraisal shall be final and binding as to the value of
the shares of all objecting shareholders.
Under Maryland law, FFC, as the successor in the Merger, shall pay the
expenses of each appraisal that is required to be made.
THE FOREGOING DISCUSSION IS ONLY A SUMMARY OF THE RIGHTS AND OBLIGATIONS OF
A DISSENTING SHAREHOLDER AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE
PROVISIONS OF FI, SECTIONS 3-718 THROUGH 3-721 OF THE MARYLAND BANKING LAWS,
WHICH ARE REPRODUCED AND SET FORTH IN FULL IN EXHIBIT D TO THIS PROSPECTUS/PROXY
STATEMENT.
Pursuant to the Merger Agreement, FFC has the right to terminate such
Agreement and to cancel the proposed merger if PBE shareholders exercise
dissenters' rights with respect to 10% or more shares of PBE Common Stock. FFC
negotiated for this right of termination in order to limit the amount of cash
that would be paid to PBE shareholders in connection with the
proposed merger
and to provide greater assurance that the merger would be treated as a pooling-
of-interests for financial accounting purposes. FFC could waive this
38
right of termination but has no present intention to do so. See THE MERGER--
Conditions, Amendment and Termination, and THE MERGER--Accounting Treatment.Merger.
Restrictions on Resale of FFC Common Stock Held By Affiliates of PBEKHG
- --------------------------------------------------------------------
The shares of FFC Common Stock to be issued upon consummation of the Merger
have been registered with the SEC under the Securities Act of 1933 (the "1933
Act") and, following the Merger, may be freely resold or otherwise transferred
by all former shareholders of PBE,KHG, except those former shareholders who are
deemed to be "affiliates" of PBEKHG within the meaning of SEC Rules 144 and 145.
In general terms, any person who is an executive officer, director or ten
percent or greater shareholder of PBEKHG at the time of the Special Meeting may be
deemed to be an affiliate of PBEKHG for purposes of SEC Rules 144 and 145.
36
FFC Common Stock received by persons who are deemed to be affiliates of PBEKHG
may be resold during the one year following the Effective Date only: (i) in
compliance with the provisions of SEC Rule 145(d), (ii) in compliance with the
provisions of another applicable exemption from the registration requirements of
the 1933 Act, or (iii) pursuant to an effective registration statement filed
with the SEC. In very general terms, SEC Rule 145(d) would permit an affiliate
of PBEKHG to sell shares of FFC Common Stock received by him or her in connection
with the Merger in ordinary brokerage transactions, subject to certain
limitations on the number of shares of FFC Common Stock which may be sold during
any consecutive three-month period. After the one-year period, the affiliates
of PBEKHG who are not affiliates of FFC may resell their shares without
restriction. Notwithstanding the foregoing, in order to comply with the SEC's
rules on pooling-of-interests accounting treatment, an affiliate of PBEKHG (as a
general rule and subject to an exception in the case of certain de minimis
-- -------
sales) may
-- ------- not sell any shares of FFC Common Stock received by him or her in
exchange for his or her shares of PBEKHG Common Stock until after the publication
of financial results covering at least thirty days of post-Merger combined
operations of FFC.
Under the terms of the Merger Agreement, each person who may be deemed to
be an affiliate of PBEKHG is required, prior to the closing of the Merger, to
deliver to FFC an agreement, in form and substance satisfactory to FFC,
acknowledging and agreeing to abide by the limitations imposed by the 1933 Act
and the rules of the SEC thereunder regarding the sale or other disposition of
the shares of FFC Common Stock to be received by him or her pursuant to the
Merger.
Warrant Agreement
- -----------------
On the day followingFollowing the execution of the Merger Agreement, PBEKHG and FFC executed a
Warrant Agreement, dated March 19,August 15, 1997 (the "Warrant Agreement"). A copy of
the Warrant Agreement is attached as Exhibit C to this Proxy
Statement.Statement/Prospectus. The following description of the Warrant Agreement does
not purport to be complete and is qualified in its entirety by reference to the
Warrant Agreement, which is incorporated herein in its entirety.
Pursuant to the Warrant Agreement, PBEKHG issued to FFC a warrant (the
"Warrant") to purchase from PBEKHG up to 45,888981,740 fully paid and non-assessable
shares of PBEKHG Common Stock at a price per share equal to $80.00,$36.75, subject to
adjustment as provided for in the Warrant Agreement (such exercise price, as so
adjusted, is referred to herein as the "Exercise Price"). The execution of the
Warrant Agreement was required by FFC as a condition to its execution of the
Merger Agreement, and the effect of the Warrant Agreement is to increase 39
the
likelihood that the Merger will occur by making it more difficult and expensive
for another party to acquire PBE.KHG.
The Warrant may be exercised in whole or in part at any time or from time
to time on or after the occurrence of an Exercise Event (as defined below) until
termination of the Warrant Agreement. So long as the Warrant is owned by FFC, it
may be exercised for no more than the number of shares of PBEKHG Common Stock equal
to 45,888981,740 (subject to adjustment as described below) less the number of shares
of PBEKHG Common Stock at the time owned by FFC.
Under the terms of the Warrant and the Warrant Agreement, FFC may exercise
the Warrant, without PBE'sKHG's consent, under the following circumstances (each an
"Exercise Event"): if (A) (I) FFC is not in material breach of the agreement or
covenants contained in the Warrant Agreement or the Merger Agreement and (II) no
preliminary or permanent injunction or other order against the delivery of
shares covered by the Warrant issued by any court of competent jurisdiction in
the United States shall be in effect and (B) upon or after the occurrence of any of the
following: (i) a knowing and intentional breach of any representation, warranty, or covenant
set forth in the Merger Agreement by PBEKHG which would permit a termination of the
Merger Agreement by FFC pursuant to Section 8.1(b)(i) thereof which is not cured and which occurs following a proposal from
any person (other than FFC) to engage(A) the
occurrence of an event described in subparagraphs (iii) or (iv) below or (B) an
Acquisition Transaction;offer or filing described in subparagraph (v) below; (ii) the failure of PBE'sKHG's
shareholders to approve the Merger Agreement at a meeting called for such
purpose if at the time of such meeting there has
37
been a publican announcement (including a public regulatory filing) by any person (other than FFC) of an offer or proposal to
acquire 25% or more of the Common Stock (before giving effect an Acquisition Transaction (as defined
below)to any exercise of
the Warrant), or to acquire, merge or consolidate with KHG, or to purchase all
or substantially all of LVNB's assets (including without limitation any shares
of LVNB or all or substantially all of LVNB's assets) and, within twelve (12) months fromten business
days after such announcement, the dateBoard of Directors of KHG either fails to
recommend against acceptance of such shareholder's
meeting, PBE engages in,offer by KHG's shareholders or enters into a written agreementtakes no
position with respect to, an
Acquisition Transaction;thereto; (iii) the acquisition by any person of beneficial
ownership of 25% or more of the PBEKHG Common Stock (before giving effect to any
exercise of the Warrant); (iv) PBEany person (other than FFC) shall have commenced
a tender or exchange offer, or shall have filed an application with an
appropriate bank regulatory authority with respect to a publicly announced
offer, to purchase or acquire securities of KHG such that, upon consummation of
such offer, such person would have beneficial ownership of 25% or more of the
KHG Common Stock and, within twelve months from such offer or filing, such
person consummates an acquisition of 25% or more of the KHG Common Stock; (v)
KHG shall have entered into an agreement, letter of intent, or other written
understanding with any person (other than FFC) providing for such person (A) to
engage in an Acquisition Transactionacquire, merge, consolidate or enter into a statutory share exchange with KHG or
to purchase all or substantially all of KHG's assets (including without
limitation any shares of LVNB or all or substantially all of LVNB's assets), (B)
to negotiate with PBEKHG with respect to an Acquisition Transaction;any of the events or (v)transactions
mentioned in the preceding clause (A); or (vi) termination, or attempted
termination, of the Merger Agreement by PBEKHG under Section 5.7 of the Merger
Agreement (relating to the exercise by the directors of PBEKHG of their fiduciary
duty) following receipt of a written proposal to engage in an Acquisition Transactionacquisition
transaction from a third party. For purposes of the
Warrant Agreement, "Acquisition Transaction" means (x) a merger or consolidation
or statutory share exchange or any similar transaction involving PBE, (y) a
purchase, lease or other acquisition of all or substantially all of the assets
of PBE or (z) a purchase or other acquisition of beneficial ownership of
securities representing 25% or more of the voting power of PBE.
The Warrant may be exercised by presentation and surrender thereof to PBEKHG
at its principal office accompanied by (i) a written notice of exercise, (ii)
payment of the Exercise Price for the number of shares of PBEKHG Common Stock
specified in such notice, and (iii) a certificate of the holder of the Warrant
(the "Holder") specifying the event or events which have occurred and which
entitle the Holder to exercise the Warrant. Upon such presentation and
surrender, PBEKHG shall issue promptly to the Holder the number of shares of PBEKHG
Common Stock to which the Holder is entitled. If the Warrant is exercised in
part, PBEKHG will, upon surrender of the Warrant for cancellation, execute and
deliver a new Warrant entitling the Holder to purchase the balance of the shares
of PBEKHG Common Stock issuable thereunder.
Generally, in the event of any change in the outstanding shares of PBEKHG
Common Stock by reason of a stock dividend, stock split or stock
reclassification, the number and kind of shares or securities subject to the
40
Warrant and the Exercise Price shall be appropriately and equitably adjusted so
that the Holder shall receive upon exercise of the Warrant the number and class
of shares or other securities or property that the Holder would have received in
respect of the shares of PBEKHG Common Stock that could have been purchased upon
exercise of the Warrant if the Warrant could have been and had been exercised
immediately prior to such event. If, at any time after the Warrant may be
exercised or sold by FFC, PBEKHG has received a written request from FFC, PBEKHG shall
prepare, file and keep effective and current any governmental approvals required
in connection with the Warrant and/or the shares of PBEKHG Common Stock issued or
issuable upon exercise of the Warrant. All expenses incurred by PBEKHG in complying
with such governmental approvals will be paid by PBE.KHG. FFC will pay all expenses
incurred by FFC in connection with such governmental approvals, including fees
and disbursements of its counsel and accountants, underwriting discounts and
commissions, and transfer taxes payable by FFC.
The Warrant and the rights conferred thereby will terminate (i) upon the
Effective Date, (ii) upon a valid termination of the Merger Agreement prior to
the occurrence of an Exercise Event, or (iii) to the extent the Warrant has
38
not previously been exercised, sixty (60) days after the occurrence of an
Exercise Event.
Under the Warrant Agreement, FFC has the right to require PBEKHG to repurchase
the Warrant or, in the event the Warrant has been exercised in whole or in part,
redeem the shares obtained upon such exercise within 60 days of an Exercise
Event. In the case of a repurchase of shares obtained upon exercise of the
Warrant, the redemption price per share (the "Redemption Price") is to be equal
to the highest of: (i) the Exercise Price, (ii) the highest price paid or
agreed to be paid for any share of Common Stock by an Acquiring Person (defined
as any person who or which is the beneficial owner of 25% or more of the PBEKHG
Common Stock) during the one year period immediately preceding the date of
redemption, and (iii) in the event of a sale of all or substantially all of
PBE'sKHG's assets: (x) the sum of the price paid in such sale for such assets and the
current market value of the remaining assets of PBEKHG as determined by a
recognized investment banking firm selected by FFC, divided by (y) the number of
shares of PBEKHG Common Stock then outstanding. If the price paid consists in
whole or in part of securities or assets other than cash, the value of such
securities or assets shall be their then current market value as determined by a
recognized investment banking firm selected by the FFC.
In the case of a repurchase of the Warrant, the redemption price is to be
equal to the product obtained by multiplying: (i) the number of shares of PBEKHG
Common Stock represented by the portion of the Warrant that FFC is requiring PBEKHG
to repurchase, times (ii) the excess of the Redemption Price over the Exercise
Price.
4139
COMPARATIVE STOCK PRICES AND DIVIDENDS
--------------------------------------
AND RELATED SHAREHOLDER MATTERS
---------------------------------------------------------------------
Common Stock of FFC
- -------------------
FFC Common Stock is traded in the over-the-counter market and is listed on
the Nasdaq National Market ("Nasdaq")NASDAQ under the symbol "FULT." The following table sets forth, for the periods
indicated, the high and low closing sale price for FFC Common Stock as reported
on NasdaqNASDAQ and cash dividends paid per share.
Cash Dividends
1995 High Low Paid Per Share
- ---- ---- --------- ------ --------------
First Quarter $15.41 $14.27 $0.118$0.116
Second Quarter 15.91 14.84 0.1260.125
Third Quarter 16.64 14.67 0.1300.129
Fourth Quarter 18.80 16.12 0.1300.132
1996
- ----
First Quarter 18.39 16.74 0.1380.137
Second Quarter 18.86 17.05 0.1500.152
Third Quarter 18.86 16.94 0.1500.152
Fourth Quarter 19.55 17.50 0.1520.153
1997
- ----
First Quarter 23.18 18.64 0.1550.159
Second Quarter 28.00 22.27 0.170
Third Quarter 30.25 26.88 0.170
On March 17,August 14, 1997, the last trading day before public announcement of the
Merger Agreement, the high and low quotations for FFC Common Stock were $22.27$28.875
and $21.82,$28.875, respectively, and the closing bid price was $21.82$28.875 per share, as
reported on Nasdaq.NASDAQ. On [Date],________, 1997, the closing bid and asked quotations for
FFC Common Stock as reported on NasdaqNASDAQ were $_____ and $_____, respectively, per
share, and the closing sale price was $______$_____ per share. As of [Date],September 30,
1997, FFC Common Stock was held by _______12,394 holders of record. The Conversion Ratio and
all pro forma and FFC historical per share information herein have been adjusted
to reflect a 10% stock dividend declared by FFC on May 1, 1997, payable on June
13, 1997, to shareholders of record on May 23, 1997. On February 28, 1997, FFC
completed the previously announced acquisition of WNB. The transaction was
accounted for as a pooling of interest. All of the financial information
contained herein has been restated to reflect the financial condition and
results of operations of WNB.
FFC has in the past paid regular quarterly cash dividends to its
shareholders on or about the 15th day of January, April, July and October of
each year.
Common Stock of PBEKHG
- -------------------
There is currently no public market for the PBEKHG Common Stock nor any
uniformly quoted price.is traded on the American Stock Exchange.
The table below reports the high and low closing sale price of KHG Common
Stock as reported on the American Stock Exchange during the periods indicated
and the cash dividends paid per share
of PBE Common
Stock during the periods indicated.
42
Cash Dividends
1995 High Low Paid Per Share
- ---- ------ ------ --------------
1995
-----
First Quarter $.36$20.25 $17.63 $0.165
Second Quarter .3619.79 17.21 0.18
Third Quarter .3622.69 19.04 0.18
Fourth Quarter .8123.91 22.50 0.18
Cash Dividends
40
Cash Dividends
1996 High Low Paid Per Share
- ---- ------ ------ --------------
First Quarter $26.13 $22.50 $ 0.20
Second Quarter 23.88 20.13 0.20
Third Quarter 23.00 21.75 0.22
Fourth Quarter 23.63 21.88 0.22
1997
- ----
First Quarter .5027.88 23.00 0.25
Second Quarter .9031.50 26.13 0.25
Third Quarter .90
Fourth Quarter .90
1997
----
First Quarter .9052.63 31.25 0.25
As of the close of business on [Date],_______________, 1997, PBE'sKHG's Common Stock
was held by approximately _________ holders of record. PBE'sKHG's ability to declare or
pay cash dividends prior to the Effective Date of the Merger is limited by the
Merger Agreement. See THE MERGER -- Business Pending the Effective Date.
PRO FORMA COMBINED
------------------
FINANCIAL INFORMATION
---------------------
The unaudited pro forma combined condensed balance sheet and the unaudited
pro forma combined condensed statements of income of FFC set forth below give
effect, using the pooling-of-interests method of accounting, to the proposed
acquisition of KHG (based upon an exchange ratio of 1.83 shares of FFC Common
Stock for each share of KHG Common Stock). The unaudited pro forma combined
condensed financial statements are presented as though the Merger between FFC
and KHG had occurred on September 30, 1997.
The unaudited pro forma financial information, including the notes thereto
set forth below, is not necessarily indicative of the financial condition or
results of operations of FFC as they would have been had the proposed
acquisition of KHG occurred during the periods presented or as they may be in
the future. The unaudited pro forma financial information set forth below
should be read in conjunction with the financial statements of FFC, including
the notes thereto, which are incorporated herein by reference, and the financial
statements of KHG, including the notes thereto, which are incorporated herein by
reference. See INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE.
41
Fulton Financial Corporation
Pro Forma Combined Balance Sheet (Unaudited)
September 30, 1997
(Dollars in Thousands)
---------------------------------------------
(Dollars in Thousands)
-------------------------------------------------
Fulton
Financial Keystone Heritage Pro Forma
Corporation Group, Inc. Adjustments Combined
---------------------------------------------------------------------------------------------
Assets
Cash and Due from Banks $187,014 $21,274 $208,288
Interest Bearing Deposits 1,225 437 1,662
Federal Funds Sold -- 8,000 8,000
Mortgage Loans Held for Sale 1,502 1,418 2,920
Investment Securities:
Securities Held to Maturity 292,483 80,177 372,660
Securities Available for
Sale 574,221 63,576 (136)(B) 637,661
Loans 3,245,082 463,493 3,708,575
Less: Allowance for Loan
Losses (46,765) (8,633) (55,398)
Unearned Income (7,998) (1,568) (9,566)
--------------------------------------------------------------------------------------------
Net Loans 3,190,319 453,292 0 3,643,611
--------------------------------------------------------------------------------------------
Premises and Equipment 59,576 8,272 67,848
Accrued Interest Receivable 26,488 4,161 30,649
Other Assets 79,894 5,729 29(B) 85,652
--------------------------------------------------------------------------------------------
TOTAL ASSETS $4,412,722 $646,336 ($107) $5,058,951
============================================================================================
Liabilities
Deposits:
Non-Interest Bearing $542,895 $74,339 $617,234
Interest Bearing 3,062,109 473,695 3,535,804
--------------------------------------------------------------------------------------------
Total Deposits 3,605,004 548,034 0 4,153,038
--------------------------------------------------------------------------------------------
Short-Term Borrowings:
Federal Funds Purchased 31,175 7,500 38,675
Securities Sold Under
Agreements to Repurchase 157,029 11,581 168,610
Demand Notes of U.S.
Treasury 5,792 -- 5,792
--------------------------------------------------------------------------------------------
Total Short-Term Borrowings 193,996 19,081 0 213,077
--------------------------------------------------------------------------------------------
Accrued Interest Payable 28,557 5,416 33,973
Other Liabilities 70,317 3,186 73,503
Long-Term Debt 56,613 3,388 60,001
--------------------------------------------------------------------------------------------
Total Liabilities 3,954,487 579,105 0 4,533,592
--------------------------------------------------------------------------------------------
42
Fulton Financial Corporation
Pro Forma Combined Balance Sheet (Unaudited)
September 30, 1997
(Dollars in Thousands)
--------------------------------------------
Fulton
Financial Keystone Heritage Pro Forma
Corporation Group, Inc. Adjustments Combined
-------------------------------------------------------------------------------
Shareholders' Equity:
Common Stock 101,572 20,358 (1,730)(A) 120,200
Capital Surplus 293,010 22,078 1,730 (A) 316,818
Retained Earnings 45,164 26,148 -- 71,312
Less: Treasury Stock -- (2,669) (53)(B) (2,722)
Net Unrealized Holding Gain
on Securities 18,489 1,316 (54)(B) 19,751
-------------------------------------------------------------------------------
Total Shareholders' Equity 458,235 67,231 (107) 525,359
-------------------------------------------------------------------------------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $4,412,722 $646,336 ($107) $5,058,951
===============================================================================
- ---------------------
Notes to Pro Forma Combined Balance Sheet:
(A) THE TRANSACTION CALLS FOR THE ISSUANCE OF FULTON FINANCIAL CORPORATION
(FFC) $2.50 PAR VALUE COMMON STOCK IN EXCHANGE FOR 100% OF THE 4,071,683
SHARES OF KEYSTONE HERITAGE GROUP, INC. (KHG) $5.00 PAR VALUE COMMON STOCK
ISSUED. THE EXCHANGE RATIO HAS BEEN SET AT 1.83 SHARES OF FFC'S COMMON
STOCK FOR EACH SHARE OF KHG'S COMMON STOCK ISSUED ON THE EFFECTIVE DATE.
KHG WILL MERGE WITH AND INTO FFC WITH FULTON FINANCIAL CORPORATION
SURVIVING THE MERGER. THIS EXCHANGE RATIO IS SUBJECT TO ADJUSTMENT IN THE
EVENT OF A STOCK DIVIDEND OR SIMILAR TRANSACTION INVOLVING FFC COMMON STOCK
PRIOR TO THE EFFECTIVE DATE.
(B) THIS PRO FORMA ADJUSTMENT REFLECT THE CLASSIFICATION OF 2,666 SHARES OF KHG
CURRENTLY OWNED BY FFC, AND CLASSIFIED AS AVAILABLE FOR SALE (COST- $53
FMV - $136), AS TREASURY STOCK UPON CONVERSION TO SHARES OF FFC.
43
Fulton Financial Corporation
Pro Forma Combined Balance Sheet (Unaudited)
December 31, 1996
(Dollars in Thousands)
--------------------------------------------
Fulton
Financial Keystone Heritage Pro Forma
Corporation Group, Inc. Adjustments Combined
-----------------------------------------------------------------------------------------
ASSETS
Cash and Due from Banks $ 180,691 $ 22,832 $ 203,523
Interest Bearing Deposits 2,077 181 2,258
Mortgage Loans Held for Sale 125 6,019 6,144
Investment Securities:
Securities Held to Maturity 429,138 91,652 520,790
Securities Available for
Sale, at fair value 349,092 62,596 (61)(b) 411,627
Loans 3,035,147 424,346 3,459,493
Less: Allowance for loan losses (44,792) (7,736) (52,528)
Unearned income (8,080) (1,812) (9,892)
-----------------------------------------------------------------------------------------
Net Loans 2,982,275 $ 414,798 0 3,397,073
-----------------------------------------------------------------------------------------
Premises and Equipment 57,900 8,132 66,032
Accrued Interest Receivable 27,044 3,677 30,721
Other Assets 82,981 6,420 3(b) 89,404
-----------------------------------------------------------------------------------------
TOTAL ASSETS $4,111,323 $616,307 $ (58) $4,727,572
=========================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Non-Interest Bearing $ 543,628 $ 72,683 $ 616,311
Interest Bearing 2,824,326 454,150 3,278,476
-----------------------------------------------------------------------------------------
Total Deposits 3,367,954 526,833 0 3,894,787
-----------------------------------------------------------------------------------------
Short-Term Borrowings:
Federal Funds Purchased 63,825 63,825
Securities Sold Under
Agreements to Repurchase 139,670 12,478 152,148
Demand Notes of U.S. Treasury 5,544 5,544
-----------------------------------------------------------------------------------------
Total Short-Term Borrowings 209,039 12,478 0 221,517
-----------------------------------------------------------------------------------------
Accrued Interest Payable 20,667 5,184 25,851
Other Liabilities 42,546 3,135 45,681
Long-Term Debt 51,560 6,438 57,998
-----------------------------------------------------------------------------------------
Total Liabilities 3,691,766 554,068 0 4,245,834
-----------------------------------------------------------------------------------------
Shareholders' equity:
Common Stock 92,174 20,358 (1,730)(a) 110,802
Capital Surplus 217,833 22,078 1,730 (a) 241,641
Retained Earnings 100,160 21,418 121,578
Net unrealized holding gain
on securities 9,390 508 (5)(b) 9,893
Less: Treasury Stock, at cost 0 (2,123) (53)(b) (2,176)
-----------------------------------------------------------------------------------------
Total Shareholders' Equity 419,557 62,239 (58) 481,738
-----------------------------------------------------------------------------------------
Total Liabilities and
Shareholders' Equity $4,111,323 $ 616,307 $ (58) $ 4,727,572
=========================================================================================
44
Fulton Financial Corporation
Pro Forma Combined Balance Sheet (Unaudited)
December 31, 1996
(Dollars in Thousands)
--------------------------------------------
Notes to Pro Forma combined Balance Sheets:
(a) These Adjustments to the capital accounts reflect the issuance
of FFC Common Stock, $2.50 par value per share for 100% of the
KHG Common Stock, $5.00 par value per share, issued. An
exchange ratio of 1.83 shares of FFC Common Stock for each
share of KHG's Common Stock was utilized in this illustration.
(b) This Adjustment reflects the classification of 2,666 shares of
KHG Common Stock currently owned by FFC, and classified as
Available for Sale (cost - $53, fmv - $61), as Treasury Stock
upon conversion to shares of FFC.
45
Fulton Financial Corporation
Pro Forma Combined Balance Sheet (Unaudited)
December 31, 1995
(Dollars in Thousands)
Fulton Keystone Heritage
Financial Group, Inc. Pro Forma
Corporation Adjustments Combined
---------------------------------------------------------------------------------
ASSETS
Cash and Due from Banks $ 165,691 $ 23,766 $189,457
Interest Bearing Deposits 4,443 246 4,689
Mortgage loans held for sale 613 378 991
Investment securities:
Securities held to maturity 560,293 86,885 647,178
Securities Available for
sale, at fair value 278,001 65,799 (61)(b) 343,739
Loans 2,731,889 393,461 3,125,350
Less: Allowance for Loan Losses (41,134) (8,025) (49,159)
Unearned income (9,327) (2,830) (12,157)
---------------------------------------------------------------------------------
Net Loans 2,681,428 382,606 0 3,064,034
---------------------------------------------------------------------------------
Premises and Equipment 52,041 7,933 59,974
Accrued Interest Receivable 27,744 3,844 31,588
Other Assets 81,643 6,320 3 (b) 87,966
---------------------------------------------------------------------------------
Total Assets $3,851,897 $ 577,777 $ (58) 4,429,616
=================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Non-Interest Bearing $ 474,755 $ 65,530 $ 540,285
Interest-bearing 2,742,451 422,387 3,164,838
---------------------------------------------------------------------------------
Total Deposits 3,217,206 487,917 3,705,123
---------------------------------------------------------------------------------
Short-Term Borrowings:
Federal Funds Purchased 190 190
Securities Sold Under
Agreements to Repurchase 115,049 8,640 123,689
Demand Notes of U.S. Treasury 5,058 5,058
---------------------------------------------------------------------------------
Total Short Term Borrowing 120,297 8,640 0 128,937
---------------------------------------------------------------------------------
Accrued Interest Payable 20,302 5,284 25,586
Other Liabilities 70,137 3,048 73,185
Long-Term Debt 37,689 14,009 51,698
---------------------------------------------------------------------------------
Total Liabilities 3,465,631 518,898 0 3,984,529
---------------------------------------------------------------------------------
Shareholders' equity:
Common Stock 84,524 20,358 (1,730)(a) 103,152
Capital Surplus 170,618 22,078 1,730 (a) 194,426
Retained earnings 124,770 16,107 140,877
Net unrealized holding gain
on securities 8,542 336 (5)(b) 8,873
Less: Treasury Stock, at cost (2,188) (53)(b) (2,241)
---------------------------------------------------------------------------------
Total shareholders' equity $ 386,266 58,879 (58) 445,087
---------------------------------------------------------------------------------
Total liabilities and
shareholders' equity $3,851,897 $ 577,777 $ (58) $4,429,616
=================================================================================
46
Fulton Financial Corporation
Pro Forma Combined Balance Sheet (Unaudited)
December 31, 1995
(Dollars in Thousands)
----------------------------------------------
Notes to Pro Forma combined Balance Sheets:
(a) These Adjustments to the capital accounts reflect the issuance
of FFC Common Stock, $2.50 par value per share for 100% of the
KHG Common Stock, $5.00 par value per share, issued. An
exchange ratio of 1.83 shares of FFC Common Stock for each
share of KHG's Common Stock was utilized in this illustration.
(b) This Adjustment reflects the classification of 2,666 shares of
KHG Common Stock currently owned by FFC, and classified as
Available for Sale (cost - $53, fmv - $61), as Treasury Stock
upon conversion to shares of FFC.
47
Fulton Financial Corporation
Pro Forma Combined Condensed Statement of Income (Unaudited)
For the Nine Months Ended September 30, 1997
(Dollars in Thousands)
----------------------------------------------------------
Fulton
Financial Keystone Heritage Adjustments(a) Pro Forma
Corporation Group, Inc. Combined
-------------------------------------------------------------------------
Interest Income:
Loans, Including Fees $ 201,066 $ 29,136 $ 230,202
Investment Securities:
Taxable 31,022 5,857 36,879
Tax-Exempt 2,021 569 2,590
Dividends 1,860 196 (2) 2,054
Federal Funds Sold 177 361 538
Interest-Bearing Deposits 53 13 66
-------------------------------------------------------------------------
TOTAL INTEREST INCOME 236,199 36,132 (2) 272,329
Interest Expense
Deposits 91,644 15,286 106,930
Short-Term Borrowings 6,390 401 6,791
Long-Term Debt 2,639 278 2,917
-------------------------------------------------------------------------
TOTAL INTEREST EXPENSE 100,673 15,965 0 116,638
-------------------------------------------------------------------------
NET INTEREST INCOME 135,526 20,167 (2) 155,691
Provision for Loan Losses 5,389 -- 5,389
-------------------------------------------------------------------------
Net Interest Income After Provision
for Loan Losses 130,137 20,167 (2) 150,302
-------------------------------------------------------------------------
Other Income
Trust Department 6,684 1,004 7,688
Service Charges on Deposit
Accounts 11,627 1,078 12,705
Other Service Charges and Fees 6,447 1,767 8,214
Gain on Sale of Mortgage Loans 875 664 1,539
Investment Securities Gains 5,205 512 5,717
Gain on Sale of Credit Card
Loans and Merchant Processing
Activity -- 618 618
-------------------------------------------------------------------------
30,838 5,643 0 36,481
-------------------------------------------------------------------------
Other Expenses
Salaries and Employee Benefits 49,078 8,211 57,289
Net Occupancy Expense 7,774 1,147 8,921
Equipment Expense 5,460 1,419 6,879
FDIC Assessment Expense 497 48 545
Special Services 5,043 605 5,648
Other 23,136 3,287 26,423
-------------------------------------------------------------------------
90,988 14,717 0 105,705
-------------------------------------------------------------------------
Income Before Income Taxes 69,987 11,093 (2) 81,078
Income Taxes 21,703 3,393 25,096
-------------------------------------------------------------------------
NET INCOME $ 48,284 $ 7,700 (2) $ 55,982
=========================================================================
Per-Share Data:
Net Income $ 1.19 $ 1.94 $ 1.17
Cash Dividends $ 0.499 $ 0.750 $ 0.485
Weighted Average Shares
Outstanding 40,548,961 3,959,748 (4,879) 47,790,421
- ---------------------
Note to Pro Forma Combined Income Statements
(a) This Adjustment represents the dividend income received by FFC on KHG
Common Stock held during the period.
48
Fulton Financial Corporation
Pro Forma Combined Condensed Statement of Income (Unaudited)
For the Nine Months Ended September 30, 1996
(Dollars in Thousands)
------------------------------------------------------------
Fulton
Financial Keystone Heritage Adjustments(a) Pro Forma
Corporation Group, Inc. Combined
------------------------------------------------------------------------------
Interest Income
Loans, Including Fees $ 182,287 $ 27,096 $ 209,383
Investment Securities:
Taxable 31,377 5,429 36,806
Tax-Exempt 2,735 382 3,117
Dividends 1,537 159 (2) 1,694
Federal Funds Sold 589 143 732
Interest-Bearing Deposits 140 13 153
TOTAL INTEREST INCOME 218,665 33,222 (2) 251,885
------------------------------------------------------------------------------
Interest Expense
Deposits 85,520 13,626 99,146
Short-Term Borrowings 5,842 369 6,211
Long-Term Debt 1,430 420 1,850
------------------------------------------------------------------------------
TOTAL INTEREST EXPENSE 92,792 14,415 0 107,207
------------------------------------------------------------------------------
NET INTEREST INCOME 125,873 18,807 (2) 144,678
Provision for Loan Losses 3,442 3,442
------------------------------------------------------------------------------
Net Interest Income
After Provision for
Loan Losses 122,431 18,807 (2) 141,236
Other Income
Trust Department 5,714 961 6,675
Service Charges on Deposit
Accounts 10,392 978 11,370
Other Service Charges and Fees 6,309 1,624 7,933
Gain on Sale of Mortgage Loans 715 644 1,359
Investment Securities Gains 2,136 58 2,194
------------------------------------------------------------------------------
TOTAL OTHER INCOME 25,266 4,265 0 29,531
------------------------------------------------------------------------------
Other Expenses
Salaries and Employee Benefits 45,570 7,522 53,092
Net Occupancy Expense 7,537 967 8,504
Equipment Expense 4,662 1,500 6,162
FDIC Assessment Expense 3,243 2 3,245
Special Services 5,015 640 5,655
Other 22,717 3,346 26,063
------------------------------------------------------------------------------
TOTAL OTHER EXPENSES 88,744 13,977 0 102,721
------------------------------------------------------------------------------
Income Before Income Taxes 58,953 9,095 (2) 68,046
Income Taxes 17,666 2,795 20,461
------------------------------------------------------------------------------
NET INCOME $ 41,287 $ 6,300 $ (2) $ 47,585
==============================================================================
Per Share Data:
Net Income $ 1.02 $ 1.55 $ 1.00
Cash Dividends $ 0.441 $ 0.621 $ 0.425
Weighted Average Shares Outstanding 40,355,919 4,065,506 (4,879) 47,790,916
- ------------------------------
Note to Pro Forma Combined Income Statements:
(a) This Adjustment represents the dividend income received by FFC on KHG
Common Stock held during the period.
49
Fulton Financial Corporation
Pro Forma Combined Condensed Statement of Income (Unaudited)
Year Ended December 31, 1996
(Dollars in Thousands)
------------------------------------------------------------
Fulton Keystone
Financial Heritage Adjustments (a) Pro Forma
Corporation Group, Inc. Combined
----------------------------------------------------------------------------------------
Interest Income
Loans, Including Fees $ 246,579 $ 36,725 $ 283,304
Investment Securities:
Taxable 41,653 7,193 48,846
Tax-exempt 3,607 530 4,137
Dividends 2,101 217 (2) 2,316
Federal Funds Sold 730 286 1,016
Interest-Bearing Deposits 179 23 202
----------------------------------------------------------------------------------------
TOTAL INTEREST INCOME 294,849 44,974 (2) 339,821
Interest Expense
Deposits 114,614 18,490 133,104
Short-Term Borrowings 8,569 486 9,055
Long-Term Debt 1,994 518 2,512
----------------------------------------------------------------------------------------
TOTAL INTEREST EXPENSE 125,177 19,494 0 144,671
----------------------------------------------------------------------------------------
NET INTEREST INCOME 169,672 25,480 (2) 195,150
Provision for Loan Losses 5,561 5,561
----------------------------------------------------------------------------------------
Net Interest Income After
Provision for Loan Losses 164,111 25,480 (2) 189,589
Other Income
Trust Department 7,872 1,310 9,182
Service Charges on Deposit
Accounts 14,164 1,331 15,495
Other Service Charges and Fees 8,619 2,271 10,890
Gain on Sale of Mortgage Loans 1,204 940 2,144
Investment Securities Gains 3,124 79 3,203
----------------------------------------------------------------------------------------
34,983 5,931 0 40,914
----------------------------------------------------------------------------------------
Other Expenses
Salaries and Employee Benefits 61,520 10,040 71,560
Net Occupancy Expenses 9,975 1,306 11,281
Equipment Expense 6,281 1,954 8,235
FDIC Assessment Expense 3,225 2 3,227
Special Services 6,764 882 7,646
Other 32,118 4,628 36,746
----------------------------------------------------------------------------------------
119,883 18,812 0 138,695
----------------------------------------------------------------------------------------
Income Before Income Taxes 79,211 12,599 (2) 91,808
Income Taxes 23,464 3,879 27,343
----------------------------------------------------------------------------------------
NET INCOME $ 55,747 $ 8,720 $ (2) $ 64,465
========================================================================================
Per-Share Data:
Net Income $ 1.38 $ 2.15 $ 1.35
Cash Dividends $ 0.594 $ 0.841 $ 0.573
Weighted Average Shares
Outstanding 40,371,748 4,053,490 (4,879) 47,784,756
- -------------------------
Note to Pro Forma Combined Income Statements:
(a) This Adjustment represents the dividend income received by FFC
on KHG Common Stock held during the period.
50
Fulton Financial Corporation
Pro Forma Combined Condensed Statement of Income (Unaudited)
Year Ended December 31, 1995
(Dollars in Thousands)
-------------------------------------------------------------
Fulton Keystone
Financial Heritage Adjustments (a) Pro Forma
Corporation Group, Inc. Combined
----------------------------------------------------------------------------------
Interest Income
Loans, Including Fees $ 230,201 $ 34,946 $ 265,147
Investment Securities:
Taxable 35,722 7,104 42,826
Tax-exempt 5,166 447 5,613
Dividends 2,072 195 (1) 2,266
Federal Funds Sold 2,711 374 3,085
Interest-Bearing Deposits 272 165 437
----------------------------------------------------------------------------------
TOTAL INTEREST INCOME 276,144 43,231 (1) 319,374
Interest Expense
Deposits 110,469 17,836 128,305
Short-Term Borrowings 6,428 466 6,894
Long-Term Debt 2,233 766 2,999
----------------------------------------------------------------------------------
TOTAL INTEREST EXPENSE 119,130 19,068 0 138,198
----------------------------------------------------------------------------------
NET INTEREST INCOME 157,014 24,163 (1) 181,176
Provision for Loan Losses 3,998 3,998
----------------------------------------------------------------------------------
Net Interest Income After
Provision for Loan Losses 153,016 24,163 (1) 177,178
Other Income
Trust Department 7,435 1,277 8,712
Service Charges on Deposit
Accounts 11,787 1,292 13,079
Other Service Charges and Fees 8,159 2,507 10,666
Gain on Sale of Mortgage Loans 1,105 209 1,314
Investment Securities Gains 3,205 126 3,331
----------------------------------------------------------------------------------
31,691 5,411 0 37,102
----------------------------------------------------------------------------------
Other Expenses
Salaries and Employee Benefits 59,060 9,770 68,830
Net Occupancy Expense 9,431 1,256 10,687
Equipment Expense 5,805 1,934 7,739
FDIC Assessment Expense 3,778 539 4,317
Special Services 5,727 769 6,496
Other 29,077 4,121 33,198
----------------------------------------------------------------------------------
112,878 18,389 0 131,267
----------------------------------------------------------------------------------
Income Before Income Taxes 71,829 11,185 (1) 83,013
Income Taxes 20,217 3,528 23,745
----------------------------------------------------------------------------------
NET INCOME $ 51,612 $ 7,657 $ (1) $ 59,268
==================================================================================
Per-Share Data:
Net Income $ 1.28 $ 1.88 $ 1.24
Cash Dividends $ 0.502 $0.705 $ 0.484
Weighted Average Shares
Outstanding 40,333,127 4,066,936 (2,594) 47,773,026
- ----------------------
Note to Pro Forma Combined Income Statements:
(a) This Adjustment represents the dividend income received by FFC
on KHG Common Stock held during the period.
51
Fulton Financial Corporation
Pro Forma Combined Condensed Statement of Income (Unaudited)
Year Ended December 31, 1994
(Dollars in Thousands)
------------------------------------------------------------
Fulton Keystone Pro Forma
Financial Heritage Adjustments Combined
Corporation Group, Inc.
-----------------------------------------------------------------------
Interest Income
Loans, Including Fees $ 187,000 $ 30,822 $ 217,822
Investment Securities:
Taxable 35,312 5,943 41,255
Tax-Exempt 6,152 558 6,710
Dividends 1,495 161 1,656
Federal Funds Sold 1,196 115 1,311
Interest-Bearing Deposits 170 12 182
-----------------------------------------------------------------------
TOTAL INTEREST INCOME 231,325 37,611 0 268,936
Interest Expense
Deposits 79,863 13,277 93,040
Short-Term Borrowings 5,310 562 5,872
Long-Term Debt 1,268 608 1,876
-----------------------------------------------------------------------
TOTAL INTEREST EXPENSE 86,341 14,447 0 100,788
-----------------------------------------------------------------------
NET INTEREST INCOME 144,984 23,164 0 168,148
Provision for Loan Losses 3,074 300 3,374
-----------------------------------------------------------------------
Net Interest Income After Provision
for Loan Losses 141,910 22,864 0 164,774
-----------------------------------------------------------------------
Other Income
Trust Department 7,063 1,289 8,352
Service Charges on Deposit Accounts 11,073 1,209 12,282
Other Service Charges and Fees 6,560 2,060 8,620
Gain on Sale of Mortgage Loans 1,189 290 1,479
Investment Securities Gains 2,133 (29) 2,104
-----------------------------------------------------------------------
28,018 4,819 0 32,837
-----------------------------------------------------------------------
Other Expenses
Salaries and Employee Benefits 54,639 8,834 63,473
Net Occupancy Expense 8,239 1,237 9,476
Equipment Expense 6,014 1,871 7,885
FDIC Assessment Expense 6,206 1,016 7,222
Special Services 5,025 713 5,738
Other 25,493 3,962 29,455
-----------------------------------------------------------------------
105,616 17,633 0 123,249
-----------------------------------------------------------------------
Income Before Income Taxes 64,312 10,050 0 74,362
Income Taxes 17,747 3,283 21,030
-----------------------------------------------------------------------
NET INCOME $ 46,565 $ 6,767 $ 0 $ 53,332
=======================================================================
Per-Share Data:
Net Income $ 1.16 $ 1.67 $ 1.12
Cash Dividends $ 0.444 $ 0.633 $ 0.428
Weighted Average Shares Outstanding 40,085,339 4,061,617 47,518,098
52
INFORMATION CONCERNING FULTON FINANCIAL CORPORATION
---------------------------------------------------
AND DESCRIPTION OF FFC COMMON STOCK
-----------------------------------
General
- -------
FFC is a Pennsylvania business corporation and a registered bank holding
company with its headquarters in Lancaster, Pennsylvania. As a bank holding
company, FFC engages in a general commercial and retail banking and trust
business, and also in related financial businesses, through its bank and nonbank
subsidiaries. FFC's subsidiary banks currently operate eighty-foureighty-six banking
offices in Pennsylvania, fifteensixteen banking offices in Maryland, sixseven banking
offices in Delaware, and twelvefourteen banking offices in New Jersey. As of
March 31,September 30, 1997, FFC had consolidated total assets of approximately $4.1$4.4
billion.
The principal assets of FFC are the following teneleven wholly-owned bank
subsidiaries, each of which is insured by the FDIC: (i) Fulton Bank ("Fulton"),
a Pennsylvania bank and trust company which is not a member of the Federal
Reserve System, (ii) Farmers Trust Bank ("Farmers Trust"), a Pennsylvania bank
and trust company which is a member of the Federal Reserve System, (iii)
Swineford National Bank ("Swineford"), a national banking association which is a
member of the Federal Reserve System, (iv) Lafayette Bank ("Lafayette"), a
Pennsylvania bank and trust company which is not a member of the Federal Reserve
System, (v) FNB Bank, National Association ("FNB"), a national banking
association which is a member of the Federal Reserve System, (vi) Great Valley
Savings Bank ("Great Valley"), a Pennsylvania-chartered savings bank which is
not a member of the Federal Reserve System, (vii) Hagerstown Trust Company
("Hagerstown"), a Maryland trust company which is not a member of the Federal
Reserve System, (viii) Delaware National Bank ("Delaware National"), a national
banking association which is a member of the Federal Reserve System, (ix) The
Bank of Gloucester County ("Gloucester"), a New Jersey bank which is not a
member of the Federal Reserve System, and (x) The Woodstown National Bank & Trust
Company ("Woodstown"), a national banking association which is a member of the
Federal Reserve System, and (xi) The Peoples Bank of Elkton ("Peoples"), a
Maryland bank which is not a member of the Federal Reserve System.
In addition, FFC has the following wholly-owned direct nonbank subsidiaries:
(i) Fulton Financial Realty Company, which holds title to or leases certain
properties on which facilities of Fulton and Farmers Trust maintain branch
offices or other facilities;are located; (ii)
Fulton Life Insurance Company, which engages in the business of reinsuring
credit life, accident and health insurance that is directly related to
extensions of credit by certain of FFC's bank subsidiaries; (iii) Central
Pennsylvania Financial Corp., which ownsholds certain non-bankinglimited partnership interests
in low and moderate income housing projects and certain subsidiaries holdingwhich in
turn hold either interests in real estate (these subsidiaries are, for the most
part, inactive, in the process of liquidation and immaterial to FFC) or
securities; and (iv) FFC Management, Inc., which owns certain securities.
As a registered bank holding company, FFC is subject to regulation under the
federal Bank Holding Company Act of 1956, as amended, and the rules adopted by
the Board of Governors of the Federal Reserve System ("Federal Reserve Board")
thereunder. Under applicable Federal Reserve Board policies, a bank holding
company such as FFC is expected to act as a source of financial strength for
each of its subsidiary banks and to commit resources to support each subsidiary
bank in circumstances when it might not do so absent such a policy. Any capital
loans made by a bank holding company to any of its subsidiary banks would be
subordinate in right of payment to the claims of depositors and certain other
creditors of such subsidiary banks.
4453
The principal executive offices of FFC are located at One Penn Square, P.0.
Box 4887, Lancaster, Pennsylvania 17604, and its telephone number is (717) 291-2411.291-
2411.
Loan Policies and Portfolio Quality
- -----------------------------------
FFC, through its bank subsidiaries, grants loans and makes other credit
facilities available to the general public. These extensions of credit are
structured to meet the varying needs of business, individual, and institutional
customers and include mortgages, lines of credit, term loans, leases and letters
of credit. This activity serves as a major source of revenue for FFC. However,
it also exposes FFC to potential losses upon borrower default. In order to
minimize the occurrence of loss, FFC's bank subsidiaries follow strict loan
underwriting and risk assessment policies. These policies emphasize the
financial strength and cash flow of the borrower rather than collateral value.
Although collateral continues to play an important part in lending decisions, it
is not a substitute for a borrower's underlying ability to pay. FFC's bank
subsidiaries confine their lending to customers who live, or which are based, in
their respective market areas. By geographically restricting the lending
activities of each bank subsidiary, their respective staffs can become more
knowledgeable about local market conditions and can thereby make better credit
risk assessments and, therefore, more prudent lending decisions. This superior
knowledge of local economic conditions, when combined with prudent underwriting
standards, offsets and often surmounts the potential risks arising from a
geographic concentration of credits. Management believes that FFC's loan
customer base is reasonably diversified, because FFC's subsidiary banks are
located in and do business within a broad spectrum of local communities and
regional economies located in central and northeastern Pennsylvania, western and
northeastern Maryland, and southern Delaware, and southwestern New Jersey.
To counteract any problems with credit quality which do arise, FFC maintains
a proactive loan review function. This function, in combination with the
lending staff, attempts to identify deteriorating loans before they reach a
critical stage. This loan review policy not only protects FFC and its
subsidiaries from realizing greater loan losses but also, in many cases, assists
the borrower as well. Due to their underwriting criteria, FFC and its bank
subsidiaries have not made a determination to limit the availability of credit
to any segment of their customer base due to changes in general economic
conditions. FFC and its bank subsidiaries do take these conditions into
consideration when assessing individual credit risk, but each loan request is
evaluated individually.
Computer System Adaptation for Year 2000
- ----------------------------------------
FFC uses software and other computer-related technologies throughout its
business that will be affected by the date change in the year 2000. FFC has an
internal study currently in process to determine the full scope and related
costs to modify, update, or replace existing systems and software to ensure that
FFC will continue to meet its internal needs and those of its customers.
Although final cost estimates have yet to be determined, it is expected that
these costs will result in an increase in expenses during 1998 and 1999.
Legal Proceedings
- -----------------
From time to time FFC and its subsidiaries are involved in routine
litigation matters that are incidental to the businesses carried on by such
entities. None of these matters is expected to have a material effect on FFC's
financial condition or operating results.
54
General Description of FFC Common Stock
- ---------------------------------------
The authorized capital of FFC consists exclusively of 200 million shares of
Common Stock, par value $2.50 per share, and 10 million shares of preferred
stock without par value. As of March 13,September 30, 1997, there were issued and
outstanding 39,570,97940,628,608 shares of FFC Common Stock, which shares were held by
11,70312,394 owners of record, and there were 823,686851,654 shares issuable upon the
exercise of options. The Conversion Ratio and all pro forma and FFC historical
per share information herein have been adjusted to reflect a 10% stock dividend
declared by FFC on May 1, 1997, payable on June 13, 1997, to
45
shareholders of record on May 23, 1997. No shares of preferred stock have been issued by FFC. FFC
Common Stock is listed for quotation on the over-the-counter NasdaqNASDAQ National
Market System under the symbol "FULT."
The holders of FFC Common Stock are entitled to one vote per share on all
matters submitted to a vote of the shareholders and may not cumulate their votes
for the election of directors. Each share of FFC Common Stock is entitled to
participate on an equal pro rata basis in dividends and other distributions.
The holders of FFC Common Stock do not have preemptive rights to subscribe for
additional shares that may be issued by FFC, and no share is entitled in any
manner to any preference over any other share. The shares of FFC Common Stock
to be issued to the shareholders of PBEKHG pursuant to the Merger will be fully
paid and non-assessable and the holders thereof will not be subject to call or
assessment under Pennsylvania law. Fulton Bank serves as the transfer agent for
FFC.
Dividends
- ---------
The holders of FFC Common Stock are entitled to receive dividends when, as
and if declared by the Board of Directors out of funds legally available
therefor. FFC has in the past paid quarterly cash dividends to its shareholders
on or about the 15th day of January, April, July and October of each year.
The ability of FFC to pay dividends to its shareholders is dependent
primarily upon the earnings and financial condition of Fulton, Farmers Trust,
Swineford, Lafayette, FNB, Great Valley, Hagerstown, Delaware National,
Gloucester, Woodstown, and Woodstown.Peoples. Funds for the payment of dividends on FFC
Common Stock are expected for the foreseeable future to be obtained primarily
from dividends paid to FFC by these teneleven bank subsidiaries, and by PBEincluding
LVNB/Farmers if the Merger is consummated, which dividends are subject to
certain statutory limitations.
Under applicable state and federal laws, the dividends that may be paid by
the bank subsidiaries of FFC without prior regulatory approval are subject to
certain prescribed limitations. As state banks chartered under the Pennsylvania
Banking Code of 1965, as amended, Fulton, Farmers Trust, Lafayette and Great
Valley may pay dividends only out of accumulated net earnings and may not
declare or pay any dividend requiring a reduction of the statutorily required
surplus of the institution. In the case of national banks such as Swineford,
FNB, Delaware National and Woodstown, the approval of the Office of the
Comptroller of the Currency ("OCC") is required under federal law if the total
of all dividends declared during any calendar year would exceed the net profits
(as defined) of the bank for the year, combined with its retained net profits
(as defined) for the two preceding calendar years. As a commercial bankbanks
organized under the laws of the state of Maryland, Hagerstown and Peoples may
only declare a cash dividend from itstheir undivided profits or (with the prior
approval of the Maryland Bank Commissioner) from itstheir surplus in excess of 100%
of itstheir required capital stock, in each case after providing for due or accrued
expenses, losses, interest and taxes. In addition, if Hagerstown's or Peoples'
surplus becomes less than 100% of itstheir respective required capital stock,
Hagerstown or Peoples may not declare or pay any cash dividends that exceed 90%
of itstheir net earnings until itstheir surplus becomes 100% of itstheir required capital
stock. As a New Jersey bank, Gloucester may not declare or pay any dividend
which would impair its capital
55
stock or reduce its surplus to a level of less than 50% of its capital stock or
if the surplus is currently less than 50% of the capital stock, the payment of
such dividends would not reduce the surplus of the bank. In addition to the
foregoing statutory restrictions on dividends, the Pennsylvania Department of
Banking (with respect to all Pennsylvania state-chartered banks), the FDIC (with
respect to Pennsylvania state-chartered banks that are not members of the
Federal Reserve System, such
46
as Fulton, Lafayette and Great Valley), the FRB
(with respect to Pennsylvania state-chartered banks that are members of the
Federal Reserve System, such as Farmers Trust), and the OCC (with respect to
national banks such as Swineford, FNB and Delaware National), also have adopted
minimum capital standards and have broad authority to prohibit a bank from
engaging in unsafe or unsound banking practices. The payment of a dividend by a
bank could, depending upon the financial condition of the bank involved and
other factors, be deemed to impair its capital or to be such an unsafe or
unsound practice.
Under the restrictions set forth above, the aggregate amount available for
the payment of dividends by the teneleven bank subsidiaries of FFC was
approximately $141 million as of December 31, 1996.
Dividend Reinvestment Plan
- --------------------------
The holders of FFC Common Stock may elect to participate in the Fulton
Financial Corporation Dividend Reinvestment Plan (the "Dividend Reinvestment
Plan"), which is a plan administered by Fulton as the Plan Agent. Under the
Dividend Reinvestment Plan, dividends payable to participating shareholders are
paid to the Plan Agent and are used to purchase, on behalf of the participating
shareholders, additional shares of FFC Common Stock. Participating shareholders
may make additional voluntary cash payments, which are also used by the Plan
Agent to purchase, on behalf of such shareholders, additional shares of FFC
Common Stock. Shares of FFC Common Stock held for the account of participating
shareholders are voted by the Plan Agent in accordance with the instructions of
each participating shareholder as set forth in his or her proxy.
Securities Laws
- ---------------
FFC, as a business corporation, is subject to the registration and
prospectus delivery requirements of the 1933 Act and is also subject to similar
requirements under state securities laws. FFC Common Stock is registered with
the SEC under Section 12(g) of the 1934 Act, and FFC is subject to the periodic
reporting, proxy solicitation and insider trading requirements of the 1934 Act.
The executive officers, directors and ten percent shareholders of FFC are
subject to certain restrictions affecting their right to sell shares of FFC
Common Stock owned beneficially by them. Specifically, each such person is
subject to the beneficial ownership reporting requirements and to the short-
swing profit recapture provisions of Section 16 of the 1934 Act and may sell
shares of FFC Common Stock only: (i) in compliance with the provisions of SEC
Rule 144, (ii) in compliance with the provisions of another applicable exemption
from the registration requirements of the 1933 Act, or (iii) pursuant to an
effective registration statement filed with the SEC under the 1933 Act.
Antitakeover Provisions
- -----------------------
The Articles of Incorporation and Bylaws of FFC include certain provisions
which may be considered to be "antitakeover" in nature, because they may have
the effect of discouraging or making more difficult the acquisition of control
over FFC by means of a hostile tender offer, exchange offer, proxy contest or
similar transaction. These provisions are intended to protect the shareholders
of FFC (including the present shareholders of PBE,KHG, who will become shareholders
of FFC following the Merger) by providing a
56
measure of assurance that FFC's shareholders will be treated fairly in the event
of an unsolicited takeover bid and by preventing a successful takeover bidder
from exercising its voting control to the detriment of the other shareholders.
However, the antitakeover provisions set forth in the Articles of Incorporation
and Bylaws of FFC, taken as a whole, may discourage a hostile
47
tender offer,
exchange offer, proxy solicitation or similar transaction relating to FFC Common
Stock. To the extent that these provisions actually discourage such a
transaction, holders of FFC Common Stock may not have an opportunity to dispose
of part or all of their stock at a higher price than that prevailing in the
market. In addition, these provisions make it more difficult to remove, and
thereby may serve to entrench, incumbent directors and officers of FFC, even if
their removal would be regarded by some shareholders as desirable.
The provisions in the Articles of Incorporation of FFC which may be
considered to be "antitakeover" in nature include the following: (i) a
provision that provides for substantial amounts of authorized but unissued
capital stock, including a class of preferred stock whose rights and privileges
may be determined prior to issuance by FFC's Board of Directors, (ii) a
provision that does not permit shareholders to cumulate their votes for the
election of directors, (iii) a provision that requires a greater than majority
shareholder vote in order to approve certain business combinations and other
extraordinary corporate transactions, (iv) a provision that establishes criteria
to be applied by the Board of Directors in evaluating an acquisition proposal,
(v) a provision that requires a greater than majority shareholder vote in order
for the shareholders to remove a director from office without cause, (vi) a
provision that prohibits the taking of any action by the shareholders without a
meeting and eliminates the right of shareholders to call a annual meeting, (vii)
a provision that limits the right of the shareholders to amend the Bylaws, and
(viii) a provision that requires, under certain circumstances, a greater than
majority shareholder vote in order to amend the Articles of Incorporation.
The provisions of the Bylaws of FFC which may be considered to be
"antitakeover" in nature include the following: (i) a provision that limits the
permissible number of directors, (ii) a provision that establishes a Board of
Directors divided into three classes, with members of each class elected for a
three-year term that is staggered with the terms of the members of the other two
classes, and (iii) a provision that requires advance written notice as a
precondition to the nomination of any person for election to the Board of
Directors, other than in the case of nominations made by existing management.
As a Pennsylvania business corporation and a corporation registered under
the Securities Exchange Act of 1934, FFC is subject to, and may take advantage
of the protections of, the antitakeover provisions of the Pennsylvania Business
Corporation Law of 1988, as amended ("BCL"). These antitakeover provisions,
which are designed to discourage the acquisition of control over a targeted
Pennsylvania business corporation, include: (i) a provision whereby the
directors of the corporation, in determining what is in the best interests of
the corporation, may consider factors other than the economic interests of the
shareholders, such as the effect of any action upon other constituencies,
including employees, suppliers, customers, creditors and the community in which
the corporation is located; (ii) a provision that permits shareholders to demand
that a controlling person pay to them the fair value of their shares in cash
upon a change in control; (iii) a provision that restricts certain business
combinations unless there is prior approval by the directors or a supermajority
of the shareholders; (iv) a provision permitting a corporation to adopt a
shareholders rights plan; (v) a provision denying the right to vote to a person
who acquires a specified percentage of stock ownership ("control shares") unless
those voting rights are restored by a vote of disinterested shareholders; and
(vi) a provision requiring a person who acquires control shares to disgorge to
the corporation all profits from the sale of equity
57
securities within eighteen months thereafter. Corporations may elect to "opt
out" of any or all of these antitakeover provisions of the BCL. FFC has not
48
elected to opt out of any of the protections provided by the antitakeover
statutes.
On June 20, 1989, FFC adopted a Shareholder Rights Plan (the "Rights Plan").
The Rights Plan is intended to discourage unfair or financially inadequate
takeover proposals and abusive takeover practices and to encourage third parties
who may in the future be interested in acquiring FFC to negotiate with FFC's
Board of Directors. The Rights Plan may have the effect of discouraging or
making more difficult the acquisition of FFC by means of a hostile tender offer,
exchange offer or similar transaction. The Rights Plan is similar to
shareholder rights plans which have been adopted by many other bank holding
companies and business corporations and contains "flip-in" and "flip-
over""flip-over"
provisions which are typically included in plans of this kind. Each share of
FFC Common Stock to be issued in connection with the Merger will be accompanied
by one right issued pursuant to the terms of the Rights Plan, which right will
initially, and until it becomes exercisable, trade with and be represented by
the FFC Common Stock certificates to be received by the shareholders of PBE.KHG.
The management of FFC does not presently contemplate recommending to the
shareholders the adoption of any additional antitakeover provisions.
Indemnification
- ---------------
The Bylaws of FFC provide for indemnification of its directors, officers,
employees and agents to the fullest extent permitted under the laws of the
Commonwealth of Pennsylvania, provided that the person seeking indemnification
acted in good faith, in a manner he or she reasonably believed to be in the best
interests of FFC, and without willful misconduct or recklessness. FFC has
purchased insurance to indemnify its directors, officers, employees and agents
under certain circumstances.
Insofar as indemnification for liabilities arising under the 1933 Act may be
permitted to directors, officers or persons controlling FFC pursuant to the
foregoing provisions of FFC's Bylaws, FFC has been informed that, in the opinion
of the SEC, such indemnification is against public policy as expressed in the
1933 Act and is therefore unenforceable.
Comparison of Shareholder Rights
- --------------------------------
Upon consummation of the Merger, the shareholders of PBEKHG will become
shareholders of FFC. There are differences between the rights of holders of PBEKHG
Common Stock and FFC Common Stock. These differences arise out of (i)
differences
between the Articles of Incorporation and Bylaws of PBEKHG and the Articles of
Incorporation and Bylaws of FFC, and (ii) differences between the
respective state and regulatory laws applicable to PBE and FFC. The most significant differences are: (1) FFC
has adopted a Shareholder Rights Plan, which provides FFC's shareholders with
certain stock-related rights in the event of a hostile takeover but may have the
effect of discouraging such a takeover (see the section above entitled
"Antitakeover Provisions"), while PBEKHG has not adopted any such plan; (2) FFC's
Articles of Incorporation authorize the issuance of shares of preferred stock
with such rights and privileges as may be determined by FFC's Board of Directors
(although FFC currently has no plans to issue preferred stock), while PBE'sKHG's
Articles of Incorporation do not authorize the issuance of any class of
preferred stock; and (3) FFC Common Stock is
registered under the 1934 Act and traded on the Nasdaq National Market, while
PBE Common Stock is not registered or actively traded.stock.
The Articles of Incorporation and Bylaws of FFC also include a number of
other provisions which are intended to protect the shareholders of FFC
49
(including the present shareholders of PBE,KHG, who will become shareholders of FFC
following the Merger) from abusive takeover practices and inadequate takeover
proposals, but which may be considered to be "antitakeover" in nature
58
and may serve to entrench the current management of FFC. See INFORMATION
CONCERNING FULTON FINANCIAL CORPORATION AND DESCRIPTION OF FFC COMMON STOCK--AntitakeoverSTOCK--
Antitakeover Provisions.
The material differences between PBEKHG Common Stock and FFC Common Stock and
the rights of their respective holders are summarized in the following table:
50
================================================================================
PBE===================================================================================
KHG FFC
- --------------------------------------------------------------------------------
-----------------------------------------------------------------------------------
Title Common Stock, $10.00$5.00 par Common Stock, $2.50 par
value per share value per share
- -------------------------------------------------------------------------------------------------------------------------------------------------------------------
Shares Authorized 500,00010,000,000 200,000,000
- -------------------------------------------------------------------------------------------------------------------------------------------------------------------
Shares Issued & Outstanding 230,596 39,570,9793,966,249 40,628,608
- -------------------------------------------------------------------------------------------------------------------------------------------------------------------
Preemptive Rights Yes (Subject to No Exceptions)No
- -------------------------------------------------------------------------------------------------------------------------------------------------------------------
Classification of Board of NoBoard of Directors Board of Directors
Directors divided into 3 classes divided into 3 classes
with 3 year terms; with 3 year terms;
one-third of directors one-third of directors
elected each year - --------------------------------------------------------------------------------elected each year
----------------------------------------------------------------------------------
Voting: Election of
Non-CumulativeDirectors Non-cumulative DirectorsNon-cumulative
- -------------------------------------------------------------------------------------------------------------------------------------------------------------------
Voting: Other Matters One vote for each share One vote for each share
owned of record owned of record
- -------------------------------------------------------------------------------------------------------------------------------------------------------------------
Shareholder Rights Plan None Yes
- -------------------------------------------------------------------------------------------------------------------------------------------------------------------
Dissenters' Rights Yes Not generally available, Not generally available,
except by resolution of except by resolution of
the Board of Directors the Board of Directors
- -------------------------------------------------------------------------------------------------------------------------------------------------------------------
Dividend Reinvestment Plan NonePlan administered by Open market plan
Registrar Transfer administered by Fulton
Company provides for Bank as Plan Agent
both open market
purchases and company
purchases
- -------------------------------------------------------------------------------------------------------------------------------------------------------------------
Market No public marketAmerican Stock Exchange Listed for quotation on
NasdaqNASDAQ National Market
- -------------------------------------------------------------------------------------------------------------------------------------------------------------------
Registered under 1934 Act NoYes Yes
- -------------------------------------------------------------------------------------------------------------------------------------------------------------------
Limitation of Liability of NoYes Yes
Directors for Monetary Damages
- -------------------------------------------------------------------------------------------------------------------------------------------------------------------
Indemnification of Yes Yes
Directors, Officers and
Employees
- -------------------------------------------------------------------------------------------------------------------------------------------------------------------
Authorized Class of No Yes, which can be
Preferred Stock issued under terms and
conditions to be
determined by the Board
of Directors
- -------------------------------------------------------------------------------------------------------------------------------------------------------------------
Control Share Statute Yes Yes
- -------------------------------------------------------------------------------------------------------------------------------------------------------------------
Business Combination Statute Yes Yes
Statute
- -------------------------------------------------------------------------------------------------------------------------------------------------------------------
Right of Shareholders to Yes No
call a Special Meeting
- -------------------------------------------------------------------------------------------------------------------------------------------------------------------
Shareholder Inspection YesRights General RightsGeneral
- -------------------------------------------------------------------------------------------------------------------------------------------------------------------
Right of Shareholders to Yes No
act by Written Consent
===================================================================================================================================================================
5159
INFORMATION CONCERNING THE PEOPLES BANK OF ELKTON
-------------------------------------------------KEYSTONE HERITAGE GROUP, INC.
----------------------------------------------------
Description of Business and Property
- ------------------------------------
PBEKHG is a MarylandPennsylvania business corporation and registered bank holding
company which was organized in 1923. PBE1982. KHG is engaged in a general banking
business, including commercial and retail banking operations, through its bank
subsidiary, in Cecil County, Maryland. PBE currently conducts its business through two banking
offices located in Cecil County, Maryland, consisting of its main officeLebanon, Lancaster, Dauphin, Berks and one
branch location.Schuylkill Counties,
Pennsylvania. At March 31,September 30, 1997, PBEKHG had total deposits of approximately $80
million, total assets of approximately $92$646
million, shareholders equity of $10$67 million, total net loans of approximately
$65$462 million and employed 45325 persons on a full-time basis and four persons on a part-timeequivalent basis. KHG's
sole bank subsidiary, LVNB, had total deposits of $548 million at September 30,
1997.
The broad range of retail and commercial banking services which PBELVNB offers
include checking accounts, savings programs, money-market accounts, certificates
of deposit, safe deposit facilities, consumer loans programs, revolving lines of
credit, overdraft checking and extended banking hours. These services are
primarily provided to consumers and small- to mid-sized companies within the
Bank'sLVNB's
market area. PBELVNB focuses its lending services on commercial, agricultural,
consumer and real estate lending to local borrowers. PBELVNB attempts to establish
a total borrowing relationship with its customers, which may typically include a
commercial real estate loan, a business line of credit for working capital
needs, a mortgage loan for the borrower's residence, a consumer loan or a
revolving personal credit line.
PBE'sKHG's service area consists of Cecil County, Maryland. PBELebanon, Lancaster, Dauphin, Berks and
Schuylkill Counties, Pennsylvania. KHG encounters vigorous competition for
market share in the communities it serves from bank holding companies, other
community banks, thrift institutions and other non-bank financial organizations.
PBEKHG competes with banking and financial branching systems, some from out of
state, which are substantially larger and have greater financial resources than
PBE.KHG. There are approximately ten113 banks, savings and loan and credit union
locations, including PBE,KHG, in the general market area serviced by PBE.KHG. The
largest of these institutions had assets of over $8.9
billion and the smallest had assets of less than $11 million.$57.5 billion.
In addition to banks and other financial institutions, PBEKHG competes for
deposits with various investment and depositary funds offered by non-banking
firms in the securities industry. There is also competition from major retail-
oriented firms who offer financial services similar to traditional services
through commercial banks without being subject to the same degree of regulation.
PBEKHG Common Stock Market Price and Dividends
- -------------------------------------------
There is currently no public market for the PBE Common Stock nor any
uniformly quoted price.
The Merger Agreement restricts the ability of PBEKHG to declare or pay cash
dividends. However, the Merger Agreement permits PBEKHG to declare and pay a
dividend of up to $0.90$.25 per share of PBEKHG Common Stock on each of (i) JuneNovember 10, 1997
(which has been paid), (ii) February 10, 1998, provided that the Effective Date
does not occur (or is not expected to occur) on or before the record date for
the dividend on the FFC Common Stock scheduled to be paid on April 15, 1997; (ii) September1998;
(iii) May 10, 1998, provided that the record date for the dividend does not
occur (or is expected to occur) on or before the record date for the dividend on
the FFC Common Stock scheduled to be paid on July 15, 1997,1998; and (iv) August 10,
1998, provided that the Effective Date does not occur (or is not expected to
occur) on or before the record date for the dividend on the FFC Common Stock
scheduled to be paid on October 15, 1997;1998 (it being the intent of FFC and KHG
that KHG be permitted to pay a dividend on the KHG Common Stock on the dates
indicated in subsections (ii), (iii) December 15, 1997, provided thatand (iv) above only if the Effective Date doesshareholders of
KHG, upon becoming shareholders of FFC, would not occur (or is not
expectedbe entitled to occur) on or before the record date for thereceive a
dividend on the FFC Common Stock scheduled to be paid on January 15, 1998; provided further if the
customary payment date for the next regular cash dividend payable after the
Effective Date on the FFC Common Stock which is eligible to be received by the
former holders of PBE is more than ninety (90) days after the payment date of
the last regular cash dividend paid or to be paid on the PBE Common Stock
52
prior to the Effective Date (such number of days over ninety (90) days being the
"Dividend Lag Period"), then PBE may declare and set aside immediately prior to
the Effective Date, and may pay at a date it may select in its discretion, a
special pro-rata dividend (the "Special Pro-Rata Dividend"). The Special Pro-
Rata Dividend shall be payable in cash, and shall not exceed an amount per share
which is the product of (i) the amount of the dividend permitted to be paid by
PBE pursuant to this paragraph, times (ii) a fraction, the numerator of which
the Dividend Lag Period and the denominator of which is ninety (90) days. See
THE MERGER -- Business Pending the Effective Date. Thus, for example, if the
Merger is to be consummated on August 1, 1997 and the dividend payment dates of
PBE and FFC are October 15, 1997 and November 15, 1997, respectively, the
Dividend Lag Period would be 31 days and PBE would be entitled to declare and
pay, immediately prior to the Effective Date, a Special Pro-Rata Dividend of
$.31 per share (its regular quarterly dividend ($.90) multiplied by .344 (31
days/90 days)).indicated in such
subsections.
60
Information About Directors and Executive Officers
- --------------------------------------------------
Certain information concerning shares of PBEKHG Common Stock owned beneficially
by each director of PBEKHG and by all directors and executive officers of PBEKHG as a
group, as of [Date],October 31, 1997, is set forth below:
==================================================================================================================================================
SHARES OF PBEKHG COMMON STOCK PERCENT
BENEFICIALLY OWNED, DIRECTLY PERCENTOWNED/(1)/ OF SHARES
NAME OF DIRECTOR AND INDIRECTLY, AS OF THE RECORD OF SHARES
DATE OUTSTANDING
==================================================================================================================================================
James G. Crouse 210Raymond M. Dorsch, Jr. 16,252 *
- ------------------------------------------------------------------------------
Judy E. Hart 575/1/--------------------------------------------------------------------
Harry J. Genesemer 78,009/(2)(7)/ 1.97
- --------------------------------------------------------------------
Charles V. Henry, III 32,350/(3)/ *
- ------------------------------------------------------------------------------
Eugene F. Herman 169/2/--------------------------------------------------------------------
Wendie DiMatteo Holsinger 266/(7)/ *
- ------------------------------------------------------------------------------
Donald S. Hicks 1,323/3/--------------------------------------------------------------------
Bruce A. Johnson 7,037/(7)/ *
- ------------------------------------------------------------------------------
Henry--------------------------------------------------------------------
Donald W. Mason 100/4/Lesher, Jr. 25,573 *
- ------------------------------------------------------------------------------
Robert E. Noll 46--------------------------------------------------------------------
Albert B. Murry 9,668/(4)/ *
- ------------------------------------------------------------------------------
Charles F. Sposato 21,084/6/ 9.14
- ------------------------------------------------------------------------------
David K. Williams 4,487/6/ 1.95
- ------------------------------------------------------------------------------
Executive Officers Who Are
Not Directors
- ------------------------------------------------------------------------------
Catherine A. Powell 11/7/--------------------------------------------------------------------
Thomas I. Siegel 31,890/(5)/ *
- ------------------------------------------------------------------------------
Thomas W. Lofland 10/8/--------------------------------------------------------------------
Brett H. Tennis 333/(7)/ *
- --------------------------------------------------------------------------------------------------------------------------------------------------
Mark Randolph Tice 17,797/(7)/ *
- --------------------------------------------------------------------
John E. Wengert 9,866 *
- --------------------------------------------------------------------
Executive Officer Who is
Not a Director
- --------------------------------------------------------------------
Kurt A. Phillips 3,660/(6)/ *
- --------------------------------------------------------------------
All Executive Officers 232,701 5.9
and 28,015 12.15% Directors as a Group
(10(12 persons)
- --------------------------------------------------------------------------------------------------------------------------------------------------
* = Less than one
percent.
28,015 12.15%
==================================================================================================================================================
- ----------------------------------------------------------------------------
/1/ Includes 475 shares--------------------------------------------------------------------------------
/(1)/ Shares shown as beneficially owned are held of record by the person
indicated, or jointly with spouse.
/2/ Includes 69 shares helda spouse or children living in the Eugene F. Herman Self-Employed Profit
Sharing Plan and Trust.
53
/3/ Includes 1,103 shares owned jointly with spouse.
/4/ Includes 50 shares owned jointly with spouse.
/5/ Includes 13,809 shares held by Anchar, a Maryland General Partnership, a
partnership jointly owned with his brother, Anthony F. Sposato and 1,810
shares owned by relatives of Mr. Sposato
/6/ Includes 4,387 shares held in a trust.
/7/ Owned jointly with spouse.
/8/ Owned jointly with spouse.
Selected Historical Financial Data
- ----------------------------------
The following table sets forth certain selected historical financial datasame
household, or as trustee or guardian for PBE for each of the five yearsminor children living in the period ended December 31, 1996. The
table should be read in conjunction with the financial statements, footnotessame
household.
/(2)/ Includes 10,000 shares as to which Mr. Genesemer holds shared voting and
other financial information included in this Proxy Statement/Prospectus. See
INFORMATION CONCERNING THE PEOPLES BANK OF ELKTON - PBE supplementary financial
information.
54
THE PEOPLES BANK OF ELKTON
Selected Historical Financial Data
(In Thousands)
As of or for the Three Months Ended March 31
--------------------------------------------
1997 1996
---------------------------
Summary of Operations
- ---------------------
Net interest income $1,074 $997
Provision for loan losses 24 21
-----------------
Net interest income after
provision for loan losses 1,050 976
Other operating income 115 110
Other operating expense 716 642
Income tax expense 145 155
-----------------
Net Income $304 $289
=================
Average Balance Sheet Totals
- ----------------------------
Total assets $91,139 $84,150
Investment securities and
money market investments 21,012 23,531
Loans and leases
(net of unearned income) 65,458 56,730
Total deposits 78,509 70,828
Long-term debt and lease
obligations 1,683 2,692
Shareholders' equity 10,249 9,811
Actual Balance at Period End
- ----------------------------
Total assets $92,197 $85,261
Long-term debt and lease
obligations 1,500 2,500
55
THE PEOPLES BANK OF ELKTON
Selected Historical Financial Data
(In Thousands)
As of or for the Year Ended December 31
--------------------------------------------------------------
1996 1995 1994 1993 1992
--------------------------------------------------------------
Summary of Operations
- ---------------------
Net interest income $4,212 $3,628 $3,306 $3,177 $2,941
Provision for loan losses 334 75 120 163 121
--------------------------------------------------------------
Net interest income after
provision for loan losses 3,878 3,553 3,186 3,014 2,820
Other operating income 444 427 422 411 349
Other operating expense 2,756 2,373 2,185 2,046 2,027
Income tax expense 520 594 528 524 411
--------------------------------------------------------------
Net Income $1,046 $1,013 $895 $855 $731
==============================================================
Average Balance Sheet Totals
- ----------------------------
Total assets $87,687 $80,959 $73,431 $70,218 $66,174
Investment securities and
money market investments 24,356 22,789 21,909 23,884 28,059
Loans and leases
(net of unearned income) 58,560 53,953 47,937 42,549 34,332
Total deposits 74,435 67,778 60,890 60,175 57,674
Long-term debt and lease
obligations 2,340 3,000 3,000 1,216 0
Shareholders' equity 9,912 9,295 8,802 8,273 7,721
Actual Balance at Period End
- ----------------------------
Total assets $91,962 $84,146 $77,206 $71,925 $69,848
Long-term debt and lease obligations 2,000 3,000 3,000 3,000 0
56
Management's Discussioninvestment power.
/(3)/ Includes 1,476 shares as to which Mr. Henry holds shared voting and
Analysis of Financial Conditioninvestment power.
/(4)/ Includes 3,149 shares as to which Mr. Murry holds shared voting and
Results of
- --------------------------------------------------------------------------
Operations
- ----------
General
-------
The following discussion is intendedinvestment power. Excludes shares issuable pursuant to assist in understanding the
financial condition and results of operations of PBE. The information contained
herein should be read in conjunction with the audited financial statements of
PBE as of December 31, 1996 and 1995 andoptions for the years ended December 31, 1996,
1995 and 1994 and the unaudited condensed financial statements as of March 31,
1997 and for the three months ended March 31, 1997 and 1996 and the accompanying
notes for such periods26,934
shares which are includedcurrently exercisable.
/(5)/ Includes 250 shares as Exhibit E to this Proxy
---------
Statement/Prospectus.
Fiscal Years Ended December 31, 1996, 1995 and 1994
---------------------------------------------------
Results of Operations
---------------------
PBE reported net income of $1,045,712 for the year ended December 31, 1996
compared to $1,013,163 for the same period in 1995. Net income for 1994 was
$895,112. Earnings per share reflect the same growth pattern, increasing from
$3.88 per share in 1994 to $4.39 in 1995 and $4.53 in 1996. The number of
shares outstanding remained unchanged during the three years ended December 31,
1996 and there were no common stock equivalents. Return on average assets
(ROA), a key profitability measure, was 1.20% for 1996 in comparison to 1.26% in
1995 and 1.22% in 1994. Another important profitability measure is return on
average equity (ROE). Reported net income reflected a ROE of 10.56% in 1996
versus 10.90% in 1995 and 10.17% for 1994.
Net Interest Income/Margins. The primary source of earnings for PBE is net
---------------------------
interest income, which is the difference between income earned on interest-
earning assets, such as loansMr. Siegel holds shared voting and
investment securities,power.
/(6)/ Includes 71 shares as to which Mr. Phillips holds shared voting and
interest incurred
oninvestment power. Excludes shares issuable pursuant to options for 16,000
shares which are currently exercisable.
/(7)/ Excludes options for 2,000 shares granted under the interest-bearing sources, such as deposits and borrowings. The level of
net interest income is determined primarily by the average balances ("volume")
and the rate spreads between the interest-earning assets and PBE's funding
sources.
Net interest income was $4,211,863 for the year ended December 31, 1996 a
16.1% increase from the net interest income of $3,627,660 earned in 1995. Net
interest income was $3,305,448 for 1994. Earning assets averaged $82,915,315 for
1996, an 8.1% increase from $76,742,555 during 1995. Earning assets were
$69,446,912 for 1994. The increase in net interest income was due to the growth
in volume of the loan portfolio as well as increasing yields. Average loans as a
percentage of total average assets increased to 66.8% in 1996 as compared to
66.7% in 1995 and 63.0% in 1994.
Interest income on loans of $5,600,849 for 1996 increased $512,500, or
10.0%, from $5,088,349 in 1995, reflecting the increased average loan balances
of $58,559,506 for 1996 from $53,953,059 in 1995. Interest income on loans was
$4,062,524 in 1994 based on an average balance of $47,538,122.
Interest income on investment securities, including federal funds sold was
$1,453,130 for 1996 a 14.2% increase over the $1,271,901 earned in 1995 which
was 11.4% higher than the $1,141,681 earned in 1994. The average balance on
investment securities was $24,355,809 for 1996, a 6.9% increase over the average
balance of $22,789,496 for 1995. The average balance of investments was
$21,908,790 for 1994. During 1996, the investment portfolio shifted to higher
concentrations in U.S. Treasury, Government agency and municipal securities and
a reduction in corporate bonds and federal funds sold.
The key performance measure for net interest income is the "net interest
margin" or net interest income divided by average earning assets. PBE's net
57
interest margin was 5.08% for 1996 and 4.73% and 4.76% for 1995 and 1994,
respectively. PBE's net interest margin is affected by loan pricing and deposit
pricing. The increased net interest margin realized in 1996 was attributable to
adding higher yielding loans.
Other Operating Revenue. Other operating revenue consists of income
-----------------------
generated from service charges on deposit accounts, as well as loan fees, wire
transfers, official check fees and collection fees. Other operating revenue for
1996 was $443,663 compared to $426,722 for 1995, a 4.0% increase. Other
operating income was $422,338 for 1994. The only significant increase in other
operating income occurred during 1996 and was the result of a $9,511 gain on the
sale of foreclosed real estate. There have been no sales of investment
securities during the three years ended December 31, 1996.
Other Expenses. Other expenses consist of non-interest expenses such as
--------------
salaries and employee benefits, occupancy expense, equipment expenses and other
operating expenses. Other expenses totaled $2,756,054 for 1996 as compared to
$2,371,963 for the same period in 1995, an increase of $384,091, or 16.2%.
Salaries and employee benefits increased to $1,511,981 in 1996 from $1,337,136
in the prior year, a $174,845 increase. The increase reflects an increased
staffing of loan officers and support staff as a result of the larger loan
portfolio. Equipment expenses also increased during 1996 from the previous year
to $234,148 from $163,531 as a result from additional depreciation and
maintenance of computer hardware and software upgrades. Other expenses
increased to $2,371,963 in 1995 from $2,184,895 in 1994. The increase of
$187,068 is largely attributable to increased salaries and benefits.
Income Taxes. PBE's effective tax rate was 33.2%, 37.0% and 37.1% for the
------------
three years ended December 31, 1996, 1995 and 1994, respectively. The two items
which have had the most significant impact in reducing the effective tax rate
have been increased earnings from tax-exempt assets and a reduction in the state
tax expense due to a tax law change at the state level.
Financial Condition
-------------------
At December 31, 1996, total assets were $91,962,452 as compared to
$84,146,248 at December 31, 1995, an increase of 9.3%. This increase was
primarily due to the $9,694,283 increase in loans which was partially offset by
the $4,725,375 decrease in the investment portfolio. The funds from the
investment portfolio were used to fund the loan growth and thereby increasing
the overall yield of earning assets.
PBE's total assets were $84,146,248 as of December 31, 1995 versus
$77,206,345 at year-end 1994, an increase of $6,939,903, or 9.0%. The increase
was attributable to loan growth and a larger investment portfolio.
Total loans, net of allowance for loan losses at December 31, 1996 were
$63,584,592, as compared to $54,172,792 at December 31, 1995, which represented
an increase of $9,411,800, or 17.4%. The increase in loans is due to PBE's
continued focus on its core lending activities consisting mainly of real estate
loans secured by first mortgages, both residential and commercial. As of
December 31, 1995, total loans, net of allowance for loan losses, were
$54,172,792, up $3,430,113, or 6.8%, from the 1994 year-end.
PBE's funding consists primarily of customer deposits. An $8,270,744
increase in total deposits was achieved as of December 31, 1996 compared to
1995. The largest portion of this increase was in more costly certificates of
deposits and other time deposits. Deposits increased from $64,723,454 as of
December 31, 1994 to $70,847,630 as of December 31, 1995. The largest portion of
this $6,124,176 was also in certificates of deposits and other time deposits.
58
Composition of Loan Portfolio. Because loans are expected to produce higher
-----------------------------
yields than investment securities and other interest-earning assets, the
absolute volume of loans and the volume as a percentage of total earning assets
is an important determinant of net interest margin. Average loans as a
percentage of total average assets was 66.8%, 66.6% and 63.0% for the three
years ended December 31, 1996, 1995 and 1994, respectively.
PBE's loan portfolio composition as of December 31, 1996 reflects greater
concentrations in mortgage loans. The amounts of loans outstanding (including
unearned income) at the indicated dates for the periods are shown in the
following table by type of loan:
December 31
---------------------
1996 1995
---------------------
(In thousands)
Commercial $ 4,297 $ 4,013
Real estate - 5,339 4,963
construction
Real estate - mortgage 49,622 41,530
Consumer 5,275 4,300
Leasing and other 10 44
---------------------
Totals $64,543 $54,850
=====================
Approximately 81% of PBE's loans have adjustable rates as of December 31,
1996, the majoritynon-employee
Director Stock Option Plan, all of which are tied to the prime rate. Interest rates on
variable rate loans adjust to the current interest rate environment, whereas
fixed rates do not permit this flexibility. If interest rates were to increase
in the future, the interest earned on the variable rate loans would improve, and
if rates were to fall, the interest earned would decline, thus impacting PBE's
income. See also the discussion under "Liquidity and Interest Rate Sensitivity"
below.
Some of the loans may be renewed or repaid prior to maturity. Therefore,
the table should not be used as a forecast of future cash collections.
One
One Year Through More Than
or Less Five Years Five Years Total
---------------------------------------------
(In thousands)
Floating rate $26,933 $25,289 $ - $52,222
Fixed rate 3,589 5,829 2,903 12,321
---------------------------------------------
Totals $30,522 $31,118 $2,903 $64,543
=============================================
Loan Quality. PBE attempts to manage the risk characteristics of its loan
------------
portfolio through various control processes, such as credit evaluation of
borrowers, establishment of lending limits and application of lending
procedures, including the holding of adequate collateral and the maintenance of
compensating balances. However, PBE seeks to rely primarily on the cash flow of
its borrowers as the principal source of repayment. Although credit policies
are designed to minimize risk, management recognizes that loan losses will occur
and that the amount of these losses will fluctuate depending on the risk
characteristics of the loan portfolio as well as general and regional economic
conditions.
59
The allowance for loan losses represents a reserve for potential losses in
the loan portfolio. The adequacy of the allowance for loan losses is evaluated
periodically based on a review of all significant loans, with a particular
emphasis on non-accruing, past due and other loans that management believes
require special attention.
For significant problem loans, management's review consists of evaluation
of the financial strengths of the borrower and the guarantor, the related
collateral, and the effects of economic conditions. Specific reserves against
the remaining loan portfolio are based on analysis of historical loan loss
ratios, loan charge-offs, delinquency trends, and previous collection
experience, along with an assessment of the effects of external economic
conditions.
The allowance for loan losses has been allocated as follows to provide for
the possibility of losses being incurred within the following categories of
loans at the dates indicated:
December 31
---------------------------------------
1996 1995
---------------------------------------
(Dollars in thousands)
% of % of
loans in loans in
each each
Allowance category Allowance category
--------- -------- --------- --------
Commercial $ 101 6.7% $ 91 7.3%
Real estate - construction
& mortgages 375 85.2 339 84.8
Consumer 183 8.1 145 7.9
Unallocated 300 - 102 -
--------------------------------------------
Totals $ 959 100.0% $ 677 100.0%
============================================
60
An analysis of PBE's loss experience is as follows:
Year Ended December 31
1996 1995
(Dollars in
Thousands)
Loans outstanding at end of year $ 64,543 $54,800
=====================
Daily average balance of loans $ 58,560 $53,953
=====================
Balance of allowance for loan losses at
beginning of year
677 711
Loans charged-off:
Commercial 38 67
Real estate - mortgage - 19
Consumer 32 56
---------------------
Total loans charged-off 70 142
---------------------
Recoveries:
Commercial 4 3
Real estate - mortgage - 2
Consumer 14 28
---------------------
Total recoveries 18 33
---------------------
Net loans charged-off 52 109
Provision for loan losses 334 75
---------------------
Balance at end of year $ 959 $ 677
=====================
Ratio of net charge-offs during
year to average loans 0.09% 0.20%
=====================
Ratio of allowance for loan losses
to loans outstanding at end of year 1.49% 1.23%
=====================
The provision for loan losses is a charge to earnings in the current period
to replenish the allowance and to maintain it at a level management has
determined to be adequate. PBE provided $334,000 and $75,000 for loan losses for
the years ended December 31, 1996 and 1995, respectively.
As of December 31, 1996, the allowance for loan losses was $959,217, as
compared with the December 31, 1995 balance of $676,734, an increase of
$282,483. Net charge-offs of $51,517 were recognized for the year ended December
31, 1996. The allowance for loan losses at December 31, 1996 represented 1.49%
of outstanding loans as compared with 1.23% as of December 31, 1995. The
increase in the percentage was justified based on the increase in the loan
portfolio and management's evaluation of the loan portfolio.
Non-performing assets are defined as non-accrual loans, accruing loans 90
days past due and real estate acquired by foreclosure. When real estate acquired
by foreclosure and held for sale is included with non-performing loans, such
realcurrently exercisable.
61
estate is recorded as a non-performing asset. Non-performing assets as of
December 31, 1996 and 1995 totaled approximately $220,000 and
$616,000,respectively.
The following table presents information concerning the aggregate amount of
nonaccrual, past due and restructured loans and other nonperforming assets:
December 31
----------------------
1996 1995
----------------------
(In thousands)
Nonaccrual loans/(1) (2)/ $ - $ 23
Accruing loans past due 90 212 497
Other real estate 8 96
---------------------
Totals $ 220 $ 616
=====================
(1) As of December 31, 1996, PBE had no impaired loans as defined by Statement
of Financial Accounting Standards No. 114.
(2) Accrual of interest is generally discontinued when a loan becomes 90 days
past due as to principal and interest. When interest accruals are
discontinued, interest credited to income is reversed. Nonaccrual loans are
restored to accrual status when all delinquent principal and interest
becomes current or the loan is considered secured and in the process of
collection. Certain loans that are determined to be sufficiently
collateralized or are in the process of collection may continue to accrue
interest after reaching 90 days past due.
Investment Securities. Investment securities are used, in part, as a source
---------------------
of liquidity and as a tool to manage interest rate risk. Total investment
securities (classified as either held to maturity or available for sale, but
excluding federal funds sold) as of December 31, 1996 decreased $4,725,375, or
20.0%. The decrease was attributable to higher loan demand. The total portfolio
had an average maturity of 4.82 years and an average tax-equivalent yield of
6.03%.
62
The following table set forth the carrying amount of investment securities
held to maturity (HTM) and available for sale (AFS) as of the dates shown:
December 31
-------------------------------------------------------------------------
1996 1995
HTM AFS Total HTM AFS Total
-------------------------------------------------------------------------
(in thousands)
United States Treasury and U.S.
Government agencies and
corporations $250 $13,597 $13,847 $1,750 $ 17,513 $ 19,263
State and municipal 95 3,976 4,071 217 832 1,049
Other securities - 150 150 1,710 778 2,488
Equity securities - 288 288 - 276 276
Mortgage-backed securities - - - 4 - 4
Totals $345 $18,011 $18,356 $3,681 $ 19,399 $ 23,080
=========================================================================
63
The following tables set forth the maturities of investment securities at
December 31, 1996 and the weighted average yields of such securities (calculated
based upon historical cost).
HELD TO MATURITY (at amortized cost)
- ----------------
MATURING
------------------------------------------------------------
After One After
But Five but
Within Within Within After Ten
One Year Five Ten Years Years
Years
------------------------------------------------------------
(In thousands)
United States Treasury and
other U.S. Government
agencies and
corporations $ - $ 250 $ - $ -
State and municipal - 95 - -
------------------------------------------------------------
Totals $ - $ 345 $ - $ -
============================================================
AVAILABLE FOR SALE (at estimated fair value)
- ------------------
MATURING
------------------------------------------------------------
After One After
But Five but
Within Within Within After Ten
One Year Five Ten Years Years
Years
------------------------------------------------------------
(In thousands)
United States Treasury and
other U.S. Government
agencies and $ 1,250 $ 9,400 $ 2,706 $ 241
corporations
State and municipal 299 1,478 1,942 257
Other securities 150 - -
------------------------------------------------------------
Totals $ 1,699 $ 10,878 $ 4,648 $ 498
============================================================
Capital Resources. Stockholders' equity was $9,902,071 as of December 31,
-----------------
1996 as compared to $9,649,669 at year-end 1995. The net increase of $252,402
was the result of $1,045,712 in net income, less cash dividends of $3.20 per
share, or $737,907. The other component of change in stockholders' equity was
$55,403 in unrealized depreciation on investment securities available for sale,
net of applicable deferred income taxes.
Stockholders' equity for 1995 was impacted by the retention of net income
of $1,013,163 less cash dividends of $435,826, or $1.89 per share, and $211,425
in unrealized appreciation in investments available for sale.
Banking regulatory authorities have implemented strict capital guidelines
directly related to the credit risk associated with an institution's assets.
Banks are required to maintain capital levels based on their "risk adjusted"
assets so that categories of assets with higher "defined" credit risks will
require more capital support than assets with lower risk. Additionally, capital
must be maintained to support certain off-balance sheet instruments.
Capital is classified as Tier I (common stockholders' equity less certain
intangible assets) and total capital (Tier I plus the allowance for loan
losses). Minimum required levels must at least equal 4% for Tier I capital and
8% for total capital. In addition, institutions must maintain a minimum of 3%
leverage capital ratio (Tier I capital to average total assets).
64
PBE's capital position as of December 31, 1996 is presented in the following
table:
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
---------------------- ----------------- ------------------
Amount Ratio Amount Ratio Amount Ratio
-------- ----- -------- ----- -------- -----
Total Capital (to Risk
Weighted Assets) $10,660 18.57% $4,592 8.00% $5,740 10.00%
Tier I Capital (to Risk
Weighted Assets) $ 9,942 17.32% $2,296 4.00% $3,444 6.00%
Tier I Capital (to
Average Assets) $ 9,942 10.94% $3,637 4.00% $4,546 5.00%
As of December 31, 1995:
Total Capital (to Risk
Weighted Assets) $10,202 21.86% $3,734 8.00% $4,667 10.00%
Tier I Capital (to Risk
Weighted Assets) $ 9,618 20.61% $1,867 4.00% $2,800 6.00%
Tier I Capital (to
Average Assets) $ 9,618 11.37% $3,384 4.00% $4,230 5.00%
Liquidity and Interest Rate Sensitivity. The objectives of asset/liability
---------------------------------------
management is to enhance the growth of PBE's primary earnings component, net
interest income. Net interest income can fluctuate with significant interest
rate movements. To lessen the impact of these rate swings, management endeavors
to structure the balance sheet so that repricing opportunities exist for both
assets and liabilities in roughly equivalent amounts at approximately the same
time intervals. Imbalances in these repricing opportunities at any point in
time constitute interest rate sensitivity.
The measurement of PBE's interest rate sensitivity, or "gap," is one of the
principal techniques used in asset/liability management. Interest sensitive gap
is the dollar difference between assets and liabilities which are subject to
interest-rate pricing within a given time period, including both floating rate
or adjustable rate instruments and instruments which are approaching maturity.
The objective of PBE is to maintain a cumulative gap position of plus or minus
20% of interest earning assets over interest bearing liabilities in all time
periods out in one year. PBE manages its gap through loan pricing, deposit
pricing, and its investment portfolio.
Management oversees the asset/liability management function and meets
periodically to monitor and manage the structure of the balance sheet, control
interest rate exposure, and evaluate pricing strategies for PBE. The asset mix
of the balance sheet is continually evaluated in terms of several variables:
yield, credit quality, appropriate funding sources and liquidity. Management of
the liabilities mix of the balance sheet focuses on expanding the various
funding sources.
In theory, interest rate risk can be diminished by maintaining a nominal level
of interest rate sensitivity. In practice, this is made difficult by a number
of factors, including cyclical variation in loan demand, different impacts on
interest-sensitive assets and liabilities when interest rates change, and the
availability of
65
funding sources. Interest-bearing liabilities commensurate with management's
expectations relative to market interest rates. Management generally attempts
to maintain a balance between rate-sensitive assets and liabilities as the
exposure period is lengthened to minimize the overall interest rate risk to PBE.
Cash flows from financing activities, which included funds received from new
and existing depositors, provided a large source of liquidity. PBE seeks to
rely primarily on core deposits from customers to provide stable and cost-
effective sources of funding to support asset growth. PBE also seeks to augment
such deposits with longer term and higher yielding certificates of deposit.
CD's of $100,000 or more are summarized by maturity in the table below entitled
"Deposits". Other sources of funds available to PBE include short-term
borrowings, primarily in the form of Federal Home Loan Bank (FHLB)
collateralized borrowings as well as long-term fixed rate borrowings from the
FHLB.
Quarter ended March 31, 1997 vs. Quarter ended March 31, 1996
-------------------------------------------------------------
Results of Operations
---------------------
PBE's net income for the first quarter of 1997 increased $15,000, or 5.0%, in
comparison to the net income for the first quarter in 1996. First quarter net
income of $304,000, or $1.32 share, represented a return on average assets (ROA)
of 1.35% and a return on average equity (ROE) of 12.08%. This compares to 1996
net income of $289,000, or $1.25 per share (1.39% ROA and 11.95% ROE). The
increase in net income was primarily a result of the growth in net interest
income, offset by an increase in non-interest expenses.
66
Net Interest Income. Net interest income increased $78,000, or 7.8%, for the
-------------------
quarter. Overall, this increase was a result of growth in PBE's balance sheet
coupled with a slightly higher net interest margin. The following tables
summarize the components of this increase as well as the changes in average
interest-earning assets and interest-bearing liabilities and the average
interest rates thereon.
Three Months
Ended March 31
--------------
Change
----------------------
1997 1996 Dollar Percent
-------------- ------------ ---------- ----------
Interest income $ 1,796,401 $ 1,691,656 $104,745 6.2%
Interest expense 722,068 694,877 27,191 3.9
-------------- ------------ ---------- ----------
Net interest income $ 1,074,333 $ 996,779 $ 77,554 7.8%
- --------------------------------------------------------------------------------
1997 1996 % Change
------------- ------------- ----------
Average interest-earning assets $85,780,266 $79,789,771 7.0%
Yield on earning assets 8.30% 8.50% (2.4)
Average interest-bearing liabilities 70,217,313 $64,656,903 8.6%
Cost of interest-bearing liabilities 4.10% 4.31% (4.9)
The 6.2% increase in interest income was due primarily to an increase in average
interest-earning assets during the period, partially offset by a small decrease
in yield. The majority of the growth in interest-earning assets was realized in
the loan portfolio, which grew 14.8% compared to the first quarter of 1996.
Loan growth was realized primarily in mortgage loans, which increased $7.4
million, or 15.5%, over the first quarter of 1996. The 3.9% increase in
interest expense was a result of an increase in average interest-bearing
liabilities offset by a small decline in rates. Average deposits increased $7.7
million, or 10.9%.
Provision and Allowance for Loan Losses. The provision for loan losses for
---------------------------------------
the quarter ended March 31, 1997 was $24,000 compared to $21,000 for the same
period of 1996. The allowance for loan losses as a percentage of gross loans
(net of unearned income) was 1.47% at March 31, 1997 as compared to 1.49% at
December 31, 1996. This decrease was a result of net charge-offs exceeding the
provision. The following table summarizes non-performing assets as of March 31,
1997 and December 31, 1996:
March 31 Dec. 31
(Dollars in thousands) 1997 1996
------------ -----------
Nonaccrual loans $ 56,000 $ -
Loans 90 days past due and accruing
366,000 212,000
Other real estate owned - 8,000
------------ ----------
Total non-performing assets $422,000 $220,000
============ ==========
Non-performing assets/Total assets 0.46% 0.24%
Non-performing assets/Gross loans 0.65% 0.34%
Other Income. Other income for the quarter ended March 31, 1997 was $115,000.
------------
This was an increase of $5,000, or 4.4%, over the comparable period in 1996.
This moderate increase was due mainly to an increase in ATM surcharges and
higher fee income earned on deposit accounts.
67
Other Expenses. Total other expenses for the first quarter of 1997 increased
--------------
$75,000, or 11.6%, to $716,000 from $642,000 in the comparable period of 1996.
The majority of this increase was in salaries and benefits, which increased
$49,000, or 18.7%, in comparison to the first quarter of 1996. This increase was
due to the addition of a senior lending officer in the second quarter of 1996 as
well as normal merit and cost of living increases. Excluding the increase in
salaries and benefits expenses, other expenses remained fairly stable,
increasing only $26,000, or 6.8%.
Income Taxes. PBE's effective income tax rate for the quarter ended March 31,
------------
1997 was 32.3% as compared to 34.8% in the first quarter of 1996. This decrease,
which reduced income tax expense by $10,000, was a result of lower state income
taxes as the State of Maryland is phasing-in changes to the taxation of banks
over a three year period.
Financial Condition
-------------------
On March 31, 1997, PBE had total assets of $92.2 million, reflecting an
increase of $235,000 over December 31, 1996. Net loans increased $1.0 million,
or 1.6%, and investments increased $2.1 million, or 11.7%. These increases in
earning assets were funded primarily through the use of existing cash and
federal funds balances. PBE's unrealized loss on its available for sale
securities grew to approximately $250,000. This increase is a result of the
higher interest rate environment in the first quarter of 1997.
Deposits increased $610,000, or 0.8%. Additional funds generated through
deposit growth were used to reduce PBE's long-term Federal Home Loan Bank
borrowings.
Liquidity and Interest Rate Sensitivity Management. The goals of PBE's
--------------------------------------------------
asset/liability management function are to ensure adequate liquidity while
maintaining an appropriate balance between the relative sensitivity of interest-
earning assets and interest-bearing liabilities.
Adequate liquidity is provided by cash, short-term investments, securities
available for sale and scheduled payments and maturities of loans receivable and
securities held to maturity. Liquidity is also provided by deposits and short-
term borrowings.
PBE uses a rate sensitive balance sheet as its primary gap management tool.
Gap management is the method chosen to measure interest rate risk. Gap analysis
measures the effect of parallel interest rate changes on net interest income.
Savings, NOW and money market accounts are divided between rate sensitive and
non-rate sensitive. They are also spread over time periods out to one year. The
objective of PBE is to maintain a cumulative gap position of plus or minus 20%
of interest earning assets over interest bearing liabilities in all time periods
out to one year. PBE manages its gap through loan pricing, deposit pricing, and
its investment portfolio.
Capital Resources. Shareholders' equity decreased $28,000, or 0.3 % during
-----------------
the first quarter of 1997. This decrease was a result of an increase in the
unrealized holding loss on available for sale securities of approximately
$125,000. Excluding this component, total equity increased $97,000 as a result
of $1.32 per share in net income, offset by $0.90 per share in dividends for the
quarter.
Current capital guidelines measure the adequacy of a bank's capital by taking
into consideration the differences in risk associated with holding various types
of assets as well as exposure to off-balance sheet commitments. The guidelines
call for a minimum risk-based Tier I capital percentage of 4.0% and a minimum
risk-based total capital of 8.0%. Tier I capital includes common shareholders'
equity less goodwill and non-qualified intangible assets. Total capital
includes all Tier I capital components plus the allowance for loan losses.
PBE is also subject to a "leverage capital" requirement, which compares
capital (using the definition of Tier I capital) to total balance sheet assets
and is
68
intended to supplement the risk based capital ratios in measuring capital
adequacy. The minimum acceptable leverage capital ratio is 3% for institutions
which are highly-rated in terms of safety and soundness and which are not
experiencing or anticipating any significant growth. Other institutions are
expected to maintain capital levels at least one or two percent above the
minimum. As of March 31, 1997, PBE's capital ratios exceeded all of the minimum
ratios as set forth above.
69
Additional Statistical Disclosure
- ---------------------------------
The following tables present certain additional statistical disclosures for PBE.
Comparative Average Balance Sheets and Net Interest Income Analysis
-------------------------------------------------------------------
Year Ended December 31
-----------------------------------------------------------
(Dollars in thousands) 1996 1995
- --------------------------------------------------------------------------------------------------
Average Yield/ Average Yield/
------- ------ ------- ------
ASSETS Balance Interest Rate Balance Interest Rate
------- -------- ---- ------- -------- ----
Interest-earning assets:
Loans (net of unearned income) $ 58,560 $5,601 9.56% $ 53,953 $5,088 9.43%
Investments 23,090 1,385 6.00 18,677 1,030 5.51
Federal funds sold 1,265 68 5.38 4,112 242 5.89
--------------------------------------------------------------
Total interest-earning assets 82,915 7,054 8.51 76,742 6,360 8.29
Noninterest-earning assets:
Other assets(2) 5,473 4,947
Less: Allowance for loan losses (701) (730)
---------- ----------
Total Assets $ 87,687 $ 80,959
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
- --------------------------------------------------------------------------------------------------
Interest-bearing liabilities:
NOW accounts $ 7,728 $ 140 1.81% $ 7,344 $ 170 2.31%
Money markets 13,490 450 3.34 12,435 496 3.99
Savings deposits 12,859 396 3.08 12,564 440 3.50
Certificates 27,110 1,531 5.65 22,503 1,275 5.67
IRA's 3,365 178 5.29 3,099 177 5.71
Other borrowed funds 2,810 147 5.23 3,394 174 5.13
--------------------------------------------------------------
Total interest-bearing liabilities 67,362 2,842 4.22 61,339 $2,732 4.45
Noninterest-bearing liabilities:
Demand deposits 9,869 9,824
Other 544 501
---------- ----------
Total Liabilities 77,775 71,664
Shareholders' equity 9,912 9,295
---------- ----------
Total Liabilities and
Shareholders' Equity $ 87,687 $ 80,959
========== ==========
Net interest income $4,212 $3,628
=========== ============
Net interest margin 5.08% 4.73%
========== =========
- --------------------------------------------------------------------------------------------------
(1) Includes nonperforming loans.
(2) Balances reflect amortized historical cost for available for sale
securities. The related unrealized holding gain/loss on securities is
included in other assets.
70
Changes in Interest Income/Expense Due to Volume and Rate Change
----------------------------------------------------------------
The following table sets forth for the periods indicated a summary of changes
in interest income and interest expense resulting from corresponding volume and
rate changes:
1996 vs. 1995
Increase (decrease) due
to change in
---------------------------
Volume Rate Net
-------- ------- -------
(in thousands)
Interest income on:
Loans (net of unearned income) $ 434 $ 79 $ 513
Investments 243 112 355
Federal funds sold (168) (6) (174)
---------------------------
Total interest-earning assets $ 509 $ 185 $ 694
===========================
Interest expense on:
NOW accounts $ 9 $ (39) $ (30)
Money markets 42 (88) (46)
Savings deposits 10 (54) (44)
Certificates 261 (5) 256
IRA's 15 (14) 1
Other borrowed funds (30) 3 (27)
---------------------------
Total interest-bearing liabilities $ 307 $(197) $ 110
===========================
Note: The rate/volume variances are allocated in the table above by applying
the changes in volume times the prior period rate and by applying the
changes in rate times the current period volume on a consistent basis
throughout.
71
Deposits
- --------
Maturities of time deposits of over $100,000 outstanding at December 31, 1996
are summarized as follows:
Time Deposits
Over $100,000
---------------
(in thousands)
Three months or less $5,022,204
Over three through six months 1,746,080
Over six through twelve months 675,632
Over twelve months 719,898
---------------
Totals 8,163,814
===============
Return on Equity and Assets
- ---------------------------
The ratio of net income to average shareholders' equity and to average total
assets and certain other ratios are as follows:
Year Ended
December 31
----------------
1996 1995
----------------
Percentage of net income to:
Average shareholders' equity 10.56% 10.90%
Average total assets 1.20% 1.26%
Percentage of dividends declared per common
share to net income per common share 70.6% 43.1%
Percentage of average shareholders' equity
to average total assets 11.30% 11.48%
72
Quarterly Consolidated Results of Operations
- --------------------------------------------
Three Months Ended
----------------------------------------
For the Year 1996 March 31 June 30 Sept. 30 Dec. 31
- ------------------------- ----------------------------------------
(In thousands, except per-share data)
Interest income $ 1,692 $ 1,730 $ 1,797 $ 1,835
Interest expense 695 700 716 731
----------------------------------------
Net interest income 997 1,030 1,081 1,104
Provision for loan losses 21 21 21 271
Other income 110 118 107 109
Other expenses 641 621 684 810
----------------------------------------
Income before income taxes 445 506 483 132
Income taxes 154 180 180 6
Net income $ 291 $ 326 $ 303 $ 126
========================================
Per-share data:
Net income $ 1.26 $ 1.42 $ 1.31 $ 0.54
Cash dividends $ 0.50 $ 0.90 $ 0.90 $ 0.90
Three Months Ended
----------------------------------------
For the Year 1995 March 31 June 30 Sept. 30 Dec. 31
- ------------------------- ----------------------------------------
(In thousands, except per-share data)
Interest income $ 1,435 $ 1,580 $ 1,649 $ 1,696
Interest expense 601 683 724 725
----------------------------------------
Net interest income 834 897 925 971
Provision for loan losses 19 19 18 19
Other income 113 113 95 106
Other expenses 614 601 612 545
----------------------------------------
Income before income taxes 314 390 390 513
Income taxes 116 145 145 188
----------------------------------------
Net income $ 198 $ 245 $ 245 $ 325
========================================
Per-share data:
Net income $ 0.86 $ 1.06 $ 1.06 $ 1.41
Cash dividends $ 0.36 $ 0.36 $ 0.36 $ 0.81
73
Five Year Consolidated Summary of Operations
- --------------------------------------------
For the Year
--------------------------------------------------
1996 1995 1994 1993 1992
--------------------------------------------------
(In thousands, except per-share data)
Interest income $ 7,054 $ 6,360 $ 5,204 $ 5,012 $ 5,122
Interest expense 2,842 2,733 1,899 1,836 2,181
--------------------------------------------------
Net interest income 4,212 3,627 3,305 3,176 2,941
Provision for loan losses 334 75 120 163 121
Other income 444 427 422 411 349
Other expenses 2,756 2,372 2,184 2,045 2,027
--------------------------------------------------
Income before income taxes 1,566 1,607 1,423 1,379 1,142
Income taxes 520 594 528 524 411
------- ------- ------- ------- -------
Net income $ 1,046 $ 1,013 $ 895 $ 855 $ 731
==================================================
PER-SHARE DATA
- --------------
Net income $ 4.53 $ 4.39 $ 3.88 $ 3.71 $ 3.17
Cash dividends $ 3.20 $ 1.89 $ 1.55 $ 1.36 $ 1.21
-------
AT YEAR END
- -----------
Total assets $91,962 $84,146 $77,206 $71,925 $69,848
Net loans 63,585 54,173 50,743 45,012 39,028
Deposits 79,118 70,848 64,723 59,231 61,310
Long-term debt 2,000 3,000 3,000 3,000 -
Shareholders' equity 9,902 9,650 8,861 8,594 7,978
74
EXPERTS
-------
The consolidated financial statements of FFC as of December 31, 1996 and
1995 and for each of the three years in the period ended December 31, 1996,
which are included in FFC's Annual Report on Form 10-K for the year ended
December 31, 1996 and are incorporated by reference in this Proxy
Statement/Prospectus have been audited by Arthur Andersen LLP, independent
public accountants, as indicated in their reports with respect thereto, and are
included herein in reliance upon the authority of said firm as experts in giving
said reports.
The consolidated financial statements of PBEKHG as of December 31, 1996 and
1995 and for each of the three years in the period ended December 31, 1996,
which are included in PBE'sKHG's 1996 and 1995 Annual Reports to shareholders have
been audited by Stegman & Company,KPMG Peat Marwick LLP, independent certified public accountants,
as indicated in their reports with respect thereto, and are included herein in
reliance upon the authority of said firm as experts in accounting and auditing.
LEGAL MATTERS
-------------
The legality of the shares of FFC Common Stock to be issued in connection
with the Merger and certain other legal matters relating to the Merger will be
passed upon by the law firm of Barley, Snyder, Senft & Cohen, LLP, located in
Chambersburg, Harrisburg, Lancaster and York, Pennsylvania, which is acting as
counsel for FFC. John O. Shirk is a partner in the firm and is a member of the
Board of Directors of FFC. As of May 1,September 30, 1997, the partners and
associates of Barley, Snyder, Senft & Cohen, LLP owned beneficially and in the
aggregate approximately 25,00827,520 shares of FFC Common Stock.
The law firm of Housley Kantarian & Bronstein, P.C., located in Washington,
D.C., has acted as counsel to PBE in connection with the Merger.
ADDITIONAL INFORMATION
----------------------
FFC has filed with the SEC a Registration Statement (No. 333-_____)333-________) with
respect to the shares of FFC Common Stock to be issued in connection with the
Merger. The Registration Statement contains certain additional information
which has been omitted from this Proxy Statement/Prospectus in accordance with
the rules and regulations of the SEC and may be examined at the offices of the
SEC at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549. Copies of
the Registration Statement may be obtained from the SEC upon payment of the
prescribed fee.
OTHER MATTERS
-------------
The Board of Directors of PBEKHG knows of no other matters other than those
discussed in this Proxy Statement/Prospectus which will be presented at the
Special Meeting. However, if any other matters are properly brought before the
Special Meeting or any postponement or adjournment thereof, any proxy given
pursuant to this solicitation will be voted in accordance with the
recommendations of the Board of Directors of PBE.
75KHG.
62
EXHIBIT A
AFFILIATION AND MERGER AGREEMENT
------------------------------------------------
AFFILIATION AND
MERGER AGREEMENT
BY AND BETWEEN
THE PEOPLES BANK OF ELKTONKEYSTONE HERITAGE GROUP, INC.
AND
FULTON FINANCIAL CORPORATION
CONFORMED TO REFLECT THE FIRST AMENDMENT TO
AFFILIATION AND MERGER AGREEMENT DATED
AS OF
MAY 20, 1997
TABLE OF CONTENTS
-----------------
Page
----
ARTICLE I
PLAN OF MERGER
--------------
ARTICLE I - ARTICLES OF MERGER.............................................. 2
------------------
Section 1.1 ArticlesPlan of Merger........................................Merger.............................................................................. 2
------------------- ----------- --------------
ARTICLE II -
CONVERSION OF SHARES AND EXCHANGE OF STOCK ------------------------------------------
CERTIFICATES................................................... 2
------------CERTIFICATES
-------------------------------------------------------
Section 2.1 Conversion of Shares......................................Shares........................................................................ 2
- ----------- --------------------
(a) General...................................................General..................................................................................... 2
-------
(b) Antidilution Provision....................................Provision...................................................................... 2
----------------------
(c) No Fractional Shares......................................Shares........................................................................ 2
--------------------
(d) Closing Market Price......................................Price........................................................................ 3
--------------------
Section 2.2 Exchange of Stock Certificates............................Certificates.............................................................. 3
- ----------- ------------------------------
(a) Exchange Agent............................................Agent.............................................................................. 3
--------------
(b) Surrender of Certificates.................................Certificates................................................................... 3
-------------------------
(c) Dividend Withholding......................................Withholding........................................................................ 4
--------------------
(d) Failure to Surrender Certificates.........................Certificates........................................................... 4
---------------------------------
(e) Expenses..................................................Expenses.................................................................................... 4
--------
Section 2.3 Treatment of Outstanding KHG Options........................................................ 4
- ----------- ------------------------------------
Section 2.4 Reservation of Shares..................................... 4Shares....................................................................... 5
- ----------- ---------------------
Section 2.42.5 Taking Necessary Action................................... 4Action..................................................................... 6
- ----------- -----------------------
Section 2.52.6 Press Releases............................................ 5Releases.............................................................................. 6
- ----------- --------------
ARTICLE III -
REPRESENTATIONS AND WARRANTIES OF PBE......................... 5KHG
-------------------------------------
Section 3.1 Authority................................................. 5Authority................................................................................... 6
- ----------- ---------
Section 3.2 Subsidiaries.............................................. 5Organization and Standing................................................................... 7
- ----------- -------------------------
Section 3.3 Subsidiaries................................................................................ 7
- ----------- ------------
Section 3.3 Organization and Standing................................. 5
-------------------------
Section 3.4 Capitalization............................................ 6Capitalization.............................................................................. 7
- ----------- --------------
Section 3.5 Articles of Incorporation,Charter, Bylaws and Minute Books........ 6
--------------------------------------------------Books............................................................ 8
- ----------- --------------------------------
Section 3.6 Financial Statements...................................... 6Statements........................................................................ 8
- ----------- --------------------
Section 3.7 Absence of Undisclosed Liabilities........................ 6Liabilities.......................................................... 8
- ----------- ----------------------------------
Section 3.8 Absence of Changes........................................ 6Changes.......................................................................... 9
- ----------- ------------------
Section 3.9 Dividends, Distributions and Stock Purchases.............. 7Purchases................................................ 9
- ----------- --------------------------------------------
Section 3.10 Taxes..................................................... 7Taxes...................................................................................... 9
- ------------ -----
Section 3.11 Title to and Condition of Assets.......................... 7Assets........................................................... 9
- ------------ --------------------------------
Section 3.12 Contracts................................................. 8Contracts.................................................................................. 10
- ------------ ---------
Section 3.13 Litigation and Governmental Directives.................... 8Directives..................................................... 10
- ------------ --------------------------------------
Section 3.14 Compliance with Laws; Governmental Authorizations......... 9Authorizations.......................................... 11
- ------------ -------------------------------------------------
Section 3.15 Insurance................................................. 9Insurance.................................................................................. 11
- ------------ ---------
Section 3.16 Financial Institutions Bonds.............................. 9Bonds............................................................... 12
- ------------ ----------------------------
Section 3.17 Labor Relations and Employment Agreements................. 9Agreements.................................................. 12
- ------------ -----------------------------------------
Section 3.18 Employee Benefit Plans.................................... 10Plans..................................................................... 12
- ------------ ----------------------
Section 3.19 Related Party Transactions................................ 10Transactions................................................................. 13
- ------------ --------------------------
Section 3.20 No Finder................................................. 11Finder.................................................................................. 13
- ------------ ---------
Section 3.21 Complete and Accurate Disclosure.......................... 11Disclosure........................................................... 13
- ------------ --------------------------------
Section 3.22 Environmental Matters..................................... 11Matters...................................................................... 14
- ------------ ---------------------
Section 3.23 Proxy Statement/Prospectus................................ 12Prospectus................................................................. 14
- ------------ --------------------------
Section 3.24 Securities Matters........................................ 12
------------------SEC Filings................................................................................ 15
- ------------ -----------
Section 3.25 Reports................................................... 12Reports.................................................................................... 15
- ------------ -------
Section 3.26 Loan Portfolio of PBE..................................... 13
---------------------the LVNB................................................................. 15
- ------------ --------------------------
Section 3.27 Investment Portfolio...................................... 13Portfolio....................................................................... 16
- ------------ --------------------
Section 3.28 Regulatory Examinations................................... 13Examinations.................................................................... 16
- ------------ -----------------------
ARTICLE IV -
REPRESENTATIONS AND WARRANTIES OF FFC.......................... 13FFC
-------------------------------------
Section 4.1 Authority................................................. 13Authority................................................................................... 16
- ----------- ---------
Section 4.2 Organization and Standing................................. 14Standing................................................................... 17
- ----------- -------------------------
Section 4.3 Capitalization............................................ 14Capitalization.............................................................................. 17
- ----------- --------------
Section 4.4 Articles of Incorporation and Bylaws...................... 14Bylaws........................................................ 17
- ----------- ------------------------------------
Section 4.5 Subsidiaries.............................................. 14Subsidiaries................................................................................ 18
- ----------- ------------
Section 4.6 Financial Statements...................................... 15Statements........................................................................ 18
- ----------- --------------------
Section 4.7 Absence of Undisclosed Liabilities........................ 15Liabilities.......................................................... 18
- ----------- ----------------------------------
Section 4.8 Absence of Changes........................................ 15Changes.......................................................................... 19
- ----------- ------------------
Section 4.9 Litigation and Governmental Directives.................... 15Directives...................................................... 19
- ----------- --------------------------------------
Section 4.10 Compliance with Laws; Governmental Authorizations......... 16Authorizations.......................................... 19
- ------------ -------------------------------------------------
Section 4.11 Complete and Accurate Disclosure.......................... 16Disclosure........................................................... 19
- ------------ --------------------------------
Section 4.12 Labor Relations........................................... 17Relations............................................................................ 20
- ------------ ---------------
Section 4.13 Employee Benefits Plans................................... 17Plans.................................................................... 20
- ------------ -----------------------
Section 4.14 Environmental Matters..................................... 17Matters...................................................................... 21
- ------------ ---------------------
Section 4.15 SEC Filings............................................... 17Filings................................................................................ 21
- ------------ -----------
Section 4.16 Proxy Statement/Prospectus................................ 17Prospectus................................................................. 21
- ------------ --------------------------
Section 4.17 Accounting Treatment...................................... 18Treatment....................................................................... 21
- ------------ --------------------
Section 4.18 Regulatory Approvals...................................... 18Approvals....................................................................... 22
- ------------ --------------------
Section 4.19 No Finder.................................................................................. 22
- ------------ ---------
Section 4.20 Taxes...................................................................................... 22
- ------------ -----
Section 4.21 Title to and Condition of Assets........................................................... 22
- ------------ --------------------------------
Section 4.22 Contracts.................................................................................. 23
- ------------ ---------
Section 4.23 Insurance.................................................................................. 23
- ------------ ---------
ARTICLE V
- COVENANTS OF PBE................................................ 18KHG
----------------
Section 5.1 Conduct of Business....................................... 18Business......................................................................... 23
- ----------- -------------------
Section 5.2 Best Efforts.............................................. 20Efforts................................................................................ 25
- ----------- ------------
Section 5.3 Access to Properties and Records.......................... 20Records............................................................ 25
- ----------- --------------------------------
Section 5.4 Subsequent Financial Statements........................... 20Statements............................................................. 26
- ----------- -------------------------------
Section 5.5 Update Schedules.......................................... 21Schedules............................................................................ 26
- ----------- ----------------
Section 5.6 Notice.................................................... 21Notice...................................................................................... 26
- ----------- ------
-ii-
Section 5.7 Other Proposals........................................... 21Proposals............................................................................. 26
- ----------- ---------------
Section 5.8 Affiliate Letters......................................... 21Letters........................................................................... 27
- ----------- -----------------
Section 5.9 No Purchases or Sales of FFC Common Stock During Price ------------------------------------------------------
Determination Period..................................... 22
--------------------Period................. 27
- ----------- ---------------------------------------------------------------------------
Section 5.10 Accounting Treatment...................................... 22Treatment....................................................................... 27
- ------------ --------------------
Section 5.11 Dividends................................................. 22Dividends.................................................................................. 28
- ------------ ---------
Section 5.12 Employment Obligations.................................... 23
----------------------
ARTICLE VI
- COVENANTS OF FFC............................................... 23FFC
----------------
Section 6.1 Best Efforts.............................................. 23Efforts................................................................................ 28
------------
(a) Applications for Regulatory Approval...................... 23Approval........................................................ 29
------------------------------------
(b) Registration Statement.................................... 23Statement...................................................................... 29
----------------------
(c) State Securities Laws..................................... 24Laws....................................................................... 29
---------------------
(d) Stock Listing............................................. 24Listing............................................................................... 29
-------------
(e) PBE Interim Bank.......................................... 24Adopt Amendments............................................................................ 29
----------------
(f) Accounting Treatment...................................... 24
--------------------
Section 6.2 Access to Properties and Records.......................... 24Records............................................................ 30
- ----------- --------------------------------
Section 6.3 Subsequent Financial Statements........................... 24Statements............................................................. 30
- ----------- -------------------------------
Section 6.4 Update Schedules.......................................... 25Schedules............................................................................ 30
- ----------- ----------------
Section 6.5 Notice.................................................... 25Notice...................................................................................... 30
- ----------- ------
Section 6.6 Employment Arrangements................................... 25Arrangements..................................................................... 30
- ----------- -----------------------
Section 6.7 No Purchase or Sales of FFC Common Stock During Price -----------------------------------------------------
Determination Period..................................... 25
--------------------Period.................. 32
- ----------- --------------------------------------------------------------------------
Section 6.8 Continuation of PBE's Structure, Name and Directors....... 26
---------------------------------------------------Restructuring, Directors, Etc............................................................... 32
- ----------- -----------------------------
Section 6.9 Indemnification........................................... 26
---------------Appointment of FFC Directors................................................................ 33
- ----------- ----------------------------
ARTICLE VII
- CONDITIONS PRECEDENT.......................................... 28PRECEDENT
--------------------
Section 7.1 Common Conditions......................................... 28Conditions........................................................................... 33
- ----------- -----------------
(a) Stockholder Approval...................................... 28Approval........................................................................ 34
--------------------
(b) Regulatory Approvals...................................... 28Approvals........................................................................ 34
--------------------
(c) Stock Listing............................................. 28Listing............................................................................... 34
-------------
(d) Tax Opinion............................................... 28Opinion................................................................................. 34
-----------
(e) Registration Statement.................................... 29Statement...................................................................... 35
----------------------
(f) No Suits.................................................. 30Suits.................................................................................... 36
--------
(g) Pooling..................................................................................... 36
-------
Section 7.2 Conditions Precedent to Obligations of FFC................ 30FFC.................................................. 36
- ----------- ------------------------------------------
(a) Accuracy of Representations and Warranties................ 30Warranties.................................................. 36
------------------------------------------
(b) Covenants Performed....................................... 30Performed......................................................................... 36
-------------------
(c) Opinion of Counsel for PBE................................ 30KHG.................................................................. 36
--------------------------
(d) Affiliate Agreements...................................... 30Agreements........................................................................ 37
--------------------
-iii-
(e) Financial Confirmation.................................... 31
----------------------KHG Options................................................................................. 37
-----------
(f) Decline in Market Price of FFC Common Stock................................................. 37
-------------------------------------------
(g) Accountants' Letter....................................... 31Letter......................................................................... 37
-------------------
(g) Accounting Treatment...................................... 32
--------------------
(h) Federal and State Securities and Antitrust Laws........... 32Laws............................................. 38
-----------------------------------------------
(i) Dissenting Stockholders................................... 32
-----------------------Environmental Matters....................................................................... 38
---------------------
(j) Environmental Matters..................................... 32Closing Documents........................................................................... 38
-----------------
(k) Employment Agreements....................................................................... 39
---------------------
(k) Crossroads Branch Lease................................... 33
-----------------------
(k) Required Notices, Consents and Approvals.................. 33
----------------------------------------
(l) Closing Documents......................................... 33
-----------------
Section 7.3 Conditions Precedent to the Obligations of PBE............ 33KHG.............................................. 39
- ----------- ----------------------------------------------
(a) Accuracy of Representations and Warranties................ 33Warranties.................................................. 39
------------------------------------------
(b) Covenants Performed....................................... 33Performed......................................................................... 39
-------------------
(c) Opinion of Counsel for FFC................................ 33FFC.................................................................. 39
--------------------------
(d) FFC Options................................................................................. 39
-----------
(e) Fairness Opinion.......................................... 34Opinion............................................................................ 39
----------------
(e) Financial Confirmation.................................... 34
----------------------
(f) Closing Documents......................................... 34Documents........................................................................... 40
-----------------
(g) Employment Agreements....................................................................... 40
---------------------
ARTICLE VIII -
TERMINATION, AMENDMENT AND WAIVER............................ 35WAIVER
---------------------------------
Section 8.1 Termination............................................... 35Termination................................................................................. 40
- ----------- -----------
(a) Mutual Consent............................................ 35Consent.............................................................................. 40
--------------
(b) Unilateral Action by FFC.................................. 35FFC.................................................................... 40
------------------------
(c) Unilateral Action By PBE.................................. 35KHG.................................................................... 40
------------------------
(d) By FFC.................................................... 35
------
Section 8.2 Effect of Termination..................................... 36Termination....................................................................... 41
- ----------- ---------------------
(a) Effect.................................................... 36Effect...................................................................................... 41
------
(b) Limited Liability......................................... 36Liability........................................................................... 41
-----------------
(c) Confidentiality........................................... 36Confidentiality............................................................................. 41
---------------
Section 8.3 Amendment................................................. 36Amendment................................................................................... 41
- ----------- ---------
Section 8.4 Waiver.................................................... 36Waiver...................................................................................... 42
- ----------- ------
ARTICLE IX
- RIGHTS OF DISSENTING STOCKHOLDERS OF PBE....................... 37
----------------------------------------
Section 9.1 Rights of Dissenting Stockholders of PBE.................. 37
----------------------------------------
ARTICLE X - CLOSING AND EFFECTIVE DATE...................................... 37DATE
--------------------------
Section 10.1 Closing................................................... 379.1 Closing..................................................................................... 42
- ----------- -------
Section 10.29.2 Effective Date............................................ 37Date.............................................................................. 42
- ----------- --------------
-iv-
ARTICLE XIX
NO SURVIVAL OF REPRESENTATIONS AND WARRANTIES.................... 37WARRANTIES
---------------------------------------------
Section 11.110.1 No Survival.............................................. 37Survival................................................................................ 42
- ------------ -----------
ARTICLE XII -XI
GENERAL PROVISIONS............................................ 38PROVISIONS
------------------
Section 12.1 Expenses................................................. 3811.1 Expenses................................................................................... 43
- ------------ --------
Section 12.211.2 Other Mergers and Acquisitions........................... 38Acquisitions............................................................. 43
- ------------ ------------------------------
Section 12.3 Notices.................................................. 3811.3 Notices.................................................................................... 43
- ------------ -------
Section 12.4 Counterparts............................................. 3911.4 Counterparts............................................................................... 44
- ------------ ------------
Section 12.511.5 Governing Law............................................ 39Law.............................................................................. 44
- ------------ -------------
Section 12.611.6 Parties in Interest...................................... 39Interest........................................................................ 44
- ------------ -------------------
Section 12.711.7 Entire Agreement......................................... 39
----------------
-v-
INDEX OF SCHEDULES
------------------
Schedule 3.1 Required Notices, Consents and ApprovalsAgreement........................................................................... 44
- ------------ Schedule 3.3 Organization and Standing----------------
Section 11.8 Materiality Standard....................................................................... 45
- ------------ Schedule 3.7 Undisclosed Liabilities
- ------------
Schedule 3.8 Changes
- ------------
Schedule 3.9 Dividends, Distributions and Stock Purchases
- ------------
Schedule 3.10 Taxes
- -------------
Schedule 3.11 Title to and Condition of Assets
- -------------
Schedule 3.12 Contracts
- -------------
Schedule 3.13 Litigations and Governmental Directives
- -------------
Schedule 3.14 Compliance with Laws; Governmental Authorizations
- -------------
Schedule 3.15 Insurance
- -------------
Schedule 3.16 Financial Institution Bonds
- -------------
Schedule 3.17 Labor Relations and Employment Agreements
- -------------
Schedule 3.18 Employee Benefit Plans
- -------------
Schedule 3.19 Related Party Transactions
- -------------
Schedule 3.20 Finders
- -------------
Schedule 3.22 Environmental Matters
- -------------
Schedule 3.26 Loan Portfolio
- -------------
Schedule 3.27 Investment Portfolio
- -------------
Schedule 4.5 Subsidiaries
- ------------
Schedule 4.7 Undisclosed Liabilities
- ------------
Schedule 4.9 Litigation and Governmental Directives
- ------------
Schedule 4.10 Compliance with Laws; Governmental Authorizations
- -------------
Schedule 4.14 Environmental Matters
- ---------------------------------
INDEX OF EXHIBITS
-----------------
Exhibit A Form of Warrant Agreement
- ---------
Exhibit B Form of Warrant
- ---------
Exhibit C Form of Articles of Merger
- ---------
Exhibit D Form of Opinion of PBE's Counsel
- ---------
Exhibit E Form of Opinion of FFC's Counsel
- ---------
AFFILIATION AND MERGER AGREEMENT
--------------------------------
Affiliation and----------------
Merger Agreement made as of the 18th15th day of March,August, 1997, as
amended as of May 20, 1997 (the "Agreement"), by and between
FULTON FINANCIAL CORPORATION, a Pennsylvania business corporation having its
administrative headquarters at One Penn Square, P. O. Box 4887, Lancaster,
Pennsylvania 17604 ("FFC"), and THE PEOPLES BANK OF ELKTON,KEYSTONE HERITAGE GROUP, INC., a Maryland bankPennsylvania
business corporation having its administrative headquarters at 130 North555 Willow
Street, Elkton, Maryland 21921Lebanon, Pennsylvania 17046 ("PBE"KHG")
BACKGROUND:.
Background:
-----------
FFC is a Pennsylvania bank holding company. PBEcompany registered under the Bank Holding Company Act
of 1956, as amended (the "BHC Act"). KHG is a Maryland bank.bank holding company registered
under the BHC Act. FFC wishesand KHG wish to acquire PBE, and PBE wishes to be acquired by FFC.merge with each other. Subject to the
terms and conditions of this Agreement, the foregoing transaction will be
accomplished by means of a merger (the "Merger") in which (i) FFC will organize
a Maryland bank ("PBE Interim Bank") as a wholly-owned subsidiary of FFC and
cause PBE Interim Bank to become a party to this Agreement, (ii) PBEKHG will be merged
with and into PBE Interim Bank, (iii) PBE Interim BankFFC, (ii) FFC will survive the Merger, and operate as a wholly-owned subsidiary of FFC under the name "The
Peoples Bank of Elkton", and (iv)(iii) all of the
outstanding shares of the common stock of PBE,KHG, $5.00 par value $10.00 per share ("PBEKHG
Common Stock"), will be converted into shares of the common stock of FFC, par
value $2.50 per share ("FFC Common Stock").
Any referenceIn addition, Lebanon Valley National Bank ("LVNB"), a national banking
association, and Keystone Heritage Life Insurance Corporation ("KHLIC"), a
Arizona insurance company, which are wholly-owned subsidiaries of KHG, will
become wholly-owned subsidiaries of FFC.
Simultaneously with the effectiveness of the Merger, FFC shall cause (i)
LVNB to PBE aftermerge with an existing bank subsidiary of FFC and (ii) the resulting
bank from such merger immediately to transfer certain of PBE with and into PBE Interim
Bank shall mean the surviving entityits branch offices to
other existing bank subsidiaries of said merger. In connectionFFC, all as more fully described in Section
6.8(a) herein (the "Restructuring").
Simultaneously with the execution of this Agreement, the parties are
to enterentering into a Warrant Agreement in the form of Exhibit A attached heretoeven date herewith (the "Warrant
Agreement"), which ---------
provides for the delivery by PBEKHG of a warrant in the form of Exhibit B attached
---------
hereto (the "Warrant")
entitling FFC to purchase shares of the PBEKHG Common Stock in certain
circumstances.
WITNESSETH:
-----------
NOW, THEREFORE, in consideration of the mutual covenants contained herein
and intending to be legally bound, the parties hereby agree as follows:
ARTICLE I
ARTICLESPLAN OF MERGER
--------------------------------
Section 1.1 ArticlesPlan of Merger. Subject to the terms and conditions of this
----------------------------- --------------
Agreement, PBEKHG shall merge with and into PBE Interim BankFFC in accordance with the ArticlesPlan of
Merger substantially in the form of Exhibit C attached hereto.
---------
ARTICLE II
CONVERSION OF SHARES AND EXCHANGE OF STOCK CERTIFICATES
-------------------------------------------------------
Section 2.1 Conversion of Shares. On the Effective Date (as defined in
----------- --------------------
Section 10.2 herein) the shares of PBEKHG Common Stock then outstanding shall be
converted into shares of FFC Common Stock, as follows:
(a) General: Subject to the provisions of Sections 2.1(b), 2.1(c) and
-------
2.1(c)2.1(d) herein, each share of PBEKHG Common Stock issued and outstanding immediately
before the Effective Date shall, on the Effective Date, be converted into and
become, without any action on the part of the holder thereof, 4.1581.83 (such number,
as it may be adjusted under Section 2.1(b) herein, the "Conversion Ratio")
shares of FFC Common Stock and the corresponding number of rights associated
with the Rights Agreement dated June 20, 1989 between FFC and Fulton Bank.
(b) Antidilution Provision: In the event that FFC shall at any time
----------------------
time
before the Effective Date increase or decreaseDate: (i) issue a dividend in shares of FFC Common Stock,
(ii) combine the number of outstanding shares of FFC Common Stock asinto a resultsmaller number of
a: (i) stock split; (ii) stock
dividend;shares, or (iii) reverse stock split; (iv) reclassification; (v)
recapitalization; (vi) exchangesubdivide the outstanding shares of shares; or (vii) similar change in its
capital account,FFC Common Stock into a
greater number of shares, then the Conversion Ratio shall be proportionately
adjusted (calculated to threetwo decimal places), so that each PBEKHG stockholder shall
receive on the Effective Date, in exchange for his shares of PBEKHG Common Stock,
the number of shares of FFC Common Stock as would then have been owned by him if
the Effective Date had occurred before the record date of such event (for(For
example, if FFC were to declare a ten percent (10%) stock dividend after the
date of this Agreement and if the record date for that stock dividend were to
occur before the Effective Date, the Conversion Ratio would be adjusted from
4.1581.83 shares to 4.57382.01 shares).
(c) No Fractional Shares: No fractional shares of FFC Common Stock
--------------------
Stock
shall be issued in connection with the Merger. In lieu of the issuance of any
fractional share to which he would otherwise be entitled, each former
stockholder of PBEKHG shall receive in cash an amount equal to the fair market
value of his fractional interest, which fair market value shall be determined by
multiplying such fraction by the Closing Market Price (as defined in Section
2.1(d) herein).
2
(d) Closing Market Price: For purposes of this Agreement, the Closing
--------------------
Closing
Market Price shall be the average of the average of the per share closing bid and asked prices
for FFC Common Stock, rounded up to the nearest $.125, for the ten (10) trading
days immediately preceding the date which is two (2) business days before the
Effective Date, as reported on the National Market System of the National
Association of Securities Dealers Automated Quotation System ("NASDAQ"), the
foregoing period of ten (10) trading days being hereinafter sometimes referred
to as the "Price Determination Period."Period" (For example, if September 30, 1997February 28, 1998 were
to be the Effective Date, then the Price Determination Period would be September 15, 16,February
11, 12, 13, 17, 18, 19, 22,20, 23, 24 and 25, and
26, 1997.)1998). In the event that NASDAQ
shall fail to report a closing bid price for FFC Common Stock for any trading
day during the Price Determination Period, the closing bid price for that day
shall be equal to the average of the closing bid prices and the average of the
closing asked prices as quoted: (i) by F. J. Morrissey & Company, Inc. and by
Ryan, Beck & Co.; or (ii) in the event that either or both of these firms are not then
making a market in FFC Common Stock, by two brokerage firms then making a market
in FFC Common Stock to be selected by FFC and approved by PBE.KHG.
Section 2.2 Exchange of Stock Certificates. PBEKHG Common Stock certificates
----------- ------------------------------
shall be exchanged for FFC Common Stock certificates in accordance with the
following procedures:
(a) Exchange Agent: The transfer agent of FFC Fulton Bank, shall
-------------- act as exchange
--------------
agent (the "Exchange Agent") to receive PBEKHG Common Stock certificates from the
holders thereof and to exchange such stock certificates for FFC Common Stock
certificates and (if applicable) to pay cash for fractional shares of PBEKHG Common
Stock pursuant to Section 2.1(c) herein. TheFCC shall cause the Exchange Agent shall, as soon as practicable but in no event later than five (5) business days,on
or promptly after the Effective Date, to mail to each former stockholder of PBEKHG
a notice specifying the procedures to be followed in surrendering such
stockholder's PBEKHG Common Stock certificates.
(b) Surrender of Certificates: As promptly as possible after receipt
-------------------------
receipt
of the Exchange Agent's notice, each former stockholder of PBEKHG shall surrender
his PBEKHG Common Stock certificates to the Exchange Agent; provided, --------
that if any
--------
former stockholder of PBEKHG shall be unable to surrender his PBEKHG Common Stock
certificates due to loss or mutilation thereof, he may make a constructive
surrender by following procedures comparable to those customarily used by FFC
for issuing replacement certificates to FFC stockholdersshareholders whose FFC Common Stock
certificates have been lost or mutilated. As soon as practicable,
but in no event later than ten (10) business days, following the receipt ofUpon receiving a proper actual or
constructive surrender of PBEKHG Common Stock certificates from a former PBEKHG
stockholder, the Exchange Agent shall issue to such stockholder, in exchange
therefor, an FFC Common Stock certificate representing the whole number of
shares of FFC Common Stock into which such stockholder's shares of PBEKHG Common
Stock have been converted in accordance with this Article II, together with 3
a
check in the
amount of any cash to which such stockholder is entitled, pursuant to Section
2.1(c) herein, in lieu of the issuance of a fractional share.
(c) Dividend Withholding: Dividends, if any, payable by FFC after the
--------------------
Effective Date to any former stockholder of PBEKHG who has not prior to the payment
date surrendered his PBEKHG Common Stock certificates may, at the option of FFC, be
withheld. Any dividends so withheld shall be paid, without interest, to such
former stockholder of PBEKHG upon proper surrender of his PBEKHG Common Stock
certificates.
(d) Failure to Surrender Certificates: All PBEKHG Common Stock
---------------------------------
certificates must be surrendered to the Exchange Agent within two (2) years
after the Effective Date. In the event that any former stockholder of PBEKHG shall
not have properly surrendered his PBEKHG Common Stock certificates within two (2)
years after the Effective Date, the shares of FFC Common Stock that would
otherwise have been issued to him may, at the option of FFC, be sold and the net
proceeds of such sale, together with the cash (if any) to which he is entitled
in lieu of the issuance of a fractional share and any previously accrued
dividends, shall be held by the Exchange Agent in a noninterest bearing account
for his benefit. From and after any such sale, the sole right of such former
stockholder of PBEKHG shall be the right to collect such net proceeds, cash and
accumulated dividends. Subject to all applicable laws of escheat, such net
proceeds, cash and accumulated dividends shall be paid to such former
stockholder of PBE,KHG, without interest, upon proper surrender of his PBEKHG Common
Stock certificates.
(e) Expenses: All costs and expenses associated with the foregoing
--------
surrender and exchange procedure shall be borne by FFC.
Section 2.3 Treatment of Outstanding KHG Options.
----------- ------------------------------------
(a) Each holder of an option (collectively, "KHG Options") to purchase
shares of KHG Common Stock that (i) is outstanding on the Effective Date, (ii)
has been granted pursuant to the 1994 Stock Incentive Plan and the 1996
Independent Directors Stock Option Plan (collectively, the "KHG Stock Option
Plans") and (iii) would otherwise survive the Effective Date shall be entitled
to receive, in cancellation of such KHG Option, an option to acquire shares of
FFC Common Stock on the terms set forth below (an "FFC Stock Option").
(b) An FFC Stock Option shall be a stock option to acquire shares of
FFC Common Stock with the following terms: (i) the number of shares of FFC
Common Stock which may be acquired pursuant to such FFC Stock Option shall be
equal to the product of the number of shares of KHG Common Stock covered by the
KHG Option multiplied by the Conversion Ratio, provided that any fractional
share of FFC Common Stock resulting from such multiplication shall be rounded to
the nearest whole share; (ii) the exercise price per share of FFC Common Stock
shall be equal to the exercise price per share of KHG Common Stock of such KHG
Option, divided by the Conversion Ratio, provided that such exercise price shall
be rounded to the nearest whole cent; (iii) the duration and other terms of such
KHG Option shall be unchanged except that all references to KHG shall be deemed
references to FFC, and that each such FFC Stock Option shall be fully
exercisable as of the Effective Date, and shall remain exercisable at least
until the stated expiration date of the corresponding KHG Option; (iv) FFC shall
assume such stock option as contemplated by Section 424(a) of the Internal
Revenue Code of 1986, as amended (the "Code"); and (v) to the extent KHG Options
qualify as incentive stock options under Section 422 of the Code, the FFC
Options exchanged therefor shall also so qualify. Subject to the foregoing, the
KHG Stock Option Plans and all options or other rights to acquire KHG Common
Stock issued thereunder shall terminate on the Effective Date.
(c) FFC shall not issue or pay for any fractional shares otherwise
issuable upon exercise of a FFC Stock Option. Prior to the Effective Time of
Merger, FFC shall reserve for issuance and, if not previously registered
pursuant to the Securities Act of 1933, as amended (the "1933 Act"), register,
the number of shares of FFC Common Stock necessary to satisfy FFC's obligations
with respect to the issuance of FFC Common Stock pursuant to the exercise of FFC
Stock Options.
(d) As of the Effective Date (to the extent required as determined by
FFC and KHG), FFC shall receive agreements from each holder of a KHG Option,
pursuant to which each such holder agrees to accept such FFC Options in exchange
for the cancellation of such KHG Options on the Effective Date.
Section 2.4 Reservation of Shares. FFC agrees that (i) prior to the
----------- ---------------------
Effective Date it will take appropriate action to reserve a sufficient number of
authorized but unissued shares of FFC Common Stock to be issued in accordance
with this Agreement, and (ii) on the Effective Date, FFC will deposit with the
Exchange Agent, for the benefit of the holders of shares of PBE Common Stock,
for exchange in accordance with this Agreement, certificates representingissue shares of
FFC Common Stock issuable pursuant to the extent set forth in, and in accordance with, this
Agreement.
Section 2.1(a) herein and cash for
fractional shares pursuant to Section 2.1(c) herein.
Section 2.42.5 Taking Necessary Action. FFC and PBEKHG shall take all such
----------- -----------------------
actions
----------------------- as may be reasonably necessary or appropriate in order to effectuate the
transactions contemplated hereby including, without limitation, providing
information necessary for preparation of any filings needed to obtain the
regulatory approvals required to consummate the Merger.Merger and the Restructuring.
In case at any time after the Effective Date any further action is necessary or
desirable to carry out the purposes of this Agreement and to vest FFC with full
title to all properties, assets, rights, approvals, immunities and franchises of
4
PBE,KHG, the officers and directors of PBE,KHG, at the expense of FFC, shall take all
such necessary action.
Section 2.52.6 Press Releases. FFC and PBEKHG agree that all press releases or
----------- --------------
other public communications relating to this Agreement or the transactions
contemplated hereby will require consultation amongmutual approval by FFC and PBE,KHG, unless counsel
has advised any such party that such release or other public communication must
immediately be issued and the issuing party has not been able, despite its good
faith efforts, to effectobtain such consultation.approval.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF PBEKHG
-------------------------------------
PBEKHG represents and warrants to FFC, as of the date of this Agreement and as
of the date of the Closing (as defined in Section 9.1 herein), as follows:
Section 3.1 Authority. The execution and delivery of this Agreement, the
----------- ---------
Warrant Agreement and the Warrant and the performance of the transactions
contemplated herein and therein have been authorized by the Board of Directors
of PBEKHG and, except for the approval of this Agreement by its stockholders, PBEKHG
has taken all corporate action necessary on its part to authorize this
Agreement, the Warrant Agreement and the Warrant and the performance of the
transactions contemplated herein and therein. This Agreement, the Warrant
Agreement and the Warrant have been duly executed and delivered by PBEKHG and,
assuming due authorization, execution and delivery by FFC, constitute valid and
binding obligations of PBE.KHG. The execution, delivery and performance of this
Agreement, the Warrant Agreement and the Warrant will not constitute a violation
or breach of or default under (i) the Articles of Incorporation or Bylaws of
PBE,KHG, (ii) the Articles of Association or Bylaws of LVNB, (iii) any statute,
rule, regulation, order, decree or directive of any governmental authority or
court applicable to PBE, subject to the receiptKHG or LVNB, or (iv) any agreement, contract, memorandum of
all
required governmental approvalsunderstanding, indenture or (iii) any Material. Contract (as such term
is defined in Section 3.12 herein)other instrument to which PBEKHG or LVNB is a party or
by which PBEKHG or LVNB or any of itstheir properties are bound, subject to PBE obtaining or making any required
notice, consent or approval as set forth on Schedule 3.1..
------------bound.
Section 3.2 Subsidiaries. PBE owns no subsidiaries, directly or indirectly.
------------
Section 3.3 Organization and Standing. As set forthKHG is a business corporation that
----------- -------------------------
is duly organized, validly existing and in good standing under the laws of the
Commonwealth of Pennsylvania. KHG is a bank holding company under the BHC Act,
and has full power and lawful authority to own and hold its properties and to
carry on Schedule 3.3, PBEits business as presently conducted. LVNB is ------------------------- ------------
a banknational banking
association that is duly organized, validly existing and in good standing under
the laws of the State of Maryland. PBEUnited States. LVNB is an insured bank under the provisions of
the Federal Deposit Insurance Act, as amended (the "FDI Act"), and is not a member
of the Federal Reserve System. PBELVNB has full power and lawful authority to own
and hold its properties and to carry on its business as presently conducted.
5KHLIC is an insurance company that is duly organized, validly existing and in
good standing under the laws of the State of Arizona. KHLIC has full power and
lawful authority to own and hold its properties and to carry on its business as
presently conducted.
Section 3.3 Subsidiaries. LVNB and KHLIC are wholly-owned direct
----------- ------------
subsidiaries of KHG. Except for LVNB and KHLIC (the "KHG Subsidiaries"), KHG
owns no subsidiaries, directly or indirectly.
Section 3.4 Capitalization. The authorized capital of PBEKHG consists
----------- --------------
exclusively of 500,00010,000,000 shares of PBEKHG Common Stock,Stock. There are 3,951,583
shares of which 230,596 shares areKHG Common Stock validly issued, outstanding, fully paid and non-assessable,non-
assessable, and no120,100 shares are held as treasury shares. In addition, 45,888 (or approximately 19.9% of the
outstanding)98,330
shares of PBEKHG Common Stock will beare reserved for issuance upon the exercise of Stock
Options granted under KHG's Stock Option Plans and 981,740 shares of KHG Common
Stock are reserved for issuance upon exercise of the Warrant. Except for the
KHG Options and the Warrant, there are and will be no outstanding obligations, options or
rights of any kind entitling other persons to acquire shares of PBEKHG Common Stock
and there are no outstanding securities or other instruments of any kind that
are convertible into shares of PBEKHG Common Stock. All outstanding shares of LVNB
Common Stock are owned beneficially and of record by KHG. There are no
outstanding obligations, options or rights of any kind entitling other persons
to acquire shares of LVNB Common Stock, and there are no outstanding securities
or instruments of any kind that are convertible into shares of LVNB Common
Stock. All outstanding shares of KHLIC Common Stock are owned beneficially and
of record by KHG. There are not outstanding obligations, options or rights of
any kind entitling other persons to acquire shares of KHLIC Common Stock, and
there are no outstanding securities or instruments of any kind that are
convertible into shares of KHLIC Common Stock. The Common Stock of LVNB and
KHLIC is sometimes collectively referred to herein as the "KHG Subsidiaries
Common Stock."
Section 3.5 Articles of Incorporation,Charter, Bylaws and Minute Books. The copies --------------------------------------------------
of the ArticlesCertificate
----------- --------------------------------
of Incorporation and Bylaws of PBEKHG and the KHG Subsidiaries that have been
delivered to FFC are true, correct and complete. Except as previously disclosed
to FFC in writing, the minute books of PBEKHG and the KHG Subsidiaries that have
been made available to FFC for inspection are true, correct and complete in all
material respects and accurately record the actions taken by the Boards of
Directors and stockholders of PBEKHG and the KHG Subsidiaries at the meetings
documented in such minutes.
Section 3.6 Financial Statements. PBEKHG has delivered to FFC the following
----------- --------------------
financial statements: Consolidated Balance Sheets for PBE at December 31, 1996 and 1995
and Consolidated Statements of Income, Consolidated Statements of Stockholders'
Equity, and Consolidated Statements of Cash Flows of KHG for the years ended
December 31, 1996, 1995 and 1994, certified by KPMG Peat Marwick LLP, and set
forth in the 1996 Annual Report to KHG's stockholders and a Consolidated Balance
Sheet of KHG at June 30, 1997 and Consolidated Statements of Income,
Consolidated Statements of Changes in Stockholders' Equity and Consolidated
Statements of Cash Flows of PBEKHG for the yearssix-month period ended December 31, 1996June 30, 1997, as
filed with the Securities and 1995
certified by Stegman & CompanyExchange Commission (the "SEC") in a Quarterly
Report on Form 10-Q (the aforementioned Consolidated Balance Sheet as of December
31, 1996June
30, 1997 being hereinafter referred to as the "PBE"KHG Balance Sheet"). Each of the
foregoing financial statements fairly presentspresent the consolidated financial
condition, assets and liabilities, and results of operations of PBEKHG and LVNB at
itstheir respective datedates and for the respective periods then ended and has been
prepared in accordance with generally accepted accounting principles
consistently applied, except as otherwise noted in a footnote thereto.thereto and except
for the omission of the notes from the financial statements applicable to any
interim period.
Section 3.7 Absence of Undisclosed Liabilities. Except as disclosed in
----------- ----------------------------------
Schedule 3.7, or as reflected, noted or adequately reserved against in the PBEKHG
- ------------
Balance Sheet, or disclosed in the Notes thereto,as at December 31, 1996, PBEJune 30, 1997, KHG had no consolidated liabilities (whether
accrued, absolute, contingent or otherwise) which were required to be reflected,
noted or reserved against in the PBEKHG Balance Sheet under generally accepted
accounting principles or which were in any case or in
the aggregate material.principles. Except as disclosed in Schedule 3.7, PBE hasKHG and the KHG
------------
Subsidiaries have not
------------ incurred, since December 31, 1996,June 30, 1997, any such liability, other
than liabilities of the same nature as those set forth in the PBEKHG Balance Sheet,
all of which have been reasonably incurred in the Ordinary Course of Business.
For purposes of this Agreement, the term "Ordinary Course of Business" shall
mean
the ordinary course of business consistent with PBE'sKHG's and the KHG Subsidiaries'
customary business practices.
Section 3.8 Absence of Changes. Since December 31, 1996 toJune 30, 1997, KHG and the date hereof,KHG
----------- ------------------
PBE hasSubsidiaries have each conducted its businesstheir businesses in the Ordinary Course of
Business and, except as disclosed in Schedule 3.8, PBE has notneither KHG nor the KHG
------------
Subsidiaries have undergone any changes in its condition ------------
(financial
6
or
otherwise), assets, liabilities, business or operations, other than changes in
the Ordinary Course of Business, which have not been, in the aggregate, materially
adverse as to PBE.KHG and the KHG Subsidiaries.
Section 3.9 Dividends, Distributions and Stock Purchases. Except as
----------- --------------------------------------------
disclosed in Schedule 3.9, since JanuaryJuly 1, 1997, to the date hereof, PBEKHG has not ------------
declared, set aside,
------------
made or paid any dividend or other distribution in respect of the PBEKHG Common
Stock, or purchased, issued or sold any shares of PBEKHG Common Stock or the KHG
Subsidiaries Common Stock.
Section 3.10 Taxes. PBE hasKHG and the KHG Subsidiaries have filed all federal,
------------ -----
state, county, municipal and
----- foreign tax returns, reports and declarations which
are required to be filed by itthem or either of them as of December 31, 1996.June 30, 1997. Except
as disclosed in Schedule 3.10: (i) PBE has
-------------KHG and the KHG Subsidiaries have paid all
-------------
taxes, penalties and interest which have become due pursuant thereto or which
became due pursuant to federal, state, county, municipal or foreign tax laws
applicable to the periods covered by the foregoing tax returns, (ii) PBE
hasneither KHG
nor the KHG Subsidiaries have received noany notice of deficiency or assessment of
additional taxes, and no tax audits are in process; and (iii) the Internal
Revenue Service (the "IRS") has not commenced or given notice of an intention to
commence any examination or audit of the federal income tax returns of PBEKHG for
any year through and including the year ended December 31, 1995.1996. Except as
disclosed in Schedule --------
3.10, PBE has notneither KHG nor the KHG Subsidiaries have granted
-------------
any waiver of any statute of limitations or otherwise
- ---- agreed to any extension of
a period for the assessment of any federal, state, county, municipal or foreign
income tax. Except as disclosed in Schedule 3.10, -------------
the accruals and reserves
-------------
reflected in the PBEKHG Balance Sheet are adequate to cover all taxes (including
interest and penalties, if any, thereon) that are payable or accrued as a result
of PBE'sKHG's consolidated operations for all periods prior to the date of such
Balance Sheet.
Section 3.11 Title to and Condition of Assets. Except as disclosed in
------------ --------------------------------
Schedule 3.11, PBE hasKHG or the KHG Subsidiaries have good and marketable title to all
material- -------------
consolidated real and
- ------------- personal properties and assets reflected in the PBEKHG
Balance Sheet or acquired subsequent to December 31, 1996June 30, 1997 (other than property and
assets disposed of in the Ordinary Course of Business), free and clear of all
liens or encumbrances of any kind whatsoever; provided, however, that the
-------- -------
representations and warranties
-------- ------- contained in this sentence do not cover liens or
encumbrances that: (i) are reflected in the PBEKHG Balance Sheet or in Schedule
--------
3.11; (ii) represent liens of -------------
current taxes and special assessments not yet due or which, if due, may be
- ----
paid without penalty, or which are being contested in good faith by appropriate
proceedings; and (iii) represent such imperfections of title, liens,
encumbrances, zoning requirements and easements, if any, as are not substantial
in character, amount or extent and do not materially detract from the value, or
interfere with the present use, of the properties and assets subject thereto.
The material structures and other improvements to real estate, furniture, fixtures and
equipment reflected in the PBEKHG Balance Sheet or acquired subsequent to December 31, 1996:June 30,
1997: (A) are in good operating condition and repair (ordinary wear and tear
excepted), and (B) comply in all material respects with all applicable laws,
ordinances and regulations, including without limitation
7
all building codes,
zoning ordinances and other similar laws, except where any noncompliance would
not materially detract from the value, or interfere with the present use, of
such structures, improvements, furniture, fixtures and equipment. PBE ownsKHG and the
KHG Subsidiaries own or hashave the right to use all real and personal properties
and assets that are material to the conduct of its businesstheir respective businesses as
presently conducted.
Section 3.12 Contracts. Each written or oral contract entered into by PBEKHG
------------ ---------
or the KHG Subsidiaries (other than contracts with customers reasonably entered
into by PBEKHG or KHG Subsidiaries in the Ordinary Course of Business) which
involves aggregate payments or receipts in excess of $50,000$100,000 per year,
including without limitation every employment contract, employee benefit plan,
agreement, lease, license, indenture, mortgage and other commitment (other than commitments to make loans) to which
PBE iseither KHG or the KHG Subsidiaries are a party or by which PBEKHG or any of itsthe KHG
Subsidiaries or any of their properties may be bound (collectively referred to
herein as "Material Contracts") is identified in Schedule 3.12. -------------
Except as
-------------
disclosed in Schedule 3.12, all Material Contracts are valid and inenforceable against KHG
-------------
full force and effect, and all parties thereto (to PBE's knowledge inor the KHG subsidiaries, as the case of third parties to such Material Contracts)may be and , KHG or the KHG subsidiaries
have in all material respects performed all obligations required to be performed
by them to date and are not in default in any material respect.respect and KHG is not
aware of any default by a third party under a Material Contract. Schedule 3.12
-------------
identifies all Material
------------- Contracts which require the consent or approval of third
parties to the execution and delivery of this Agreement or to the consummation
of the transactions contemplated herein.
Section 3.13 Litigation and Governmental Directives. Except as disclosed in
------------ --------------------------------------
Schedule 3.13, (i) there is no litigation, investigation or proceeding pending,
- -------------
or to the knowledge of PBEKHG or the KHG Subsidiaries threatened, that involves PBE,KHG
or the KHG Subsidiaries or any of itstheir properties and that, if determined
adversely, would materially and adversely affect the condition (financial or
otherwise), assets, liabilities, business, operations or future prospects of PBE;KHG
or the KHG Subsidiaries; (ii) there are no outstanding orders, writs,
injunctions, judgments, decrees, regulations, directives, consent agreements or
memoranda of understanding issued by any federal, state or local court or
governmental authority or arbitration tribunal issued against or with the
consent of PBEKHG or the KHG Subsidiaries that materially and adversely affect the
condition (financial or otherwise), assets, liabilities, business, operations or
future prospects of PBE,KHG or the KHG Subsidiaries or that in any manner restrict
the right of PBEKHG or the KHG Subsidiaries to carry on its businesstheir businesses as
presently conducted taken as a whole; and (iii) neither KHG nor the executive officers of PBEKHG
Subsidiaries are not aware of any fact or condition presently existing that might
give rise to any litigation, investigation or proceeding which, if determined
adversely to PBE,either KHG or the KHG Subsidiaries, would materially and adversely
affect the consolidated condition (financial or otherwise), assets, liabilities,
business, operations or future prospects of PBEKHG or the KHG Subsidiaries or would
restrict in any manner the right of PBEKHG or the KHG Subsidiaries to carry on
its businesstheir businesses as presently conducted.conducted taken as a whole. All litigation
(except for bankruptcy proceedings in which PBE hasKHG or the KHG Subsidiaries have
filed proofs of claim) in which PBE isKHG or the KHG Subsidiaries are involved as a
plaintiff (other than routine collection and foreclosure suits initiated in the
Ordinary Course of BusinessBusiness) in which the amount sought to be recovered is less
than $25,000)$50,000 is identified in Schedule 3.13.
For the purposes of this Agreement, references to
-------------
the future prospects of a party shall be
8
deemed to refer to the prospects of such party assuming its business is carried
out in the future in a manner consistent with past practices.
Section 3.14 Compliance with Laws; Governmental Authorizations. Except as
------------ -------------------------------------------------
disclosed in Schedule 3.14 or where noncompliance would not have a material and
-------------
adverse effect upon the condition (financial or otherwise), assets, liabilities,
business, operations or future prospects of PBE:KHG or the KHG Subsidiaries: (i) toKHG
and the knowledge of PBE,
PBE isKHG Subsidiaries are in compliance with all statutes, laws, ordinances,
rules, regulations, judgments, orders, decrees, directives, consent agreements,
memoranda of understanding, permits, concessions, grants, franchises, licenses,
and other governmental authorizations or approvals applicable to PBEKHG or the KHG
Subsidiaries or to any of itstheir properties; and (ii) all material permits,
concessions, grants, franchises, licenses and other governmental authorizations
and approvals necessary for the conduct of the business of PBEKHG or the KHG
Subsidiaries as presently conducted have been duly obtained and are in full
force and effect, and there are no proceedings pending or to the knowledge of
PBE, threatened which may
result in the revocation, cancellation, suspension or materially adverse
modification of any thereof.
Section 3.15 Insurance. As of the date hereof, allAll policies of insurance ---------
relating to PBE'sKHG's and the
------------ ---------
KHG Subsidiaries' operations (except for title insurance policies), including
without limitation all financial institutions bonds, held by or on behalf of PBE
isKHG
or the KHG Subsidiaries are listed in Schedule 3.15. All such policies of
-------------
insurance are in full force -------------
and effect, and as of the date hereof, no notices of cancellation have been
received in connection therewith.
Section 3.16 Financial Institutions Bonds. Since January 1990, PBE1, 1993, LVNB has
------------ ----------------------------
continuously maintained in full force and effect one or more financial
institutions bonds listed in Schedule 3.16 insuring PBELVNB against acts of
-------------
dishonesty by each of its employees. As of the date hereof, noNo claim has been made under any such bond
and PBELVNB is not aware of any fact or condition presently existing which might
form the basis of a claim under any such bond. PBELVNB has received no reason to believenotice that
its present financial institutions bond or bonds will not be renewed by its
carrier on substantially the same terms as those now in effect.
Section 3.17 Labor Relations and Employment Agreements. PBE is notNeither KHG nor any
------------ -----------------------------------------
of the KHG Subsidiaries are a party
----------------------------------------- to or bound by any collective bargaining
agreement. PBE enjoys aKHG and the KHG Subsidiaries enjoy good working relationshiprelationships with
itstheir employees, and there are no labor disputes pending, or to the knowledge of
PBEKHG or the KHG Subsidiaries threatened, that might materially and adversely
affect the condition (financial or otherwise), assets, liabilities, business or
operations of PBE.KHG or LVNB. Except as disclosed in Schedule 3.17, PBE has noneither KHG
-------------
nor any of the KHG Subsidiaries have any employment contract,
------------- severance
agreement, deferred compensation agreement, consulting agreement or similar
obligation (an "Employment Obligation") with any director, officer, employee,
agent or consultant, and all such persons are serving at the will and
pleasure of PBE.consultant. Except as disclosed in Schedule 3.17, as of the Effective
-------------
Date
------------- (as defined in Section 10.29.2 herein), PBEneither KHG nor any of the KHG
Subsidiaries will not
9
have any liability for employee termination rights arising out
of any Employment Obligation.
Section 3.18 Employee Benefit Plans. All employee benefit plans, contracts
------------ ----------------------
or arrangements to which PBE isKHG or any of the KHG Subsidiaries are a party or by
which PBE isKHG or any of the KHG Subsidiaries are bound, including without limitation
all pension, retirement, deferred compensation, incentive, bonus, profit
sharing, stock purchase, stock option, life insurance, death or survivor's
benefit, health insurance, sickness, disability, medical, surgical, hospital,
severance, layoff or vacation plans, contracts or arrangements, are identified
in Schedule 3.18. PBE's retirement savings plan, a contributoryThe Lebanon Valley National Bank Pension Plan and the Lebanon
-------------
defined contribution planValley National Bank Retirement Savings Plan (the "PBE 401(k) Plan""KHG Pension Plans"), is are
exempt from tax under Sections 401 and 501 of the Internal Revenue Code, of 1986, as amended (the
"Code"), and has been maintained and
operated in material compliance with all applicable provisions of the Code and
the Employee Retirement Income Security Act of 1974, as amended ("ERISA"). Except as disclosed in Schedule 3.18, no
-------------No
"prohibited transaction" (as such term is defined in the Code or in ERISA) has
occurred in respect of the PBE 401(k) PlanKHG Pension Plans or any other employee benefit plan,
including, without limitation, PBE's nonqualified deferred compensation plan,
nonqualified salary continuation agreement and severance pay plan,
(all "employee benefit pension plans" and all "employee welfare benefit plans",
as those terms are defined in ERISA, of PBEKHG or any of the KHG Subsidiaries being
collectively referred to herein as "PBE"KHG Benefit Plans" and individually as a
"PBE"KHG Benefit Plan"), to which PBE isKHG or any of the KHG Subsidiaries are a party or
by which PBE isKHG or any of the KHG Subsidiaries are bound. There have been no
material breaches of fiduciary duty by any fiduciary under or with respect to
the PBE 401(k) PlanKHG Pension Plans or any other PBEKHG Benefit Plan, and no claim is pending or
to the knowledge of PBE,
threatened with respect to any PBEKHG Benefit Plan other than claims for benefits
made in the Ordinary Course of Business. PBE has notNeither KHG nor any of the KHG
Subsidiaries have incurred any material liability for any tax imposed by Section
4975 of the Code or for any material penalty imposed by the Code or by ERISA
with respect to the PBE 401(k) PlanKHG Pension Plans or any other PBEKHG Benefit Plan. There has
not been any audit of any PBEKHG Benefit Plan by the Department of Labor, the IRS
or the PBGC since January 1, 1990.
Section 3.19 Related Party Transactions. Except as disclosed in Schedule
------------ -------------------------- --------
3.19, PBE has noneither KHG nor any of the KHG Subsidiaries have any contract, extension
- ----
of credit, business arrangement or other
- ---- relationship of any kind with any of
the following persons: (i) any executive officer or director (including any
person who has served in such capacity since January 1, 1995) of PBE;KHG or any of
the KHG Subsidiaries; (ii) any stockholder owning five percent (5%) or more of
the outstanding PBEKHG Common Stock; and (iii) any "associate" (as defined in Rule
405 ofunder the SEC)1933 Act) of the foregoing persons or any business in which any of
the foregoing persons is an officer, director, employee or five percent (5%) or
greater equity owner. Each such contract or extension of credit disclosed in
Schedule 3.19, except as otherwise specifically described therein, has been made
- -------------
in the Ordinary Course of Business on substantially the same terms, including
interest rates and collateral, as those prevailing at the time for comparable
arms' length transactions with other persons that do not involve more than a
normal risk of collectability or present other unfavorable features.
10
Section 3.20 No Finder. Except as disclosed in Schedule 3.20, PBE has notneither KHG
------------ --------- -------------
nor any of the KHG Subsidiaries have paid or become obligated to pay any fee or
commission of any kind whatsoever to any broker, finder, advisor or other
intermediary for, on account of or in connection with the transactions
contemplated in this Agreement.
Section 3.21 Complete and Accurate Disclosure. Neither this Agreement
------------ --------------------------------
(insofar as it relates to PBE, PBEKHG, the KHG Subsidiaries, KHG Common Stock, KHG
Subsidiaries Common Stock, and the involvement of PBEKHG and the KHG Subsidiaries
in the transactions contemplated hereby) nor any financial statement, schedule
(including without limitation its Schedules to this Agreement), certificate, or
other statement or document delivered by PBEKHG or the KHG Subsidiaries to FFC in
connection herewith contains any statement which, at the time and in light of
the circumstances under which it is made, is false or misleading with respect to
any material fact or omits to state any material fact necessary to make the
statements contained herein or therein not false or misleading.
In particular, without limiting the
generality of the foregoing sentence, the information provided and the
representations made by PBE to FFC in connection with the Registration Statement
(as defined in Section 6.1(b) herein), both at the time such information and
representations are provided and made and at the time of the effectiveness of
the Registration Statement, will be true and accurate in all material respects
and will not contain any false or misleading statement with respect to any
material fact or omit to state any material fact required to be stated therein
or necessary in order (i) to make the statements made therein not false or
misleading, or (ii) to correct any statement contained in an earlier
communication with respect to such information or representations which has
become false or misleading.
Section 3.22 Environmental Matters. Except as disclosed in Schedule 3.22,
------------ --------------------- -------------
PBE has noneither KHG nor any of the KHG Subsidiaries have any knowledge that any
environmental contaminant, pollutant, toxic or hazardous waste or other similar
substance has been generated, used, stored, processed, disposed of or discharged
onto any of the real estate now or previously owned or acquired (including
without limitation any real estate acquired by means of foreclosure or exercise
of any other creditor's right) or leased by PBE.KHG or any of the KHG Subsidiaries.
In particular, without limiting the generality of the foregoing sentence, except
as disclosed in Schedule 3.22, PBE has noneither KHG nor any of the KHG Subsidiaries have
-------------
any knowledge that: (i)
------------- any materials containing asbestos have been used or
incorporated in any building or other structure or improvement located on any of
the real estate now or previously owned or acquired (including without
limitation any real estate acquired by means of foreclosure or exercise of any
other creditor's right) or leased by PBE;KHG or any of the KHG Subsidiaries; (ii)
any electrical transformers, fluorescent light fixtures with ballasts or other
equipment containing PCB's are or have been located on any of the real estate
now or previously owned or acquired (including without limitation any real
estate acquired by means of foreclosure or exercise of any other creditor's
right) or leased by PBE;KHG or any of the KHG Subsidiaries; or (iii) any underground
storage tanks for the storage of gasoline, petroleum products or other toxic or
hazardous wastes or similar substances are or have ever been located on any of
the real estate now or previously owned or acquired (including without
limitation any real 11
estate acquired by means of foreclosure or exercise of any
other creditor's right) or leased by PBE.KHG or any of the KHG Subsidiaries.
Section 3.23 Proxy Statement/Prospectus. At the time the Proxy
Statement/------------ --------------------------
Statement/Prospectus (as defined in Section 6.1(b) herein) is mailed to the
stockholders of PBEKHG and at all times subsequent to such mailing, up to and
including the Effective Date, the Proxy Statement/Prospectus (including any pre-
and post-
effectivepost-effective amendments and supplements thereto), with respect to all
information relating to PBE, PBEKHG, the KHG Subsidiaries, KHG Common Stock, the KHG
Subsidiaries Common Stock and all actions taken and statements made by PBEKHG and
the KHG Subsidiaries in connection with the transactions contemplated herein
(except for information provided by FFC to PBE)KHG or the KHG Subsidiaries) will:
(i) comply in all material respects with applicable provisions of the Securities1933 Act, of 1933, as amended (the "1933
Act"),
and the Securities Exchange Act of 1934, as amended (the "1934 Act"), and the
applicable rules and regulations of the Securities and Exchange Commission
(the "SEC");SEC thereunder; and (ii) not contain any
statement which, at the time and in light of the circumstances under which it is
made, is false or misleading with respect to any material fact, or omits to
state any material fact that is required to be stated therein or necessary in
order (A) to make the statements therein not false or misleading, or (B) to
correct any statement in an earlier communication with respect to the Proxy
Statement/Prospectus which has become false or misleading.
Section 3.24 Securities Matters. The PBE Common Stock is traded in the over-
------------------
the-counter marketSEC Filings. No registration statement, offering circular,
------------ -----------
proxy statement, schedule or report filed and is not registeredwithdrawn by KHG with the FDICSEC
under the 1933 Act or the 1934 Act. OnAct, on the date of effectiveness (in the case of
any registration statement or offering circular) or on the date of filing (in
the case of any report or schedule) or on the date of mailing (in the case of
any proxy statement), no offering circular or proxy
statement contained any untrue statement of a material fact or
omitted to state any material fact required to be stated therein or necessary in
order to make the statements made therein, in light of the circumstances under
which they were made, not misleading.
Section 3.25 Reports. PBE hasKHG and LVNB have filed all material reports,
------------ -------
registrations and
------- statements that are required to be filed with the FDIC,Federal
Reserve Board (the "FRB"), the Maryland State Bank
CommissionerFederal Deposit Insurance Corporation (the
"FDIC"), the Office of the Comptroller of the Currency (the "OCC") and any other
applicable federal, state or local governmental or regulatory authorities and
such reports, registrations and statements referred to in this Section 3.25
were, as of their respective dates, in compliance in all material respects with
all of the statutes, rules and regulations enforced or promulgated by the
governmental or regulatory authority with which they were filed; provided,
however, that the failure to file any such report, registration, or statement or
the failure of any report, registration or statement to comply with the
applicable regulatory standard shall not be deemed to be a breach of the
foregoing representation unless such failure has or may have a material adverse
impact on PBE. PBEKHG and the KHG Subsidiaries on a consolidated basis. KHG has
furnished FFC with, or made available to FFC, copies of all such filings made in
the last three fiscal years and in the period from January 1, 19961997 through the
date of this Agreement. KHG is required to file reports with the SEC pursuant
to Section 12 of the 1934 Act, and has made all appropriate filings under the
1934 Act and the rules and regulations promulgated thereunder. The KHG Common
Stock is traded on the American Stock Exchange under the symbol "KHG."
Section 3.26 Loan Portfolio of PBE.the LVNB.
------------ --------------------------
(a) Attached hereto as Schedule 3.26 is a --------------------- -------------
list of (w) all outstanding
-------------
commercial relationships, i.e. commercial loans, commercial loan commitments and
commercial letters of credit, of PBE with an
aggregate principal amount in excess of $250,000,LVNB (x) all loans of PBELVNB classified by PBELVNB
or any regulatory authority as "Monitor," "Substandard," "Doubtful" or "Loss,"
(y) all commercial and mortgage loans of PBELVNB classified as "non-
accrual,"non-accrual," and
(z) all commercial loans of PBELVNB classified as "in substance foreclosed."
(b) LVNB has adequately reserved for or charged off loans in
accordance with applicable regulatory requirements and LVNB's reserve for loan
losses is adequate in all material respects.
Section 3.27 Investment Portfolio. Attached hereto as Schedule 3.27 is a
------------ -------------------- -------------
list of all securities held by PBEKHG and LVNB for investment, showing the
principal amount, book value and market value of each security as of a recent
date, and of all short-term investments held by it as of December 31, 1996.June 30, 1997. These
securities are free and clear of all liens, pledges and encumbrances, except as
shown on Schedule 3.27.
- -------------
Section 3.28 Regulatory Examinations.
------------ -----------------------
(a) Except as shown on Schedule 3.28, within the past five years,
-------------
except for normal examinations conducted by a regulatory agency in
the regular course of the business of PBE,KHG or any of the KHG Subsidiaries, no
regulatory agency has initiated any proceeding or investigation into the
business or operations of PBE. PBE hasKHG or any of the KHG Subsidiaries. Neither KHG nor
any of the KHG Subsidiaries have received noany objection from any regulatory
agency to PBE'sKHG's or the KHG Subsidiaries' response to any violation, criticism or
exception with respect to any report or statement relating to any examinations
of PBEKHG and the KHG Subsidiaries which would have a materially adverse effect on
PBE.KHG and any of the KHG Subsidiaries on a consolidated basis.
(b) PBE will not beNeither KHG nor any of the KHG Subsidiaries are required to divest
any assets currently held by it or discontinue any activity currently conducted
as a result of the Federal Deposit Insurance Corporation Improvement Act of
1991, any regulations promulgated thereunder, or otherwise which would
have a materially adverse effect on PBE.KHG and any of the KHG Subsidiaries on a
consolidated basis.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF FFC
-------------------------------------
FFC represents and warrants to PBE,KHG, as of the date of this Agreement and as
of the date of the Closing, as follows:
Section 4.1 Authority. The execution and delivery of this Agreement and the
----------- ---------
consummation of the transactions contemplated herein have been authorized by the
Board of Directors of FFC, and no other corporate action on the part of FFC is
necessary to authorize this Agreement or the consummation by FFC of the
transactions contemplated herein. This Agreement has been duly executed and
delivered by FFC and, assuming due authorization, execution and delivery by PBE,KHG,
constitutes a valid and binding obligation of FFC. The execution, delivery and
consummation of this Agreement will not constitute a violation or breach of or
default under (i) the Articles of Incorporation 13
or Bylaws of FFC (ii)or any statute,
rule, regulation, order, decree, or directive, of any governmental authority or court applicable to FFC, subject to the receipt
of all required government approvals, or (iii) any agreement, contract,
memorandum of understanding, indenture or other
instrument to which FFC is a party or by which FFC or any of its properties are
bound.
Section 4.2 Organization and Standing. FFC is a business corporation that
----------- -------------------------
is
------------------------- duly organized, validly existing and in good standing under the laws of the
Commonwealth of Pennsylvania. FFC is a registered bank holding company under
the Bank Holding CompanyBHC Act of 1956, as amended (the "BHC Act"), and has full power and lawful authority to own and hold its
properties and to carry on its present business.
Section 4.3 Capitalization. The authorized capital of FFC consists
----------- --------------
exclusively of 100,000,000200,000,000 shares of FFC Common Stock and 10,000,000 shares of
preferred stock without par value (the "FFC Preferred Stock"). AsThere was
39,627,648 shares of March 13,
1997, there wereFFC Common Stock validly issued, outstanding, fully paid
and non-assessable 35,973,617 shares of FFC Common Stock as of the date of this Agreement, and no shares wereare held as treasury shares. No shares of FFC
Preferred Stock have been issued as of the date of this Agreement, and FFC has
no present intention to issue any shares of FFC Preferred Stock. As of March 13, 1997,the date
of this Agreement, there wereare no outstanding obligations, options or rights of
any kind entitling other persons to acquire shares of FFC Common Stock or shares
of FFC Preferred Stock and there wereare no outstanding securities or other
instruments of any kind convertible into shares of FFC Common Stock or into
shares of FFC Preferred Stock, except as follows: (i) 748,806888,506 shares of FFC
Common Stock were issuable upon the exercise of outstanding stock options
granted under the FFC Incentive Stock Option Plan and the FFC Employee Stock
Purchase Plan and (ii) there arewere outstanding 35,973,61739,627,648 Rights representing the
right under certain circumstances to purchase shares of FFC Common Stock
pursuant to the terms of a Shareholder Rights Agreement, dated June 20, 1989,
entered into between FFC and Fulton Bank and (iii) shares of FFC Common Stock
reserved from time to time for issuance pursuant to FFC's Employee Stock
Purchase and Dividend Reinvestment Plans.
Section 4.4 Articles of Incorporation and Bylaws. The copies of the
----------- ------------------------------------
Articles
------------------------------------ of Incorporation, as amended, and of the Bylaws, as amended, of FFC
that have been delivered to PBEKHG are true, correct and complete.
Section 4.5 Subsidiaries. Schedule 4.5 contains a list of all subsidiaries
----------- ------------ ------------
("Subsidiaries") which FFC owns, directly or indirectly. Except as otherwise
disclosed on Schedule 4.5: (i) FFC owns, directly or indirectly, all of the
------------
outstanding shares of capital stock of each Subsidiary, and (ii) as of the date
of this Agreement: (A) there are no outstanding obligations, options or rights
of any kind entitling persons (other than FFC or any Subsidiary) to acquire
shares of capital stock of any Subsidiary, and (B) there are no outstanding
securities or other instruments of any kind held by persons (other than 14
FFC or
any Subsidiary) that are convertible into shares of capital stock of any
Subsidiary. Each Subsidiary is duly organized, validly existing and in good
standing under the laws of the jurisdiction pursuant to which it is
incorporated. Each Subsidiary has full power and lawful authority to own and
hold its properties and to carry on its business as presently conducted. Each
Subsidiary
which is a banking institution is an insured bank under the provisions of the
FDI Act.
Section 4.6 Financial Statements. FFC has delivered to PBEKHG the following
----------- --------------------
financial statements: Consolidated Balance Sheets, Consolidated Statements of
Income, Consolidated Statements of Stockholders'Shareholders' Equity, and Consolidated
Statements of Cash Flows for the years ended December 31, 1996, 1995 and 1994,
certified by Arthur Andersen LLP and set forth in the Annual Report to the
stockholdersshareholders of FFC for the year ended December 31, 1996 and Consolidated
Balance Sheets as of June 30, 1997, Consolidated Statements of Income for the
three-month and six-month periods ended June 30, 1997, and Consolidated
Statements of Cash Flows for the six months ended June 30, 1997 and 1996, as
filed with the SEC in a Quarterly Report on Form 10-Q (the Consolidated Balance
Sheet as of December 31, 1996June 30, 1997 being hereinafter referred to as the "FFC Balance
Sheet"). Each of the foregoing financial statements fairly presents the
consolidated financial position, assets, liabilities and results of operations
of FFC at itstheir respective datedates and for the respective periods then ended and
has been prepared in accordance with generally accepted accounting principles
consistently applied, except as otherwise noted in a footnote thereto.
Section 4.7 Absence of Undisclosed Liabilities. Except as disclosed in
----------- ----------------------------------
Schedule 4.7 or as reflected, noted or adequately reserved against in the FFC
- ------------
Balance Sheet, and disclosed in the Notes thereto, at December 31, 1996June 30, 1997 FFC had no material liabilities (whether
accrued, absolute, contingent or otherwise) which are required to be reflected,
noted or reserved against therein under generally accepted accounting principles
or which are in any case or in the aggregate material. Except as described in
Schedule 4.7, since December 31,
------------
1996June 30, 1997 FFC has not incurred any such liability other
- ------------
than liabilities of the same nature as those set forth in the FFC Balance Sheet,
all of which have been reasonably incurred in the ordinary course of business.
Section 4.8 Absence of Changes. Since December 31, 1996, other than theJune 30, 1997 there has not been any
----------- ------------------
acquisition of The Woodstown National Bank & Trust Company effected on February
28, 1997, FFC has conducted its businessmaterial and adverse change in the Ordinary Course of Business and
has not undergone any changes in its condition (financial or otherwise), assets,
liabilities, business, operations or operations, other than changes in the Ordinary Coursefuture prospects of Business, which have not been, in the aggregate, materially adverse as to FFC.
Section 4.9 Litigation and Governmental Directives. Except as disclosed in
----------- --------------------------------------
Schedule 4.9: (i) there is no litigation, investigation or proceeding pending,
- ------------
or to the knowledge of FFC threatened, that involves FFC or its properties and
that, if determined adversely to FFC, would materially and adversely affect the
condition (financial or otherwise), assets, liabilities, business, operations or
future prospects of FFC; (ii) there are no outstanding orders, writs,
injunctions, judgments, decrees, regulations, directives, consent agreements or
memoranda of understanding issued by any federal, state or 15
local court or
governmental authority or of any arbitration tribunal against FFC which
materially and adversely affect the condition (financial or otherwise), assets,
liabilities, business, operations or future prospects of FFC or restrict in any
manner the right of FFC to carry on its business as presently conducted; and
(iii) the executive officers of FFC areis not aware of any fact or condition presently existing that might
give rise to any litigation, investigation or proceeding which, if determined
adversely to FFC, would materially and adversely affect the condition (financial
or otherwise), assets, liabilities, business, operations or future prospects of
FFC or restrict in any manner the right of FFC to carry on its business as
presently conducted.
Section 4.10 Compliance with Laws; Governmental Authorizations. Except as
------------ -------------------------------------------------
disclosed in Schedule 4.10 or where noncompliance would not have a material and
-------------
adverse effect upon the condition (financial or otherwise), assets, liabilities,
business, operations or future prospects of FFC: (i) FFC and each of its
Subsidiaries are in compliance with all statutes, laws, ordinances, rules,
regulations, judgments, orders, decrees, directives, consent agreements,
memoranda of understanding, permits, concessions, grants, franchises, licenses,
and other governmental authorizations or approvals applicable to their
respective operations and properties; and (ii) all permits, concessions, grants,
franchises, licenses and other governmental authorizations and approvals
necessary for the conduct of the respective businesses of FFC and each of its
Subsidiaries as presently conducted have been duly obtained and are in full
force and effect, and there are not proceedings pending or to the knowledge of
FFC, threatened which may
result in the
revocation, cancellation, suspension or materially adverse modification of any
thereof.
Section 4.11 Complete and Accurate Disclosure. Neither this Agreement
------------ --------------------------------
(insofar as it relates to FFC, FFC Common Stock, and the involvement of FFC in
the transactions contemplated hereby) nor any financial statement, schedule
(including, without limitation, its Schedules to this Agreement), certificate or
other statement or document delivered by FFC to PBEKHG in connection herewith
contains any statement which, at the time and under the circumstances under
which it is made, is false or misleading with respect to any material fact or
omits to state any material fact necessary to make the statements contained
herein or therein not false or misleading. In particular, without limiting the
generality of the foregoing sentence, the information provided and the
representations made by FFC to PBEKHG in connection with the Registration Statement
(as defined in Section 6.1(b)), both at the time such information and
representations are provided and made and at the time of the Closing, will be
true and accurate in all material respects and will not contain any false or
misleading statement with respect to any material fact or omit to state any
material fact required to be stated therein or necessary in order (i) to make
the statements made not false or misleading, or (ii) to correct any statement
contained in an earlier communication with respect to such information or
representations which has become false or misleading.
16
Section 4.12 Labor Relations. Neither FFC nor any of its Subsidiaries is a
------------ ---------------
party to or bound by any collective bargaining agreement. FFC and each of its
Subsidiaries enjoy good working relationships with their employees, and there
are no labor disputes pending, or to the knowledge of FFC or any Subsidiary
threatened, that might materially and adversely affect the condition (financial
or otherwise), assets, liabilities, business or operations of FFC.
Section 4.13 Employee Benefits Plans. FFC's contributory profit-sharing
------------ -----------------------
plan, defined benefits pension plan and 401(k) plan (hereinafter collectively
referred to as the "FFC Pension Plans") are exempt from tax under Sections 401
and 501 of the Code, have been maintained and operated in compliance with all
applicable provisions of the Code and ERISA, are not subject to any accumulated
funding deficiency within the meaning of ERISA and the regulations promulgated
thereunder, and do not have any outstanding liability to the PBGC. No
"prohibited transaction" or "reportable event" (as such terms are defined in the
Code or ERISA) has occurred with respect to the FFC Pension Plans or any other
FFC employee benefit plan to which FFC or any of its subsidiaries are a party or by
which FFC or any of its subsidiaries are bound (each hereinafter called an "FFC
Benefit Plan"). There have been no breaches of fiduciary duty by any fiduciary
under or with respect to the FFC Pension Plans or any other FFC Benefit Plan. FFC has notPlan,
and no claim is pending or threatened with respect to any FCC Benefit Plan other
than claims for benefits made in the Ordinary Course of Business. Neither FCC
or any of its subsidiaries have incurred any liability for any tax imposed by
Section 4975 of the Code or for any penalty imposed by the Code or by ERISA with
respect to the FFC Pension Plans or any other FFC Benefit Plan. There has not
been any audit of any FCC Benefit Plan by the Department of Labor, the IRS or
the PBGC since 1990.
Section 4.14 Environmental Matters. Except as disclosed in Schedule 4.14 or
------------ --------------------- -------------
as reflected, noted or adequately reserved against in the FFC Balance Sheet, FFC
has no knowledge of any material liability relating to any environmental
contaminant, pollutant, toxic or hazardous waste or other similar substance that
has been used, generated, stored, processed, disposed of or discharged onto any
of the real estate now or previously owned or acquired (including without
limitation real estate acquired by means of foreclosure or other exercise of any
creditor's right) or leased by FFC and which is required to be reflected, noted
or adequately reserved against in FFC's consolidated financial statements under
generally accepted accounting principles.
Section 4.15 SEC Filings. No registration statement, offering circular,
------------ -----------
proxy statement, schedule or report filed and not withdrawn since December 31,
1991, by FFC with the SEC
under the 1933 Act or the 1934 Act, on the date of effectiveness (in the case of
any registration statement or offering circular) or on the date of filing (in
the
case of any report or schedule) or on the date of mailing (in the case of any
proxy statement), contained any untrue statement of a material fact or omitted
to state any material fact required to be stated therein or necessary in order
to make the statements therein, in light of the circumstances under which they
were made, not misleading.
Section 4.16 Proxy Statement/Prospectus. At the time the Proxy
Statement/------------ --------------------------
Statement/Prospectus (as defined in Section 6.1(b)) is mailed to the
stockholders of PBEKHG and at all
17
times subsequent to such mailing, up to and
including the Effective Date, the Proxy Statement/Prospectus (including any pre-
and post-effective amendments and supplements thereto), with respect to all
information relating to FFC, the FFC Common Stock, and actions taken and statements
made by FFC in connection with the transactions contemplated herein (other than
information provided by PBEKHG or LVNB to FFC), will: (i) comply in all material
respects with applicable provisions of the 1933 Act and 1934 Act and the
applicablepertinent rules and regulations of the SEC thereunder; and (ii) not contain any statement
which, at the time and in light of the circumstances under which it is made, is
false or misleading with respect to any material fact, or omits to state any
material fact that is required to be stated therein or necessary in order (A) to
make the statements therein not false or misleading, or (B) to correct any
statement in an earlier communication with respect to the Proxy
Statement/Prospectus which has become false or misleading.
Section 4.17 Accounting Treatment. To the best of FFC's knowledge after
------------ --------------------
reasonable investigation and consultation with its advisors, and subject to any
factors beyond FFC's control, the Merger will qualify for pooling-of-intereststreatment as a
"pooling-of-interests" for accounting treatment.purposes.
Section 4.18 Regulatory Approvals. FFC is not aware of any reason why any
------------ --------------------
of
-------------------- the required regulatory approvals to be obtained in connection with the
Merger should not be granted by such regulatory authorities or why such
regulatory approvals should be conditioned on any requirement which would be a
significant impediment to FFC's ability to carry on its business.
Section 4.19 No Finder. FFC has not paid or become obligated to pay any fee
------------ ---------
or commission of any kind whatsoever to any broker, finder, advisor or other
intermediary for, on account of, or in connection with the transactions
contemplated in this Agreement.
Section 4.20 Taxes. FFC has filed, or has received extension for filing,
------------ -----
all federal, state, county, municipal and foreign tax returns, reports and
declarations which are required to be filed by it as of June 30, 1997. To the
best of FFC's knowledge, (i) FFC has paid all taxes, penalties and interest
which have become due pursuant thereto or which became due pursuant to federal,
state, county, municipal or foreign tax laws applicable to the periods covered
by the foregoing tax returns, and (ii) FFC has not received any notice of
deficiency or assessment of additional taxes. To the best of FFC's knowledge,
the accruals and reserves reflected in the FFC Balance Sheet are adequate to
cover all material taxes (including interest and penalties, if any, thereon)
that are payable or accrued as a result of FFC's consolidated operations for all
periods prior to the date of such Balance Sheet.
Section 4.21 Title to and Condition of Assets. FFC has good and marketable
------------ --------------------------------
title to all consolidated real and personal properties and assets reflected in
the FFC Balance Sheet or acquired subsequent to June 30, 1997 (other than
property and assets disposed of in the Ordinary Course of Business), free and
clear of all liens or encumbrances of any kind whatsoever; provided, however,
-------- -------
that the representations and warranties contained in this sentence to not cover
liens or encumbrances that: (i) are reflected in the FFC Balance Sheet; (ii)
represent liens of current taxes not yet due or which, if due, may be paid
without penalty, or which are being contested in good faith by appropriate
proceedings; and (iii) represent such imperfections of title, liens,
encumbrances, zoning requirements and easements, if any, as are not substantial
in character, amount or extent and do not materially detract from the value, or
interfere with the present or proposed use, of the properties and assets subject
thereto.
Section 4.22 Contracts. To the best of FFC's knowledge, all FFC Material
------------ ---------
Contracts are enforceable against FFC, and FFC has in all material respects
performed all obligations required to be performed by it to date and is not in
default in any material respect. "FFC Material Contracts" shall be defined as
each written or oral contract entered into by FFC (other than contracts with
customers reasonably entered into by FFC in the Ordinary Course of Business)
which involves aggregate payments or receipts in excess of $100,000 per year,
including without limitation every employment contract, employee benefit plan,
agreement, lease, license, indenture, mortgage and other commitment to which
either FFC or FFC Subsidiaries are a party or by which FFC or any of the FFC
Subsidiaries or any of their properties may be bound.
Section 4.23 Insurance. To the best of FFC's knowledge, all policies of
------------ ---------
insurance covering operations of FFC which are, in the aggregate, material
(except for title insurance policies), including without limitation all
financial institutions bonds, held by or on behalf of FFC are in full force and
effect, and no notices of cancellation have been received in connection
therewith.
ARTICLE V
COVENANTS OF PBEKHG
----------------
From the date of this Agreement until the Effective Date, PBEKHG covenants and
agrees to do, and shall cause LVNB to do, the following:
Section 5.1 Conduct of Business. Except as otherwise consented to by FFC in
----------- -------------------
writing which consent will not be unreasonably withheld PBEor delayed, KHG and the
KHG Subsidiaries shall: (i) use all reasonable efforts to carry on its businesstheir
respective businesses in, and only in, the Ordinary Course of Business; (ii) to
the extent consistent with prudent business judgment, use all reasonable efforts
to preserve itstheir present business organization,organizations, to retain the services of
itstheir present officers and employees, and to maintain itstheir relationships with
customers, suppliers and others having business dealings with PBE;KHG or any of the
KHG Subsidiaries; (iii) maintain all of itstheir structures, equipment and other
real property and tangible personal property in good repair, order and
condition, except for ordinary wear and tear and damage by unavoidable casualty;
(iv) to the extent consistent with prudent business judgment, use all reasonable
efforts to preserve or collect all material claims and causes of action
belonging to PBE;KHG or any of the KHG Subsidiaries; (v) to the extent consistent
with prudent business judgment, keep in full force and effect all insurance
policies now carried by 18
PBE;KHG or any of the KHG Subsidiaries; (vi) to the extent
consistent with prudent business judgment, perform in all material respects each
of itstheir obligations under all Material Contracts (as defined in Section 3.12
herein) to which PBE isKHG or any of the KHG Subsidiaries are a party or by which PBEany
of them may be bound or which relate to or affect itstheir properties, assets and
business; (vii) maintain itstheir books of account and other records in the
Ordinary Course of Business; (viii) comply in all material respects with all
statutes, laws, ordinances, rules and regulations, decrees, orders, consent
agreements, memoranda of understanding and other federal, state, and local
governmental directives applicable to PBEKHG or any of the KHG Subsidiaries and to
the conduct of its business;their businesses; (ix) not amend PBE's ArticlesKHG's or any of Incorporationthe KHG
Subsidiaries' Charter or Bylaws; (x) not enter into or assume any Material
Contract, incur any material liability or obligation, or make any material
commitment, except in the Ordinary Course of Business; (xi) not make any
material acquisition or disposition of any properties or assets or subject any
of itstheir properties or assets to any material lien, claim, charge, or
encumbrance of any kind whatsoever; (xii) not knowingly take or permit to be
taken any action which would causeconstitute a breach of any representation, or warranty
to be
materially inaccurate as of the date of such action or constitute a material
breach of any covenant set forth in this Agreement; (xiii) except as permitted in Section
5.11 herein, not declare, set aside or pay any dividend or make any other
distribution in respect of PBEKHG Common Stock; (xiv) not authorize, purchase,
redeem, issue (except upon the exercise of outstanding options under the KHG
Stock Option Plans) or sell (or grant options or rights to purchase or sell) any
shares of PBEKHG Common Stock or any other equity or debt securities of PBE
other thanKHG except
to the Warrant;extent necessary to follow participants' investment directions under the
KHG Pension Plans; (xv) not increase the rate of compensation of, pay a bonus or
severance compensation to, establish or amend any PBEKHG Benefit Plan, except as
required by law (as defined in Section 3.18 herein) for, or enter into or amend
any Employment Obligation (as defined in Section 3.17 herein) with, any officer,
director, employee or consultant of PBE,KHG or any of the KHG Subsidiaries, except
that PBEKHG and the KHG Subsidiaries may grant reasonable salary increases and
bonuses to itstheir officers and employees in the Ordinary Course of Business to
the extent consistent with itstheir past practice;practice and may enter into the Employment
Agreements permitted by Section 5.12 herein; (xvi) not enter into any related
party transaction of the kind contemplated in Section 3.19 herein except in the
Ordinary Course of Business consistent with past practice (as disclosed on
Schedule 3.19); (xvii) in determining the additions to loan loss reserves and
- -------------
the loan write-offs, writedowns and other adjustments that reasonably should be
made by PBELVNB during the fiscal year ending December 31, 1997, PBEKHG and the KHG
Subsidiaries shall consult with FFC and shall act in accordance with generally
accepted accounting principles and PBE'sKHG's and the KHG Subsidiaries' customary
business practices; (xviii) file with appropriate federal, state, local and
other governmental agencies all tax returns and other material reports required
to be filed, pay in full or make adequate provisions for the payment of all
taxes, interest, penalties, assessments or deficiencies shown to be due on tax
returns or by any taxing authorities and report all information on such returns
truthfully, accurately and completely; (xix) not renew any existing contract for
services, goods, equipment or the like or enter into, amend in any material
respect or terminate any contract or agreement (including without limitation any
settlement agreement with respect to litigation) that is or may reasonably be
expected to have a material adverse effect on PBEKHG and the KHG Subsidiaries
except in the Ordinary Course of Business consistent with past practice
(provided that FFC shall not unreasonably withhold or delay its consent to such
transactions); (xx) not make any capital expenditures other than in the Ordinary
Course of Business or as necessary to maintain
19
existing assets in good repair;
(xxi) not make application for the opening or closing of any, or open or close
any, branches or automated banking facility,except with respect to the establishment of anfor one automated banking
facility at Union Hospital;to be installed in Myerstown, Pennsylvania; (xxii) not make any equity
investment or commitment to make such an investment in real estate or in any
real estate development project, other than in connection with foreclosures,
settlements in lieu of foreclosure or troubled loan or debt restructuring in the
Ordinary Course of Business consistent with customary banking practice; (xxiii) not make purchases
of securities for its investment portfolio without prior consultation with FFC;
(xxiv) not extend or
amend PBE's lease relating to its "Crossroads Shopping
Center" branch office (the "Crossroads Branch Lease") without FFC's prior
written consent; or (xxv)(xxiii) not take any other action similar to the foregoing which would have the
effect of frustrating the purposes of this Agreement or the Merger or cause the
Merger not to qualify for pooling-of-interests accounting treatment (if
applicable) or as a tax-free reorganization under Section 368 of the Code.
Section 5.2 Best Efforts. PBEKHG and the KHG Subsidiaries shall cooperate with
----------- ------------
FFC and shall use its
------------their best efforts to do or cause to be done all things
necessary or appropriate on its part in order to fulfill the conditions
precedent set forth in Article VII of this Agreement and to consummate the
transactions contemplated by this Agreement.Agreement, including the Merger and
Restructuring. In particular, without limiting the generality of the foregoing
sentence, PBEKHG and the KHG Subsidiaries shall: (i) cooperate with FFC in the
preparation of all required applications for regulatory approval of the
transactions contemplated by this Agreement and in the preparation of the
Registration Statement (as defined in Section 6.1(b)); (ii) call a meeting of
its stockholders and take, in good faith, all actions which are necessary or
appropriate on its part in order to secure the approval of this Agreement by its
stockholders at that meeting; and (iii) cooperate with FFC in making PBE'sKHG's and
the KHG Subsidiaries' employees reasonably available for training by FFC at PBE'sthe
KHG Subsidiaries' facilities prior to the Effective Date, to the extent that
such training is deemed reasonably necessary by FFC to ensure that PBE'sthe KHG
Subsidiaries' facilities will be properly operated in accordance with FFC's
policies after the Merger.
Section 5.3 Access to Properties and Records. PBEKHG and the KHG Subsidiaries
----------- --------------------------------
shall give to FFC and its
-------------------------------- authorized employees and representatives (including
without limitation its counsel, accountants, economic and environmental
consultants and other designated representatives) such access during normal
business hours to all properties, books, contracts, documents and records of PBEKHG
and the KHG Subsidiaries as FFC may reasonably request, (other than information with respect to the deliberations of PBE
concerning this Agreement, the Merger and the transactions contemplated hereby), subject to the
obligation of FFC and its authorized employees and representatives to maintain
the confidentiality of all nonpublic information concerning PBEKHG and the KHG
Subsidiaries obtained by reason of such access and subject to applicable law.
Section 5.4 Subsequent Financial Statements. Between the date of signing of
----------- -------------------------------
this Agreement and the Effective Date, PBEKHG and the KHG Subsidiaries shall
promptly prepare and deliver to FFC
20
as soon as practicable all internal monthly
and quarterly financial statements, all quarterly and annual reports to
stockholders and all reports to regulatory authorities prepared by or for PBEeither
KHG or any of the KHG Subsidiaries (which additional financial statements and
reports are hereinafter collectively referred to as the "Additional PBEKHG
Financial Statements"). The representations and warranties set forth in
Sections 3.6, 3.7 and 3.8 shall apply to the Additional PBEKHG Financial
Statements.
Section 5.5 Update Schedules. PBEKHG or any of the KHG Subsidiaries shall
----------- ----------------
promptly disclose to FFC in writing ----------------
any material change, addition, deletion or
other modification to the information set forth in its Schedules hereto; provided, however, that any such updates to the
-------- -------
Schedules shall only be required on a monthly basis except with respect to
matters which represent material changes to the Schedules.hereto.
Section 5.6 Notice. PBEKHG or any of the KHG Subsidiaries shall promptly
----------- ------
notify FFC in writing of any material
------ actions, claims, investigations, proceedings or
other developments which, if pending or in existence on the date of this
Agreement, would have been required to be disclosed to FFC in order to ensure
the accuracy of the representations and warranties set forth in this Agreement
or which otherwise could materially and adversely affect the condition
(financial or otherwise), assets, liabilities, business operations or future
prospects of PBEKHG or any of the KHG Subsidiaries or restrict in any manner itstheir
ability to carry on its businesstheir respective businesses as presently conducted.
Section 5.7 Other Proposals. PBEKHG or any of the KHG Subsidiaries shall not,
----------- ---------------
nor shall itthey permit any of its
---------------their officers, directors, employees, agents,
consultants or other representatives to: (i) solicit, initiate or encourage any
proposal for a merger or other acquisition of PBE,KHG or any of the KHG
Subsidiaries, or any material portion of itstheir properties or assets, with or by
any person other than FFC, or (ii) cooperate with, or furnish any nonpublic
information concerning PBEKHG or any of the KHG Subsidiaries to, any person in
connection with such a proposal (an "Acquisition Proposal"); provided, however,
that the obligations of PBEKHG or any of the KHG Subsidiaries and itstheir directors
and other representatives under this Section 5.7 are subject to the limitation
that the Board of Directors shall be free to take such action as the Board of
Directors determines, in good faith, and after consultation with outside
counsel, thatit is not legally inconsistent with its fiduciary duty. PBEKHG will
notify FFC immediately if any discussions or negotiations are sought to be
initiated, any inquiry or proposal is made, or any such information is
requested, with respect to an Acquisition Proposal or potential Acquisition
Proposal or if any Acquisition Proposal is received or indicated to be
forthcoming.
Section 5.8 Affiliate Letters. PBEKHG shall deliver or cause to be delivered
----------- -----------------
to
----------------- FFC, at or before the Closing, a letter from each of the executive officers and
directors of PBEKHG (and shall use its best efforts to obtain and deliver such a
letter from each stockholder of PBE)KHG) who may be deemed to be an "affiliate" (as
that term is defined for purposes of Rules 145 and 405 promulgated by the SEC
under the 1933 Act) of PBE,KHG, in form and substance satisfactory to FFC, under the
terms of which each such officer, director or stockholder acknowledges and
agrees to abide by all limitations imposed by the 1933
21
Act and by all rules,
regulations and releases promulgated thereunder by the SEC with respect to the
sale or other disposition of the shares of FFC Common Stock to be received by
such person pursuant to this Agreement.
Section 5.9 No Purchases or Sales of FFC Common Stock During Price
----------- ------------------------------------------------------
Determination Period. PBEKHG and the KHG Subsidiaries shall not, and shall use
its- --------------------
their best efforts to ensure - --------------------
that itstheir executive officers and directors do not,
and shall use itstheir best efforts to ensure that each stockholder of PBEKHG who may
be deemed an "affiliate" (as defined in SEC Rules 145 and 405) of PBEKHG does not,
purchase or sell on NASDAQ, or submit a bid to purchase or an offer to sell on
NASDAQ, directly or indirectly, any shares of FFC Common Stock or any options,
rights or other securities convertible into shares of FFC Common Stock during
the Price Determination Period.
Section 5.10 Accounting Treatment. PBEKHG acknowledges that FFC presently
------------ --------------------
intends to treat the business combination contemplated by this Agreement as a
"pooling-of-interests" for financial reporting purposes. PBEKHG shall not take
(and shall use sitsits best efforts not to permit any of the directors, officers,
employees, stockholders, agents, consultants or other representatives of PBEKHG or
any of the KHG Subsidiaries to take) any action that would preclude FFC from
treating such business combination as a "pooling-of-interests" for financial
reporting purposes.purposes; provided however, that KHG may purchase shares of KHG Common
Stock in the ordinary course of business during the Price Determination Period
pursuant to KHG's dividend reinvestment plan.
Section 5.11 Dividends. PBEKHG shall not declare or pay a cash dividend on the
------------ ---------
PBEKHG Common Stock; provided, however, that PBEKHG may declare and pay a dividend of
up to $.90$.25 per share of PBEKHG Common Stock on each of (i) JuneNovember 10, 1997, (ii) February
10, 1998, provided that the Effective Date does not occur (or is not expected to
occur) on or before the record date for the dividend on the FFC Common Stock
scheduled to be paid on April 15, 1997; (ii)
September1998; (iii) May 10, 1998, provided that the
record date for the dividend does not occur (or is not expected to occur) on or
before the record date for the dividend on the FFC Common Stock scheduled to be
paid on July 15, 1997,1998; and (iv) August 10, 1998, provided that the Effective
Date does not occur (or is not expected to occur) on or before the record date
for the dividend on the FFC Common Stock scheduled to be paid on October 15,
1997;1998 (it being the intent of FFC and KHG that KHG be permitted to pay a dividend
on the KHG Common Stock on the dates indicated in subsections (ii), (iii) December 15,
1997, provided thatand
(iv) above only if the Effective Date doesshareholders of KHG, upon becoming shareholders of FFC,
would not occur (or is not expectedbe entitled to occur) on or before the record date for thereceive a dividend on the FFC Common Stock scheduledon the
payment dates indicated in such subsections.
Section 5.12 Agreements with Senior Employees. On the date of this
------------ --------------------------------
Agreement, KHG and the KHG Subsidiaries shall cause the existing employment
agreements with Albert B. Murry and Kurt A. Phillips (the "KHG Senior
Employees") to be paid on January 15, 1998,terminated and enter into Employment Agreements in the forms
attached hereto as Exhibit B (the "Employment Agreements") with the KHG Senior
---------
Employees; provided, further ifhowever, that neither the customary
payment date fortermination of such existing
employment agreements or the next regular cash dividend payable afterEmployment Agreements shall become effective until
the Effective Date
on the FFC Common Stock which is eligible to be received by the former holders
of PBE is more than ninety (90) days after the payment date of the last regular
cash dividend paid or to be paid on the PBE Common Stock prior to the Effective
Date (such number of days over ninety (90) days being the "Dividend Lag
Period"), then PBE may declare and set aside immediately prior to the Effective
Date, and may pay at a date it may select in its discretion, a special pro-rata
dividend (the "Special Pro-Rata Dividend") pursuant hereto (any such Special
Pro-Rata Dividend shall be payable in cash, and shall not exceed an amount per
share which is the product of (i) the amount of the dividend permitted to be
paid by PBE pursuant to this paragraph, times (ii) a fraction, the numerator of
which the Dividend Lag Period and the denominator of which is ninety (90) days).
Thus, for example, if the Merger is to consummated on August 1, 1997 and the
dividend payment dates of PBE and FFC are October 15, 1997 and November 15,
1997, respectively, the Dividend Lag Period would be 31 days and thus
22
PBE would be entitled to declare and pay, immediately prior to the Effective
Date, a Special Pro-Rata Dividend of $.31 per share (its regular quarterly
dividend ($.90) multiplied by .344 (31 days/90 days)).
Section 5.12 Employment Obligations. Prior to the Effective Date, without
----------------------
theDate. Without prior written consent of FFC, PBEKHG and the KHG
Subsidiaries shall not modify the terms of the Employment Agreements or any
other Employment Obligations (as defined in Section 3.17) and PBErelated to the KHG
Senior Employees. Neither KHG or the KHG Subsidiaries shall not create any new
Employment Obligation.Obligation related to the KHG Senior Employees.
ARTICLE VI
COVENANTS OF FFC
----------------
From the date of this Agreement until the Effective Date, or until such
later date as may be expressly stipulated in any Section of this Article VI, FFC
covenants and agrees to do the following:
Section 6.1 Best Efforts. FFC shall cooperate with PBEKHG and the KHG
----------- ------------
Subsidiaries and shall use its
------------ best efforts to do or cause to be done all things
necessary or appropriate on its part in order to fulfill the conditions
precedent set forth in Article VII of this Agreement and to consummate the
transactions contemplated by this Agreement.Agreement, including the Merger and
Restructuring. In particular, without limiting the generality of the foregoing
sentence, FFC agrees to do the following:
(a) Applications for Regulatory Approval: FFC shall promptly prepare
------------------------------------
prepare
and file, within forty-five (45) days of the date hereof (subject to the
timely cooperation by PBE and its counsel in connection with such applications), with the cooperation and assistance of (and after review by) PBEKHG and
its counsel and accountants, all required applications for regulatory approval
of the transactions contemplated by this Agreement, including without limitation
an
applicationapplications for approval under the BHC Act, the FDIPennsylvania Banking Code of
1965, as amended, the National Bank Act, as amended, and the Maryland
Financial Institutions Code,Federal Deposit
Insurance Act, as required;amended.
(b) Registration Statement: FFC shall promptly prepare, with the
----------------------
cooperation and assistance of (and after review by) PBEKHG and its counsel and
accountants, and file with the SEC a registration statement (the "Registration
Statement") for the purpose of registering the shares of FFC Common Stock to be
issued to stockholders of KHG under the provisions of this Agreement and a proxy
statement and prospectus which is prepared as a part thereof (the "Proxy
Statement/Prospectus") for the purpose of registering the shares of FFCFFC's Common
Stock to be issued to the stockholders of PBE,KHG, and the soliciting of the proxies
of PBE'sKHG's stockholders in favor of the Merger, under the provisions of this
Agreement. FFC may rely upon all information provided to it by PBEKHG and LVNB in
this connection and FFC shall not be liable for any untrue statement of a
material fact or any omission to state a material fact in the Registration
Statement, or in the Proxy Statement/Prospectus, if such statement is made by
FFC in reliance upon any information provided to FFC by PBEKHG or the KHG
Subsidiaries or by any of 23
itstheir officers, agents or representatives. PBE shall not be liable for any untrue
statement of material fact or any omission to state a material fact in the
Registration Statement or the Proxy Statement/Prospectus if such statement is
made by PBE in reliance upon any information provided to PBE by FFC or by any of
its officers, agents or representatives;
(c) State Securities Laws: FFC, with the cooperation and ---------------------
assistance of
PBE---------------------
KHG and its counsel and accountants, shall promptly take all such actions as may
be necessary or appropriate in order to comply with all applicable securities
laws of any state having jurisdiction over the transactions contemplated by this
Agreement;Agreement.
(d) Stock Listing: FFC, with the cooperation and assistance of KHG and
-------------
its counsel and accountants, shall promptly take all such actions as
------------- may be
necessary or appropriate in order to list the shares of FFC Common Stock to be
issued in the Merger on NASDAQ;NASDAQ.
(e) PBE Interim Bank.Adopt Amendments: FFC shall organize PBE Interim Bank, causenot adopt any amendments to its
----------------
PBE Interim Bankcharter or bylaws or other organizational documents that would alter the terms
of FFC's Common Stock or could reasonably be expected to behave a partymaterial adverse
effect on the ability of FFC to perform its obligations under this Agreement and approve this Agreement as
Interim's Shareholder; and
(f) Accounting Treatment. FFC shall take no action which would
--------------------
have the effect of causing the Merger not to qualify for pooling-of-interests
accounting treatment or as a tax-free reorganization under Section 368 of the
Code.Agreement.
Section 6.2 Access to Properties and Records. FFC shall give to PBEKHG and to
----------- --------------------------------
its authorized employees and representatives (including without limitation PBE'sKHG's
counsel, accountants, economic and environmental consultants and other
designated representatives) such access during normal business hours to all
properties, books, contracts, documents and records of FFC as PBEKHG may reasonably
request, (other than information with respect to the deliberations of FFC
concerning this Agreement, the Merger and the transactions contemplated hereby
or any matter referenced by subparagraph (i) of Section 12.2 herein), subject to the obligation of PBEKHG and its authorized employees and
representatives to maintain the confidentiality of all nonpublic information
concerning FFC obtained by reason of such access.
Section 6.3 Subsequent Financial Statements. Between the date of signing of
----------- -------------------------------
this Agreement and the Effective Date, FFC shall promptly prepare and deliver to
PBEKHG as soon as practicable each Quarterly Report to FFC's stockholdersshareholders and any
Annual Report to FFC's stockholdersshareholders normally prepared by FFC. The
representations and warranties set forth in Sections 4.5, 4.6, 4.7 and 4.74.8 herein
shall apply to the financial statements (hereinafter collectively referred to as
the "Additional FFC Financial Statements") set forth in the foregoing Quarterly
Reports and any Annual Report to FFC's stockholders.
24
shareholders.
Section 6.4 Update Schedules. FFC shall promptly disclose to PBEKHG in writing
----------- ----------------
any change, addition, deletion or other modification to the information set
forth in its Schedules to this Agreement; provided, however, that any such
-------- -------
updates to the Schedules shall only be required on a monthly basis except with
respect to matters which represent material changes to the Schedules.Agreement.
Section 6.5 Notice. FFC shall promptly notify PBEKHG in writing of any
----------- ------
actions,
------ claims, investigations or other developments which, if pending or in
existence on the date of this Agreement, would have been required to be
disclosed to PBEKHG in order to ensure the accuracy of the representations and
warranties set forth in this Agreement or which otherwise could materially and
adversely affect the condition (financial or otherwise), assets, liabilities,
business, operations or future prospects of FFC or restrict in any manner the
right of FFC to carry on its business as presently conducted.
Section 6.6 Employment Arrangements.
----------- -----------------------
(a) From and after the Effective Date (subject to the provisions of
subsection (c) below) and subject to the Employment Agreements contemplated by
Section 5.12 herein, FFC shall cause PBE:the KHG Subsidiaries and/or Lebanon Valley/
Farmers (as such term is defined in Section 6.8 below): (i) to honorsatisfy each of
the Employment Obligations (as defined in Section 3.17 herein), and (ii) to
honor PBE'ssatisfy the KHG Subsidiaries' obligations under the PBEKHG Benefit Plans.
(b) On and after the Effective Date for a periodand subject to the Employment
Agreements contemplated by Section 5.12 herein, (subject to the provisions of
at least three
(3) years,subsection (c) below), FFC shall cause PBEthe KHG Subsidiaries and/or Lebanon
Valley/ Farmers to (i)use their best efforts to retain each present full-time
employee of LVNB at such employee's current position (or, if offered to, and
accepted by, an employee, a position for which the employee is qualified with
FFC or an FFC subsidiary bank at a salary commensurate with the position), (ii)
pay compensation to each person who was employed by PBE as of the Effective Date and
who continues to be employed by PBEKHG on orand after the Effective Date, that is at
least equal to the aggregate compensation that such person was receiving from
PBEKHG or the KHG Subsidiaries prior to the Effective Date (unless there is a
material change in the duties and responsibilities of such employee), (ii) and (iii)
provide employee benefits including under the PBE Benefit
Plans, to each such person who is a full-timean employee, on and after
the Effective Date, that are substantially equivalent in the aggregate to the
employee benefits that such person was receiving as a full-timean employee from PBEKHG or the
KHG Subsidiaries prior to the Effective Date and (iii) providethat are no less favorable than
employee benefits afforded to eachsimilarly situated employees of FFC and its
Subsidiaries. For vesting and eligibility purposes for employee benefits,
former LVNB employees shall receive credit for years of service with LVNB. With
respect to any welfare benefit plans to which such person who is a part-time employee, onemployees may become
eligible, FFC and its Subsidiaries shall cause such plans to provide credit for
any co-payments or deductibles by such employees and waive all pre-existing
condition exclusions and waiting periods.
(c) Notwithstanding anything herein to the contrary (including, without
limitation, the provisions of subsections (a) and (b) above), (i) FFC may, after
the Effective Date, discontinue and terminate the KHG Stock Option Plans in
accordance with Section 2.3, (ii) in the event that areFFC causes the same as the employee benefits that are being received at the applicable
time by part-timeKHG
Subsidiaries and/or Lebanon Valley/Farmers to continue to employ officers or
employees of other bankingKHG and the KHG Subsidiaries owned by FFC.as of the Effective Date, the KHG
Subsidiaries and/or Lebanon Valley/Farmers shall employ such persons on the
Effective Date, as "at will" employees subject to the continued satisfactory
performance of their respective duties, and (iii) in the event the KHG
Subsidiaries and/or Lebanon Valley/Farmers do not employ, or terminate the
employment (other than as a result of unsatisfactory performance of their
respective duties) of any officers or employees of KHG or any of the KHG
Subsidiaries as of the Effective Date, FFC shall cause the KHG Subsidiaries
and/or Lebanon Valley/Farmers to pay severance benefits to such employee as
follows: (A) in the event employment is terminated on or prior to the date which
is one year after the Effective Date, one week's salary plus an additional one
week's salary for each year of service with KHG or the KHG Subsidiaries, with a
maximum severance benefit of 26 weeks' salary and (B) in the event employment is
terminated thereafter, in accordance with the then existing severance policy of
Lebanon Valley/Farmers.
Section 6.7 No Purchase or Sales of FFC Common Stock During Price
----------- -----------------------------------------------------
Determination Period. Neither FFC nor any Subsidiary of FFC, nor any executive
- --------------------
officer or director of FFC or any Subsidiary of FFC, nor any shareholder of FFC
who may be deemed to be an "affiliate" (as that term is defined for purposes of
Rules 145 and 405 promulgated by the SEC under the 1933 Act) of FFC, shall
purchase or sell on NASDAQ, or submit a bid to purchase or an offer to sell on
NASDAQ, directly or indirectly, any shares of FFC Common Stock or any options,
rights or other securities convertible into shares of FFC Common Stock during
the Price Determination Period; provided, however, that FFC may purchase shares
-------- -------
of FFC Common Stock in the 25
ordinary course of business during the Price
Determination Period pursuant to FFC's Benefit Plans or FFC's Dividend
Reinvestment Plan.
Section 6.8 ContinuationRestructuring, Directors, Etc..
----------- ------------------------------
(a) Simultaneously with the effectiveness of PBE's Structure, Namethe Merger FFC anticipates
effecting the Restructuring as follows: (i) LVNB and Directors.
---------------------------------------------------
(a)Farmers Trust Bank
("Farmers"), a wholly-owned FFC subsidiary, will merge; (ii) the surviving
bank in such merger ("Lebanon Valley/Farmers") would immediately transfer (A)
branch offices of LVNB located in Dauphin and Lancaster Counties and the assets
and deposit liabilities related to such branch offices to Fulton Bank ("FB"),
another wholly-owned FFC subsidiary, and (B) the Sinking Spring branch office of
LVNB and the assets and deposit liabilities related to such branch office to
Great Valley Savings Bank ("GVSB"), also a wholly-owned FFC subsidiary and (iii)
to the extent determined advisable by FFC, FFC may close existing branches of
LVNB, Farmers, FB, GVSB or other subsidiaries of FFC which may overlap
geographically with other branches of FFC's subsidiary banks. Lebanon
Valley/Farmers, as a wholly-owned FFC subsidiary, would operate all Lebanon
County branch offices now operated by LVNB and Farmers, and in addition, the
Womelsdorf and Pine Grove branch of LVNB, under a corporate name which would
reflect the identities of both Lebanon Valley and Farmers.
(b) For a period offrom the Effective Date through a date determined by
FFC (not to be before five (5) years after the Effective Date,Date), FFC shall
(subject to the right of FFC and the PBEKHG Continuing Directors to terminate such
obligations under this Section 6.8(a) under subsections (b)(c) and (c)(d) below)
(i) preserve the business structure of PBE as a Maryland bank; (ii) preserve the
present name of PBE; and (iii) continue in office the:
Offer appointment to all present directors of PBELVNB to the board of directors of
Lebanon Valley/Farmers who indicate their desire to serve (the "PBE"LVNB Continuing
Directors"), provided, --------
that (A) each non-employee PBELVNB Continuing Director shall
continue to--------
receive director's fees from PBE onLebanon Valley/Farmers in the same basis as prior to the Merger, i.e. a
quarterly stipendform of $1,250 and meeting feesan annual
retainer of $100 per Board of Directors
meeting and $50 per committee meeting (provided that FFC may direct PBE to
reduce the frequency of such meetings) and shall continue to receive such other
incidental benefits as he was receiving from PBE prior to the Effective Date
(such benefits being previously disclosed to FFC)$9,000 and (B) each PBELVNB Continuing Director shall be subject to
FFC's mandatory retirement rules for directors. (b)Unless dissolved by KHG prior
to the Effective Date, the Pine Grove, Womelsdorf, Eastern Lebanon County and
Agricultural advisory committees of LVNB would be retained by Lebanon
Valley/Farmers and members of such committee would receive the same compensation
which they are presently receiving. Albert B. Murry would be appointed chairman
of the board and chief executive officer of Lebanon Valley/Farmers.
(c) FFC shall have the right to terminate its obligations under
subsection (a)(b) of this Section 6.8 as a result of (i) regulatory considerations,
(ii) safe and sound banking practices, or (iii) the exercise of their fiduciary
duties by FFC's directors; (iv) the failure of PBE to achieve budget goals
established for FFC's banking subsidiaries in any fiscal year in which FFC
achieves such goals on a consolidated basis (provided that PBE shall be deemed
to have achieved its budget goals if its actual results are within ten percent
(10%) of its budget goals); or (v) FFC's acquisition of a financial institution
located in Maryland.
(c)directors.
(d) Notwithstanding anything herein to the contrary, the PBELVNB
Continuing Directors, in their exercise of their fiduciary duty as to the best
interests of PBELVNB and FFC, may, by a majority vote of such directors, modify or
waive any or all of the foregoing provisions in subsection (a)(b) of this Section
6.8.
Section 6.9 Indemnification.
---------------
(a) From andAppointment of FFC Directors.
----------- ----------------------------
FFC shall, on or promptly after the Effective Date, appoint to FFC's Board
of the Merger, PBE and any
successorDirectors two of PBE shall, and FFC shall cause PBE and any successor to, indemnify,
defend and hold harmless each person who is now, or has been at any time priorKHG's current directors (designated, subject to the
date hereof, or who becomesreasonable approval of FFC, by vote of KHG's Board of Directors prior to the
Effective DateDate) to serve as directors of FFC. During the Merger, an
officer, employee or director of PBE (the "Indemnified Parties") against all
losses, claims, damages, costs, expenses (including reasonable attorneys' fees),
liabilities or judgments or amounts that are paid in settlement (which
settlement shall require the prior written consent of FFC and PBE, which consent
shall not be unreasonably withheld) or in
26
connection with any claim, action, suit, proceeding or investigation (a "Claim")
in which an Indemnified Party is, or is threatened to be made, a party or a
witness based in whole or in part out of the fact that such person is or was a
director, officer or employee of PBE if such Claim pertains to any matter of
fact arising, existing or occurring prior to the Effective Date (including,
without limitation, the Merger and other transactions contemplated by this
Agreement) regardless of whether such Claim is asserted or claimed prior to, at,
orfive-year period after
the Effective Date, (the "Indemnified Liabilities")the FFC Board of Directors shall nominate such designees for
election, and support their election, at each annual meeting of shareholders of
FFC at which such designees' terms expires. During such period, in the event
either of such designees shall cease to serve as a director of FFC, the full extent
permitted under applicable law as to the date hereof or amended prior to the
Effective Date and under the Articles of Incorporation or Bylaws of PBE as in
effect as of the date hereof (and PBE shall pay expenses in advance of the full
disposition of any such action or proceeding to each of the Indemnified Parties
to the full extent permitted by applicable law and PBE's Articles of
Incorporation and Bylaws). Any Indemnified Party wishing to claim
indemnification under this provision, upon learning of any claim, shall notify
PBE and FFC (but the failure to so notify PBE and FFC shall not relieve PBE from
any liability which PBE may have under this section except to the extent PBE is
materially prejudiced thereby). In the defense of any action covered by this
Section 6.9, FFC and PBELVNB
Continuing Directors shall have the right to directdesignate one other person then
serving on the defenseBoard of such
action and retain counsel of its choice; provided, however, that,
notwithstanding the foregoing, the Indemnified PartiesLebanon Valley/Farmers to serve as a group may retain a
single law firm to represent them with respect to each matter under this section
if there is, under applicable standardsdirector of professional conduct, a conflict on
any significant issue between the positions of PBE and the Indemnified Parties
(the Indemnified Parties may also retain more than one law firm if there is,
under applicable standards of professional conduct, a conflict of any
significant issues between the positions of two or more Indemnified Parties).
Under no circumstances shall FFC
have an obligation to advance funds to satisfy
an obligation of PBE or any successor to PBE under this Section 6.9.
(b) FFC shall use its reasonable efforts (and PBE shall cooperate in
these efforts) to obtain "tail" coverage relating to PBE's existing directors
and officers liability insurance policy (provided that FFC may substitute
therefor policies of at least the same coverage and amounts containing terms and
conditions which are substantially no less advantageous) with respect to claims
arising from facts or circumstances which occur prior(subject to the Effective Date and
covering persons who are covered by such insurance immediately prior to the
Effective Date.
(c) From and after the Effective Date, the directors, officers and
employees of PBE who become directors, officers or employees of FFC or any of
its subsidiaries, (i) except for the indemnification rights set forth in
subparagraph (a) above, shall have indemnification rights with prospective
application only and (ii) shall be covered on a prospective basis by FFC's
directors and officers liability insurance policy on a basis at least equal to
the coverage provided to persons in similar positions at FFC. The prospective
indemnification rights shall consist of such rights to which directors, officers
or employees of FFC are entitled under the provisions of the Articles of
27
Incorporationreasonable concurrence of FFC as in effect from time to time after the Effective Date,
as applicable and provisions of applicable law as in effect from time to time
after the Effective Date.
(d) The obligations of FFC provided under this Section 6.9 are
intended to benefit, and be enforceable against, FFC directly by the Indemnified
Parties, and shall be binding on all respective successors of FFC.person designated).
ARTICLE VII
CONDITIONS PRECEDENT
--------------------
Section 7.1 Common Conditions. The obligations of the parties to consummate
----------- -----------------
this Agreement shall be subject to the satisfaction of each of the following
common conditions prior to or as of the Closing, except to the extent that any
such condition shall have been waived in accordance with the provisions of
Section 8.4 herein:
(a) Stockholder Approval: This Agreement shall have been duly
--------------------
authorized, approved and adopted by the stockholders of PBE.KHG.
(b) Regulatory Approvals: The approval of each federal and state
--------------------
regulatory authority having jurisdiction over the transactions contemplated by
this Agreement (including the Merger and Restructuring), including without
limitation, the Federal Reserve Board, Pennsylvania Department of Banking, the
FDIC,Office of the Comptroller of the Currency and the Maryland State Bank Commissioner,Federal Deposit Insurance
Corporation, shall have been obtained and all applicable waiting and notice
periods shall have expired, subject to no terms or conditions which would (i)
require or could reasonably be expected to require (A) any divestiture by FFC of
a portion of the business of FFC, or any subsidiary of FFC or (B) any
divestiture by PBEKHG or the KHG Subsidiaries of a portion of its businesstheir businesses
which FFC in its good faith judgment believes will have a significant adverse
impact on the business or prospects of PBEKHG or LVNB, as the case may be, or (ii)
impose any condition upon FFC, or any of its subsidiaries, which in FFC's good
faith judgment (x) would be materially burdensome to FFC and its subsidiaries
taken as a whole, or (y) would significantly increase the costs incurred or that
will be incurred by FFC as a result of consummating the Merger or (z) would
prevent FFC from obtaining any material benefit contemplated by it to be
attained as a result of the Merger.
(c) Stock Listing. The shares of FFC Common Stock to be issued -------------
in the
-------------
Merger shall have been authorized for listing on NASDAQ.
(d) Tax Opinion. Each of FFC and PBEKHG shall have received an -----------
opinion of
-----------
FFC's counsel, Barley, Snyder, Senft & Cohen, LLP, reasonably acceptable to FFC
and PBE,KHG, addressed to FFC and PBE,KHG, with respect to federal tax laws or
regulations, to the effect that:
(1) The Merger will constitute a reorganization within the meaning
of Section 368(a)(1)(A) and (a)(2)(D) of the Code;
28
(2) No gain or loss will be recognized by FFC, PBE Interim BankKHG or PBELVNB by
reason of the Merger;
(3) The bases of the assets of PBE immediately afterKHG in the Mergerhands of FFC will be the
same as the bases of such assets in the hands of KHG immediately prior to the
Merger;
(4) The holding period of the assets of PBE immediately afterKHG in the Mergerhands of FFC will
include the period during which such assets were held by PBEKHG prior to the
Merger;
(5) A holder of PBEKHG Common Stock who receives shares of FFC Common
Stock in exchange for his PBEKHG Common Stock pursuant to the reorganization
(including(except with respect to each received in lieu of fractional shares of FFC Common
Stock deemed issued as described below) will not recognize any gain or loss upon
the exchange;exchange.
(6) A holder of PBEKHG Common Stock who receives cash in lieu of a
fractional share of FFC Common Stock will be treated as if he received a
fractional share of FFC Common Stock pursuant to the reorganization and FFC then
redeemed such fractional share for the cash. The holder of PBEKHG Common Stock
will recognize capital gain or loss on the constructive redemption of the
fractional share in an amount equal to the difference between the cash received
and the adjusted basis of the fractional share;share.
(7) The tax basis of the FFC Common Stock to be received by the
stockholders of PBEKHG pursuant to the terms of this Agreement will be equal toinclude the
tax basisholding period of the PBEKHG Common Stock surrendered in exchange therefor,
decreased by
the amount of cash received and increased by the amount of any gain (and by the
amount of any dividend income) recognizedprovided that such KHG Common Stock is held as a capital interest on the
exchange; andEffective Date.
(8) The holding period of the shares of FFC Common Stock to be
received by the stockholders of PBEKHG will include the period during which they
held the shares of PBEKHG Common Stock surrendered, provided the shares of PBEKHG
Common Stock are held as a capital asset on the date of the exchange.
(e) Registration Statement: The Registration Statement (as defined in
----------------------
Section 6.1(b), including any amendments thereto) shall have been declared
effective by the SEC; the information contained therein shall be true, complete
and correct in all material respects as of the date of mailing of the Proxy
Statement/Prospectus (as defined in Section 6.1(b)) to the stockholders of KHG;
regulatory clearance for the offering contemplated by the Registration Statement
(the "Offering") shall have been received from each federal and state regulatory
authority having jurisdiction over the Offering; and no stop order shall have
been issued and no proceedings shall have been instituted or threatened by any
federal or state regulatory authority to suspend or terminate the effectiveness
of the Registration Statement or the Offering.
29
(f) No Suits: No action, suit or proceeding shall be pending or
--------
threatened before any federal, state or local court or governmental authority or
before any arbitration tribunal which seeks to modify, enjoin or prohibit or
otherwise adversely and materially affect the transactions contemplated by this
Agreement; provided, however, that if FFC agrees to defend and indemnify KHG and
-------- -------
LVNB and their respective officers and directors with regard to any such action,
suit or proceeding pending or threatened against them or any of them, then such
pending or threatened action, suit or proceeding shall not be deemed to
constitute the failure of a condition precedent to the obligation of KHG to
consummate this Agreement.
(g) Pooling: FFC and KHG shall have been advised in writing by Arthur
-------
Anderson LLP on the Effective Date that the Merger should be treated as a
pooling transaction for financial accounting purposes.
Section 7.2 Conditions Precedent to Obligations of FFC. The obligations of
----------- ------------------------------------------
FFC to consummate this Agreement shall be subject to the satisfaction of each of
the following conditions prior to or as of the Closing, except to the extent
that any such condition shall have been waived by FFC in accordance with the
provisions of Section 8.4 herein:
(a) Accuracy of Representations and Warranties: All of the
------------------------------------------
representations and warranties of PBEKHG as set forth in this Agreement, all of the
information contained in the Schedules hereto and all PBEKHG Closing Documents (as
defined in Section 7.2(l)7.2(j)) shall be true and correct in all material respects as
of the Closing as if made on such date (or on the date to which it relates in
the case of any representation or warranty which expressly relates to an earlier
date); provided,, except to the extent that without limiting the generalityany misrepresentations and breaches of the foregoing clause,
--------
a "material" deviation from the accuracy of PBE's representations and warranties
shall be deemed to exist for purposes of this Section 7.2(a) if, as ofwarranty
at the Closing FFC shall have discovered information not previously disclosed in PBE's
Schedules or in the PBE Balance Sheet indicating that PBE has incurred or will
incur costs, expenses, losses and/or liabilities which would haveaggregate be material to KHG and the KHG
Subsidiaries taken as a material
adverse impact on PBE's financial condition or operating results.whole.
(b) Covenants Performed: PBEKHG shall have performed or complied in all
-------------------
all
material respects with each of the covenants required by this Agreement to be
performed or complied with by it.
(c) Opinion of Counsel for PBE:KHG: FFC shall have received an opinion,
--------------------------
opinion,
dated the Effective Date, from Housley KantarianDrinker Biddle & Bronstein, P.C.,Reath LLP, counsel to PBE,KHG, in
substantially the form of Exhibit DC hereto. In rendering any ---------
such opinion, such
---------
counsel may require and, to the extent they deem necessary or appropriate may
rely upon, opinions of other counsel and upon representations made in
certificates of officers of PBE,KHG, FFC, affiliates of the foregoing, and others.
(d) Affiliate Agreements.Agreements: Stockholders of PBEKHG who are or will be
--------------------
affiliates of PBEKHG or FFC for the purposes of Accounting Series Release No. 135
and the 1933 Act shall have entered into agreements with FFC, in form and
substance satisfactory to FFC, reasonably necessary to assure (i) the ability
of FFC to use pooling-of-interests accounting for the Merger; and (ii)
compliance with Rule 145 under the 1933 Act.
30
(e) Financial Confirmation: FFC (together with its accountants, if
----------------------
the adviceKHG Options: All holders of such accountants is deemed necessary or desirable by FFC)KHG Options shall have establisheddelivered
-----------
documentation reasonably satisfactory to its reasonable satisfaction that, since December 31, 1996,
there shall not have been any materialFFC canceling the KHG Options in
exchange for FFC Stock Options pursuant to Section 2.3 herein.
(f) Decline in Market Price of FFC Common Stock: The Closing Market
-------------------------------------------
Price (as adjusted appropriately for an event described in section 2.1(b) herein
and adverse change inassuming the condition
(financial or otherwise), assets, liabilities, business or operations or future
prospects of PBE. In particular, without limiting the generalityEffective Date is thirty (30) days after receipt of the foregoing sentence, the Additional PBE Financial Statements (as definedlast
required approval under Section 9.1 hereunder) shall be either (a) in Section 5.4) shall indicate that the consolidated financial condition, assets,
liabilities and resultsexcess of
operations of PBE as$23.82 per share (82.5% of the respective dates reported
therein do not vary adversely in any material respect from the consolidated
financial condition, assets, liabilities and results of operations presented in
the PBE Balance Sheet. For purposes of this Section 7.2(e), a material and
adverse change shall mean an event, change, or occurrence which, individually or
together with any other event, change, or occurrence, has a material adverse
impact on (i) the financial position, business, results of operations or future
prospects of PBE or (ii) the ability of PBE to perform its obligations under
this Agreement, provided that "material and adverse change" shall not be deemed
to include the impact of (a) changes in banking and similar laws of general
applicability or interpretations thereof by court of governmental authorities,
(b) changes in GAAP or regulatory accounting principles generally applicable to
banks and their holding companies, (c) actions or omissions of PBE taken with
the prior written consentclosing bid price of FFC Common Stock on August
14, 1997) or (b) in contemplationexcess of an amount per share equal to (i) $28.875 (the
closing bid price of FFC Common Stock on August 14, 1997) multiplied by (ii)
0.825 multiplied by (iii) the transactions
contemplated hereby, (d) changes in economic conditions generally affecting
financial institutions including changes inquotient obtained by dividing the general level of interest rates,
and (e)average NASDAQ
Bank Index for the direct effects of compliance with this Agreement on the operating
performance of PBE, including expenses incurred by PBE in consummating the
transactions contemplatedPrice Determination Period by the Agreement (subjectNASDAQ Bank Index on August
14, 1997 (the "Market Test"). Thus, for example, assuming the average NASDAQ
Bank Index for the Price Determination Period reflects a decline of 10% from
August 14, 1997, (a) would be $23.82 and (b) would be $21.44 ($28.875 x 0.825 x
0.90) and the Closing Market Price would be required to disclosure hereinbe $21.44 or FFC's prior written approval, such approvallower for
this condition precedent not to be unreasonably withheld, of
such expenses).
(f)satisfied or for KHG to terminate this
Agreement under Section 8.1(c)(iii) herein.
(g) Accountants' Letter.Letter: At its option, FFC shall have received a
-------------------
"comfort" letter from the independent certified public accountants for PBE,KHG,
dated (i) the effective date of the Registration Statement and (ii) the
Effective Date, in each case substantially to the effect that:
(1) it is a firm of independent public accountsaccountants with respect to
PBEKHG and its subsidiaries within the meaning of the 1933 Act and the rules and
regulations of the SEC thereunder;
(2) in its opinion the audited financial statements of PBEKHG
examined by it and included in the Registration Statement comply as to form in
all material respects with the applicable requirements of the 1933 Act and the
applicable published rules and regulations of the SEC thereunder with respect to
registration statements on the form employed; and
31
(3) on the basis of specified procedures (which do not
constitute an examination in accordance with generally accepted audit
standards), consisting of a reading of the unaudited financial statements, if
any, of PBEKHG included in such Registration Statement and of the latest available
unaudited financial statements of PBE,KHG, inquiries of officers responsible for
financial and accounting matters of PBEKHG and a reading of the minutes of meetings
of stockholders and the Board of Directors of PBE,KHG, nothing has come to its
attention which causes it to believe: (i) that the financial statements, if any,
of PBEKHG included in such Registration Statement do not comply in all material
respects with the applicable accounting requirements of the 1933 Act and the
published rules and regulations thereunder; and (ii) that any such unaudited
financial statements of PBEKHG from which unaudited quarterly financial information
set forth in such Registration Statement has been derived, are not fairly
presented in conformity with generally accepted accounting principles applied on
a basis consistent with that of the audited financial statements.
(g) Accounting Treatment: FFC and its accountants shall have
--------------------
established to their satisfaction that, as of the Closing, the transactions
contemplated by this Agreement can be accounted for as a "pooling-of-interests"
for financial reporting purposes.
(h) Federal and State Securities and Antitrust Laws: FFC and its
-----------------------------------------------
counsel shall have determined to their satisfaction that, as of the Closing, all
applicable securities and antitrust laws of the federal government and of any
state government having jurisdiction over the transactions contemplated by this
Agreement shall have been complied with.
(i) Dissenting Stockholders: Dissenters' rights shall have been
-----------------------
exercised with respect to less than 10% of the outstanding shares of PBE Common
Stock.
(j) Environmental Matters: No environmental problem of the kind
---------------------
contemplated in Section 3.22 and not disclosed in Schedule 3.22 shall have been
-------------
discovered which would, or which potentially could, materially and adversely
affect the condition (financial or otherwise), assets, liabilities, business or
operations of either KHG or future prospects of PBE, provided, that for purposes of
--------
determining the materiality of an undisclosed environmental problem or problems,
the definition of "material" shall be governed by the proviso to Section 7.2(a)
of this Agreement.
(k) Crossroads Branch Lease: PBE shall have amended the Crossroads
-----------------------
Branch Lease to the reasonable satisfaction of FFC.
32
(l) Required Notices, Consents and Approvals: PBE shall have
----------------------------------------
received any material required notice, consent or approval as contemplated by
Section 3.1 herein.
(m)LVNB.
(j) Closing Documents: PBEKHG shall have delivered to FFC: (i) a
-----------------
certificate signed by PBE'sKHG's President and Chief Executive Officer and by its
Secretary (or other officers reasonably acceptable to FFC) verifying that to the best of their knowledge
after reasonable investigation, all of
the representations and warranties of PBEKHG set forth in this Agreement are true
and correct in all material respects as of the Closing and that PBEKHG has
performed in all material respects each of the covenants required to be
performed by it
under this Agreement; (ii) all consents and authorizations of landlords and
other persons that are necessary to permit this Agreement to be consummated
without violation of any lease or other agreement to which PBEKHG or LVNB is a
party or by which itthey or any of itstheir properties are bound; and (iii) such
other certificates and documents as FFC and its counsel may reasonably request
(all of the foregoing certificates and other documents being herein referred to
as the "PBE"KHG Closing Documents").
(k) Employment Agreements: The existing employment agreements
---------------------
between LVNB and the Senior Executives shall be terminated and replaced with the
Employment Agreements, effective as of the Effective Date.
Section 7.3 Conditions Precedent to the Obligations of PBE.KHG. The obligation
----------- ----------------------------------------------
of PBEKHG to consummate this Agreement shall be subject to the satisfaction of each
of the following conditions prior to or as of the Closing, except to the extent
that any such condition shall have been waived by PBEKHG in accordance with the
provisions of Section 8.4 herein:
(a) Accuracy of Representations and Warranties: All of the
------------------------------------------
representations and warranties of FFC as set forth in this Agreement, all of the
information contained in its Schedules hereto and all FFC Closing Documents (as
defined in Section 7.3(f) of this Agreement) shall be true and correct in all
material respects as of the Closing as if made on such date (or on the date to
which it relates in the case of any representation or warranty which expressly
relates to an earlier date)., except to the extent that any misrepresentations
and breaches of warranty at the Closing shall not in the aggregate be material
to FFC and its subsidiaries taken as a whole.
(b) Covenants Performed: FFC shall have performed or complied in
-------------------
all material respects with each of the covenants required by this Agreement to
be performed or complied with by FFC.
(c) Opinion of Counsel for FFC: PBEKHG shall have received an opinion
--------------------------
opinion
from Barley, Snyder, Senft & Cohen, LLP, counsel to FFC, dated the Effective
Date, in substantially the form of Exhibit EF hereto. In rendering any such
---------
such
opinion, such counsel may require and, to the extent they deem necessary or
appropriate may rely upon, opinions of other counsel and upon representations
made in certificates of officers of FFC, PBE,KHG, affiliates of the foregoing, and
others.
(d) FFC Options: FFC Options shall be substituted in cancellation
-----------
of the KHG Options pursuant to Section 2.3 herein.
(e) Fairness Opinion: PBEKHG shall have obtained from BerwindDanielson
----------------
Financial Group, L.P.Associates, Inc., or from another independent financial advisor selected by the
33
Board of Directors of PBE,KHG, an opinion dated within five (5) days of the Proxy
Statement/Prospectus to be furnished to the stockholdersBoard of PBEDirectors of KHG stating
that the terms of the acquisition contemplated by this Agreement are fair to the
stockholders of PBEKHG from a financial point of view.
(e) Financial Confirmation: PBE (together with its accountants, if
----------------------
the advice of such accountants is deemed necessary or desirable by PBE) shall
have established to its reasonable satisfaction that, since December 31, 1996,
there has not been any material and adverse change in the condition (financial
or otherwise), assets, liabilities, business, operations or future prospects of
FFC. In particular, without limiting the generality of the foregoing sentence,
the Additional FFC Financial Statements shall indicate that the financial
condition, assets, liabilities and results of operations of FFC as of the
respective dates reported therein do not vary adversely in any material respect
from the financial condition, assets, liabilities and results of operations
presented in the FFC Balance Sheet. For purposes of this Section 7.3(e), a
material and adverse change shall mean an event, change, or occurrence which,
individually or together with any other event, change, or occurrence, has a
material adverse impact on (i) the consolidated financial position, business,
results of operations or future prospects of FFC or (ii) the ability of FFC to
perform its obligations under this Agreement, provided that "material and
adverse change" shall not be deemed to include the impact of (a) changes in
banking and similar laws of general applicability or interpretations thereof by
court of governmental authorities, (b) changes in GAAP or regulatory accounting
principles generally applicable to banks and their holding companies or (c)
changes in economic conditions generally affecting financial institutions
including changes in the general level of interest rates.
(f) Closing Documents: FFC shall have delivered to PBE:KHG: (i) a
-----------------
certificate signed by FFC's President and SecretaryChief Executive Officer (or other
officersofficer reasonably acceptable to PBE)KHG) verifying that to the best of their knowledge
after reasonable investigation, all of the representations
and warranties of FFC set forth in this Agreement are true and correct in all
material respects as of the Closing and that FFC has performed in all material
respects each of the covenants required to be performed by FFC; and (ii) such
other certificates and documents as PBEKHG and its counsel may reasonably request
(all of the foregoing certificates and documents being herein referred to as the
"FFC Closing Documents").
(g) Employment Agreements: The Exchange Agentexisting employment agreements
---------------------
between LVNB and the Senior Executives shall have certified to PBE that it is in
receiptbe terminated and replaced with the
Employment Agreements, effective as of (i) certificates representing a whole number of shares of FFC Common
Stock to be issued to the stockholders of PBE pursuant to this Agreement and
(ii) sufficient cash to be paid to the PBE stockholders for fractional shares.
34
Effective Date.
ARTICLE VIII
TERMINATION, AMENDMENT AND WAIVER
---------------------------------
Section 8.1 Termination. This Agreement may be terminated at any time
----------- -----------
before
----------- the Effective Date (whether before or after the authorization, approval
and adoption of this Agreement by the stockholders of PBE)KHG) as follows:
(a) Mutual Consent: This Agreement may be terminated by mutual
--------------
consent of the parties upon the affirmative vote of a majority of each of the
Boards of Directors of PBEKHG and FFC, followed by written notices given to the
other party.
(b) Unilateral Action by FFC: This Agreement may be terminated
------------------------
unilaterally by the affirmative vote of the Board of Directors of FFC, followed
by written notice given to PBE,KHG, if: (i) there has been a material breach by PBEKHG
of any representation, warranty or material failure to comply with any covenant
set forth in this Agreement which breach results in a material and adverse
change as to PBE (as such standard is set forth in Sections 7.2(a) and (e)
herein) and such breach has not been cured within thirty
(30) days after written notice of such breach has been given by FFC to PBE, provided that FFC is not
then in material breach of any representation, warranty or covenant contained in
the Agreement;KHG; or
(ii) any condition precedent to FFC's obligations as set forth in Article VII of
this Agreement remains unsatisfied, through no fault of FFC, on JanuaryAugust 31, 1998.
(c) Unilateral Action By PBE:KHG: This Agreement may be terminated
------------------------
unilaterally by the affirmative vote of a majority of the Board of Directors of
PBE,KHG, followed by written notice given to FFC, if: (i) there has been a material
breach by FFC of any representation, warranty or material failure to comply with
any covenant set forth in this Agreement which breach results in a material and
adverse change as to FFC (as such standard is set forth in Sections 7.3(a) and
(e) herein) and such breach has not been cured
within thirty (30) days after written notice of such breach has been given by
PBEKHG to FFC, provided that PBE is
not then in material breach of any representation, warranty or covenant
contained in this Agreement; orFFC; (ii) any condition precedent to PBE'sKHG's obligations as set forth in
Article VII of this Agreement remains unsatisfied, through no fault of PBE,KHG, on
JanuaryAugust 31, 1998.
(d) By FFC: By FFC if, prior to 9:30 a.m. on March 19, 1997, PBE
------
does1998 or (iii) the Market Test would not execute and deliver to FFC the Warrant Agreement.be met.
Section 8.2 Effect of Termination.
----------- ---------------------
(a) Effect. In the event of a permitted termination of this
------
Agreement under Section 8.1 herein, thisthe Agreement shall become null and void and
the transactions contemplated herein shall thereupon be abandoned, except that
the
35
provisions relating to limited liability and confidentiality set forth in
Sections 8.2(b) and 8.2(c) herein shall survive such termination.
(b) Limited Liability. The termination of this Agreement in
-----------------
accordance with the terms of Section 8.1 herein shall create no liability on the
part of either party, or on the part of either party's directors, officers,
stockholders,shareholders, agents or representatives, except that if this Agreement is
terminated by FFC by reason of a material breach by PBE,KHG, or if this Agreement is
terminated by PBEKHG by reason of a material breach by FFC, and such breach
involves an intentional, willful or grossly negligent misrepresentation or
breach of covenant, the breaching party shall be liable to the nonbreaching
party for all costs and expenses reasonably incurred by the nonbreaching party
in connection with the preparation, execution and attempted consummation of this
Agreement, including the reasonable fees of its counsel, accountants,
consultants and other advisors and representatives.
(c) Confidentiality. In the event of a termination of this
---------------
Agreement, neither FFC nor PBEKHG nor LVNB shall use or disclose to any other
person any confidential information obtained by it during the course of its
investigation of the other party or parties, except as may be necessary in order
to establish the liability of the other party or parties for breach as
contemplated under Section 8.2(b) herein and each party shall promptly return to the party all non-
public proprietary and business information received from such party.herein.
Section 8.3 Amendment. To the extent permitted by law, this Agreement may
----------- ---------
be
--------- amended at any time before the Effective Date (whether before or after the
authorization, approval and adoption of this Agreement by the stockholders of
PBE)KHG), but only by a written instrument duly authorized, executed and delivered
by FFC and by PBE;KHG; provided, however, that (i) any amendment to the provisions of
-------- -------
of
Section 2.1 herein relating to the consideration to be received by the former
stockholders of PBEKHG in exchange for their shares of PBEKHG Common Stock shall not
take effect until such amendment has been approved, adopted or ratified by the
stockholders of PBEKHG in accordance with applicable law and (ii) PBE Interim Bank
shall be permitted to join as a party to this Agreement upon its formation
without execution of such joinder by FFC or PBE.Pennsylvania law.
Section 8.4 Waiver. Any term or condition of this Agreement may be waived,
----------- ------
to the extent permitted by applicable federal and state law, by the party or
parties entitled to the benefit thereof at any time before the Effective Date
(whether before or after the authorization, approval and adoption of this
Agreement by the stockholders of PBE)KHG) by a written instrument duly authorized,
executed and delivered by such party or parties.
36
ARTICLE IX
RIGHTS OF DISSENTING STOCKHOLDERS OF PBE
----------------------------------------
Section 9.1 Rights of Dissenting Stockholders of PBE. The stockholders of
----------------------------------------
PBE shall be entitled to and may exercise dissenters' rights if and to the
extent they are entitled to do so under the provisions of FI (S)(S) 3-718
through 3-721 of the Financial Institutions Article, Annotated Code of Maryland.
ARTICLE X
CLOSING AND EFFECTIVE DATE
--------------------------
Section 10.19.1 Closing. Provided that all conditions precedent set forth in
----------- -------
Article VII of this Agreement shall have been satisfied or shall have been
waived in accordance with Section 8.4 of this Agreement, the parties shall hold
a closing (the "Closing") at the offices of FFC at One Penn Square, Lancaster,
Pennsylvania, within thirty (30) days after the receipt of all required
regulatory and shareholder approvals and after the expiration of all applicable
waiting periods on a date to be agreed upon by the parties, at which time the
parties shall deliver the PBEKHG Closing Documents, the FFC Closing Documents, the
opinions of counsel required by Sections 7.1(d), 7.2(c) and 7.3(c) herein, and
such other documents and instruments as may be necessary or appropriate to
effectuate the purposes of this Agreement.
Section 10.29.2 Effective Date. The Mergermerger of KHG with and into FFC shall
----------- --------------
become effective and this Agreement shall be consummated on the date --------------
of issuance(the
"Effective Date") of the Certificatefiling of Merger issued by the Maryland State Bank
Commissioner pursuant to FI (S)3-709 of the Financial Institutions Article,
Annotated Code of Maryland or(or on such other later date specified in such
document) Articles of Merger with the CertificateDepartment of Merger.State of the Commonwealth of
Pennsylvania.
ARTICLE XIX
NO SURVIVAL OF REPRESENTATIONS AND WARRANTIES
---------------------------------------------
Section 11.110.1 No Survival. The representations and warranties of PBEKHG and of
------------ -----------
FFC set forth in this Agreement shall expire and be terminated on the Effective
Date by consummation of this Agreement, and no such representation or warranty
shall thereafter survive.
ARTICLE XIIXI
GENERAL PROVISIONS
------------------
Section 12.111.1 Expenses. Except as provided in Section 8.2(b) herein, each
------------ --------
party shall pay its own expenses incurred in connection with this Agreement and
the 37
consummation of the transactions contemplated herein. For purposes of this
Section 12.111.1 herein, the cost of printing the Proxy Statement/Prospectus shall
be deemed to be an expense of FFC.
Section 12.211.2 Other Mergers and Acquisitions. Subject to the right of PBEKHG
------------ ------------------------------
to
------------------------------ refuse to consummate this Agreement pursuant to Section 8.1(c) herein by
reason of a material breach by FFC of the warranty and representation set forth
in Section 4.7 herein, nothing set forth in this Agreement shall be construed:
(i) to preclude FFC from acquiring, or to limit in any way the right of FFC to
acquire, prior to or following the Effective Date, the stock or assets of any
other financial services institution or other corporation or entity, whether by
issuance or exchange of FFC Common Stock or otherwise; (ii) to preclude FFC from
issuing, or to limit in any way the right of FFC to issue, prior to or following
the Effective Date, FFC Common Stock, FFC Preferred Stock or any other equity or
debt securities; or (iii) to preclude FFC from taking, or to limit in any way
the right of FFC to take, any other action not expressly and specifically
prohibited by the terms of this Agreement.
Section 12.311.3 Notices. All notices, claims, requests, demands and other
------------ -------
communications which are required or permitted to be given under this Agreement
shall be in writing and shall be deemed to have been duly delivered if delivered
in person, transmitted by telegraph or facsimile machine (but only if receipt is
acknowledged in writing), or mailed by registered or certified mail, return
receipt requested, as follows:
(a) If to FFC, to:
Rufus A. Fulton, Jr., President
and Chief Executive Officer
Fulton Financial Corporation
One Penn Square
P.O. Box 4887
Lancaster, Pennsylvania 17604
With a copy to:
Paul G. Mattaini, Esq.
Barley, Snyder, Senft & Cohen, LLP
126 East King Street
Lancaster, PA 17602
38
(b) If to PBE,KHG, to:
Robert E. Noll,Albert B. Murry, President and Chief Executive Officer
The Peoples Bank of Elkton
130 NorthKeystone Heritage Group, Inc.
555 Willow Street
Elkton, Maryland 21921Lebanon, PA 17046
With a copy to:
Leonard S. Volin, Esq.
Housley KantarianF. Douglas Raymond, III, Esquire
Drinker Biddle & Bronstein, P.C.
1220 19thReath LLP
Philadelphia National Bank Building
1345 Chestnut Street
N.W.; Suite 700
Washington, D.C. 20036Philadelphia, PA 19107-3496
Section 12.411.4 Counterparts. This Agreement may be executed simultaneously
------------ ------------
in
------------ several counterparts, each of which shall be deemed an original, but all such
counterparts together shall be deemed to be one and the same instrument.
Section 12.511.5 Governing Law. This Agreement shall be deemed to have been
------------ -------------
made
------------- in, and shall be governed by and construed in accordance with the
substantive laws of, the Commonwealth of Pennsylvania.
Section 12.611.6 Parties in Interest. This Agreement shall be binding upon and
------------ -------------------
inure to the benefit of the parties hereto and their respective successors,
assigns and legal representatives; provided, however, that neither party may
-------- -------
assign its rights or delegate its duties under this Agreement without the prior
written consent of the other party.
Section 12.711.7 Entire Agreement. This Agreement, together with the Warrant
------------ ----------------
Agreement and the Warrant being executed by the parties on the date hereof, sets
forth the entire understanding and agreement of the parties hereto and
supersedes any and all prior agreements, arrangements and understandings,
whether oral or written, relating to the subject matter hereof and thereof.
39Section 11.8 Materiality Standard. For the purposes of this Agreement,
------------ --------------------
terms such as "material," "materially," "in any material respect," etc., as they
may apply to KHG or its subsidiaries, shall be measured with respect to KHG and
its subsidiaries on a consolidated basis.
IN WITNESS WHEREOF, the parties have caused this Agreement to be executed
by their duly authorized officers all as of the day and year first above
written.
FULTON FINANCIAL CORPORATION
By: /s/ Rufus A. Fulton, Jr.
------------------------------------------------------------------------
Rufus A. Fulton, Jr., President
and Chief Executive Officer
Attest: /s/ William R. Colmery
--------------------------------------------------------------------
William R. Colmery, Secretary
THE PEOPLES BANK OF ELKTONKEYSTONE HERITAGE GROUP, INC.
By: /s/ David K. Williams
-------------------------------------
David K. Williams,
Chairman of the BoardAlbert B. Murry
-----------------------------------
Albert B. Murry, President and
Chief Executive Officer
Attest: /s/ Cathy C. Dunn
-------------------------------------
Cathy C. Dunn,Peggy Y. Layser
-------------------------------
Peggy Y. Layser, Secretary
EXHIBIT B
OPINION OF BERWIND FINANCIAL, L.P.
----------------------------------
FormOpinion of Fairness Opinion
June ___,Danielson Associates, Inc.
-------------------------------------
DANIELSON ASSOCIATES, INC.
6110 Executive Boulevard
Suite 504
Rockville, Maryland 20852-3903
Tel: (301) 468-4884
Fax: (301) 468-0013
PITTSBURGH OFFICE
-----------------
TEL: (412)262-3207
November 16, 1997
Board of Directors
The Peoples Bank of Elkton
130 NorthKeystone Heritage Group, Inc.
555 Willow Street
Elkton, Maryland 21921Lebanon, Pennsylvania 17042
Dear Members of the Board:
You have requested ourSet forth herein is the updated opinion of Danielson Associates Inc.
("Danielson Associates") as to the fairness,"fairness" of the offer by Fulton Financial
Corporation ("Fulton") of Lancaster, Pennsylvania to acquire all of the common
stock of Keystone Heritage Group, Inc. ("Keystone Heritage") of Lebanon,
Pennsylvania. The "fair" sale value is defined as the price at which all of the
shares of Keystone Heritage's common stock would change hands between a willing
seller and a willing buyer, each having reasonable knowledge of the relevant
facts. In opining as to the "fairness" of the offer, it also must be determined
if the Fulton common stock that is to be exchanged for Keystone Heritage stock
is "fairly" valued.
In preparing the original opinion dated August 15, 1997, Keystone
Heritage's market was analyzed; its business and prospects were discussed with
its management; and its financial performance was compared with other
Pennsylvania banks. In addition, any unique characteristics also were
considered.
This opinion was based partly on data supplied to Danielson Associates by
Keystone Heritage, but it relied on some public information all of which was
believed to be reliable, but neither the completeness nor accuracy of such
information could be guaranteed. In particular, the opinion assumed, based on
its management's representation, that there were no significant asset quality
problems beyond what was stated in recent reports to regulatory agencies and in
the monthly report to the directors.
In determining the "fair" sale value of Keystone Heritage, the primary
emphasis was on prices paid relative to earnings for Pennsylvania banks that had
similar financial, structural and market characteristics. These prices were
then related to assets and equity capital, also referred to as "book."
The "fair" market value of Fulton's common stock to be exchanged for
Keystone Heritage stock was determined by a comparison with other similar bank
holding companies and included no in person due diligence of Fulton. This
comparison showed Fulton stock to be valued consistent with the comparable
banks.
In the original opinion, based on the analysis of Keystone Heritage's
recent performance and its future potential, comparisons with similar
transactions and unique characteristics, it was determined that its "fair" sale
value was between $175 and $195 million, or $44.30 to $49.35 per share. Thus,
Fulton's offer of $211.7 million, or $52.85 per share, was a "fair" offer from a
financial point of view for Keystone Heritage and its shareholders.
Board of Directors
November 16, 1997
Page Two
There has been no subsequent change in Fulton's performance and its stock
is trading at or above where it was at the time of the offer. Since the value of
the offer has not changed and there has been no subsequent negative change to
Fulton, this offer is still "fair" from a financial point of view to the shareholders of The Peoples Bank of Elkton ("Peoples") of the
financial terms of the proposed merger byKeystone
Heritage and between Peoples and a wholly-owned
subsidiary of Fulton Financial Corporation ("Fulton"). The terms of the
proposed merger (the "Proposed Merger") by and between Peoples and the wholly-
owned subsidiary of Fulton are set forth in the Affiliation and Merger Agreement
dated March 18, 1997, as amended as of May 20, 1997, (the "Merger Agreement")
and provides that each outstanding share of Peoples common stock will be
converted into the right to receive 4.158 shares of Common Stock par value $2.50
per share of Fulton with cash to be paid in lieu of any fractional shares.
Berwind Financial, L.P., as part of its investment banking business, regularly
is engaged in the valuation of assets, securities and companies in connection
with various types of asset and security transactions, including mergers,
acquisitions, private placements and valuations for various other purposes, and
in the determination of adequate consideration in such transactions.
In arriving at our opinion, we have, among other things: (i) reviewed the
historical financial performances, current financial positions and general
prospects of Peoples and Fulton, (ii) reviewed the Merger Agreement, (iii)
reviewed and analyzed the stock market performance of Peoples and Fulton, (iv)
studied and analyzed the consolidated financial and operating data of Peoples
and Fulton, (v) considered the terms and conditions of the Proposed Merger
between Peoples and Fulton as compared with the terms and conditions of
comparable bank and bank holding company mergers and acquisitions, (vi) met
and/or communicated with certain members of Peoples' and Fulton's senior
management to discuss their respective operations, historical financial
statements and future prospects, and (vii) conducted such other financial
analyses, studies and investigations as we deemed appropriate.
Our opinion is given in reliance on information and representations made or
given by Peoples and Fulton, and their respective officers, directors, auditors,
counsel and other agents, and on filings, releases and other information issued
by Peoples and Fulton including financial statements, financial projections, and
stock price data as well as certain information from recognized independent
sources. We have not independently verified the information concerning Peoples
and Fulton nor other data which we have considered in our review and, for
purposes of the opinion set forth below, we have assumed and relied upon the
accuracy and completeness of all such information and data. Additionally, we
assume that the Proposed Merger is, in all respects, lawful under applicable
law.
With regard to financial and other information relating to the general
prospects of Peoples and Fulton, we have assumed that such information has been
reasonably prepared and reflects the best currently available estimates and
judgments of the managements of Peoples and Fulton as to Peoples' and Fulton's
Board of Directors
June ___, 1997
Page 2
most likely future performance. In rendering our opinion, we have assumed that
in the course of obtaining the necessary regulatory approvals for the Proposed
Merger no conditions will be imposed that will have a material adverse effect on
the contemplated benefits of the Proposed Merger to Peoples.
Our opinion is based upon information provided to us by the managements of
Peoples and Fulton, as well as market, economic, financial and other conditions
as they exist and can be evaluated only as of the date hereof and speaks to no
other period. Our opinion pertains only to the financial consideration of the
Proposed Merger and does not constitute a recommendation to the Board of Peoples
and does not constitute a recommendation to Peoples' shareholders as to how such
shareholders should vote on the Proposed Merger.
Based on the foregoing, it is our opinion that, as of the date hereof, the
financial terms of the Proposed Merger by and between Peoples and Fulton is
fair, from a financial point of view, to the shareholders of Peoples.
Sincerely,
BERWIND FINANCIAL, L.P.shareholders.
Respectfully submitted,
/s/ Arnold G. Danielson
Arnold G. Danielson
Chairman
Danielson Associates Inc.
AGD:ld
Enclosure
EXHIBIT C
WARRANT AGREEMENT AND WARRANT
-----------------------------
WARRANT AGREEMENT
-----------------
THIS WARRANT AGREEMENT is made March 19,August 15, 1997 by and between Fulton
Financial Corporation, a Pennsylvania business corporation ("FFC") and The
Peoples Bank of Elkton,Keystone
Heritage Group, Inc., a Maryland bankPennsylvania business corporation ("PBE"KHG").
W I T N E S S E T H:
- - - - - - - - - -
WHEREAS, FFC and PBE have enteredKHG are, simultaneously with the execution of this
Agreement, entering into an Affiliation anda Merger Agreement dated March 18, 1997as of the date hereof (the
"Merger Agreement"); and
WHEREAS, as a condition to FFC's entry into the Merger Agreement and in
consideration of such entry, PBEKHG has agreed to issue to FFC, on the terms and
conditions set forth herein, a warrant entitling FFC to purchase up to an
aggregate of 45,888981,740 shares of PBE'sKHG's common stock, $5.00 par value $10.00 per share
(the "Common Stock");
NOW, THEREFORE, in consideration of the execution of the Merger Agreement
and the premises herein contained, and intending to be legally bound, FFC and
PBEKHG agree as follows:
1. Issuance of Warrant. Concurrently with the execution of the Merger
-------------------
Agreement and this Agreement, PBEKHG shall issue to FFC a warrant in the form
attached as Exhibit A hereto (the "Warrant", which term as used herein shall
include any warrant or warrants issued upon transfer or exchange of the original
Warrant) to purchase up to 45,888981,740 shares of Common Stock, subject to adjustment
as provided in this Agreement and in the Warrant. The Warrant shall be
exercisable at a purchase price of $80.00$36.75 per share, subject to adjustment as
provided in the Warrant (the "Exercise Price"). So long as the Warrant is
outstanding and unexercised, PBEKHG shall at all times maintain and reserve, free
from preemptive rights, such number of authorized but unissued shares of Common
Stock as may be necessary so that the Warrant may be exercised, without any
additional authorization of Common Stock, after giving effect to all other
options, warrants, convertible securities and other rights to acquire shares of
Common Stock. PBEKHG represents and warrants that it has duly authorized the
execution and delivery of the Warrant and this Agreement and the issuance of
Common Stock upon exercise of the Warrant. PBEKHG covenants that the shares of
Common Stock issuable upon exercise of the Warrant shall be, when so issued,
duly authorized, validly issued, fully paid and nonassessable and subject to no
preemptive rights. The Warrant and the shares of Common Stock to be issued upon
exercise of the Warrant are hereinafter collectively referred to, from time to
time, as the "Securities." So long as the Warrant is owned by FFC, the Warrant
will in no event be exercised for more than that number of shares of Common
Stock equal to 45,888981,740 (subject to adjustment as provided in this Agreement and in the Warrant) less
the number of shares of Common Stock at the time owned by FFC.
2. Assignment, Transfer, or Exercise of Warrant. FFC will not sell,
--------------------------------------------
assign, transfer or exercise the Warrant, in whole or in part, without the prior
written consent of PBEKHG except (A) if (I) FFC is not in material breach of the
agreement or covenants contained in this Agreement or the Merger Agreement and
(II) no preliminary or permanent injunction or other order against the delivery
of shares covered by the Warrant issued by any court of competent jurisdiction
in the United States shall be in effect and (B) upon or after the occurrence of any of the
following: (i) a knowing and intentional breach of any representation, warranty, or covenant
set forth in the Merger Agreement by PBEKHG which would permit a termination of the
Merger Agreement by FFC pursuant to Section 8.1(b)(i) thereof which is not cured and which occurs following a
proposal from any person (other than FFC) to engagefollowing: (A)
the occurrence of an event described in subparagraphs (iii) or (iv) below or (B)
an Acquisition
Transaction;offer or filing described in subparagraph (v) below; (ii) the failure of
PBE'sKHG's shareholders to approve the Merger Agreement at a meeting called for such
purpose if at the time of such meeting there has been a publican announcement (including a public regulatory filing) by any
Person (other than FFC) of an offer or proposal to acquire 25% or more of the
Common
Stock (before giving effect an Acquisition
Transactionto any exercise of the Warrant), or to acquire,
merge or consolidate with KHG, or to purchase all or substantially all of KHG's
assets (including without limitation any shares of Lebanon Valley National Bank
("LVNB") or all or substantially all of LVNB's assets) and, within twelve (12) months fromten business
days after such announcement, the dateBoard of Directors of KHG either fails to
recommend against acceptance of such shareholder's
meeting, PBE engages in,offer by KHG's shareholders or enters into a written agreementtakes no
position with respect to, an
Acquisition Transaction;thereto; (iii) the acquisition by any Person of Beneficial
Ownership of 25% or more of the Common Stock (before giving effect to any
exercise of the Warrant); (iv) PBEany Person (other than FFC) shall have commenced
a tender or exchange offer, or shall have filed an application with an
appropriate bank regulatory authority with respect to a publicly announced
offer, to purchase or acquire securities of KHG such that, upon consummation of
such offer, such Person would have Beneficial Ownership of 25% or more of the
Common Stock (before giving effect to any exercise of the Warrant) and, within
12 months from such offer or filing, such person consummates an acquisition
described in subparagraph (iii) above; (v) KHG shall have entered into an
agreement, letter of intent, or other written understanding with any Person (other than
FFC) providing for such Person (A) to engage in an Acquisition Transactionacquire, merge, consolidate or enter into
a statutory share exchange with KHG or to purchase all or substantially all of
KHG's assets (including without limitation any shares of LVNB or all or
substantially all of LVNB's assets), or (B) to negotiate with PBEKHG with respect
to an Acquisition Transaction;any of the events or (v)transactions mentioned in the preceding clause (A) or
(vi) termination, or attempted termination, of the Merger Agreement by PBEKHG under
Section 5.7 of the Merger Agreement following receipt of a written proposal to
engage in an Acquisition Transaction from a third party.Agreement. As used in this Paragraph 2, the terms
"Beneficial Ownership" and "Person" shall have the respective meanings set forth
in Paragraph 7(g) herein. For purposes of this
Agreement, "Acquisition Transaction" shall mean (x) a merger or consolidation of
statutory share exchange or any similar transaction involving PBE, (y) a
purchase, lease or other acquisition of all or substantially all of the assets
of PBE or (z) a purchase or other acquisition of beneficial ownership of
securities representing 25% or more of the voting power of PBE.7(f).
3. Governmental Filing, Etc..Registration Rights. If, at any time within two years after the Warrant
-------------------
may be
------------------------- exercised or sold, PBEKHG shall receive a written request therefor from FFC,
PBEKHG shall prepare and file and keep effective and current any required application or
filing to register such shares or to obtain required regulatory or other
approval for their issuance, and provide or file such documentationa shelf registration statement (the "Registration
Statement") under the Securities Act of 1933, as may be
required by, all applicable governmental entities or agencies (any such
governmental filing(s)
-2-
hereinafter collectively referred to as the "Governmental Filing"amended (the "Securities Act"),
covering or
in connection with, the Warrant and/or the Common Stock issued or issuable upon exercise of
the Warrant. PBEWarrant (the "Securities"), and shall use its best efforts to cause the
Governmental FilingRegistration Statement to become effective and remain current.current for such period
not in excess of 180 days from the day such registration statement first becomes
effective as may be reasonably necessary to affect such sale or other
disposition. Without the prior written consent of FFC, neither PBEKHG nor any
other holder of securities of PBEKHG may include any othersuch securities in the
Governmental Filing. Notwithstanding
anything herein to the contrary, FFC shall have right to request the
Governmental Filing described in this Section 3 on one occasion only.Registration Statement.
4. Duties of PBEKHG upon Governmental Filing.Registration. If and whenever PBEKHG is
-------------------------------------- required by the
-------------------------------
provisions of Paragraph 3 of this Agreement to makeeffect the registration of any Governmental Filing or to take any other action, PBEof
the Securities under the Securities Act, KHG shall:
(a) prepare and file with the all applicable governmental entities or
agenciesSecurities and Exchange Commission (the
"SEC") such amendments to the Governmental FilingRegistration Statement and supplements theretoto the
prospectus contained therein as may be necessary to keep the Governmental FilingRegistration
Statement effective current, and accurate;current;
(b) furnish to FFC and to anythe underwriters of the Securities being
registered such reasonable number of copies of the Governmental Filing, any
documentsRegistration Statement,
the preliminary prospectus and final prospectus contained therein, and such
other documents as FFC or such underwriters may reasonably request in order
to facilitate the public offering of the Securities;
(c) use its best efforts to register or qualify the Securities
covered by the Governmental FilingRegistration Statement under the state securities or blue sky
laws of such jurisdictions as FFC or such underwriters may reasonably
request;
(d) notify FFC, promptly after PBEKHG shall receive notice thereof, of
the time when the Governmental FilingRegistration Statement has become effective or any
supplement or amendment to any documentprospectus forming a part of the Governmental
FilingRegistration
Statement has been filed;
(e) notify FFC promptly of any request by any governmental entities
or agenciesthe SEC for the amending or
supplementing of the Governmental FilingRegistration Statement or any documentthe prospectus contained
therein, or for additional information;
(f) prepare and file with all applicable governmental entities or
agenciesthe SEC, promptly upon the request of FFC,
any amendments or supplements to the Governmental FilingRegistration Statement or any documentthe
prospectus contained therein which, in the opinion of counsel for FFC, are
required under any lawthe Securities Act or regulation;
-3-
the rules and regulations promulgated
by the SEC thereunder in connection with the public offering of the
Securities;
(g) prepare and promptly file with all governmental entities or
agenciesthe SEC such amendments of or
supplements to (i) the Governmental FilingRegistration Statement or the documentprospectus contained
therein; or (ii) the Governmental Filingtherein as may be necessary to correct any statements or omissions if, at
the time when a Governmental Filingprospectus relating to such Securities is required to be
delivered under law or regulation,the Securities Act, any event shall have occurred as the
result of which such Governmental Filingprospectus as then in effect would include an untrue
statement of a material fact or would omit to state any material fact
required to be stated therein or necessary in order to make the statements
therein, in the light of the circumstances under which they were made, not
misleading;
(h) advise FFC, promptly after PBEKHG shall receive notice or obtain
knowledge of the issuance of any stop order by any governmental entity or
agencythe SEC suspending the
effectiveness of the Governmental Filing or of any
action by any governmental entity or agency preventing the exercise of any
right or obligation hereunder or that may be exercised in connection
herewith,Registration Statement, or the initiation or
threatening of any proceeding for suchthat purpose, and promptly use its best
efforts to prevent such actionthe issuance of any stop order or to obtain its
withdrawal if such actionstop order should be taken;issued; and
(i) at the request of FFC, furnish on the date or dates provided for
in anythe underwriting agreement: (i) an opinion or opinions of counsel for PBEKHG
for the purposes of such Governmental Filing,registration, addressed to the underwriters and to
FFC, covering such matters as such underwriters and FFC may reasonably
request and as are customarily covered by issuer's counsel at that time; and
(ii) a letter or letters from the independent certified
public accountants for PBE,KHG, addressed
to the underwriters and to FFC, covering such matters as such underwriters
or FFC may reasonably request, in which letters such accountants shall state
(without limiting the generality of the foregoing) that they are independent
certified public
accountants within the meaning of the Securities Act of 1933, as amended
(the "Securities Act"), and that, in the
opinion of such accountants, the financial statements and other financial
data of PBEKHG included in the Governmental FilingRegistration Statement or any amendment or
supplement thereto comply in all material respects with the applicable
accounting requirements of the Securities Act or such other law or regulation as may be at issue.Act.
5. Expenses of Registration. With respect to the Governmental Filingregistration requested
------------------------
requested
pursuant to Paragraph 3 of this Agreement, (a) PBEKHG shall bear all registration,
filing and NASD fees, printing and engraving expenses, fees and disbursements of
its counsel and accountants and all legal fees and disbursements and other
expenses of PBEKHG to comply with state securities or blue sky laws of any
jurisdictions in which the Securities to be offered are to be registered or
qualified; and
-4-
(b) FFC shall bear all fees and disbursements of its counsel and
accountants, underwriting discounts and commissions, transfer taxes for FFC and
any other expenses incurred by FFC.
6. Indemnification. In connection with any Registration Statement or any
---------------
Governmental Filing or any
amendment or supplement thereto:
(a) PBEKHG shall indemnify and hold harmless FFC, any underwriter (as
defined in the Securities Act) for FFC, and each person, if any, who
controls FFC or such underwriter (within the meaning of the Securities Act)
from and against any and all loss, damage, liability, cost or expense to
which FFC or any such underwriter or controlling person may become subject
under any
applicable law,,the Securities Act or otherwise, insofar as such loss, damage,
liability, cost or expense arises out of or is caused by any untrue
statement or alleged untrue statement of any material fact contained in the
Governmental Filing,Registration Statement, any documentprospectus or preliminary prospectus contained
therein or any amendment or supplement to the foregoing,thereto, or arises out of or is based
upon the omission or alleged omission to state therein a material fact
required to be stated therein or necessary in order to make the statements
therein, in light of the circumstances under which they were made, not
misleading; provided, however, that PBEKHG will not be
-------- ------- liable in any such case
-------- -------
to the extent that any such loss, damage, liability, cost or expense arises
out of or is based upon an untrue statement or alleged untrue statement or
omission or alleged omission so made in conformity with information
furnished by FFC, such underwriter or such controlling person in writing
specifically for use in the preparation thereof.
(b) FFC shall indemnify and hold harmless PBE,KHG, any underwriter (as
defined in the Securities Act), and each person, if any, who controls PBEKHG or
such underwriter (within the meaning of the Securities Act) from and against
any and all loss, damage, liability, cost or expense to which PBEKHG or any
such underwriter or controlling person may become subject under the
Securities Act or otherwise, insofar as such loss, damage, liability, cost
or expense arises out of or is caused by any untrue or alleged untrue
statement of any material fact contained in the Governmental Filing,Registration Statement, any
documentprospectus or preliminary prospectus contained therein or any amendment or
supplement to the foregoing,thereto, or arises out of or is based upon the omission or the
alleged omission to state therein a material fact required to be stated
therein or necessary in order to make the statements therein, in light of
the circumstances in which they were made, not misleading; provided, however, that FFC will not
-------- -------
be liablemisleading, in any sucheach case to
the extent, but only to the extent, that any such loss, damage,
liability, cost or expense arises out of or is based upon an untrue statement or alleged
untrue statement or omission or alleged omission was so made in reliance
upon and in conformity with written information furnished by PBE, such underwriter,
such underwriter or such controlling person in writingFFC
specifically for use in the preparation thereof.
-5-
(c) Promptly after receipt by any party which is entitled to be
indemnified, pursuant to the provisions of subparagraph (a) or (b) of this
Paragraph 6, of any claim in writing or of notice of the commencement of any
action involving the subject matter of the foregoing indemnity provisions,
such indemnified party shall, if a claim in respect thereof is to be made
against the indemnifying party pursuant to the provisions of subparagraph
(a) or (b) of this Paragraph 6, promptly notify the indemnifying party of
the receipt of such claim or notice of the commencement of such action, but
the omission to so notify the indemnifying party will not relieve it from
any liability which it may otherwise have to any indemnified party
hereunder. In case any such action is brought against any indemnified party
and it notifies the indemnifying party of the commencement thereof, the
indemnifying party shall have the right to participate in and, to the extent
that it may wish, jointly with any other indemnifying party similarly
notified, to assume the defense thereof, with counsel satisfactory to such
indemnified party; provided, however, that if -------- -------
the defendants in any action
-------- -------
include both the indemnified party or parties and the indemnifying party and
there is a conflict of interest which would prevent counsel for the
indemnifying party from also representing any indemnified party, such
indemnified party shall have the right to select separate counsel to
participate in the defense of such indemnified party. After notice from the
indemnifying party to such indemnified party of its election so to assume
the defense thereof, the indemnifying party will not be liable to such
indemnified party, pursuant to the provisions of subparagraph (a) or (b) of
this Paragraph 6, for any legal or other expenses subsequently incurred by
such indemnified party in connection with the defense thereof, other than
reasonable costs of investigation, unless (i) such indemnified party shall
have employed separate counsel in accordance with the provisions of the
preceding sentence, (ii) the indemnifying party shall not have employed
counsel satisfactory to the indemnified party to represent the indemnified
party within a reasonable time after the notice of the commencement of the
action, or (iii) the indemnifying party has authorized the employment of
counsel for the indemnified party at the expense of the indemnifying party.
(d) If recovery is not available under the foregoing indemnification
provisions, for any reason other than as specified therein, any party
entitled to indemnification by the terms thereof shall be entitled to obtain
contribution with respect to its liabilities and expenses, except to the
extent that contribution is not permitted under Section 11(f) of the
Securities Act or such other law or regulation as may be applicable.Act. In determining the amount of contribution to which the
respective parties are entitled there shall be considered the parties'
relative knowledge and access to information concerning the matter with
respect to which the claim was asserted, the opportunity to correct and/or
-6-
prevent any statement or omission, and any other equitable considerations
appropriate under the circumstances. FFC and PBEKHG agree that it would not be
equitable if the amount of such contribution were determined by pro rata or
per capita allocation even if the underwriters and FFC as a group were
considered a single entity for such purpose.
7. Redemption and Repurchase Rights.
--------------------------------
(a) From and after the date on which any event described in Paragraph
2 of this Agreement occurs, the Holder as defined in the Warrant (which
shall include a former Holder), who has exercised the Warrant in whole or in
part shall have the right to require PBEKHG to redeem some or all of the shares
of Common Stock for which the Warrant was exercised at a redemption price
per share (the "Redemption Price") equal to the highest of: (i) the Exercise
Price, (ii) the highest price paid or agreed to be paid for any share of
Common Stock by an Acquiring Person (as defined below) during the one year
period immediately preceding the date of redemption, and (iii) in the event
of a sale of all or substantially all of PBE'sKHG's assets or all or
substantially all of LVNB's assets: (x) the sum of the price paid in such
sale for such assets and the current market value of the remaining assets of
PBEKHG as determined by a recognized investment banking firm selected by such
Holder, divided by (y) the number of shares of Common Stock then
outstanding. If the price paid consists in whole or in part of securities or
assets other than cash, the value of such securities or assets shall be
their then current market value as determined by a recognized investment
banking firm selected by the Holder.Holder and reasonably acceptable to KHG.
(b) From and after the date on which any event described in Paragraph
2 of this Agreement occurs, the Holder as defined in the Warrant (which
shall include a former Holder), shall have the right to require PBEKHG to
repurchase all or any portion of the Warrant at a price (the "Warrant
Repurchase Price") equal to the product obtained by multiplying: (i) the
number of shares of Common Stock represented by the portion of the Warrant
that the Holder is requiring PBEKHG to repurchase, times (ii) the excess of the
Redemption Price over the Exercise Price.
(c) The Holder's right, pursuant to this Paragraph 7, to require PBEKHG
to repurchase a portion or all of the Warrant, and/or to require PBEKHG to
redeem some or all of the shares of Common Stock for which the Warrant was
exercised, shall expire on the close of business on the 60th day following
the occurrence of any event described in Paragraph 2.
-7-
(d) The Holder may exercise its right, pursuant to this Paragraph 7,
to require PBEKHG to repurchase all or a portion of the Warrant, and/or to
require PBEKHG to redeem some or all of the shares of Common Stock for which
the Warrant was exercised, by surrendering for such purpose to PBE,KHG, at its
principal office within the time period specified in the preceding
subparagraph, the Warrant and/or a certificate or certificates representing
the number of shares to be redeemed accompanied by a written notice stating
that it elects to require PBEKHG to repurchase the Warrant or a portion thereof
and/or to redeem all or a specified number of such shares in accordance with
the provisions of this Paragraph 7. As promptly as practicable, and in any
event within five business days after the surrender of the Warrant and/or
such certificates and the receipt of such notice relating thereto, PBEKHG shall
deliver or cause to be delivered to the Holder: (i) the applicable
Redemption Price (in immediately available funds) for the shares of Common
Stock which it is not then prohibited under applicable law or regulation
from redeeming, and/or (ii) the applicable Warrant Repurchase Price, and/or
(iii) if the Holder has given PBEKHG notice that less
than the whole Warrant is to be repurchased and/or less than the full number
of shares of Common Stock evidenced by the surrendered certificate or
certificates are to be redeemed, a new certificate or certificates, of like
tenor, for the number of shares of Common Stock evidenced by such
surrendered certificate or certificates less the number shares of Common
Stock redeemed and/or a new Warrant reflecting the fact that only a portion
of the Warrant was repurchased.
(e) To the extent that PBEKHG is prohibited under applicable law or
regulation, or as a result of administrative or judicial action, from
repurchasing the Warrant and/or redeeming the Common Stock as to which the
Holder has given notice of repurchase and/or redemption, PBEKHG shall
immediately so notify the Holder and thereafter deliver or cause to be
delivered, from time to time to the Holder, the portion of the Warrant
Repurchase Price and/or the Redemption Price which it is no longer
prohibited from delivering, within five business days after the date on
which PBEKHG is no longer so prohibited; provided, however, that to the extent
-------- -------
that PBEKHG is at the time and after the expiration of 25 months, so prohibited
from delivering the Warrant Repurchase Price and/or the Redemption Price, in
full (and PBEKHG hereby undertakes to use its best efforts to obtain all
required regulatory and legal approvals as promptly as practicable), PBEKHG
shall deliver to the Holder a new Warrant (expiring one year after delivery)
evidencing the right of the Holder to purchase that number of shares of
Common Stock representing the portion of the Warrant which PBEKHG is then so
prohibited from repurchasing, and/or PBEKHG shall deliver to the Holder a
certificate for the shares of Common Stock which PBEKHG is then so prohibited
from redeeming, and PBEKHG shall have no further obligation to repurchase such
-8-
new Warrant or redeem such Common Stock; and provided further, that upon
--- -------- -------
receipt of such notice and until five days thereafter the Holder may revoke
its notice of repurchase of the Warrant and/or redemption of Common Stock by
written notice to PBEKHG at its principal office stating that the Holder elects
to revoke its election to exercise its right to require PBEKHG to repurchase
the Warrant and/or redeem the Common Stock, whereupon PBEKHG will promptly
redeliver to the Holder the Warrant and/or the certificates representing
shares of Common Stock surrendered to PBEKHG for purposes of such repurchase
and/or redemption, and PBEKHG shall have no further obligation to repurchase
such Warrant and/or redeem such Common Stock.
(f) Notwithstanding anything to the contrary herein, PBE shall be
obligated to pay any sums due FFC or any other Holders under this Paragraph
7 only upon consummation of an Acquisition Transaction referenced in
Paragraph 2 herein; provided, however, PBE's obligation to make such a
payment due to the exercise event described in clause (iii) or the
definition of Acquisition Transaction described in clause (z) of Paragraph
2 shall become binding only upon an acquisition of Beneficial Ownership of
50% or more of the PBE Common Stock or securities representing 50% or more
of the voting power of PBE.
(g) As used in this Agreement the following terms have the meanings
indicated:
(1) "Acquiring Person" shall mean any "Person" (hereinafter
defined) who or which is the "Beneficial Owner" (hereinafter defined) of
25% or more of the Common Stock;
(2) A "Person" shall mean any individual, firm, corporation or
other entity and shall also include any syndicate or group deemed to be
a "Person" by operation of Section 13(d)(3) of the Securities Exchange
Act of 1934, as amended;
(3) A Person shall be a "Beneficial Owner", and shall have
"Beneficial Ownership",Ownership," of all securities:
(i) which such Person or any of its Affiliates (as
hereinafter defined) beneficially owns, directly or indirectly; and
(ii) which such Person or any of its Affiliates or Associates
has (1) the right to acquire (whether such right is exercisable
immediately or only after the passage of time or otherwise) -9-
pursuant
to any agreement, arrangement or understanding or upon the exercise
of conversion rights, exchange rights, warrants or options, or
otherwise, or (2) the right to vote pursuant to any proxy, power of
attorney, voting trust, agreement, arrangement or understanding; and
(4) "Affiliate" and "Associate" shall have the respective meanings
ascribed to such terms in Rule 12b-2 of the regulations promulgated by
the SEC under the Securities and Exchange Act of 1934, as amended.
8. Remedies. Without limiting the foregoing or any remedies available to
--------
FFC, it is specifically acknowledged that FFC would not have an adequate remedy
at law for any breach of this Warrant Agreement and shall be entitled to
specific performance of PBE'sKHG's obligations under, and injunctive relief against
any actual or threatened violation of the obligations of any Person subject to,
this Agreement.
9. Miscellaneous.
-------------
(a) The representations, warranties, and covenants of PBEKHG set forth in
the Merger Agreement are hereby incorporated by reference in and made a part
of this Agreement, as if set forth in full herein.
(b) This Agreement, the Warrant and the Merger Agreement set forth the
entire understanding and agreement of the parties hereto and supersede any
and all prior agreements, arrangements and understandings, whether written
or oral, relating to the subject matter hereof and thereof. No amendment,
supplement, modification, waiver, or termination of this Agreement shall be
valid and binding unless executed in writing by both parties.
(c) This Agreement shall be deemed to have been made in, and shall be
governed by and interpreted in accordance with the substantive laws of, the
Commonwealth of Pennsylvania.
10. Termination. This Agreement, and all of PBE's obligations hereunder,
-----------
shall automatically terminate, without further action of the parties, at the
time the Warrant terminates.
-10-
IN WITNESS WHEREOF, the parties hereto have caused this instrument to be
executed by their duly authorized officers as of the day and year first above
written.
FULTON FINANCIAL CORPORATION
By: ---------------------------------/s/ Rufus A. Fulton, Jr.
-----------------------------------------------
Rufus A. Fulton, Jr., President
and Chief Executive Officer
Attest: -----------------------------/s/ William R. Colmery
-------------------------------------------
William R. Colmery, Secretary
THE PEOPLES BANK OF ELKTONKEYSTONE HERITAGE GROUP, INC.
By: ---------------------------------
David K. Williams, Sr., Chairman
of the Board/s/ Albert B. Murry
-----------------------------------------------
Albert B. Murry, President
and Chief Executive Officer
Attest: -----------------------------
Cathy C. Dunn,/s/ Peggy Y. Layser
-------------------------------------------
Peggy Y. Layser, Secretary
WARRANT
-------
to Purchase up to 45,888981,740 Shares of the
Common Stock, No Par Value,
$10.00 Per Share,
of
THE PEOPLES BANK OF ELKTONKEYSTONE HERITAGE GROUP, INC.
-----------------------------
This is to certify that, for value received, Fulton Financial Corporation
("FFC") or any permitted transferee (FFC or such transferee being hereinafter
called the "Holder") is entitled to purchase, subject to the provisions of this
Warrant, from The Peoples Bank of Elkton,Keystone Heritage Group, Inc., a Maryland trust companyPennsylvania business corporation
("PBE"KHG"), at any time on or after the date hereof, an aggregate of up to 45,888981,740
fully paid and non-assessable shares of common stock, no par value $10.00 per share, of PBE (the "Common
Stock"), of KHG at a price per share equal to $80.00,$36.75, subject to adjustment as
herein provided (the "Exercise Price"). This Warrant is transferable only in
accordance with the terms and provisions of the Warrant Agreement (as defined
below) the terms of which are deemed incorporated herein.
1. Exercise of Warrant. Subject to the provisions hereof and the
-------------------
limitations set forth in Paragraph 2 of a Warrant Agreement of even date
herewith by and between FFC and PBEKHG (the "Warrant Agreement"), which Warrant
Agreement was entered into in connectionsimultaneously with an Affiliation anda Merger Agreement dated March 18, 1997of even date
herewith between FFC and PBEKHG (the "Merger Agreement"), this Warrant may be
exercised in whole or in part or sold, assigned or transferred at any time or
from time to time on or after the date hereof. This Warrant shall be exercised
by presentation and surrender hereof to PBEKHG at the principal office of PBE,KHG,
accompanied by (i) a written notice of exercise, (ii) payment to PBE,KHG, for the
account of PBE and in the form of a certified or bank
check,KHG, of the Exercise Price for the number of shares of Common Stock
specified in such notice, and (iii) a certificate of the Holder specifying the
event or events which have occurred and entitle the Holder to exercise this
Warrant. The Exercise Price for the number of shares of Common Stock specified
in the notice shall be payable in immediately available funds.
Upon such presentation and surrender, PBEKHG shall issue promptly (and within
one business day if requested by the Holder) to the Holder or its assignee,
transferee or designee the number of shares of Common Stock to which the Holder
is entitled hereunder. PBEKHG covenants and warrants that such shares of Common
Stock, when so issued, will be duly authorized, validly issued, fully paid and
non-assessable, and free and clear of all liens and encumbrances.
If this Warrant should be exercised in part only, PBEKHG shall, upon surrender
of this Warrant for cancellation, execute and deliver a new Warrant evidencing
the rights of the Holder thereof to purchase the balance of the shares of Common
Stock issuable hereunder. Upon receipt by PBEKHG of this Warrant, in proper form
for exercise, the Holder shall be deemed to be the holder of record of the
shares of Common Stock issuable upon such exercise, notwithstanding that the
stock transfer books of PBEKHG may then be closed or that certificates representing
such shares of Common Stock shall not then be actually delivered to the Holder.
PBEKHG shall pay all expenses, and any and all United States federal, state and
local taxes and other charges, that may be payable in connection with the
preparation, issue and delivery of stock certificates pursuant to this Paragraph
1 in the name of the Holder or its assignee, transferee or designee.
2. Reservation of Shares; Preservation of Rights of Holder.
-------------------------------------------------------
PBEKHG shall at all times, while this Warrant is outstanding and unexercised,
maintain and reserve, free from preemptive rights, such number of authorized but
unissued shares of Common Stock as may be necessary so that this Warrant may be
exercised without any additional authorization of Common Stock after giving
effect to all other options, warrants, convertible securities and other rights
to acquire shares of Common Stock at the time outstanding. PBEKHG further agrees
that (i) it will not, by charter amendment or through reorganization,
consolidation, merger, dissolution or sale of assets, or by any other voluntary
act or omission, avoid or seek to avoid the observance or performance of any of
the covenants, stipulations or conditions to be observed or performed hereunder
or under the Warrant Agreement by PBE,KHG, (ii) it will promptly take all action
(including (A) complying with all premergerpre-merger notification, reporting and waiting
period requirements specified in 15 U.S.C. (S)18a and the regulations
promulgated thereunder and (B) in the event that, under Section 3 of the Bank
Holding Company Act of 1956, as amended (12 U.S.C. (S)1842(a)(3)), or the Change
in Bank Control Act of 1978, as amended (12 U.S.C. (S)1817(j)), or the Financial
Institutions Article, Annotated Code of Maryland (Fl (S)5-901 et. seq.) prior approval
of the Board of Governors of the Federal Reserve System (the "Board"),
the Federal Deposit Insurance Corporation (the "FDIC"), or the Maryland State
Bank Commissioner (the "Commissioner") is
necessary before this Warrant may be exercised, cooperating fully with the
Holder in preparing any and all such applications and providing such information
to the Board as the Board the FDIC or the
Commissioner may require) in order to permit the Holder to exercise
this Warrant and PBEKHG duly and effectively to issue shares of its Common Stock
hereunder, and (iii) it will promptly take all action necessary to protect the
rights of the Holder against dilution as provided herein.
3. Fractional Shares. PBEKHG shall not be required to issue fractional shares
-----------------
shares
of Common Stock upon exercise of this Warrant but shall pay for any fractional
shares in cash or by certified or official bank check at the Exercise Price.
4. Exchange or Loss of Warrant. This Warrant is exchangeable, without
---------------------------
expense, at the option of the Holder, upon presentation and surrender hereof at
the -2-
principal office of PBEKHG for other warrants of different denominations
entitling the Holder to purchase in the aggregate the same number of shares of
Common Stock issuable hereunder. The term "Warrant" as used herein includes any
warrants for which this Warrant may be exchanged. Upon receipt by PBEKHG of
evidence reasonably satisfactory to it of the loss, theft, destruction or
mutilation of this Warrant, and (in the case of loss, theft or destruction) of
reasonably satisfactory indemnification, and upon surrender and cancellation of
this Warrant, if mutilated, PBEKHG will execute and deliver a new Warrant of like
tenor and date.
5. Repurchase. The Holder shall have the right to require PBEKHG to
----------
repurchase all or any portion of this Warrant under the terms and conditions of
Paragraph 7 of the Warrant Agreement.
6. Adjustment. The number of shares of Common Stock issuable upon the
----------
exercise of this Warrant and the Exercise Price shall be subject to adjustment
from time to time as provided in this Paragraph 6.
(A) Stock Dividends, etc.
---------------------
(1) Stock Dividends. In case PBEKHG shall pay or make a dividend or
---------------
other distribution on any class of capital stock of PBEKHG in Common Stock, the
number of shares of Common Stock issuable upon exercise of this Warrant shall be
increased by multiplying such number of shares by a fraction of which the
denominator shall be the number of shares of Common Stock outstanding at the
close of business on the day immediately preceding the date of such distribution
and the numerator shall be the sum of such number of shares and the total number
of shares of Common Stock constituting such dividend or other distribution, such
increase to become effective immediately after the opening of business on the
day following such distribution.
(2) Subdivisions. In case outstanding shares of Common Stock shall
------------
be subdivided into a greater number of shares of Common Stock, the number of
shares of Common Stock issuable upon exercise of this Warrant at the opening of
business on the day following the day upon which such subdivision becomes
effective shall be proportionately increased, and, conversely, in case
outstanding shares of Common Stock shall each be combined into a smaller number
of shares of Common Stock, the number of shares of Common Stock issuable upon
exercise of this Warrant at the opening of business on the day following the day
upon which such combination becomes effective shall be proportionately
decreased, such increase or decrease, as the case may be, to become effective
immediately after the opening of business on the day following the date upon
which such subdivision or combination becomes effective.
-3-
(3) Reclassifications. The reclassification of Common Stock into
-----------------
securities (other than Common Stock) and/or cash and/or other consideration
shall be deemed to involve a subdivision or combination, as the case may be, of
the number of shares of Common Stock outstanding immediately prior to such
reclassification into the number or amount of securities and/or cash and/or
other consideration outstanding immediately thereafter and the effective date of
such reclassification shall be deemed to be "the day upon which such subdivision
becomes effective," or "the day upon which such combination becomes effective,"
as the case may be, within the meaning of clause (2) above.
(4) Optional Adjustments. PBEKHG may make such increases in the number
--------------------
of shares of Common Stock issuable upon exercise of this Warrant, in addition to
those required by this subparagraph (A), as shall be determined by its Board of
Directors to be advisable in order to avoid taxation so far as practicable of
any dividend of stock or stock rights or any event treated as such for federal
income tax purposes to the recipients.
(5) Adjustment to Exercise Price. Whenever the number of shares of
----------------------------
Common Stock issuable upon exercise of this Warrant is adjusted as provided in
this Paragraph 6(A), the Exercise Price shall be adjusted by a fraction in which
the numerator is equal to the number of shares of Common Stock issuable prior to
the adjustment and the denominator is equal to the number of shares of Common
Stock issuable after the adjustment.
(B) Certain Sales of Common Stock.
-----------------------------
(1) Adjustment to Shares Issuable. If and whenever PBEKHG sells or
-----------------------------
otherwise issues (other than under circumstances in which Paragraph 6(A)
applies) any shares of Common Stock, the number of shares of Common Stock
issuable upon exercise of this Warrant shall be increased by multiplying such
number of shares by a fraction, the denominator of which shall be the number of
shares of Common Stock outstanding at the close of business on the day
immediately preceding the date of such sale or issuance and the numerator of
which shall be the sum of such number of shares and the total number of shares
constituting such sale or other issuance, such increase to become effective
immediately after the opening of business on the day following such sale or
issuance.
(2) Adjustment to Exercise Price. If and whenever PBEKHG sells or
----------------------------
otherwise issues any shares of Common Stock (excluding any stock dividend or
other issuance not for consideration to which Paragraph 6(A) applies) for a
consideration per share which is less than the Exercise Price at the time of
such sale or other issuance, then in each such case the Exercise Price shall be
forthwith changed (but only if a reduction would result) to the price
(calculated to the nearest -4-
cent) determined by dividing: (i) an amount equal to
the sum of (aa) the number of shares of Common Stock outstanding immediately
prior to such issue or sale, multiplied by the then effective Exercise Price,
plus (bb) the total consideration, if any, received and deemed received by PBEKHG
upon such issue or sale, by (ii) the total number of shares of Common Stock
outstanding immediately after such issue or sale.
(C) Definition. For purposes of this Paragraph 6, the term "Common
----------
Stock" shall include (1) any shares of PBEKHG of any class or series which has no
preference or priority in the payment of dividends or in the distribution of
assets upon any voluntary or involuntary liquidation, dissolution or winding up
of PBEKHG and which is not subject to redemption by PBE,KHG, and (2) any rights or
options to subscribe for or to purchase shares of Common Stock or any stock or
securities convertible into or exchangeable for shares of Common Stock (such
convertible or exchangeable stock or securities being hereinafter called
"Convertible Securities"), whether or not such rights or options or the right to
convert or exchange any such Convertible Securities are immediately exercisable.
For purposes of any adjustments made under Paragraph 6(A) or 6(B) as a result of
the distribution, sale or other issuance of rights or options or Convertible
Securities, the number of Shares of Common Stock outstanding after or as a
result of the occurrence of events described in Paragraph 6(A)(1) or 6(B)(1)
shall be calculated by assuming that all such rights, options or Convertible
Securities have been exercised for the maximum number of shares issuable
thereunder.
7. Notice. (A) Whenever the number of shares of Common Stock for which
------
this Warrant is exercisable is adjusted as provided in Paragraph 6, PBEKHG shall
promptly compute such adjustment and mail to the Holder a certificate, signed by
the principal financial officer of PBE,KHG, setting forth the number of shares of
Common Stock for which this Warrant is exercisable as a result of such
adjustment having become effective.
(B) Upon the occurrence of any event which results in the Holder having
the right to require PBEKHG to repurchase this Warrant, as provided in Paragraph 7
of the Warrant Agreement, PBEKHG shall promptly notify the Holder of such event;
and PBEKHG shall promptly compute the Warrant Repurchase Price and furnish to the
Holder a certificate, signed by the principal financial officer of PBE,KHG, setting
forth the Warrant Repurchase Price and the basis and computation thereof.
8. Rights of the Holder. (A) Without limiting the foregoing or any
--------------------
remedies available to the Holder, it is specifically acknowledged that the
Holder would not have an adequate remedy at law for any breach of the provisions
of this Warrant and shall be entitled to specific performance of PBE'sKHG's
obligations under, and injunctive relief against any actual or threatened
violation of the obligations of any Person (as defined in Paragraph 7 of the
Warrant Agreement) subject to, this Warrant.
-5-
(B) The Holder shall not, by virtue of its status as Holder, be entitled
to any rights of a shareholder in PBE.KHG.
9. Termination. This Warrant and the rights conferred hereby shall
-----------
terminate (i) upon the Effective Date of the merger provided for in the Merger
Agreement, (ii) upon a valid termination of the Merger Agreement prior to the
occurrence of an event described in Paragraph 2 of the Warrant Agreement, or
(iii) to the extent this Warrant has not previously been exercised, 60 days
after the occurrence of an event described in Paragraph 2 of the Warrant
Agreement.
10. Governing Law. This Warrant shall be deemed to have been delivered in,
-------------
in,
and shall be governed by and interpreted in accordance with the substantive laws
of, the Commonwealth of Pennsylvania.
Dated: March 19, 1997
THE PEOPLES BANK OF ELKTON
By:
-----------------------------------
David K. Williams, Sr., Chairman
of the Board
Attest:
-------------------------------
Cathy C. Dunn, Secretary
-6-
EXHIBIT D
STATUTE RELATING TO DISSENTERS' RIGHTS
--------------------------------------
Maryland Banking Laws
FI, (S) 3-720
Part II. Rights of Objecting Stockholders.
-------------------------------------------
(S) 3-718. Successor may offer fair value.
(a) In general. -- The successor in a consolidation, merger, or transfer of
assets may offer to pay in cash to the objecting stockholders of a constituent
bank not more than what it considers to be the fair value of their shares of
stock as of the time of the stockholders' meeting approving the transaction.
(b) Effect of acceptance. -- An objecting stockholder who accepts the offer is
barred from receiving the appraised fair value of the shares of stock under (S)
3-719 of this subtitle. (An. Code 1957, art. 11, (S)(S) 109, 113; 1980, ch. 33,
(S) 2.)
(S) 3-719. Right to fair value.
(a) General rule. -- The owner of shares of stock that were voted against a
consolidation, merger, or transfer of assets is entitled to receive the fair
value of those shares, in cash, if the transaction becomes effective.
(b) Procedure by stockholder. -- A stockholder who desires to receive payment
of the fair value for shares under this section, within 30 days after the
transaction becomes effective, shall:
(1) Make a written demand on the successor for payment; and
(2) Surrender the stock certificates. (An. Code 1957, art. 11, (S)(S) 109,
113; 1980, ch. 33, (S) 2.)
(S)3-720. Appraisal of fair value.
(a) Basis of fair value. -- The fair value of the shares of stock shall be
determined as of the date of the stockholders' meeting approving the
consolidation, merger, or transfer of assets.
(b) Appraisers.
(1) The determination of fair value shall be made by three appraisers as
follows:
(i) One chosen by the owners of two thirds of the shares involved;
(ii) One chosen by the board of directors of the successor; and
(iii) The third chosen by the other two appraisers.
(2) The fair value to which any two appraisers agree shall govern.
(3) The appraisers shall give notice of the fair value determination to the
successor and to each stockholder who has made demand for the
determination under (S) 3-719 of this subtitle.
(c) Reappraisal.
(1) Within 5 days after the appraisers give the notice of the fair value
determination, a stockholder who is dissatisfied with that value may
notify the Commissioner.
(2) The Commissioner shall have the shares reappraised.
(3) This reappraisal is final and binding as to the value of the shares of
stock of that stockholder.
(d) Appraisal by Commissioner.
(1) If the appraisal to be made under subsection (b) of this section is not
completed within 90 days after the consolidation, merger, or transfer of
assets becomes effective, the Commissioner shall have an appraisal made.
(2) This appraisal is final and binding as to the value of the shares of stock
of all objecting stockholders.
(e) Expenses of appraisals. -- The successor shall pay the expenses of each
appraisal made under this section. (An. Code 1957, art. 11, (S)(S) 109, 113;
1980, ch. 33, (S) 2; 1996, ch. 326, (S) 2.)
(S) 3-721. Amount due is debt of successor.
Any amount due to an objecting stockholder under this Part II is a debt of the
successor. (An. Code 1957, art. 11, (S) 113; 1980, ch. 33, (S) 2.)
Subtitle 8. Conversions and Voluntary Dissolutions.
(S)3-801. Conversion of national banking association into commercial bank.
(a) General rule. -- A national banking association that is located in this
State may convert into a commercial bank as provided by federal law and this
section.
(b) State requirements in general.
(1) The national banking association shall meet the requirements of this
title for incorporation of a commercial bank.
(2) The procedures for incorporation may be modified as required by the
difference between incorporation and conversion.
(c) Articles of incorporation. -- The consenting stockholders of the national
banking association shall sign, acknowledge, and file articles of incorporation.
The articles shall state that the conversion has been approved by the
stockholders in the manner required by federal law.
(d) Cash payment for stock. -- The requirement for cash payment for stock may
be met by exchanging shares of the new commercial bank for those of the national
banking association valued at not more than fair cash market value.
(e) Transfer of property, rights, duties, and franchises.
(1) The new commercial bank shall be considered the same business and
corporate entity as the national banking association and, except as
limited by this article or by its charter or bylaws, has all of the
rights, powers, and duties of the national banking association.
(2) The national banking association's rights, franchises, and interests in
any property become the property of the new commercial bank, subject to
the liabilities of the national banking association that exist at the
time of the conversion.
81
For the Three Months Ended
March 31, 1997 and 1996
TABLE OF CONTENTS
-----------------
FINANCIAL STATEMENTS Page
----
Balance Sheets 84
Statements of Income 85
Statements of Cash Flows 86
NOTES TO FINANCIAL STATEMENTS 87
83
THE PEOPLES BANK OF ELKTON
BALANCE SHEETS (UNAUDITED)
- -------------------------------------------------------------------------------
March 31, 1997 December 31, 1996
ASSETS
- --------------------------------------------------------------------------------
Cash and due from banks $ 3,991,846 $ 5,339,580
Federal funds sold 650,000 2,175,000
Investment securities:
Held to maturity (Fair value:
$364,288 in 1997
and $342,373 in 1996) 370,328 344,666
Available for sale 20,107,605 18,010,189
Loans 65,594,285 64,543,809
Less: Allowance for loan losses (962,767) (959,217)
---------------- ----------------
Net Loans 64,631,518 63,584,592
================ ================
Bank premises and equipment 930,115 951,722
Accrued interest and fees receivable 666,992 727,958
Deferred income taxes 563,363 484,894
Income taxes receivable - 44,692
Prepaid expenses and other assets 285,148 299,159
---------------- -----------------
Total Assets $92,196,915 $91,962,452
================ =================
LIABILITIES
- --------------------------------------------------------------------------------
Deposits:
Demand $10,551,124 $12,338,953
Money Market 13,475,707 12,973,790
Savings and NOW 15,411,736 16,773,075
Other time deposits 40,289,085 37,032,556
---------------- -----------------
Total Deposits 79,727,652 79,118,374
---------------- -----------------
Short-term borrowings 444,294 552,799
Federal Home Loan Bank borrowings 1,500,000 2,000,000
Accrued interest payable 365,191 211,207
Accrued income taxes 99,941 -
Other liabilities 186,181 178,001
---------------- -----------------
Total Liabilities 82,323,259 82,060,381
---------------- -----------------
STOCKHOLDERS' EQUITY
- -------------------------------------------------------------------------------
Common stock ($10.00 par)
Shares: Authorized 500,000
Issued and
Outstanding 230,596 2,305,960 2,305,960
Surplus 2,305,960 2,305,960
Undivided profits 5,426,286 5,329,987
Net unrealized depreciation on investment (164,550) (39,836)
securities available for sale
---------------- -----------------
Total Shareholders'
Equity 9,873,656 9,902,071
---------------- -----------------
Total Liabilities and
Shareholders' Equity $92,196,915 $91,962,452
================ =================
- -------------------------------------------------------------------------------
See notes to financial statements
84
THE PEOPLES BANK OF ELKTON
STATEMENTS OF INCOME (UNAUDITED)
- --------------------------------------------------------------------------------
Three Months Ended March 31
----------------------------
1997 1996
----------------------------
INTEREST REVENUE
- --------------------------------------------------------------------------------
Loans, including fees $1,472,829 $1,356,289
U.S. Treasury and Government agency securities 256,789 266,384
State and municipal securities 49,165 12,113
Corporate bonds 2,062 37,595
Other investment securities 5,314 5,121
Federal funds sold 10,242 14,154
--------------- ------------
Total Interest Revenue 1,796,401 1,691,656
INTEREST EXPENSE
- --------------------------------------------------------------------------------
Deposits of $100,000 or more 131,183 99,325
Other deposits 566,210 556,330
Short-term borrowings 3,299 5,488
Federal Home Loan Bank borrowings 21,376 33,734
--------------- ------------
Total Interest Expense 722,068 694,877
Net Interest Income 1,074,333 996,779
PROVISION FOR LOAN LOSSES 24,000 21,000
--------------- ------------
Net Interest Income After Provision for Loan Losses 1,050,333 975,779
--------------- ------------
OTHER OPERATING REVENUE
- --------------------------------------------------------------------------------
Service charges on deposit accounts 93,716 94,973
Other commissions and fees 20,802 14,703
--------------- ------------
114,518 109,676
OTHER EXPENSES
- --------------------------------------------------------------------------------
Salaries 308,555 259,860
Employee benefits 85,301 80,389
Occupancy expense 43,431 38,945
Furniture and equipment expense 63,253 51,227
Other operating expense 215,744 211,318
--------------- ------------
716,284 641,739
Income Before Income Taxes 448,567 443,716
INCOME TAXES 144,733 154,446
--------------- ------------
Net Income $ 303,834 $ 289,270
=============== ============
Earnings per common share $ 1.32 $ 1.25
- --------------------------------------------------------------------------------
See notes to financial statements
85
THE PEOPLES BANK OF ELKTON
STATEMENTS OF CASH FLOWS (UNAUDITED)
- ------------------------------------------------------------------------------
Three Months Ended
March 31
---------------------------------
1997 1996
---------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 303,834 $ 289,270
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan losses 24,000 21,000
Depreciation and amortization of
premises and equipment 49,699 50,511
Net amortization (accretion) of investment
security premiums (discounts) 1,283 (22,916)
Gain on sale of foreclosed real estate - (4,832)
Decrease (increase) in accrued interest
and fees receivable 60,966 (44,884)
Decrease in prepaid expenses and other
assets 14,011 84,582
Increase in accrued interest payable 153,984 125,514
Increase in accrued income taxes payable 144,633 140,447
Increase (decrease) in other liabilities 8,180 (17,705)
----------- -----------
Total adjustments 456,756 331,717
----------- -----------
Net cash provided by operating
activities 760,590 620,987
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities of securities held
to maturity - 755,067
Proceeds from maturities of securities
available for sale 1,750,000 6,748,933
Purchase of securities available for sale (4,077,544) (7,964,774)
Net increase in loans (1,070,926) (2,008,645)
Proceeds from sales of foreclosed real estate - 93,148
Purchase of premises and equipment (28,092) (116,615)
----------- -----------
Net cash used in investing
activities (3,426,562) (2,492,886)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net (decrease) increase in demand and savings
deposits (2,647,251) 758,867
Net increase in time deposits 3,256,529 479,477
Decrease in long-term debt (500,000) (500,000)
(Decrease) increase in short-term borrowings (108,505) 98,745
Dividends paid (207,535) (115,298)
----------- -----------
Net cash (used in) provided by
financing activities (206,762) 721,794
----------- -----------
Net Decrease in Cash and Cash Equivalents (2,872,734) (1,150,105)
Cash and Cash Equivalents at Beginning of
Period 7,514,580 4,707,334
----------- -----------
Cash and Cash Equivalents at End of Period $ 4,641,846 $ 3,557,229
=========== ===========
Supplemental Disclosures of Cash Flow Information
Cash paid during the period for:
Interest $ 565,543 $ 569,365
Income taxes $ - $ -
- ------------------------------------------------------------------------------
See notes to financial statements
86
THE PEOPLES BANK OF ELKTON
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
- -----------------------------------------
NOTE A - Basis of Presentation
The accompanying unaudited financial statements have been prepared in accordance
with generally accepted accounting principles for interim financial information
and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X.
Accordingly, they do not include all of the information and notes required by
generally accepted accounting principles for complete financial statements. In
the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included.
Operating results for the three month period ended March 31, 1997 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 1997.
NOTE B - Net Income Per Share
Net income per share is computed on the basis of the weighted average number of
common shares outstanding.
NOTE C - Merger With Fulton Financial Corporation
On March 18, 1997, The Peoples Bank of Elkton ("PBE") entered into an
Affiliation and Merger Agreement with Fulton Financial Corporation ("FFC").
Under the terms of the agreement, FFC will acquire each of the 230,596
outstanding shares of the common stock of PBE in exchange for 4.158 shares of
FFC's common stock.
FFC is a $4.1 billion multi-bank holding company which owns ten other banking
subsidiaries in Pennsylvania, Maryland, New Jersey and Delaware. PBE will
become FFC's second banking subsidiary in the State of Maryland. The acquisition
is subject to approval by regulatory authorities and PBE's shareholders and is
expected to close in the third or fourth quarter of 1997.
NOTE D - New Accounting Standards
Accounting for Transfers and Servicing of Financial Assets and Extinguishments
- ------------------------------------------------------------------------------
of Liabilities: Statement of Financial Accounting Standards No. 125, "Accounting
- --------------
for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities" (Statement 125) was issued in 1996 and is effective for 1997.
Statement of Financial Accounting Standards No. 127 (Statement 127) was also
issued in 1996 and amended Statement 125 by deferring for one year the effective
date for certain provisions of Statement 125. PBE adopted the applicable
provisions of Statement 125, on January 1, 1997 and intends to adopt the
remaining provisions on January 1, 1998. No material financial statement impact
is expected.
Earnings Per Share: Statement of Financial Accounting Standards No. 128,
- ------------------
"Earnings Per Share" (Statement 128) was issued in February, 1997. Statement 128
simplifies the standards for computing earnings per share (EPS) previously found
in Accounting Principles Board Opinion No. 15 and makes them comparable to
international EPS standards. It replaces the presentation of primary EPS with a
presentation of basic EPS and requires dual presentation of basic and diluted
EPS on the face of the income statement for all entities with complex capital
structures. It also requires a reconciliation of the numerator and denominator
of basic and diluted EPS. Statement 128 is effective for periods ending after
DecemberAugust 15, 1997
KEYSTONE HERITAGE GROUP, INC.
By: /s/ Albert B. Murry
-----------------------------------------------
Albert B. Murry, President and
requires restatement of all prior-period EPS data
presented. Statement 128 will not have a significant impact on the earnings per
share of PBE.
87
THE PEOPLES BANK OF ELKTON
REPORT ON AUDITS
OF FINANCIAL STATEMENTS
FOR THE YEARS ENDED
DECEMBER 31, 1996, 1995 AND 1994
No extracts from this report may be published without our written consent
Stegman & Company
TABLE OF CONTENTS
Page
INDEPENDENT AUDITORS' REPORT 5
FINANCIAL STATEMENTS
Balance Sheets 7
Statements of Income 8
Statements of Changes in Stockholders' Equity 9
Statement of Cash Flows 10-11
NOTES TO FINANCIAL STATEMENTS 12-23
OFFICERS, DIRECTORS AND FORMER DIRECTORS 24
3
[LETTERHEAD OF STEGMAN & COMPANY APPEARS HERE]
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
The Peoples Bank of Elkton
Elkton Maryland
We have audited the accompanying balance sheets of The Peoples Bank of
Elkton as of December 31, 1996, 1995 and 1994, and the related statements of
income, changes in stockholders' equity, and cash flows for the years then
ended. 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
misstatements. 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 The Peoples Bank of
Elkton as of December 31, 1996, 1995 and 1994, and the results of its operations
and its cash flows for the years then ended in conformity with generally
accepted accounting principles.Chief Executive Officer
Attest: /s/ Stegman & Company
Towson, Maryland
January 6, 1997
5
THE PEOPLES BANK OF ELKTON
BALANCE SHEETS
DECEMBER 31, 1996, 1995 AND 1994
ASSETS
1996 1995 1994
------------ ------------ ------------
Cash and due from banks $ 5,339,580 $ 3,607,334 $ 3,919,935
Federal funds sold 2,175,000 1,100,000 4,500,000
Investments available for sale - at
fair value 18,010,189 19,398,914 12,121,940
Investments held to maturity at
amortized cost -
fair value of $342,373 (1996),
$3,690,792 (1995) and $3,662,953
(1994) 344,666 3,681,316 3,740,403
Loans 64,543,809 54,849,526 51,454,665
Less: allowance for loan losses (959,217) (676,734) (711,986)
----------- ----------- -----------
Loans - net 63,584,592 54,172,792 50,742,679
Bank premises and equipment 951,722 735,005 725,027
Accrued interest and fees receivable 727,958 725,388 573,395
Deferred income taxes 484,894 312,589 448,500
Income taxes receivable 44,692 - 17,170
Prepaid expenses and other assets 299,159 317,094 321,480
Foreclosed real estate - 95,816 95,816
----------- ----------- -----------
TOTAL ASSETS $91,962,452 $84,146,248 $77,206,345
=========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Demand $12,338,953 $ 9,805,411 $ 9,546,069
Money market 12,973,790 14,348,673 15,277,593
Savings and NOW 16,773,075 13,702,619 15,108,388
Other time deposits 37,032,556 32,990,927 24,791,404
----------- ----------- -----------
Total deposits 79,118,374 70,847,630 64,723,454
Short-term borrowings 552,799 276,917 314,205
Federal Home Loan Bank borrowings 2,000,000 3,000,000 3,000,000
Accrued interest payable 211,207 209,658 134,807
Accrued income taxes - 4,203 -
Other liabilities 178,001 158,171 172,972
----------- ----------- -----------
Total liabilities 82,060,381 74,496,579 68,345,438
----------- ----------- -----------
Stockholders' equity:
Common stock, par value $10.00 per
share; authorized 500,000 shares;
230,596 shares issued and outstanding
for 1996, 1995 and 1994 2,305,960 2,305,960 2,305,960
Surplus 2,305,960 2,305,960 2,305,960
Undivided profits 5,329,987 5,022,182 4,444,845
Net unrealized (depreciation)
appreciation on investment securities
available for sale (39,836) 15,567 (195,858)
----------- ----------- -----------
Total stockholders' equity 9,902,071 9,649,669 8,860,907
----------- ----------- -----------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $91,962,452 $84,146,248 $77,206,345
=========== =========== ===========
See accompanying notes.
7
THE PEOPLES BANK OF ELKTON
STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
1996 1995 1994
----------- ---------- -----------
INTEREST REVENUE:
Loans, including fees $5,600,849 $5,088,349 $4,062,524
U.S. Treasury and Government
agency securities 1,157,411 746,902 445,309
State and municipal securities 105,228 12,968 20,922
Corporate bonds 101,875 248,617 514,790
Other investment securities 20,775 21,631 24,754
Federal funds sold 67,841 241,783 135,906
---------- ---------- ----------
Total interest revenue 7,053,979 6,360,250 5,204,205
---------- ---------- ----------
INTEREST EXPENSE:
Deposits of $100,000 or more 448,563 365,984 113,389
Other deposits 2,246,515 2,192,654 1,618,188
Short-term borrowings 27,260 21,481 15,680
Federal Home Loan Bank borrowings 119,778 152,471 151,500
---------- ---------- ----------
Total interest expense 2,842,116 2,732,590 1,898,757
---------- ---------- ----------
NET INTEREST INCOME 4,211,863 3,627,660 3,305,448
PROVISION FOR LOAN LOSSES 334,000 75,000 120,000
---------- ---------- ----------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 3,877,863 3,552,660 3,185,448
---------- ---------- ----------
OTHER OPERATING REVENUE:
Service charges on deposit accounts 353,885 347,490 341,686
Other commissions and fees 80,267 79,232 80,652
Gain on sale of foreclosed real estate 9,511 - -
---------- ---------- ----------
Total other operating revenue 443,663 426,722 422,338
---------- ---------- ----------
OTHER EXPENSES:
Salaries 1,185,856 1,070,844 934,208
Employee benefits 326,125 266,292 233,202
Occupancy expense 195,589 176,106 157,978
Furniture and equipment expense 234,148 163,531 155,827
Other operating expenses 814,336 695,190 703,680
---------- ---------- ----------
Total other expenses 2,756,054 2,371,963 2,184,895
---------- ---------- ----------
INCOME BEFORE INCOME TAXES 1,565,472 1,607,419 1,422,891
---------- ---------- ----------
INCOME TAXES:
Current 658,106 591,094 567,585
Deferred (138,346) 3,162 (39,806)
---------- ---------- ----------
519,760 594,256 527,779
---------- ---------- ----------
NET INCOME $1,045,712 $1,013,163 $ 895,112
========== ========== ==========
Earnings per common share $4.53 $4.39 $3.88
===== ===== =====
See accompanying notes.
8
THE PEOPLES BANK OF ELKTON
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
Unrealized
Appreciation
(Depreciation)
on Investment
Common Stock Securities
------------------- Undivided Available
Shares Par Value Surplus Profits for Sale
-------- ---------- ---------- ----------- --------------
Balances at January 1, 1994 230,596 $2,305,960 $2,305,960 $3,907,157 $ 74,529
Net income - - - 895,112 -
Cash dividend, $1.55 per share - - - (357,424) -
Unrealized depreciation on investment
securities available for sale, net of
applicable deferred income taxes - - - - (270,387)
------- ---------- ---------- ---------- -------------
Balances at December 31, 1994 230,596 2,305,960 2,305,960 4,444,845 (195,858)
Net income - - - 1,013,163 -
Cash dividend, $1.89 per share - - - (435,826) -
Unrealized appreciation on investment
securities available for sale, net of
applicable deferred income taxes - - - - 211,425
------- ---------- ---------- ---------- -------------
Balances at December 31, 1995 230,596 2,305,960 2,305,960 5,022,182 15,567
Net income - - - 1,045,712 -
Cash dividend, $3.20 per share - - - (737,907) -
Unrealized depreciation on investment
securities available for sale, net of
applicable deferred income taxes - - - - (55,403)
------- ---------- ---------- ---------- -------------
Balances at December 31, 1996 230,596 $2,305,960 $2,305,960 $5,329,987 $ (39,836)
======= ========== ========== ========== =============
See accompanying notes.
9
THE PEOPLES BANK OF ELKTON
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
1996 1995 1994
------------- ------------- ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,045,712 $ 1,013,163 $ 895,112
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation and amortization 218,679 189,412 176,061
Provision for credit losses 334,000 75,000 120,000
Deferred income taxes (138,346) 3,162 (39,806)
Gain on sale of foreclosed real
estate (9,511) - -
Increase in accrued income and
other assets (55,746) (180,792) (151,827)
Increase in accrued expenses and
other liabilities 17,176 64,253 63,813
Other - net (50,617) (36,735) 112,756
------------ ------------ -----------
Net cash provided by operating
activities 1,361,347 1,127,463 1,176,109
------------ ------------ -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities of held to
maturity investment securities 3,336,650 641,910 988,015
Proceeds from maturities of
available for sale securities 21,214,064 11,950,000 11,097,000
Proceeds from sale of student loans - 463,874 -
Purchase of available for sale
investment securities (19,915,602) (19,539,140) (6,808,455)
Net increase in loans (9,795,344) (3,858,735) (5,796,965)
Purchase of bank premises and
equipment (408,976) (149,035) (144,535)
Proceeds from sale of foreclosed
real estate 213,888 - -
Purchase of foreclosed real estate (7,500) - -
------------ ------------ -----------
Net cash used in investing
activities (5,362,820) (10,491,126) (664,940)
------------ ------------ -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits 8,270,744 6,124,176 5,492,209
Net increase (decrease) in
short-term borrowings 275,882 (37,288) (542,430)
Repayment of Federal Home Loan Bank
borrowings (1,000,000) - -
Dividends paid (737,907) (435,826) (357,424)
------------ ------------ -----------
Net cash provided by financing
activities 6,808,719 5,651,062 4,592,355
------------ ------------ -----------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS 2,807,246 (3,712,601) 5,103,524
CASH AND CASH EQUIVALENTS
AT BEGINNING OF YEAR 4,707,334 8,419,935 3,316,411
------------ ------------ -----------
CASH AND CASH EQUIVALENTS
AT END OF YEAR $ 7,514,580 $ 4,707,334 $ 8,419,935
============ ============ ===========
10
The Peoples Bank of Elkton
Statements of Cash Flows (Continued)
For the Years Ended December 31, 1996, 1995 and 1994
1996 1995 1994
---------- ---------- ----------
Supplemental schedule of cash flows
activity:
Interest paid $2,840,567 $2,657,739 $1,870,948
========== ========== ==========
Income taxes paid $ 692,000 $ 570,000 $ 588,600
========== ========== ==========
Noncash investing activities:
Transfer from loans to other real
estate owned $ 101,061 $ - $ -
======== =========== ========
See accompanying notes.
11
THE PEOPLES BANK OF ELKTON
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting and reporting policies in the accompanying financial
statements conform to generally accepted accounting principles and to general
practices within the banking industry. Certain reclassifications have been
made to amounts previously reported to conform with the classifications made in
1996.
Nature of Operations
--------------------
The Bank provides a full range of banking services to individuals and
businesses through its main office and one branche in Cecil County, Maryland.
Its primary deposit products are certificates of deposit and demand, savings,
NOW and money market accounts. Its primary lending products are commercial and
consumer loans and real estate mortgages.
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.
The Bank's loan portfolio consists primarily of residential and
commercial real estate mortgage loans in the Cecil County area. Accordingly,
the collectibility of a substantial portion of the Bank's loan portfolio is
susceptible to changes in the local economy and the local real estate market.
Investment Securities Available for Sale
----------------------------------------
Investment securities designated as available for sale are stated at
fair value based on quoted market prices. They represent those securities
which management may sell as part of its asset/liability strategy or that may
be sold in response to changing interest rates or liquidity needs. The cost of
securities sold is determined by the specific identification method.
Investment Securities Held to Maturity
--------------------------------------
Investment securities held to maturity are stated at amortized cost.
The Bank has the ability and intent to hold these securities until maturity.
12
Loans and Allowance for Loan Losses
-----------------------------------
Loans are stated at face value less deferred origination fees and the
allowance for loan losses. Interest on loans is accrued based on the principal
amounts outstanding. The accrual of interest is discontinued when
circumstances indicate that collection is questionable. The Bank recognizes
loan origination fees as revenue over the contractual life of the loan.
The allowance for loan losses is maintained at a level which, in
management's judgment, is adequate to absorb credit losses inherent in the loan
portfolio. The amount of the allowance is based on management's evaluation of
the collectibility of the loan portfolio, including the nature of the
portfolio, credit concentrations, trends in historical loss experience,
specific impaired loans, and economic conditions. Allowances for impaired
loans are generally determined based on collateral values or the present value
of estimated cash flows. The allowance is increased by a provision for loan
losses, which is charged to expense and reduced by charge offs, net of
recoveries.
While management uses all available information to recognize loan
losses, future additions to the allowance 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. Such examinations could result in the Bank recognizing
additions to these allowances based on the regulator's judgments about
information available to them at the time of their examination.
Foreclosed Real Estate
----------------------
Real estate acquired through foreclosure of loans is carried at cost
or fair value minus estimated costs of disposal, whichever is lower. Fair
value is based on independent appraisals and other relevant factors. At the
time of acquisition, any excess of the loan balance over fair value is charged
to the allowance for loan losses. Gains and losses on sales of foreclosed real
estate are included in non-interest income.
Bank Premises and Equipment
---------------------------
Bank premises and equipment are recorded at cost less accumulated
depreciation. Depreciation is computed using the straight-line and accelerated
methods over the estimated useful lives of the assets.
Income Taxes
------------
Deferred tax assets and liabilities are recognized for the future
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases.
Cash and Cash Equivalents
-------------------------
For purposes of reporting cash flows, cash and cash equivalents
include cash on hand, amounts due from banks, and federal funds sold.
Generally, federal funds are purchased and sold for one-day periods.
13
Earnings per Common Share
-------------------------
Earnings per common share are based on the weighted average number of
shares after giving retroactive effect to stock splits and dividends and
totaled 230,596 for 1996, 1995 and 1994.
2. ADOPTION OF RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
Impaired Loans
--------------
Effective January 1, 1995, the Corporation adopted the provisions of
Statements of Financial Accounting Standards Nos. 114 and 118, Accounting by
Creditors for Impairment of a Loan. This statement defines a loan as impaired
when, based on current information and events, it is probable that a creditor
will be unable to collect all amounts due according to the contractual terms of
a loan. If the value of the impaired loan is less than the recorded investment
in the loan. The creditor shall recognize the impairment by creating a
valuation allowance for the difference. See Note 5 for presentation of loans
which management considered impaired.
Financial Assets and Liabilities
--------------------------------
On January 1, 1997, the Bank adopted the provisions of Statement of
Financial Accounting Standards (SFAS) No. 125, Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities. This
statement provides consistent standards for distinguishing transfers of
financial assets that are sales from transfers that are secured borrowings.
The adoption of this pronouncement did not have a material impact on the
financial position of the Bank.
Long-Lived Assets
-----------------
Long-lived assets are evaluated regularly for other-than-temporary
impairment. If circumstances suggest that their value may be impaired and the
write-down would be material, an assessment of recoverability is performed
prior to any write-down of the asset. SFAS No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of,
was adopted on January 1, 1996. Implementation of this standard did not have a
significant impact on the financial condition or results of operations of the
Bank.
3. INVESTMENT SECURITIES AVAILABLE FOR SALE
The amortized cost, gross unrealized holding gains and losses and fair
values of investment securities available for sale are as follows:
December 31, 1996
------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
----------- ---------- ---------- -----------
U.S. Treasury $ 1,000,450 $ - $ 140 $ 1,000,310
U.S. Government agency 12,691,579 15,043 110,354 12,596,268
Corporate bonds 150,000 - 271 149,729
State and municipal 3,945,061 36,527 5,706 3,975,882
----------- ------- -------- -----------
Total debt securities
available for sale 17,787,090 51,570 116,471 17,722,189
Federal Home Loan Bank stock 288,000 - - 288,000
----------- ------- -------- -----------
$18,075,090 $51,570 $116,471 $18,010,189
=========== ======= ======== ===========
14
December 31, 1995
------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
----------- ---------- ---------- -----------
U.S. Treasury $ 5,739,267 $22,881 $ - $ 5,762,148
U.S. Government agency 11,749,962 893 - 11,750,855
Corporate bonds 777,009 540 - 777,549
Total debt securities 831,214 1,048 - 832,262
available for sale ----------- ------- -------- -----------
Equity securities 19,097,452 25,362 - 19,122,814
276,100 - - 276,100
----------- ------- -------- -----------
$19,373,552 $25,362 $ - $19,398,914
=========== ======= ======== ===========
December 31, 1994
------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
----------- ---------- ---------- -----------
U.S. Treasury $ 4,756,354 $ - $ 83,956 $ 4,672,398
U.S. Government agency 3,250,021 - 167,685 3,082,336
Corporate bonds 4,144,756 3,105 70,555 4,077,306
----------- ------- -------- -----------
Total debt securities
available for sale 12,151,131 3,105 322,196 11,832,040
Equity securities 289,900 - - 289,900
----------- ------- -------- -----------
$12,441,031 $ 3,105 $322,196 $12,121,940
=========== ======= ======== ===========
Contractual maturities for securities designated as being available for
sale at December 31, 1996 are shown below. Actual maturities will differ from
contractual maturities because borrowers may have the right to call or prepay
obligations with or without call or prepayment penalties.
Amortized Fair
Cost Value
----------- -----------
Maturing within one year $ 1,699,169 $ 1,699,511
Maturing over one to five years 10,921,636 10,878,557
Maturing over five years to ten years 4,666,875 4,648,143
Maturing over ten years 499,410 495,978
----------- -----------
Total debt securities $17,787,090 $17,722,189
available for sale =========== ===========
15
4. INVESTMENT SECURITIES HELD TO MATURITY
The amortized cost and estimated market values of investment securities
held to maturity are as follows:
December 31, 1996
----------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---------- ---------- ---------- ----------
U.S. Government agency $ 250,000 $ - $ 3,905 $ 246,095
State and municipal 94,666 1,612 - 96,278
---------- ------ ------- ----------
$ 344,666 $1,612 $ 3,905 $ 342,373
========== ====== ======= ==========
December 31, 1995
----------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---------- ---------- ---------- ----------