<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934 (Amendment No.___)
Filed by the Registrant [X]
Filed by a Party other than the Registrant [_]
Check the appropriate box:
[X] Preliminary Proxy Statement [_] Confidential, For Use of the
Commission Only (as permitted by
Rule 14a-6(e)(2))
[_] Definitive Proxy Statement
[_] Definitive Additional Materials
[_] Soliciting Material Pursuant to Section 240.14a-11(c) or Section 240.14a-12
Fulton Bancorp, Inc.
- --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
N/A
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than Registrant)
Payment of Filing Fee (Check the appropriate box):
[_] No fee required
[X] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
(1) Title of each class of securities to which transaction applies:
Fulton Bancorp, Inc. common stock par value $.01 per share
-------------------------------------------------------------------------
(2) Aggregate number of securities to which transaction applies:
1,653,949 shares
-------------------------------------------------------------------------
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which
the filing fee is calculated and state how it was determined):
$19.15
-------------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
$31,673,124
-------------------------------------------------------------------------
(5) Total fee paid:
$6,350
-------------------------------------------------------------------------
[_] Fee paid previously with preliminary materials.
[_] Check box if any part of the fee is offset as provided by Exchange
Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee
was paid previously. Identify the previous filing by registration statement
number, or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
-------------------------------------------------------------------------
(2) Form, Schedule or Registration Statement No.:
-------------------------------------------------------------------------
(3) Filing Party:
-------------------------------------------------------------------------
(4) Date Filed:
-------------------------------------------------------------------------
<PAGE>
__________, 1999
Dear Stockholder:
The Boards of Directors of Fulton Bancorp, Inc. and Central Bancompany,
Inc. have agreed to a merger in which Central will acquire Fulton. In the
merger, Fulton will merge with and into a subsidiary of Central, and Fulton
Savings Bank, F.S.B. will merge with and into Central's subsidiary, The Central
Trust Bank.
In the merger, you will receive a cash payment of $19.15 for each share of
Fulton stock that you own. The closing price of Fulton's common stock on the
last trading day before the merger was announced was $17.00 per share. Upon
completion of the merger you will no longer own any stock or have any interest
in Fulton, nor will you receive, as a result of the merger, any stock of
Central. For United States federal income tax purposes, your exchange of shares
of Fulton common stock for cash generally will cause you to recognize a gain or
loss measured by the difference between the cash you receive in the merger and
your tax basis in your shares of Fulton common stock.
We cannot complete the merger unless we obtain the necessary government
approvals and unless the stockholders of Fulton approve the merger agreement. We
have scheduled a special meeting for Fulton stockholders to vote on the merger
agreement. The meeting will be held at Fulton's offices at 410 Market Street,
Fulton, Missouri on ______, _______, 1999 at __:00 _.m., local time.
It is very important that your shares be represented at the meeting,
regardless of whether you plan to attend in person. If you fail to vote, it will
have the same effect as a vote against approval of the merger agreement. To
assure that your shares are represented in voting on this very important matter,
please sign, date and return the enclosed proxy card promptly in the enclosed
postage-prepaid envelope whether or not you plan to attend the meeting. If you
are a stockholder of record and do attend, you may, if you wish, revoke your
proxy and vote your shares in person at the meeting.
This document contains a more complete description of the meeting and the
terms of the merger. We urge you to review this entire document carefully.
Financial information regarding Fulton is provided in this document. You may
also obtain information about Fulton from documents filed with the Securities
and Exchange Commission.
I enthusiastically support the merger and join with the other members of
our Board of Directors in recommending that you vote in favor of the merger.
Kermit D. Gohring
President and Chief Executive Officer
Proxy Statement first mailed to stockholders on or about __________, 1999
<PAGE>
Fulton Bancorp, Inc.
410 Market Street
Fulton, Missouri 65251
(573) 642-6618
____________________________
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON _____________, 1999
____________________________
NOTICE IS HEREBY GIVEN that a Special Meeting of Stockholders of Fulton
Bancorp, Inc. ("Fulton") will be held at Fulton's offices at 410 Market Street,
Fulton, Missouri on ___________, ___________, 1999 at __:__ __.m., local time,
for the following purposes:
1. To consider and vote upon a proposal to approve and adopt the
Agreement and Plan of Merger, dated as of May 18, 1999, by and between
Central Bancompany, Inc. and Fulton, pursuant to which Fulton will
merge with a wholly owned subsidiary of Central Bancompany, Inc. and
each share of common stock of Fulton, par value $.01 per share, will
be converted into the right to receive $19.15 in cash, all on and
subject to the terms and conditions contained therein.
2. To transact such other business as may properly come before the
meeting or any adjournment or postponement.
Only stockholders of record at the close of business on __________, 1999
will be entitled to notice of and to vote at the meeting and at any adjournment
or postponement.
Fulton stockholders have the right to dissent from the merger and obtain
payment in cash of the fair value of their shares of Fulton common stock under
applicable provisions of Delaware law. In order to perfect dissenters' rights,
Fulton stockholders must give written demand for appraisal of their shares
before the taking of the vote on the merger at the special meeting and must not
vote in favor of the merger. A copy of the applicable Delaware statutory
provisions is included as Appendix C to the accompanying proxy statement and a
summary of the provisions can be found under "THE MERGER--You Have Appraisal
Rights in the Merger."
In the event that there are not sufficient votes to approve the foregoing
proposal at the time of the meeting, the meeting may be adjourned in order to
permit further solicitation by Fulton.
By Order of the Board of Directors
Bonnie K. Smith
Corporate Secretary
Fulton, Missouri
__________, 1999
The Board of Directors unanimously recommends that you vote "FOR" the
proposal to approve and adopt the merger agreement.
Whether or not you plan to attend the meeting, please complete, sign, date
and return the enclosed proxy in the accompanying pre-addressed postage-paid
envelope.
<PAGE>
PROXY STATEMENT
TABLE OF CONTENTS
<TABLE>
<S> <C>
SUMMARY.......................................................................... 2
SELECTED FINANCIAL DATA OF FULTON................................................ 7
MARKET PRICE AND DIVIDEND INFORMATION............................................ 9
MEETING OF FULTON STOCKHOLDERS................................................... 10
Place, Date and Time........................................................ 10
Purpose of the Meeting...................................................... 10
Who Can Vote at the Meeting................................................. 10
Attending the Meeting....................................................... 10
Vote Required............................................................... 10
Voting by Proxy............................................................. 11
Participants in Fulton Savings' ESOP........................................ 11
Independent Public Accountants.............................................. 12
BENEFICIAL OWNERSHIP OF FULTON COMMON STOCK...................................... 12
THE MERGER....................................................................... 14
The Parties to the Merger................................................... 14
Overview of the Transaction; What You Will Receive.......................... 14
Taxable Transaction for Fulton Stockholders................................. 15
Background of the Merger.................................................... 15
Fulton's Financial Advisor Says the Merger Consideration is
Fair From a Financial Point of View.................................... 18
Interests of Fulton's Directors and Officers in the Merger
that Differ From Your Interests........................................ 24
Establishment of Advisory Board............................................. 25
Regulatory Approvals Needed to Complete the Merger.......................... 25
Accounting Treatment of the Merger.......................................... 26
THE MERGER AGREEMENT............................................................. 27
Terms of the Merger......................................................... 27
When Will the Merger be Completed........................................... 27
Procedures for Exchanging Your Stock Certificates........................... 28
Conditions to Completing the Merger......................................... 28
Conduct of Business Prior to the Merger..................................... 29
Covenants of Fulton and Central in the Merger Agreement..................... 31
Representations and Warranties Made by Central and Fulton
in the Merger Agreement................................................ 33
Terminating the Merger Agreement............................................ 33
Expenses and Termination Fees............................................... 33
Changing the Terms of the Merger Agreement.................................. 34
BUSINESS OF FULTON BANCORP, INC.................................................. 34
General..................................................................... 34
Market Area................................................................. 34
Lending Activities.......................................................... 35
Investment Activities....................................................... 46
Deposit Activities and Other Sources of Funds............................... 47
Competition................................................................. 50
Subsidiary Activities....................................................... 50
Personnel................................................................... 51
Properties.................................................................. 51
Legal Proceedings........................................................... 51
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS........................................................ 51
General..................................................................... 51
Operating Strategy.......................................................... 51
Interest Rate Risk Management............................................... 52
Interest Rate Sensitivity of Net Portfolio Value............................ 52
Comparison of Financial Condition at March 31, 1999
and June 30, 1998...................................................... 53
Results of Operations for the Three Months Ended March
31, 1999 and 1998...................................................... 53
Results of Operations for the Nine Months Ended March
31, 1999 and 1998...................................................... 54
Comparison of Financial Condition at June 30, 1998 and 1997................. 55
Results of Operations for the Years Ended June 30,
1998 and 1997.......................................................... 55
Results of Operations for the Years Ended June 30,
1997 and April 30, 1996................................................ 57
Yields Earned and Rates Paid................................................ 58
Liquidity and Capital Resources............................................. 60
Year 2000 Compliance........................................................ 61
New Accounting Standards.................................................... 62
Effect of Inflation and Changing Prices..................................... 62
REGULATION AND SUPERVISION....................................................... 62
General..................................................................... 62
Holding Company Regulation.................................................. 63
Federal Savings Institution Regulation...................................... 63
Federal Reserve System...................................................... 68
FEDERAL AND STATE TAXATION....................................................... 68
Federal Taxation............................................................ 68
Missouri Taxation........................................................... 69
Delaware Taxation........................................................... 70
WHERE YOU CAN FIND MORE INFORMATION.............................................. 70
STOCKHOLDER PROPOSALS............................................................ 70
</TABLE>
<PAGE>
APPENDIX A Agreement and Plan of Merger,
dated as of May 18, 1999, by
and between Central Bancompany, Inc.
and Fulton Bancorp, Inc.
APPENDIX B Fairness Opinion of Manchester
Partners, L.L.C.
APPENDIX C Section 262 of the Delaware
General Corporation Law
<PAGE>
SUMMARY
This summary does not contain all of the information that is important to
you. You should carefully read the entire proxy statement to fully understand
the merger.
THE COMPANIES
<TABLE>
<S> <C>
Central Bancompany, Inc. Central is a bank holding company based in Jefferson
238 Madison City, Missouri. Central operates a total of 32 banking
Jefferson City, Missouri 65101 offices in Missouri through 12 banks. At March 31,
(573) 634-1234 1999, Central had total assets of $4.5 billion, deposits of
$3.5 billion and stockholders' equity of $401.3 million.
Fulton Bancorp, Inc. Fulton is the savings and loan holding company for
410 Market Street Fulton Savings Bank, F.S.B. Fulton Savings operates
Fulton, Missouri 65251 one office in Fulton and one office in Holts Summit,
(573) 642-6618 Missouri and specializes in mortgage lending. At
March 31, 1999, Fulton had total assets of
$117.7 million, deposits of $72.2 million, and
stockholders' equity of $25.4 million.
For a discussion of the business of Fulton, see
"BUSINESS OF FULTON BANCORP" beginning on
page ____. For a discussion of the recent results of
operation of Fulton, see "MANAGEMENT'S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATION" beginning on page ____.
THE STOCKHOLDERS' MEETING
Place, Date and Time (page ____) The special meeting will be held at Fulton's offices
at 410 Market Street, Fulton, Missouri on ___________,
1999 at __:__ a.m., local time.
Purpose of the Meeting (page ____) At the special meeting, you will be asked to
approve a merger agreement that provides for
the merger of Fulton with a subsidiary of Central.
Who Can Vote At the Meeting You can vote at the meeting of Fulton stockholders
(page ____) if you owned Fulton common stock at the close of business
on ________, 1999. You will be able to cast one vote
for each share of Fulton common stock you owned at that
time. As of __________, 1999, there were _____________
shares of Fulton common stock outstanding.
</TABLE>
2
<PAGE>
<TABLE>
<S> <C>
What Vote is Required for Approval of In order to approve the merger agreement, the holders
the Merger Agreement (page __) of a majority of the outstanding shares of Fulton
common stock entitled to vote must vote in its favor.
You can vote your shares by attending the meeting and
voting in person or by mailing the enclosed proxy card.
THE MERGER
Overview of the Transaction Fulton has agreed to merge with a subsidiary of
(page __) Central, with Fulton being the surviving corporation.
Fulton will then merge into Central, with Central being
the surviving corporation. Immediately after this
merger, Fulton Savings will merge with The Central Trust
Bank, with The Central Trust Bank being the surviving
institution. As a result of this transaction, Fulton and
Fulton Savings will cease to exist. Central intends to
operate Fulton Savings' offices as branches of The
Central Trust Bank.
What You Will Receive (page __) As a Fulton stockholder, each of your shares of Fulton
common stock will automatically become exchangeable for
$19.15 in cash. You will have to surrender your Fulton
stock certificates to receive this cash payment. Central
will send you written instructions for surrendering
your certificates after we have completed the merger. For
more information on how this exchange procedure works, see
"THE MERGER AGREEMENT--Procedures for Exchanging Your Stock
Certificates" on page __ of this document.
Shares of Fulton are quoted on the Nasdaq National Market.
On May 18, 1999, which was the last trading day before we
announced the merger, Fulton common stock closed at $17.00
per share.
Taxable Transaction for Fulton For United States federal income tax purposes, your exchange
Stockholders (page __) of shares of Fulton common stock for cash generally will
cause you to recognize a gain or loss measured by the
difference between the cash you receive in the merger and
your tax basis in your shares of Fulton common stock.
You should consult your own tax advisor for a full
understanding of the merger's tax consequences that are
particular to you.
Recommendation to Stockholders The board of directors of Fulton believes that the merger
(page __ ) is advisable and fair to you and in your best interests,
and unanimously recommends that you vote "FOR" the proposal to
approve the merger agreement.
</TABLE>
3
<PAGE>
<TABLE>
<S> <C>
For a discussion of the circumstances surrounding the merger
and the factors considered by Fulton's board of directors in
approving the merger agreement, please see pages __ through __.
Fairness Opinion of Fulton's Manchester Partners, L.L.C. has delivered to the Fulton
Financial Advisor (page __) board of directors its opinion that, as of the date of this
document, the merger consideration is fair to the holders
of Fulton common stock from a financial point of view. A copy of
this opinion is provided as Appendix B to this proxy statement.
You should read it completely to understand the procedures
followed, assumptions made, matters considered, qualifications
and limitations on the review made by Manchester Partners in
providing this opinion. Manchester Partners estimates that it will
receive professional fees totaling approximately $220,000 from Fulton
for its services in connection with the merger.
You Have Appraisal Rights in the Delaware law provides you with dissenters' appraisal rights in the
Merger (page __) merger. This means that if you are not satisfied with the amount
you are receiving in the merger, you are legally entitled to have
the value of your shares independently determined to receive
payment based on that valuation. To exercise your dissenters' rights
you must deliver a written objection to the merger to Fulton at or
before the special meeting and you must not vote in favor of the
merger. Objections to the merger should be addressed to
Fulton's Corporate Secretary and sent to Fulton at 410 Market Street,
Fulton, Missouri 65251. Your failure to follow exactly the procedures
specified under Delaware law will result in the loss of your
dissenters' rights. A copy of the dissenters' rights provisions of
Delaware law is provided as Appendix C to this proxy statement.
Interests of Directors and Officers Some of Fulton's directors and officers have interests in the
in the Merger that Differ From Your merger that are different from, or are in addition to, their
Interests (page __) interests as stockholders in Fulton. The members of Fulton's
board of directors knew about these additional interests, and
considered them, when they approved the agreement and the
merger. These include:
1. the vesting of shares of restricted stock as a result of
the consummation of the merger;
2. the payment of severance benefits under the existing
employment agreement with Fulton's chief executive
officer;
</TABLE>
4
<PAGE>
<TABLE>
<S> <C>
3. the creation of an advisory board containing the
current directors of Fulton; and
4. provisions in the merger agreement relating to
protection against claims.
Regulatory Approvals Needed to We cannot complete the merger unless it is approved by
Complete the Merger (page ____) the Board of Governors of the Federal Reserve
System, the Federal Deposit Insurance Corporation and
the Missouri Division of Finance. Central has filed all
of the required applications or waiver requests with these
regulatory authorities. As of the date of this proxy
statement, Central has not received any of the required
approvals. While we do not know of any reason why Central
would not be able to obtain the necessary approvals in a timely
manner, we cannot be certain when or if Central will receive them.
</TABLE>
THE MERGER AGREEMENT
A copy of the merger agreement is provided as Appendix A to this proxy
statement. Please read the agreement. It is the legal document that governs the
merger.
<TABLE>
<S> <C>
Conditions to Completing the Merger The completion of the merger depends on a number of conditions
(page ____) being met. In addition to the parties complying with the
merger agreement, these include:
1. approval of the merger agreement by the Fulton stockholders;
2. approval of the merger by federal and state regulatory
authorities;
3. the absence of any injunction or legal restraint blocking
the merger or government proceedings trying to block the
merger;
4. the absence of any law or regulation that makes the merger
illegal; and
5. Fulton stockholders having exercised dissenters' rights with
respect to no more than 10% of the outstanding Fulton shares.
Where the law permits, Central and Fulton could decide to
complete the merger even though one or more of these
conditions has not been met. Fulton cannot be certain when or if
the conditions to the merger will be satisfied or waived, or that the
merger will be completed.
</TABLE>
5
<PAGE>
<TABLE>
<S> <C>
Terminating the Merger Agreement Fulton and Central can agree at any time to terminate the
(page ___) merger agreement without completing the merger, even if the
stockholders of Fulton have approved it. Also, either of us
can decide, without the consent of the other, to terminate
the agreement if:
1. Fulton's stockholders do not approve the merger;
2. a required regulatory approval is denied or a governmental
authority blocks the merger;
3. we do not complete the merger by March 31, 2000; or
4. the other party breaches a representation, warranty or
covenant that would have a material adverse effect on
the party seeking to terminate.
In addition, Fulton may terminate the merger agreement if
Fulton's board of directors determines that it must
accept a superior offer from a third party in the exercise
of its fiduciary duties.
Termination Fees (page __) If Fulton terminates the merger agreement in order to accept a
superior offer or if, after another party proposes to acquire
Fulton, Fulton stockholders fail to approve the merger agreement
and within 12 months Fulton enters into a merger agreement with
a third party, Fulton will pay Central a termination fee of
$750,000.
If either party terminates the merger agreement because the other
party has willfully breached a representation, warranty or covenant,
then the breaching party will pay the other a fee of $200,000.
Changing the Terms of the Merger We can agree to amend the agreement, and each of us can waive
Agreement (page __) our right to require the other party to adhere to the terms and
conditions of the agreement, where the law allows. However, we may
not do so after Fulton stockholders approve the agreement if the
amendment or waiver reduces or changes the consideration that will
be received by Fulton stockholders. In those cases the Fulton
stockholders would have to approve the amendment or waiver.
</TABLE>
6
<PAGE>
SELECTED FINANCIAL DATA OF FULTON
The following tables show summarized historical financial data for Fulton.
The information in the following tables is based on historical financial
information that Fulton has presented in its prior SEC filings. You should read
this summary financial information in connection with this historical financial
information and with the more detailed financial information we provide in this
document. In November 1996, Fulton's board of directors approved a change in
Fulton's fiscal year end from April 30 to June 30. Financial information for the
periods prior to 1997 reflects Fulton Savings only, as Fulton Bancorp did not
commence operations until October 1996. The audited financial statements of
Fulton and the unaudited financial statements of Fulton for the nine months
ended March 31, 1999 and 1998 are included in this proxy statement beginning on
page F-1. Fulton's unaudited financial statements for the nine months ended
March 31, 1999 and 1998 include normal, recurring adjustments necessary to
fairly present the data for such period. The unaudited data is not necessarily
indicative of expected results of a full year's operation.
<TABLE>
<CAPTION>
At March 31, At June 30, At April 30,
-------------------------- --------------------------
1999 1998 1997 1996 1996 1995 1994
------------ -------- -------- -------- -------- -------- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Financial Condition Data:
Total assets...................... $117,770 $110,110 $100,569 $88,771 $85,496 $79,351 $73,620
Cash.............................. 9,267 13,778 7,108 3,154 2,924 4,189 5,322
U.S. Government and federal
agency obligations.............. 1,445 950 1,899 3,208 3,216 4,201 4,260
Mortgage-backed securities........ -- -- -- -- -- 1 1,196
State and municipal securities.... 299 -- -- -- -- -- --
Loans receivable, net............. 98,701 88,104 83,759 76,561 73,893 67,805 60,282
Loans held for sale............... 3,687 3,649 4,463 2,527 2,306 574 --
Deposits.......................... 72,208 69,164 67,197 71,288 70,316 65,205 64,630
Federal Home Loan Bank advances... 18,375 12,810 6,500 7,000 5,000 4,500 --
Stockholders' equity.............. 25,417 25,495 25,257 9,274 9,117 8,484 7,933
</TABLE>
<TABLE>
<CAPTION>
Nine Months Year Ended Two
Ended March 31, June 30, Months Year Ended April 30,
----------------- ------------------ ----------------------------
Ended
1999 1998 1998 1997 June 30, 1996 1995 1994
1996
----------------- -------- -------- -------- -------- -------- --------
(Dollars in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Selected Operating Data:
Interest income..................... $6,645 $6,097 $8,147 $7,340 $1,149 $6,172 $5,355 $5,413
Interest expense.................... 3,418 3,105 4,183 3,939 665 3,781 2,944 2,671
------ ------ ------ ------ ------ ------ ------ ------
Net interest income.............. 3,227 2,992 3,964 3,401 484 2,391 2,411 2,742
Provision for loan losses........... 130 60 70 120 25 44 118 48
------ ------ ------ ------ ------ ------ ------ ------
Net interest income after
provision for loan losses.......... 3,097 2,932 3,894 3,281 459 2,347 2,293 2,694
Non-interest income................. 464 580 792 637 119 485 360 413
Non-interest expense................ 2,258 2,109 2,890 2,625 316 1,849 1,809 1,741
------ ------ ------ ------ ------ ------ ------ ------
Income before income taxes.......... 1,303 1,403 1,796 1,293 262 983 844 1,366
Income taxes........................ 488 518 657 471 98 363 301 485
------ ------ ------ ------ ------ ------ ------ ------
Net income....................... $ 815 $ 885 $1,139 $ 822 $ 164 $ 620 $ 543 $ 881
====== ====== ====== ====== ====== ====== ====== ======
Basic net income per share.......... $ 0.53 $ 0.56 $ 0.72 $ 0.52 N/A N/A N/A N/A
======= ======= ======== ========
Diluted income per share............ $ 0.52 $ 0.56 $ 0.70 $ 0.52
======= ======= ======== ========
</TABLE>
7
<PAGE>
<TABLE>
<CAPTION>
At or For the
Nine Months Ended At or For the Year At or For the Year
March 31, Ended June 30, Ended April 30,
----------------- -----------------------------------------------------
1999 1998 1998 1997 1996 1995 1994
-------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Selected Consolidated Financial
Ratios and Other Data:/(1)/
Return on average assets/(2)/................ 0.93% 1.10% 1.06% 0.83% 0.75% 0.72% 1.12%
Return on average equity/(3)/................ 4.23 4.64 4.44 4.10 7.00 6.55 11.92
Interest rate spread during
period/(4)/................................. 2.61 2.55 2.58 2.69 2.60 2.96 3.58
Net interest margin/(5)/..................... 3.79 3.82 3.82 3.61 3.02 3.33 3.90
Non-interest expenses to
average assets.............................. 2.59 2.63 2.69 2.66 2.23 2.39 2.37
Non-performing loans to total
loans/(6)/.................................. 0.82 0.26 0.18 0.44 0.43 0.23 1.53
Non-performing assets to total
assets/(7)/................................. 0.92 0.56 0.28 0.56 0.60 0.20 1.53
Allowance for loan losses to
non-performing loans/(6)/................... 128.89 400.00 625.07 250.68 245.44 498.05 72.18
Allowance for loan losses to
total loans................................. 1.06 1.06 1.09 1.09 1.02 1.10 1.09
Dividend payout ratio/(7)/................... 46.75 31.07 33.01 20.92 -- -- --
</TABLE>
_________________________
(1) Ratios for the nine month periods ended March 31, 1999 and 1998 are
annualized where appropriate.
(2) Return on average assets is calculated by dividing net income by average
outstanding assets.
(3) Return on average stockholders' equity is calculated by dividing net income
by average stockholders' equity.
(4) The interest rate spread represents the difference between the weighted
average yield on average interest-earning assets and the weighted average
cost of average interest-bearing liabilities.
(5) Net interest margin represents net interest income as a percent of average
interest-earning assets.
(6) Non-performing loans consist of non-accrual loans and loans delinquent 90
days or more.
(7) Dividend payout ratio is calculated by dividing cash dividends by net
income.
8
<PAGE>
MARKET PRICE AND DIVIDEND INFORMATION
Fulton common stock is listed on the National Market System of the Nasdaq
Stock Market under the symbol FTNB.
The following table lists the high and low prices per share for Fulton common
stock as reported on the Nasdaq National Market and the quarterly cash dividends
declared by Fulton for the periods indicated.
<TABLE>
<CAPTION>
Fulton Common Stock
----------------------------
High Low Dividends
------- ------- ---------
<S> <C> <C> <C>
Fiscal 1997
Quarter ended September 30, 1996........... N/A N/A N/A
Quarter ended December 31, 1996............ $16.250 $12.250 N/A
Quarter ended March 31, 1997............... $18.375 $14.625 $ 0.05
Quarter ended June 30, 1997................ $20.375 $17.500 $ 0.05
Fiscal 1998
Quarter ended September 30, 1997........... $26.750 $19.750 $ 0.05
Quarter ended December 31, 1997............ $24.000 $19.250 $ 0.05
Quarter ended March 31, 1998............... $23.125 $21.500 $ 0.06
Quarter ended June 30, 1998................ $23.500 $16.750 $ 0.06
Fiscal 1999
Quarter ended September 30, 1998........... $20.188 $15.750 $0.075
Quarter ended December 31, 1998............ $17.656 $14.875 $0.075
Quarter ended March 31, 1999............... $16.313 $14.750 $0.075
Quarter ended June 30, 1999
(through June 15, 1999)................. $18.250 $ 3.250 $0.075
</TABLE>
The closing price per share of Fulton common stock on May 18, 1999, which
was the last trading day preceding the public announcement of the proposed
merger, was $17.00. On __________, 1999, which is the last trading day prior to
the date of this proxy statement, the closing price for Fulton common stock was
$______.
As of ____________, 1999, there were approximately ______ holders of record
of Fulton common stock. This number does not reflect the number of persons or
entities who may hold their stock in nominee or "street" name through brokerage
firms.
9
<PAGE>
MEETING OF FULTON STOCKHOLDERS
Place, Date and Time
The meeting will be held at Fulton's offices at 410 Market Street, Fulton,
Missouri on _________, _____________, 1999, at __:00 __.m., local time.
Purpose of the Meeting
The purpose of the meeting is to consider and vote on a proposal to approve
and adopt the merger agreement and to act on any other matters brought before
the meeting.
Who Can Vote at the Meeting
You are entitled to vote your Fulton common stock if the records of Fulton
showed that you held your shares as of the close of business on _____________,
1999. As of the close of business on that date, a total of _____________ shares
of Fulton common stock were outstanding. Each share of common stock has one
vote. As provided in Fulton's Certificate of Incorporation, record holders of
Fulton's common stock who beneficially own, either directly or indirectly, in
excess of 10% of Fulton's outstanding shares are not entitled to any vote in
respect of the shares held in excess of the 10% limit.
Attending the Meeting
If you are a beneficial owner of Fulton common stock held by a broker, bank
or other nominee (i.e., in "street name"), you will need proof of ownership to
be admitted to the meeting. A recent brokerage statement or letter from a bank
or broker are examples of proof of ownership. If you want to vote your shares of
Fulton common stock held in street name in person at the meeting, you will have
to get a written proxy in your name from the broker, bank or other nominee who
holds your shares.
Vote Required
The special meeting will be held if a majority of the outstanding shares of
common stock entitled to vote is represented at the meeting. If you return valid
proxy instructions or attend the meeting in person, your shares will be counted
for purposes of determining whether there is a quorum, even if you abstain from
voting. Broker non-votes also will be counted for purposes for determining the
existence of a quorum. A broker non-vote occurs when a broker, bank or other
nominee holding shares for a beneficial owner does not vote on a particular
proposal because the nominee does not have discretionary voting power with
respect to that item and has not received voting instructions from the
beneficial owner. Under applicable rules, brokers, banks and other nominees may
not exercise their voting discretion on the proposal to approve and adopt the
merger agreement and, for this reason, may not vote shares held for beneficial
owners without specific instructions from the beneficial owners.
The approval and adoption of the merger agreement will require the
affirmative vote of the holders of at least a majority of the outstanding shares
of common stock entitled to vote at the meeting. Failure to return a properly
executed proxy card or to vote in person will have the same effect as a vote
against the merger agreement. Abstentions and broker non-votes also will have
the same effect as a vote against the merger agreement.
10
<PAGE>
As of _________________, 1999, directors and executive officers of Fulton,
and persons closely associated with them, beneficially owned _______________
shares of Fulton common stock, not including shares that may be acquired upon
the exercise of stock options. This equals _______% of the outstanding shares of
Fulton common stock. As of the same date, neither Central nor any of its
directors and executive officers owned any shares of Fulton common stock.
Voting by Proxy
This proxy statement is being sent to you by the board of directors of
Fulton for the purpose of requesting that you allow your shares of Fulton common
stock to be represented at the special meeting by the persons named in the
enclosed proxy card. All shares of Fulton common stock represented at the
meeting by properly executed proxies will be voted in accordance with the
instructions indicated on the proxy card. If you sign and return a proxy card
without giving voting instructions, your shares will be voted as recommended by
Fulton's board of directors. The board recommends a vote "FOR" approval of the
merger agreement.
If any matters not described in this proxy statement are properly presented
at the special meeting, the persons named in the proxy card will use their own
judgment to determine how to vote your shares. This includes a motion to adjourn
or postpone the meeting in order to solicit additional proxies. However, no
proxy voted against the proposal to approve the merger agreement will be voted
in favor of an adjournment or postponement to solicit additional votes in favor
of the merger agreement. Fulton does not know of any other matters to be
presented at the meeting.
You may revoke your proxy at any time before the vote is taken at the
meeting. To revoke your proxy you must either advise the Secretary of Fulton in
writing before your common stock has been voted at the special meeting, deliver
later proxy instructions, or attend the meeting and vote your shares in person.
Attendance at the special meeting will not in itself constitute revocation of
your proxy.
If your Fulton common stock is held in street name, you will receive
instructions from your broker, bank or other nominee that you must follow in
order to have your shares voted. Your broker or bank may allow you to deliver
your voting instructions via the telephone or the Internet. Please see the
instruction form that accompanies this proxy statement.
Fulton will pay the cost of this proxy solicitation. In addition to
soliciting proxies by mail, directors, officers and employees of Fulton may
solicit proxies personally and by telephone. None of these persons will receive
additional or special compensation for soliciting proxies. Fulton will, upon
request, reimburse brokers, banks and other nominees for their expenses in
sending proxy materials to their customers who are beneficial owners and
obtaining their voting instructions.
Participants in Fulton Savings' ESOP
If you participate in the Fulton Savings Bank, F.S.B. Employee Stock
Ownership Plan ("ESOP"), the proxy card represents a voting instruction to the
trustees of the ESOP as to the number of shares in your plan account. Each
participant in the ESOP may direct the trustees as to the manner in which shares
of common stock allocated to the participant's plan account are to be voted.
Unallocated shares of common stock held by the ESOP and allocated shares for
which no voting instructions are received will be voted by the trustees in the
same proportion as shares for which the trustees have received voting
instructions, subject to the trustees' exercise of their fiduciary obligations.
11
<PAGE>
Independent Public Accountants
Moore, Horton & Carlson, P.C. has served as Fulton's independent auditors
since April 30, 1986. A representative of Moore, Horton & Carlson is expected to
be present at the special meeting and will have an opportunity to make a
statement if he or she desires and will be able to respond to appropriate
questions.
BENEFICIAL OWNERSHIP OF FULTON COMMON STOCK
The following table provides information as of May 31, 1999 with respect to
persons known to Fulton to be the beneficial owners of more than 5% of Fulton's
outstanding common stock.
<TABLE>
<CAPTION>
Number of Shares Percent of Common
Name and Address Beneficially Owned Stock Outstanding
- ---------------- ------------------ -------------------
<S> <C> <C>
Fulton Savings Bank, F.S.B. 137,332 (1) 8.3%
Employee Stock Ownership Plan
410 Market Street
Fulton, Missouri 65251
</TABLE>
___________________________
(1) Includes 106,422 shares which have not been allocated to participants'
accounts and over which the trustees have sole voting power and 30,910
shares which have been allocated to participants' accounts and over which
the trustees have shared voting power. Under the terms of the ESOP, the
trustees will vote unallocated shares and allocated shares for which no
voting instructions are received in the same proportion as shares for which
the trustees have received voting instructions from participants. The
trustee of the ESOP is First Bankers Trust Company.
12
<PAGE>
The following table provides information about the shares of Fulton common
stock that may be considered to be owned by each director of Fulton and by all
directors and executive officers of Fulton as a group as of May 31, 1999. A
person may be considered to own any shares of common stock over which he or she
has, directly or indirectly, sole or shared voting or investing power.
<TABLE>
<CAPTION>
Number of Shares
That May Be
Number of Acquired Within Percent of
Shares 60 Days By Common Stock
Name/Title Owned Exercising Options Outstanding
- ---------------------------------- ----------------- ---------------------- ---------------
<S> <C> <C> <C>
Dennis J. Adrian 24,088 (1) 1,719 1.6%
Director
Billy M. Conner 20,863 (1)(3) 1,719 1.4
Director
Kermit D. Gohring 38,637 (1)(2)(4) 6,877 2.8
President, Chief Executive Officer and
Director
Richard W. Gohring 16,033 (1)(2)(5) 2,406 1.1
Executive Vice President and Director
Clifford E. Hamilton, Jr. 25,438 (1)(6) 1,719 1.6
Director
Bonnie K. Smith 24,214 (1)(2)(7) 4,126 1.7
Senior Vice President and Director
David W. West 18,438 (1)(2) 1,719 1.2
Director
All directors and executive officers as a group 167,711 (1)(2) 20,285 11.4
(eight persons)
</TABLE>
_______________________________
(1) Shares of restricted stock awarded under Fulton's 1997 Management
Recognition and Development Plan as to which the holders have voting power
but not investment power are included as follows: Mr. Adrian, 2,751 shares;
Mr. Conner, 2,751 shares; Mr. K. Gohring, 11,003 shares; Mr. R. Gohring,
3,850 shares; Mr. Hamilton, 2,751 shares; Mrs. Smith, 6,601 shares; Mr.
West, 2,751 shares; and all directors and executive officers as a group,
187,996 shares.
(2) Shares allocated under Fulton Savings' ESOP as of December 31, 1998 over
which the individual has shared voting power but not investment power are
included as follows: Mr. K. Gohring, 2,326 shares; Mr. R. Gohring, 1,309
shares; Mrs. Smith, 1,425 shares; and all directors and executive officers
as a group, 10,912 shares.
(3) Includes 2,532 shares owned by Mr. Conner's spouse.
(4) Includes 7,800 shares owned by Mr. Gohring's spouse.
(5) Includes 420 shares owned by Mr. Gohring's spouse.
(6) Includes 740 shares owned by Mr. Hamilton's spouse.
(7) Includes 2,330 shares owned by Mrs. Smith's spouse.
13
<PAGE>
THE MERGER
The following discussion of the merger is qualified by reference to the
merger agreement, which is attached to this proxy statement as Appendix A. You
should read the entire merger agreement carefully.
The Parties to the Merger
Central Bancompany, Inc.
Central Bancompany was incorporated in 1970 as a Missouri business
corporation and a bank holding company regulated by the Federal Reserve Board
under the Bank Holding Company Act of 1956, as amended.
At year end 1998, Central was operating 12 banks and one trust company
at 82 separate locations throughout the State of Missouri. Its banks are
community oriented institutions that serve all of the financial needs of its
respective communities, from full-service deposit and lending products to all
types of investment products.
Fulton Bancorp, Inc.
Fulton became the holding company for Fulton Savings in October 1996 in
connection with Fulton Savings' conversion from mutual to stock form of
organization. As a savings and loan holding company, Fulton is subject to
regulation by the Office of Thrift Supervision (the "OTS"). Since its formation,
Fulton's principle business has been to direct and coordinate the business of
Fulton Savings.
Fulton Savings, which was founded in 1912, is a federally chartered savings
bank located in Fulton, Missouri. Fulton Savings is regulated by the OTS and its
deposits are insured by the FDIC up to applicable limits. Fulton Savings is a
community oriented financial institution that engages primarily in the business
of attracting deposits from the general public and using those funds to
originate residential and commercial mortgage loans within Fulton Savings'
market area. Fulton Savings also originates multi-family real estate,
construction, land and consumer and other loans.
For a discussion of the business of Fulton, see "BUSINESS OF FULTON
BANCORP, INC." elsewhere in this proxy statement. For a discussion of the recent
results of operation of Fulton, see "MANAGEMENT'S DISCUSSION OF FINANCIAL
CONDITION AND RESULTS OF OPERATION" elsewhere in this proxy statement.
Overview of the Transaction; What You Will Receive
The boards of directors of Fulton and Central have each unanimously
approved a merger agreement that provides that Fulton will merge with a wholly
owned subsidiary of Central. Fulton will survive the merger and become a wholly
owned subsidiary of Central. Fulton will then merge into Central, with Central
being the surviving corporation. Upon completion of the merger, each share of
Fulton common stock will be converted into the right to receive $19.15 in cash.
After the merger you will no longer own any stock or have any interest in
Fulton, nor will you receive, as a result of the merger, any stock of Central.
14
<PAGE>
Immediately after the merger, Fulton Savings will merge into The Central
Trust Bank. The surviving bank will be The Central Trust Bank. It is the intent
of Central to operate the offices of Fulton Savings as branches of The Central
Trust Bank.
Taxable Transaction for Fulton Stockholders
The following is a discussion of the material federal income tax
consequences of the merger to holders of Fulton common stock. The discussion is
based upon the Internal Revenue Code, Treasury regulations, IRS rulings, and
judicial and administrative decisions in effect as of the date of this proxy
statement. This discussion assumes that the Fulton common stock is generally
held for investment. In addition, this discussion does not address all of the
tax consequences that may be relevant to you in light of your particular
circumstances or to Fulton stockholders subject to special rules, such as
foreign persons, financial institutions, tax-exempt organizations, dealers in
securities or foreign currencies or insurance companies.
The receipt of cash for Fulton common stock pursuant to the merger will be
a taxable transaction for federal income tax purposes to stockholders receiving
such cash, and may be a taxable transaction for state, local and foreign tax
purposes as well. You will recognize a gain or loss measured by the difference
between your tax basis for the Fulton common stock owned by you at the time of
the merger and the amount of cash you receive for your Fulton shares. Your gain
or loss will be a capital gain or loss if your Fulton stock is a capital asset
in your hands.
The cash payments due to the holders of Fulton common stock upon the
exchange of such Fulton common stock pursuant to the merger generally will be
subject to "backup withholding" for federal income tax purposes unless certain
requirements are met. Under federal law, the third-party paying agent (in this
case, The Central Trust Bank) must withhold 31% of the cash payments to holders
of Fulton common stock to whom backup withholding applies, and the federal
income tax liability of such persons will be reduced by the amount so withheld.
To avoid backup withholding, you must provide The Central Trust Bank with your
taxpayer identification number and complete a form in which you certify that you
have not been notified by the IRS that you are subject to backup withholding as
a result of a failure to report interest and dividends. The taxpayer
identification number of an individual is his or her Social Security Number.
Neither Central nor Fulton has requested or will request a ruling from the
IRS as to any of the tax effects to Fulton's stockholders of the transactions
discussed in this proxy statement, and no opinion of counsel has been or will be
rendered to Fulton's stockholders with respect to any of the tax effects of the
merger to stockholders.
The tax consequences of the merger to you may vary depending upon your
particular circumstances. Therefore, you should consult your tax advisor to
determine the particular tax consequences of the merger to you, including those
relating to state and/or local taxes.
Background of the Merger
Since Fulton Savings converted from the mutual to stock form of
organization in October 1996, the Fulton board of directors has considered
various strategic alternatives for deploying the capital raised in the
conversion and has monitored the rapid pace of consolidation in the financial
services industry. In December 1997, as part of its regular review of strategic
alternatives, the Fulton board received a presentation from a financial advisor
as to various capital management and operational strategies. The board of
directors
15
<PAGE>
continued to discuss these strategies over the next few months. In March 1998,
the board met with its financial advisor, this time to discuss various
strategies for enhancing stockholder value, including the merger of Fulton with
another institution. In April 1998, the Fulton board again met with its
financial advisor to discuss strategic options for maximizing stockholder value.
At that meeting, the board considered various capital management and operational
strategies and specifically discussed potential partners for a business
combination, with a focus on which institutions would have an interest in a
business combination and the ability to complete the transaction. At this
meeting, the Fulton board authorized its financial advisor to contact certain
parties regarding their possible interest in a business combination with Fulton.
During May 1998, Fulton's financial advisor contacted six institutions that
it had identified as being potential merger partners for Fulton. Three of the
six institutions requested and reviewed information regarding Fulton. Following
this process, one of the three expressed an interest in acquiring Fulton.
However, the one expression of interest was for approximately $17.00 per share
and was conditioned on Fulton demonstrating an ability to achieve a
significantly higher level of earnings in the period from the signing of a
definitive agreement to the closing of the transaction. At a meeting on June 9,
1998, Fulton's financial advisor reviewed with the board of directors the
results of its discussions with the potential merger partners and the state of
the market for bank and thrift acquisitions generally. The board determined that
the one expression of interest was inadequate relative to Fulton's prospects on
a stand-alone basis and to the mergers and acquisition market generally and
declined to pursue it.
During the Autumn of 1998, management of Fulton came to believe that
Central was interested in acquiring Fulton. In November 1998, the Fulton board
decided to meet with Manchester Partners to discuss obtaining its assistance in
exploring a business combination with Central and in implementing certain
operational strategies aimed at deploying Fulton's capital. The board determined
to contact Manchester Partners because of its expertise in mergers and
acquisitions of financial institutions in Missouri and because principals of
Manchester Partners had established business relationships with senior officers
of Central, which was expected to facilitate contact between the two
institutions. The board also believed that Manchester Partners' local presence
and operational experience could prove useful to Fulton in the longer term. In
December 1998, the Fulton board met with representatives of Manchester Partners
to discuss their services. At a meeting held on February 9, 1999, the Fulton
board determined to engage Manchester Partners for the purpose of furthering its
review of strategic options.
Over the next several weeks, Manchester Partners had several meetings with
representatives of Central to discuss the possibility of Central acquiring
Fulton. During the same period, Manchester Partners met with representatives of
Fulton in order to develop alternative operational strategies. In mid-April,
Central indicated that it would be interested in acquiring Fulton for $19.15 per
share, subject to resolution of certain operational issues and a due diligence
review of Fulton.
At a meeting held on April 15, 1999, Manchester Partners reviewed with the
Fulton board its discussions with Central regarding the possible acquisition of
Fulton by Central. In addition, legal counsel for Fulton reviewed with the board
its fiduciary duties to stockholders. The board concluded that the stockholders'
interest would best be served by continuing to explore the terms of a possible
transaction with Central. In early May, Fulton invited Central to perform a due
diligence review of Fulton.
Beginning in early May 1999, representatives of Fulton and Central
negotiated the terms of the merger agreement. At the same time, representatives
of Fulton conducted a limited due diligence review of Central and Central
completed its due diligence review of Fulton. The progress of the negotiations
were reported to the members of the Fulton board by Mr. Kermit D. Gohring
throughout this period.
16
<PAGE>
A final draft of the merger agreement was provided to the Fulton board on
May 14, 1999. On May 16, the Fulton board met with legal counsel to review the
contents of the merger agreement. Legal counsel also reviewed with the board the
course of negotiations and the results of due diligence and presented a summary
of the board's fiduciary duties in the context of a sale of control of Fulton.
On the evening of May 18, 1999 the Fulton board reconvened to consider the
final draft of the merger agreement. Legal counsel reviewed the changes to the
earlier draft, answered questions and discussed the board members' fiduciary
duties. Manchester Partners presented its analysis and delivered its opinion
that the merger consideration was fair, from a financial point of view, to the
stockholders of Fulton. As part of its process of analyzing the adequacy of the
merger consideration, Manchester Partners contacted six financial institutions
to determine whether they were interested in acquiring Fulton. The six
institutions included the one institution that expressed limited interest in
acquiring Fulton in 1998 and three of the other institutions contacted in 1998.
None of these institutions were interested in acquiring Fulton at a price
greater than $19.15. The Fulton board then discussed the terms of the merger
agreement and the presentation by Manchester Partners. After conclusion of the
review and discussion, a vote was taken and the Fulton board unanimously
approved the merger agreement and authorized Mr. Kermit D. Gohring to execute
the merger agreement and related documents on behalf of Fulton.
Recommendation of the Fulton Board; Fulton's Reasons for the Merger
Fulton's board of directors has unanimously approved the merger agreement
and recommends that Fulton stockholders vote "FOR" the approval of the merger
agreement.
Fulton's board has determined that the merger and the merger agreement are
advisable and are fair to, and in the best interests of, Fulton and its
stockholders. In reaching this determination, the Fulton board consulted with
legal counsel as to its legal duties and the terms of the merger agreement and
with its financial advisor with respect to the financial aspects and fairness of
the transaction. In arriving at its determination, the Fulton board also
considered a number of factors including, but not limited to, the following,
which include all material factors considered by the Fulton board:
1. information concerning the businesses, earnings, operations, financial
condition and prospects of Fulton and Central, both individually and
as combined;
2. the financial advice rendered by Manchester Partners, as financial
advisors to Fulton, that the merger consideration is fair, from a
financial standpoint, to the Fulton stockholders. (see "--Fairness
Opinion of Fulton's Financial Advisor");
3. the terms of the merger agreement, including the taxable nature of the
cash to be paid to Fulton stockholders;
4. the results of the contacts and discussions between Fulton and its
financial advisor and various third parties and the belief of the
Fulton board that the merger with Central offered the best transaction
available to Fulton and its stockholders;
5. the historical trading prices for Fulton common stock;
6. the current and prospective economic, competitive and regulatory
environment facing Fulton, Central and the financial services
industry;
17
<PAGE>
7. the results of the due diligence investigation of Central, including
an assessment of Central's ability to pay the aggregate merger
consideration and the likelihood of the merger being approved by
regulatory authorities; and
8. Fulton's strategic alternatives to the merger, including the continued
operation of Fulton Savings as an independent community bank.
In reaching its determination to approve and recommend the merger, the
Fulton board did not assign any specific or relative weights to any of the
foregoing factors, and individual directors may have weighed factors
differently.
Fulton's Financial Advisor Says the Merger Consideration is Fair From a
Financial Point of View
The Fulton board retained Manchester Partners in February 1999 to provide
certain financial advisory and investment banking services to Fulton, with the
objective of assessing Fulton's strategic alternatives to enhance stockholder
value. These services included assisting Fulton and the Fulton board in
negotiating financial terms with prospective acquirors and rendering its opinion
with respect to the fairness of the merger consideration from a financial point
of view to Fulton stockholders in the event Fulton entered into an agreement to
be acquired. In requesting Manchester Partners' advice and opinion, the Fulton
board did not give any special instructions to Manchester Partners, nor did it
impose any limitations upon the scope of the investigation which Manchester
Partners might wish to conduct to enable it to give its opinion. Although
Manchester Partners evaluated the fairness to Fulton's stockholders from a
financial point of view of the consideration to be received in the merger,
Manchester Partners was not requested to, and did not, recommend the form or
amount of consideration to be received in the merger, which was determined by
Fulton and Central through arms-length negotiations.
Manchester Partners was selected by Fulton to act as its financial advisor
because of Manchester Partners' knowledge of Fulton's market and expertise in
connection with mergers and acquisitions of savings and loan associations,
savings banks, savings and loan holding companies, commercial banks and bank
holding companies. Pursuant to a letter agreement dated February 4, 1999, and
executed by Fulton on February 9, 1999, which was revised and replaced by a
letter agreement dated April 16, 1999 and executed by Fulton on April 20, 1999,
Manchester Partners estimates that it will receive from Fulton total
professional fees of approximately $220,000, of which $20,000 has been paid to
date, plus reimbursement of certain out-of-pocket expenses, for its services in
connection with the merger. In addition, Fulton has agreed to indemnify
Manchester Partners against certain liabilities, including liabilities under the
federal securities laws. Manchester Partners' fee is not conditioned upon its
conclusions with respect to the fairness of the merger consideration.
On May 18, 1999, at the meeting at which the Fulton board approved and
adopted the merger agreement, Manchester Partners presented its analysis to the
Fulton board and rendered its opinion to the Fulton board that, as of such date,
the merger consideration was fair to holders of Fulton common stock from a
financial point of view. That opinion was updated as of the date of this proxy
statement.
In rendering its fairness opinion, Manchester Partners reviewed and
analyzed the following:
1. the merger agreement;
2. the following information for Fulton:
18
<PAGE>
(a) audited financial statements as of, and for the fiscal years
ended, June 30, 1998, 1997 and 1996, incorporated in the
respective annual reports to stockholders,
(b) regulatory and internal financial and other reports through
December 31, 1998, and
(c) the proxy statement for Fulton's 1998 annual meeting of
stockholders;
3. the results of discussions with Fulton's management and directors
regarding past and current business, operations, financial condition
as of December 31, 1998, and future prospects;
4. Fulton's latest publicly-available financial statements, operating
results and market pricing characteristics relative to those publicly-
traded savings institutions with characteristics deemed by Manchester
Partners to be relatively comparable;
5. competitive, economic and demographic characteristics in Fulton's
market area;
6. the potential impact of regulatory and legislative changes on savings
institutions;
7. the financial terms of other recently completed and pending
acquisitions of savings institutions, regionally and nationally, with
characteristics deemed by Manchester Partners to be relatively
comparable;
8. expressions of interest by third parties; and
9. Central's financial condition through December 31, 1998, which was
used to assess Central's resources and its ability to complete the
merger from a cash and capital perspective.
In rendering its opinion, Manchester Partners relied, without independent
verification, on the accuracy and completeness of the information about
themselves that Fulton and Central furnished to Manchester Partners, as well as
publicly available information regarding other financial institutions and
competitive, economic and demographic data. Fulton did not restrict Manchester
Partners as to the material it was permitted to review. Manchester Partners did
not perform or obtain any independent appraisals or evaluations of the assets
and liabilities and potential and/or contingent liabilities of Fulton.
Manchester Partners expresses no opinion on matters of a legal, regulatory,
tax or accounting nature or the ability of the merger to be consummated. In
rendering its opinion, Manchester Partners assumed that in the course of
obtaining the necessary regulatory and governmental approvals for the proposed
merger, no restriction will be imposed on Central that would have a material
adverse effect on the ability of the merger to be consummated.
Manchester Partners' opinion was based solely upon the information
available to it and the economic, market and other circumstances as they existed
as of May 18, 1999, and the date of this proxy statement. Events occurring after
the date of this proxy statement could materially affect the assumptions
Manchester Partners used in preparing its opinion.
In connection with rendering its opinion, Manchester Partners performed a
variety of financial analyses which are summarized below. Although the
evaluation of the fairness, from a financial point of
19
<PAGE>
view, of the merger consideration was to some extent subjective based on the
experience and judgment of Manchester Partners, and not merely the result of
mathematical analyses of financial data, Manchester Partners principally relied
on the financial analyses summarized below in its determinations. The
preparation of a fairness opinion is a complex process and is not necessarily
susceptible to partial analyses or summary description. Manchester Partners
believes its analyses must be considered as a whole and that selecting portions
of such analyses and factors considered by Manchester Partners without
considering all such analyses and factors could create an incomplete view of the
process underlying Manchester Partners' opinion. In its analyses, Manchester
Partners took into account its assessment of general business, market, monetary,
financial and economic conditions, industry performance and other matters, many
of which are beyond the control of Fulton and Central, as well as Manchester
Partners' experience and knowledge of financial institutions and its principals'
experience in similar transactions. With respect to the comparable transactions
analysis described below, no public company utilized as a comparison is
identical to Fulton and such analyses necessarily involve complex considerations
and judgments concerning the differences in financial and operating
characteristics of the companies and other factors that could affect the
acquisition values of the companies concerned. Manchester Partners conducted
these analyses solely for the purpose of providing its opinion as to the
fairness to the holders of Fulton common stock from a financial point of view of
the merger consideration. These analyses do not purport to be appraisals or
necessarily reflect the prices at which businesses or securities actually may be
sold. Any estimates contained in Manchester Partners' analyses are not
necessarily indicative of future results or values, which may be significantly
more or less favorable than such estimates. None of the analyses performed by
Manchester Partners was assigned a greater significance by Manchester Partners
than any other.
Manchester Partners compared the merger on the basis of stated multiples of
reported earnings, tangible book value and assets of Fulton implied by the
merger consideration to be paid to the holders of Fulton common stock with the
same ratios in 18 pending and completed thrift acquisitions in Missouri,
Illinois and Iowa since the beginning of 1995 deemed by Manchester Partners to
be comparable. The following table shows the range of pricing ratios of the
comparable transactions, the average pricing ratios of the comparable
transactions and the pricing ratios for the acquisition of Fulton.
<TABLE>
<CAPTION>
Acquisition Pricing Ratios Since 1995
Comparable Transactions
------------------------------
Acquisition of
Range Average Fulton Bancorp, Inc.
-------------- ------------- --------------------------
<S> <C> <C> <C>
Price/Earning Ratios 11 to 61 times 27 times 30 times
Price/Tangible Book Ratios 115% to 212% 146% 125%
Price/Assets Ratios 9% to 36% 20% 27%
Price/Deposits Ratios 11% to 52% 27% 44%
</TABLE>
As the table above illustrates, Fulton was within the ranges on all pricing
ratios and was above the average with respect to price/earnings, price/assets
and price/deposits.
Because of the significant decline in acquisition pricing ratios in the
last year, Manchester Partners also compared the pricing ratios in the merger
with the acquisition pricing ratios in the six transactions that were completed
or pending since July 1998. The acquisition pricing ratios of this group were:
20
<PAGE>
<TABLE>
<CAPTION>
Acquisition Pricing Ratios Since July 1998
Comparable Transactions
-------------------------
Acquisition of
Range Average Fulton Bancorp, Inc.
------------- -------- --------------------
<S> <C> <C> <C>
Price/Earning Ratios 11 to 35 times 21 times 30 times
Price/Tangible Book Ratios 106% to 154% 127% 125%
Price/Assets Ratios 12% to 24% 19% 27%
Price/Deposits Ratios 18% to 46% 28% 44%
</TABLE>
As the table above illustrates, the acquisition pricing ratios for Fulton
were above the average pricing ratios for the comparable transactions in the
last year with respect to price/earnings, price/assets and price/deposits and
was only slightly below the average for price/tangible book.
No company or transaction used in this composite is identical to Fulton or
the merger. Accordingly, an analysis of the results of the foregoing is not
mathematical; rather, it involves complex considerations and judgments
concerning differences in financial and operating characteristics of the
companies involved and other factors that could affect the trading values of the
securities of the company or companies to which they are being compared.
As described above, Manchester Partners' opinion and presentation to the
Fulton board was one of many factors taken into consideration by the Fulton
board in making its determination to approve the merger agreement and the
transactions contemplated thereby. Although the foregoing summary describes the
material components of the analyses presented by Manchester Partners to the
Fulton board on May 18, 1999, and updated as of the date of this proxy
statement, in connection with its opinion as of these dates, it does not purport
to be a complete description of all the analyses performed by Manchester
Partners and is qualified by reference to the written opinion of Manchester
Partners set forth as Appendix B hereto, which you should read in its entirety.
The full text of Manchester Partners' opinion, which sets forth the
assumptions made, procedures followed, matters considered and limits on the
review undertaken, is attached as Appendix B to this proxy statement and is
incorporated herein by reference. The description of Manchester Partners'
opinion set forth herein is qualified in its entirety by reference to Appendix
B. You should read the Manchester Partners' opinion in its entirety. The
Manchester Partners' opinion is addressed only to the Fulton board and is
directed only to the merger consideration to be received in the merger by the
holders of Fulton common stock and does not constitute a recommendation as to
how you should vote at the special meeting.
You Have Appraisal Rights in the Merger
Under Delaware law, if you do not wish to accept the cash payment provided
for in the merger agreement you have the right to dissent from the merger and to
receive payment in cash for the fair value of your Fulton common stock. Fulton
stockholders electing to exercise dissenters' rights must comply with the
provisions of Section 262 of the Delaware General Corporation Law in order to
perfect their rights. Fulton will require strict compliance with the statutory
procedures. A copy of Section 262 is attached as Appendix C.
21
<PAGE>
The following is intended as a brief summary of the material provisions of
the Delaware statutory procedures required to be followed by a stockholder in
order to dissent from the merger and perfect the stockholder's dissenters'
rights. This summary, however, is not a complete statement of all applicable
requirements and is qualified in its entirety by reference to Section 262 of the
Delaware General Corporation Law, the full text of which appears in Appendix C
of this proxy statement.
Section 262 requires that stockholders be notified not less than 20 days
before the special meeting to vote on the merger that dissenters' appraisal
rights will be available. A copy of Section 262 must be included with such
notice. This proxy statement constitutes Fulton's notice to its stockholders of
the availability of dissenters' rights in connection with the merger in
compliance with the requirements of Section 262. If you wish to consider
exercising your dissenters' rights you should carefully review the text of
Section 262 contained in Appendix C because failure to timely and properly
comply with the requirements of Section 262 will result in the loss of your
dissenters' rights under Delaware law.
If you elect to demand appraisal of your shares, you must satisfy each of
the following conditions:
1. You must deliver to Fulton a written demand for appraisal of your
shares before the vote with respect to the merger is taken. This
written demand for appraisal must be in addition to and separate from
any proxy or vote abstaining from or against the merger. Voting
against or failing to vote for the merger by itself does not
constitute a demand for appraisal within the meaning of Section 262.
2. You must not vote in favor of the merger. An abstention or failure to
vote will satisfy this requirement, but a vote in favor of the merger,
by proxy or in person, will constitute a waiver of your dissenters'
rights in respect of the shares so voted and will nullify any
previously filed written demands for appraisal.
If you fail to comply with either of these conditions and the merger is
completed, you will be entitled to receive the cash payment for your shares of
Fulton common stock as provided for in the merger agreement, but you will have
no dissenters' rights with respect to your shares of Fulton common stock.
All demands for appraisal should be addressed to the Corporate Secretary,
Fulton Bancorp, Inc., 410 Market Street, Fulton, Missouri 65251, before the vote
on the merger is taken at the special meeting and should be executed by, or on
behalf of, the record holder of the shares of Fulton common stock. The demand
must reasonably inform Fulton of the identity of the stockholder and the
intention of the stockholder to demand appraisal of his or her shares.
To be effective, a demand for appraisal by a holder of Fulton common stock
must be made by or in the name of such registered stockholder, fully and
correctly, as the stockholder's name appears on his or her stock certificate(s)
and cannot be made by the beneficial owner if he or she does not also hold the
shares of record. The beneficial holder must, in such cases, have the registered
owner submit the required demand in respect of such shares.
If shares are owned of record in a fiduciary capacity, such as by a
trustee, guardian or custodian, execution of a demand for appraisal should be
made in such capacity; and if the shares are owned of record by more than one
person, as in a joint tenancy or tenancy in common, the demand should be
executed by or for all joint owners. An authorized agent, including one for two
or more joint owners, may execute the demand for appraisal for a stockholder of
record; however, the agent must identify the record owner or
22
<PAGE>
owners and expressly disclose the fact that, in executing the demand, he or she
is acting as agent for the record owner. A record owner, such as a broker, who
holds shares as a nominee for others, may exercise his or her right of appraisal
with respect to the shares held for one or more beneficial owners, while not
exercising this right for other beneficial owners. In such case, the written
demand should state the number of shares as to which appraisal is sought. Where
no number of shares is expressly mentioned, the demand will be presumed to cover
all shares held in the name of such record owner.
If you hold your shares of Fulton common stock in a brokerage account or in
other nominee form and you wish to exercise appraisal rights, you should consult
with your broker or such other nominee to determine the appropriate procedures
for the making of a demand for appraisal by such nominee.
Within 10 days after the effective date of the merger, Central must give
written notice that the merger has become effective to each Fulton stockholder
who has properly filed a written demand for appraisal and who did not vote in
favor of the merger. Within 120 days after the effective date, either Central or
any stockholder who has complied with the requirements of Section 262 may file a
petition in the Delaware Court of Chancery demanding a determination of the fair
value of the shares held by all stockholders entitled to appraisal. Central does
not presently intend to file such a petition in the event there are dissenting
stockholders and has no obligation to do so. Accordingly, the failure of a
stockholder to file such a petition within the period specified could nullify
such stockholder's previously written demand for appraisal.
At any time within 60 days after the effective date, any stockholder who
has demanded an appraisal has the right to withdraw the demand and to accept the
cash payment specified by the merger agreement for his or her shares of Fulton
common stock. If a petition for appraisal is duly filed by a stockholder and a
copy of the petition is delivered to Central, Central will then be obligated
within 20 days after receiving service of a copy of the petition to provide the
Chancery Court with a duly verified list containing the names and addresses of
all stockholders who have demanded an appraisal of their shares. After notice to
dissenting stockholders, the Chancery Court is empowered to conduct a hearing
upon the petition, to determine those stockholders who have complied with
Section 262 and who have become entitled to the appraisal rights provided
thereby. The Chancery Court may require the stockholders who have demanded
payment for their shares to submit their stock certificates to the Register in
Chancery for notation thereon of the pendency of the appraisal proceedings; and
if any stockholder fails to comply with such direction, the Chancery Court may
dismiss the proceedings as to such stockholder.
After determination of the stockholders entitled to appraisal of their
shares of Fulton common stock, the Chancery Court will appraise the shares,
determining their fair value exclusive of any element of value arising from the
accomplishment or expectation of the merger, together with a fair rate of
interest. When the value is determined, the Chancery Court will direct the
payment of such value, with interest thereon accrued during the pendency of the
proceeding if the Chancery Court so determines, to the stockholders entitled to
receive the same, upon surrender by such holders of the certificates
representing such shares.
In determining fair value, the Chancery Court is required to take into
account all relevant factors. You should be aware that the fair value of your
shares as determined under Section 262 could be more, the same, or less than the
value that you are entitled to receive pursuant to the merger agreement.
Costs of the appraisal proceeding may be imposed upon Central and the
stockholders participating in the appraisal proceeding by the Chancery Court as
the Chancery Court deems equitable in the circumstances. Upon the application of
a stockholder, the Chancery Court may order all or a portion of the
23
<PAGE>
expenses incurred by any stockholder in connection with the appraisal
proceeding, including, without limitation, reasonable attorneys' fees and the
fees and expenses of experts, to be charged pro rata against the value of all
shares entitled to appraisal. Any stockholder who had demanded appraisal rights
will not, after the effective date, be entitled to vote shares subject to such
demand for any purpose or to receive payments of dividends or any other
distribution with respect to such shares (other than with respect to payment as
of a record date prior to the effective date); however, if no petition for
appraisal is filed within 120 days after the effective date, or if such
stockholder delivers a written withdrawal of his or her demand for appraisal and
an acceptance of the merger within 60 days after the effective date, then the
right of such stockholder to appraisal will cease and such stockholder will be
entitled to receive the cash payment for shares of his or her Fulton common
stock pursuant to the merger agreement. Any withdrawal of a demand for appraisal
made more than 60 days after the effective date of the merger may only be made
with the written approval of the surviving corporation and must, to be
effective, be made within 120 days after the effective date.
In view of the complexity of Section 262, Fulton stockholders who may wish
to dissent from the merger and pursue appraisal rights should consult their
legal advisors.
Interests of Fulton's Directors and Officers in the Merger that Differ From Your
Interests
Some members of Fulton's management and the Fulton board may have interests
in the merger that are in addition to, or different from the interests of
stockholders. The Fulton board was aware of these interests and considered them
in approving the merger agreement.
Existing Employment. Fulton is a party to an employment agreement with its
chief executive officer, Kermit D. Gohring, which provides Mr. Gohring with a
severance payment and continuation of his employee benefits if he is terminated
following a "change in control" of Fulton or Fulton Savings, as defined in the
agreement. The merger will constitute a change in control of Fulton and Fulton
Savings and as a result of Mr. Gohring's termination of employment after
completion of the merger, he will be entitled to a severance payment in the
amount of approximately $__________.
Central has also agreed to honor Fulton's and Fulton Savings' employment
agreements with Richard W. Gohring and Bonnie K. Smith. Richard W. Gohring's and
Bonnie K. Smith's employment contracts require that they receive a severance
payment of $________ and $________________, respectively, following the
consummation of the merger. However, Richard W. Gohring, Bonnie K. Smith and
Central have agreed that Richard W. Gohring and Bonnie K. Smith may forego their
respective payments in exchange for employment with The Central Trust Bank for a
period of at least two years following the merger. Mr. Gohring and Ms. Smith
will retain the right to require payment under their employment contracts
(thereby foregoing employment with The Central Trust Bank) until 30 days after
the consummation of the merger.
Vesting of Restricted Stock. Directors and officers of Fulton received
grants of restricted stock under Fulton's 1997 Management Recognition and
Development Plan (the "MRDP"), with vesting of the shares to occur over a period
of five years. Under the terms of the Plan, all unvested restricted shares of
Fulton common stock will become vested upon a change in control of Fulton. The
merger will constitute a change in control of Fulton. The directors and
executive officers of Fulton currently hold a total of 187,996 shares of
unvested restricted stock, which will be converted into the right to receive the
merger consideration of $19.15. The following table reflects the number of
shares of unvested restricted stock held by each director and executive officer
and the cash payment each will receive in exchange for such shares.
24
<PAGE>
<TABLE>
<CAPTION>
Number of Unvested Total Cash Payment
Shares of Restricted for Unvested Shares of
Name and Title Stock Restricted Stock
- -------------- -------------------- ----------------------
<S> <C> <C>
Dennis J. Adrian 2,751 $ 52,682
Director
Billy M. Conner 2,751 52,682
Director
Kermit D. Gohring 11,003 210,707
President, Chief Executive Officer and Director
Richard W. Gohring 3,850 73,728
Executive Vice President and Director
Clifford E. Hamilton, Jr. 2,751 52,682
Director
Bonnie K. Smith 6,601 126,409
Senior Vice President and Director
David W. West 2,751 52,682
Director
</TABLE>
Protection of Fulton Directors and Officers Against Claims. Central has
agreed to indemnify and hold harmless each present and former director and
officer of Fulton for a period of six years from liability and expenses arising
out of matters existing or occurring at or prior to the consummation of the
merger to the fullest extent allowed under Delaware law as in effect at the time
of closing. This indemnification extends to liability arising out of the
transactions contemplated by the merger agreement. Central has also agreed to
advance any costs to each of these persons as they are incurred. Central has
also agreed that it will maintain a policy of directors' and officers' liability
insurance coverage for the benefit of Fulton's directors and officers for six
years following consummation of the merger.
Establishment of Advisory Board
Central will elect or appoint all of the members of Fulton's board of
directors who are willing to serve, to an advisory board. Central will maintain
the advisory board for at least one year following the closing of the merger,
after which time Central will have the right to dissolve the advisory board. The
advisory board will advise Central with respect to deposit and lending
activities in Fulton's market area, as well as maintain and develop customer
relationships. Each member of the advisory board will receive a monthly fee of
$200 plus appropriate fees for any additional services performed.
Regulatory Approvals Needed to Complete the Merger
Completion of the merger and the bank merger are subject to a number of
regulatory approvals and consents. The acquisition of Fulton Savings by Central
is subject to the approval of the Board of Governors of the Federal Reserve
System or the Federal Reserve Bank of Kansas City under the Bank Holding Company
Act. Central filed a request for a waiver of this application requirement and
the Federal Reserve granted the waiver request on _____________, 1999. The bank
merger is subject to the prior approval of the FDIC under the Bank Merger Act.
In reviewing applications under the Bank Merger Act, the FDIC must consider,
among other factors, the financial and managerial resources and future prospects
of the existing and resulting institutions, and the convenience and needs of the
communities to be served. In addition, the FDIC may not approve a transaction if
it will result in a monopoly or otherwise be anticompetitive. Central filed an
application with the FDIC on ______________, 1999. The bank merger also requires
the prior approval of the OTS. In approving the bank merger, the OTS must find,
among other things, that the bank
25
<PAGE>
merger would not frustrate the purposes of the mutual-to-stock conversion
regulations or subvert the fairness of Fulton Savings' mutual-to-stock
conversion.
Further, under Missouri law, the bank merger is subject to the prior
approval of the Director of Finance. The Central Trust Bank filed the plan of
bank merger and copies of the proceedings of the respective boards of directors
with the Director of Finance on ______________________, 1999 for his approval.
Under the Community Reinvestment Act of 1977, the FDIC and the Federal
Reserve System must take into account the record of performance of The Central
Trust Bank and Fulton Savings in meeting the credit needs of the entire
community, including low- and moderate-income neighborhoods, served by each
institution. As part of the review process, the banking agencies frequently
receive comments and protests from community groups and others. The Central
Trust Bank and Fulton Savings each received a "Satisfactory" rating during their
last respective federal Community Reinvestment Act examinations.
In addition, a period of 15 to 30 days must expire following approval by
the FDIC and the Federal Reserve System, within which period the United States
Department of Justice may file objections to the merger under the federal
antitrust laws. While Central believes that the likelihood of such action by the
Department of Justice is remote in this case, there can be no assurance that the
Department of Justice will not initiate such proceeding, or that the Attorney
General of the State of Missouri will not challenge the merger, or if such
proceeding is instituted or challenge is made, as to the result of the
challenge.
The merger and the bank merger cannot proceed in the absence of the
requisite regulatory approvals. See "THE MERGER AGREEMENT--Conditions to
Completing the Merger" and "--Terminating the Merger Agreement." There can be no
assurance that the requisite regulatory approvals will be obtained, and if
obtained, there can be no assurance as to the date of any such approval. There
can also be no assurance that any such approvals will not contain a condition or
requirement that causes such approvals to fail to satisfy the condition set
forth in the merger agreement and described under "THE MERGER AGREEMENT--
Conditions to Completing the Merger."
Central is not aware of any other regulatory approvals that would be
required for completion of the merger, except as described above. Should any
other approvals be required, it is presently contemplated that such approvals
would be sought. There can be no assurance that any other approvals, if
required, will be obtained.
The approval of any application merely implies the satisfaction of
regulatory criteria for approval, which does not include review of the merger
from the standpoint of the adequacy of the consideration to be received by
Fulton stockholders. Furthermore, regulatory approvals do not constitute an
endorsement or recommendation of the merger.
Accounting Treatment of the Merger
Central will account for the merger under the purchase method of
accounting. This means that Central and Fulton will be treated as one company as
of the date of the merger and Central will record the fair market value of
Fulton's assets less liabilities on its financial statements. Central will
record any difference between the purchase price and the fair value of Fulton's
identifiable net assets as goodwill.
26
<PAGE>
THE MERGER AGREEMENT
The following describes material provisions of the merger agreement. This
description does not purport to be complete and is qualified by reference to the
merger agreement, which is attached as Appendix A and is incorporated into this
proxy statement by reference.
Terms of the Merger
The merger agreement provides for a business combination in which Fulton
will merge with a wholly owned subsidiary of Central. Fulton will be the
surviving corporation in the merger and will become a wholly owned subsidiary of
Central. Fulton will then merge into Central, with Central being the surviving
corporation. The current directors and officers of Fulton will cease to be
directors and officers of Fulton upon completion of the merger. The current
directors of Fulton will be appointed or elected to an advisory board after the
merger. Under the merger agreement, Central has the right to revise the
structure of the transaction so long as the revised structure does not change
the amount or kind of consideration being paid to Fulton stockholders, diminish
the benefits of the transaction to Fulton stockholders, directors, officers and
employees, or materially delay or impede the receipt of any required regulatory
approval.
As a result of the merger, except as noted below, each outstanding share of
Fulton common stock will become exchangeable for a cash payment equal to $19.15.
If there is a change in the capitalization of Fulton as a result of a stock
split, stock dividend, reclassification, recapitalization or other similar
transaction, the amount of the merger consideration will be equitably adjusted.
Shares held directly or indirectly by Central and shares held by Fulton as
treasury stock will be canceled and retired upon completion of the merger, and
no payment will be made for them. Canceled shares will not include shares held
by either Fulton or Central in a fiduciary capacity or in satisfaction of a debt
previously contracted. Holders of shares for which dissenters' rights have been
exercised will be entitled only to the rights granted by Section 262 of the
Delaware General Corporation Law.
Under the merger agreement, because the exercise price per share of all
outstanding options to purchase Fulton common stock is greater than $19.15, each
outstanding stock option granted under Fulton's stock option plan will be
canceled without any payment at the consummation of the merger.
In connection with the merger, The Central Trust Bank and Fulton Savings
have entered into a plan of merger under which The Central Trust Bank and Fulton
Savings will merge, with The Central Trust Bank being the surviving bank. It is
the intention of The Central Trust Bank to operate the former offices of Fulton
Savings as offices of The Central Trust Bank. The bank merger agreement may be
terminated by mutual consent of the parties at any time and will be terminated
automatically in the event the merger agreement is terminated.
When Will the Merger be Completed
The closing of the merger will take place on a date designated by Central
that is no later that the last day of the month in which the last waiting period
under the required regulatory approvals expires and all of the conditions to the
merger contained in the merger agreement are satisfied or waived, unless Central
and Fulton agree to another date. See "--Conditions to Completing the Merger."
On the date of the closing, Central will file a certificate of merger with the
Delaware Secretary of State merging Fulton into Central's wholly owned
subsidiary. The merger will become effective at the time stated in the
certificate of merger.
27
<PAGE>
We expect to complete the merger in the fourth calendar quarter of 1999.
However, we cannot guarantee when or if the required regulatory approvals will
be obtained. See "--Regulatory Approvals Needed to Complete the Merger."
Furthermore, either party may terminate the merger agreement if, among other
reasons, the merger has not been completed on or before March 31, 2000, unless
failure to complete the merger by that time is due to the breach of any
representation, warranty or covenant by the party seeking to terminate. See "--
Terminating the Merger Agreement."
Procedures for Exchanging Your Stock Certificates
Within five business days after the completion of the merger, The Central
Trust Bank will mail to each former holder of record of Fulton common stock a
letter with instructions on how to exchange Fulton stock certificates for the
cash merger consideration.
Please do not send in your Fulton stock certificates until you receive the
letter of transmittal and instructions from The Central Trust Bank. Do not
return your stock certificates with the enclosed proxy.
After you mail the letter of transmittal and your stock certificates to The
Central Trust Bank, your check will be mailed to you. The Fulton certificates
you surrender will be canceled.
After the completion of the merger, there will be no further transfers of
Fulton common stock. Fulton stock certificates presented for transfer after the
completion of the merger will be canceled and exchanged for the merger
consideration.
If your Fulton stock certificates have been lost, stolen or destroyed, you
will have to prove your ownership of these certificates and that they were lost,
stolen or destroyed before you receive any consideration for your shares. The
Central Trust Bank will send you instructions on how to provide such evidence.
Conditions to Completing the Merger
The obligations of Central and Fulton to consummate the merger are
conditioned on the following:
1. the approval of the merger agreement by Fulton's stockholders;
2. the receipt of all required regulatory approvals and the expiration of
all statutory waiting periods;
3. no party to the merger being subject to any legal order that prohibits
consummating any part of the transaction and no governmental entity
having instituted any proceeding for the purpose of blocking the
transaction;
4. the absence of any statute, rule or regulation that prohibits
completion of any part of the transaction; and
5. the other party having performed in all material respects its
obligations under the merger agreement, the other party's
representations and warranties being true and correct as of the
28
<PAGE>
date of the merger agreement and as of the closing date, and receipt
of a certificate signed by the other party's chief executive officer
and chief financial officer to such effect.
The obligations of Central to complete the merger are also conditioned on
the number of shares for which dissenters' rights have been exercised not
exceeding 10% of the outstanding shares of Fulton common stock.
The obligations of Fulton to complete the merger are also conditioned on
Central having deposited the funds to pay the merger consideration with The
Central Trust Bank, acting as exchange agent.
Fulton cannot guarantee whether all of the conditions to the merger will be
satisfied or waived by the party permitted to do so. If the merger is not
completed on or before March 31, 2000, the merger agreement may be terminated by
a vote of a majority of the board of directors of either Central or Fulton.
Conduct of Business Prior to the Merger
Fulton has agreed that, until the completion of the merger, Fulton will use
its best efforts to:
1. conduct its business in the regular, ordinary and usual course
consistent with past practice;
2. maintain and preserve intact its business organization, properties,
leases, employees and advantageous business relationships and retain
the services of its officers and key employees;
3. take no action which would interfere with the ability of Central or
Fulton to perform their respective covenants and agreements on a
timely basis under the merger agreement;
4. take no action which would interfere with any party's ability to
obtain any necessary approvals, consents or waivers of any
governmental authority required for the transactions contemplated by
the merger agreement; and
5. take no action that results in or is reasonably likely to have a
material adverse effect on Fulton or Fulton Savings.
Further, except as otherwise provided in the merger agreement, until the
completion of the merger, Fulton has agreed that it will not take certain
actions unless permitted to by Central. These include:
1. amending its certificate of incorporation or bylaws;
2 issuing any shares of its capital stock or any securities convertible
or exercisable for any shares of its capital stock other than shares
issued upon the exercise of outstanding stock options; changing the
terms of any of its outstanding stock options or issuing any option;
or changing its capitalization;
3. paying any cash or stock dividends other than regular quarterly cash
dividends not in excess of $0.075 per share, making any other
distribution or purchasing any shares of its capital stock;
29
<PAGE>
4. disposing of any of its material assets other than in the ordinary
course of business consistent with past practice;
5. increasing the compensation or fringe benefits of any of its employees
or directors, other than general increases in compensation for non-
executive officer employees in the ordinary course of business
consistent with past practice; adopting, establishing or amending any
Fulton employee benefit plan unless required by the merger agreement
or by law; hiring any employee with an annual total compensation in
excess of $35,000; or entering into, modifying or renewing any
employment contract or other agreement with any director, officer or
other employee;
6. changing its method of accounting as in effect at March 31, 1999,
except as contemplated by the merger agreement and as required by
changes in generally accepted accounting practices;
7. settling any claim against Fulton for more than $50,000 or agreeing to
material restrictions on the operations of Fulton;
8. acquiring any business or assets of another business that would be
material to Fulton;
9. making any real estate loans other than in the ordinary course of
business secured by undeveloped land or non-residential real estate
located outside of Missouri or making any non-residential construction
loans outside of Missouri, except pursuant to existing loan
commitments;
10. opening any new branch or applying to relocate or terminate the
operation of any banking office;
11. making any investment other than in the ordinary course of business
consistent with past practice in individual amounts not to exceed
$50,000, other than certain debt securities;
12. making any investment in any debt security (including mortgage-backed
and mortgage-related securities) except for short- to intermediate-
term U.S. government and U.S. government agency securities, mortgage-
backed or mortgage related securities which would not be considered
"high risk" securities or securities of the Federal Home Loan Bank
("FHLB") or materially restructuring or changing its investment
securities portfolio;
13. entering into, renewing, amending or terminating any contract, or
making any change in any of its leases or contracts, other than with
respect to those involving the payment of less than $20,000 per year;
14. making or modifying any loan except in conformity with existing
lending practices in amounts not to exceed an aggregate of $500,000
with respect to any individual borrower or for which Fulton has a
binding loan commitment as of the date of the merger agreement;
15. incurring any additional borrowings other than short-term (six months
or less) FHLB borrowings and reverse repurchase agreements consistent
with past practice, or pledging any of its assets to secure any
borrowings other than as required pursuant to the
30
<PAGE>
terms of borrowings currently in effect or in connection with
borrowings or reverse repurchase agreements permitted under the merger
agreement;
16. making any capital expenditures in excess of $20,000 per expenditure
other than pursuant to binding commitments and other than expenditures
necessary to maintain existing assets in good repair or to make
payment of necessary taxes;
17. organizing, capitalizing, lending to or otherwise investing in any
subsidiary;
18. electing any new senior executive officer or director;
19. entering into any new line of business; and
20. taking or omitting to take any action that is intended or may
reasonably be expected to result in any of Fulton's representations
and warranties contained in the merger agreement being or becoming
untrue in any material respect.
Covenants of Fulton and Central in the Merger Agreement
Agreement Not to Solicit Other Offers
Fulton has agreed not to seek to have an outside third party try to buy a
material interest in Fulton or its subsidiaries. Generally, an effort by Fulton
to obtain an offer to engage in a merger or similar business combination, buy at
least 25% of Fulton's assets or 25% of Fulton's stock, or a public announcement
to enter into an agreement to do any of these things, would violate this
covenant.
Despite Fulton's agreement not to solicit other offers, the Fulton board may
generally enter into discussions or negotiations with anyone who makes an
unsolicited, written bona fide proposal to acquire Fulton that is a financially
superior proposal to that of Central. A proposal of this nature is one about
which Fulton's financial advisors opine in writing is superior to this merger
from a financial point of view to Fulton's stockholders. For the Fulton board to
enter into negotiations on a superior proposal, it would also have to first
determine that their fiduciary duties obligate them to do so. If Fulton does
enter into negotiations with a third party regarding a superior proposal, it has
to notify Central and provide Central with information about the other party and
its proposal.
The Fulton board may also withdraw or modify its recommendation for the
merger and enter into a business combination with a third party if, after
consulting with independent legal counsel, the board determines in good faith
that doing so is necessary for it to comply with its fiduciary duties to
stockholders.
Employee Matters
Each Fulton Savings employee whose employment is not specifically terminated
will become an employee of The Central Trust Bank. Central will use its best
efforts to retain all of Fulton Savings' employees, subject to their
qualifications and the needs of The Central Trust Bank.
Appropriate steps will be taken to terminate all of Fulton's employee
benefit plans around the time the merger closes. All former employees of Fulton
Savings who continue as employees of The Central Trust Bank will be eligible to
participate in Central's employee benefit plans on the same basis as any newly-
hired
31
<PAGE>
employee of The Central Trust Bank. However, service with Fulton Savings will
also be treated as service with The Central Trust Bank for purposes of
determining eligibility to participate and vesting, but not for accrual of
benefits, with respect to each Central benefit plan. Service with Fulton or
Fulton Savings also will be treated as service with The Central Trust Bank for
purposes of satisfying any waiting periods, evidence of insurability
requirements or the application of any preexisting condition limitation with
respect to any of Central's welfare benefit plans. Continuing employees will
also receive credit for service with Fulton Savings for purposes of computing
vacation pay benefits.
Prior to the consummation of the merger, Fulton Savings will terminate its
ESOP. After consummation of the merger, the ESOP will repay the outstanding
balance of its loan and allocate any surplus cash to the accounts of ESOP
participants in proportion to their account balances, to the extent allowed
under applicable law and the governing documents of the ESOP.
Indemnification of Fulton Officers and Directors
Central has agreed to indemnify and hold harmless each present and former
director and officer of Fulton for a period of six years from liability and
expenses arising out of matters existing or occurring at or prior to the
consummation of the merger to the fullest extent allowed under Delaware law as
in effect at the time of closing. Central has also agreed that it will maintain
a policy of directors' and officers' liability insurance coverage, or provide a
policy providing comparable coverage and amounts on terms no less favorable than
Fulton's current policy, for the benefit of Fulton's directors and officers for
six years following the consummation of the merger.
Certain Other Covenants
The merger agreement also contains other agreements relating to the conduct
of the parties prior to the consummation of the merger, including the following:
1. After all required regulatory and stockholder approvals have been
received, Fulton will cause Fulton Savings to revise its loan,
litigation and real estate valuation policies and practices, and
investment and asset/liability management policies and practices to
conform to those of The Central Trust Bank. Fulton shall not be
required to take such action more than 30 days prior to closing.
However, Central must first confirm that it is not aware of any fact
that would prevent the completion of the merger.
2. Fulton will give Central reasonable access during normal business
hours to its property, books, contracts and records and furnish to
Central all information it may reasonably request.
3. Fulton will take any necessary action to exempt the parties and this
transaction from any antitakeover provisions contained in Fulton's
certificate of incorporation or bylaws or federal or state law.
4. Central and Fulton will use their respective reasonable best efforts
to obtain all required approvals and to consummate the merger.
5. Central and Fulton will consult with each other regarding any public
statements about the merger.
32
<PAGE>
6. Fulton will notify Central of any contract defaults and any events
which would reasonably be likely to result in a material adverse
effect on Fulton. Central and Fulton will notify each other of any
communication from a third party regarding the need to obtain that
party's consent to the merger and of any event that would be
reasonably likely to cause any representation or warranty in the
merger agreement to be untrue or to cause any covenant or condition in
the merger agreement not to be complied with.
Representations and Warranties Made by Central and Fulton in the Merger
Agreement
Both Central and Fulton have made certain customary representations and
warranties to each other relating to their businesses. For information on these
representations and warranties, please refer to the merger agreement attached as
Appendix A. The representations and warranties must be true in all material
respects through the completion of the merger unless the change does not have a
material negative impact on the party's business, financial condition or results
of operations. See "--Conditions to Completing the Merger."
Terminating the Merger Agreement
The merger agreement may be terminated at or prior to the completion of the
merger, either before or after approval of the merger agreement by the
stockholders of Fulton by:
1. the mutual consent of Central and Fulton;
2. either party if Fulton's stockholders fail to approve the merger
agreement;
3. either party if a required regulatory approval is denied or any
governmental entity prohibits the merger or bank merger;
4. either party if the merger is not consummated by March 31, 2000;
5. either party if the other party breaches a representation, warranty or
covenant that would have a material adverse effect on the party seeking
to terminate; or
6. Fulton if its board of directors determines that it must accept a
superior offer from a third party in the exercise of its fiduciary
duties.
Expenses and Termination Fees
All costs and expenses incurred in connection with the merger will be paid
by the party incurring the expense.
If Fulton terminates the merger agreement in order to accept a superior
offer or if, after another party proposes to acquire Fulton, the stockholders
fail to approve the merger agreement and within 12 months Fulton enters into a
merger agreement with a third party, Fulton will pay Central a termination fee
of $750,000.
If either party terminates the merger agreement because the other party has
willfully breached a representation, warranty or covenant, then the breaching
party will pay the other a fee of $200,000.
33
<PAGE>
Changing the Terms of the Merger Agreement
Prior to the completion of the merger, any provision of the merger agreement
may be waived, amended or modified by the parties. However, after the vote by
the stockholders of Fulton, no amendment or modification may be made that would
reduce the consideration to be received by Fulton's stockholders under the terms
of the merger.
BUSINESS OF FULTON BANCORP, INC.
General
Fulton was organized as a Delaware corporation in May 1996 for the purpose
of becoming the holding company for Fulton Savings Bank upon its conversion from
a federal mutual savings bank to a federal stock savings bank. The conversion
was completed on October 17, 1996 through the issuance of 1,719,250 shares of
common stock by Fulton at a price of $10.00 per share.
Fulton Savings, founded in 1912, is a federally chartered savings bank
located in Fulton, Missouri. Fulton Savings is regulated by the OTS, its primary
federal regulator, and the FDIC, the insurer of its deposits. Fulton Savings'
deposits are insured by the FDIC's Savings Association Insurance Fund ("SAIF")
and have been federally insured since 1965. Fulton Savings has been a member of
the FHLB since 1942. Fulton Savings is a community oriented financial
institution that engages primarily in the business of attracting deposits from
the general public and using those funds to originate residential and commercial
mortgage loans within Fulton Savings' market area. Fulton Savings generally
sells all of the fixed-rate and some of the adjustable-rate residential mortgage
("ARM") loans that it originates while retaining the servicing rights on such
loans. Fulton Savings also originates multi-family, commercial real estate,
construction, land, consumer and other loans. Fulton Savings frequently sells
participation interests in the non-residential mortgage loans it originates.
On November 13, 1996, Fulton's board of directors approved a change in
Fulton's fiscal year end from April 30 to June 30.
Market Area
Fulton Savings conducts operations in central Missouri through its main
office in Fulton, Missouri and its branch office in Holts Summit, Missouri, both
of which are in Callaway County. Fulton Savings also serves Boone County and, to
a lesser extent, Cole and Audrian Counties. Fulton, which is the county seat,
serves as the economic and employment center of Callaway County. Additional
employment is available in the nearby metropolitan areas of Columbia (in Boone
County) and Jefferson City (in Cole County). Columbia is the location of the
University of Missouri and provides significant employment in education and
medicine. Jefferson City is the state capital of Missouri, resulting in a
significant concentration of government employment and an historically stable
economy. Callaway County represents Fulton Savings' primary market area for
deposit generation as most of its depositors live in this county, particularly
in the areas surrounding Fulton Savings' offices. Fulton Savings' deposits have
increased slightly in recent years. However, because Callaway County has a small
population, Fulton Savings' ability to achieve deposit growth is limited. Fulton
Savings' lending activities have been concentrated in Callaway County and the
city of Columbia. Loan demand has been strong in recent years, especially in the
city of Columbia.
34
<PAGE>
While Callaway County is a more rural county with a much lower population
base and overall smaller economy than Cole and Boone Counties, the economy has
been stable historically due to the economies in the contiguous counties. The
Callaway County economy, which had been based on agriculture, has diversified in
recent years to include employment in health care, education, manufacturing and
local/state government. The County's largest employers are Fulton State Hospital
and Union Electric Company, which operates a large electrical generation plant.
The economies of Columbia and Boone County historically have been very stable
due to the presence of the University of Missouri. Callaway and Boone Counties
have an estimated combined population of 159,000, with Callaway County having an
estimated population of only 35,000. Over the last five years, both Callaway and
Boone County have experienced growth in population and households exceeding the
state and national averages in percentage terms, although the actual numbers are
small given the relatively small size of these counties.
Lending Activities
General. The principal lending activity of Fulton Savings is the origination
of conventional mortgage loans for the purpose of purchasing or refinancing
owner-occupied, one- to four-family residential properties. Fulton Savings also
originates multi-family, commercial real estate, construction, land and consumer
and other loans. Fulton Savings' net loans receivable totalled $88.1 million at
June 30, 1998, representing 80.0% of consolidated total assets.
Loan Portfolio Analysis. The following table sets forth the composition of
Fulton Savings' loan portfolio by type of loan at the dates indicated. Fulton
Savings had no concentration of loans exceeding 10% of total gross loans other
than as disclosed below.
<TABLE>
<CAPTION>
At June 30, At April 30,
---------------------------------------
1998 1997 1996
-------------------- ---------------- ----------------
Amount Percent Amount Percent Amount Percent
--------- ------- ------ ------- ------ -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Mortgage loans:
One- to four-family................ $54,664 56.23% $53,461 58.37% $46,741 59.61%
Multi-family....................... 6,039 6.21 4,279 4.67 3,845 4.90
Commercial......................... 12,011 12.36 9,507 10.38 8,706 11.10
Construction....................... 11,320 11.64 11,295 12.33 7,686 9.80
Land............................... 4,402 4.53 3,524 3.85 1,518 1.94
------- ------ ------- ------ ------- ------
Total mortgage loans............. 88,436 90.97 82,066 89.60 68,496 87.35
Consumer and other loans............ 8,775 9.03 9,525 10.40 9,922 12.65
------- ------ ------- ------ ------- ------
Total loans...................... 97,211 100.00% 91,591 100.00% 78,418 100.00%
====== ====== ======
Undisbursed loan funds.............. (8,197) (6,959) (3,743)
Net deferred loan origination fees.. 61 46 --
Allowance for loan losses........... (971) (919) (782)
------- ------- -------
Loans receivable, net............ $88,104 $83,759 $73,893
======= ======= =======
</TABLE>
Residential Real Estate Lending. The primary lending activity of Fulton
Savings is the origination of mortgage loans to enable borrowers to purchase
existing one- to four-family homes. At June 30, 1998, $54.7 million, or 56.2% of
Fulton Savings' total gross loan portfolio, consisted of loans secured by one-
to four-family residences. Fulton Savings presently originates both ARM loans
and fixed-rate mortgage loans. Fulton Savings' loans are generally underwritten
and documented in accordance with the guidelines established by Freddie Mac.
Fulton Savings generally sells to Freddie Mac or Fannie Mae all of the fixed-
rate mortgage loans that it originates. Generally, Fulton Savings sells whole
loans to Freddie Mac and
35
<PAGE>
Fannie Mae on a servicing-retained basis. All loans are sold without recourse.
Fulton Savings also sells a portion of the ARM loans that it originates to other
financial institutions. Such loans generally are sold on a servicing-retained
basis and Fulton Savings occasionally retains a participation interest in the
loan. Fulton Savings' decision to hold or sell loans is based on its
asset/liability management policies and goals and the market conditions for
mortgages. See "-- Lending Activities -- Loan Originations, Sales and
Purchases." At June 30, 1998, $72.0 million, or 74.1% of Fulton Savings' total
gross loans, were subject to periodic interest rate adjustments.
Fulton Savings offers ARM loans at rates and terms competitive with market
conditions. Substantially all of the ARM loans originated by Fulton Savings meet
the underwriting standards of Freddie Mac. Fulton Savings offers ARM products
that adjust either annually or every three years. These ARM products utilize the
national quarterly cost of funds index as published by the OTS plus a margin of
3.0%. The initial interest rate on Fulton Savings' ARM loans is generally at or
near the fully indexed rate. Until May 1996, Fulton Savings' ARM loans utilized
the 8th District cost of funds index. Accordingly, most of Fulton Savings' ARM
portfolio is based on this index. Fulton Savings switched from the 8th District
to the national cost of funds index because it believes that the national cost
of funds index is more stable and cannot easily be influenced by the deposit
pricing and borrowing costs of a few institutions. Both the 8th District and the
national cost of funds indices are lagging market indices, which means that
upward adjustments in these indices may occur more slowly than changes in Fulton
Savings' cost of interest-bearing liabilities, especially during periods of
rapidly increasing interest rates. ARM loans held in Fulton Savings' portfolio
do not permit negative amortization of principal and carry no prepayment
restrictions. The periodic interest rate cap (the maximum amount by which the
interest rate may be increased or decreased in a given period) on Fulton
Savings' ARM loans is generally 1.0% to 1.5% per adjustment period and the
lifetime interest rate cap is generally 4.5% to 6.0% over the initial interest
rate of the loan. The terms and conditions of the ARM loans offered by Fulton
Savings, including the index for interest rates, may vary from time to time.
Borrower demand for ARM loans versus fixed-rate mortgage loans is a function of
the level of interest rates, the expectation of changes in the level of
interest rates and the difference between the initial interest rates and fees
charged for each type of loan. The relative amount of fixed-rate mortgage loans
and ARM loans that can be originated at any time is largely determined by the
demand for each in a competitive environment.
Fulton Savings also offers ARM loans for non-owner-occupied one- to four-
family homes. The rates on such loans are generally slightly higher than for a
comparable loan for an owner-occupied residence. Loans secured by non-owner-
occupied residences generally involve greater risks than loans secured by owner-
occupied residences. Payments on loans secured by such properties are often
dependent on the successful operation or management of the properties. In
addition, repayment of such loans may be subject to a greater extent to adverse
conditions in the real estate market or the economy. Fulton Savings requires
that borrowers with loans secured by non-owner-occupied homes submit annual
financial statements.
The retention of ARM loans in Fulton Savings' loan portfolio helps reduce
Fulton Savings' exposure to changes in interest rates. There are, however,
unquantifiable credit risks resulting from the potential of increased costs due
to increased rates to be paid by the customer. It is possible that during
periods of rising interest rates the risk of default on ARM loans may increase
as a result of repricing and the increased payments required by the borrower.
Another consideration is that although ARM loans allow Fulton Savings to
increase the sensitivity of its asset base to changes in interest rates, the
extent of this interest sensitivity is limited by the periodic and lifetime
interest rate adjustment limits. Because of these considerations, Fulton Savings
has no assurance that yields on ARM loans will be sufficient to offset increases
in Fulton Savings' cost of funds.
36
<PAGE>
While one- to four-family residential real estate loans are normally
originated with 15 to 30 year terms, such loans typically remain outstanding for
substantially shorter periods. This is because borrowers often prepay their
loans in full upon sale of the property pledged as security or upon refinancing
the original loan. In addition, substantially all mortgage loans in Fulton
Savings' loan portfolio contain due-on-sale clauses providing that Fulton
Savings may declare the unpaid amount due and payable upon the sale of the
property securing the loan. Typically, Fulton Savings enforces these due-on-sale
clauses to the extent permitted by law and as business judgment dictates. Thus,
average loan maturity is a function of, among other factors, the level of
purchase and sale activity in the real estate market, prevailing interest rates
and the interest rates payable on outstanding loans.
Fulton Savings generally requires title insurance insuring the status of
its lien or a title abstract and acceptable attorney's opinion on all loans
where real estate is the primary source of security. Fulton Savings also
requires that fire and casualty insurance (and, if appropriate, flood insurance)
be maintained in an amount at least equal to the outstanding loan balance.
Fulton Savings' lending policies generally limit the maximum loan-to-value
ratio on mortgage loans secured by owner-occupied properties to 95% of the
lesser of the appraised value or the purchase price, with the condition that
private mortgage insurance is generally required on loans with loan-to-value
ratios greater than 80%. The maximum loan-to-value ratio on mortgage loans
secured by non-owner-occupied properties generally is 80%.
Multi-Family Residential and Commercial Real Estate Lending. Multi-family
residential and commercial real estate lending has been a constant part of
Fulton Savings' lending strategy in recent years. At June 30, 1998, Fulton
Savings' gross loan portfolio included $6.0 million in multi-family real estate
loans and $12.0 million in commercial real estate loans. Fulton Savings
frequently sells participation interests in the larger multi-family and
commercial real estate loans that it originates. Fulton Savings retains the
servicing rights on such loans and generally retains 10% or 20% of the loan
balance.
Multi-family and commercial real estate loans originated by Fulton Savings
are predominately adjustable-rate loans and generally are for terms of up to 25
years. The maximum loan-to-value ratio for multi-family and commercial real
estate loans generally is 75%. Multi-family loans typically are secured by small
to medium sized projects. Fulton Savings' commercial real estate loan portfolio
consists predominantly of loans secured by residential care facilities, nursing
homes, medical buildings, small shopping centers, small office buildings and
churches, most of which are located in Fulton Savings' market area. Appraisals
on properties that secure multi-family and commercial real estate loans are
performed by an independent appraiser engaged by Fulton Savings before the loan
is made. Underwriting of multi-family and commercial real estate loans includes
a thorough analysis of the cash flows generated by the real estate to support
the debt service and the financial resources, experience and income level of
the borrowers. Annual operating statements on each multi-family and commercial
real estate loan are required and reviewed by management.
Multi-family and commercial real estate lending affords Fulton Savings an
opportunity to receive interest at rates higher than those generally available
from one- to four-family residential lending. However, loans secured by such
properties usually are greater in amount, more difficult to evaluate and monitor
and, therefore, involve a greater degree of risk than one- to four-family
residential mortgage loans. Because payments on loans secured by multi-family
and commercial properties are often dependent on the successful operation and
management of the properties, repayment of such loans may be affected by adverse
conditions in the real estate market or the economy. Fulton Savings seeks to
minimize these risks by limiting the
37
<PAGE>
maximum loan-to-value ratio to 75% and strictly scrutinizing the financial
condition of the borrower, the quality of the collateral and the management of
the property securing the loan. Fulton Savings also obtains loan guarantees from
financially capable parties based on a review of personal financial statements.
Construction Lending. Fulton Savings originates residential construction
loans to individuals and, occasionally, to builders, to construct one- to four-
family homes. In addition, Fulton Savings occasionally originates construction
loans for multi-family or commercial properties. In addition, Fulton Savings
occasionally originates speculative construction loans, i.e, where purchasers
for the finished homes may be identified either during or following the
construction period. Fulton Savings limits the number of speculative loans to a
single builder in order to limit risk. At June 30, 1998, Fulton Savings'
construction loan portfolio totaled $11.3 million, or 11.6% of total gross
loans. At such date, Fulton Savings' construction loan portfolio consisted of 75
residential construction loans totaling $9.9 million and three commercial real
estate construction loans totaling $1.4 million.
Construction loans are generally made in connection with permanent
financing. Construction loans that are not made in connection with the granting
of permanent financing on the property are for terms of six months.
Construction lending is considered to involve a higher level of risk as
compared to one- to four-family residential lending because of the inherent
difficulty in estimating both a property's value at completion of the project
and the estimated cost of the project. The nature of these loans is such that
they are more difficult to evaluate and monitor. If the estimate of value proves
to be inaccurate, Fulton Savings may be confronted at, or prior to, the maturity
of the loan, with a project the value of which is insufficient to assure full
repayment. Fulton Savings attempts to minimize these risks by limiting the
maximum loan-to-value ratio on construction loans to 85% for residential
construction loans and 80% for non-residential construction loans and by
conditioning disbursements on the presentation of itemized bills and an
inspection of the construction site. For non-residential construction loans,
Fulton Savings generally obtains personal guarantees and requires borrowers to
submit annual financial statements.
Land Lending. Fulton Savings occasionally originates loans for the
acquisition of land upon which the purchaser can then build or make improvements
necessary to build or to sell as improved lots. At June 30, 1998, Fulton
Savings' land loan portfolio totaled $4.4 million and consisted of 57 loans.
Land loans originated by Fulton Savings are generally adjustable-rate loans and
have maturities of 10 to 20 years.
Loans secured by undeveloped land or improved lots involve greater risks
than one- to four-family residential mortgage loans because such loans are more
difficult to evaluate. If the estimate of value proves to be inaccurate, in the
event of default and foreclosure Fulton Savings may be confronted with a
property the value of which is insufficient to assure full repayment. Fulton
Savings attempts to minimize this risk by limiting the maximum loan-to-value
ratio on land loans to 65%.
Consumer and Other Lending. Fulton Savings originates a variety of consumer
and other non-mortgage loans. Consumer loans generally have shorter terms to
maturity and higher interest rates than mortgage loans. Fulton Savings' consumer
and other loans consist primarily of secured consumer loans, automobile loans,
home improvement loans, deposit account loans and student loans. Fulton Savings
also engages in a small amount of commercial business lending. Such loans
include asset-based loans secured by inventory and short-term working capital
loans. At June 30, 1998, Fulton Savings' consumer and other loans totalled
approximately $8.8 million, or 9.0% of Fulton Savings' total gross loans.
38
<PAGE>
Consumer loans entail greater risk than do residential mortgage loans,
particularly in the case of consumer loans that are unsecured or secured by
rapidly depreciating assets such as automobiles. In such cases, any repossessed
collateral for a defaulted consumer loan may not provide an adequate source of
repayment of the outstanding loan balance as a result of the greater likelihood
of damage, loss or depreciation. The remaining deficiency often does not warrant
further substantial collection efforts against the borrower beyond obtaining a
deficiency judgment. In addition, consumer loan collections are dependent on the
borrower's continuing financial stability, and thus are more likely to be
adversely affected by job loss, divorce, illness or personal bankruptcy.
Furthermore, the application of various federal and state laws, including
federal and state bankruptcy and insolvency laws, may limit the amount that can
be recovered on such loans.
Maturity of Loan Portfolio. The following table sets forth contractual
amortization of loans at June 30, 1998. Demand loans, loans having no stated
schedule of repayments and no stated maturity, and overdrafts are reported as
becoming due within one year. Amounts presented are the gross loan balances
before adjustments for undisbursed loan proceeds, net deferred loan origination
fees, and allowance for loan losses. The table does not include any estimate of
prepayments which significantly shorten the average life of all loans and may
cause Fulton Savings' actual repayment experience to differ from that shown
below.
<TABLE>
<CAPTION>
After After
One Year 5 Years
Within Through Through Beyond Total
One Year 5 Years 10 Years 10 Years
-------- ------- -------- -------- -------
(In thousands)
<S> <C> <C> <C> <C> <C>
Mortgage loans:
One- to four-family (1)...... $ 3,140 $10,156 $12,665 $28,703 $54,664
Multi-family................. 232 895 1,508 3,404 6,039
Commercial................... 535 2,610 3,863 5,003 12,011
Construction................. 11,320 -- -- -- 11,320
Land......................... 1,742 1,048 749 863 4,402
Consumer and other loans...... 4,465 3,583 553 174 8,775
------- ------- ------- ------- -------
Total gross loans.......... $21,434 $18,292 $19,338 $38,147 $97,211
======= ======= ======= ======= =======
</TABLE>
____________________________
(1) Includes 124 loans totalling $8.4 million construction/permanent loans.
The following table sets forth the dollar amount of all loans due after
June 30, 1999 that have fixed interest rates and have floating or adjustable
interest rates.
<TABLE>
<CAPTION>
Floating or
Fixed Rates Adjustable Rates
----------- ----------------
(In thousands)
<S> <C> <C>
Mortgage loans:
One- to four-family........ $ 4,976 $46,548
Multi-family............... 503 5,304
Commercial................. 4,574 6,902
Construction............... -- --
Land....................... 657 2,003
Consumer and other loans.... 4,310 --
------- -------
Total gross loans........ $15,020 $60,757
======= =======
</TABLE>
39
<PAGE>
Scheduled contractual principal repayments of loans do not reflect the
actual life of such assets. The average life of a loan is substantially less
than its contractual terms because of prepayments. In addition, due-on-sale
clauses on loans generally give Fulton Savings the right to declare loans
immediately due and payable in the event, among other things, that the borrower
sells the real property subject to the mortgage and the loan is not repaid. The
average life of mortgage loans tends to increase, however, when current mortgage
loan market rates are substantially higher than rates on existing mortgage loans
and, conversely, decrease when rates on existing mortgage loans are
substantially higher than current mortgage loan market rates.
Loan Solicitation and Processing. Loan applicants come primarily through
existing customers, referrals by realtors, homebuilders and existing customers,
and walk-ins. Fulton Savings also uses radio and newspaper advertising to create
awareness of its loan products. Upon receipt of a loan application from a
prospective borrower, a credit report and other data are obtained to verify
specific information relating to the loan applicant's employment, income and
credit standing. An appraisal of the real estate offered as collateral generally
is undertaken by an independent fee appraiser certified by the State of
Missouri.
Real estate loans up to $250,000 must be approved by the Loan Committee,
which consists of the President and three non-employee directors. Loans
exceeding $250,000 must be approved by the entire board of directors. Fulton
Savings' loan approval process allows mortgage loans to be approved in
approximately five days and closed in 20 days. Consumer loans may be approved by
any loan officer. Non-mortgage loans exceeding $100,000 must be approved by the
entire board of directors.
Loan Originations, Sales and Purchases. While Fulton Savings originates
both adjustable-rate and fixed-rate loans, its ability to generate each type of
loan is dependent upon relative customer demand for loans in its market. For the
years ended June 30, 1998 and 1997, and April 30, 1996, Fulton Savings
originated $58.2 million, $55.6 million and $51.3 million of loans,
respectively. Of the $58.2 million of loans originated during the year ended
June 30, 1998, 69.18% were adjustable-rate loans and 30.82% were fixed-rate
loans.
Fulton Savings generally sells all of its fixed-rate single-family
residential mortgage loans to Freddie Mac or Fannie Mae and a portion of its
residential ARM loans to other financial institutions. Sales are made on a non-
recourse basis with servicing retained. Sales of loans to Freddie Mac and Fannie
Mae are whole loans, whereas Fulton Savings frequently retains a participation
interest in residential ARM loans sold to other financial institutions. Fulton
Savings also sells participation interests in the larger multi-family,
commercial real estate and construction loans that it originates to other
financial institutions. Such sales are also made on a non-recourse basis with
servicing retained. Fulton Savings has obtained commitments from several
financial institutions to purchase loans up to a specified aggregate amount.
Sales of loans generally are beneficial to Fulton Savings since these sales
increase the size of Fulton Savings' loan servicing portfolio. See "-- Lending
Activities --Loan Servicing." Loan sales also provide funds for additional
lending and other investments and increase liquidity. In addition, sales of
participation interests in non-residential mortgage loans help to reduce the
risks associated with this type of lending.
40
<PAGE>
The following table shows total loans originated, purchased, sold and
repaid during the periods indicated.
<TABLE>
<CAPTION>
Year Ended
Year Ended June 30, April 30,
---------------------------
1998 1997 1996
------ ------- ----------
(In thousands)
<S> <C> <C> <C>
Loans originated:
Mortgage loans:
One- to four-family.......................... $23,951 $29,317 $25,263
Multi-family................................. 2,489 1,048 4,519
Commercial................................... 5,698 4,207 4,415
Construction.................................. 17,053 11,243 8,365
Land......................................... 1,805 2,201 655
Consumer and other loans...................... 7,179 7,625 8,079
------- ------- -------
Total loans originated..................... 58,175 55,641 51,296
Loans purchased:
Mortgage loans:
One- to four-family.......................... -- -- --
Construction................................. 57 -- 484
------- ------- -------
Total loans purchased....................... 57 -- 484
Loans sold:
Whole loans.................................. 4,298 7,766 3,812
Participations............................... 11,306 14,587 18,820
------- ------- -------
Total loans sold........................... 15,604 22,353 22,632
Less:
Principal repayments......................... 34,139 21,661 20,463
Transfer to real estate owned................ 438 -- 271
Transfers to repossessed assets.............. 2 -- --
Amounts charged off.......................... 19 -- --
Loans held for sale.......................... 3,649 4,463 2,306
------- ------- -------
38,247 26,124 23,040
------- ------- -------
Net increase in loans receivable, net......... $ 4,381 $ 7,164 $ 6,108
======= ======= =======
</TABLE>
Loan Commitments. Fulton Savings occasionally issues commitments to
originate loans conditioned upon the occurrence of certain events. Such
commitments are made on specified terms and conditions and are honored for up to
45 days from the date of loan approval. Fulton Savings had outstanding net loan
commitments of approximately $4.0 million at June 30, 1998.
Loan Origination and Other Fees. Fulton Savings, in some instances,
receives loan origination fees. Loan fees are a fixed dollar amount or a
percentage of the principal amount of the mortgage loan that is charged to the
borrower for funding the loan. The amount of fees charged by Fulton Savings
currently is $300 for loans secured by owner-occupied, single-family homes and
$500 for most larger loans. Current accounting standards require fees received
(net of certain loan origination costs) for originating loans to be deferred and
amortized into interest income over the contractual life of the loan. Net
deferred fees or costs associated with loans that are prepaid are recognized as
income at the time of prepayment.
Loan Servicing. Fulton Savings sells loans to Freddie Mac, Fannie Mae and
other financial institutions on a servicing-retained basis and receives fees in
return for performing the traditional services of collecting individual payments
and managing the loans. At June 30, 1998, Fulton Savings was servicing
41
<PAGE>
$104.4 million of loans for others. Loan servicing includes processing payments,
accounting for loan funds and collecting and paying real estate taxes, hazard
insurance and other loan-related items, such as private mortgage insurance. When
Fulton Savings receives the gross mortgage payment from individual borrowers, it
remits to the investor in the mortgage a predetermined net amount based on the
yield on that mortgage. The difference between the coupon on the underlying
mortgage and the predetermined net amount paid to the investor is the gross loan
servicing fee. For the year ended June 30, 1998, loan servicing fees totaled
$311,000. In addition, Fulton Savings retains certain amounts in escrow for the
benefit of the investor for which Fulton Savings incurs no interest expense but
is able to invest. At June 30, 1998, Fulton Savings held $642,000 in escrow for
its portfolio of loans serviced for others.
Nonperforming Assets and Delinquencies. When a mortgage loan borrower fails
to make a required payment when due, Fulton Savings institutes collection
procedures. The first notice is mailed to the borrower approximately ten days
after the payment is due in order to permit the borrower to make the payment
before the imposition of a late fee. A second notice is generated when a payment
becomes 20 days past due. Attempts to contact the borrower by telephone or
letter generally begin when a payment becomes 30 days past due. If a
satisfactory response is not obtained, continuous follow-up contacts are
attempted until the loan has been brought current. Before the 90th day of
delinquency, attempts to interview the borrower, preferably in person, are made
to establish (1) the cause of the delinquency; (2) whether the cause is
temporary; (3) the attitude of the borrower toward the debt; and (4) a mutually
satisfactory arrangement for curing the default.
In most cases, delinquencies are cured promptly; however, if by the 91st
day of delinquency, or sooner if the borrower is chronically delinquent and all
reasonable means of obtaining payment on time have been exhausted, foreclosure,
according to the terms of the security instrument and applicable law, is
initiated. Interest income on loans is reduced by the full amount of accrued and
uncollected interest.
Fulton Savings' board of directors is informed on a monthly basis as to the
status of all loans that are delinquent more than 60 days, the status on all
loans in foreclosure, and the status of all foreclosed and repossessed property
owned by Fulton Savings.
42
<PAGE>
The following table sets forth information with respect to Fulton Savings'
nonperforming assets and restructured loans within the meaning of Statement of
Financial Accounting Standards ("SFAS") No. 15 at the dates indicated. It is the
policy of Fulton Savings to cease accruing interest on loans 90 days or more
past due.
<TABLE>
<CAPTION>
At
At June 30, April 30,
--------------
1998 1997 1996
------ ------ ---------
(In thousands)
<S> <C> <C> <C>
Loans accounted for on a nonaccrual basis:
Mortgage loans:
One- to four-family......................... $ 71 $ 40 $ 175
Commercial.................................. -- 160 69
Consumer and other loans..................... -- -- 75
----- ----- -----
Total..................................... 71 200 319
Accruing loans which are contractually
past due 90 days or more..................... 84 166 --
----- ----- -----
Total of nonaccrual and 90 days past due
loans........................................ 155 366 319
Real estate owned, net........................ 158 197 197
----- ----- -----
Total nonperforming assets.............. $ 313 $ 563 $ 516
===== ===== =====
Restructured loans............................ $ 252 $ 252 $ 271
Nonaccrual and 90 days or more past due loans
as a percentage of loans receivable, net..... 0.18% 0.44% 0.43%
Nonaccrual and 90 days or more past due loans
as a percentage of total assets.............. 0.14 0.36 0.37
Nonperforming assets as a percentage of
total assets................................. 0.28 0.56 0.60
</TABLE>
Interest income that would have been recorded for the year ended June 30,
1998, had nonaccruing loans been current in accordance with their original
terms, amounted to approximately $6,000. The amount of interest included in
interest income on such loans for the year ended June 30, 1998 amounted to
approximately $4,000.
Real Estate Owned. Real estate acquired by Fulton Savings as a result of
foreclosure or by deed-in-lieu of foreclosure is classified as real estate owned
until it is sold. When property is acquired it is recorded at the lower of its
cost, which is the unpaid principal balance of the related loan plus foreclosure
costs, or fair market value. Subsequent to foreclosure, real estate owned is
carried at the lower of the foreclosed amount or fair value, less estimated
selling costs.
Asset Classification. The OTS has adopted various regulations regarding
problem assets of savings institutions. The regulations require that each
insured institution review and classify its assets on a regular basis. In
addition, in connection with examinations of insured institutions, OTS examiners
have authority to identify problem assets and, if appropriate, require them to
be classified. There are three classifications for problem assets: substandard,
doubtful and loss. Substandard assets have one or more defined weaknesses and
are characterized by the distinct possibility that the insured institution will
sustain some loss if the deficiencies are not corrected. Doubtful assets have
the weaknesses of substandard assets with the additional characteristic that the
weaknesses make collection or liquidation in full on the basis of currently
existing
43
<PAGE>
facts, conditions and values questionable, and there is a high possibility of
loss. An asset classified as loss is considered uncollectible and of such little
value that continuance as an asset of the institution is not warranted. If an
asset or portion thereof is classified as loss, the insured institution
establishes specific allowances for loan losses for the full amount of the
portion of the asset classified as loss. All or a portion of general loan loss
allowances established to cover possible losses related to assets classified
substandard or doubtful may be included in determining an institution's
regulatory capital, while specific valuation allowances for loan losses
generally do not qualify as regulatory capital. Assets that do not currently
expose the insured institution to sufficient risk to warrant classification in
one of the aforementioned categories but possess weaknesses are classified as
special mention and monitored by Fulton Savings.
At June 30, 1998, assets classified as doubtful, substandard or special
mention totaled $2.1 million and included three commercial loans totaling
$97,000, 24 substandard loans, which consisted of 13 one- to four-family
mortgage loans totaling $559,000, one commercial real estate loan totaling
$296,000 and 10 consumer loans totaling $158,000, and 35 special mention loans,
which consisted of 19 one- to four-family mortgage loans totaling $688,000, two
commercial loans totaling $141,000 and 14 consumer loans totaling $179,000. The
aggregate amounts of Fulton Savings' classified assets at the dates indicated
were as follows:
<TABLE>
<CAPTION>
At June 30, At April 30,
---------------
1998 1997 1996
------- ------ -----------
(In thousands)
<S> <C> <C> <C>
Loss......................... $ -- $ -- $ --
Doubtful..................... 97 -- --
Substandard.................. 1,013 737 798
Special mention.............. 1,008 675 708
------ ------ ------
Total classified assets.... $2,118 $1,412 $1,506
====== ====== ======
</TABLE>
Allowance for Loan Losses. Fulton Savings has established a systematic
methodology for the determination of provisions for loan losses. The methodology
is set forth in a formal policy and takes into consideration the need for an
overall general valuation allowance as well as specific allowances that are tied
to individual loans.
In originating loans, Fulton Savings recognizes that losses will be
experienced and that the risk of loss will vary with, among other things, the
type of loan being made, the creditworthiness of the borrower over the term of
the loan, general economic conditions and, in the case of a secured loan, the
quality of the security for the loan. Fulton Savings increases its allowance for
loan losses by charging provisions for loan losses against income.
The general valuation allowance is maintained to cover losses inherent in
the portfolio of performing loans. Management's periodic evaluation of the
adequacy of the allowance is based on a number of factors, including
management's evaluation of the collectibility of the loan portfolio, the nature
of the portfolio, credit concentrations, trends in historical loss experience,
specific impaired loans and economic conditions. Specific valuation allowances
are established to absorb losses on loans for which full collectibility may not
be reasonably assured. The amount of the allowance is based on the estimated
value of the collateral securing the loan and other analyses pertinent to each
situation. Generally, a provision for losses is charged against income on a
quarterly basis to maintain the allowances.
At June 30, 1998, Fulton Savings had an allowance for loan losses of
$971,000. The allowance for loan losses is maintained at an amount management
considers adequate to absorb losses inherent in the
44
<PAGE>
portfolio. Although management believes that it uses the best information
available to make such determinations, future adjustments to the allowance for
loan losses may be necessary and results of operations could be significantly
and adversely affected if circumstances differ substantially from the
assumptions used in making the determinations.
While Fulton Savings believes it has established its existing allowance for
loan losses in accordance with generally accepted accounting principles, there
can be no assurance that regulators, in reviewing Fulton Savings' loan
portfolio, will not request Fulton Savings to increase significantly its
allowance for loan losses. In addition, because future events affecting
borrowers and collateral cannot be predicted with certainty, there can be no
assurance that the existing allowance for loan losses is adequate or that
substantial increases will not be necessary should the quality of any loans
deteriorate as a result of the factors discussed above. Any material increase in
the allowance for loan losses may adversely affect Fulton Savings' financial
condition and results of operations.
The following table sets forth an analysis of Fulton Savings' allowance for
loan losses at and for the periods indicated. Where specific loan loss reserves
have been established, any differences between the loss allowances and the
amount of loss realized has been charged or credited to current income.
<TABLE>
<CAPTION>
Year Ended
Year Ended June 30, April 30,
-----------------------------
1998 1997 1996
-------- ------- ----------
(Dollars in thousands)
<S> <C> <C> <C>
Allowance at beginning of period................... $ 919 $ 800 $ 762
Provision for loan losses.......................... 70 120 44
Recoveries:
Mortgage loans:
One- to four-family.............................. -- 11 1
Multi-family..................................... -- -- --
Commercial....................................... -- -- --
Construction..................................... -- -- --
Land............................................. -- -- --
Consumer and other loans.......................... -- 4 2
------- ------- -------
Total recoveries............................... -- 15 3
Charge-offs:
Mortgage loans:
One- to four-family.............................. 14 -- 1
Multi-family..................................... -- -- --
Commercial....................................... -- -- --
Construction..................................... -- -- --
Land............................................. -- -- 10
Consumer and other loans.......................... 4 16 16
------- ------- -------
Total charge-offs................................ 18 16 27
------- ------- -------
Net charge-offs.................................. 18 1 24
------- ------- -------
Balance at end of period........................ $ 971 $ 919 $ 782
======= ======= =======
Allowance for loan losses as a percentage of
total loans outstanding at end of period.......... 1.09% 1.09% 1.02%
Net charge-offs as a percentage of average
loans outstanding during the period............... 0.02 -- 0.03
Allowance for loan losses as a percentage of
nonperforming loans at end of period.............. 625.07 250.68 245.44
</TABLE>
45
<PAGE>
The following table sets forth the breakdown of the allowance for loan
losses by loan category for the periods indicated. Management believes that the
allowance can be allocated by category only on an approximate basis. The
allocation of the allowance to each category is not necessarily indicative of
future losses and does not restrict the use of the allowance to absorb losses in
any other category.
<TABLE>
<CAPTION>
At June 30, At April 30,
------------------------------------
1998 1997 1996
----------------- ---------------- ------------------
% of % of % of
Loans Loans Loans
in Each in Each in Each
Category Category Category
to Total to Total to Total
Amount Loans Amount Loans Amount Loans
------ -------- ------ -------- ------ ---------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Mortgage loans:
One- to four-family............... $295 56.23% $382 58.37% $322 59.61%
Multi-family...................... 46 6.21 43 4.67 38 4.90
Commercial........................ 176 12.36 162 10.38 78 11.10
Construction...................... 45 11.64 37 12.33 83 9.80
Land.............................. 29 4.53 34 3.85 15. 1.94
Consumer and other loans........... 235 9.03 101 10.40 104 12.65
Unallocated....................... 145 N/A 160 N/A 142 N/A
---- ---- ----
Total allowance for loan losses.. $971 $919 $782
==== ==== ====
</TABLE>
Investment Activities
Fulton Savings is permitted under federal and state law to invest in
various types of liquid assets, including U.S. Treasury obligations, securities
of various federal agencies and of state and municipal governments, deposits at
the FHLB-Des Moines, certificates of deposit of federally insured institutions,
certain bankers' acceptances and federal funds. Subject to various restrictions,
Fulton Savings may also invest a portion of its assets in commercial paper and
corporate debt securities. Savings institutions like Fulton Savings are also
required to maintain an investment in FHLB stock. Fulton Savings is required
under federal regulations to maintain a minimum amount of liquid assets.
SFAS No. 115, "Accounting for Certain Investments in Debt and Equity
Securities," requires that investments be categorized as "held to maturity,"
"trading securities" or "available for sale," based on management's intent as to
the ultimate disposition of each security. SFAS No. 115 allows debt securities
to be classified as "held to maturity" and reported in financial statements at
amortized cost only if the reporting entity has the positive intent and ability
to hold those securities to maturity. Securities that might be sold in response
to changes in market interest rates, changes in the security's prepayment risk,
increases in loan demand, or other similar factors cannot be classified as "held
to maturity." Debt and equity securities held for current resale are classified
as "trading securities." Such securities are reported at fair value, and
unrealized gains and losses on such securities would be included in earnings.
Debt and equity securities not classified as either "held to maturity" or
"trading securities" are classified as "available for sale." Such securities are
reported at fair value, and unrealized gains and losses on such securities are
excluded from earnings and reported as a net amount in a separate component of
equity. It is currently the intention of management to classify all securities
in Fulton Savings' investment portfolio as available for sale.
46
<PAGE>
A committee consisting of the Chief Executive Officer, the Chief Financial
Officer and three outside directors determines appropriate investments in
accordance with the board of directors' approved investment policies and
procedures. Fulton Savings' investment policies generally limit investments to
U.S. Government and agency securities, municipal bonds, certificates of
deposits, marketable corporate debt obligations, mortgage-backed securities and
certain types of mutual funds. Fulton Savings' investment policy does not permit
engaging directly in hedging activities or purchasing high risk mortgage
derivative products or corporate bonds rated less than "BBB." Investments are
made based on certain considerations, which include the interest rate, yield,
settlement date and maturity of the investment, Fulton Savings' liquidity
position, and anticipated cash needs and sources (which in turn include
outstanding commitments, upcoming maturities, estimated deposits and anticipated
loan amortization and repayments). The effect that the proposed investment would
have on Fulton Savings' credit and interest rate risk, and risk-based capital is
also given consideration during the evaluation.
The following table sets forth the composition of Fulton's investment
securities portfolio at the dates indicated. All of Fulton's investment
securities are classified as "available for sale."
<TABLE>
<CAPTION>
At June 30,
----------------------------------------- At April 30,
1998 1997 1996
--------------------- ------------------- ---------------------
Percent Percent Percent
Carrying of Carrying of Carrying of
Value Portfolio Value Portfolio Value Portfolio
-------- --------- -------- --------- --------- ---------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
U.S. Government and federal
agency obligations............. $950 100.00% $1,899 100.00% $3,216 100.00%
==== ====== ====== ====== ====== ======
</TABLE>
The table below sets forth certain information regarding the carrying
value, weighted average yields and maturities or periods to repricing of
Fulton's investment securities at June 30, 1998.
<TABLE>
<CAPTION>
At June 30, 1998
-------------------------------------------------------------------------
Amount Due Or Repricing:
Within Over One Year
One Year or Less to Five Years Over Five Years
---------------------- ------------------------ ------------------------
Weighted Weighted Weighted
Carrying Average Carrying Average Carrying Average
Value Yield Value Yield Value Yield
-------- -------- ---------- -------- --------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
U.S. Government and federal
agency obligations........... $950 5.63% $ -- --% $ -- --%
==== ==== ==== == ==== ==
</TABLE>
Deposit Activities and Other Sources of Funds
General. Deposits and loan repayments are the major sources of Fulton
Savings' funds for lending and other investment purposes. Scheduled loan
repayments are a relatively stable source of funds, while deposit inflows and
outflows and loan prepayments are influenced significantly by general interest
rates and money market conditions. Borrowings through the FHLB-Des Moines are
used to compensate for reductions in the availability of funds from other
sources. Presently, Fulton Savings has no other borrowing arrangements.
47
<PAGE>
Deposit Accounts. Savings deposits are the primary source of funds for
Fulton Savings' lending and investment activities and for its general business
purposes. Substantially all of Fulton Savings' depositors are residents of the
State of Missouri. Deposits are attracted from within Fulton Savings' market
area through the offering of a broad selection of deposit instruments, including
NOW accounts, money market deposit accounts, regular savings accounts,
certificates of deposit and retirement savings plans. Deposit account terms
vary, according to the minimum balance required, the time periods the funds must
remain on deposit and the interest rate, among other factors. In determining the
terms of its deposit accounts, Fulton Savings considers current market interest
rates, profitability to Fulton Savings, matching deposit and loan products and
its customer preferences and concerns. Fulton Savings reviews its deposit mix
and pricing weekly. Fulton Savings does not accept brokered deposits, nor has it
aggressively sought jumbo certificates of deposit.
Fulton Savings currently offers certificates of deposit for terms not
exceeding 120 months. As a result, Fulton Savings believes that it is better
able to match the repricing of its liabilities to the repricing of its loan
portfolio.
The following table indicates the amount of Fulton Savings' jumbo
certificates of deposit by time remaining until maturity as of June 30, 1998.
Jumbo certificates of deposit are certificates in amounts of $100,000 or more.
<TABLE>
<CAPTION>
Maturity Period Amount
--------------- --------------
(In thousands)
<S> <C>
Three months or less..................... $1,014
Over three through six months............ 743
Over six through 12 months............... 2,197
Over 12 months........................... 2,171
------
Total jumbo certificates of deposit..... $6,125
======
</TABLE>
The following table sets forth the balances (inclusive of interest
credited) and changes in dollar amounts of deposits in the various types of
accounts offered by Fulton Savings between the dates indicated.
<TABLE>
<CAPTION>
At June 30, At April 30,
-------------------------------------------------------------
1998 1997 1996
------------------------------------------------------------- ------------------
Percent Percent Percent
of Increase of Increase of
Amount Total (Decrease) Amount Total (Decrease) Amount Total
------- ------- ---------- ------- -------- ---------- -------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Passbook.................. $ 6,288 9.09% $ 369 $ 5,919 8.77% $ 9 $ 5,910 8.41%
NOW accounts.............. 4,964 7.18 33 4,931 7.30 672 4,259 6.06
Money market deposit...... 2,640 3.82 (127) 2,767 4.10 (273) 3,040 4.32
Fixed-rate certificates
Which mature:
Within one year......... 32,370 46.80 (895) 33,265 49.28 (701) 33,966 48.30
After one year,
but within two years... 13,369 19.33 2,139 11,230 16.63 (2,092) 13,322 18.95
After two years,
but within four years.. 5,735 8.29 (944) 6,679 9.89 (983) 7,662 10.90
After four years........ 1,918 2.77 1,054 864 1.28 417 447 0.63
Other..................... 1,880 2.72 26 1,854 2.75 144 1,710 2.43
------- ------ ------ ------- ------ ------- ------- ------
Total.................. $69,164 100.00% $1,655 $67,509 100.00% $(2,807) $70,316 100.00%
======= ====== ====== ======= ====== ======= ======= ======
</TABLE>
48
<PAGE>
The following table sets forth the time deposits in Fulton Savings
categorized by rates at the dates indicated.
<TABLE>
<CAPTION>
At June 30, At
----------------- April 30,
1998 1997 1996
-------- ------- ----------
(In thousands)
<S> <C> <C> <C>
3.00 - 3.99%..................... $ 7 $ 103 $ 105
4.00 - 4.99%..................... 93 1,669 6,119
5.00 - 5.99%..................... 36,755 33,133 26,144
6.00 - 6.99%..................... 15,623 16,067 20,261
7.00 - 7.99%..................... 900 1,043 2,751
8.00 - 8.99%..................... 14 23 17
------- ------- -------
Total....................... $53,392 $52,038 $55,397
======= ======= =======
</TABLE>
The following table sets forth the amount and maturities of time deposits
at June 30, 1998.
<TABLE>
<CAPTION>
Amount Due
--------------------------------------------------------
Less Two to Three After
Than One to Two Three to Four Four
One Year Years Years Years Years Total
-------- ---------- ------ -------- -------- ---------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
3.00 - 3.99%..................... $ 7 $ -- $ -- $ -- $ -- $ 7
4.00 - 4.99%..................... -- -- 93 -- -- 93
5.00 - 5.99%..................... 27,055 7,282 1,177 426 815 36,755
6.00 - 6.99%..................... 4,743 5,762 2,775 1,254 1,089 15,623
7.00 - 7.99%..................... 565 325 10 -- -- 900
8.00 - 8.99%..................... -- -- -- -- 14 14
------- ------- ------ ------ ------ -------
Total........................ $32,370 $13,369 $4,055 $1,680 $1,918 $53,392
======= ======= ====== ====== ====== =======
</TABLE>
The following table sets forth the deposit activities of Fulton Savings for
the periods indicated.
<TABLE>
<CAPTION>
Year Ended June 30, Year
-------------------
Ended
April 30,
1998 1997 1996
--------- -------- ---------
(In thousands)
<S> <C> <C> <C>
Beginning balance................ $67,509 $70,316 $65,205
Net deposits (withdrawals)
before interest credited........ (1,426) (5,095) 2,941
Interest credited................ 3,081 2,288 2,170
Net increase (decrease) in
deposits........................ 1,655 (2,807) 5,111
------- ------- -------
Ending balance................... $69,164 $67,509 $70,316
======= ======= =======
</TABLE>
49
<PAGE>
Borrowings. Fulton Savings utilizes advances from the FHLB-Des Moines to
supplement its supply of lendable funds and to meet deposit withdrawal
requirements. The FHLB-Des Moines functions as a central reserve bank providing
credit for savings associations and certain other member financial institutions.
As a member of the FHLB-Des Moines, Fulton Savings is required to own capital
stock in the FHLB-Des Moines and is authorized to apply for advances on the
security of such stock and certain of its mortgage loans and other assets
(principally securities that are obligations of, or guaranteed by, the U.S.
Government) provided certain creditworthiness standards have been met. Advances
are made pursuant to several different credit programs. Each credit program has
its own interest rate and range of maturities. Depending on the program,
limitations on the amount of advances are based on the financial condition of
the member institution and the adequacy of collateral pledged to secure the
credit.
The following tables sets forth certain information regarding short-term
borrowings by Fulton Savings at the dates and for the periods indicated:
<TABLE>
<CAPTION>
Year
Ended
Year Ended June 30, April 30,
--------------------
1998 1997 1996
------- --------- ----------
(In thousands)
<S> <C> <C> <C>
Maximum amount of FHLB advances outstanding at any month end
during the period......................................................... $15,447 $8,000 $5,500
Approximate average FHLB advances outstanding during the period............ 11,208 6,962 4,555
Approximate weighted average rate paid on FHLB advances
during the period......................................................... 6.33% 6.22% 6.62%
Balance of FHLB advances outstanding at end of period...................... $12,810 $6,500 $5,000
Weighted average rate paid on FHLB advances at end of period............... 6.16% 5.84% 6.75%
</TABLE>
Competition
Fulton Savings operates in a competitive market for the attraction of
savings deposits (its primary source of lendable funds) and in the origination
of loans. Its most direct competition for savings deposits has historically come
from local commercial banks and other thrifts operating in its market area. A
portion of the Callaway County residents commute to work in either Columbia or
Jefferson City and, thus, there is strong competition from other financial
institutions in these larger metropolitan areas. Particularly in times of high
interest rates, Fulton Savings has faced additional significant competition for
investors' funds from short-term money market securities and other corporate and
government securities. Fulton Savings' competition for loans also comes from
mortgage bankers. Such competition for deposits and the origination of loans may
limit Fulton Savings' growth in the future.
Subsidiary Activities
Fulton Savings has one subsidiary, Multi-Purpose Service Agency, Inc.,
whose activities consist primarily of selling credit life insurance to Fulton
Savings' customers. At June 30, 1998, Fulton Savings' equity investment in its
subsidiary was $51,000.
Federal savings associations generally may invest up to 3% of their assets
in service corporations, provided that at least one-half of any amount in excess
of 1% is used primarily for community, inner-city and community development
projects. Fulton Savings' investment in its subsidiary did not exceed these
limits at June 30, 1998.
50
<PAGE>
Personnel
As of March 31, 1999, Fulton Savings had 43 employees. The employees are
not represented by a collective bargaining unit and Fulton Savings believes its
relationship with its employees to be good.
Properties
Fulton operates two full service facilities, both of which it owns. At June
30, 1998, the net book value of the property (including land and building) and
Fulton's fixtures, furniture and equipment was $1.4 million.
Legal Proceedings
Periodically, there have been various claims and lawsuits involving Fulton
Savings, such as claims to enforce liens, condemnation proceedings on properties
on which Fulton Savings holds security interests, claims involving the making
and servicing of real property loans and other issues incident to Fulton
Savings' business. Neither Fulton nor Fulton Savings is a party to any pending
legal proceedings that it believes would have a material adverse effect on the
financial condition or operations of Fulton.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
General
Management's discussion and analysis of the financial condition and results
of operations is intended to assist in understanding the consolidated financial
condition and results of operations of Fulton. The information contained in this
section should be read in conjunction with the consolidated financial statements
and accompanying notes thereto beginning on page F-1 of this proxy statement.
Operating Strategy
The business of Fulton Savings consists principally of attracting deposits
from the general public and using such deposits to originate residential and
commercial mortgage loans. Fulton Savings generally sells most of the fixed-rate
and some of the adjustable-rate mortgage loans that it originates while
retaining the related servicing rights. Loan originations include single and
multifamily mortgages, construction, land and consumer and other loans.
Management maintains adequate liquidity with interest-bearing deposits and U.S.
Government securities. Funding assets with deposits remains management's primary
strategy, although FHLB advances have allowed management to lock in relative low
long-term rates to improve return on equity over the longer term.
Operating results are dependent primarily on net interest income, which is
the difference between the income earned on its interest-earning assets, such as
loans and investments, and the cost of its interest-bearing liabilities,
consisting of deposits and FHLB advances. Operating results are also
significantly affected by general economic and competitive conditions, primarily
changes in market interest rates, governmental legislation and policies
concerning monetary and fiscal affairs and housing, as well as regulatory
policies.
Fulton Savings' strategy is to operate as a conservative, well-capitalized,
profitable, community-oriented financial institution dedicated to financing home
ownership and other consumer needs while
51
<PAGE>
focusing on superior customer service. Management believes it has successfully
implemented its strategy by:
. maintaining strong capital levels;
. limiting interest rate risk;
. controlling operating expenses;
. generating additional noninterest income through loan sales and
servicing operations; and
. emphasizing personalized customer service at competitive prices.
Interest Rate Risk Management
Management has adopted a strategy to maintain the interest rate sensitivity
of its assets and liabilities in order to reduce the impact of rate changes on
Fulton Savings' net interest income. The strategy includes originating and
holding adjustable rate mortgage loans and maintaining a relatively short-term
investment portfolio. At June 30, 1998, adjustable-rate and short-term
construction loans comprised 78.1% of the loan portfolio. As a part of managing
interest sensitivity and planning for long-term profitability, management is
engaging in a funds matching program where the proceeds from relatively low-
cost, long-term, fixed-rate, FHLB advances are invested in mortgage loans with
similar maturities at favorable interest-rate spreads.
Interest Rate Sensitivity of Net Portfolio Value
In order to encourage institutions to reduce their interest rate risk, the
OTS adopted a rule incorporating an interest rate risk component into the risk-
based capital rules. Using data compiled by the OTS, Fulton Savings receives a
report which measures interest rate risk by modeling the change in net portfolio
value ("NPV") over a variety of interest rate scenarios. This procedure for
measuring interest rate risk was developed by the OTS to replace the "gap"
analysis (the difference between interest-earning assets and interest-bearing
liabilities that mature or reprice within a specific time period). NPV is the
present value of expected cash flows from assets, liabilities and off-balance
sheet contracts. The calculation is intended to illustrate the change in NPV
that will occur in the event of an immediate chance in interest rates of at
least 200 basis points with no effect given to any steps that management might
take to counter the effect of that interest rate movement.
The following table is provided by the OTS and sets forth the changes in
Fulton Savings' NPV at June 30, 1998, based on OTS assumptions, that would occur
in the event of an immediate change in interest rates, with no effect given to
any steps that management might take to counteract that change.
<TABLE>
<CAPTION>
Net Portfolio Value
-----------------------------------
Basis Point ("bp")
Change in Rates Amount $ Change (1) % Change
------------------ -----------------------------------
(Dollars in thousands)
<S> <C> <C> <C>
400 $20,069 $ (141) (1)%
300 20,552 342 2
200 20,809 599 3
100 20,727 517 3
0 20,210 -- --
(100) 19,572 (637) (3)
(200) 18,819 (1,391) (7)
(300) 18,191 (2,019) (10)
(400) 17,614 (2,596) (13)
</TABLE>
52
<PAGE>
As with any method of measuring interest rate risk, certain shortcomings
are inherent in the method of analysis presented in the foregoing table. For
example, although certain assets and liabilities may have similar maturities or
periods of repricing, they may react in different degrees to changes in market
interest rates. Also, the interest rates on certain types of assets and
liabilities may fluctuate in advance of changes in market interest rates, while
interest rates on other types may lag behind changes in market rates.
Additionally, certain assets, such as substantially all of Fulton Savings' ARM
loans, have features which restrict changes in interest rates on a short-term
basis over the life of the asset. Further, in the event of a change in interest
rates, expected rates of prepayments on loans and early withdrawals from
certificates could deviate significantly from those assumed in calculating the
table.
Comparison of Financial Condition at March 31, 1999 and June 30, 1998
Total assets increased $7.7 million or 7.0% to $117.8 million at March
31, 1999 primarily due to growth in loans receivable, which increased $10.6
million or 12.0%. Management took advantage of favorable rates and terms
available on FHLB advances which funded $5.6 million of the growth in total
assets. Deposits increased by $3.0 million or 4.4%. Transaction savings accounts
increased $1.8 million or 11.6% due to normal seasonal fluctuations, and
certificates of deposit increased $1.2 million or 2.3%.
During the nine months ended March 31, 1999, Fulton completed one
stock repurchase program and its board of directors authorized a second stock
repurchase program for the repurchase of up to 10% of Fulton's outstanding
common shares, or 170,205 shares, in the open market over a 12 month period. In
connection with the repurchase programs, Fulton purchased 111,462 shares of
treasury stock for $1,899,000 during the nine months ended March 31, 1999.
Primarily as a result of the treasury stock purchases, total stockholders'
equity decreased $78,000 from June 30, 1998 to March 31, 1999. ESOP and MRDP
transactions increased total stockholders equity $1,391,000 in the aggregate;
net income contributed $815,000; and dividends paid totaled $382,000.
Nonperforming assets, which are defined as loans 90 days or more past
due, loans on nonaccrual status, and foreclosed real estate owned totaled
$1,079,000 or 0.92% of total assets at March 31, 1999 compared to $313,000 or
0.28% of total assets as of June 30, 1998. The increase in nonperforming loans
primarily reflected an increase in loans being reported as past due as a result
of delays in processing refinancings and extensions. Management believes that
the allowance for loan losses at March 31, 1999 is adequate to cover any
potential loss resulting from the increase in nonperforming assets.
Results of Operations for the Three Months Ended March 31, 1999 and 1998
Net income for the three months ended March 31, 1999 decreased $11,000
or 4.9% compared to the three months ended March 31, 1998. Diluted earnings per
share were $0.14 per share for the current quarter, the same as reported for the
three months ended March 31, 1998. Net interest income increased $137,000
compared to the same quarter of a year ago. However, that favorable variance was
more than offset by a $60,000 increase in the provision for loan losses, a
$68,000 decrease in non-interest income, a $14,000 increase in non-interest
expense, and a $6,000 increase in income taxes.
The $137,000 or 14.3% increase in net interest income reflected a
combination of a $5.3 million or 4.9% increase in average total interest earning
assets and 32 basis point increase in net interest margin to 3.89% for the
current quarter. The increase in net interest margin primarily reflected a
favorable shift in earning asset mix from lower yielding interest bearing
accounts at other financial institutions to higher yielding mortgage loans.
Average mortgage loans increased $14.3 million or 17.8%, while average interest
53
<PAGE>
bearing accounts at other financial institutions decreased $8.9 million 52.8%.
An increase in average FHLB advances of approximately $3.6 million funded a
significant portion of the increase in average total earning assets.
The $60,000 provision for loan losses in the current quarter reflected
management's judgment of the provision necessary to maintain an adequate loan
reserve balance based upon loan growth and the quality of the loan portfolio. No
provision for loan losses was recorded in the three month period ended March 31,
1998. The allowance for loan losses was 1.06% of total loans outstanding
(including loans held for sale) at March 31, 1999 compared to 1.05% of total
loans outstanding at June 30, 1998. At March 31,1999 the allowance for loan
losses was 128.9% of nonperforming loans compared to 626.5% of nonperforming
loans at June 30, 1998.
The $68,000 or 37.8% decrease in non-interest income primarily
reflected decreases in gain on sales of loans and loan servicing fees. The
decline in gain on sales of loans primarily reflected the write-off of
previously recorded service assets on loans which pre-paid during the quarter,
while the decline in loan servicing fees was due to the amortization of
servicing assets pursuant to SFAS No. 125 which was adopted January 1, 1997.
The $14,000 or 1.8% increase in non-interest expense primarily
reflected a $32,000 increase in other non-interest expense plus increases in
directors' fees and data processing costs. Those unfavorable variances were
partially offset by a $32,000 decrease in employee salaries and benefits. The
increase in other non-interest expense primarily reflected fees paid to
management consultants. Directors' fees per meeting were increased in January,
1999, and the increase in data processing costs resulted from system upgrades.
The 6.6% decrease in employee salaries and benefits, the largest component of
non-interest expense, was due primarily to a decrease of $77,000 in MRDP expense
for the current quarter compared to the same quarter of a year ago. The decrease
in MRDP expense was partially offset by a $29,000 or 13.1% increase in salary
expense and a reduction in deferred salary costs relating to loan originations.
The 13.1% increase in salary expense was necessary to remain competitive in the
local market area.
Fulton's effective income tax rate for the three months ended March
31, 1999 was 39.3% compared to 37.0% for the same period last year.
Results of Operations for the Nine Months Ended March 31, 1999 and 1998
Net income for the nine months ended March 31, 1999 decreased $70,000
or 7.9% compared to the nine months ended March 31, 1998, and diluted earnings
per share decreased $0.04 or 7.1% to $0.52 per share for the current nine month
period. Net interest income increased $235,000 and income taxes decreased
$30,000. However, those favorable variances were more than offset by a $70,000
increase in the provision for loan losses, a $116,000 decrease in non-interest
income, and a $149,000 increase in non-interest expense.
The $235,000 or 7.9% increase in net interest income reflected a $9.0
million or 8.6% increase in average total earning assets. Average mortgage loans
increased $10.8 million or 13.5%, and all other interest earning assets
decreased $1.8 million in the aggregate. Net interest margin was 3.79% of
average earning assets for the nine months ended March 31, 1999 compared to
3.82% for the same period last fiscal year. The decline in net interest margin
primarily reflected an increase in the proportion of earning assets supported by
higher cost FHLB advances. Approximately $6.3 million of the increase in average
total earning assets was funded by FHLB advances.
54
<PAGE>
The $70,000 increase in the provision for loan losses reflected
management's judgment of the provision necessary to maintain an adequate loan
reserve balance based upon loan growth and the quality of the loan portfolio.
The $116,000 or 20.0% decrease in non-interest income primarily
reflected decreases in gain on sales of loans and loan servicing fees, which
were partially offset by a decrease in loss from foreclosed assets. The decline
in gain on sales of loans primarily reflected the write-off of previously
recorded gains on sales of loans which paid off during the first nine months,
while the decline in loan servicing fees was due to the amortization of
servicing assets pursuant to SFAS No. 125 which was adopted January 1, 1997.
The $149,000 or 7.1% increase in non-interest expense primarily
reflected a $77,000 increase in employee salaries and benefits, a $39,000
increase in other noninterest expense, and a $20,000 increase in data processing
costs. Employee salaries and benefits, the largest component of non-interest
expense increased 6.3% due primarily to an $87,000 or 13.5% increase in salary
expense; a $22,000 increase in MRDP expense; and a $19,000 increase in payroll
taxes. Those increases were partially offset by a $60,000 decrease in ESOP
expense. As stated earlier, the increase in salary expense was necessary to
remain competitive in the local market area. MRDP expense was first incurred
starting in October of 1997. Accordingly, the nine month period ended March 31,
1998 included only six months of MRDP expense, while the nine month period ended
March 31, 1999 included nine months of MRDP expense. The increase in payroll
taxes primarily reflected employer taxes on the first installment of MRDP shares
vesting to employees. The $60,000 decrease in ESOP expense primarily reflected a
lower average market price for Fulton's stock. As mentioned earlier, the
increase in other noninterest expense primarily reflected management consulting
fees and the increase in data processing costs reflected system upgrades.
The $30,000 decrease in income tax expense primarily reflected
decreased pre-tax income. Fulton's effective income tax rate was 37.5% for the
nine months ended March 31, 1999 compared to 36.9% for the nine months ended
March 31, 1998.
Comparison of Financial Condition at June 30, 1998 and 1997
Assets increased $9.5 million, or 9.5 percent, to $110.1 million at
June 30, 1998. Management took advantage of favorable rates and terms available
on FHLB advances which funded $6.3 million of the growth. Deposits grew by $2.0
million, primarily certificates of deposit. Cash and interest-bearing deposits
increased $6.7 million, as proceeds from the most recent FHLB advances were not
yet invested in loans at year end. The level of loans held for investment
increased $4.3 million or 5.2%. Loan sales remained strong. The balance of
mortgages sold to and serviced for others increased by $14.3 million to $104.8
million from $90.5 million at June 30, 1997.
Non performing assets totaled $313,000 or 0.28% of total assets at
June 30, 1998. The composition includes one mortgage loan totaling $71,000,
eleven consumer loans totaling $84,000 and foreclosed real estate. The non
performing mortgage loans are considered well secured and in the process of
collection.
Results of Operations for the Years Ended June 30, 1998 and 1997
Fulton Bancorp earned $1.1 million or $0.70 per diluted share for the
fiscal year ended June 30, 1998, a $317,000 increase from the $822,000, or $0.52
per diluted share, reported for the 1997 fiscal year. Results for 1998 reflect
increases in both net interest income and noninterest income and a reduction in
the
55
<PAGE>
provision for loan losses. Return on assets improved to 1.06% from 0.83%, and
return on stockholders' equity improved to 4.44% from 4.10%.
Net Interest Income. Net interest income increased 17% or $563,000 for
the year ended June 30, 1998, on the strength of an $807,000 rise in interest
income. The rise in interest income was due primarily to a $4.3 million increase
in net loans outstanding. Interest on net loans rose $633,000 over 1997. Higher
loan rates also contributed to the rise. Interest expense rose $244,000, due an
increase in interest paid on FHLB advances.
While net interest income increased in dollar terms, the spread
between the yield on earning assets and the cost of interest-bearing liabilities
declined slightly to 2.58% from 2.69%. The decline in the spread reflects the
time lag between receiving the proceeds of FHLB advances and their subsequent
investment in higher yielding loans. Income from interest-earning deposits rose
$264,000, due to the temporary investment of advance proceeds, while the
interest paid on FHLB advances rose $277,000. Contributing to the narrower
spread was a decrease in lower-costing savings accounts. Average deposits were
higher in 1997 due to the funds held in late 1996 during Fulton's public
offering.
Management has adopted a long-term strategy to increase net interest
income and return on shareholders' equity. FHLB advances allow management to
lock in relatively low-cost, long-term, fixed-rate obligations, which can
profitably fund long-term assets. While rate spreads using this strategy are
lower, management expects net interest income and return on shareholders' equity
to improve.
Provisions for Loan Losses. Provisions for loan losses are charges to
earnings to bring the total allowance for loan losses to a level management
considers adequate to provide for estimated loan losses according to
management's evaluation of the collectibility of the loan portfolio. The
evaluation considers the composition and risk characteristics of the loan
portfolio, historical loss experience, specific impaired loans, concentrations
by borrower, and general economic conditions. The $70,000 provision for the year
ended June 30, 1998 reflects managements evaluation of the size and composition
of the loan portfolio.
Noninterest Income. Noninterest income for the year ended June 30,
1998, rose $156,000, or 24 percent, to $792,000. Recognition of gains on loan
sales exceeded decreases in the related servicing income and a provision for
loss on foreclosed real estate. Pursuant to adoption of SFAS No. 125, Fulton
recognized gains of $392,000 on the sale of loans, compared to $158,000
recognized in 1997. The increase primarily reflects a full year of gain
recognition, as opposed to six months for the comparable 1997 period.
Loan servicing income decreased 2% to $311,000 for the year ended June
30, 1998, as compared to $318,000 for the prior year. The decrease is a result
of the amortization of the loan servicing assets. A $40,000 provision for loss
on foreclosed real estate reduced the carrying value of the parcel owned.
Noninterest Expense. Noninterest expense increased $265,000 to $2.9
million. The absence of a one-time, $427,000 SAIF assessment levied in 1996
mitigated a $634,000 rise in salaries and benefits, of which $524,000 related to
the adoption on the MRDP. The majority of the five year, $1.5 million stock
award is expensed in the first two years of the program. A $107,000 increase in
other noninterest expense is due primarily to higher expenses related to being a
publicly traded company.
56
<PAGE>
Results of Operations for the Years Ended June 30, 1997 and April 30, 1996
Net Income. Net income increased by $202,000 to $822,000 for the year
ended June 30, 1997, from $620,000 for the year ended April 30, 1996. This
increase was primarily due to the investing of the conversion proceeds in
interest-earning obligations, and was offset by the one-time SAIF assessment of
approximately $427,000 imposed on Fulton Savings' deposits as a result of the
enactment of the Deposit Insurance Fund Act, and increased expenses operating as
a public company. Interest income increased $1.2 million, interest expense
increased $157,000, provision for loan losses increased $76,000, noninterest
income increased $151,000, noninterest expense increased $776,000 and income
taxes increased $108,000 to account for the increase in net income. Return on
assets increased from 0.75% for the year ended April 30, 1996 to 0.83% for the
year ended June 30, 1997. Return on equity decreased from 7.00% for the year
ended April 30, 1996 to 4.10% for the year ended June 30, 1997 resulting
primarily from the approximate $16.6 million increase in equity from the
conversion.
Net Interest Income. Net interest income increased $1.0 million for
the year ended June 30, 1997, from $2.4 million for the year ended April 30,
1996, to $3.4 million for the year ended June 30, 1997. Total interest income
increased $1.1 million to $7.3 million, or 18.9%, for the year ended June 30,
1997, from $6.2 million for the year ended April 30, 1996, primarily as a result
of the availability of conversion funds for investment for approximately eight
and one-half months and, to a lesser extent, an increase in the average yields
of the loan portfolio from 7.97% to 8.00% and Fulton's portfolio of obligations
of the U.S. Government and federal agencies from 6.48% to 6.55%. Although
interest expense increased $157,000, resulting from higher average balances in
NOW, money market and passbook accounts, the average rate paid on average
deposits decreased from 5.09% for the year ended April 30, 1996 to 4.99% for the
year ended June 30, 1997. Interest expense on FHLB advances increased $116,000
while the rate paid on the average balance decreased from 6.88% to 6.22%. The
increase in yield of interest earning assets and decrease in cost of interest on
interest-bearing liabilities resulted in an increase in the interest rate spread
from 2.60% for the year ended April 30, 1996 to 2.69% for the year ended June
30, 1997.
Provision for Loan Losses. The provision for loan losses was $120,000
for the year ended June 30, 1997, as compared to $44,000 for the year ended
April 30, 1996. The increase in the provision was to adjust the allowance for
loan losses to reflect the increase in loans receivable.
Noninterest Income. Noninterest income increased $151,000, or 31.5%,
to $637,000 for the year ended June 30, 1997 from $486,000 for the year ended
April 30, 1996. Loan servicing fees increased $37,000 to $318,000 for the year
ended June 30, 1997 from $281,000 for the year ended April 30, 1996 due to an
increase in loans serviced for others. Gain on sale of loans from the
implementation of FASB No. 125 resulted in an increase of $158,000 for the year
ended June 30, 1997 as compared to no gain during the year ended April 30, 1996.
Other noninterest income decreased $61,000 primarily resulting from the
patronage dividend received from Fulton Savings' data processor in the year
ended April 30, 1996, in the amount of $57,000 and was not replaced in the year
ended June 30, 1997. Gain on sale of other assets increased $10,000 resulting
from the sale of an equity interest in Financial Information Trust, Fulton
Savings' cooperative data processor.
Noninterest Expense. Noninterest expense increased $776,000 to $2.6
million for the year ended June 30, 1997 from $1.8 million for the year ended
April 30, 1996. The increase was primarily due to an increase in federal deposit
insurance premiums of approximately $427,000 for the one-time SAIF assessment.
The change also included an increase of $203,000 in employee salaries and
benefits, resulting primarily from implementation of the ESOP and a $52,000
increase in occupancy costs from increased depreciation expense of approximately
$34,000 and routine building maintenance of approximately $14,000, and a
$117,000 increase in other noninterest expense primarily related to operating as
a public company.
57
<PAGE>
Income Taxes. The provision for income taxes increased to $471,000 for
the year ended June 30, 1997, from $363,000 for the year ended April 30, 1996,
primarily as a result of the higher income before income taxes.
Yields Earned and Rates Paid
The earnings of Fulton depend largely on the spread between the yield
on interest-earning assets and the cost of interest-bearing liabilities, as well
as the relative size of Fulton's interest-earning assets and interest-bearing
liability portfolios.
The following table sets forth, for the periods indicated, information
regarding average balances of assets and liabilities as well as the total dollar
amounts of interest income from average interest-earning assets and interest
expense on average interest-bearing liabilities, resultant yields, interest rate
spreads, net interest margin, and ratio of average interest-earning assets to
average interest-bearing liabilities. Average balances are derived from month-
end balances. Management does not believe that the use of month-end balances
instead of daily balances has caused any material differences in information
presented.
<TABLE>
<CAPTION>
Year Ended June 30. Year Ended April 30,
----------------------------------------------------------------------------------------------
1998 1997 1996
--------------------------------- ----------------------------------------------------------
Average Yield/ Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost Balance Interest Cost
------------ -------- ------ --------- -------- ------ -------- --------- ------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets (1):
Loans receivable, net (2)..... $ 89,428 $7,350 8.22% $83,936 $6,717 8.00% $71,380 $5,689 7.97%
U.S. Government and federal
agency securities available for
sale.......................... 1,466 88 5.99 2,746 180 6.55 3,896 253 6.48
FHLB stock.................... 677 47 6.95 637 45 7.05 628 45 7.17
Interest-bearing deposits..... 12,312 662 5.38 6,943 398 5.73 3,133 185 5.90
-------- ------ ------- ------ ------- ------
Total interest-bearing
assets..................... 103,883 8,147 7.84 94,262 7,340 7.79 79,037 6,172 7.81
Non-interest-earning assets...... 3,538 4,392 3,695
-------- ------- -------
Total assets............... $107,421 $98,654 $82,732
======== ======= =======
Interest-bearing liabilities:
NOW, money market and
passbook...................... $ 15,470 394 2.55 $16,829 441 2.62 $14,728 387 2.62
Certificates of deposit....... 52,833 3,079 5.83 53,470 3,065 5.73 53,273 3,077 5.78
-------- ------ ------- ------ ------- ------
Total average deposits..... 68,303 3,473 5.08 70,299 3,506 4.99 68,001 3,464 5.09
FHLB advances................. 11,208 710 6.33 6,962 433 6.22 4,616 317 6.88
-------- ------ ------- ------ ------- ------
Total interest-bearing
liabilities................ 79,511 4,183 5.26 77,261 3,939 5.10 72,617 3,781 5.21
Non-interest-bearing
liabilities................ 2,261 1,349 1,261
-------- ------- -------
Total average liabilities.. 81,772 78,610 73,878
Average stockholders' equity..... 25,649 20,044 8,854
-------- ------- -------
Total liabilities and
stockholders' equity....... $107,421 $98,654 $82,732
======== ======= =======
Net interest income.............. $3,964 $3,401 $2,391
====== ====== ======
Interest rate spread (3)......... 2.58% 2.69% 2.60%
Net interest margin (4).......... 3.82% 3.61% 3.02%
Ratio of average interest-earning
assets to average interest-bearing
liabilities...................... 130.65% 122.00% 108.84%
</TABLE>
____________________________
(1) Includes related assets available for sale and unamortized discounts and
premiums.
(2) Amount is net of deferred loan fees and includes loans held for sale and
non-performing loans.
(3) Net interest rate spread represents the difference between the average
yield on interest-earning assets and the average cost of interest-bearing
liabilities.
(4) Net interest margin represents net interest income divided by average
interest-earning assets.
58
<PAGE>
The following table presents (on a consolidated basis) the weighted average
yields earned on loans, investments and other interest-earning assets, and the
weighted average interest rates paid on deposits and borrowings and the
resultant interest rate spreads at the dates indicated.
<TABLE>
<CAPTION>
At
At June 30, April 30,
------------------------
1998 1997 1996
---------- ---------- ------------
<S> <C> <C> <C>
Weighted average yield earned on:
Loans receivable, net...................................... 8.01% 8.07% 7.76%
U.S. Government and federal agency obligations
available for sale...................................... 5.63 6.18 6.08
FHLB stock................................................. 7.18 6.98 6.71
Interest-bearing deposits.................................. 6.05 5.43 3.42
All interest-earning assets................................ 7.74 7.85 7.61
Weighted average rate paid on:
NOW, money market and passbook accounts.................... 2.99 2.97 2.63
Certificates of deposit.................................... 5.82 5.78 5.80
FHLB advances.............................................. 6.16 5.84 6.75
All interest-bearing liabilities........................... 5.38 5.25 5.23
Interest rate spread (spread between weighted average yield
earned on all interest-earning assets and weighted average
rate paid on all interest-bearing liabilities)............. 2.36 2.60 2.38
</TABLE>
The following table sets forth the effects of changing rates and volume on
net interest income of Fulton. Information is provided with respect to: (i)
effects on interest income attributable to changes in volume (changes in volume
multiplied by prior rate); (ii) effects on interest income attributable to
changes in rate (changes in rate multiplied by prior volume); and (iii) effects
attributable to changes in rate/volume (changes in rate multiplied by changes in
volume).
<TABLE>
<CAPTION>
Year Ended June 30, 1998 Year Ended June 30, 1997
Compared to Compared to
Year Ended June 30, 1997 Year Ended April 30, 1996
Increase (Decrease) Due to Increase (Decrease) Due to
---------------------------- -----------------------------
Rate/ Rate/
Rate Volume Volume Net Rate Volume Volume Net
---- ------ ------ --- ---- ------ ------ ---
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable, net.................. $182 $439 $ 12 $633 $ 23 $1,001 $ 4 $1,028
U.S. Government and federal
agency obligations................... (15) (84) 7 (92) 3 (75) (1) (73)
FHLB stock............................. (1) 3 -- 2 (1) 1 -- --
Interest-bearing deposits.............. (25) 308 (19) 264 (5) 224 (6) 213
---- ---- ---- ---- ---- ------ ---- ------
Total net change in income
on interest-earning assets......... 141 666 -- 807 20 1,151 (3) 1,168
Interest expense:
NOW, money market and
passbook accounts..................... (21) (36) 2 (55) 7 55 1 63
Certificates of deposits............... 60 (36) (1) 23 (32) 11 -- (21)
FHLB advances.......................... 8 263 5 276 (30) 161 (15) 116
---- ---- ---- ---- ---- ------ ---- ------
Total net change in expense
on interest-bearing liabilities........ 47 191 6 244 (55) 227 (14) 158
---- ---- ---- ---- ---- ------ ---- ------
Net change in net interest income....... $ 94 $475 $ (6) $563 $ 75 $ 924 $ 11 $1,010
==== ==== ==== ==== ==== ====== ==== ======
</TABLE>
59
<PAGE>
Liquidity and Capital Resources
Fulton's principal sources of funds are cash receipts from deposits,
proceeds from principal and interest payments on loans, proceeds from sales of
loans and loan participations, proceeds from maturing securities, FHLB advances
and net earnings. Fulton Savings has an agreement with the FHLB Des Moines to
provide cash advances of unspecified amounts. Fulton Savings must hold an
unencumbered portfolio of eligible one- to four-family residential mortgages
with a book value of not less than 150% of the indebtedness. For regulatory
purposes, liquidity is measured as a ratio of cash and certain investments to
withdrawable deposits. The minimum level of liquidity required by regulation is
presently 4%. Fulton's liquidity ratio at March 31, 1999, was approximately
11.3%. Fulton maintains a higher level of liquidity than required by regulation
in order to more closely match interest-sensitive assets with interest-sensitive
liabilities.
Liquidity management is both an ongoing and long-term component of Fulton's
asset/liability management strategy. Excess funds generally are invested in
interest-bearing deposits at the FHLB Des Moines. Should Fulton require funds
beyond its ability to generate them internally, additional sources of funds are
available through advances from the FHLB. The primary investing activity of
Fulton is the origination of mortgage loans. During the year ended June 30,
1998, Fulton originated mortgage loans in the amount of $52.0 million. Fulton
did not purchase any one- to four-family mortgage loans. During the nine months
ended March 31, 1999, Fulton originated mortgage loans in the amount of $54.2
million and purchased $1.2 million of one- to four-family mortgages. Other
investing activities include investing in interest-bearing deposits and the
purchase of U.S. Government obligations.
Fulton must maintain an adequate level of liquidity to ensure the
availability of sufficient funds to support loan growth and deposit withdrawals,
to satisfy financial commitments and to take advantage of investment
opportunities. During the nine months ended March 31, 1999 and the years ended
June 30, 1998 and 1997, and April 30, 1996, Fulton (or Fulton Savings) used its
sources of funds primarily to fund loan commitments and to pay deposit
withdrawals. At March 31, 1999, Fulton had loan commitments outstanding of $6.4
million of which $5.3 million is for fixed rate loans ranging from 6.25 to
10.5%.
Like most thrift institutions, deposits, particularly certificates of
deposit, have been the primary source of external funds for Fulton. By offering
interest rates that are competitive with or at a slight premium to the average
rate paid by local competitors, Fulton has had some success in lengthening the
maturity of its certificate of deposit portfolio, a component of its
asset/liability management strategy. At March 31, 1999, certificates of deposit
amounted to $54.6 million, or 75.6% of total deposits, including $35.3 million
which were scheduled to mature within one year of March 31, 1999. Historically,
Fulton has been able to retain a significant amount of its deposits as they
mature. Management of Fulton believes it has adequate resources to fund all loan
commitments by deposits and, as necessary, borrowings in the form of FHLB
advances and that it can adjust the offering rates of savings certificates to
retain deposits in changing interest rate environments.
Fulton is not subject to any regulatory capital requirements. Fulton
Savings is subject to certain capital requirements imposed by the OTS. Fulton
Savings satisfied each of these requirements at March 31, 1999. See Note I of
the Consolidated Financial Statements.
60
<PAGE>
Year 2000 Compliance
The Year 2000 issue concerns computer software programs which use only two
digits to identify the calendar Year in date fields. Software applications
utilizing two digit date fields could produce erroneous results at the turn of
the century. The Year 2000 issue presents several potential risks to Fulton.
The banking transactions of Fulton's customers are processed by one or more
systems provided by a third-party data processing service. Failure of one or
more of those systems to function as a result of the Year 2000 date change could
result in Fulton's inability to properly process customer transactions. If that
were to occur, Fulton could lose customers to other financial institutions,
resulting in a loss of revenue.
A number of Fulton's borrowers utilize computers and computer software to
varying degrees in conjunction with the operation of their businesses. The
customers and suppliers of the businesses may utilize computers as well. Should
Fulton's borrowers, or the businesses on which they depend, experience Year 2000
related computer problems, such borrowers' cash flow could be disrupted,
adversely effecting their ability to repay their loans with Fulton.
Concern on the part of certain depositors that the Year 2000 related
problems could impair access to their deposit account balances following the
Year 2000 date change could result in Fulton experiencing a deposit outflow
prior to December 31, 1999. Should the Year 2000 related problems occur which
cause any of Fulton Savings' systems, or the systems of the third-party service
bureau upon which Fulton depends, to become inoperative, increased personnel
costs could be incurred if additional staff is required to perform functions
that the inoperative systems would have other wise performed.
Management believes it is not possible to estimate the potential lost
revenue due to the Year 2000 issue, as the extent and longevity of such
potential problems cannot be predicted.
Fulton has a Year 2000 Action Plan which management has used to identify
and correct Year 2000 compliance issues. Fulton has reviewed all services and
operational components to identify technical and non-technical areas of concern.
Having identified these internal and external components, Fulton has replaced
some of its computer hardware with Year 2000 compliant equipment. Fulton has
requested third party providers to insure Year 2000 compliance by requiring them
to test their own systems and services. All third party vendors have identified
Year 2000 issues and are compliant or are completing revisions to systems and
software to become Year 2000 complaint in the first quarter of 1999. Testing
schedules have been established with each provider. The primary service provider
for Fulton is Fiserv, which provides data processing services. Fiserv has
indicated that it is Year 2000 compliant. Further, Fulton has tested all of its
internal computer software and has determined that they are Year 2000 compliant.
A number of Fulton's borrowers utilize computers and computer software to
varying degrees in conjunction with the operation of their businesses. Should
Fulton's borrowers, or the businesses on with they depend, experience Year 2000
related computer problems, these borrowers may experience cash flow disruptions
which could adversely affect their ability to repay their loans to Fulton.
Fulton has contacted these borrowers to determine their status relating to
compliance with Year 2000 issues. Responses received from these borrowers
indicate that they are aware of the Year 2000 problem and are compliant or
taking the necessary steps to be compliant. Fulton is requiring new borrowers to
be Year 2000 compliant before granting any extensions of credit.
61
<PAGE>
Fulton has developed a business resumption and contingency plan. This plan
takes into account the actions Fulton will implement if there is a disruption
caused by Year 2000 related computer problems. Fulton feels that the probability
of an extended disruption is unlikely. Nevertheless, the contingency plans being
developed take into account disruptions caused by the loss utilities such as
power, water or telecommunications. Fulton is preparing to handle its business
transactions off-line for a short period of time.
To date, Fulton has incurred costs of approximately $106,000 relating to
the Year 2000 issue. The majority of that amount was the result of the purchase
of Year 2000 compliant hardware and software. Fulton presently anticipates that
total expense relating to the Year 2000 issue will not exceed $150,000.
New Accounting Standards
See Note A to the Consolidated Financial Statements.
Effect of Inflation and Changing Prices
The consolidated financial statements and related financial data presented
herein have been prepared in accordance with generally accepted accounting
principles which require the measurement of financial position and operating
results in terms of historical dollars, without considering the change in the
relative purchasing power of money over time due to inflation. The primary
impact of inflation on operations of Fulton is reflected in increased operating
costs. Unlike most industrial companies, virtually all the assets and
liabilities of a financial institution are monetary in nature. As a result,
interest rates generally have a more significant impact on a financial
institution's performance than do general levels of inflation. Interest rates do
not necessarily move in the same direction or to the same extent as the prices
of goods and services.
REGULATION AND SUPERVISION
General
As a savings and loan holding company, Fulton is required by federal law to
file reports with, and otherwise comply with, the rules and regulations of the
OTS. Fulton Savings is subject to extensive regulation, examination and
supervision by the OTS, as its primary federal regulator, and the FDIC, as the
deposit insurer. Fulton Savings is a member of the FHLB and its deposit accounts
are insured up to applicable limits by the SAIF managed by the FDIC. Fulton
Savings must file reports with the OTS and the FDIC concerning its activities
and financial condition in addition to obtaining regulatory approvals prior to
entering into certain transactions such as mergers with, or acquisitions of,
other savings institutions. The OTS and/or the FDIC conduct periodic
examinations to test Fulton Savings' safety and soundness and compliance with
various regulatory requirements. This regulation and supervision establishes a
comprehensive framework of activities in which an institution can engage and is
intended primarily for the protection of the insurance fund and depositors. The
regulatory structure also gives the regulatory authorities extensive discretion
in connection with their supervisory and enforcement activities and examination
policies, including policies with respect to the classification of assets and
the establishment of adequate loan loss reserves for regulatory purposes. Any
change in such regulatory requirements and policies, whether by the OTS, the
FDIC or the Congress, could have a material adverse impact on Fulton, Fulton
Savings and their operations. Certain of the regulatory requirements applicable
to Fulton Savings and to Fulton are referred to below or elsewhere herein. The
description of statutory provisions and regulations applicable to savings
62
<PAGE>
institutions and their holding companies set forth in this proxy statement does
not purport to be a complete description of such statutes and regulations and
their effects on Fulton and Fulton Savings.
Holding Company Regulation
Fulton is a nondiversified unitary savings and loan holding company within
the meaning of federal law. As a unitary savings and loan holding company,
Fulton generally is not restricted under existing laws as to the types of
business activities in which it may engage, provided that Fulton Savings
continues to be a qualified thrift lender. See "Federal Savings Institution
Regulation -- QTL Test." Upon any non-supervisory acquisition by Fulton of
another savings institution or savings bank that meets the qualified thrift
lender test and is deemed to be a savings institution by the OTS, Fulton would
become a multiple savings and loan holding company (if the acquired institution
is held as a separate subsidiary) and would generally be limited to activities
permissible for bank holding companies under Section 4(c)(8) of the Bank Holding
Company Act, subject to the prior approval of the OTS, and certain activities
authorized by OTS regulation.
A savings and loan holding company is prohibited from, directly or
indirectly, acquiring more than 5% of the voting stock of another savings
institution or savings and loan holding company, without prior written approval
of the OTS and from acquiring or retaining control of a depository institution
that is not insured by the FDIC. In evaluating applications by holding companies
to acquire savings institutions, the OTS considers the financial and managerial
resources and future prospects of the company and institution involved, the
effect of the acquisition on the risk to the deposit insurance funds, the
convenience and needs of the community and competitive factors.
The OTS may not approve any acquisition that would result in a multiple
savings and loan holding company controlling savings institutions in more than
one state, subject to two exceptions: (i) the approval of interstate supervisory
acquisitions by savings and loan holding companies and (ii) the acquisition of a
savings institution in another state if the laws of the state of the target
savings institution specifically permit such acquisitions. The states vary in
the extent to which they permit interstate savings and loan holding company
acquisitions.
Although savings and loan holding companies are not subject to specific
capital requirements or specific restrictions on the payment of dividends or
other capital distributions, federal regulations do prescribe such restrictions
on subsidiary savings institutions as described below. Fulton Savings must
notify the OTS 30 days before declaring any dividend to Fulton. In addition, the
financial impact of a holding company on its subsidiary institution is a matter
that is evaluated by the OTS and the agency has authority to order cessation of
activities or divestiture of subsidiaries deemed to pose a threat to the safety
and soundness of the institution.
Federal Savings Institution Regulation
Business Activities. The activities of federal savings institutions are
governed by federal law and regulations. These laws and regulations delineate
the nature and extent of the activities in which federal associations may
engage. In particular, many types of lending authority for federal association,
e.g., commercial, non-residential real property loans and consumer loans, are
limited to a specified percentage of the institution's capital or assets.
63
<PAGE>
Capital Requirements. The OTS capital regulations require savings
institutions to meet three minimum capital standards: a 1.5% tangible capital
ratio, a 3% leverage ratio and an 8% risk-based capital ratio. In addition, the
prompt corrective action standards discussed below also establish, in effect, a
minimum 2% tangible capital standard, a 4% leverage ratio (3% for institutions
receiving the highest rating on the CAMEL financial institution rating system),
and, together with the risk-based capital standard itself, a 4% Tier I risk-
based capital standard. The OTS regulations also require that, in meeting the
tangible, leverage and risk-based capital standards, institutions must generally
deduct investments in and loans to subsidiaries engaged in activities as
principal that are not permissible for a national bank.
The risk-based capital standard for savings institutions requires the
maintenance of Tier I (core) and total capital (which is defined as core capital
and supplementary capital) to risk-weighted assets of at least 4% and 8%,
respectively. In determining the amount of risk-weighted assets, all assets,
including certain off-balance sheet assets, are multiplied by a risk-weight
factor of 0% to 100%, assigned by the OTS capital regulation based on the risks
believed inherent in the type of asset. Core (Tier I) capital is defined as
common stockholders' equity (including retained earnings), certain noncumulative
perpetual preferred stock and related surplus, and minority interests in equity
accounts of consolidated subsidiaries less intangibles other than certain
mortgage servicing rights and credit card relationships. The components of
supplementary capital currently include cumulative preferred stock, long-term
perpetual preferred stock, mandatory convertible securities, subordinated debt
and intermediate preferred stock, the allowance for loan and lease losses
limited to a maximum of 1.25% of risk-weighted assets and up to 45% of
unrealized gains on available-for-sale equity securities with readily
determinable fair values. Overall, the amount of supplementary capital included
as part of total capital cannot exceed 100% of core capital.
The capital regulations also incorporate an interest rate risk component.
Savings institutions with "above normal" interest rate risk exposure are subject
to a deduction from total capital for purposes of calculating their risk-based
capital requirements. For the present time, the OTS has deferred implementation
of the interest rate risk component. At March 31, 1999, Fulton Savings met each
of its capital requirements.
The following table presents Fulton Savings' capital position at March 31,
1999.
<TABLE>
<CAPTION>
Excess Capital
-----------------------
Actual Required (Deficiency) Actual Required
Capital Capital Amount Percent Percent
---------- ----------- ----------- --------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Tangible $19,730 $1,765 $17,965 16.77% 1.50%
Core (Leverage) 19,730 3,529 16,201 16.77 3.00
Risk-based 20,594 5,508 15,086 29.91 8.00
</TABLE>
Prompt Corrective Regulatory Action. The OTS is required to take certain
supervisory actions against undercapitalized institutions, the severity of which
depends upon the institution's degree of undercapitalization. Generally, a
savings institution that has a ratio of total capital to risk weighted assets of
less than 8%, a ratio of Tier I (core) capital to risk-weighted assets of less
than 4% or a ratio of core capital to total assets of less than 4% (3% or less
for institutions with the highest examination rating) is considered to be
"undercapitalized." A savings institution that has a total risk-based capital
ratio less than 6%, a Tier I capital ratio of less than 3% or a leverage ratio
that is less than 3% is considered to be
64
<PAGE>
"significantly undercapitalized" and a savings institution that has a tangible
capital to assets ratio equal to or less than 2% is deemed to be "critically
undercapitalized." Subject to a narrow exception, the OTS is required to appoint
a receiver or conservator for an institution that is "critically
undercapitalized." The regulation also provides that a capital restoration plan
must be filed with the OTS within 45 days of the date a savings institution
receives notice that it is "undercapitalized," "significantly undercapitalized"
or "critically undercapitalized." Compliance with the plan must be guaranteed by
any parent holding company. In addition, numerous mandatory supervisory actions
become immediately applicable to an undercapitalized institution, including, but
not limited to, increased monitoring by regulators and restrictions on growth,
capital distributions and expansion. The OTS could also take any one of a number
of discretionary supervisory actions, including the issuance of a capital
directive and the replacement of senior executive officers and directors.
Insurance of Deposit Accounts. Deposits of Fulton Savings are presently
insured by the SAIF. The FDIC maintains a risk-based assessment system by which
institutions are assigned to one of three categories based on their
capitalization and one of three subcategories based on examination ratings and
other supervisory information. An institution's assessment rate depends upon the
categories to which it is assigned. Assessment rates for SAIF member
institutions are determined semiannually by the FDIC and currently range from
zero basis points for the healthiest institutions to 27 basis points for the
riskiest.
In addition to the assessment for deposit insurance, institutions are
required to make payments on bonds issued in the late 1980s by the Financing
Corporation ("FICO") to recapitalize the predecessor to the SAIF. During 1998,
FICO payments for SAIF members, including Fulton Savings, approximated 6.10
basis points, while Bank Insurance Fund ("BIF") members paid 1.22 basis points.
By law, there will be equal sharing of FICO payments between SAIF and BIF
members on the earlier of January 1, 2000 or the date the SAIF and BIF are
merged. The FDIC has authority to increase insurance assessments. A significant
increase in SAIF insurance premiums would likely have an adverse effect on the
operating expenses and results of operations of Fulton Savings. Management
cannot predict what insurance assessment rates will be in the future.
Insurance of deposits may be terminated by the FDIC upon a finding that the
institution has engaged in unsafe or unsound practices, is in an unsafe or
unsound condition to continue operations or has violated any applicable law,
regulation, rule, order or condition imposed by the FDIC or the OTS. The
management of Fulton Savings does not know of any practice, condition or
violation that might lead to termination of deposit insurance.
Thrift Rechartering Legislation. Legislation enacted in 1996 provided that
the BIF and SAIF were to have merged on January 1, 1999 if there were no more
savings associations as of that date. Various proposals to eliminate the federal
savings association charter, create a uniform financial institutions charter,
abolish the OTS and restrict savings and loan holding company activities have
been introduced in Congress. Fulton Savings is unable to predict whether such
legislation will be enacted or the extent to which the legislation would
restrict or disrupt its operations.
Loans to One Borrower. Federal law provides that savings institutions are
generally subject to the limits on loans to one borrower applicable to national
banks. A savings institution may not make a loan or extend credit to a single or
related group of borrowers in excess of 15% of its unimpaired capital and
surplus. An additional amount may be lent, equal to 10% of unimpaired capital
and surplus, if secured by specified readily-marketable collateral. At March 31,
1999, Fulton Savings' limit on loans to one borrower was $3.1
65
<PAGE>
million, and Fulton Savings' largest aggregate outstanding balance of loans to
one borrower was $2.7 million.
QTL Test. The HOLA requires savings institutions to meet a qualified thrift
lender test. Under the test, a savings association is required to either qualify
as a "domestic building and loan association" under the Internal Revenue Code or
maintain at least 65% of its "portfolio assets" (total assets less: (i)
specified liquid assets up to 20% of total assets; (ii) intangibles, including
goodwill; and (iii) the value of property used to conduct business) in certain
"qualified thrift investments" (primarily residential mortgages and related
investments, including certain mortgage-backed securities) in at least nine
months out of each 12 month period.
A savings institution that fails the qualified thrift lender test is
subject to certain operating restrictions and may be required to convert to a
bank charter. As of March 31, 1999, Fulton Savings met the qualified thrift
lender test. Recent legislation has expanded the extent to which education
loans, credit card loans and small business loans may be considered "qualified
thrift investments."
Limitation on Capital Distributions. OTS regulations impose limitations
upon all capital distributions by a savings institution, including cash
dividends, payments to repurchase its shares and payments to shareholders of
another institution in a cash-out merger. The rule effective in 1998 established
three tiers of institutions based primarily on an institution's capital level.
An institution that exceeded all capital requirements before and after a
proposed capital distribution ("Tier I Bank") and had not been advised by the
OTS that it was in need of more than normal supervision, could, after prior
notice but without obtaining approval of the OTS, make capital distributions
during the calendar year equal to the greater of (i) 100% of its net earnings to
date during the calendar year plus the amount that would reduce by one-half the
excess capital over its capital requirements at the beginning of the calendar
year or (ii) 75% of its net income for the previous four quarters. Any
additional capital distributions required prior regulatory approval. At March
31, 1999, Fulton Savings was a Tier I Bank. Effective April 1, 1999, the OTS's
capital distribution regulation changed. Under the new regulation, an
application to and the prior approval of the OTS will be required prior to any
capital distribution if the institution does not meet the criteria for
"expedited treatment" of applications under OTS regulations (i.e., generally,
examination ratings in the two top categories), the total capital distributions
for the calendar year exceed net income for that year plus the amount of
retained net income for the preceding two years, the institution would be
undercapitalized following the distribution or the distribution would otherwise
be contrary to a statute, regulation or agreement with OTS. If an application is
not required, the institution must still provide prior notice to OTS of the
capital distribution. In the event Fulton Savings' capital fell below its
regulatory requirements or the OTS notified it that it was in need of more than
normal supervision, Fulton Savings' ability to make capital distributions could
be restricted. In addition, the OTS could prohibit a proposed capital
distribution by any institution, which would otherwise be permitted by the
regulation, if the OTS determines that such distribution would constitute an
unsafe or unsound practice.
Liquidity. Fulton Savings is required to maintain an average daily balance
of specified liquid assets equal to a monthly average of not less than a
specified percentage of its net withdrawable deposit accounts plus short-term
borrowings. This liquidity requirement is currently 4%, but may be changed from
time to time by the OTS to any amount within the range of 4% to 10%. Monetary
penalties may be imposed for failure to meet these liquidity requirements.
Fulton Savings has never been subject to monetary penalties for failure to meet
its liquidity requirements.
66
<PAGE>
Assessments. Savings institutions are required to pay assessments to the
OTS to fund the agency's operations. The general assessments, paid on a semi-
annual basis, are computed upon the savings institution's total assets,
including consolidated subsidiaries, as reported in Fulton Savings' latest
quarterly thrift financial report.
Transactions with Related Parties. Fulton Savings' authority to engage in
transactions with "affiliates" (e.g., any company that controls or is under
common control with an institution, including the Company and its non-savings
institution subsidiaries) is limited by federal law. The aggregate amount of
covered transactions with any individual affiliate is limited to 10% of the
capital and surplus of the savings institution. The aggregate amount of covered
transactions with all affiliates is limited to 20% of the savings institution's
capital and surplus. Certain transactions with affiliates are required to be
secured by collateral in an amount and of a type described in federal law. The
purchase of low quality assets from affiliates is generally prohibited. The
transactions with affiliates must be on terms and under circumstances, that are
at least as favorable to the institution as those prevailing at the time for
comparable transactions with non-affiliated companies. In addition, savings
institutions are prohibited from lending to any affiliate that is engaged in
activities that are not permissible for bank holding companies and no savings
institution may purchase the securities of any affiliate other than a
subsidiary.
Fulton Savings' authority to extend credit to executive officers, directors
and 10% shareholders ("insiders"), as well as entities such persons control, is
also governed by federal law. Such loans are required to be made on terms
substantially the same as those offered to unaffiliated individuals and not
involve more than the normal risk of repayment. Recent legislation created an
exception for loans made pursuant to a benefit or compensation program that is
widely available to all employees of the institution and does not give
preference to insiders over other employees. The law limits both the individual
and aggregate amount of loans Fulton Savings may make to insiders based, in
part, on Fulton Savings' capital position and requires certain board approval
procedures to be followed.
Enforcement. The OTS has primary enforcement responsibility over savings
institutions and has the authority to bring actions against the institution and
all institution-affiliated parties, including stockholders, and any attorneys,
appraisers and accountants who knowingly or recklessly participate in wrongful
action likely to have an adverse effect on an insured institution. Formal
enforcement action may range from the issuance of a capital directive or cease
and desist order to removal of officers and/or directors to institution of
receivership, conservatorship or termination of deposit insurance. Civil
penalties cover a wide range of violations and can amount to $25,000 per day, or
even $1 million per day in especially egregious cases. The FDIC has the
authority to recommend to the Director of the OTS that enforcement action to be
taken with respect to a particular savings institution. If action is not taken
by the Director, the FDIC has authority to take such action under certain
circumstances. Federal law also establishes criminal penalties for certain
violations.
Standards for Safety and Soundness. The federal banking agencies have
adopted Interagency Guidelines prescribing Standards for Safety and Soundness.
The guidelines set forth the safety and soundness standards that the federal
banking agencies use to identify and address problems at insured depository
institutions before capital becomes impaired. If the OTS determines that a
savings institution fails to meet any standard prescribed by the guidelines, the
OTS may require the institution to submit an acceptable plan to achieve
compliance with the standard.
67
<PAGE>
Federal Reserve System
The Federal Reserve Board regulations require savings institutions to
maintain non-interest earning reserves against their transaction accounts
(primarily NOW and regular checking accounts). The regulations generally provide
that reserves be maintained against aggregate transaction accounts as follows:
for accounts aggregating $46.5 million or less (subject to adjustment by the
Federal Reserve Board) the reserve requirement is 3%; and for accounts
aggregating greater than $46.5 million, the reserve requirement is $1.395
million plus 10% (subject to adjustment by the Federal Reserve Board between 8%
and 14%) against that portion of total transaction accounts in excess of $46.5
million. The first $4.9 million of otherwise reservable balances (subject to
adjustments by the Federal Reserve Board) are exempted from the reserve
requirements. Fulton Savings complies with the foregoing requirements.
FEDERAL AND STATE TAXATION
Federal Taxation
General. Fulton and Fulton Savings report their income on a fiscal year,
consolidated basis and the accrual method of accounting, and are subject to
federal income taxation in the same manner as other corporations with some
exceptions, including particularly Fulton Savings' reserve for bad debts
discussed below. The following discussion of tax matters is intended only as a
summary and does not purport to be a comprehensive description of the tax rules
applicable to Fulton or Fulton Savings. For its 1999 taxable year, Fulton is
subject to a maximum federal income tax rate of 34%.
Bad Debt Reserves. For fiscal years beginning prior to December 31, 1995,
thrift institutions which qualified under certain definitional tests and other
conditions of the Internal Revenue Code were permitted to use certain favorable
provisions to calculate their deductions from taxable income for annual
additions to their bad debt reserve. A reserve could be established for bad
debts on qualifying real property loans (generally secured by interests in real
property improved or to be improved) under (i) the percentage of taxable income
method or (ii) the experience method. The reserve for nonqualifying loans was
computed using the experience method.
Congress repealed the reserve method of accounting for bad debts for tax
years beginning after 1995 and required savings institutions to recapture (i.e.,
take into income) certain portions of their accumulated bad debt reserves.
Thrift institutions eligible to be treated as "small banks" (assets of $500
million or less) are allowed to use the experience method applicable to such
institutions, while thrift institutions that are treated as large banks (assets
exceeding $500 million) are required to use only the specific charge-off method.
Thus, the percentage of taxable income method of accounting for bad debts is no
longer available for any financial institution.
A thrift institution required to change its method of computing reserves
for bad debts will treat such change as a change in method of accounting,
initiated by the taxpayer, and having been made with the consent of the IRS. Any
Section 481(a) adjustment required to be taken into income with respect to such
change generally will be taken into income ratably over a six-taxable year
period, beginning with the first taxable year beginning after 1995, subject to a
2-year suspension if the "residential loan requirement" is satisfied.
68
<PAGE>
Under the residential loan requirement provision, the recapture required by
the 1996 Act will be suspended for each of two successive taxable years,
beginning with Fulton Savings' 1996 taxable year, in which Fulton Savings
originates a minimum of certain residential loans based upon the average of the
principal amounts of such loans made by Fulton Savings during its six taxable
years preceding its current taxable year.
Fulton Savings is required to recapture (i.e., take into income) over a six
year period the excess of the balance of its tax bad debt reserves as of
December 31, 1995 over the balance of such reserves as of December 31, 1987. As
a result of such recapture, Fulton Savings will incur an additional tax
liability of approximately $60,000 which is generally expected to be taken into
income beginning in 1998 over a six year period.
Distributions. Under the 1996 Act, if Fulton Savings makes "non-dividend
distributions" to Fulton, such distributions will be considered to have been
made from Fulton Savings' unrecaptured tax bad debt reserves (including the
balance of its reserves as of December 31, 1987) to the extent thereof, and then
from Fulton Savings' supplemental reserve for losses on loans, to the extent
thereof, and an amount based on the amount distributed (but not in excess of the
amount of such reserves) will be included in Fulton Savings' income. Non-
dividend distributions include distributions in excess of Fulton Savings'
current and accumulated earnings and profits, as calculated for federal income
tax purposes, distributions in redemption of stock, and distributions in partial
or complete liquidation. Dividends paid out of Fulton Savings' current or
accumulated earnings and profits will not be so included in its income.
The amount of additional taxable income triggered by a non-dividend is an
amount that, when reduced by the tax attributable to the income, is equal to the
amount of the distribution. Thus, if Fulton Savings makes a non-dividend
distribution to Fulton, approximately one and one-half times the amount of such
distribution (but not in excess of the amount of such reserves) would be
includable in income for federal income tax purposes, assuming a 35% federal
corporate income tax rate. Fulton Savings does not intend to pay dividends that
would result in a recapture of any portion of its bad debt reserves.
SAIF Recapitalization Assessment. The Funds Act levied a $0.0657 fee on
every $100 of thrift deposits held on March 31, 1995. For financial statement
purposes, this assessment was reported as an expense for the quarter ended
September 30, 1996. The Funds Act includes a provision which states that the
amount of any special assessment paid to capitalize SAIF under this legislation
is deductible under Section 162 of the Code in the year of payment.
Missouri Taxation
Fulton and its wholly owned subsidiary, Multi-Purpose Subsidiary Service
Agency, Inc., are subject to the Missouri corporation franchise tax. Each
corporation's franchise tax liability is equal to one-twentieth of one percent
of the par value of the corporation's outstanding shares and surplus if the
corporation's outstanding shares and surplus exceeds $200,000. If the
corporation's outstanding shares, or any part of the outstanding shares, consist
of shares without par value, then, for the purposes of calculating the
corporation's tax liability, such shares shall be considered as having a value
of $5.00 per share unless the actual value of such shares should exceed $5.00
per share, in which case the tax shall be levied and collected on the actual
value and the surplus if the actual value and the surplus exceeds $200,000.
Missouri-based banking institutions, like Fulton Savings, pay a special
financial institutions tax at the rate of 7% of net income, based on adjusted
federal taxable income without regard to net operating loss carryforwards. This
tax is in lieu of certain other state taxes on banking institutions, on their
property, capital or income, except taxes on tangible personal property owned by
Fulton Savings and held for lease
69
<PAGE>
or rental to others and on real estate, contributions paid under the
Unemployment Compensation Law of Missouri, social security taxes, sales taxes
and use taxes. In addition, Fulton Savings is entitled to a credit against this
tax for all taxes paid to the State of Missouri or any political subdivision,
except taxes on tangible personal property owned by Fulton Savings and held for
lease or rental to others and on real estate, contributions paid under the
Unemployment Compensation Law of Missouri, social security taxes, sales and use
taxes, and taxes imposed by the Missouri Financial Institutions Tax Law.
Missouri banking institutions do not pay the regular corporate income tax.
Delaware Taxation
As a Delaware holding company not earning income in Delaware, Fulton is
exempted from Delaware corporate income tax, but is required to file an annual
report with, and pay an annual franchise tax to, the State of Delaware.
WHERE YOU CAN FIND MORE INFORMATION
Fulton files annual, quarterly and current reports, proxy statements and
other information with the SEC. You may read and copy any reports, statements or
other information that Fulton files at the SEC's public reference rooms in
Washington, D.C., New York, New York, and Chicago, Illinois. Please call the SEC
at 1-800-SEC-0330 for further information on the public reference rooms.
Fulton's public filings are also available to the public from commercial
document retrieval services and at the Internet World Wide Website maintained by
the SEC at "http://www.sec.gov."
You should rely only on the information contained or incorporated by
reference in this document to vote your shares at the meeting. Fulton has not
authorized anyone to provide you with information that is different from what is
contained in this document. This document is dated ________, 1999. You should
not assume that the information contained in this document is accurate as of any
date other than that date, and neither the mailing of this document to
stockholders nor the issuance of Fulton's securities in the merger shall create
any implication to the contrary.
STOCKHOLDER PROPOSALS
If the merger is not approved by Fulton's stockholders at the special
meeting, Fulton expects that it would hold its 1999 annual meeting of
stockholders in the fourth calendar quarter of 1999. Any proposal to be
presented by any stockholder for action at the 1999 annual meeting must have
been received by the Secretary of Fulton no later than June 1, 1999 in order to
be eligible for inclusion in Fulton's proxy materials for the annual meeting. As
of that date, Fulton had not received any stockholder proposals for inclusion in
the proxy materials for the 1999 annual meeting.
If a stockholder wishes to present a proposal at Fulton's annual meeting,
the stockholder must give advance notice to Fulton not less than 90 days prior
to the meeting, unless less than 100 days' notice or prior disclosure of the
date of the meeting is given, in which case the stockholder must give notice to
Fulton within ten days after disclosure of the meeting date. Fulton's bylaws
specify the information that must accompany notice of a stockholder proposal.
Copies of the bylaws may be obtained from the Secretary of Fulton.
70
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors
Fulton Bancorp, Inc.
Fulton, Missouri
We have audited the accompanying consolidated statements of financial condition
of Fulton Bancorp, Inc. ("Company") as of June 30, 1998 and 1997, and the
related consolidated statements of income, stockholders' equity, and cash flows
for the years ended June 30, 1998 and 1997, for the two months ended June 30,
1996 and for the year ended April 30, 1996. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of the Company as of
June 30, 1998 and 1997, and the results of their operations and their cash flows
for the years ended June 30, 1998 and 1997, for the two months ended June 30,
1996 and for the year ended April 30, 1996, in conformity with generally
accepted accounting principles.
As described in Note A, the Company changed its method of accounting for
impaired loans on May 1, 1995, and for mortgage servicing rights on May 1, 1996.
/s/ Moore, Horton & Carlson, P.C.
- ---------------------------------
Mexico, Missouri
August 28, 1998
F-1
<PAGE>
Fulton Bancorp, Inc.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
June 30
1998 1997
------------ ------------
<S> <C> <C>
ASSETS
Cash (includes interest-bearing deposits of $13,146,912 and
$6,330,942, respectively) $ 13,777,625 $ 7,107,921
Investment securities, available-for-sale--Note B 950,276 1,899,023
Stock in Federal Home Loan Bank ("FHLB") of Des Moines 643,300 637,200
Loans held for sale 3,649,482 4,463,220
Loans receivable--Note C 88,104,227 83,759,306
Accrued interest receivable--Note D 678,310 728,882
Premises and equipment--Note E 1,419,413 1,482,623
Foreclosed real estate--Note C 157,525 197,525
Other assets 730,268 293,340
------------ ------------
TOTAL ASSETS $110,110,426 $100,569,040
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Deposits--Note F $ 69,163,842 $ 67,197,455
Advances from Federal Home Loan Bank of Des Moines--Note H 12,810,007 6,500,000
Advances from borrowers for property taxes and insurance 984,986 1,018,316
Accrued interest payable 84,034 96,318
Other liabilities 1,572,190 499,616
------------ ------------
TOTAL LIABILITIES 84,615,059 75,311,705
Commitments and contingencies--Notes L and M
Stockholders' Equity--Notes G, I, J and O
Preferred stock, $.01 par value, 1,000,000 shares authorized,
none issued --- ---
Common stock, $.01 par value, 6,000,000 shares authorized,
1,719,250 shares issued and outstanding 17,193 17,193
Additional paid-in capital 16,943,018 16,600,967
Retained earnings - substantially restricted 10,673,592 9,910,443
Unearned ESOP shares (1,133,372) (1,271,674)
Deferred management recognition and development plan ("MRDP") (1,006,062) ---
Unrealized gain on securities available-for-sale 998 406
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 25,495,367 25,257,335
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $110,110,426 $100,569,040
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-2
<PAGE>
Fulton Bancorp, Inc.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years ended June 30, 1998 and 1997, two months ended June 30, 1996 and year
ended April 30, 1996
<TABLE>
<CAPTION>
Unrealized
Additional Unearned Gain (Loss)
Common Paid-In Retained ESOP on Deferred Treasury
Stock Capital Earnings Shares Securities MRDP Stock
---------- --------------- ------------ --------------- ----------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at April 30, 1995 $ --- $ --- $ 8,475,818 $ --- $ 8,333 $ --- $ ---
Net income --- --- 620,076 --- --- --- ---
Change in unrealized gain
(loss) on securities
available-for-sale,
net of tax --- --- --- --- 12,516 --- ---
------- ----------- ----------- ----------- -------- ----------- ---------
BALANCE AT
APRIL 30, 1996 --- --- 9,095,894 --- 20,849 --- ---
Net income --- --- 164,481 --- --- --- ---
Change in unrealized gain
(loss) on securities
available-for-sale,
net of tax --- --- --- --- (7,369) --- ---
------- ----------- ----------- ----------- -------- ----------- ---------
BALANCE AT
JUNE 30, 1996 --- --- 9,260,375 --- 13,480 --- ---
Net income --- --- 821,993 --- --- --- ---
Net proceeds from
issuance of
common stock--Note M 17,193 16,531,937 --- --- --- --- ---
Common stock issued to
Employee Stock Ownership
Plan ("ESOP")--Note J --- --- --- (1,375,400) --- --- ---
Release of ESOP shares --- 69,030 --- 103,726 --- --- ---
Change in unrealized gain
(loss) on securities
available-for-sale,
net of tax --- --- --- --- (13,074) --- ---
Dividends paid ($.10 per
share) --- --- (171,925) --- --- --- ---
------- ----------- ----------- ----------- -------- ----------- ---------
BALANCE AT
JUNE 30, 1997 17,193 16,600,967 9,910,443 (1,271,674) 406 --- ---
Net income --- --- 1,139,182 --- --- --- ---
Release of ESOP shares --- 157,520 --- 138,302 --- --- ---
Change in unrealized gain
(loss) on securities
available-for-sale,
net of tax --- --- --- --- 592 --- ---
Purchase of Treasury Stock --- --- --- --- --- --- (497,222)
Establish MRDP --- 5,622 --- --- --- (1,530,132) 497,222
Market value adjustment of
MRDP --- 178,909 --- --- --- --- ---
Compensation expense MRDP --- --- --- --- --- 524,070 ---
Dividends paid ($.22 per
share) --- --- (376,033) --- --- --- ---
------- ----------- ----------- ----------- -------- ----------- ---------
BALANCE AT
JUNE 30, 1998 $17,193 $16,943,018 $10,673,592 $(1,133,372) $ 998 $(1,006,062) $ ---
======= =========== =========== =========== ======== =========== =========
<CAPTION>
Total
Stockholders'
Equity
--------------
<S> <C>
Balance at April 30, 1995 $ 8,484,151
Net income 620,076
Change in unrealized gain
(loss) on securities
available-for-sale,
net of tax 12,516
-----------
BALANCE AT
APRIL 30, 1996 9,116,743
Net income 164,481
Change in unrealized gain
(loss) on securities
available-for-sale,
net of tax (7,369)
-----------
BALANCE AT
JUNE 30, 1996 9,273,855
Net income 821,993
Net proceeds from
issuance of
common stock--Note M 16,549,130
Common stock issued to
Employee Stock Ownership
Plan ("ESOP")--Note J (1,375,400)
Release of ESOP shares 172,756
Change in unrealized gain
(loss) on securities
available-for-sale,
net of tax (13,074)
Dividends paid ($.10 per
share) (171,925)
-----------
BALANCE AT
JUNE 30, 1997 25,257,335
Net income 1,139,182
Release of ESOP shares 295,822
Change in unrealized gain
(loss) on securities
available-for-sale,
net of tax 592
Purchase of Treasury Stock (497,222)
Establish MRDP (1,027,288)
Market value adjustment of
MRDP 178,909
Compensation expense MRDP 524,070
Dividends paid ($.22 per
share) (376,033)
-----------
BALANCE AT
JUNE 30, 1998 $25,495,367
===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
Fulton Bancorp, Inc.
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Two Months Year Ended
Year Ended June 30 Ended April 30
1998 1997 June 30, 1996 1996
--------------------------------------------------
<S> <C> <C> <C> <C>
Interest Income
Mortgage loans $6,497,768 $5,872,624 $ 952,973 $4,914,438
Consumer and other loans 852,265 843,975 143,672 774,757
Investment securities 134,928 224,874 43,444 297,716
Interest-bearing deposits 661,906 398,091 8,980 184,777
---------- ---------- ---------- ----------
Total Interest Income 8,146,867 7,339,564 1,149,069 6,171,688
Interest Expense
Deposits -- Note F 3,472,938 3,505,186 600,412 3,463,533
Advances from FHLB 709,750 433,248 64,842 317,497
---------- ---------- ---------- ----------
Total Interest Expense 4,182,688 3,938,434 665,254 3,781,030
---------- ---------- ---------- ----------
Net Interest Income 3,964,179 3,401,130 483,815 2,390,658
Provision for Loan Losses -- Note C 70,000 120,000 25,000 44,242
---------- ---------- ---------- ----------
Net Interest Income After Provision
for Loan Losses 3,894,179 3,281,130 458,815 2,346,416
Noninterest Income (Loss)
Loan servicing fees 310,638 317,735 50,747 280,525
Service charges and other fees 132,032 139,874 24,370 129,588
Income (Loss) from foreclosed assets, net (48,918) 7,018 1,577 10,282
Gain on sale of loans 392,198 158,436 --- ---
Gain on sale of other assets --- 9,780 40,823 ---
Other 6,248 3,796 1,840 65,113
---------- ---------- ---------- ----------
Total Noninterest Income 792,198 636,639 119,357 485,508
Noninterest Expense
Employee salaries and benefits 1,715,872 1,081,983 151,347 878,770
Occupancy costs 272,233 274,151 40,410 222,514
Advertising 51,565 54,492 6,473 31,751
Data processing 166,065 176,412 32,687 152,755
Federal insurance premiums 47,703 511,473 30,782 153,182
Directors' fees 89,843 86,543 14,424 87,223
Other 546,914 439,722 40,068 322,653
---------- ---------- ---------- ----------
Total Noninterest Expense 2,890,195 2,624,776 316,191 1,848,848
---------- ---------- ---------- ----------
INCOME BEFORE INCOME TAXES 1,796,182 1,292,993 261,981 983,076
Income Taxes--Note G 657,000 471,000 97,500 363,000
---------- ---------- ---------- ----------
NET INCOME $1,139,182 $ 821,993 $ 164,481 $ 620,076
========== ========== ========== ==========
Basic income per share $ .72 $ .52 $ N/A $ N/A
========== ========== ========== ==========
Diluted income per share $ .70 $ .52 $ N/A $ N/A
========== ========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
Fulton Bancorp, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Two Months Year Ended
Year Ended June 30 Ended April 30
1998 1997 June 30, 1996 1996
-----------------------------------------------------------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES
Net income $ 1,139,182 $ 821,993 $ 164,481 $ 620,076
Adjustments to reconcile net income to net cash
provided by operating activities
Provision for loss on other real estate 40,000 --- --- ---
Depreciation and amortization 147,010 167,648 21,511 126,863
Amortization of premiums and discounts (315) (9,401) (3,090) (1,167)
Provisions for loan losses 70,000 120,000 (25,000) 44,242
Deferred income taxes (83,400) 8,500 5,600 5,000
Proceeds from sales of loans held for sale 15,604,233 22,352,416 2,465,482 22,632,003
Originations of loans held for sale (14,790,495) (24,288,113) (707,758) (24,364,659)
Stock and patronage dividends --- --- 47,326 (44,421)
Gain on sale of loans held for sale (392,198) (158,436) --- ---
Amortization of servicing asset 45,314 3,567 --- ---
Loss on disposal of foreclosed real estate 8,245 --- --- ---
ESOP shares released 295,822 172,755 --- ---
MRDP compensation expense 524,070 --- --- ---
Change to assets and liabilities
increasing (decreasing) cash flows
Accrued interest receivable 50,572 (24,263) (97,047) (114,519)
Other assets 30,818 (226,117) (23,877) (43,591)
Accrued interest payable (12,284) (3,373) (199,822) 27,872
Other liabilities 224,200 156,558 217,562 (91,319)
------------ ------------ ----------- ------------
NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES 2,900,774 (906,266) 1,865,368 (1,203,620)
CASH FLOWS FROM INVESTING
ACTIVITIES
Purchase of investment securities,
available-for-sale --- (1,202,890) --- (193,687)
Proceeds from maturities of investment securities
available-for-sale 950,004 2,500,004 --- 1,200,899
Loans originated, net of repayments (4,460,978) (7,289,495) (4,622,561) (5,837,654)
Purchase of mortgage loans --- --- (484,200)
Purchase FHLB stock (6,100) --- --- ---
Purchase of premises and equipment (83,800) (239,684) (110,954) (307,182)
Carrying value of other real estate investment
disposal --- 408,543 --- ---
Expenditures on foreclosed real estate --- --- --- (3,099)
------------ ------------ ----------- ------------
NET CASH USED IN
INVESTING ACTIVITIES (3,600,874) (5,823,522) (4,733,515) (5,624,923)
</TABLE>
F-5
<PAGE>
Fulton Bancorp, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS - Cont'd
<TABLE>
<CAPTION>
Two Months Year Ended
Year Ended June 30 Ended April 30
1998 1997 June 30, 1996 1996
--------------------------------------------------------
<S> <C> <C> <C> <C>
CASH FLOWS FROM FINANCING
ACTIVITIES
Net increase (decrease) in deposits $ 1,966,387 $ (3,879,523) $ 974,238 $ 5,111,241
Advances from FHLB
Borrowings 13,000,000 11,500,000 2,000,000 1,500,000
Repayments (6,689,993) (12,000,000) --- (1,000,000)
Net increase (decrease) in advances for
taxes and insurance (33,330) 59,293 126,303 (47,393)
Proceeds from sale of common stock --- 16,549,131 --- ---
Purchase treasury shares for MRDP (497,227) --- --- ---
Loan to ESOP --- (1,375,400) --- ---
Dividends paid (376,033) (171,925) --- ---
----------- ------------ ---------- -----------
NET CASH PROVIDED BY
FINANCING ACTIVITIES 7,369,804 10,681,576 3,100,541 5,563,848
----------- ------------ ---------- -----------
NET INCREASE (DECREASE) IN CASH 6,669,704 3,951,788 232,394 (1,264,695)
Cash, beginning of period 7,107,921 3,156,133 2,923,739 4,188,434
----------- ------------ ---------- -----------
CASH, END OF PERIOD $13,777,625 $ 7,107,921 $3,156,133 $ 2,923,739
=========== ============ ========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH
FLOW INFORMATION
Cash paid for
Interest on deposits $ 3,488,294 $ 3,501,813 $ 400,579 $ 3,753,158
=========== ============ ========== ===========
Interest on FHLB advances $ 709,750 $ 433,248 $ 64,842 $ 317,947
=========== ============ ========== ===========
Income tax $ 862,376 $ 288,000 $ 81,270 $ 247,100
=========== ============ ========== ===========
Noncash investing and financing activities are
as follows
Loans to facilitate sales of real estate $ 30,000 $ --- $ --- $ 77,805
=========== ============ ========== ===========
Foreclosed real estate acquired by foreclosure
or deed in lieu of foreclosure $ 40,140 $ --- $ --- $ 267,861
=========== ============ ========== ===========
Stock and patronage dividends $ --- $ --- $ --- $ 59,826
=========== ============ ========== ===========
Allocation of MRDP shares of common stock $ 1,530,132 $ --- $ --- $ ---
=========== ============ ========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
Fulton Bancorp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying reporting policies and practices of Fulton Bancorp, Inc.
conform to generally accepted accounting principles ("GAAP") and to prevailing
practices within the thrift industry. A summary of the more significant
accounting policies follows:
Nature of Operations: The Company, a Delaware corporation, was incorporated in
- --------------------
May, 1996 for the purpose of becoming the holding company of Fulton Savings
Bank, FSB ("Bank"). On October 17, 1996, the Bank converted from a mutual to a
stock form of ownership and the Company completed its initial public offering
and acquired all of the outstanding capital stock of the Bank.
The Bank provides a variety of financial services to individual and corporate
customers through its headquarters located in Fulton, Missouri and its branch
located in Holts Summit, Missouri. The Bank's primary deposit products are
interest-bearing checking and savings accounts and certificates of deposit. Its
primary lending products are one- to four-family residential loans.
Principles of Consolidation and Change in Fiscal Year: The consolidated
- -----------------------------------------------------
financial statements include the accounts of the Company and its wholly-owned
subsidiary, the Bank, and its wholly-owned subsidiary, Multi-Purpose Service
Agency, Inc., whose activities consist principally of selling mortgage
redemption insurance to the Bank's customers. Significant intercompany balances
and transactions have been eliminated in consolidation.
On November 13, 1996, the Board of Directors of the Company approved a change in
the Company's fiscal year end from April 30 to June 30. Accordingly, the
accompanying consolidated statements of income and stockholders' equity and cash
flows include the transition period from May 1, 1996 to June 30, 1996.
Investment Securities: All securities are designated as available-for-sale, a
- ---------------------
designation which provides the investor with certain flexibility in managing its
investment portfolio. Such securities are reported at fair value; net
unrealized gains and losses are excluded from income and reported net of
applicable income taxes as a separate component of equity.
Gains or losses on sales of securities are recognized in operations at the time
of sale and are determined by the difference between the net sales proceeds and
the cost of the securities using the specific identification method, adjusted
for any unamortized premiums or discounts. Premiums or discounts are amortized
or accreted to income using the interest method over the period to maturity.
Stock in Federal Home Loan Bank of Des Moines: Stock in the FHLB is stated at
- ---------------------------------------------
cost and the amount of stock held is determined by regulation. No ready market
exists for such stock and it has no quoted market value.
Loans Held for Sale: Mortgage loans originated and held for sale in the
- -------------------
secondary market are carried at the lower of cost or market value determined on
an aggregate basis. Gains and losses, if any, on the sale of these loans are
determined using the specific identification method.
F-7
<PAGE>
NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Cont'd
Loans Receivable: Loans receivable are carried at unpaid principal balances,
- ----------------
less the allowance for loan losses. Loan origination and commitment fees and
certain direct loan origination costs are deferred and amortized to interest
income over the contractual life of the loan using the interest method.
The Company's real estate loan portfolio consists primarily of long-term loans
secured by first trust deeds on single-family residences, other residential
property, commercial property and land. The adjustable-rate mortgage is the
Company's primary loan investment.
Loans are placed on nonaccrual status when principal or interest is delinquent
for 90 days or more. Uncollectible interest on loans is charged off or an
allowance established by a charge to income equal to all interest previously
accrued. Interest is subsequently recognized only to the extent cash payments
are received until delinquent interest is paid in full and in management's
judgment, the borrower's ability to make periodic interest and principal
payments is back to normal in which case the loan is returned to accrual basis.
Allowance for Loan Losses: 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.
Impaired Loans: The Company adopted Statement of Financial Accounting Standard
- --------------
("SFAS") No. 114, "Accounting by Creditors for Impairment of a Loan" and SFAS
No. 118, "Accounting by Creditors for Impairment of a Loan - Income Recognition
and Disclosures, an amendment of SFAS No. 114", effective May 1, 1995. These
statements address the accounting by creditors for impairment of certain loans.
They apply to all creditors and to all loans, uncollateralized as well as
collateralized, except for large groups of small-balance homogeneous loans that
are collectively evaluated for impairment, loans measured at fair value or at
lower of cost or fair value, leases, and debt securities. The Company considers
all one- to four-family residential mortgage loans, construction loans, and all
consumer and other loans to be smaller homogeneous loans.
Management applies its normal loan review procedures in determining when a loan
is impaired. All nonaccrual loans are considered impaired. Impaired loans are
assessed individually and impairment identified when the accrual of interest has
been discontinued, loans have been restructured or management has serious doubts
about the future collectibility of principal and interest, even though the loans
are currently performing. Factors considered in determining impairment include,
but are not limited to, expected future cash flow, the financial condition of
the borrower and current economic conditions. The Company measures each impaired
loan based on the fair value of its collateral and charges off those loans or
portions of loans deemed uncollectible. Management has elected to continue to
use its existing nonaccrual methods for recognizing interest income on impaired
loans.
Loan Servicing: Effective May 1, 1996, the Company adopted SFAS No. 122,
- --------------
"Accounting for Mortgage Servicing Rights" (an amendment to SFAS No. 65). SFAS
No. 122 was subsequently superseded by SFAS No. 125 "Accounting for Transfers
and Servicing of Financial Assets and Extinguishment of Liabilities". SFAS No.
125 was effective for transfers and servicing of financial assets and
extinguishment of liabilities
F-8
<PAGE>
NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Cont'd
occurring after December 31, 1996 and is to be applied prospectively. Both
statements generally require entities that sell or securitize loans and retain
mortgage servicing rights to allocate the total cost of the mortgage loan to the
mortgage servicing right and the loan based on their relative fair value. Costs
allocated to mortgage servicing rights should be recognized as a separate asset
and amortized over the period of estimated net servicing income and evaluated
for impairment based on fair value.
Premises and Equipment: Premises and equipment have been stated at cost less
- ----------------------
accumulated depreciation and amortization. Depreciation and amortization are
computed on a straight-line basis over the estimated useful lives of the
respective assets, which range from five to fifty years.
Foreclosed Real Estate: Real estate acquired in settlement of loans is carried
- ----------------------
at the lower of the balance of the related loan at the time of foreclosure or
fair value less the estimated costs to sell the asset. Costs of holding
foreclosed property are charged to expense in the current period, except for
significant property improvements which are capitalized to the extent that
carrying value does not exceed estimated fair market value.
Income Taxes: Deferred tax assets and liabilities are recognized for the future
- ------------
tax consequences, attributable to differences between the financial statement
carrying amounts of existing assets and labilities and their respective income
tax bases. As changes in tax law or rates are enacted, deferred tax assets and
liabilities are adjusted through the provision for income taxes.
Statements of Cash Flows: For purposes of the cash flows, cash and amounts due
- ------------------------
from depository institutions and interest-bearing deposits in other banks with a
maturity of three months or less at date of purchase are considered cash
equivalents.
Risk and Uncertainties: The Company is a community-oriented financial
- ----------------------
institution which provides traditional financial services within the areas it
serves. The Company is engaged primarily in the business of attracting deposits
from the general public using these funds to originate one- to four-family
residential mortgage loans located primarily in Fulton, Missouri, Callaway
County, and its contiguous counties. The Company's principal market area
consists of rural communities and substantially all of the Company's loans are
to residents of or secured by properties located in its principal lending area.
Accordingly, the ultimate collectibility of the Company's loan portfolio is
dependent upon market conditions in that area. This geographic concentration is
considered in management's establishment of the allowance for loan losses.
The consolidated financial statements have been prepared in conformity with
generally accepted accounting principles. In preparing the consolidated
statements, management is required to make estimates and assumptions which
affect the reported amounts of assets and liabilities as of the balance sheet
dates and income and expenses for the periods covered. Actual results could
differ significantly from these estimates and assumptions.
In the normal course of its business, the Company encounters two significant
types of risk, economic and regulatory. There are three main components of
economic risk: interest rate risk, credit risk and market risk. The Company is
subject to interest rate risk to the degree that its interest-bearing
liabilities mature or reprice more or less rapidly, or on a different basis,
than its interest-earning assets. Credit risk is the risk of default on the
Company's loan portfolio that results from the borrower's inability or
unwillingness to make contractually required payments. Market risk results from
changes in the value of assets and liabilities which
F-9
<PAGE>
NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Cont'd
may impact, favorably or unfavorably, the realizability of those assets and
liabilities held by the Company.
The Company is subject to the regulations of various government agencies. These
regulations can and do change significantly from period to period. The Company
also undergoes periodic examinations by the regulatory agencies, which may
subject it to further changes with respect to asset valuations, amounts of
required loss allowances and operating restrictions resulting from the
regulators' judgements based on information available to them at the time of
their examination.
Net Income Per Share: Basic income per share is based upon the weighted average
- --------------------
number of common shares outstanding during the periods presented. Diluted
income per share include the effects of all dilutive potential common shares
outstanding during each period. Income per share for all periods presented
conform to SFAS No. 128.
New Accounting Standards: In June 1997, the Financial Accounting Standards
- ------------------------
Board ("FASB") issued SFAS No. 130, Reporting of Comprehensive Income and SFAS
No. 131, Disclosures about Segments of an Enterprise and Related Information.
SFAS No. 130 establishes standards for reporting and display of comprehensive
income in a full set of general purpose financial statements. An enterprise
shall continue to display an amount for net income but will also be required to
display other comprehensive income, which includes other changes in equity.
SFAS No. 131 establishes standards for the way that public business enterprises
report information about operating segments in annual financial statements. It
also establishes standards for related disclosures about products and services,
geographic areas and major customers.
In February 1998, the FASB issued SFAS No. 132, Employers' Disclosures about
Pensions and Other Postretirement Benefits, to revise present disclosure
requirements applicable to those benefits. Although the standard does not
change the measurement or recognition requirements for postretirement benefit
plans, it standardizes the disclosure requirements; requires additional
information on changes in benefit obligations and fair values of plan assets;
and eliminates certain present disclosure requirements.
SFAS Nos. 130, 131 and 132 are effective for fiscal years beginning after
December 15, 1997 and, accordingly, will be adopted by the Company in the year
ending June 30, 1999. Management does not expect that these standards will
significantly affect the Company's financial reporting.
In June 1998, the FASB issued SFAS No. 133 Accounting for Derivative Instruments
and Hedging Activities. SFAS No. 133 standardizes the accounting for Derivative
instruments, including certain derivative instruments embedded in other
contracts, Under SFAS No. 133, entities are required to carry all derivative
instruments in the statement of financial position at fair value. The
accounting for changes in the fair value (i.e. gains or losses) of a derivative
instrument depends on whether it has been designated and qualifies as part of a
hedging relationship and, if so, on the reason for holding it. If certain
conditions are met, entities may elect to designate a derivative instrument as a
hedge of exposures to changes in fair values, cash flows or foreign currencies.
If the hedged exposure is a fair value exposure, the gain or loss on the
derivative instrument is recognized in earnings in the period of change together
with the offsetting loss or gain on the hedged item attributable to the risk
being hedged. If the hedged exposure is a cash flow exposure, the effective
portion of the gain or loss on the derivative instrument is reported initially
as a component of the other comprehensive income (outside earnings) and
subsequently reclassified into earnings when the forecasted transaction affects
earnings. Any
F-10
<PAGE>
NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Cont'd
amounts excluded from the assessment of hedge effectiveness as well as the
ineffective portion of the gain or loss is reported in earnings immediately.
Accounting for foreign currency hedges is similar to the accounting for fair
value and cash flow hedges. If the derivative instrument is not designated as a
hedge, the gain or loss is recognized in earnings in the period of change.
SFAS No. 133 is effective for the financial statements issued for periods
beginning after June 15, 1999. The Company is currently evaluating the effects
of SFAS No. 133.
Reclassification: Certain amounts in the prior periods consolidated financial
- -----------------
statements have been reclassified to conform with the current year presentation.
NOTE B--INVESTMENT SECURITIES, AVAILABLE-FOR-SALE
<TABLE>
<CAPTION>
Amortized Gross Unrealized Fair
----------------
Cost Gains Losses Value
----------------------------------------
<S> <C> <C> <C> <C>
U.S. Government obligations
June 30, 1998 $ 948,689 $1,587 $ --- $ 950,276
========== ====== ====== ==========
June 30, 1997 $1,898,378 $3,744 $3,099 $1,899,023
========== ====== ====== ==========
</TABLE>
The scheduled contractual maturities of debt securities at June 30, 1998, are
all within one year. Expected maturities may differ from contractual maturities
because borrowers may have the right to call or prepay obligations without call
or prepayment penalties.
Investment securities were pledged to secure deposits as required or permitted
by law, with a carrying value of $582,000 and $1,228,727 and a fair value of
$582,486 and $1,228,267 at June 30, 1998 and 1997, respectively.
NOTE C--LOANS RECEIVABLE
Loans receivable consist of the following at June 30:
<TABLE>
<CAPTION>
1998 1997
--------------------------
<S> <C> <C>
Mortgage loans:
One- to four-family residences $54,664,341 $53,461,377
Multi-family 6,038,504 4,278,995
Commercial 12,011,013 9,506,609
Construction 11,319,713 11,295,154
Land 4,402,215 3,524,482
----------- -----------
88,435,786 82,066,617
Less undisbursed portion of mortgage loans 8,196,732 6,958,581
----------- -----------
80,239,054 75,108,036
</TABLE>
F-11
<PAGE>
NOTE C--LOANS RECEIVABLE - Cont'd
<TABLE>
<S> <C> <C>
Consumer and other loans:
Consumer 5,180,374 6,447,397
Automobile 1,746,597 1,793,229
Savings 343,471 196,365
Commercial 427,152 257,226
Equity line of credit 422,706 440,896
Education 650,490 385,397
Other 3,730 4,360
----------- -----------
8,774,520 9,524,870
----------- -----------
89,013,574 84,632,906
Net deferred loan-origination fees 61,237 45,715
Allowance for loan losses (970,584) (919,315)
----------- -----------
Loans receivable, net $88,104,227 $83,759,306
=========== ===========
</TABLE>
In the normal course of business, the Company has made loans to its directors
and officers. In the opinion of management, related party loans are made on
substantially the same terms, including interest rates and collateral, as those
prevailing at the time for comparable transactions with unrelated persons and do
not involve more than the normal risk of collectibility. The aggregate dollar
amount of loans outstanding to directors and officers total approximately
$241,800 and $137,300 at June 30, 1998 and 1997, respectively.
Mortgage loans serviced for others are not included in the accompanying
consolidated statements of financial condition. The unpaid principal balance of
mortgage loans serviced for others was $104,078,886 and $90,436,230 at June 30,
1998 and 1997, respectively.
Custodial escrow balances maintained in connection with the foregoing loan
servicing were $642,061 and $654,237 at June 30, 1998 and 1997, respectively.
Mortgage servicing rights of $475,730 and $158,436 were capitalized during the
years ended June 30, 1998 and 1997, respectively. Amortization of mortgage
servicing rights totaled $45,314 and $3,567 for the years ended June 30, 1998
and 1997, respectively. The unamortized balance of $472,094 and $154,869
approximated the fair value of such rights at June 30, 1998 and 1997,
respectively, and is included in other assets in the accompanying consolidated
statement of financial condition.
The Company had loans serviced by others amounting to $2,103,342 and $2,400,282
at June 30, 1998 and 1997, respectively.
Allowance for loan losses is as follows:
<TABLE>
<CAPTION>
Two Months Year Ended
Year Ended June 30 Ended April 30
1998 1997 June 30, 1996 1996
-----------------------------------------------
<S> <C> <C> <C> <C>
Balance, beginning of
period $919,315 $799,861 $782,070 $761,897
Provision for loan losses 70,000 120,000 25,000 44,242
Charge-offs (18,840) (16,207) (9,079) (27,391)
</TABLE>
F-12
<PAGE>
NOTE C--LOANS RECEIVABLE - Cont'd
<TABLE>
<S> <C> <C> <C> <C>
Recoveries 109 15,661 1,870 3,322
-------- -------- -------- --------
BALANCE, END OF PERIOD $970,584 $919,315 $799,861 $782,070
======== ======== ======== ========
</TABLE>
The recorded investment in impaired loans, for which there is no need for a
valuation allowance based upon the measure of the loan's fair value of the
underlying collateral at June 30, 1998 and 1997, was $-0- and $160,130,
respectively. The average recorded investment in impaired loans during the year
ended June 30, 1998 and 1997, was $91,732 and $176,466, respectively. The
related interest income that would have been recorded had the loans been current
in accordance with their original terms amounted to approximately $6,000 and
$26,000 at June 30, 1998 and 1997, respectively. The amount of interest
included in interest income on such loans for the year ended June 30, 1998 and
1997, amounted to approximately $4,000 and $16,000, respectively.
The allowance for losses on foreclosed real estate was $40,000 and $-0- at June
30, 1998 and 1997, respectively.
D--ACCRUED INTEREST RECEIVABLE
Accrued interest receivable consist of the following at June 30:
<TABLE>
<CAPTION>
1998 1997
--------------------
<S> <C> <C>
Loans $662,982 $707,553
Investments securities 15,328 21,329
-------- --------
$678,310 $728,882
======== ========
</TABLE>
NOTE E--PREMISES AND EQUIPMENT
Premises and equipment consist of the following at June 30:
<TABLE>
<CAPTION>
1998 1997
----------------------
<S> <C> <C>
Land $ 129,705 $ 129,705
Building and improvements 1,217,224 1,203,216
Furniture and equipment 1,320,642 1,278,163
---------- ----------
2,667,571 2,611,084
Less accumulated depreciation and amortization 1,248,158 1,128,461
---------- ----------
$1,419,413 $1,482,623
========== ==========
</TABLE>
F-13
<PAGE>
NOTE F--DEPOSITS
Deposit account balances are summarized as follows at June 30:
<TABLE>
<CAPTION>
Weighted
Average Rate
At June 30, 1998 1997
-------------------- ------------------
1998 Amount % Amount %
------------ ----------------------------------------
<S> <C> <C> <C> <C> <C>
Non-interest-bearing --- % $ 1,880,089 2.7% $ 1,542,811 2.3%
NOW 2.63 4,963,807 7.2 4,930,834 7.4
Money Market 3.55 2,640,176 3.8 2,767,325 4.1
Passbook savings 3.03 6,287,701 9.1 5,918,794 8.8
----------- ----- ----------- ----
15,771,773 22.8 15,159,764 22.6
Certificates of deposit:
3.00 to 3.99% 3.00 7,036 --- 103,168 .2
4.00 to 4.99% 4.75 92,616 .1 1,669,189 2.5
5.00 to 5.99% 5.66 36,754,829 53.2 33,132,580 49.3
6.00 to 6.99% 6.12 15,623,561 22.6 16,066,691 23.9
7.00 to 7.99% 7.04 899,920 1.3 1,043,101 1.5
8.00 to 8.99% 8.00 14,107 --- 22,962 ---
----------- ----- ----------- ----
5.82 53,392,069 77.2 52,037,691 77.4
----------- ----- ----------- ----
$69,163,842 100.0% $67,197,455 100.0%
=========== ===== ========== =====
</TABLE>
The aggregate amount of certificates of deposit with a minimum denomination of
$100,000 was approximately $6,124,806 and $5,923,000 at June 30, 1998 and 1997,
respectively. Deposits over $100,000 are not federally insured.
The Company held deposits of approximately $1,628,738 and $1,133,604 for its
directors and officers at June 30, 1998 and 1997, respectively.
NOTE F--DEPOSITS
At June 30, 1998, contractual maturities of certificates of deposit are as
follows:
<TABLE>
<CAPTION>
Stated Year Ended June 30
Interest Rate 1999 2000 2001 2002 2003 After
- ------------- ----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
3.00 to 3.99% $ 7,036 $ --- $ --- $ --- $ --- $ ---
4.00 to 4.99% --- --- 92,616 --- --- ---
5.00 to 5.99% 27,055,187 7,281,962 1,176,411 426,290 814,979 ---
6.00 to 6.99% 4,743,586 5,761,928 2,775,507 1,254,006 1,043,535 45,000
7.00 to 7.99% 564,267 325,369 10,283 --- --- ---
8.00 to 8.99% --- --- --- --- 14,107 ---
----------- ----------- ---------- ---------- ---------- -------
</TABLE>
F-14
<PAGE>
NOTE F--DEPOSITS - Cont'd.
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
$32,370,076 $13,369,259 $4,054,817 $1,680,296 $1,872,621 $45,000
=========== =========== ========== ========== ========== =======
</TABLE>
Interest expense on deposits are as follows:
<TABLE>
<CAPTION>
Two Months Year Ended
Year Ended June 30 Ended April 30
1998 1997 June 30, 1996 1996
--------------------------------------------------
<S> <C> <C> <C> <C>
NOW, Money Market and
Passbook savings accounts $ 403,971 $ 449,175 $ 65,873 $ 386,380
Certificate accounts 3,068,967 3,056,011 534,539 3,077,153
---------- ---------- -------- ----------
$3,472,938 $3,505,186 $600,412 $3,463,533
========== ========== ======== ==========
</TABLE>
NOTE G--INCOME TAXES
Components of income tax expense (benefit) are as follows:
<TABLE>
<CAPTION>
Two Months Year Ended
Year Ended June 30 Ended June 30 April 30,
1998 1997 1996 1996
--------------------------------------------------------
<S> <C> <C> <C> <C>
Current $ 740,400 $479,500 $ 103,100 $ 368,000
Deferred (benefit) (83,400) (8,500) (5,600) (5,000)
----------- -------- ------------ ---------
$ 657,000 $471,000 $ 97,500 $ 363,000
=========== ======== ============ =========
</TABLE>
In addition, the Company recorded deferred income tax (benefit) to equity
relating to unrealized gains and losses on investment securities available-for-
sale of $(350), $(7,719), $(4,349) and $7,388 for the years ended June 30, 1998
and 1997, the two months ended June 30, 1996 and year ended April 30, 1996,
respectively.
The provision for income taxes as shown on the consolidated statements of income
differs from amounts computed by applying the statutory federal income tax rate
of 34% to income before taxes as follows:
<TABLE>
<CAPTION>
Two Months
Year Ended June 30 Ended June 30 Year Ended
1998 1997 1996 April 30, 1996
-------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Income tax expense at
statutory rates $610,702 34.0% $439,618 34.0% $89,074 34.0% $334,239 34.0%
</TABLE>
F-15
<PAGE>
NOTE G--INCOME TAXES - Cont'd.
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Increase (decrease) resulting
from:
State income taxes, net
of federal benefit 51,874 2.9 31,020 2.4 8,910 3.4 21,120 2.1
Other, net (5,576) (.3) 362 --- (484) (.2) 7,641 0.8
-------- ---- -------- ---- ------- ---- -------- ----
$657,000 36.6% $471,000 36.4% $97,500 37.2% $363,000 36.9%
======== ==== ======== ==== ======= ==== ======== ====
</TABLE>
Deferred income taxes reflect the impact of "temporary differences" between
amounts of assets and liabilities for financial reporting purposes and such
amounts as measured by tax laws. Temporary differences which give rise to a
significant portion of deferred tax assets and liabilities included in other
assets at June 30 are as follows:
<TABLE>
<CAPTION>
1998 1997
---------------------
<S> <C> <C>
Deferred tax assets
Allowance for loan losses $ 315,430 $ 320,400
Accrued compensation and benefits 211,720 ---
Deferred tax liabilities
Depreciation (131,450) (125,860)
FHLB stock dividend (76,040) (76,040)
Unrealized gain on available-for-sale securities (590) (240)
Gain on sale of loans (175,260) (57,500)
--------- ---------
NET DEFERRED TAX ASSET $ 143,810 $ 60,760
========= =========
</TABLE>
During 1996, the Small Business Job Protection Act (the "Act") was signed into
law. The Act eliminated the percentage of taxable income bad debt deductions
for thrift institutions for tax years beginning after December 31, 1995. The
Act provides that bad debt reserves accumulated prior to 1988 be exempt from
recapture. Bad debt reserves accumulated after 1987 are subject to recapture.
The Bank has provided for deferred income taxes for the reserve recapture after
1987; therefore the impact of this legislation will not have a material effect
on the Bank's financial statements.
Prior to the enactment of the Act, the Bank at June 30, 1998, accumulated
approximately $1,900,000 of retained earnings for which no deferred income tax
liability has been recognized. This amount represents an allocation of income
to bad debt deductions for income tax purposes only. If any of this amount is
used other than to absorb loan losses(which is not anticipated), the amount will
be subject to income tax at the current corporate rates.
NOTE H--ADVANCES FROM FEDERAL HOME LOAN BANK OF DES MOINES
Advances from FHLB, with weighted average interest rates, consist of the
following at June 30:
<TABLE>
<CAPTION>
1998 1997
-------------------------
<S> <C> <C>
5.83% due on or before October 17, 1997 $ --- $1,000,000
5.48% due on or before November 18, 1997 --- 1,000,000
5.70% due on or before November 28, 1997 --- 2,000,000
</TABLE>
F-16
<PAGE>
NOTE H--ADVANCES FROM FEDERAL HOME LOAN BANK OF DES MOINES - Cont'd.
<TABLE>
<S> <C> <C>
6.11% due on or before March 20, 1998 --- 2,500,000
6.79% due on or before August 15, 2012 967,040 ---
6.61% due on or before September 19, 2012 969,975 ---
6.35% due on or before October 3, 2012 972,803 ---
5.96% due on or before October 16, 1998 1,000,000 ---
6.10% due on or before November 19, 2002 1,000,000 ---
6.31% due on or before November 19, 2012 1,952,373 ---
6.00% due on or before November 17, 2000 1,000,000 ---
5.95% due on or before November 19, 1999 1,000,000 ---
5.81% due on or before November 19, 1998 1,000,000 ---
5.98% due on or before January 8, 2013 2,947,816 ---
----------- ----------
$12,810,007 $6,500,000
=========== ==========
</TABLE>
Scheduled maturities of FHLB advances are as follows:
Year ending
June 30 Amount
--------------------------------
1999 $ 2,344,001
2000 366,258
2001 2,389,959
2002 1,415,175
2003 449,240
Thereafter 5,845,374
-----------
$12,810,007
===========
The Company has signed a blanket pledge agreement with the FHLB under which it
can draw advances of unspecified amounts. The Company must hold an unencumbered
portfolio of eligible one- to four-family residential mortgages with a book
value of not less than 150% of the indebtedness.
NOTE I--REGULATORY CAPITAL REQUIREMENTS
The Bank is subject to various regulatory capital requirements administered by
the federal banking agencies. Failure to meet minimum capital requirements can
initiate certain mandatory and possibly additional discretionary, actions by
regulators that, if undertaken, could have a direct material effect on the
Bank's financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Bank must meet specific
capital guidelines that involve quantitative measures of the Bank's assets,
liabilities, and certain off-balance sheet items as calculated under regulatory
accounting practices. The Bank capital amounts and classification are also
subject to qualitative judgement by the regulators about components, risk
weightings, and other factors.
Quantitative measures established by regulation to insure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth below) of
total and Tier I capital to risk-weighted assets, and Tier I capital to average
assets (all as defined in the regulations). Management believes, as of June 30,
1998, that the Bank meets all capital adequacy requirements to which it is
subject.
F-17
<PAGE>
NOTE I--REGULATORY CAPITAL REQUIREMENTS - Cont'd
Based on its regulatory capital ratios at June 30, 1998, the Bank is categorized
as "well capitalized" under the regulatory framework for prompt corrective
action. To be categorized as "well capitalized" the Bank must maintain minimum
total risk-based, Tier I risk-based, and Tier I leverage ratios as set forth in
the table. The Bank's actual capital amounts and ratios also presented in the
table.
<TABLE>
<CAPTION>
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
---------------------- ---------------------- -----------------------
Amount Ratio Amount Ratio Amount Ratio
---------------------- ---------------------- -----------------------
<S> <C> <C> <C> <C> <C> <C>
As of June 30, 1998
Total Risk-Based Capital
(to Risk Weighted Assets) $19,275,679 30.19% * $5,108,161 * 8.0% * $6,385,201 * 10.0%
Tier I Capital
(to Risk Weighted Assets) 18,635,054 16.94% * 4,399,918 * 4.0% * 6,599,877 * 6.0%
Tier I Capital
(to Adjusted Assets) 18,635,054 16.94% * 3,299,938 * 3.0% * 5,499,897 * 5.0%
Tangible Capital
(to Adjusted Assets) 18,635,054 16.94% * 1,649,969 * 1.5% * N/A N/A
As of June 30, 1997
Total Risk-Based Capital
(to Risk Weighted Assets) $17,505,389 28.86% * $4,852,392 * 8.0% * $6,065,490 * 10.0%
Tier I Capital
(to Risk Weighted Assets) 16,944,728 16.85% * 4,022,584 * 4.0% * 6,033,877 * 6.0%
Tier I Capital
(to Adjusted Assets) 16,944,728 16.85% * 3,016,938 * 3.0% * 5,028,231 * 5.0%
Tangible Capital
(to Adjusted Assets) 16,944,728 16.85% * 1,508,469 * 1.5% * N/A * N/A
</TABLE>
- -----------------
* greater than or equal to
NOTE J--EMPLOYEE BENEFITS
The Company has a 401(k) salary reduction plan that covers all employees meeting
specific age and length of service requirements. Under the plan, the Company
matches up to 3 percent of participating employees' salaries. Pension costs
recognized under the plan totalled $20,982, $19,215, $3,036, and $19,330 for the
years ended June 30, 1998 and 1997, the two months ended June 30, 1996, and the
year ended April 30, 1996, respectively.
In connection with the conversion from mutual to stock form, the Company
established an employee stock ownership plan for the benefit of participating
employees. Employees are eligible to participate upon attaining age twenty-one
and completing one year of service.
The ESOP borrowed $1,375,400 from the Company to fund the purchase of 137,540
shares of the Company's common stock. The purchase of shares of the ESOP was
recorded in the consolidated financial statements
F-18
<PAGE>
NOTE J--EMPLOYEE BENEFITS - Cont'd.
through a credit to common stock and additional paid-in capital with a
corresponding charge to a contra equity account for the unreleased shares. The
loan is secured solely by the common stock and is to be repaid in equal
quarterly installments of principal and interest payable through September 2006
at 8.25% interest. The intercompany ESOP note and related interest were
eliminated in consolidation.
The Company makes quarterly contributions to the ESOP which are equal to the
debt service less dividends on unallocated ESOP shares used to repay the loan.
Dividends on allocated shares will be paid to participants of the ESOP. The ESOP
shares are pledged as collateral on the ESOP loan. Shares are released from
collateral and allocated to participating employees, based on the proportion of
loan principal and interest repaid and compensation of the participants.
Forfeitures will be reallocated to participants on the same basis as other
contributions in the plan year. Benefits are payable upon a participant's
retirement, death, disability or separation from service.
Effective with the date of the stock conversion, the Company adopted Statement
of Position ("SOP") 93-6. As shares are committed to be released from
collateral, the Company reports compensation expense equal to the average fair
value of the shares committed to be released. Dividends on allocated shares will
be charged to stockholders' equity. Dividends on unallocated shares are recorded
as a reduction to the ESOP loan. ESOP expense for the years ended June 30, 1998
and 1997 was $318,084 and $242,004 respectively. The fair value of unreleased
shares based on market price of the Company's stock was $2,082,567, and
$2,559,236 at June 30, 1998 and 1997, respectively.
The number of ESOP shares at June 30, 1998 are summarized as follows:
Allocated shares 17,288
Shares released for allocation 6,915
Unreleased shares 113,337
-------
137,540
=======
The Board of Directors has approved the adoption of a MRDP. Under the MRDP,
Common stock aggregating 68,770 shares may be awarded to certain officers and
directors of Company and the Bank. The awards will not require any payment by
the recipients and will vest over five years beginning one year after
shareholder approval of the MRDP (October 23, 1997). The Company purchased
22,600 shares of treasury stock and will issue 46,170 additional shares from
authorized shares in August, 1998 to fully fund the plan. At June 30, 1998, the
Company had awarded all 68,770 shares.
Deferred compensation, representing the shares market value at the date of award
has been recorded as a reduction of stockholders' equity and is being amortized
over a five year vesting period using an accelerated method. The amortized
balance was $1,006,062 at June 30, 1998. The Company recognized $524,070 as
salaries and benefits expense relating to this plan for the year ended June 30,
1998.
The Company has authorized and the shareholders have approved (October 23, 1997)
the adoption of a stock option plan. Under the stock option plan, options to
acquire 171,925 shares of the Company's stock may be granted to certain
officers, directors and employees of the Company and the Bank. The options will
enable the recipient to purchase stock at an exercise price equal to the fair
market value of the stock at the date of grant. On October 23, 1997 the Company
granted options for 171,925 shares for $19.75 per share. The options will vest
over the five years following the date of grant and are exercisable for up to 10
years.
F-19
<PAGE>
NOTE J--EMPLOYEE BENEFITS - Cont'd.
The Company adopted SFAS No. 123, Accounting for Stock-Based Compensation,
which permits entities to recognize, as expense over the vesting period, the
fair value of all stock-based awards on the date of grant. Alternatively, SFAS
No. 123 allows entities to disclose pro forma net income and income per share as
if the fair value-based method defined in SFAS No. 123 has been applied, while
continuing to apply the provisions of Accounting Principles Board ("APB")
Opinion No. 25, Accounting for Stock Issued to Employees, under which
compensation expense is recorded on the date of grant only if the current market
price of the underlying stock exceeds the exercise price.
The Company has elected to apply the recognition provisions of APB Opinion No.
25 and provide the pro forma disclosure provisions of SFAS No. 123. Had
Compensation expense for the Company's incentive and nonstatutory stock options
been determined based upon the fair value of the grant date consistent with the
methodology prescribed under SFAS No. 123, the Company's net earnings and
diluted earnings per share would have been reduced by approximately $119,000 or
$0.07 per share, for the year ended June 30, 1998.
Following is a summary of the fair values of options granted using the Black-
Scholes option-pricing model:
Fair value at grant date $8.09
Assumptions:
Dividend yield 0.52%
Volatility 30.98%
Risk-free interest rate 5.37%
Expected life 10 years
Pro forma net earnings reflect only options granted and vested in fiscal 1998.
Therefore, the full impact of calculating compensation expense for stock options
under SFAS is not reflected in the pro forma net earnings amount presented above
because compensation expense is reflected over the options' vesting period.
NOTE K--INCOME PER SHARE
The shares used in calculation of basic and diluted income per share are as
follows:
<TABLE>
<CAPTION>
Year ended June 30
1998 1997
--------- ---------
<S> <C> <C>
Weighted average common shares outstanding 1,591,224 1,584,902
Stock options 28,065 ---
--------- ---------
1,619,289 1,584,902
========= =========
</TABLE>
NOTE L--FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK AND CONCENTRATIONS OF
CREDIT RISK
The Company is a party to financial instruments with off-balance sheet risk in
the normal course of business to meet customer financing needs. These financial
instruments consist principally of commitments to extend credit. The Company
uses the same credit policies in making commitments and conditional obligations
as it does for on-balance sheet instruments. The Company's exposure to credit
loss in the event of nonperformance by the other party is represented by the
contractual amount of those instruments. The Company does not
F-20
<PAGE>
NOTE L--FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK AND CONCENTRATIONS OF
CREDIT RISK-Cont'd.
generally require collateral or other security on unfunded loan commitments
until such time that loans are funded.
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses. The Company
evaluates each customer's creditworthiness on a case-by-case basis. The amount
of collateral obtained, if deemed necessary by the Company upon extension of
credit, is based on management's credit evaluation of the counterparty. Such
collateral consists primarily of residential properties.
The Company had the following outstanding commitments at June 30, 1998:
<TABLE>
<S> <C>
Undisbursed portion of mortgage loans $ 8,196,732
Undisbursed equity line of credit 1,506,920
Commitments to originate mortgage loans with variable or pending interest rates 1,374,700
Commitments to originate mortgage loans with fixed interest rates ranging
from 7.50% to 8.75% 2,637,175
-----------
TOTAL $13,715,527
===========
</TABLE>
At June 30, 1997, the Company had amounts on deposit at banks and federal
agencies in excess of federally insured limits of approximately $14,802,000.
NOTE M--COMMITMENTS AND CONTINGENCIES
In the ordinary course of business, the Company has various outstanding
commitments and contingent liabilities that are not reflected in the
accompanying consolidated financial statements. In addition, the Company is a
defendant in certain claims and legal actions arising in the ordinary course of
business. In the opinion of management, after consultation with legal counsel,
the ultimate disposition of these matters is not expected to have a material
adverse effect on the consolidated financial position of the Company.
NOTE N--SAVINGS ASSOCIATION INSURANCE FUND ASSESSMENT
On September 30, 1996, the Deposit Insurance Fund Act authorized the Federal
Deposit Insurance Corporation to impose a special one-time assessment on each
depository institution to recapitalize the Savings Association Insurance Fund to
a level commensurate with the Bank Insurance Fund. The special assessment
amounted to $427,263 and is included in federal insurance premiums in the
consolidated statement of income for June 30, 1997.
NOTE O--CONVERSION TO STOCK OWNERSHIP
On January 9, 1995, the Board of Directors of the Bank adopted a plan of
conversion pursuant to which the Bank converted from a federally-chartered
mutual savings bank to a federally-chartered stock savings bank
F-21
<PAGE>
NOTE O--CONVERSION TO STOCK OWNERSHIP - Cont'd.
with the concurrent formation of the holding company which acquired all of the
common stock of the Bank. On October 17, 1996, the Company sold 1,719,250 shares
of common stock at $10 per share to eligible purchasers, including depositors of
the Bank. Total proceeds from the conversion, after deducting conversion
expenses of $643,370 were $16,549,130 and are reflected as common stock and
additional paid-in capital in the accompanying consolidated statements of
financial condition. The Company utilized $8,274,565 of the net proceeds to
acquire all of the common stock of the Bank. The Company was also authorized to
issue 1,000,000 shares of $.01 par value preferred stock. At June 30, 1998, no
shares of preferred stock had been issued.
As part of the conversion, the Bank established a liquidation account for the
benefit of eligible depositors who continue to maintain their deposit accounts
in the Bank after conversion. In the unlikely event of a complete liquidation of
the Bank, and only in such event, each eligible depositor will be entitled to
receive a liquidation distribution from the liquidation account in the
proportionate amount of the then-current adjusted balance for deposit accounts
held before distribution may be made with respect to the Bank's capital stock.
The Bank may not declare or pay a cash dividend to the Company on, or repurchase
any of, its capital stock if the effect thereof would cause the retained
earnings of the Bank to be reduced below the amount required for the liquidation
account. Except for such restrictions, the existence of the liquidation account
does not restrict the use or application of retained earnings.
The Bank may not declare or pay cash dividends on, or repurchase any of, its
shares of common stock, if the effect would cause stockholder's equity to be
reduced below applicable regulatory capital maintenance requirements or if such
declaration and payment would otherwise violate regulatory requirements.
NOTE P--FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No, 107, Disclosures About Fair Value of Financial Instruments, requires
disclosure of estimated fair value for financial instruments held by the
Company. Fair value estimates of the Company's financial instruments as of June
30, 1998 and 1997, including methods and assumptions utilized, are set forth
below.
The following methods and assumptions were used by the Company in estimating
fair values of financial instruments as disclosed herein.
Cash and due from depository institutions: The carrying amounts approximate
fair value.
Investment securities: Fair value is determined by reference to quoted market
prices.
Stock in FHLB: This stock is a restricted asset and its carrying value is a
reasonable estimate of fair value.
Loans held-for-sale: The carrying value is a reasonable estimate of fair value.
Loans receivable: The fair value of fixed rate first mortgage loans is
estimated by using discounted cash flow analyses, using interest rates currently
offered by the Company for loans with similar terms to borrowers of similar
credit quality. The carrying value of variable rate first mortgage loans
approximate fair value. The fair value of consumer loans is calculated by using
the discounted cash flow based upon the current market for like instruments.
Fair values for impaired loans are estimated using discounted cash flow
analyses.
F-22
<PAGE>
NOTE P--FAIR VALUE OF FINANCIAL INSTRUMENTS - Cont'd.
Accrued interest receivable: The carrying value approximates fair value.
Transaction deposits: Transaction deposits, payable on demand or with
maturities of 90 days or less, have a fair value equal to book value.
Certificates of deposit: The fair value of fixed maturity certificates of
deposit is estimated by discounting the future cash flows using the rates
currently offered for deposits of similar maturities.
Advances from borrowers for taxes and insurance: The carrying value
approximates fair value.
All other liabilities: The carrying value approximates fair value.
Off-balance sheet instruments: The fair value of a loan commitment and a letter
of credit is determined based on the fees currently charged to enter into
similar agreements, taking into account the remaining terms of the agreement and
the present creditworthiness of the counterparties. Neither the fees earned
during the year on these instruments nor their value at year-end are significant
to the Company's consolidated financial position.
Limitations: Fair value estimates are made at a specific point in time, based
on relevant market information and information about the financial instrument.
The valuation techniques employed above involve uncertainties and are affected
by assumptions used and judgements regarding prepayments, credit risk, discount
rates, cash flows and other factors. Changes in assumptions could significantly
affect the reported fair value.
In addition, the fair value estimates are based on existing on- and off-balance
sheet financial instruments without attempting to estimate the value of
anticipated future business and the value of assets and liabilities that are not
considered financial instruments. For example, the Company has a mortgage
servicing portfolio that contributes net fee income annually. The mortgage
servicing portfolio is not considered a financial instrument and its value has
not been incorporated into the fair value estimates. Also, the fair value
estimates do not include the benefit that results from the low-cost funding
provided by the deposit liabilities compared to the cost of borrowing funds in
the market. The amounts at June 30, 1998 and 1997 (dollars in thousands) are as
follows:
<TABLE>
<CAPTION>
1998 1997
---------------- -----------------
Carrying Fair Carrying Fair
Amount Value Amount Value
----------------- ----------------
<S> <C> <C> <C> <C>
ASSETS
Cash and due from depository institutions $13,778 $13,778 $ 7,108 $ 7,108
Investment securities 950 950 1,899 1,899
Stock in FHLB 643 643 637 637
Loans held-for-sale, net 3,649 3,649 4,463 4,463
Loans receivable, net 88,104 88,392 83,759 83,352
Accrued interest receivable 678 678 729 729
LIABILITIES
Transaction accounts $15,772 $15,772 $15,159 $15,159
Certificates of deposit 53,392 53,509 52,038 51,942
Advances from Federal Home Loan Bank 12,810 12,810 6,500 6,500
</TABLE>
F-23
<PAGE>
NOTE P--FAIR VALUE OF FINANCIAL INSTRUMENTS - Cont'd.
Advances from borrowers for property taxes
and insurance 985 985 1,018 1,018
Accrued interest payable 84 84 96 96
NOTE Q--CONDENSED PARENT COMPANY ONLY FINANCIAL STATEMENTS
The following condensed balance sheet and condensed statements of income and
cash flows for Fulton Bancorp, Inc. should be read in conjunction with the
consolidated financial statements and the notes thereto.
<TABLE>
<CAPTION>
June 30,
1998 1997
-------------------------
<S> <C> <C>
CONDENSED BALANCE SHEET
ASSETS
Cash and cash equivalents $ 6,224,861 $ 6,913,111
ESOP note receivable 1,202,372 1,301,347
Other assets 359,217 41,273
Investment in subsidiary 18,584,145 17,006,135
----------- -----------
TOTAL ASSETS $26,370,595 $25,261,866
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accrued liabilities $ 26,854 $ 4,531
Accrued MRDP 848,374 ---
Stockholders' equity $25,495,367 25,257,335
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $26,370,595 $25,261,866
=========== ===========
</TABLE>
<TABLE>
<CAPTION>
Inception
Oct. 17, 1996
Year ended to June 30,
June 30, 1998 1997
----------------------------
<S> <C> <C>
CONDENSED STATEMENT OF INCOME
Interest income $ 465,280 $345,894
Expenses 694,694 106,334
---------- --------
INCOME (LOSS) BEFORE EQUITY IN
UNDISTRIBUTED EARNINGS OF SUBSIDIARY (229,414) 239,560
Equity in undistributed earnings of subsidiary 1,281,596 694,526
---------- --------
INCOME BEFORE INCOME TAXES 1,052,182 934,086
---------- --------
Income taxes (benefit) (87,000) 91,000
---------- --------
NET INCOME $1,139,182 $843,086
========== ========
</TABLE>
F-24
<PAGE>
NOTE Q--CONDENSED PARENT COMPANY ONLY FINANCIAL STATEMENTS - Cont'd.
<TABLE>
<CAPTION>
Inception
Oct. 17, 1996
Year ended to June 30,
June 30, 1998 1997
--------------------------------------
<S> <C> <C>
CONDENSED STATEMENT OF CASH FLOWS
Cash flows from operating activities
Net income $1,139,182 $ 843,086
Adjustments to reconcile net income
to net cash provided by operating activities
Equity in income of the subsidiary (1,281,596) (694,526)
Amortization of deferred MRDP 524,070 ---
Increase in other assets (317,944) (41,273)
Increase in accrued liabilities 22,323 4,531
---------- -----------
NET CASH PROVIDED BY OPERATING ACTIVITIES 86,035 111,818
Cash flows from investing activities
Purchase of common stock of the subsidiary --- (8,274,565)
---------- -----------
NET CASH USED IN INVESTING ACTIVITIES --- (8,274,565)
Cash flows from financing activities
Proceeds from sale of common stock --- 16,549,130
Loan to ESOP --- (1,375,400)
Principal collected from ESOP 98,975 74,053
Dividends paid (376,033) (171,925)
Purchase of treasury stock (497,227) ---
---------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES (774,285) 15,075,858
---------- -----------
NET INCREASE (DECREASE)
IN CASH AND CASH EQUIVALENTS (688,250) 6,913,111
Cash and cash equivalents at beginning of period 6,913,111 ---
---------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $6,224,861 $ 6,913,111
========== ===========
Non-cash investing and financing activities
Allocation of MRDP shares of common stock $1,530,132 $ ---
========== ===========
</TABLE>
F-25
<PAGE>
NOTE R--CONDENSED COMPARATIVE FINANCIAL INFORMATION FOR TRANSITION PERIOD
REPORTING
<TABLE>
<CAPTION>
Two Months Ended
June 30,
1996 1995
----------------------
(Unaudited)
<S> <C> <C>
Interest income $1,149,069 $985,922
Interest expense 665,254 561,622
---------- --------
Net interest income 483,815 424,300
Provision for loan losses 25,000 ---
---------- --------
Net interest income after provision for loan losses 458,815 424,300
Noninterest income 119,357 80,467
Noninterest expense 316,191 304,596
---------- --------
Income before income taxes 261,981 200,171
Income taxes 97,500 74,300
---------- --------
NET INCOME $ 164,481 $125,871
========== ========
</TABLE>
F-26
<PAGE>
FULTON BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Dollars in thousands)
<TABLE>
<CAPTION>
March 31, June 30,
1999 1998
========= ==========
(Unaudited)
<S> <C> <C>
ASSETS
Cash, including interest-bearing accounts of $8,676,000
and $13,147,000, respectively $ 9,267 $ 13,778
Investment securities, available-for-sale 1,744 950
Stock in Federal Home Loan Bank of Des Moines 986 643
Loans held for sale 3,687 3,649
Loans receivable, net of allowance for loan losses of
$1,093,000 and $971,000, respectively 98,701 88,104
Accrued interest receivable 790 678
Premises and equipment 1,406 1,420
Foreclosed real estate 231 158
Loan servicing assets 621 535
Other assets 337 195
-------- --------
TOTAL ASSETS $117,770 $110,110
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits $ 72,208 $ 69,164
Advances from Federal Home Loan Bank of Des Moines 18,375 12,810
Advances from borrowers for property taxes and insurance 792 985
Other escrow accounts 605 499
Accrued interest payable 97 84
Other liabilities 276 1,073
-------- --------
TOTAL LIABILITIES 92,353 84,615
STOCKHOLDERS' EQUITY
Preferred stock, $0.01 par value per share, 1,000,000 shares
authorized, none issued -- --
Common stock, $0.01 par value per share, 6,000,000 shares
authorized, 1,765,411 and 1,719,250 issued, respectively 18 17
Additional paid-in capital 17,859 16,943
Treasury stock, 111,462 shares (1,899) --
Retained earnings - substantially restricted 11,107 10,674
Unearned ESOP shares (1,030) (1,134)
Deferred management recognition and development plan (635) (1,006)
Unrealized gain (loss) on securities available-for-sale (3) 1
-------- --------
TOTAL STOCKHOLDERS' EQUITY 25,417 25,495
-------- --------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $117,770 $110,110
======== ========
</TABLE>
See accompanying notes to Consolidated Financial Statements.
F-27
<PAGE>
FULTON BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
March 31, March 31,
1999 1998 1999 1998
---------- ---------- ---------- ----------
(unaudited)
<S> <C> <C> <C> <C>
INTEREST INCOME
Mortgage loans $1,896 $1,558 $5,485 $4,809
Consumer and other loans 212 239 654 701
Investment securities 40 30 104 107
Interest-earning deposits 77 221 402 480
------ ------ ------ ------
TOTAL INTEREST INCOME 2,225 2,048 6,645 6,097
INTEREST EXPENSE
Deposits 854 861 2,624 2,596
Advances from Federal Home Loan Bank
of Des Moines 276 229 794 509
TOTAL INTEREST EXPENSE 1,130 1,090 3,418 3,105
------ ------ ------ ------
NET INTEREST INCOME 1,095 958 3,227 2,992
PROVISION FOR LOAN LOSSES 60 0 130 60
------ ------ ------ ------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 1,035 958 3,097 2,932
NON-INTEREST INCOME
Loan servicing fees 75 94 223 268
Gain on sales of loans 14 66 176 283
Service charges and other fees 22 19 70 63
Income (loss) from foreclosed asset 0 (1 ) (10 ) (40)
Other 1 2 5 6
------ ------ ------ ------
TOTAL NON-INTEREST INCOME 112 180 464 580
NON-INTEREST EXPENSE
Employee salaries and benefits 453 485 1,304 1,227
Occupancy costs 64 66 208 203
Advertising 11 11 40 44
Data processing 49 43 142 122
Federal insurance premiums 12 11 35 35
Directors' fees 33 24 79 67
Other 176 144 450 411
------ ------ ------ ------
TOTAL NON-INTEREST EXPENSE 798 784 2,258 2,109
------ ------ ------ ------
INCOME BEFORE INCOME TAXES 349 354 1,303 1,403
INCOME TAXES 137 131 488 518
------ ------ ------ ------
NET INCOME $ 212 $ 223 $ 815 $ 885
====== ====== ====== ======
BASIC EARNINGS PER SHARE $ 0.14 $ 0.14 $ 0.53 $ 0.56
====== ====== ====== ======
DILUTED EARNINGS PER SHARE $ 0.14 $ 0.14 $ 0.52 $ 0.56
====== ====== ====== ======
</TABLE>
See accompanying notes to Consolidated Financial Statements.
F-28
<PAGE>
FULTON BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
<TABLE>
<CAPTION>
Nine Months Ended
March 31,
1999 1998
---------- ---------
(Unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 815 $ 885
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 101 115
Provision for loan losses 130 60
Provision for loss on foreclosed real estate -- 40
Proceeds from sales of loans held for sale 23,185 14,221
Origination of loans held for sale (23,223) (15,149)
Gain on sales of loans held for sale (155) (258)
Amortization of servicing asset 69 --
ESOP shares released 171 223
MRDP compensation expense 371 --
Change to assets and liabilities increasing (decreasing) cash flows
Accrued interest receivable (112) 91
Other assets (141) (209)
Accrued interest payable 13 40
Other liabilities 51 394
---------- ---------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 1,275 453
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities of investment securities
available-for-sale 950 700
Purchase of securities available-for-sale (1,748) --
Loans originated, net of repayments (10,799) (1,055)
Purchase of premises and equipment (87) (43)
Purchase of Federal Home Loan Bank stock (343) (136)
---------- ---------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES (12,027) (534)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in deposits 3,044 2,034
Advances from Federal Home Loan Bank of Des Moines:
Borrowings 8,000 9,000
Repayments (2,435) (2,607)
Net increase (decrease) in escrows (87) (153)
Purchase of treasury shares (1,899) (475)
Dividends paid (382) (275)
---------- ---------
NET CASH PROVIDED BY FINANCING ACTIVITIES 6,241 7,524
---------- ---------
NET INCREASE (DECREASE) IN CASH (4,511) 7,443
---------- ---------
Cash, beginning of period 13,778 7,095
---------- ---------
CASH, END OF PERIOD $ 9,267 $ 14,538
========== =========
</TABLE>
See accompanying notes to Consolidated Financial Statements.
F-29
<PAGE>
FULTON BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A -- Basis of Presentation
- -------------------------------
The consolidated interim financial statements as of March 31, 1999, included in
this report have been prepared by Fulton Bancorp, Inc. (the "Company") without
audit. In the opinion of management, all adjustments (consisting only of normal
recurring accruals) necessary for a fair presentation are reflected in the March
31, 1999, interim financial statements. The results of operations for the period
ended March 31, 1999, are not necessarily indicative of operating results for
the full year.
NOTE B -- Earnings Per Share
- ----------------------------
During the quarter ended December 31, 1997, the Company adopted Statement of
Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS No. 128").
The Statement requires dual presentation of basic and diluted earnings per share
("EPS") on the face of the statement of income. Basic EPS is computed by
dividing income available to common stockholders by the weighted average number
of common shares outstanding for the period. Diluted EPS reflects the potential
dilution that could occur if securities or other contracts to issue common stock
were exercised or converted into common stock.
A summary of EPS calculations for the three and nine month periods ended March
31, 1999 and 1998, is as follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
March 31, March 31,
1999 1998 1999 1998
-------- -------- ------- --------
(In thousands, except per share amounts)
<S> <C> <C> <C> <C>
Basic earnings per share:
Income available to common shareholders $ 212 $ 223 $ 815 $ 885
======= ====== ======= =======
Average common shares outstanding 1,494 1,593 1,537 1,594
======= ====== ======= =======
Basic earnings per share $ 0.14 $ 0.14 $ 0.53 $ 0.56
======= ====== ======= =======
Diluted earnings per share:
Income available to common shareholders $ 212 $ 223 $ 815 $ 885
======= ====== ======= =======
Average common shares outstanding 1,494 1,593 1,537 1,594
Dilutive potential common shares outstanding
due to common stock options and grants 22 46 20 26
------- ------ ------- -------
Average number of common shares and
dilutive potential common shares outstanding 1,516 1,639 1,557 1,620
======= ====== ======= =======
Diluted earnings per share $ 0.14 $ 0.14 $ 0.52 $ 0.56
======= ====== ======= =======
</TABLE>
F-30
<PAGE>
FULTON BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE C -- Employee Stock Ownership Plan
- ---------------------------------------
In connection with the conversion to stock form, the Company's subsidiary,
Fulton Savings Bank, FSB, (the "Bank"), established an Employee Stock Ownership
Plan ("ESOP") for the exclusive benefit of participating employees (all salaried
employees who have completed at least 1,000 hours of service in a twelve-month
period and have attained the age of 21). The ESOP borrowed funds from the
Company in an amount sufficient to purchase 137,450 shares (8% of the Common
Stock issued in the stock offering). The loan is secured by the shares purchased
and will be repaid by the ESOP with funds from contributions made by the Bank,
dividends received by the ESOP and any other earnings on ESOP assets. The Bank
presently expects to contribute approximately $203,300, including interest,
annually to the ESOP. Contributions will be applied to repay interest on the
loan first, then the remainder will be applied to principal. The loan is
expected to be repaid in approximately 10 years. Shares purchased with the loan
proceeds are held in a suspense account for allocation among participants as the
loan is repaid. Contributions to the ESOP and shares released from the suspense
account are allocated among participants in proportion to their compensation
relative to total compensation of all active participants. Benefits generally
become 20% vested after three years of credited service and then 20% per year
thereafter until 100% vested. Vesting is accelerated upon retirement, death or
disability of the participant. Forfeitures are returned to the Company or
reallocated to other participants to reduce future funding costs. Benefits may
be payable upon retirement, death, disability or separation from service. Since
the Bank's annual contributions are discretionary, benefits payable under the
ESOP cannot be estimated.
The Company accounts for its ESOP in accordance with Statement of Position 93-6,
EMPLOYERS' ACCOUNTING FOR EMPLOYEE STOCK OWNERSHIP PLANS. Accordingly, the debt
of the ESOP is eliminated in consolidation and the shares pledged as collateral
are reported as unearned ESOP shares in the consolidated balance sheets.
Contributions to the ESOP shall be sufficient to pay principal and interest
currently due under the loan agreement. As shares are committed to be released
from collateral, the Company reports compensation expense equal to the average
market price of the shares for the respective period, and the shares become
outstanding for earnings per share computations. Dividends on allocated ESOP
shares are recorded as a reduction of retained earnings; dividends on
unallocated ESOP shares are recorded as a reduction of debt. ESOP compensation
expense was $145,000 for the nine months ended March 31, 1999.
F-31
<PAGE>
FULTON BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
A summary of ESOP shares at March 31, 1999, is as follows:
<TABLE>
<S> <C>
Shares distributed to terminated participants 208
Shares allocated 30,910
Shares released for allocation 3,457
Unreleased shares 102,965
----------
TOTAL 137,540
==========
Fair value of unreleased shares $1,557,346
==========
</TABLE>
NOTE D - Stock Based Compensation Plans
- ---------------------------------------
The Board of Directors adopted and the shareholders subsequently approved a
Management Recognition and Development Plan ("MRDP") and a Stock Option Plan
("SOP") on October 23, 1997. These plans were established to assist the Company
and its subsidiary in attracting, retaining and motivating key management and
employees by aligning their financial interest with those of the shareholders of
the Company.
The MRDP is a fixed award of 68,761 shares of restricted stock which vests over
a five year period. The Company selected an amortization method which recognizes
a higher percentage of compensation cost in the earlier years than in the later
years of the service period. Compensation cost will approximate 34% of the cost
of the MRDP awards in the first year, 31% the second year, 18% the third, and
17% in the remaining two years.
Under the SOP, options to acquire shares of the Company's common stock may be
granted to certain officer, directors and employees of the Bank. The options
will enable the recipient to purchase stock at an exercise price equal to the
fair market value of the stock at the date of the grant. On November 12, 1997,
the Company granted options for 171,925 shares at $19.75 per share. The options
will vest over a five year period following the date of grant and are
exercisable for up to ten years.
As permitted under SFAS No. 123, "Accounting for Stock-Based Compensation", the
Company has elected to apply the recognition provisions of Accounting Principles
Board Opinion No. 25, under which compensation expense is recorded on the date
of grant only if the current market price of the underlying stock exceeds the
exercise price. Accordingly, adoption of SFAS No. 123 will have no impact on the
Company's consolidated financial position or results of operations.
F-32
<PAGE>
FULTON BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE E - Year 2000 Issue
- ------------------------
The year 2000 issue concerns computer software programs which use only two
digits to identify the calendar year in date fields. Software applications
utilizing two digit date fields could produce erroneous results at the turn of
the century. The Federal Financial Institutions Examination Council requires all
insured financial institutions to complete an inventory of core computer
function and set priorities for meeting Year 2000 conversion goals. The
Company's material software applications are provide by a third party data
processing service. The Company has inventoried and assessed core computer
functions. All material systems were judged compliant by September 30, 1998.
Testing will continue through the remainder of 1999. Estimated cost to the
Company is not expected to be material since all critical applications are
supported by the third party data processing service.
NOTE F - Reclassifications
- --------------------------
Certain amounts in the prior period's consolidated financial statements have
been reclassified to conform with the current year presentation.
NOTE G - Comprehensive Income
- -----------------------------
On July 1, 1998 the Company adopted the provisions of Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income", which
established standards for reporting and display of comprehensive income and its
components (revenues, expenses, gains and losses) in a full set of general-
purpose financial statements. For the three and nine month periods ended March
31, 1999 and 1998, unrealized holding gains and losses on investments in debt
and equity securities available-for-sale were the Company's only other
comprehensive income component.
F-33
<PAGE>
FULTON BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Comprehensive income for the three and nine month periods ended March 31, 1999
and 1998 is summarized as follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
March 31, March 31,
1999 1998 1999 1998
-------- -------- ------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Net income $ 212 $ 223 $ 815 $ 885
Other comprehensive income:
Net unrealized holding gains (losses)
on investments in debt and equity
securities available-for-sale (4) 0 (4) 1
Adjustment for net securities (gains)
losses realized in net income, net
of applicable income taxes 0 0 0 0
-------- ------- ------ ------
Total other comprehensive income (4) 0 (4) 1
-------- ------- ------ ------
Comprehensive income $ 208 $ 223 $ 811 $ 886
======== ======= ====== ======
</TABLE>
F-34
<PAGE>
APPENDIX A
================================================================================
AGREEMENT AND PLAN OF MERGER
DATED AS OF MAY 18, 1999
BY AND BETWEEN
CENTRAL BANCOMPANY, INC.
AND
FULTON BANCORP, INC.
================================================================================
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE NO.
<S> <C>
Introductory Statement...................................................... A-4
ARTICLE I
THE MERGER............................................................... A-4
----------
Section 1.1. Structure of the Merger.................................... A-4
-----------------------
Section 1.2. Effect on Outstanding Shares of Fulton Common Stock........ A-4
---------------------------------------------------
Section 1.3. Exchange Procedures........................................ A-5
-------------------
Section 1.4. Effect on Outstanding Shares of Acquisition Sub Common
------------------------------------------------------
Stock...................................................... A-7
-----
Section 1.5. Stock Options; Restricted Stock............................ A-7
-------------------------------
Section 1.6. Bank Merger................................................ A-7
-----------
Section 1.7. Directors and Officers of Fulton at Effective Time......... A-7
--------------------------------------------------
Section 1.8. Alternative Structure...................................... A-8
---------------------
Section 1.9. Certificate of Incorporation and Bylaws of the Surviving
--------------------------------------------------------
Corporation................................................ A-8
-----------
ARTICLE II
REPRESENTATIONS AND WARRANTIES........................................... A-8
------------------------------
Section 2.1. Disclosure Letters......................................... A-8
------------------
Section 2.2. Representations and Warranties of Fulton................... A-8
----------------------------------------
Section 2.3. Representations and Warranties of Central..................A-21
-----------------------------------------
ARTICLE III
CONDUCT PENDING THE MERGER...............................................A-24
--------------------------
Section 3.1. Conduct of Fulton's Business Prior to the Effective Time...A-24
--------------------------------------------------------
Section 3.2. Forbearance by Fulton......................................A-25
---------------------
Section 3.3. Conduct of Central's Business Prior to the Effective Time..A-28
---------------------------------------------------------
ARTICLE IV
COVENANTS................................................................A-28
---------
Section 4.1. Acquisition Proposals......................................A-28
---------------------
Section 4.2. Certain Policies of Fulton.................................A-29
--------------------------
Section 4.3. Access and Information.....................................A-29
----------------------
Section 4.4. Certain Filings, Consents and Arrangements.................A-30
------------------------------------------
Section 4.5. Antitakeover Provisions....................................A-30
-----------------------
Section 4.6. Additional Agreements......................................A-30
---------------------
Section 4.7. Publicity..................................................A-31
---------
Section 4.8. Stockholders Meeting.......................................A-31
--------------------
Section 4.9. Proxy Statement............................................A-31
---------------
Section 4.10. Notification of Certain Matters............................A-31
-------------------------------
Section 4.11. Employees, Directors and Officers..........................A-32
---------------------------------
Section 4.12. Indemnification............................................A-33
---------------
</TABLE>
A-2
<PAGE>
<TABLE>
<S> <C>
ARTICLE V
CONDITIONS TO CONSUMMATION..............................................A-34
--------------------------
Section 5.1. Conditions to Each Party's Obligations....................A-34
--------------------------------------
Section 5.2. Conditions to the Obligations of Central..................A-35
----------------------------------------
Section 5.3. Conditions to the Obligations of Fulton...................A-35
---------------------------------------
ARTICLE VI
TERMINATION.............................................................A-36
-----------
Section 6.1. Termination...............................................A-36
-----------
Section 6.2. Termination Fees..........................................A-37
----------------
Section 6.3. Effect of Termination.....................................A-37
---------------------
ARTICLE VII
CLOSING, EFFECTIVE DATE AND EFFECTIVE TIME..............................A-38
------------------------------------------
Section 7.1. Effective Date and Effective Time.........................A-38
---------------------------------
Section 7.2. Deliveries at the Closing.................................A-38
-------------------------
ARTICLE VIII
CERTAIN OTHER MATTERS...................................................A-38
---------------------
Section 8.1. Certain Definitions; Interpretation.......................A-38
-----------------------------------
Section 8.2. Survival..................................................A-39
--------
Section 8.3. Waiver; Amendment.........................................A-39
-----------------
Section 8.4. Counterparts..............................................A-39
------------
Section 8.5. Governing Law.............................................A-39
-------------
Section 8.6. Expenses..................................................A-39
--------
Section 8.7. Notices...................................................A-39
-------
Section 8.8. Entire Agreement; etc.....................................A-40
---------------------
Section 8.9. Successors and Assigns; Assignment........................A-41
----------------------------------
</TABLE>
A-3
<PAGE>
AGREEMENT AND PLAN OF MERGER
----------------------------
This is an AGREEMENT AND PLAN OF MERGER, dated as of the 18th day of
May, 1999 ("AGREEMENT"), by and between Central Bancompany, Inc., a Missouri
corporation ("CENTRAL"), and Fulton Bancorp, Inc., a Delaware corporation
("FULTON").
INTRODUCTORY STATEMENT
The Board of Directors of each of Central and Fulton (i) has
determined that this Agreement and the business combination and related
transactions contemplated hereby are in the best interests of Central and
Fulton, respectively, and in the best interests of their respective stockholders
and (ii) has approved, at meetings of each of such Boards of Directors, this
Agreement.
Central and Fulton desire to make certain representations,
warranties and agreements in connection with the business combination and
related transactions provided for herein and to prescribe various conditions to
such transactions.
In consideration of their mutual promises and obligations hereunder,
the parties hereto adopt and make this Agreement and prescribe the terms and
conditions hereof and the manner and basis of carrying it into effect, which
shall be as follows:
ARTICLE I
THE MERGER
----------
Section 1.1. Structure of the Merger. Prior to the Effective Date
-----------------------
(as defined in SECTION 7.1), Central will form a Delaware corporation that will
be a wholly owned subsidiary of Central ("ACQUISITION SUB"). On the Effective
Date, Acquisition Sub will merge with and into Fulton ("MERGER"), with Fulton
being the surviving entity, pursuant to the provisions of, and with the effect
provided in, the Delaware General Corporation Law ("DGCL"). Upon consummation
of the Merger, the separate corporate existence of Acquisition Sub shall cease.
Fulton shall be the surviving corporation in the Merger and shall continue to be
governed by the laws of the State of Delaware and its name and separate
corporate existence, with all of its rights, privileges, immunities, powers and
franchises, shall continue unaffected by the Merger. From and after the
Effective Time (as defined in SECTION 7.1), Fulton shall possess all of the
properties and rights and be subject to all of the liabilities and obligations
of Acquisition Sub, all as more fully described in the DGCL.
Section 1.2. Effect on Outstanding Shares of Fulton Common Stock.
---------------------------------------------------
(a) By virtue of the Merger, automatically and without any action
on the part of the holder thereof, each share of common stock, par value
$.01 per share, of Fulton ("FULTON COMMON STOCK") issued and outstanding at
the Effective Time, other than Excluded Shares (as
A-4
<PAGE>
defined below), shall become and be converted into the right to receive $19.15
in cash (the "MERGER CONSIDERATION").
"EXCLUDED SHARES" shall consist of (i) shares the holder of
which pursuant to any applicable law providing for dissenters' or appraisal
rights is entitled to receive payment in accordance with the provisions of any
such law, such holder to have only the rights provided in any such law (the
"DISSENTERS' SHARES"), (ii) shares held directly or indirectly by Central
(other than shares held in a fiduciary capacity or in satisfaction of a debt
previously contracted) and (iii) shares held by Fulton as treasury stock.
(b) If, between the date of this Agreement and the Effective Time,
the outstanding shares of Fulton Common Stock shall have been changed into a
different number of shares or into a different class by reason of any stock
dividend, subdivision, reclassification, recapitalization, split, combination or
exchange of shares, the Merger Consideration shall be adjusted correspondingly
to the extent appropriate to reflect such change in the number of outstanding
shares.
(c) As of the Effective Time, each Excluded Share, other
than Dissenters' Shares, shall be cancelled and retired and shall cease to
exist, and no exchange or payment shall be made with respect thereto.
Section 1.3. Exchange Procedures.
-------------------
(a) Appropriate transmittal materials ("LETTER OF TRANSMITTAL")
shall be mailed as soon as reasonably practicable after the Effective Time, and
in no event later than five business days thereafter, to each holder of record
of Fulton Common Stock as of the Effective Time. A Letter of Transmittal will be
deemed properly completed only if accompanied by certificates representing all
shares of Fulton Common Stock to be converted thereby.
(b) At and after the Effective Time, each certificate ("FULTON
CERTIFICATE") previously representing shares of Fulton Common Stock (except as
specifically set forth in SECTION 1.2) shall represent only the right to receive
the Merger Consideration multiplied by the number of shares of Fulton Common
Stock previously represented by the Fulton Certificate.
(c) Prior to the Effective Time, Central shall deposit, or shall
cause to be deposited, in a segregated account with The Central Trust Bank
("CENTRAL BANK"), which shall act as exchange agent ("EXCHANGE AGENT") for the
benefit of the holders of shares of Fulton Common Stock, for exchange in
accordance with this SECTION 1.3, an amount of cash sufficient to pay the
aggregate Merger Consideration to be paid with respect to the outstanding shares
of Fulton Common Stock pursuant to SECTION 1.2.
(d) The Letter of Transmittal shall (i) specify that delivery shall
be effected, and risk of loss and title to the Fulton Certificates shall pass,
only upon delivery of the Fulton Certificates to the Exchange Agent, (ii) be in
a form and contain any other provisions as Central may reasonably determine and
(iii) include instructions for use in effecting the surrender of the
A-5
<PAGE>
Fulton Certificates in exchange for the Merger Consideration. Upon the proper
surrender of the Fulton Certificates to the Exchange Agent, together with a
properly completed and duly executed Letter of Transmittal, the holder of such
Fulton Certificates shall be entitled to receive in exchange therefor a check
in the amount equal to the cash that such holder has the right to receive
pursuant to SECTION 1.2. Fulton Certificates so surrendered shall forthwith be
canceled. As soon as practicable, but no later than 10 business days following
receipt of the properly completed Letter of Transmittal and any necessary
accompanying documentation, the Exchange Agent shall issue a check as provided
herein. If there is a transfer of ownership of any shares of Fulton Common Stock
not registered in the transfer records of Fulton, the Merger Consideration shall
be issued to the transferee thereof if the Fulton Certificates representing such
Fulton Common Stock are presented to the Exchange Agent, accompanied by all
documents required, in the reasonable judgment of Central and the Exchange
Agent, (x) to evidence and effect such transfer and (y) to evidence that any
applicable stock transfer taxes have been paid.
(e) From and after the Effective Time there shall be no transfers on
the stock transfer records of Fulton of any shares of Fulton Common Stock. If,
after the Effective Time, Fulton Certificates are presented to Central, they
shall be canceled and exchanged for the Merger Consideration deliverable in
respect thereof pursuant to this Agreement in accordance with the procedures set
forth in this SECTION 1.3.
(f) Any portion of the aggregate amount of cash to be paid pursuant
to SECTION 1.2 that remains unclaimed by the stockholders of Fulton for 12
months after the Effective Time shall be repaid by the Exchange Agent to Central
upon the written request of Central. After such request is made, any
stockholders of Fulton who have not theretofore complied with this SECTION 1.3
shall look only to Central for the Merger Consideration deliverable in respect
of each share of Fulton Common Stock such stockholder holds, as determined
pursuant to SECTION 1.2 of this Agreement, without any interest thereon. If
outstanding Fulton Certificates are not surrendered prior to the date on which
such payments would otherwise escheat to or become the property of any
governmental unit or agency, the unclaimed items shall, to the extent permitted
by any abandoned property, escheat or other applicable laws, become the property
of Central (and, to the extent not in its possession, shall be paid over to it),
free and clear of all claims or interest of any person previously entitled to
such claims. Notwithstanding the foregoing, neither the Exchange Agent nor any
party to this Agreement (or any affiliate thereof) shall be liable to any former
holder of Fulton Common Stock for any amount delivered to a public official
pursuant to applicable abandoned property, escheat or similar laws.
(g) Central and the Exchange Agent shall be entitled to rely upon
Fulton's stock transfer books to establish the identity of those persons
entitled to receive the Merger Consideration, which books shall be conclusive
with respect thereto. In the event of a dispute with respect to ownership of
stock represented by any Fulton Certificate, Central and the Exchange Agent
shall be entitled to deposit any Merger Consideration represented thereby in
escrow with an independent third party and thereafter be relieved with respect
to any claims thereto.
A-6
<PAGE>
(h) If any Fulton Certificate shall have been lost, stolen or
destroyed, upon the making of an affidavit of that fact by the person claiming
such Fulton Certificate to be lost, stolen or destroyed and, if required by the
Exchange Agent, the posting by such person of a bond in such amount as the
Exchange Agent may direct as indemnity against any claim that may be made
against it with respect to such Fulton Certificate, the Exchange Agent will
issue in exchange for such lost, stolen or destroyed Fulton Certificate the
Merger Consideration deliverable in respect thereof pursuant to SECTION 1.2.
Section 1.4. Effect on Outstanding Shares of Acquisition Sub Common
------------------------------------------------------
Stock. By virtue of the Merger, automatically and without any action on the
- -----
part of the holder thereof, each share of Common Stock of Acquisition Sub
issued and outstanding at the Effective Time shall be converted into one share
of the Common Stock of Fulton, as the surviving corporation.
Section 1.5. Stock Options; Restricted Stock.
-------------------------------
(a) At the Effective Time, each option to acquire shares of Fulton
Common Stock ("FULTON OPTION") granted pursuant to the Fulton Bancorp, Inc. 1997
Stock Option Plan (the "FULTON OPTION PLAN") that is then outstanding and
unexercised shall be canceled, and in lieu thereof the holders of such options
shall be paid in cash an amount equal to the product of (i) the number of shares
of Fulton Common Stock subject to such option at the Effective Time and (ii) an
amount equal to the excess of the Merger Consideration over the exercise price
per share of such option, net of any cash which must be withheld under federal
and state income and employment tax requirements. In the event that the exercise
price of a Fulton Option is greater than the Merger Consideration, then at the
Effective Time such Fulton Option shall be canceled without any payment made in
exchange therefor. At the Effective Time, the Fulton Option Plan shall be deemed
terminated.
(b) All unvested shares of restricted stock awarded under the Fulton
Bancorp, Inc. 1997 Management Recognition and Development Plan ("MRDP") shall,
as of the Effective Time, become vested pursuant to the terms of MRDP and
converted into the right to receive the Merger Consideration. At the Effective
Time, the MRDP shall be deemed terminated.
Section 1.6. Bank Merger. Concurrently with or as soon as
-----------
practicable after the execution and delivery of this Agreement, Central Bank, a
wholly owned subsidiary of Central, and Fulton Savings Bank, FSB ("FULTON
SAVINGS"), a wholly owned subsidiary of Fulton, shall enter into the Plan of
Bank Merger, in the form attached hereto as EXHIBIT A, pursuant to which the
merger of Fulton Savings with and into Central Bank ("BANK MERGER") will be
effected. The parties hereto intend that the Bank Merger shall become effective
on the Effective Date and shall take all actions necessary or appropriate to
cause the Bank Merger to become effective immediately following the Effective
Time.
Section 1.7. Directors and Officers of Fulton at Effective Time. At
--------------------------------------------------
the Effective Time, the directors and officers of Fulton shall consist of the
directors and officers of Acquisition Sub serving immediately prior to the
Effective Time, each to hold office in
A-7
<PAGE>
accordance with the Certificate of Incorporation and Bylaws of the surviving
corporation until their respective successors are duly elected or appointed and
qualified.
Section 1.8. Alternative Structure. Notwithstanding anything to
---------------------
the contrary contained in this Agreement, prior to the Effective Time, Central
may specify that the structure of the transactions contemplated hereby be
revised and the parties shall enter into such alternative transactions as
Central may determine to effect the purposes of this Agreement; PROVIDED,
HOWEVER, that such revised structure shall not (i) alter or change the amount or
kind of the Merger Consideration or the economic benefits of the transactions
contemplated hereby to the holders of Fulton Common Stock, (ii) diminish the
benefits to be received by the directors, officers or employees of Fulton or
Fulton Savings as set forth in or as contemplated by this Agreement, or
(iii) materially impede or delay the receipt of any approval referred to in this
Agreement. This Agreement and any related documents shall be appropriately
amended in order to reflect any such revised structure.
Section 1.9. Certificate of Incorporation and Bylaws of the
----------------------------------------------
Surviving Corporation. The Certificate of Incorporation and Bylaws of
- ---------------------
Fulton in effect immediately prior to the Effective Time shall be the
Certificate of Incorporation and Bylaws of the surviving corporation from and
after the Effective Time until amended as provided by law.
ARTICLE II
REPRESENTATIONS AND WARRANTIES
------------------------------
Section 2.1. Disclosure Letters. Prior to the execution and
------------------
delivery of this Agreement, Fulton and Central have each delivered to the
other a letter (each, its "DISCLOSURE LETTER") setting forth, among other
things, facts, circumstances and events the disclosure of which is required or
appropriate in relation to any or all of their respective representations and
warranties (and making specific reference to the Section of this Agreement to
which they relate). The mere inclusion of a fact, circumstance or event in a
Disclosure Letter shall not be deemed an admission by a party that such item
represents a material exception or that such item is reasonably likely to result
in a Material Adverse Effect (as defined in Article VIII hereof).
Section 2.2. Representations and Warranties of Fulton. Fulton
------------------------------------------
represents and warrants to Central that, except as disclosed in Fulton's
Disclosure Letter:
(a) Organization.
------------
(i) Fulton is a corporation duly organized, validly existing
and in good standing under the laws of the State of Delaware and is registered
as a savings and loan holding company under the Home Owners' Loan Act, as
amended ("HOLA"). Fulton Savings is a stock savings association duly organized,
validly existing and in good standing under the laws of the United States of
America and is a wholly-owned Subsidiary (as defined below) of Fulton. Each
Subsidiary of Fulton other than Fulton Savings is a corporation, limited
liability company or partnership duly organized, validly existing and in good
standing under the laws of its
A-8
<PAGE>
jurisdiction of incorporation or organization. Each of Fulton and its
Subsidiaries has all requisite corporate power and authority to own, lease and
operate its properties and to carry on its business as now being conducted. As
used in this Agreement, unless the context requires otherwise, the term
"SUBSIDIARY" when used with respect to any party means any corporation or other
organization, whether incorporated or unincorporated, which is consolidated with
such party for financial reporting purposes or which is controlled, directly or
indirectly, by such party.
(ii) Fulton and each of its Subsidiaries has the requisite
corporate power and authority and is duly qualified to do business and is in
good standing in each jurisdiction in which the nature of its business or the
ownership or leasing of its properties makes such qualification necessary.
(iii) Fulton's Disclosure Letter sets forth all of Fulton's
Subsidiaries and all entities (whether corporations, partnerships or similar
organizations), including the corresponding percentage ownership, in which
Fulton owns, directly or indirectly, 5% or more of the ownership interests as of
the date of this Agreement and indicates for each of Fulton's Subsidiaries, as
of such date, its jurisdiction of organization and the jurisdiction(s) wherein
it is qualified to do business. All such Subsidiaries and ownership interests
are in compliance with all applicable laws, rules and regulations relating to
direct investments in equity ownership interests. Fulton owns, either directly
or indirectly, all of the outstanding capital stock of each of its Subsidiaries.
No Subsidiary of Fulton other than Fulton Savings is an "insured depository
institution" as defined in the Federal Deposit Insurance Act, as amended
("FDIA"), and the applicable regulations thereunder. All of the shares of
capital stock of Fulton's Subsidiaries are fully paid, nonassessable and not
subject to any preemptive rights and are owned by Fulton or a Subsidiary of
Fulton free and clear of any claims, liens, encumbrances or restrictions (other
than those imposed by applicable federal and state securities laws), and there
are no agreements or understandings with respect to the voting or disposition of
any such shares.
(iv) The deposits of Fulton Savings are insured by the
Savings Association Insurance Fund of the Federal Deposit Insurance
Corporation ("FDIC") to the extent provided in the FDIA.
(b) Capital Structure.
-----------------
(i) The authorized capital stock of Fulton consists of
7,000,000 shares of Fulton Common Stock and 1,000,000 shares of preferred stock,
par value $.01 per share. As of the date of this Agreement (A) 1,653,949 shares
of Fulton Common Stock were issued and outstanding, not including shares held in
treasury, (B) no shares of Fulton preferred stock were issued and outstanding,
(C) no shares of Fulton Common Stock were reserved for issuance, except that
171,925 shares of Fulton Common Stock were reserved for issuance pursuant to the
Fulton Option Plan, (D) no shares of Fulton preferred stock were reserved for
issuance and (E) 111,462 shares of Fulton Common Stock were held by Fulton in
its treasury. The authorized capital stock of Fulton Savings consists of 1,000
shares of common stock, par value $1.00 per share, and 9,000 shares of preferred
stock having no par value. As of the date of this Agreement, 1,000 shares of
such common stock were outstanding, no shares of such preferred stock were
A-9
<PAGE>
outstanding and all outstanding shares of such common stock were, and as of the
Effective Time will be, owned by Fulton. All outstanding shares of capital stock
of Fulton and Fulton Savings are duly authorized and validly issued, fully paid
and nonassessable and not subject to any preemptive rights and, with respect to
shares of Fulton held by Fulton in its treasury or by its Subsidiaries and
shares of Fulton Savings, are free and clear of all liens, claims, encumbrances
or restrictions (other than those imposed by applicable federal and state
securities laws) and there are no agreements or understandings with respect to
the voting or disposition of any such shares. Fulton's Disclosure Letter sets
forth a complete and accurate list of all outstanding options to purchase Fulton
Common Stock that have been granted pursuant to the Fulton Option Plan,
including the names of the optionees, dates of grant, exercise prices, dates of
vesting, dates of termination and shares subject to each grant.
(ii) No bonds, debentures, notes or other indebtedness of
Fulton having the right to vote on any matters on which stockholders may vote
are issued or outstanding.
(iii) As of the date of this Agreement, except for options
granted pursuant to the Fulton Option Plan, neither Fulton nor any of its
Subsidiaries has or is bound by any outstanding subscriptions, options,
warrants, calls, rights, convertible securities, commitments or agreements of
any character obligating Fulton or any of its Subsidiaries to issue, deliver or
sell, or cause to be issued, delivered or sold, any additional shares of capital
stock of Fulton or any of its Subsidiaries or obligating Fulton or any of its
Subsidiaries to grant, extend or enter into any such option, warrant, call,
right, convertible security, commitment or agreement. As of the date hereof,
there are no outstanding contractual obligations of Fulton or any of its
Subsidiaries to repurchase, redeem or otherwise acquire any shares of capital
stock of Fulton or any of its Subsidiaries.
(c) Authority.
---------
(i) Fulton has all requisite corporate power and authority
to enter into this Agreement and, subject to approval of this Agreement by the
requisite vote of Fulton's stockholders and receipt of all required regulatory
or governmental approvals, to consummate the transactions contemplated hereby.
The execution and delivery of this Agreement and, subject to the approval of
this Agreement by Fulton's stockholders, the consummation of the transactions
contemplated hereby, have been duly authorized by all necessary corporate
actions on the part of Fulton. This Agreement has been duly and validly executed
and delivered by Fulton and constitutes a valid and binding obligation of
Fulton, enforceable in accordance with its terms, subject to applicable
bankruptcy, insolvency and similar laws affecting creditors' rights and remedies
generally and subject, as to enforceability, to general principles of equity,
whether applied in a court of law or a court of equity.
(ii) Fulton Savings has all requisite corporate power and
authority to enter into the Plan of Bank Merger and, subject to approval of the
Plan of Bank Merger by Fulton as the sole stockholder of Fulton Savings and the
receipt of all required regulatory or governmental approvals, to consummate the
transactions contemplated thereby. The execution and delivery of the Plan of
Bank Merger and the consummation of the transactions contemplated
A-10
<PAGE>
thereby have been duly authorized by all necessary corporate actions on the part
of Fulton Savings. The Plan of Bank Merger, upon execution and delivery by
Fulton Savings, will be duly and validly executed and delivered by Fulton
Savings and will constitute a valid and binding obligation of Fulton Savings,
enforceable in accordance with its terms, subject to applicable bankruptcy,
insolvency and similar laws affecting creditors' rights and remedies generally
and subject, as to enforceability, to general principles of equity, whether
applied in a court of law or a court of equity.
(d) Stockholder Approval; Fairness Opinion. The affirmative vote of
---------------------------------------
a majority of the outstanding shares of Fulton Common Stock entitled to vote on
this Agreement is the only vote of the stockholders of Fulton required for
approval of this Agreement and the consummation of the Merger and the related
transactions contemplated hereby. Fulton has received the written opinion of
Manchester Partners, L.L.C., a division of D.R. Hancock & Co., to the effect
that, as of the date hereof, the Merger Consideration to be received by Fulton's
stockholders is fair, from a financial point of view, to such stockholders.
(e) No Violations; Consents. The execution, delivery and
-----------------------
performance of this Agreement by Fulton do not, and the consummation of the
transactions contemplated hereby will not, constitute (i) assuming receipt of
all Requisite Regulatory Approvals (as defined in SECTION 2.3(C)) and requisite
stockholder approvals, a violation of any law, rule or regulation or any
judgment, decree, order, governmental permit or license to which Fulton or any
of its Subsidiaries (or any of their respective properties) is subject, (ii) a
violation of the certificate of incorporation or bylaws of Fulton or the
similar organizational documents of any of its Subsidiaries or (iii) a breach
or violation of, or a default under (or an event which, with due notice or
lapse of time or both, would constitute a default under), or result in the
termination of, accelerate the performance required by, or result in the
creation of any lien, pledge, security interest, charge or other encumbrance
upon any of the properties or assets of Fulton or any of its Subsidiaries under,
any of the terms, conditions or provisions of any note, bond, indenture, deed of
trust, loan agreement or other agreement, instrument or obligation to which
Fulton or any of its Subsidiaries is a party, or to which any of their
respective properties or assets may be subject. The consummation by Fulton and
Fulton Savings of the transactions (including the Bank Merger) contemplated
hereby (exclusive of the effect of any changes effected pursuant to SECTION 1.8)
will not require any approval, consent or waiver under any such law, rule,
regulation, judgment, decree, order, governmental permit or license or the
approval, consent or waiver of any other party to any such agreement, or
instrument, other than (x) the approval of the holders of a majority of the
outstanding shares of Fulton Common Stock entitled to vote thereon, (y) the
approval of Fulton as the sole stockholder of Fulton Savings and (z) the consent
of the Office of Thrift Supervision ("OTS"). As of the date hereof, the
executive officers of Fulton know of no reason pertaining to Fulton why any of
the approvals referred to in this SECTION 2.2(E) should not be obtained.
A-11
<PAGE>
(f) Reports and Financial Statements.
--------------------------------
(i) Fulton and each of its Subsidiaries have each timely
filed all material reports, registrations and statements, together with any
amendments required to be made with respect thereto, that they were required to
file since June 30, 1997 with (a) the FDIC, (b) the OTS, (c) the National
Association of Securities Dealers, Inc. ("NASD") and (d) the Securities and
Exchange Commission ("SEC") (collectively, "FULTON'S REPORTS") and have paid all
fees and assessments due and payable in connection therewith. As of their
respective dates, none of Fulton's Reports contained any untrue statement of a
material fact or omitted to state a material fact required to be stated therein
or necessary to make the statements made therein, in light of the circumstances
under which they were made, not misleading. All of Fulton's Reports filed with
the SEC complied in all material respects with the applicable requirements of
the Securities Exchange Act of 1934, as amended ("EXCHANGE ACT") and the rules
and regulations of the SEC promulgated thereunder.
(ii) Each of the financial statements of Fulton included in
Fulton's Reports complied as to form, as of their respective dates of filing
with the SEC, in all material respects with applicable accounting requirements
and with the published rules and regulations of the SEC with respect thereto
and have been prepared in accordance with generally accepted accounting
principles ("GAAP") applied on a consistent basis during the periods involved
(except as may be indicated in the notes thereto or, in the case of the
unaudited financial statements, as permitted by the SEC). Each of the
consolidated statements of condition contained or incorporated by reference in
Fulton's Reports (including in each case any related notes and schedules) and
each of the consolidated statements of operations, consolidated statements of
cash flows and consolidated statements of changes in stockholders' equity,
contained or incorporated by reference in Fulton's Reports (including in each
case any related notes and schedules) fairly presented (x) the financial
position of the entity or entities to which it relates as of its date and (y)
the results of operations, stockholders' equity and cash flows, as the case may
be, of the entity or entities to which it relates for the periods set forth
therein (subject, in the case of unaudited interim statements, to normal year-
end audit adjustments that are not material in amount or effect), in each case
in accordance with GAAP, except as may be noted therein.
(g) Absence of Certain Changes or Events. Except as disclosed in
------------------------------------
Fulton's Reports filed on or prior to the date of this Agreement, since June 30,
1998, (i) Fulton and its Subsidiaries have not incurred any liability, except in
the ordinary course of their business consistent with past practice,
(ii) Fulton and its Subsidiaries have conducted their respective businesses only
in the ordinary and usual course of such businesses consistent with their past
practices, (iii) there has not been any Material Adverse Effect with respect to
Fulton and its Subsidiaries, taken as a whole, and (iv) there has been no
change in any accounting principles, practices or methods of Fulton or any
of its Subsidiaries other than as required by GAAP.
(h) Absence of Claims. No litigation, controversy, claim, action,
-----------------
suit or other legal administrative or arbitration proceeding before any court,
governmental agency or arbitrator is pending against Fulton or any of its
Subsidiaries and no such litigation, controversy, claim, action, suit or
proceeding has been threatened.
A-12
<PAGE>
(i) Absence of Regulatory Actions. Since June 30, 1997, neither
-------------------------------
Fulton nor any of its Subsidiaries has been a party to any cease and desist
order, written agreement or memorandum of understanding with, or any commitment
letter or similar undertaking to, or has been subject to any action, proceeding,
order or directive by, or has been a recipient of any extraordinary supervisory
letter from any federal or state governmental authority charged with the
supervision or regulation of depository institutions or depository institution
holding companies or engaged in the insurance of bank and/or savings and loan
deposits ("GOVERNMENT REGULATORS"), or has adopted any board resolutions at the
request of any Government Regulator, or has been advised by any Government
Regulator that it is contemplating issuing or requesting (or is considering the
appropriateness of issuing or requesting) any such action, proceeding, order,
directive, written agreement, memorandum of understanding, extraordinary
supervisory letter, commitment letter, board resolutions or similar undertaking.
(j) Taxes. All federal, state, local and foreign tax returns required
-----
to be filed by or on behalf of Fulton or any of its Subsidiaries have been
timely filed or requests for extensions have been timely filed and any such
extension shall have been granted and not have expired, and all such filed
returns are complete and accurate in all material respects. All taxes shown on
such returns, all taxes required to be shown on returns for which extensions
have been granted and all other taxes required to be paid by Fulton or any of
its Subsidiaries have been paid in full or adequate provision has been made for
any such taxes on Fulton's balance sheet (in accordance with GAAP). For purposes
of this SECTION 2.2(J), the term "taxes" shall include all income, franchise,
gross receipts, real and personal property, real property transfer and gains,
wage and employment taxes. As of the date of this Agreement, there is no audit
examination, deficiency assessment, tax investigation or refund litigation with
respect to any taxes of Fulton or any of its Subsidiaries, and no claim has been
made by any authority in a jurisdiction where Fulton or any of its Subsidiaries
do not file tax returns that Fulton or any such Subsidiary is subject to
taxation in that jurisdiction. All taxes, interest, additions and penalties due
with respect to completed and settled examinations or concluded litigation
relating to Fulton or any of its Subsidiaries have been paid in full or adequate
provision has been made for any such taxes on Fulton's balance sheet (in
accordance with GAAP). Fulton and its Subsidiaries have not executed an
extension or waiver of any statute of limitations on the assessment or
collection of any material tax due that is currently in effect. Fulton and each
of its Subsidiaries has withheld and paid all taxes required to have been
withheld and paid in connection with amounts paid or owing to any employee,
independent contractor, creditor, stockholder or other third party, and Fulton
and each of its Subsidiaries has timely complied with all applicable information
reporting requirements under Part III, Subchapter A of Chapter 61 of the
Internal Revenue Code (the "IRC") and similar applicable state and local
information reporting requirements.
(k) Agreements.
----------
(i) Fulton and its Subsidiaries are not bound by any material
contract (as defined in Item 601(b)(10) of Regulation S-K promulgated by the
SEC), to be performed after the date hereof that has not been filed with or
incorporated by reference in Fulton's Reports. Neither Fulton nor any of its
Subsidiaries is a party to an oral or written (A) agreement (other than
agreements with any officer or director) requiring the payment by Fulton or a
subsidiary of
A-13
<PAGE>
Fulton of $25,000 or more per annum not terminable on 60 days' or less notice,
(B) agreement with any present or former director, officer or employee of Fulton
or any of its Subsidiaries the benefits of which are contingent, or the terms of
which are materially altered, upon the occurrence of a transaction involving
Fulton or any of its Subsidiaries of the nature contemplated by this Agreement,
(C) agreement with respect to any employee or director of Fulton or any of its
Subsidiaries providing any term of employment or compensation guarantee
extending for a period longer than 60 days, (D) agreement or plan, including any
stock option plan, phantom stock or stock appreciation rights plan, restricted
stock plan or stock purchase plan, any of the benefits of which will be
increased, or the vesting or payment of the benefits of which will be
accelerated, by the occurrence of any of the transactions contemplated by this
Agreement or the value of any of the benefits of which will be calculated on the
basis of any of the transactions contemplated by this Agreement or (E) agreement
containing covenants that limit the ability of Fulton or any of its Subsidiaries
to compete in any line of business or with any person, or that involve any
restriction on the geographic area in which, or method by which, Fulton
(including any successor thereof) or any of its Subsidiaries may carry on its
business (other than as may be required by law or any regulatory agency). Fulton
has previously delivered to Central true and complete copies of each agreement
and other documents referenced in Fulton's Disclosure Letter with respect to
this SECTION 2.2(K)(I).
(ii) Neither Fulton nor any of its Subsidiaries is in
default under (and no event has occurred which, with due notice or lapse of time
or both, would constitute a default under) or is in violation of any provision
of any note, bond, indenture, mortgage, deed of trust, loan agreement, lease or
other agreement to which it is a party or by which it is bound or to which any
of its respective properties or assets is subject.
(iii) Fulton and each of its Subsidiaries owns or possesses
valid and binding licenses and other rights to use without payment all patents,
copyrights, trade secrets, trade names, servicemarks and trademarks used in its
businesses, and neither Fulton nor any of its Subsidiaries has received any
notice of conflict with respect thereto that asserts the right of others. Each
of Fulton and its Subsidiaries has performed all the obligations required to be
performed by it and are not in default under any contract, agreement,
arrangement or commitment relating to any of the foregoing.
(l) Labor Matters. Fulton and its Subsidiaries are in material
-------------
compliance with all applicable laws respecting employment and employment
practices, terms and conditions of employment and wages and hours, and are not
engaged in any unfair labor practice. Neither Fulton nor any of its Subsidiaries
is or has ever been a party to, or is or has ever been bound by, any collective
bargaining agreement, contract or other agreement or understanding with a labor
union or labor organization with respect to its employees, nor is Fulton or any
of its Subsidiaries the subject of any proceeding asserting that it has
committed an unfair labor practice or seeking to compel it or any such
Subsidiary to bargain with any labor organization as to wages and conditions of
employment nor has any such proceeding been threatened, nor is there any strike,
other labor dispute or organizational effort involving Fulton or any of its
Subsidiaries pending or threatened.
A-14
<PAGE>
(m) Employee Benefit Plans.
----------------------
(i) Fulton's Disclosure Letter contains a complete and
accurate list of all pension, retirement, stock option, stock purchase, stock
ownership, savings, stock appreciation right, profit sharing, deferred
compensation, consulting, bonus, group insurance, severance and other benefit
plans, contracts, agreements and arrangements, including, but not limited to,
"employee benefit plans," as defined in Section 3(3) of the Employee Retirement
Income Security Act of 1974, as amended ("ERISA"), incentive and welfare
policies, contracts, plans and arrangements and all trust agreements related
thereto with respect to any present or former directors, officers or other
employees of Fulton or any of its Subsidiaries (hereinafter referred to
collectively as the "FULTON EMPLOYEE PLANS"). There has been no announcement or
commitment by Fulton or any of its Subsidiaries to create an additional Fulton
Employee Plan, or to amend any Fulton Employee Plan, except for amendments
required by applicable law which do not materially increase the cost of such
Fulton Employee Plan. With respect to each Fulton Employee Plan, Fulton has
supplied to Central a true and correct copy of (A) the annual report on the
applicable form of the Form 5500 series filed with the Internal Revenue Service
("IRS") for the most recent plan year, if required to be filed, (B) such Fulton
Employee Plan, including amendments thereto, (C) each trust agreement, insurance
contract or other funding arrangement relating to such Fulton Employee Plan,
including amendments thereto, and (D) the most recent determination letter
issued by the IRS if such Fulton Employee Plan is a Fulton Qualified Plan (as
defined below).
(ii) There is no pending or threatened litigation,
administrative action or proceeding relating to any Fulton Employee Plan. All of
the Fulton Employee Plans comply in all material respects with all applicable
requirements of ERISA, the IRC and other applicable laws. There has occurred no
"prohibited transaction" (as defined in Section 406 of ERISA or Section 4975 of
the IRC) with respect to the Fulton Employee Plans which is likely to result in
the imposition of any penalties or taxes under Section 502(i) of ERISA or
Section 4975 of the IRC upon Fulton or any of its Subsidiaries.
(iii) Neither Fulton nor any of its Subsidiaries maintains a
pension plan or any other employee benefit plan subject to Title IV of ERISA.
Neither Fulton nor any of its Subsidiaries has contributed to any "multiemployer
plan," as defined in Section 3(37) of ERISA, on or after September 26, 1980.
(iv) Each Fulton Employee Plan that is an "employee pension
benefit plan" (as defined in Section 3(2) of ERISA) and which is intended to be
qualified under Section 401(a) of the IRC (a "FULTON QUALIFIED PLAN") has
received a favorable determination letter from the IRS, and Fulton and its
Subsidiaries are not aware of any circumstances likely to result in revocation
of any such favorable determination letter. Each Fulton Qualified Plan that is
an "employee stock ownership plan" (as defined in Section 4975(e)(7) of the IRC)
has satisfied all of the applicable requirements of Sections 409 and 4975(e)(7)
of the IRC and the regulations thereunder in all respects and any assets of any
such Fulton Qualified Plan that are not allocated to participants' individual
accounts are pledged as security for, and may be applied to satisfy, any
securities acquisition indebtedness.
A-15
<PAGE>
(v) Fulton and its Subsidiaries do not have any obligations
for post-retirement or post-employment benefits under any Fulton Employee Plan
that cannot be amended or terminated upon 60 days' notice or less without
incurring any liability thereunder, except for coverage required by Part 6 of
Title I of ERISA or Section 4980B of the IRC, or similar state laws, the cost of
which is borne by the insured individuals. With respect to Fulton or any of its
Subsidiaries, for the Fulton Employee Plans listed in Fulton's Disclosure
Letter, the execution and delivery of this Agreement and the consummation of the
transactions contemplated hereby will not result in any payment or series of
payments by Fulton or any of its Subsidiaries to any person which is an "excess
parachute payment" (as defined in Section 280G of the IRC), increase or secure
(by way of a trust or other vehicle) any benefits payable under any Fulton
Employee Plan or accelerate the time of payment or vesting of any such benefit.
(n) Title to Assets. Fulton's Disclosure Letter contains a complete
---------------
and accurate list of all real property owned or leased by Fulton or any of its
Subsidiaries, including all properties of Fulton or any of its Subsidiaries
classified as "Real Estate Owned" or words of similar import (the "REAL
PROPERTY"). To the knowledge of Fulton, none of the buildings, structures or
other improvements located on the Real Property encroaches upon or over any
adjoining parcel or real estate or any easement or right-of-way. Fulton and each
of its Subsidiaries have good and marketable title to their respective
properties and assets (including any intellectual property asset such as any
trademark, service mark, tradename or copyright) and property acquired in a
judicial foreclosure proceeding or by way of a deed in lieu of foreclosure or
similar transfer whether real or personal, tangible or intangible, reflected on
the consolidated financial statements of Fulton as of June 30, 1998, or acquired
after such date, other than such items of personal property as have been
disposed of in the ordinary course of business since June 30, 1998, in each case
free and clear of any liens, security interests, encumbrances, mortgages,
pledges, restrictions, charges or rights or interests of others, except pledges
to secure deposits and other liens incurred in the ordinary course of business.
Each lease pursuant to which Fulton or any of its Subsidiaries is lessee or
lessor is valid and in full force and effect and neither Fulton nor any of its
Subsidiaries, nor any other party to any such lease, is in default or in
violation of any provisions of any such lease. All material tangible properties
of Fulton and each of its Subsidiaries are in a good state of maintenance and
repair, conform with all applicable ordinances, regulations and zoning laws and
are considered by Fulton to be adequate for the current business of Fulton and
its Subsidiaries.
(o) Compliance with Laws. Fulton and each of its Subsidiaries has
--------------------
all permits, licenses, certificates of authority, orders and approvals of, and
has made all filings, applications and registrations with, all federal, state,
local and foreign governmental or regulatory bodies (each, a "GOVERNMENTAL
ENTITY") that are required in order to permit it to carry on its business as it
is presently conducted; all such permits, licenses, certificates of authority,
orders and approvals are in full force and effect, and, to the best knowledge of
Fulton, no suspension or cancellation of any of them is threatened. Neither
Fulton nor any of its Subsidiaries are in material violation of, is, to the
knowledge of Fulton, under investigation with respect to any material violation
of, or has been given notice or been charged with any material violation of, any
law, ordinance, regulation, order, writ, rule, decree or condition to approval
of any Governmental Entity.
A-16
<PAGE>
(p) Fees. Other than financial advisory services performed for
----
Fulton by Manchester Partners, L.L.C., neither Fulton nor any of its
Subsidiaries, nor any of their respective officers, directors, employees or
agents, has employed any broker or finder or incurred any liability for any
financial advisory fees, brokerage fees, commissions or finder's fees, and no
broker or finder has acted directly or indirectly for Fulton or any of its
Subsidiaries in connection with this Agreement or the transactions contemplated
hereby. Fulton has provided Central with a true and correct copy of the contract
between Fulton and Manchester Partners, L.L.C.
(q) Environmental Matters. There is no suit, claim, action, demand,
---------------------
executive or administrative order, directive, investigation or proceeding
pending or threatened before any court, governmental agency or board or other
forum against Fulton or any of its Subsidiaries for alleged noncompliance
(including by any predecessor) with, or liability under, any Environmental Law
(as defined below) or relating to the presence of or release into the
environment of any Hazardous Material (as defined below), whether or not
occurring at or on a site owned, leased or operated by it or any of its
Subsidiaries. To Fulton's knowledge, the properties currently owned or operated
by Fulton or any of its Subsidiaries (including, without limitation, soil,
groundwater or surface water on, under or adjacent to the properties, and
buildings thereon) are not contaminated with and do not otherwise contain any
Hazardous Material other than as permitted under applicable Environmental Law.
Neither Fulton nor any of its Subsidiaries has received any notice, demand
letter, executive or administrative order, directive, request or other
communication (written or oral) for information from any federal, state, local
or foreign governmental entity or any third party indicating that it may be in
violation of, or liable under, any Environmental Law. To Fulton's knowledge,
there are no underground storage tanks on, in or under any properties owned or
operated by Fulton or any of its Subsidiaries and no underground storage tanks
have been closed or removed from any properties owned or operated by Fulton or
any of its Subsidiaries. To Fulton's knowledge, during the period of Fulton's or
any of its Subsidiaries' ownership or operation of any of their respective
current properties, there has been no contamination by or release of Hazardous
Materials in, on, under or affecting such properties. To Fulton's knowledge,
prior to the period of Fulton's or any of its Subsidiaries' ownership or
operation of any of their respective current properties, there was no
contamination by or release of Hazardous Material in, on, under or affecting
such properties.
"ENVIRONMENTAL LAW" means (i) any federal, state or local law,
statute, ordinance, rule, regulation, code, license, permit, authorization,
approval, consent, legal doctrine, order, directive, executive or administrative
order, judgment, decree, injunction, legal requirement or agreement with any
Governmental Entity relating to (A) the protection, preservation or restoration
of the environment (which includes, without limitation, air, water vapor,
surface water, groundwater, drinking water supply, structures, soil, surface
land, subsurface land, plant and animal life or any other natural resource), or
to human health or safety as it relates to Hazardous Materials, or (B) the
exposure to, or the use, storage, recycling, treatment, generation,
transportation, processing, handling, labeling, production, release or disposal
of, Hazardous Materials, in each case as amended and as now in effect. The term
Environmental Law includes all federal, state and local laws, rules, regulations
or requirements relating to the protection of the environment or health and
safety, including, without limitation, (i) the Federal Comprehensive
Environmental Response, Compensation and Liability Act of 1980, the Superfund
Amendments
A-17
<PAGE>
and Reauthorization Act of 1986, the Federal Water Pollution Control Act of
1972, the Federal Clean Air Act, the Federal Clean Water Act, the Federal
Resource Conservation and Recovery Act of 1976 (including, but not limited to,
the Hazardous and Solid Waste Amendments thereto and Subtitle I relating to
underground storage tanks), the Federal Solid Waste Disposal and the Federal
Toxic Substances Control Act, the Federal Insecticide, Fungicide and Rodenticide
Act, the Federal Occupational Safety and Health Act of 1970 as it relates to
Hazardous Materials, the Federal Hazardous Substances Transportation Act, the
Emergency Planning and Community Right-To-Know Act, the Safe Drinking Water Act,
the Endangered Species Act, the National Environmental Policy Act, the Rivers
and Harbors Appropriation Act or any so-called "Superfund" or "Superlien" law,
each as amended and as now or hereafter in effect, and (ii) any common law or
equitable doctrine (including, without limitation, injunctive relief and tort
doctrines such as negligence, nuisance, trespass and strict liability) that may
impose liability or obligations for injuries or damages due to, or threatened as
a result of, the presence of or exposure to any Hazardous Material.
"HAZARDOUS MATERIAL" means any substance (whether solid, liquid or
gas) which is or could be detrimental to human health or safety or to the
environment, currently or hereafter listed, defined, designated or classified as
hazardous, toxic, radioactive or dangerous, or otherwise regulated, under any
Environmental Law, whether by type or by quantity, including any substance
containing any such substance as a component. Hazardous Material includes,
without limitation, any toxic waste, pollutant, contaminant, hazardous
substance, toxic substance, hazardous waste, special waste, industrial
substance, oil or petroleum, or any derivative or by-product thereof, radon,
radioactive material, asbestos, asbestos-containing material, urea formaldehyde
foam insulation, lead and polychlorinated biphenyl.
(r) Loan Portfolio; Allowance.
-------------------------
(i) With respect to each loan owned by Fulton or its
Subsidiaries in whole or in part, to Fulton's knowledge (A) the note and the
related security documents are each legal, valid and binding obligations of the
maker or obligor thereof, enforceable against such maker or obligor in
accordance with their terms, (B) the note and the related security documents,
copies of which are included in the loan files, are true and correct copies of
the documents they purport to be and have not been suspended, amended, modified,
canceled or otherwise changed except as otherwise disclosed by documents in the
applicable loan file and (C) Fulton or one of its Subsidiaries is the sole
holder of legal and beneficial title to each loan reflected in the consolidated
financial statements of Fulton except as otherwise disclosed in the applicable
loan file or on the books and records of Fulton and its Subsidiaries.
(ii) The allowance for loan losses reflected in Fulton's
statement of financial condition at March 31, 1999 was, and the allowance for
possible losses shown on the balance sheets in Fulton's Reports for periods
ending after March 31, 1999 will be, in the opinion of management, adequate to
provide for losses inherent in Fulton's loan portfolio. At the Effective Time,
Fulton Savings' allowance for loan losses shall be not less than $1,100,000.
A-18
<PAGE>
(s) Deposits. None of the deposits of Fulton or any of its
--------
Subsidiaries is a "brokered" deposit.
(t) Anti-takeover Provisions Inapplicable. Fulton and its
-------------------------------------
Subsidiaries have taken all actions required to exempt Fulton, Central,
Acquisition Sub, Central Bank, the Agreement, the Plan of Bank Merger, the
Merger and the Bank Merger from any provisions of an antitakeover nature
contained in their organizational documents, and the provisions of any federal
or state "anti-takeover," "fair price," "moratorium," "control share
acquisition" or similar laws or regulations.
(u) Material Interests of Certain Persons. No officer or director of
-------------------------------------
Fulton, or any "associate" (as such term is defined in Rule 12b-2 under the
Exchange Act) of any such officer or director, has any material interest in any
material contract or property (real or personal), tangible or intangible, used
in or pertaining to the business of Fulton or any of its Subsidiaries.
(v) Insurance. In the opinion of management, Fulton and its
---------
Subsidiaries are presently insured for amounts deemed reasonable by management
against such risks as companies engaged in a similar business would, in
accordance with good business practice, customarily be insured. All of the
insurance policies and bonds maintained by Fulton and its Subsidiaries are in
full force and effect, Fulton and its Subsidiaries are not in default thereunder
and all material claims thereunder have been filed in due and timely fashion.
(w) Investment Securities; Derivatives.
----------------------------------
(i) Except for investments in Federal Home Loan Bank ("FHLB")
Stock, pledges to secure FHLB borrowings, reverse repurchase agreements entered
into in arms-length transactions pursuant to normal commercial terms and
conditions and entered into in the ordinary course of business and restrictions
that exist for securities to be classified as "held to maturity," none of the
investments reflected in the consolidated balance sheet of Fulton at March 31,
1999, and none of the investment securities held by it or any of its
Subsidiaries since March 31, 1999, is subject to any restriction (contractual or
statutory) that would materially impair the ability of the entity holding such
investment freely to dispose of such investment at any time.
(ii) Except for adjustable-rate mortgage loans and
adjustable-rate advances, neither Fulton nor any of its Subsidiaries is a party
to or has agreed to enter into an exchange-traded or over-the-counter equity,
interest rate, foreign exchange or other swap, forward, future, option, cap,
floor or collar or any other contract that is a derivative contract (including
various combinations thereof) or owns securities that (a) are referred to
generically as "structured notes," "high risk mortgage derivatives," "capped
floating rate notes" or "capped floating rate mortgage derivatives" or (b) are
likely to have changes in value as a result of interest or exchange rate changes
that significantly exceed normal changes in value attributable to interest or
exchange rate changes.
A-19
<PAGE>
(x) Indemnification. Except as provided in the certificate of
---------------
incorporation or bylaws of Fulton and the similar governing documents of its
Subsidiaries, neither Fulton nor any Subsidiary is a party to any
indemnification agreement with any of its present or former directors, officers,
or employees, and, to the best knowledge of Fulton, there are no claims for
which any such person would be entitled to indemnification under the
organization certificate of incorporation or bylaws of Fulton or the similar
governing documents of any of its Subsidiaries, under any applicable law or
regulation or under any indemnification agreement.
(y) Books and Records. The books and records of Fulton and its
-----------------
Subsidiaries on a consolidated basis have been, and are being, maintained in
accordance with applicable legal and accounting requirements and reflect in all
material respects the substance of events and transactions that should be
included therein.
(z) Corporate Documents. Complete and correct copies of the
-------------------
certificate of incorporation, bylaws and similar governing documents of Fulton
and each of Fulton's Subsidiaries, as in effect as of the date of this
Agreement, have previously been delivered to Central. The minute books of Fulton
and Fulton Savings constitute a complete and correct record of all actions taken
by their respective boards of directors (and each committee thereof) and their
stockholders. The minute books of each of Fulton's other Subsidiaries
constitutes a complete and correct record of all actions taken by their
respective boards of directors (and each committee thereof) and the stockholders
of each such Subsidiary.
(aa) Year 2000 Matters. Fulton and its Subsidiaries have completed a
-----------------
review of their computer systems to identify systems that could be affected by
the "Year 2000" issue and reasonably believe they have identified all such Year
2000 problems. Fulton's management has developed and commenced implementation of
a plan which is designed to complete any required initial changes to the
computer systems of Fulton and its Subsidiaries and to complete testing of those
changes by June 30, 1999 (the "YEAR 2000 PLAN"). Between the date of this
Agreement and the Effective Time, Fulton shall use commercially practicable
efforts to implement and/or continue to undertake its Year 2000 Plan. Year 2000
issues have not had, and are not reasonably expected to have, a Material Adverse
Effect on Fulton and its Subsidiaries, taken as a whole.
(bb) Proxy Statement. The information regarding Fulton to be
---------------
included in the proxy statement to be filed with the SEC by Fulton under the
Exchange Act and distributed in connection with Fulton's meeting of stockholders
to vote upon this Agreement and the Merger (as amended or supplemented from time
to time, the "PROXY STATEMENT") will not contain any untrue statement of a
material fact or omit 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 are made, not misleading.
(cc) Community Reinvestment Act Compliance. Fulton Savings is in
-------------------------------------
material compliance with the applicable provisions of the Community Reinvestment
Act ("CRA") and the regulations promulgated thereunder, and Fulton Savings
currently has a CRA rating of satisfactory or better. To Fulton's knowledge,
there is no fact or circumstance or set of facts or
A-20
<PAGE>
circumstances that would cause Fulton Savings to fail to comply with such
provisions or cause the CRA rating of Fulton Savings to fall below satisfactory.
(dd) Undisclosed Liabilities. As of the date hereof, Fulton and its
-----------------------
Subsidiaries have not incurred any debt, liability or obligation of any nature
whatsoever (whether accrued, contingent, absolute or otherwise and whether due
or to become due) except for (i) liabilities reflected on or reserved against in
the consolidated financial statements of Fulton as of June 30, 1998, (ii)
liabilities incurred since June 30, 1998 in the ordinary course of business
consistent with past practice that, either alone or when combined with all
similar liabilities, have not had, and would not reasonably be expected to have,
a Material Adverse Effect on Fulton and its Subsidiaries, taken as a whole, and
(iii) liabilities incurred for legal, accounting, financial advising fees and
out-of-pocket expenses in connection with a proposed sale or merger of Fulton.
Section 2.3. Representations and Warranties of Central. Central
-----------------------------------------
represents and warrants to Fulton that, except as specifically disclosed in
Central's Disclosure Letter:
(a) Organization.
------------
(i) Central is a corporation duly organized, validly
existing and in good standing under the laws of the State of Missouri and is
registered as a bank holding company under the Bank Holding Company Act, as
amended ("BHCA"). Central Bank is a trust company duly organized, validly
existing and in good standing under the laws of the State of Missouri and is a
Subsidiary of Central. Each Subsidiary of Central other than Central Bank is a
corporation, limited liability company or partnership duly organized, validly
existing and in good standing under the laws of its jurisdiction of
incorporation or organization. Each of Central and its Subsidiaries has all
requisite corporate power and authority to own, lease and operate its properties
and to carry on its business as now being conducted.
(ii) Central and each of its Subsidiaries has the requisite
corporate power and authority and is duly qualified to do business and is in
good standing in each jurisdiction in which the nature of its business or the
ownership or leasing of its properties makes such qualification necessary.
(iii) All of the shares of capital stock of Central Bank are
fully paid, nonassessable and not subject to any preemptive rights and (except
for directors' qualifying shares) are owned by Central free and clear of any
claims, liens, encumbrances or restrictions (other than those imposed by
applicable federal and state securities laws) and there are no agreements or
understandings with respect to the voting or disposition of any such shares.
(iv) The deposits of Central Bank are insured by the Bank
Insurance Fund of the FDIC to the extent provided in the FDIA.
A-21
<PAGE>
(b) Authority.
---------
(i) Central has all requisite corporate power and authority
to enter into this Agreement and, subject to receipt of all required regulatory
or governmental approvals, to consummate the transactions contemplated hereby.
The execution and delivery of this Agreement and the consummation of the
transactions contemplated hereby have been duly authorized by all necessary
corporate actions on the part of Central. This Agreement has been duly and
validly executed and delivered by Central and constitutes a valid and binding
obligation of Central, enforceable in accordance with its terms, subject to
applicable bankruptcy, insolvency and similar laws affecting creditors' rights
and remedies generally and subject, as to enforceability, to general principles
of equity, whether applied in a court of law or a court of equity.
(ii) Central Bank has all requisite corporate power and
authority to enter into the Plan of Bank Merger and, subject to approval of the
Plan of Bank Merger by the stockholders of Central Bank and the receipt of all
required regulatory or governmental approvals, to consummate the transactions
contemplated thereby. The execution and delivery of the Plan of Bank Merger and,
subject to the approval of the stockholders of Central Bank, the consummation of
the transactions contemplated thereby, have been duly authorized by all
necessary corporate actions on the part of Central Bank. The Plan of Bank
Merger, upon execution and delivery by Central Bank, will be duly and validly
executed and delivered by Central Bank and will constitute a valid and binding
obligation of Central Bank, enforceable in accordance with its terms, subject to
applicable bankruptcy, insolvency and similar laws affecting creditors' rights
and remedies generally and subject, as to enforceability, to general principles
of equity, whether applied in a court of law or a court of equity.
(c) No Violations; Consents. The execution, delivery and performance
-----------------------
of this Agreement by Central do not, and the consummation of the transactions
contemplated hereby will not, constitute (i) assuming receipt of all Requisite
Regulatory Approvals, a violation of any law, rule or regulation or any
judgment, decree, order, governmental permit or license to which Central or any
of its Subsidiaries (or any of their respective properties) is subject, (ii) a
violation of the articles of incorporation or bylaws of Central or the similar
organizational documents of any of its Subsidiaries or (iii) a breach or
violation of, or a default under (or an event which, with due notice or lapse of
time or both, would constitute a default under), or result in the termination
of, accelerate the performance required by, or result in the creation of any
lien, pledge, security interest, charge or other encumbrance upon any of the
properties or assets of Central or any of its Subsidiaries under, any of the
terms, conditions or provisions of any note, bond, indenture, deed of trust,
loan agreement or other agreement, instrument or obligation to which Central or
any of its Subsidiaries is a party, or to which any of their respective
properties or assets may be subject. The consummation by Central and Central
Bank of the transactions (including the Bank Merger) contemplated hereby
(exclusive of the effect of any changes effected pursuant to SECTION 1.8) will
not require any approval, consent or waiver under any such law, rule,
regulation, judgment, decree, order, governmental permit or license or the
approval, consent or waiver of any other party to any such agreement, or
instrument, other than (x) the approval of Central as the sole shareholder of
Acquisition Sub, (y) the approval of the shareholders of Central Bank, and (z)
the
A-22
<PAGE>
approval of the Board of Governors of the Federal Reserve System ("FRB") under
the BHCA, the approval of the Missouri Division of Finance under Chapter 362 of
the Missouri Revised Statutes, and the approval of the FDIC under Section 18(c)
of the FDIA (collectively, the "REQUISITE REGULATORY APPROVALS"). As of the date
hereof, the executive officers of Central know of no reason pertaining to
Central why any of the approvals referred to in this SECTION 2.3(C) should not
be obtained.
(d) Reports and Financial Statements.
--------------------------------
(i) Central and each of its Subsidiaries have each timely
filed all material reports, registrations and statements, together with any
amendments required to be made with respect thereto, that they were required to
file since December 31, 1996 with (a) the FDIC, (b) the FRB and (c) the Missouri
Division of Finance (collectively, "CENTRAL'S REPORTS") and, to Central's
knowledge, have paid all fees and assessments due and payable in connection
therewith. As of their respective dates, none of Central's Reports contained any
untrue statement of a material fact or omitted to state a material fact required
to be stated therein or necessary to make the statements made therein, in light
of the circumstances under which they were made, not misleading.
(ii) The financial statements of Central, as of December 31,
1998 and 1997 and for each of the years in the three-year period ended December
31, 1998, have been prepared in accordance with GAAP applied on a consistent
basis during the periods involved (except as may be indicated in the notes
thereto). The consolidated statements of condition at December 31, 1998 and 1997
(including in each case any related notes and schedules) and each of the
consolidated statements of operations, consolidated statements of cash flows and
consolidated statements of changes in stockholders' equity, for the years ended
December 31, 1998, 1997 and 1996 (including in each case any related notes and
schedules) fairly presented (a) the financial position of the entity or entities
to which it relates as of its date and (b) the results of operations,
stockholders' equity and cash flows, as the case may be, of the entity or
entities to which it relates for the periods set forth therein, in each case in
accordance with GAAP, except as may be noted therein.
(e) Absence of Certain Changes or Events. Except as disclosed in
------------------------------------
Central's Reports filed on or prior to the date of this Agreement, since
December 31, 1998, there has not been any Material Adverse Effect with respect
to Central and its Subsidiaries, taken as a whole.
(f) Absence of Claims. No litigation, proceeding, controversy, claim
-----------------
or action before any court or governmental agency is pending or has been
threatened against Central or any of its Subsidiaries that would reasonably be
expected to prevent or would adversely affect or which seeks to prohibit the
consummation of the transactions contemplated by this Agreement.
(g) Absence of Regulatory Actions. Neither Central nor any of its
-----------------------------
Subsidiaries is a party to any cease and desist order, written agreement or
memorandum of understanding with, or any commitment letter or similar written
undertaking to, or is subject to
A-23
<PAGE>
any action, proceeding, order or directive by, or is a recipient of any
extraordinary supervisory letter from any Government Regulator, or has adopted
any board resolutions at the request of any Government Regulator, nor has it
been advised by any Governmental Regulator that it is contemplating issuing or
requesting (or is considering the appropriateness of issuing or requesting) any
such action, proceeding, order, directive, written agreement, memorandum of
understanding, extraordinary supervisory letter, commitment letter, board
resolutions or similar written undertaking.
(h) Year 2000 Matters. Central has completed a review of its
-----------------
computer systems to identify systems that could be affected by the "Year 2000"
issue and reasonably believes it has identified all Year 2000 problems.
Central's management has developed and commenced implementation of a plan which
is designed to complete any required initial changes to its computer systems and
to complete testing of those changes by June 30, 1999. Between the date of this
Agreement and the Effective Time, Central shall use commercially practicable
efforts to implement and/or continue to undertake such plan. Year 2000 issues
are not reasonably expected to prevent or adversely affect the ability of
Central to obtain the Requisite Regulatory Approvals.
(i) Proxy Statement. The information regarding Central to be
---------------
provided to Fulton by Central for inclusion in the Proxy Statement will not
contain any untrue statement of a material fact or omit 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 are made, not
misleading.
(j) Community Reinvestment Act Compliance. Central's depository
-------------------------------------
institution Subsidiaries are each in material compliance with the applicable
provisions of the CRA and the regulations promulgated thereunder, and each
currently has a CRA rating of satisfactory or better. To Central's knowledge,
there is no fact or circumstance or set of facts or circumstances that would
cause any of its depository institution Subsidiaries to fail to comply with such
provisions or cause the CRA rating of any such institution to fall below
satisfactory.
(k) Availability of Funds. Central has readily available to it
---------------------
sufficient funds to satisfy its obligations under Article I of this Agreement.
ARTICLE III
CONDUCT PENDING THE MERGER
--------------------------
Section 3.1. Conduct of Fulton's Business Prior to the Effective
---------------------------------------------------
Time. Except as expressly provided in this Agreement, during the period from the
- ----
date of this Agreement to the Effective Time, Fulton shall, and shall cause its
Subsidiaries to, use its best efforts to (i) conduct its business in the
regular, ordinary and usual course consistent with past practice, (ii) maintain
and preserve intact its business organization, properties, leases, employees and
advantageous business relationships and retain the services of its officers and
key employees, (iii) take no action which would adversely affect or delay the
ability of Fulton or Central to perform their
A-24
<PAGE>
respective covenants and agreements on a timely basis under this Agreement, (iv)
take no action which would adversely affect or delay the ability of Fulton,
Fulton Savings, Central or Central Bank to obtain any necessary approvals,
consents or waivers of any governmental authority required for the transactions
contemplated hereby or which would reasonably be expected to result in any such
approvals, consents or waivers containing any material condition or restriction,
and (v) take no action that results in or is reasonably likely to have a
Material Adverse Effect on Fulton or Fulton Savings.
Section 3.2. Forbearance by Fulton. Without limiting the covenants
----------------------
set forth in SECTION 3.1 hereof, except as otherwise provided in this Agreement
and except to the extent required by law or regulation or any Governmental
Entity, during the period from the date of this Agreement to the Effective Time,
Fulton shall not, and shall not permit any of its Subsidiaries to, without the
prior consent of Central:
(a) change any provisions of the certificate of incorporation or
bylaws of Fulton or the similar governing documents of its Subsidiaries;
(b) issue, deliver or sell any shares of its capital stock or any
securities or obligations convertible or exercisable for any shares of its
capital stock or change the terms of any of its outstanding stock options or
warrants or issue, grant or sell any option, warrant, call, commitment, stock
appreciation right, right to purchase or agreement of any character relating to
the authorized or issued capital stock of Fulton except pursuant to the exercise
of stock options or warrants outstanding as of the date of this Agreement, or
split, combine, reclassify or adjust any shares of its capital stock or
otherwise change its capitalization;
(c) other than regular quarterly dividends not in excess of $0.075
per share of Fulton Common Stock, make, declare or pay any cash or stock
dividend or make any other distribution on, or directly or indirectly redeem,
purchase or otherwise acquire, any shares of its capital stock or any securities
or obligations convertible into or exchangeable for any shares of its capital
stock. Subject to applicable regulatory restrictions, if any, Fulton Savings may
pay a cash dividend that is, in the aggregate, sufficient to fund any dividend
by Fulton permitted hereunder;
(d) other than in the ordinary course of business consistent with
past practice, sell, transfer, assign, mortgage, encumber or otherwise dispose
of any of its material properties, leases, assets or other rights or agreements
to any individual, corporation or other entity other than a direct or indirect
wholly owned Subsidiary of Fulton;
(e) (i) increase in any manner the compensation or fringe benefits
of any of its employees or directors, other than general increases in
compensation for non-executive officer employees in the ordinary course of
business consistent with past practice; (ii) except as specifically provided for
elsewhere herein or as required by applicable law or to maintain qualification
pursuant to the IRC, adopt, amend, renew or terminate any Fulton Employee Plan;
(iii) hire any employee with an annual total compensation payment in excess of
$35,000; or (iv)
A-25
<PAGE>
enter into, modify or renew any employment contract or other agreement or
arrangement with any director, officer or other employee;
(f) except as contemplated by SECTION 4.2, change its method of
accounting as in effect at March 31, 1999, except as required by changes in GAAP
as concurred in by Fulton's independent auditors;
(g) settle any claim, action or proceeding involving any liability
of Fulton or any of its Subsidiaries for money damages in excess of $50,000 or
impose material restrictions upon the operations of Fulton or any of its
Subsidiaries;
(h) acquire or agree to acquire, by merging or consolidating with,
or by purchasing a substantial equity interest in or a substantial portion of
the assets of, or by any other manner, any business or any corporation,
partnership, association or other business organization or division thereof or
otherwise acquire or agree to acquire any assets, in each case which are
material, individually or in the aggregate, to Fulton, except in satisfaction of
debts previously contracted;
(i) except pursuant to commitments existing at the date hereof which
have previously been disclosed to Central, other than in the ordinary course
consistent with past practice, make any real estate loans secured by undeveloped
land or real estate located outside the State of Missouri (other than real
estate secured by one-to-four family homes) or make any construction loans
(other than construction loans secured by one-to-four family homes) outside the
State of Missouri;
(j) establish or commit to the establishment of any new branch or
other office facilities or file any application to relocate or terminate the
operation of any banking office;
(k) other than in the ordinary course of business consistent with
past practice in individual amounts not to exceed $50,000 and other than
investments for Fulton's portfolio made in accordance with SECTION 3.2(L), make
any investment either by purchase of stock or securities, contributions to
capital, property transfers, or purchase of any property or assets of any other
individual, corporation or other entity;
(l) make any investment in any debt security, including
mortgage-backed and mortgage-related securities (other than U.S. government and
U.S. government agency securities with final maturities not greater than five
years, mortgage-backed or mortgage related securities which would not be
considered "high risk" securities pursuant to Thrift Bulletin Number 52 issued
by the OTS or securities of the FHLB, in each case that are purchased in the
ordinary course of business consistent with past practice), or materially
restructure or change its investment securities portfolio, through purchases,
sales or otherwise;
(m) enter into, renew, amend or terminate any contract or agreement,
or make any change in any of its leases or contracts, other than with respect to
those involving aggregate
A-26
<PAGE>
payments of less than, or the provision of goods or services with a market value
of less than, $20,000 per annum and other than contracts or agreements covered
by SECTION 3.2(N);
(n) make, renegotiate, renew, increase, extend, modify or purchase
any loan, lease (credit equivalent), advance, credit enhancement or other
extension of credit, or make any commitment in respect of any of the foregoing,
except (A) in conformity with existing lending practices in amounts not to
exceed an aggregate of $500,000 with respect to any individual borrower or (B)
loans or advances as to which Fulton has a binding obligation to make such loan
or advances as of the date hereof;
(o) incur any additional borrowings other than short-term (six
months or less) FHLB borrowings and reverse repurchase agreements consistent
with past practice, or pledge any of its assets to secure any borrowings other
than as required pursuant to the terms of borrowings of Fulton or any Subsidiary
in effect at the date hereof or in connection with borrowings or reverse
repurchase agreements permitted hereunder;
(p) make any capital expenditures in excess of $20,000 per
expenditure other than pursuant to binding commitments existing on the date
hereof disclosed in the Fulton Disclosure Schedule and other than expenditures
necessary to maintain existing assets in good repair or to make payment of
necessary taxes;
(q) organize, capitalize, lend to or otherwise invest in any
Subsidiary;
(r) elect to any senior executive office any person who is not a
member of the senior executive officer team of Fulton as of the date of this
Agreement or elect to the Board of Directors of Fulton any person who is not a
member of the Board of Directors of Fulton as of the date of this Agreement;
(s) enter into any new line of business;
(t) take or omit to take any action that is intended or may
reasonably be expected to result in any of Fulton's representations and
warranties set forth in this Agreement being or becoming untrue in any material
respect, or which would make any of such representations and warranties untrue
or incorrect in any material respect if made anew after taking such action;
(u) agree or make any commitment to take any action that is
prohibited by this SECTION 3.2.
In the event that Central does not respond in writing to Fulton
within five business days of receipt by Central of a written request for Fulton
to engage in any of the actions for which Central's prior written consent is
required pursuant to this SECTION 3.2, Central shall be deemed to have consented
to such action. Any request by Fulton or response thereto by Central shall be
made in accordance with the notice provisions of SECTION 8.7, shall note that it
is a
A-27
<PAGE>
request pursuant to this SECTION 3.2 and shall state that a failure to respond
within five business days shall constitute consent.
Section 3.3. Conduct of Central's Business Prior to the Effective
---------------------------------------------------
Time. Except as expressly provided in this Agreement, during the period from the
- ----
date of this Agreement to the Effective Time, Central shall, and shall cause its
Subsidiaries to, use its best efforts to (i) take no action which would
materially adversely affect or delay the ability of Fulton or Central to perform
their respective covenants and agreements on a timely basis under this Agreement
and (ii) take no action which would adversely affect or delay the ability of
Fulton, Central, Fulton Savings or Central Bank to obtain any necessary
approvals, consents or waivers of any governmental authority required for the
transactions contemplated hereby or which would reasonably be expected to result
in any such approvals, consents or waivers containing any material condition or
restriction.
ARTICLE IV
COVENANTS
Section 4.1. Acquisition Proposals. From and after the date hereof
---------------------
until the termination of this Agreement, neither Fulton or Fulton Savings, nor
any of their respective officers, directors, employees, representatives, agents
or affiliates (including, without limitation, any investment banker, attorney or
accountant retained by Fulton or any of its Subsidiaries), will, directly or
indirectly, initiate, solicit or knowingly encourage (including by way of
furnishing non-public information or assistance), or facilitate knowingly, any
inquiries or the making of any proposal that constitutes, or may reasonably be
expected to lead to, any Acquisition Proposal (as defined below), or enter into
or maintain or continue discussions or negotiate with any person or entity in
furtherance of such inquiries or to obtain an Acquisition Proposal or agree to
or endorse any Acquisition Proposal; PROVIDED, HOWEVER, that nothing contained
in this SECTION 4.1 shall prohibit the Board of Directors of Fulton from (i)
furnishing information to, or entering into discussions or negotiations with
any, person or entity that makes an unsolicited written, bona fide proposal to
acquire Fulton pursuant to a merger, consolidation, share exchange, business
combination, tender or exchange offer or other similar transaction, if, and only
to the extent that, (A) the Board of Directors of Fulton receives a written
opinion from its independent financial advisor that such proposal may be
superior to the Merger from a financial point-of-view to Fulton's stockholders
and (B) the Board of Directors of Fulton, after consultation with independent
legal counsel, determines in good faith that such action is necessary for the
Board of Directors of Fulton to comply with its fiduciary duties to stockholders
under applicable law (such proposal that satisfies (A) and (B) being referred to
herein as a "SUPERIOR PROPOSAL"), (ii) complying with Rule 14e-2 promulgated
under the Exchange Act with regard to a tender or exchange offer or (iii)
failing to make or withdrawing or modifying its recommendation and entering into
a Superior Proposal if there exists a Superior Proposal and the Board of
Directors of Fulton, after consultation with independent legal counsel,
determines in good faith that such action is necessary for the Board of
Directors of Fulton to comply with its fiduciary duties to stockholders under
applicable law.
A-28
<PAGE>
For purposes of this Agreement, "ACQUISITION PROPOSAL" shall mean any of
the following (other than the transactions contemplated hereunder) involving
Fulton or any of its Subsidiaries: (i) any merger, consolidation, share
exchange, business combination, or other similar transaction; (ii) any sale,
lease, exchange, mortgage, pledge, transfer or other disposition of 25% or more
of the assets of Fulton or Fulton Savings, taken as a whole, in a single
transaction or series of transactions; (iii) any tender offer or exchange offer
for 25% or more of the outstanding shares of capital stock of Fulton or the
filing of a registration statement under the Securities Act of 1933 in
connection therewith; or (iv) any public announcement of a proposal, plan or
intention to do any of the foregoing or any agreement to engage in any of the
foregoing.
Section 4.2. Certain Policies of Fulton.
--------------------------
(a) At the request of Central, Fulton shall cause Fulton Savings to
modify and change its loan, litigation and real estate valuation policies and
practices (including loan classifications and levels of reserves) and investment
and asset/liability management policies and practices after the date on which
all Requisite Regulatory Approvals and stockholder approvals are received, and
after receipt of written confirmation from Central that it is not aware of any
fact or circumstance that would prevent completion of the Merger, and prior to
the Effective Time so as to be consistent on a mutually satisfactory basis with
those of Central Bank; PROVIDED, HOWEVER, that Fulton shall not be required to
take such action more than 30 days prior to the Effective Date; and PROVIDED,
FURTHER, that such policies and procedures are not prohibited by GAAP or any
applicable laws and regulations.
(b) Fulton's representations, warranties and covenants contained in
this Agreement shall not be deemed to be untrue or breached in any respect for
any purpose as a consequence of any modifications or changes undertaken solely
on account of this SECTION 4.2. Central agrees to hold harmless, indemnify and
defend Fulton and its Subsidiaries, and their respective directors, officers and
employees, for any loss, claim, liability or other damage caused by or resulting
from compliance with this SECTION 4.2.
Section 4.3. Access and Information. Upon reasonable notice, Fulton
----------------------
shall (and shall cause its Subsidiaries to) afford Central and its
representatives (including, without limitation, directors, officers and
employees of Central and its affiliates and counsel, accountants and other
professionals retained by Central) such reasonable access during normal business
hours throughout the period prior to the Effective Time to the books, records
(including, without limitation, tax returns and work papers of independent
auditors), contracts, properties, personnel and to such other information
relating to Fulton and its Subsidiaries as Central may reasonably request;
PROVIDED, HOWEVER, that no investigation pursuant to this SECTION 4.3 shall
affect or be deemed to modify any representation or warranty made herein. Fulton
shall provide Central with true and complete copies of all financial and other
information relating to the business or operations of Fulton and its
Subsidiaries that is provided to directors of Fulton and Fulton Savings in
connection with meetings of their Board of Directors of committees thereof. In
furtherance, and not in limitation of the foregoing, Fulton shall make available
to Central all information necessary or appropriate for the preparation and
filing of all real property and real estate transfer tax returns and reports
required by reason of the Merger or the Bank Merger.
A-29
<PAGE>
Central will not, and will cause its representatives not to, use any information
obtained pursuant to this SECTION 4.3 for any purpose unrelated to the
consummation of the transactions contemplated by this Agreement. Subject to the
requirements of applicable law, Central will keep confidential, and will cause
its representatives to keep confidential, all information and documents obtained
pursuant to this SECTION 4.3 unless such information (i) was already known to
Central or an affiliate of Central, other than pursuant to a confidentiality
agreement or other confidential relationship, (ii) becomes available to Central
or an affiliate of Central from other sources not known by such party to be
bound by a confidentiality agreement or other obligation of secrecy, (iii) is
disclosed with the prior written approval of Fulton or (iv) is or becomes
readily ascertainable from published information or trade sources. In the event
that this Agreement is terminated or the transactions contemplated by this
Agreement shall otherwise fail to be consummated, each party shall promptly
cause all copies of documents or extracts thereof containing information and
data as to another party hereto (or an affiliate of any party hereto) to be
returned to the party that furnished the same.
Section 4.4. Certain Filings, Consents and Arrangements. Central
-------------------------------------------
shall as soon as practicable and in cooperation with Fulton (and in any event
within 45 days after the date hereof) make, or cause to be made, any filings and
applications and provide any notices required to be filed or provided in order
to obtain all approvals, consents and waivers of Governmental Entities and third
parties necessary or appropriate for the consummation of the transactions
contemplated hereby. Central shall provide Fulton and its counsel with an
opportunity to review all filings, applications and notices prior to their being
submitted to any governmental authority and shall provide Fulton with copies of
all filings, applications and notices submitted to any governmental authority.
Section 4.5. Antitakeover Provisions. Fulton and its Subsidiaries
-----------------------
shall take all steps required by any relevant federal or state law or regulation
or under any relevant agreement or other document to exempt or continue to
exempt Central, Acquisition Sub, Central Bank, the Agreement, the Plan of Bank
Merger, the Merger and the Bank Merger from any provisions of an antitakeover
nature contained in Fulton's or its Subsidiaries' organization certificates and
bylaws and the provisions of any federal or state antitakeover laws.
Section 4.6. Additional Agreements. Subject to the terms and
---------------------
conditions herein provided, each of the parties hereto agrees to use all
reasonable efforts to take promptly, or cause to be taken promptly, all actions
and to do promptly, or cause to be done promptly, all things necessary, proper
or advisable under applicable laws and regulations to consummate and make
effective the transactions contemplated by this Agreement, including the Merger
and the Bank Merger, as expeditiously as possible, including using efforts to
obtain all necessary actions or non-actions, extensions, waivers, consents and
approvals from all applicable Governmental Entities, effecting all necessary
registrations, applications and filings (including, without limitation, filings
under any applicable state securities laws) and obtaining any required
contractual consents and regulatory approvals.
A-30
<PAGE>
Section 4.7. Publicity. Fulton and Central shall consult with each
---------
other in issuing any press releases or otherwise making public statements with
respect to the Merger and any other transaction contemplated hereby and in
making any filings with any Governmental Entity or with any national securities
exchange with respect thereto.
Section 4.8. Stockholders Meeting. Fulton shall take all action
--------------------
necessary, in accordance with applicable law and its Certificate of
Incorporation and Bylaws, to convene a meeting of its stockholders ("STOCKHOLDER
MEETING") as promptly as practicable for the purpose of considering and voting
on approval and adoption of this Agreement, the Merger and the other
transactions provided for in this Agreement. Except to the extent legally
required for the discharge by the Board of Directors of its fiduciary duties as
advised by such Board's counsel, the Board of Directors of Fulton shall (a)
recommend at its Stockholder Meeting that the stockholders vote in favor of and
approve the transactions provided for in this Agreement and (b) use its best
reasonable efforts to solicit such approvals. Fulton may employ professional
proxy solicitors to assist in contacting stockholders in connection with
soliciting favorable votes on the Merger.
Section 4.9. Proxy Statement. As soon as practicable after the date
---------------
hereof, Fulton shall prepare a Proxy Statement for the purpose of taking
stockholder action on the Merger and this Agreement and shall file the Proxy
Statement with the SEC, respond to comments of the staff of the SEC and,
promptly after the Proxy Statement is cleared by the SEC, mail the Proxy
Statement to the holders of record (as of the applicable record date) of shares
of voting stock of Fulton. Fulton shall provide Central and its counsel with an
opportunity to review the Proxy Statement prior to its being filed with the SEC
and shall provide Central and its counsel with copies of the definitive Proxy
Statement.
Section 4.10. Notification of Certain Matters. Fulton shall give
-------------------------------
prompt notice to Central of: (a) any event or notice of, or other communication
relating to, a default or event that, with notice or lapse of time or both,
would become a default, received by Fulton or any of its Subsidiaries subsequent
to the date of this Agreement and prior to the Effective Time, under any
contract material to the financial condition, properties, businesses or results
of operations of Fulton and its Subsidiaries taken as a whole to which Fulton or
any Subsidiary is a party or is subject; and (b) any event, condition, change or
occurrence which individually or in the aggregate has, or which, so far as
reasonably can be foreseen at the time of its occurrence, is reasonably likely
to result in a Material Adverse Effect with respect to Fulton and its
Subsidiaries taken as a whole. Each of Fulton and Central shall give prompt
notice to the other party of any (i) notice or other communication from any
third party alleging that the consent of such third party is or may be required
in connection with any of the transactions contemplated by this Agreement and
(ii) the occurrence or non-occurrence of any fact or event which would be
reasonably likely to cause any representation or warranty contained in this
Agreement to be untrue or inaccurate in any respect at any time from the date
hereof to the Effective Time or to cause any covenant, condition or agreement
under this Agreement not to be complied with or satisfied in all material
respects.
A-31
<PAGE>
Section 4.11. Employees, Directors and Officers.
---------------------------------
(a) All persons who are employees of Fulton Savings immediately
prior to the Effective Time and whose employment is not specifically terminated
at or prior to the Effective Time (a "CONTINUING EMPLOYEE") shall, at the
Effective Time, become employees of Central Bank; PROVIDED, HOWEVER, that in no
event shall any of Fulton's employees be officers of Central Bank, or have or
exercise any power or duty conferred upon such an officer, unless and until duly
elected or appointed to such position in accordance with the bylaws of Central
Bank. All of the Continuing Employees shall be employed at the will of Central
Bank and no contractual right to employment shall inure to such employees
because of this Agreement. Central will use its best efforts to retain all of
the employees of Fulton Savings, subject to the qualifications of such employees
and the needs of Central Bank.
(b) Except as otherwise provided in paragraph (d) of this SECTION
4.11, appropriate steps shall be taken to terminate all Fulton Employee Plans as
of the Effective Time or as promptly as practical thereafter. Immediately
following the Effective Time, each Continuing Employee shall be eligible to
participate in Central's benefit plans on the same basis as a new employee of
Central or Central Bank (it being understood that inclusion of Continuing
Employees in Central's benefit plans may occur at different times with respect
to different plans); PROVIDED, HOWEVER, that with respect to each Central
benefit plan, for purposes of determining eligibility to participate and vesting
(but not for the accrual of benefits), service with Fulton or Fulton Savings
shall be treated as service with Central Bank. Service with Fulton or Fulton
Savings also shall be treated as service with Central Bank for purposes of
satisfying any waiting periods, evidence of insurability requirements, or the
application of any preexisting condition limitation with respect to any Central
or Central Bank "welfare benefit plan", as defined in Section 3(1) of ERISA.
Each Continuing Employee shall receive credit for service with Fulton or Fulton
Savings for purposes of computing vacation pay benefits.
(c) Central agrees to honor existing employment agreements,
including the change in control provisions of such agreements, between Fulton
and Fulton Savings and certain employees as set forth in Fulton's Disclosure
Letter. Such payments may be made by Fulton immediately prior to the Effective
Time if so agreed to by Central, or on such other schedule as may be mutually
agreed upon by the individual employee and Central.
(d) Prior to the Effective Time, Fulton shall terminate the Fulton
Employee Stock Ownership Plan ("ESOP") by proper action of the Board of
Directors of Fulton. As soon as administratively practicable after the Effective
Time, the ESOP shall apply any cash received in the Merger with respect to
unallocated shares of Fulton Common Stock to the repayment in full of the
outstanding ESOP indebtedness. Any surplus cash remaining after repayment of
such indebtedness shall be allocated as investment earnings of the ESOP to the
stock accounts of ESOP participants (and, if required, to the accounts of former
participants or their beneficiaries) in proportion to their stock account
balances in a manner consistent with the terms of the ESOP plan document.
A-32
<PAGE>
(e) Central shall cause all of the members of Fulton's Board of
Directors as of the date of this Agreement, who are willing to so serve, to be
elected to or appointed as members of an advisory board ("ADVISORY BOARD") as of
the Effective Time. Central shall maintain the Advisory Board for a period of
not less than one year, but may modify or dissolve the Advisory Board in its
sole discretion after the first anniversary of the Effective Time. The function
of the Advisory Board shall be to advise Central with respect to deposit and
lending activities in Fulton's market area and to maintain and develop customer
relationships. Each member of the Advisory Board shall receive a monthly fee of
$200, plus appropriate fees for any additional services such member shall
perform.
Section 4.12. Indemnification.
----------------
(a) From and after the Effective Time through the sixth anniversary
of the Effective Date, Central (and any successor) agrees to indemnify and hold
harmless each present and former director and officer of Fulton and its
Subsidiaries and each officer or employee of Fulton and its Subsidiaries that is
serving or has served as a director or trustee of another entity expressly at
Fulton's request or direction (each, an "INDEMNIFIED PARTY"), against any costs
or expenses (including reasonable attorneys' fees), judgments, fines, amounts
paid in settlement, losses, claims, damages or liabilities (collectively,
"COSTS") incurred in connection with any claim, action, suit, proceeding or
investigation, whether civil, criminal, administrative or investigative, arising
out of matters existing or occurring at or prior to the Effective Time
(including the transactions contemplated by this Agreement), whether asserted or
claimed prior to, at or after the Effective Time, and to advance any such Costs
to each Indemnified Party as they are from time to time incurred, in each case
to the fullest extent such Indemnified Party would have been permitted to be
indemnified as a director, officer or employee of Fulton and its Subsidiaries
and under the DGCL (as in effect on the Effective Date).
(b) Any Indemnified Party wishing to claim indemnification under
SECTION 4.12(A), upon learning of any such claim, action, suit, proceeding or
investigation, shall promptly notify Central thereof, but the failure to so
notify shall not relieve Central of any liability it may have hereunder to such
Indemnified Party if such failure does not materially and substantially
prejudice Central. In the event of any such claim, action, suit, proceeding or
investigation: (i) Central shall have the right to assume the defense thereof
with counsel reasonably acceptable to the Indemnified Party and Central shall
not be liable to such Indemnified Party for any legal expenses of other counsel
subsequently incurred by such Indemnified Party in connection with the defense
thereof, except that if Central does not elect to assume such defense within a
reasonable time or counsel for the Indemnified Party at any time advises that
there are issues which raise conflicts of interest between Central and the
Indemnified Party (and counsel for Central does not disagree), the Indemnified
Party may retain counsel satisfactory to such Indemnified Party, and Central
shall remain responsible for the reasonable fees and expenses of such counsel as
set forth above, to be paid promptly as statements therefor are received;
PROVIDED, HOWEVER, that Central shall be obligated pursuant to this paragraph
(b) to pay for only one firm of counsel for all Indemnified Parties in any one
jurisdiction with respect to any given claim, action, suit, proceeding or
investigation unless the use of one counsel for such Indemnified Parties would
present such counsel with a conflict of interest; (ii) the Indemnified
A-33
<PAGE>
Party will reasonably cooperate in the defense of any such matter; and (iii)
Central shall not be liable for any settlement effected by an Indemnified Party
without its prior written consent, which consent may not be withheld unless such
settlement is unreasonable in light of such claims, actions, suits, proceedings
or investigations against, or defenses available to, such Indemnified Party.
(c) Central shall pay all reasonable Costs, including attorneys'
fees, that may be incurred by any Indemnified Party in successfully enforcing
the indemnity and other obligations provided for in this SECTION 4.12 to the
fullest extent permitted under the DGCL (as in effect on the Effective Date).
The rights of each Indemnified Party hereunder shall be in addition to any other
rights such Indemnified Party may have under applicable law.
(d) Central shall maintain Fulton's existing directors and officers'
insurance policy (or provide a policy providing comparable coverage and amounts
on terms no less favorable to the persons currently covered by Fulton's existing
policy, including Central's existing policy if its meets the foregoing standard)
covering persons who are currently covered by such insurance for a period of six
years after the Effective Date.
(e) In the event Central or any of its successors or assigns (i)
consolidates with or merges into any other person or entity and shall not be the
continuing or surviving corporation or entity of such consolidation or merger or
(ii) transfers or conveys all or substantially all of its properties and assets
to any person or entity, then, and in each such case, to the extent necessary,
proper provision shall be made so that the successors and assigns of Central
assume the obligations set forth in this SECTION 4.12.
(f) The provisions of this SECTION 4.12 are intended to be for the
benefit of, and shall be enforceable by, each Indemnified Party and his or her
representatives.
ARTICLE V
CONDITIONS TO CONSUMMATION
--------------------------
Section 5.1. Conditions to Each Party's Obligations. The respective
--------------------------------------
obligations of each party to effect the Merger shall be subject to the
satisfaction of the following conditions:
(a) This Agreement shall have been approved by the requisite vote of
Fulton's stockholders in accordance with applicable laws and regulations.
(b) The Requisite Regulatory Approvals shall have been obtained and
shall remain in full force and effect, and all statutory waiting periods in
respect thereof shall have expired.
(c) No party hereto shall be subject to any order, decree, ruling or
injunction of a court or agency of competent jurisdiction which enjoins or
prohibits the consummation of the Merger, the Bank Merger or any other
transactions contemplated by this Agreement and no
A-34
<PAGE>
Governmental Entity shall have instituted any proceeding for the purpose of
enjoining or prohibiting the consummation of the Merger, the Bank Merger or any
transactions contemplated by this Agreement.
(d) No statute, rule or regulation shall have been enacted,
promulgated, or enforced by any governmental authority which prohibits,
restricts or makes illegal consummation of the Merger, the Bank Merger or any
other transactions contemplated by this Agreement.
Section 5.2. Conditions to the Obligations of Central. The
----------------------------------------
obligations of Central to effect the Merger shall be further subject to the
satisfaction of the following additional conditions, any one or more of which
may be waived by Central:
(a) Each of the obligations of Fulton and Fulton Savings,
respectively, required to be performed by it at or prior to the Closing pursuant
to the terms of this Agreement shall have been duly performed and complied with
in all material respects and the representations and warranties of Fulton and
Fulton Savings contained in this Agreement shall be true and correct as of the
date of this Agreement and as of the Effective Time as though made at and as of
the Effective Time (except as to any representation or warranty which
specifically relates to an earlier date) except where the failure of such
representations and warranties to be so true and correct (without giving effect
to any limitation as to "materiality" set forth therein) would not have,
individually or in the aggregate, a Material Adverse Effect on Fulton, and
Central shall have received a certificate to the foregoing effect signed by the
chief executive officer and the chief financial or principal accounting officer
of Fulton.
(b) On the Closing Date, Dissenters' Shares shall not constitute
more than 10% of the outstanding shares of Fulton Common Stock.
Section 5.3. Conditions to the Obligations of Fulton. The
---------------------------------------
obligations of Fulton to effect the Merger shall be further subject to the
satisfaction of the following additional conditions, any one or more of which
may be waived by Fulton:
(a) Each of the obligations of Central and Central Bank,
respectively, required to be performed by it at or prior to the Closing pursuant
to the terms of this Agreement shall have been duly performed and complied with
in all material respects and the representations and warranties of Central and
Central Bank contained in this Agreement shall be true and correct as of the
date of this Agreement and as of the Effective Time as though made at and as of
the Effective Time (except as to any representation or warranty which
specifically relates to an earlier date) except where the failure of such
representations and warranties to be so true and correct (without giving effect
to any limitation as to "materiality" set forth therein) would not have,
individually or in the aggregate, a Material Adverse Effect on Central, and
Fulton shall have received a certificate to the foregoing effect signed by the
chief executive officer and the chief financial or principal accounting officer
of Central.
A-35
<PAGE>
(b) Central shall have provided to the Exchange Agent sufficient
cash to pay the aggregate Merger Consideration and Fulton shall have received a
certificate from the Exchange Agent to such effect.
ARTICLE VI
TERMINATION
-----------
Section 6.1. Termination. This Agreement may be terminated, and the
-----------
Merger abandoned, at or prior to the Effective Date, either before or after any
requisite stockholder approval:
(a) by the mutual consent of Central and Fulton in a written
instrument, if the Board of Directors of each so determines by vote of a
majority of the members of its entire Board; or
(b) by Central or Fulton, if its Board of Directors so determines by
vote of a majority of the members of its entire Board, in the event of the
failure of the stockholders of Fulton to approve the Agreement at the
Stockholder Meeting; PROVIDED, HOWEVER, that Fulton shall only be entitled to
terminate the Agreement pursuant to this clause if it has complied in all
material respects with its obligations under SECTION 4.8; or
(c) by Central or Fulton, by written notice to the other party, if
either (i) any approval, consent or waiver of a governmental agency required to
permit consummation of the transactions contemplated hereby shall have been
denied or (ii) any governmental authority of competent jurisdiction shall have
issued a final, unappealable order enjoining or otherwise prohibiting
consummation of the transactions contemplated by this Agreement; or
(d) by Central or Fulton, if its Board of Directors so determines by
vote of a majority of the members of its entire Board, in the event that the
Merger is not consummated by March 31, 2000, unless the failure to so consummate
by such time is due to the breach of any representation, warranty or covenant
contained in this Agreement by the party seeking to terminate; or
(e) by Central or Fulton (provided that the party seeking
termination is not then in material breach of any representation, warranty,
covenant or other agreement contained herein), in the event of (i) a failure to
perform or comply by the other party with any covenant or agreement of such
other party contained in this Agreement, which failure or non-compliance is
material in the context of the transactions contemplated by this Agreement, or
(ii) any inaccuracies, omissions or breach in the representations, warranties,
covenants or agreements of the other party contained in this Agreement the
circumstances as to which either individually or in the aggregate have, or
reasonably could be expected to have, a Material Adverse Effect on such other
party; in either case which has not been or cannot be cured within 30 calendar
days after written notice thereof is given by the party seeking to terminate to
such other party; or
A-36
<PAGE>
(f) by Fulton, if the Board of Directors of Fulton reasonably
determines that a proposal made by a third party to acquire, directly or
indirectly, including pursuant to a tender offer, exchange offer, merger,
consolidation, business combination, recapitalization, liquidation, dissolution
or similar transaction, for consideration consisting of cash and/or securities,
more than 50% of the combined voting power of the shares of Fulton Common Stock
then outstanding or all or substantially all of the assets of Fulton constitutes
a Superior Proposal and that such proposal must be accepted in order to comply
with the Board of Directors' fiduciary duties to stockholders under applicable
law; PROVIDED, HOWEVER, that prior to any such termination, Fulton shall use its
reasonable efforts to negotiate in good faith with Central to make such
adjustments in the terms and conditions of this Agreement a would enable Fulton
to proceed with the transactions contemplated herein.
Section 6.2. Termination Fees.
----------------
(a) In the event that (a) Fulton terminates this Agreement pursuant
to SECTION 6.1(F) or (b) Central or Fulton terminates this Agreement pursuant to
SECTION 6.1(B) after it has been publicly announced prior to the Stockholders
Meeting that a person (other than Central) has made or disclosed an intention to
make a proposal to engage in a merger, consolidation, share exchange or other
similar transaction with Fulton or Fulton Savings and within 12 months after the
termination of this Agreement Fulton or Fulton Savings enters into an agreement
with any person to effect a merger, consolidation, share exchange or other
similar transaction, then Fulton shall, within 10 business days following
written demand by Central, pay to Central an amount equal to $750,000.
(b) In the event that Fulton willfully breaches a representation,
warranty or covenant contained herein and, as a result thereof, Central
terminates this Agreement pursuant to SECTION 6.1(E) at a time when Fulton was
not entitled to terminate this Agreement under Section 6.1(B), (C), (D), (E) or
(F), then Fulton shall, within 10 business days following written demand by the
Central, pay to Central an amount equal to $200,000.
(c) In the event that Central willfully breaches a representation,
warranty or covenant contained herein and, as a result thereof, Fulton
terminates this Agreement pursuant to SECTION 6.1(E) at a time when Central was
not entitled to terminate this Agreement under Section 6.1(B), (C), (D), or (E),
then Central shall, within 10 business days following written demand by the
Fulton, pay to Fulton an amount equal to $200,000.
Section 6.3. Effect of Termination. In the event of termination of
---------------------
this Agreement by either Central or Fulton prior to the consummation of the
Merger as provided in SECTION 6.1, this Agreement shall forthwith become void
and have no effect except (i) the obligations of the parties under SECTIONS 4.3
(with respect to confidentiality and the return of information), 6.2 and 8.6
shall survive any termination of this Agreement and (ii) that notwithstanding
anything to the contrary contained in this Agreement, no party shall be relieved
or released from any liabilities or damages arising out of its willful breach of
any provision of this Agreement.
A-37
<PAGE>
ARTICLE VII
CLOSING, EFFECTIVE DATE AND EFFECTIVE TIME
------------------------------------------
Section 7.1. Effective Date and Effective Time. The closing of the
---------------------------------
transactions contemplated hereby ("CLOSING") shall take place at the offices of
Central, 238 Madison Avenue, Jefferson City, Missouri, unless another place is
agreed to by Central and Fulton, on a date designated by Central ("CLOSING
DATE") that is no later than the last day of the month in which the expiration
of the last applicable waiting period in connection with notices to and
approvals of governmental authorities shall occur and all conditions to the
consummation of this Agreement are satisfied or waived, or on such other date as
may be agreed to by the parties. Prior to the Closing Date, Acquisition Sub and
Fulton shall execute a Certificate of Merger in accordance with all appropriate
legal requirements, which shall be filed as required by law on the Closing Date,
and the Merger provided for therein shall become effective upon such filing or
on such date as may be specified in such Certificate of Merger. The date of such
filing or such later effective date as specified in the Certificate of Merger is
herein referred to as the "EFFECTIVE DATE." The "EFFECTIVE TIME" of the Merger
shall be as set forth in the Certificate of Merger.
Section 7.2. Deliveries at the Closing. Subject to the provisions of
-------------------------
Articles V and VI, on the Closing Date there shall be delivered to Central and
Fulton the documents and instruments required to be delivered under Article V.
ARTICLE VIII
CERTAIN OTHER MATTERS
---------------------
Section 8.1. Certain Definitions; Interpretation. As used in this
-----------------------------------
Agreement, the following terms shall have the meanings indicated:
"material" means material to Central or Fulton (as the case may be)
and its respective Subsidiaries, taken as a whole.
"Material Adverse Effect" means an effect which is material and
adverse to the business, financial condition or results of operations of
Fulton or Central, as the context may dictate, and its Subsidiaries (as
defined herein) taken as a whole; PROVIDED, HOWEVER, that any such effect
resulting from any (A) changes in laws, rules or regulations or generally
accepted accounting principles or regulatory accounting requirements or
interpretations thereof that apply to both Central and Central Bank and
Fulton and Fulton Savings, as the case may be, or to similarly situated
financial and/or depository institutions or (B) changes in economic
conditions affecting financial institutions generally, including but not
limited to, changes in the general level of market interest rates shall
not be considered in determining if a Material Adverse Effect has
occurred.
"knowledge" shall mean, with respect to a party hereto, actual
knowledge of any of the members of the Board of Directors of that party or
any officer of that party with the title ranking not less than vice
president.
A-38
<PAGE>
"person" includes an individual, corporation, limited liability
company, partnership, association, trust or unincorporated organization.
When a reference is made in this Agreement to Sections, Exhibits or
Schedules, such reference shall be to a Section of, Exhibit or Schedule to, this
Agreement unless otherwise indicated. The table of contents and headings
contained in this Agreement are for ease of reference only and shall not affect
the meaning or interpretation of this Agreement. Whenever the words "include,"
"includes" or "including" are used in this Agreement, they shall be deemed
followed by the words "without limitation." Any singular term in this Agreement
shall be deemed to include the plural, and any plural term the singular. Any
reference to gender in this Agreement shall be deemed to include any other
gender.
Section 8.2. Survival. Only those agreements and covenants of the
--------
parties that are by their terms applicable in whole or in part after the
Effective Time, including SECTIONS 4.3, 4.11 and 4.12 of this Agreement, shall
survive the Effective Time. All other representations, warranties, agreements
and covenants shall be deemed to be conditions of the Agreement and shall not
survive the Effective Time.
Section 8.3. Waiver; Amendment. Prior to the Effective Time, any
-----------------
provision of this Agreement may be (i) waived in writing by the party benefitted
by the provision or (ii) amended or modified at any time (including the
structure of the transaction) by an agreement in writing between the parties
hereto except that, after the vote by the stockholders of Fulton or Central, no
amendment or modification may be made that would reduce the amount or alter or
change the kind of consideration to be received by holders of Fulton Common
Stock or contravene any provision of the DGCL or the federal banking laws, rules
and regulations.
Section 8.4. Counterparts. This Agreement may be executed in
------------
counterparts each of which shall be deemed to constitute an original, but all of
which together shall constitute one and the same instrument.
Section 8.5. Governing Law. This Agreement shall be governed by, and
-------------
interpreted in accordance with, the laws of the State of Missouri, without
regard to conflicts of laws principles.
Section 8.6. Expenses. Each party hereto will bear all expenses
--------
incurred by it in connection with this Agreement and the transactions
contemplated hereby.
Section 8.7. Notices. All notices, requests, acknowledgments and
-------
other communications hereunder to a party shall be in writing and shall be
deemed to have been duly given when delivered by hand, overnight courier or
facsimile transmission (confirmed in writing) to such party at its address or
facsimile number set forth below or such other address or facsimile transmission
as such party may specify by notice (in accordance with this provision) to the
other party hereto.
A-39
<PAGE>
If to Fulton, to:
Fulton Bancorp, Inc.
410 Market Street
Fulton, Missouri 65251
Facsimile: (573) 642-6570
Attention:Kermit D. Gohring, President
With copies to:
Paul M. Aguggia, Esq.
Muldoon, Murphy & Faucette LLP
5101 Wisconsin Avenue, N.W.
Washington, D.C. 20016
Facsimile: (202) 966-9409
If to Central, to:
Central Bancompany, Inc.
238 Madison
Jefferson City, Missouri 65101
Facsimile: (573) 635-1434
Attention:Robert M. Robuck
Vice Chairman of the Board
With copies to:
Charles A. Weber, Esq.
Executive Vice President, Secretary
and General Counsel
and to:
Thomas A. Vetter, Esq.
Cook, Vetter, Doerhoff and Landwehr
231 Madison
Jefferson City, Missouri 65101
Facsimile: (573) 635-7414
Section 8.8. Entire Agreement; etc. This Agreement, together with
---------------------
the Plan of Bank Merger and the Disclosure Letters, represents the entire
understanding of the parties hereto with reference to the transactions
contemplated hereby and supersedes any and all other oral or written agreements
heretofore made. All terms and provisions of this Agreement shall be binding
upon and shall inure to the benefit of the parties hereto and their respective
successors and assigns. Except for SECTIONS 4.11 and 4.12, which confer rights
on the parties described therein,
A-40
<PAGE>
nothing in this Agreement is intended to confer upon any other person any rights
or remedies of any nature whatsoever under or by reason of this Agreement.
Section 8.9. Successors and Assigns; Assignment. This Agreement
----------------------------------
shall be binding upon and inure to the benefit of the parties hereto and their
respective successors and assigns; PROVIDED, HOWEVER, that this Agreement may
not be assigned by either party hereto without the written consent of the other
party.
A-41
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be executed by their duly authorized officers as of the 18th day of May, 1999.
CENTRAL BANCOMPANY, INC.
By: /s/ Robert M. Robuck
----------------------------------------
Robert M. Robuck
Vice Chairman of the Board
FULTON BANCORP, INC.
By: /s/ Kermit D. Gohring
----------------------------------------
Kermit D. Gohring
President and Chief Executive Officer
A-42
<PAGE>
Appendix B
_____________, 1999
Board of Directors
Fulton Bancorp, Inc.
410 Market Street
Fulton, MO 65251
Gentlemen:
You have requested our opinion as to the fairness, from a financial point
of view, to the shareholders of Fulton Bancorp, Inc. ("Fulton") of the
consideration to be paid to Fulton's shareholders by Central Bancompany in
Jefferson City, Missouri ("Central"), pursuant to the terms of the proposed
Agreement and Plan of Merger by and among Fulton and Central (the "Agreement").
Pursuant to the Agreement, the holder of each share of common stock of Fulton
would be entitled to receive $19.15 per share in cash.
Manchester Partners, L.L.C., as part of its investment banking services, is
engaged in the independent valuation of businesses and securities in connection
with mergers, acquisitions, and sales of listed and unlisted securities, private
placements and valuations for corporate and other purposes. We are familiar with
Fulton and Central and have completed our financial analysis of this
transaction.
In rendering our opinion, we have reviewed the Agreement, as well as
financial and other information that was publicly available or furnished to us
by Fulton and Central, including information provided during Manchester
Partners' discussions with their respective managements. We have conducted
conversations with Central's senior management regarding recent developments for
Central. In addition, we have spoken to members of Central's management and
Fulton's management regarding factors which affect each entity's business. We
have also compared certain financial and securities data (as appropriate) of
Fulton with various other companies whose securities are traded in public
markets, reviewed the historical stock prices and trading volumes of the common
stock of Fulton, reviewed prices and premiums paid in other business
combinations and conducted such other financial studies, analyses and
investigations as we deemed appropriate for purposes of this opinion.
In rendering our opinion, we have relied upon and assumed, without
independent verification, the accuracy and completeness of all of the financial
and other information that was provided to us or that was otherwise reviewed by
us. With respect to the pro forma analysis supplied to us, we have assumed that
such information was reasonably prepared on the basis reflecting the best
currently
<PAGE>
Board of Directors
, 1999
Page 2
available estimates and judgments of the respective managements of Central and
Fulton as to the future operating and financial performance of Central and
Fulton and that such information provided a reasonable basis upon which we could
form our opinion. We also assumed that there were no material changes in the
assets, liabilities, financial condition, results of operations, business or
prospects of either Central or Fulton since the date of the most recent
financial statements made available to us. We did not make or obtain any
independent evaluation, appraisal or physical inspection of Central's or
Fulton's assets or liabilities nor did we review loan files of Central or
Fulton.
Our opinion is necessarily based on economic, market, financial and other
conditions as they exist on, and on the information made available to us as of,
the date of this letter. Our opinion is directed to the Board of Directors of
Fulton and does not constitute a recommendation to any shareholder as to how
such shareholder should vote on the proposed transaction, nor have we expressed
any opinion as to the prices at which any securities of Fulton might trade in
the future. Except as required by applicable law, including (without limitation)
federal securities laws, our opinion may not be published or otherwise used or
referred to, nor shall any public reference to Manchester Partners be made,
without our consent.
Based upon the foregoing and such other factors as we deem relevant, we are
of the opinion, as of the date hereof, that the consideration to be paid to the
shareholders of Fulton pursuant to the Agreement is fair, from a financial point
of view, to the shareholders of Fulton.
Very truly yours,
MANCHESTER PARTNERS, L.L.C.
<PAGE>
APPENDIX C
SECTION 262 OF THE DELAWARE GENERAL CORPORATION LAW
(a) Any stockholder of a corporation of this State who holds shares of
stock on the date of the making of a demand pursuant to subsection (d) of this
section with respect to such shares, who continuously holds such shares through
the effective date of the merger or consolidation, who has otherwise complied
with subsection (d) of this section and who has neither voted in favor of the
merger or consolidation nor consented thereto in writing pursuant to Section 228
of this title shall be entitled to an appraisal by the Court of Chancery of the
fair value of the stockholder's shares of stock under the circumstances
described in subsections (b) and (c) of this section. As used in this section,
the word "stockholder" means a holder of record of stock in a stock corporation
and also a member of record of a nonstock corporation; the words "stock" and
"share" mean and include what is ordinarily meant by those words and also
membership or membership interest of a member of a nonstock corporation; and the
words "depository receipt" mean a receipt or other instrument issued by a
depository representing an interest in one or more shares, or fractions thereof,
solely of stock of a corporation, which stock is deposited with the depository.
(b) Appraisal rights shall be available for the shares of any class or
series of stock of a constituent corporation in a merger or consolidation to be
effected pursuant to Section 251 (other than a merger effected pursuant to
Section 251(g) of this title), Section 252, Section 254, Section 257, Section
258, Section 263 or Section 264 of this title:
(1) Provided, however, that no appraisal rights under this section
shall be available for the shares of any class or series of stock, which
stock, or depository receipts in respect thereof, at the record date fixed
to determine the stockholders entitled to receive notice of and to vote at
the meeting of stockholders to act upon the agreement of merger or
consolidation, were either (i) listed on a national securities exchange or
designated as a national market system security on an interdealer quotation
system by the National Association of Securities Dealers, Inc. or (ii) held
of record by more than 2,000 holders; and further provided that no
appraisal rights shall be available for any shares of stock of the
constituent corporation surviving a merger if the merger did not require
for its approval the vote of the stockholders of the surviving corporation
as provided in subsection (f) of Section 251 of this title.
(2) Notwithstanding paragraph (1) of this subsection, appraisal
rights under this section shall be available for the shares of any class or
series of stock of a constituent corporation if the holders thereof are
required by the terms of an agreement of merger or consolidation pursuant
to Sections 251, 252, 254, 257, 258, 263 and 264 of this title to accept
for such stock anything except:
a. Shares of stock of the corporation surviving or resulting from
such merger or consolidation, or depository receipts in respect
thereof;
b. Shares of stock of any other corporation, or depository receipts
in respect thereof, which shares of stock (or depository receipts in
respect thereof) or depository receipts at the effective date of the
merger or consolidation will be either listed on a national securities
exchange or designated as a national market system security on an
interdealer quotation system by the National Association of Securities
Dealers, Inc. or held of record by more than 2,000 holders;
c. Cash in lieu of fractional shares or fractional depository
receipts described in the foregoing subparagraphs a. and b. of this
paragraph; or
d. Any combination of the shares of stock, depository receipts and
cash in lieu of fractional shares or fractional depository receipts
described in the foregoing subparagraphs a., b. and c. of this
paragraph.
<PAGE>
(3) In the event all of the stock of a subsidiary Delaware corporation
party to a merger effected under Section 253 of this title is not owned by
the parent corporation immediately prior to the merger, appraisal rights
shall be available for the shares of the subsidiary Delaware corporation.
(c) Any corporation may provide in its certificate of incorporation that
appraisal rights under this section shall be available for the shares of any
class or series of its stock as a result of an amendment to its certificate of
incorporation, any merger or consolidation in which the corporation is a
constituent corporation or the sale of all or substantially all of the assets of
the corporation. If the certificate of incorporation contains such a provision,
the procedures of this section, including those set forth in subsections (d) and
(e) of this section, shall apply as nearly as is practicable.
(d) Appraisal rights shall be perfected as follows:
(1) If a proposed merger or consolidation for which appraisal rights
are provided under this section is to be submitted for approval at a
meeting of stockholders, the corporation, not less than 20 days prior to
the meeting, shall notify each of its stockholders who was such on the
record date for such meeting with respect to shares for which appraisal
rights are available pursuant to subsections (b) or (c) hereof that
appraisal rights are available for any or all of the shares of the
constituent corporations, and shall include in such notice a copy of this
section. Each stockholder electing to demand the appraisal of such
stockholder's shares shall deliver to the corporation, before the taking of
the vote on the merger or consolidation, a written demand for appraisal of
such stockholder's shares. Such demand will be sufficient if it reasonably
informs the corporation of the identity of the stockholder and that the
stockholder intends thereby to demand the appraisal of such stockholder's
shares. A proxy or vote against the merger or consolidation shall not
constitute such a demand. A stockholder electing to take such action must
do so by a separate written demand as herein provided. Within 10 days after
the effective date of such merger or consolidation, the surviving or
resulting corporation shall notify each stockholder of each constituent
corporation who has complied with this subsection and has not voted in
favor of or consented to the merger or consolidation of the date that the
merger or consolidation has become effective; or
(2) If the merger or consolidation was approved pursuant to Section
228 or Section 253 of this title, each constituent corporation, either
before the effective date of the merger or consolidation or within ten days
thereafter, shall notify each of the holders of any class or series of
stock of such constituent corporation who are entitled to appraisal rights
of the approval of the merger or consolidation and that appraisal rights
are available for any or all shares of such class or series of stock of
such constituent corporation, and shall include in such notice a copy of
this section; provided that, if the notice is given on or after the
effective date of the merger or consolidation, such notice shall be given
by the surviving or resulting corporation to all such holders of any class
or series of stock of a constituent corporation that are entitled to
appraisal rights. Such notice may, and, if given on or after the effective
date of the merger or consolidation, shall, also notify such stockholders
of the effective date of the merger or consolidation. Any stockholder
entitled to appraisal rights may, within 20 days after the date of mailing
of such notice, demand in writing from the surviving or resulting
corporation the appraisal of such holder's shares. Such demand will be
sufficient if it reasonably informs the corporation of the identity of the
stockholder and that the stockholder intends thereby to demand the
appraisal of such holder's shares. If such notice did not notify
stockholders of the effective date of the merger or consolidation, either
(i) each such constituent corporation shall send a second notice before the
effective date of the merger or consolidation notifying each of the holders
of any class or series of stock of such constituent corporation that are
entitled to appraisal rights of the effective date of the merger or
consolidation or (ii) the surviving or resulting corporation shall send
such a second notice to all such holders on or within 10 days after such
effective date; provided, however, that if such second notice is sent
C-2
<PAGE>
more than 20 days following the sending of the first notice, such second
notice need only be sent to each stockholder who is entitled to appraisal
rights and who has demanded appraisal of such holder's shares in accordance
with this subsection. An affidavit of the secretary or assistant secretary
or of the transfer agent of the corporation that is required to give either
notice that such notice has been given shall, in the absence of fraud, be
prima facie evidence of the facts stated therein. For purposes of
determining the stockholders entitled to receive either notice, each
constituent corporation may fix, in advance, a record date that shall be
not more than 10 days prior to the date the notice is given, provided, that
if the notice is given on or after the effective date of the merger or
consolidation, the record date shall be such effective date. If no record
date is fixed and the notice is given prior to the effective date, the
record date shall be the close of business on the day next preceding the
day on which the notice is given.
(e) Within 120 days after the effective date of the merger or
consolidation, the surviving or resulting corporation or any stockholder who has
complied with subsections (a) and (d) hereof and who is otherwise entitled to
appraisal rights, may file a petition in the Court of Chancery demanding a
determination of the value of the stock of all such stockholders.
Notwithstanding the foregoing, at any time within 60 days after the effective
date of the merger or consolidation, any stockholder shall have the right to
withdraw such stockholder's demand for appraisal and to accept the terms offered
upon the merger or consolidation. Within 120 days after the effective date of
the merger or consolidation, any stockholder who has complied with the
requirements of subsections (a) and (d) hereof, upon written request, shall be
entitled to receive from the corporation surviving the merger or resulting from
the consolidation a statement setting forth the aggregate number of shares not
voted in favor of the merger or consolidation and with respect to which demands
for appraisal have been received and the aggregate number of holders of such
shares. Such written statement shall be mailed to the stockholder within 10 days
after such stockholder's written request for such a statement is received by the
surviving or resulting corporation or within 10 days after expiration of the
period for delivery of demands for appraisal under subsection (d) hereof,
whichever is later.
(f) Upon the filing of any such petition by a stockholder, service of a
copy thereof shall be made upon the surviving or resulting corporation, which
shall within 20 days after such service file in the office of the Register in
Chancery in which the petition was filed a duly verified list containing the
names and addresses of all stockholders who have demanded payment for their
shares and with whom agreements as to the value of their shares have not been
reached by the surviving or resulting corporation. If the petition shall be
filed by the surviving or resulting corporation, the petition shall be
accompanied by such a duly verified list. The Register in Chancery, if so
ordered by the Court, shall give notice of the time and place fixed for the
hearing of such petition by registered or certified mail to the surviving or
resulting corporation and to the stockholders shown on the list at the addresses
therein stated. Such notice shall also be given by 1 or more publications at
least 1 week before the day of the hearing, in a newspaper of general
circulation published in the City of Wilmington, Delaware or such publication as
the Court deems advisable. The forms of the notices by mail and by publication
shall be approved by the Court, and the costs thereof shall be borne by the
surviving or resulting corporation.
(g) At the hearing on such petition, the Court shall determine the
stockholders who have complied with this section and who have become entitled to
appraisal rights. The Court may require the stockholders who have demanded an
appraisal for their shares and who hold stock represented by certificates to
submit their certificates of stock to the Register in Chancery for notation
thereon of the pendency of the appraisal proceedings; and if any stockholder
fails to comply with such direction, the Court may dismiss the proceedings as to
such stockholder.
C-3
<PAGE>
(h) After determining the stockholders entitled to an appraisal, the Court
shall appraise the shares, determining their fair value exclusive of any element
of value arising from the accomplishment or expectation of the merger or
consolidation, together with a fair rate of interest, if any, to be paid upon
the amount determined to be the fair value. In determining such fair value, the
Court shall take into account all relevant factors. In determining the fair rate
of interest, the Court may consider all relevant factors, including the rate of
interest which the surviving or resulting corporation would have had to pay to
borrow money during the pendency of the proceeding. Upon application by the
surviving or resulting corporation or by any stockholder entitled to participate
in the appraisal proceeding, the Court may, in its discretion, permit discovery
or other pretrial proceedings and may proceed to trial upon the appraisal prior
to the final determination of the stockholder entitled to an appraisal. Any
stockholder whose name appears on the list filed by the surviving or resulting
corporation pursuant to subsection (f) of this section and who has submitted
such stockholder's certificates of stock to the Register in Chancery, if such is
required, may participate fully in all proceedings until it is finally
determined that such stockholder is not entitled to appraisal rights under this
section.
(i) The Court shall direct the payment of the fair value of the shares,
together with interest, if any, by the surviving or resulting corporation to the
stockholders entitled thereto. Interest may be simple or compound, as the Court
may direct. Payment shall be so made to each such stockholder, in the case of
holders of uncertificated stock forthwith, and the case of holders of shares
represented by certificates upon the surrender to the corporation of the
certificates representing such stock. The Court's decree may be enforced as
other decrees in the Court of Chancery may be enforced, whether such surviving
or resulting corporation be a corporation of this State or of any state.
(j) The costs of the proceeding may be determined by the Court and taxed
upon the parties as the Court deems equitable in the circumstances. Upon
application of a stockholder, the Court may order all or a portion of the
expenses incurred by any stockholder in connection with the appraisal
proceeding, including, without limitation, reasonable attorney's fees and the
fees and expenses of experts, to be charged pro rata against the value of all
the shares entitled to an appraisal.
(k) From and after the effective date of the merger or consolidation, no
stockholder who has demanded his appraisal rights as provided in subsection (d)
of this section shall be entitled to vote such stock for any purpose or to
receive payment of dividends or other distributions on the stock (except
dividends or other distributions payable to stockholders of record at a date
which is prior to the effective date of the merger or consolidation); provided,
however, that if no petition for an appraisal shall be filed within the time
provided in subsection (e) of this section, or if such stockholder shall deliver
to the surviving or resulting corporation a written withdrawal of such
stockholder's demand for an appraisal and an acceptance of the merger or
consolidation, either within 60 days after the effective date of the merger or
consolidation as provided in subsection (e) of this section or thereafter with
the written approval of the corporation, then the right of such stockholder to
an appraisal shall cease. Notwithstanding the foregoing, no appraisal proceeding
in the Court of Chancery shall be dismissed as to any stockholder without the
approval of the Court, and such approval may be conditioned upon such terms as
the Court deems just.
(l) The shares of the surviving or resulting corporation to which the
shares of such objecting stockholders would have been converted had they
assented to the merger or consolidation shall have the status of authorized and
unissued shares of the surviving or resulting corporation.
C-4
<PAGE>
FORM OF REVOCABLE PROXY
FULTON BANCORP, INC.
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
OF FULTON BANCORP, INC.
FOR THE SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON ____________.
The undersigned stockholder of Fulton Bancorp, Inc. (the "Company") hereby
appoints Kermit D. Gohring, Bonnie K. Smith, and Hon. Clifford E. Hamilton, Jr.
as proxies, each of them with full power of substitution, to attend and act as
proxy for the undersigned and to cast all votes which the undersigned
stockholder is entitled to cast at the special meeting of stockholders of the
Company to be held at _____, local time on _______, 1999, at ______________, and
any and all adjournments and postponements thereof (the "Special Meeting"), with
all powers which the undersigned would possess if personally present (i) as
designated below with respect to the matters set forth below and described in
the accompanying Proxy Statement and (ii) in their discretion with respect to
any other business that may properly come before the Special Meeting. The
undersigned stockholder hereby revokes any proxy or proxies heretofore given.
This proxy will be voted in the manner directed by the undersigned
stockholder. If no direction is made, this proxy will be voted (1) "FOR"
approval and adoption of the Merger Agreement (as defined herein) and (2) in the
discretion of the proxies as to all other matters that may properly come before
the Special Meeting.
This proxy card will also be used to provide voting instructions to the
trustee for any shares of common stock of the Company allocated to participants
under the Fulton Savings Bank, F.S.B. Employee Stock Ownership Plan.
(continued--to be signed and dated on reverse side)
<PAGE>
The Board of Directors recommends a vote "FOR" approval and adoption of the
Merger Agreement.
1. Approval and adoption of the Agreement and Plan of Merger, dated as of
May 18, 1999, by and between Central Bancompany, Inc. and the Company
pursuant to which the Company will merge with a wholly owned
subsidiary of Central Bancompany, Inc. and each share of common stock
of the Company, par value at $.01 per share, will be converted into
the right to receive $19.15 in cash, all on and subject to the terms
and conditions contained therein.
FOR AGAINST ABSTAIN
[_] [_] [_]
2. In their discretion, the proxies are authorized to vote upon such
other business as may properly come before the Special Meeting or any
adjournment or postponement thereof. As of the date of the Special
Meeting, management of the Company is not aware of any such other
business.
The undersigned hereby acknowledges receipt of the Notice of Special
Meeting of Stockholders and the Proxy Statement, dated _______, 1999, for the
Special Meeting.
Dated: ___________________________________________
Signature: _______________________________________
Signature: _______________________________________
Title: ___________________________________________
(Please date and sign here exactly as name appears
at left. When signing as attorney, administrator,
trustee or guardian, give full title as such; and
when stock has been issued in the name of two or
more persons, all should sign.)
PLEASE ACT PROMPTLY.
SIGN, DATE AND MAIL YOUR PROXY CARD TODAY
IN THE ENCLOSED POSTAGE-PAID ENVELOPE.
IF YOU RECEIVE MORE THAN ONE PROXY CARD, PLEASE DATE,
SIGN AND RETURN ALL CARDS IN THE ACCOMPANYING ENVELOPE.
2
