<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
PRE-EFFECTIVE AMENDMENT NO. 1 TO
FORM S-4
REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933
FULTON FINANCIAL CORPORATION
--------------------------------------------------------
(Exact name of registrant as specified in its charter)
Pennsylvania
---------------------------------
(State or other jurisdiction of
incorporation or organization)
6711 23-2195389
-------------------------- -------------------------
(Primary SIC Code Number) (I.R.S. Employer
Identification Number)
One Penn Square
P.O. Box 4887
Lancaster, Pennsylvania 17604
(717) 291-2411
--------------------------------------------------------------------------
(Address and telephone number of registrant's principal executive offices)
Rufus A. Fulton, Jr., President and Chief Executive Officer
Fulton Financial Corporation
One Penn Square
P.O. Box 4887
Lancaster, Pennsylvania 17604
---------------------------------------------------------------
(Name, address and telephone number of agent for service)
Copy To: Copy To:
Paul G. Mattaini, Esquire Leonard S. Volin, Esquire
Barley, Snyder, Senft & Cohen, LLP Housley Kantarian & Bronstein, P.C.
126 East King Street 1220 19th Street, N.W., Suite 700
Lancaster, PA 17602-2893 Washington, D.C. 20036
(717) 299-5201 (202) 822-9611
Approximate date of commencement of proposed sale of the securities to the
public: As soon as practicable after the effective date of this Registration
Statement.
<PAGE>
If the securities being registered on this form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [_]
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant shall
file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
<PAGE>
June 18, 1997
Dear Shareholder:
You are cordially invited to a Special Meeting of Shareholders (the
"Meeting") of The Peoples Bank of Elkton ("PBE") to be held on July 22, 1997,
at 10:00 a.m., at Singerly Fire Company Banquet Facility, 300 Newark Avenue,
Elkton, Maryland.
At the Meeting, holders of all outstanding shares of Common Stock, par
value $10.00 per share (the "PBE Common Stock"), of PBE will be asked to
consider and vote upon a proposal to approve the merger (the "Merger") of PBE
and a subsidiary of Fulton Financial Corporation ("FFC"), in accordance with the
terms of the Affiliation and Merger Agreement dated March 18, 1997, as amended
as of May 20, 1997, between PBE and FFC (the "Merger Agreement"). Following the
Merger, the resulting bank will operate as a wholly-owned subsidiary of FFC
under the name "The Peoples Bank of Elkton." Pursuant to the Merger Agreement,
each Share outstanding at the effective date of the Merger will automatically be
converted into the right to receive 4.158 shares of FFC's Common Stock, and cash
will be paid in lieu of fractional shares. Consummation of the Merger is subject
to certain conditions, including the approval of the merger by various
regulatory agencies and approval of the PBE shareholders as described
below.
The Board of Directors of PBE has unanimously approved and declared the
Merger advisable and recommends that the shareholders of PBE vote in favor of
the Merger Agreement.
It is very important that your shares be represented at the Meeting,
regardless of whether you plan to attend in person. The affirmative vote of
two-thirds of the outstanding shares of PBE Common Stock will be required to
approve the Merger Agreement. Consequently, your failure to vote would have the
same effect as a vote against the Merger. You are therefore urged to execute
and return the enclosed proxy card in the enclosed postage-paid envelope as soon
as possible to ensure your shares will be voted at the Meeting.
Sincerely yours,
David K. Williams, Sr.
Chairman
<PAGE>
The Peoples Bank of Elkton
130 North Street
Elkton, Maryland 21921
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
To be Held July 22, 1997
To the Shareholders of
The Peoples Bank of Elkton:
NOTICE IS HEREBY GIVEN that a Special Meeting of Shareholders of The Peoples
Bank of Elkton ("PBE") will be held at Singerly Fire Company Banquet Facility,
300 Newark Avenue, Elkton, Maryland, on July 22, 1997, at 10:00 a.m. local time,
for the following purposes:
(1) To consider and vote upon a proposal to approve the merger (the
"Merger") of PBE and a subsidiary of Fulton Financial Corporation ("FFC"), in
accordance with the terms of the Affiliation and Merger Agreement dated March
18, 1997, as amended as of May 20, 1997 the "Merger Agreement"), between PBE and
FFC (a copy of which, without exhibits or schedules, is attached to the
accompanying Proxy Statement/Prospectus as Exhibit A). In the Merger, each of
the outstanding shares of Common Stock, par value $10.00 per share ("PBE Common
Stock"), of PBE will automatically be converted into the right to receive 4.158
shares of FCC's Common Stock. Following the Merger, the resulting bank will
operate as a wholly-owned subsidiary of FFC under the name "The Peoples Bank of
Elkton." The Merger is more fully described in the accompanying Proxy
Statement/Prospectus; and
(2) To transact such other business as may properly come before the
Special Meeting or any adjournments thereof, including, without limitation, a
motion to adjourn or postpone the Meeting to another time and place for the
purpose of soliciting additional proxies in favor of the Merger Agreement or
otherwise.
The Board of Directors has fixed the close of business on June 6, 1997, as
the record date (the "Record Date") for the Special Meeting. Only those persons
who are record holders of PBE Common Stock at such date will be entitled to
notice of, and to vote at, the Special Meeting and any adjournment thereof. The
attached Proxy Statement/Prospectus forms a part of this Notice and is
incorporated herein by reference.
Appraisal rights will be available to shareholders of record as of the
Record Date who vote against the Merger and continuously hold their shares
through the effective date of the Merger and otherwise comply with the
provisions of FI Sections 3-718 through 3-721 of the Maryland Banking Laws, a
copy of which is attached as Exhibit D to the accompanying Proxy
Statement/Prospectus.
THE AFFIRMATIVE VOTE OF THE HOLDERS OF TWO-THIRDS OF THE OUTSTANDING SHARES
OF PBE COMMON STOCK ENTITLED TO VOTE THEREON WILL BE REQUIRED TO ADOPT THE
MERGER AGREEMENT PROVIDING FOR THE MERGER OF PBE WITH A SUBSIDIARY OF FFC.
WHETHER OR NOT YOU PLAN TO ATTEND THE SPECIAL MEETING, THE BOARD OF DIRECTORS
URGES YOU TO MARK, SIGN, DATE AND RETURN AS SOON AS POSSIBLE THE ENCLOSED PROXY
IN THE ENCLOSED ENVELOPE. GIVING THE PROXY WILL NOT AFFECT YOUR RIGHT TO VOTE IN
PERSON IF YOU ATTEND THE MEETING.
By order of the Board of Directors
Cathy C. Dunn
Secretary
Elkton, Maryland
June 18, 1997
<PAGE>
PROXY STATEMENT/PROSPECTUS
--------------------------
FULTON FINANCIAL CORPORATION
ONE PENN SQUARE
P.O. BOX 4887
LANCASTER, PENNSYLVANIA 17604
(717) 291-2411
----------------------------------
THE PEOPLES BANK OF ELKTON
130 NORTH STREET
ELKTON, MARYLAND 21921
(410) 398-3900
----------------------------------
This Proxy Statement/Prospectus relates to (i) the Special Meeting of
Shareholders (the "Special Meeting") of The Peoples Bank of Elkton ("PBE") to be
held on July 22, 1997, and (ii) the issuance of up to 958,818 shares of the
$2.50 par value common stock of Fulton Financial Corporation ("FFC") to be
issued in connection with, and conditioned upon, the effectiveness of the merger
of PBE with a subsidiary of FFC (the "Merger"). The Merger is described more
fully in this Proxy Statement/Prospectus.
----------------------------------
No person has been authorized to give any information or to make any
representation not contained in this Proxy Statement/Prospectus and, if given or
made, such information or representation must not be relied upon as having been
authorized. This Proxy Statement/Prospectus does not constitute an offer to any
person to exchange or sell, or a solicitation from any person of an offer to
exchange or purchase, the securities offered by this Proxy Statement/Prospectus,
or the solicitation of a proxy from any person, in any jurisdiction in which it
is unlawful to make such an offer or solicitation. Neither the delivery of this
Proxy Statement/Prospectus nor any distribution of the securities to which this
Proxy Statement/Prospectus relates shall under any circumstances create any
implication that the information contained herein is correct at any time
subsequent to the date hereof.
----------------------------------
This Proxy Statement/Prospectus does not cover resales of shares of FFC
Common Stock issued to affiliates of PBE in connection with the Merger described
herein. No such person is authorized to make use of this Proxy
Statement/Prospectus in connection with any such resale.
----------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROXY STATEMENT/PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
----------------------------------
THESE SECURITIES OFFERED HEREBY ARE NOT SAVINGS ACCOUNTS, DEPOSITS OR OTHER
OBLIGATIONS OF A BANK OR SAVINGS ASSOCIATION AND ARE NOT INSURED BY THE FEDERAL
DEPOSIT INSURANCE CORPORATION OR ANY OTHER GOVERNMENTAL AGENCY.
----------------------------------
The date of this Proxy Statement/Prospectus is June 18, 1997.
<PAGE>
AVAILABLE INFORMATION
---------------------
FFC is subject to the informational requirements of the Securities Exchange
Act of 1934, as amended (the "1934 Act"), and in accordance therewith FFC files
periodic reports, proxy statements and other information with the Securities and
Exchange Commission (the "SEC"). Such periodic reports, proxy statements and
other information may be inspected and copied at the public reference facilities
maintained by the SEC at Judicial Plaza, 450 Fifth Street, N.W., Washington,
D.C. 20549, and also at the Regional Offices of the SEC located at Seven World
Trade Center, Suite 1300, New York, New York 10048; Curtis Center, 601 Walnut
Street, Suite 1005E, Philadelphia, Pennsylvania 19106; and Citicorp Center, 500
West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of such
material may be obtained, at prescribed rates, by delivering a request to the
Public Reference Section of the SEC at Judicial Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549. In addition, the SEC maintains a web site
(http://www.sec.gov) that contains periodic reports, proxy and information
statements and other information regarding companies which are subject to the
reporting requirements of the 1934 Act. FFC Common Stock is listed on the Nasdaq
Stock Market and material as to FFC can also be inspected at the offices of the
National Association of Securities Dealers, Inc., 1735 K Street, N.W.,
Washington, D.C. 20006.
THIS PROXY STATEMENT/PROSPECTUS DOES NOT CONTAIN ALL OF THE INFORMATION SET
FORTH IN THE REGISTRATION STATEMENT AND THE RELATED EXHIBITS THAT FFC HAS FILED
WITH THE SEC (CERTAIN PARTS OF WHICH ARE OMITTED IN ACCORDANCE WITH THE RULES
AND REGULATIONS OF THE SEC), AND TO WHICH REFERENCE IS HEREBY MADE. THIS PROXY
STATEMENT/PROSPECTUS IS PART OF THE REGISTRATION STATEMENT AND SUCH REGISTRATION
STATEMENT, INCLUDING EXHIBITS, CAN BE INSPECTED AND COPIED AT THE PUBLIC
REFERENCE FACILITIES MAINTAINED BY THE SEC LISTED ABOVE. THIS PROXY
STATEMENT/PROSPECTUS INCORPORATES DOCUMENTS BY REFERENCE WHICH ARE NOT PRESENTED
HEREIN OR DELIVERED HEREWITH. THESE DOCUMENTS ARE AVAILABLE UPON REQUEST FROM
WILLIAM R. COLMERY, SECRETARY, FULTON FINANCIAL CORPORATION, ONE PENN SQUARE,
P.0. BOX 4887, LANCASTER, PENNSYLVANIA 17604, TELEPHONE: (717) 291-2852. IN
ORDER TO ENSURE TIMELY DELIVERY OF SUCH DOCUMENTS, ANY SUCH REQUEST SHOULD BE
MADE BY JULY 7, 1997.
<PAGE>
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
-----------------------------------------------
The following documents and information are hereby incorporated by reference
into this Proxy Statement/Prospectus:
1. FFC's Annual Report on Form 10-K for the year ended December 31, 1996;
2. FFC's Quarterly Report on Form 10-Q for the quarter ended March 31,
1997; and
3. FFC's Current Reports on Form 8-K dated March 7, 1997 (as amended by
Form 8-K/A dated May 12, 1997) and March 31, 1997.
All documents filed by FFC pursuant to Sections 13(a), 13(c), 14, or 15(d)
of the 1934 Act after the date of this Proxy Statement/Prospectus and prior to
the Special Meeting are hereby incorporated by reference into this Proxy
Statement/Prospectus and shall be deemed a part hereof from the date of filing
of each such document. Any statement contained in a document incorporated by
reference herein shall be deemed to be modified or superseded for purposes of
this Proxy Statement/Prospectus to the extent that a statement contained herein
or in any other subsequently filed document which is also incorporated by
reference herein modifies or supersedes such statement. Any statement so
modified or superseded shall not be deemed, except as so modified or superseded,
to constitute a part of this Proxy Statement/Prospectus.
<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS
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Page
<S> <C>
SUMMARY..................................................................... 1
- -------
The PBE Special Meeting................................................. 1
Purpose of the Meeting.................................................. 1
The Parties............................................................. 1
Required Vote........................................................... 2
Terms of the Merger..................................................... 3
Conversion and Exchange of Shares of PBE Common Stock................... 3
Reasons for the Merger.................................................. 3
Opinion of PBE's Financial Advisor...................................... 4
Management and Operations Following the Merger.......................... 4
Effective Date.......................................................... 5
Termination of the Merger Agreement..................................... 5
Comparison of Shareholder Rights........................................ 5
Restrictions on Resales by Affiliates................................... 6
Federal Income Tax Consequences......................................... 6
Accounting Treatment.................................................... 6
Dissenters' Rights...................................................... 6
Limitations on Negotiations; Warrant Granted to FFC..................... 6
Conditions and Amendments............................................... 7
Comparative Stock Prices................................................ 7
Selected Historical and Pro Forma Combined Per Share Data............... 8
Selected Historical Financial Data...................................... 14
GENERAL INFORMATION--SPECIAL MEETING OF PBE SHAREHOLDERS.................... 19
- --------------------------------------------------------
Introduction............................................................ 19
Date, Time and Place of Special Meeting................................. 19
Shareholders Entitled to Vote........................................... 19
Purpose of Meeting...................................................... 19
Solicitation of Proxies................................................. 19
Quorum and Required Vote................................................ 19
Revocation and Voting of Proxies........................................ 20
Shares Outstanding and Principal Holders Thereof........................ 20
Interests of Certain Persons in Matters To Be Acted Upon................ 21
Recommendation of the Board of Directors of PBE......................... 22
THE MERGER.................................................................. 23
- ----------
General Information..................................................... 23
Background of the Merger................................................ 23
Reasons for the Merger; Recommendation of the Board of Directors........ 25
Additional Reasons for the Merger....................................... 25
Opinion of Financial Advisor to The Peoples Bank of Elkton.............. 27
Conversion and Exchange of Shares....................................... 30
Business Pending The Effective Date..................................... 32
Conditions, Amendment and Termination................................... 34
Effective Date of the Merger............................................ 35
Management and Operations Following the Merger.......................... 35
Federal Income Tax Consequences......................................... 36
Accounting Treatment.................................................... 37
Rights of Dissenting Shareholders....................................... 37
Restrictions on Resale of FFC Common Stock Held By Affiliates of PBE.... 39
Warrant Agreement....................................................... 39
COMPARATIVE STOCK PRICES AND DIVIDENDS
- --------------------------------------
AND RELATED SHAREHOLDER MATTERS.......................................... 42
-------------------------------
Common Stock of FFC..................................................... 42
Common Stock of PBE..................................................... 42
</TABLE>
i
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
INFORMATION CONCERNING FULTON FINANCIAL CORPORATION
- ---------------------------------------------------
AND DESCRIPTION OF FFC COMMON STOCK...................................... 44
-----------------------------------
General................................................................. 44
Loan Policies and Portfolio Quality..................................... 45
Legal Proceedings....................................................... 45
General Description of FFC Common Stock................................. 45
Dividends............................................................... 46
Dividend Reinvestment Plan.............................................. 47
Securities Laws......................................................... 47
Antitakeover Provisions................................................. 47
Indemnification......................................................... 49
Comparison of Shareholder Rights........................................ 49
INFORMATION CONCERNING THE PEOPLES BANK OF ELKTON........................... 52
- -------------------------------------------------
Description of Business and Property.................................... 52
PBE Common Stock Market Price and Dividends............................. 52
Information About Directors and Executive Officers...................... 53
Selected Historical Financial Data...................................... 54
Management's Discussion and Analysis of Financial Condition and
Results of Operations............................................... 57
Additional Statistical Disclosure....................................... 69
EXPERTS..................................................................... 74
- -------
LEGAL MATTERS............................................................... 74
- -------------
ADDITIONAL INFORMATION...................................................... 74
- ----------------------
OTHER MATTERS............................................................... 74
- -------------
EXHIBITS
- --------
Exhibit A - Affiliation and Merger Agreement........................... A-1
Exhibit B - Opinion of Berwind Financial, L.P.......................... B-1
Exhibit C - Warrant Agreement and Warrant.............................. C-1
Exhibit D - Statute Relating to Dissenters' Rights..................... D-1
Exhibit E - Financial Statements for The Peoples Bank of Elkton........ E-1
</TABLE>
ii
<PAGE>
SUMMARY
-------
The following is a summary of certain information set forth in this Proxy
Statement/Prospectus regarding the Merger between PBE and a subsidiary of FFC.
This summary is provided for convenience only and does not set forth completely
all material features of the Merger. This summary should be read in conjunction
with and is qualified in its entirety by the more detailed information which is
set forth elsewhere in this Proxy Statement/Prospectus and the attached Exhibits
or which is incorporated herein by reference.
The PBE Special Meeting
-----------------------
A Special Meeting of the shareholders of PBE will be held on July 22, 1997,
at 10:00 a.m., local time, at Singerly Fire Company Banquet Facility, 300 Newark
Avenue, Elkton, Maryland. Only those shareholders of record at the close of
business on June 6, 1997, will be entitled to receive notice of and to vote at
the meeting. As of the record date, there were outstanding 230,596 shares of the
common stock, par value $10.00 per share, of PBE ("PBE Common Stock"), each of
which is entitled to one vote. See GENERAL INFORMATION--SPECIAL MEETING OF PBE
SHAREHOLDERS.
Purpose of the Meeting
----------------------
The shareholders of PBE will be asked at the Special Meeting to consider and
vote upon a proposal to approve and adopt the Affiliation and Merger Agreement,
dated March 18, 1997, as amended as of May 20, 1997, (the "Merger Agreement")
between FFC and PBE, under the terms of which (i) FFC will organize a Maryland
bank ("PBE Interim Bank") as a wholly-owned subsidiary of FFC and cause PBE
Interim Bank to become a party to the Merger Agreement, (ii) PBE will be merged
with and into PBE Interim Bank, (iii) PBE Interim Bank will survive the Merger
and operate as a wholly-owned subsidiary of FFC after the Merger under the name
"The Peoples Bank of Elkton" (all references to PBE in this Prospectus/Proxy
Statement with respect to matters after the Merger shall be deemed to refer to
such resulting bank), and (iv) each of the outstanding share of PBE Common
Stock, par value $10.00 per share, will be converted into 4.158 (the "Conversion
Ratio") shares of the common stock of FFC, par value $2.50 per share ("FFC
Common Stock"). PBE's shareholders will receive cash in lieu of fractional
shares of FFC Common Stock. The Conversion Ratio and all pro forma and FFC
historical per share information herein have been adjusted to reflect a 10%
stock dividend declared by FFC on May 1, 1997, payable on June 13, 1997, to
shareholders of record on May 23, 1997. On February 28, 1997, FFC completed the
previously announced acquisition of The Woodstown National Bank & Trust Company
("WNB"). The transaction was accounted for as a pooling of interest. All of
the financial information contained herein has been restated to reflect the
financial condition and results of operations of WNB. See THE MERGER. The
Merger Agreement without exhibits or schedules, is attached as Exhibit A to this
Proxy Statement/Prospectus.
The Parties
-----------
Fulton Financial Corporation: Fulton Financial Corporation is a Pennsylvania
----------------------------
business corporation and a registered bank holding company that maintains its
headquarters in Lancaster, Pennsylvania. As a bank holding company, FFC engages
in a general commercial and retail banking and trust business, and also in
related financial businesses, through its fourteen directly-held bank and
nonbank subsidiaries. FFC's bank subsidiaries currently operate eighty-four
banking offices in Pennsylvania, fifteen banking offices in Maryland, six
banking offices in Delaware, and twelve banking offices in New Jersey. As of
March 31, 1997, FFC had consolidated total assets of approximately $4.1 billion.
1
<PAGE>
The principal assets of FFC are the following ten wholly-owned bank
subsidiaries, each of which is a bank whose deposits are insured by the Federal
Deposit Insurance Corporation ("FDIC"): (i) Fulton Bank, a Pennsylvania bank
and trust company which is not a member of the Federal Reserve System, (ii)
Farmers Trust Bank, a Pennsylvania bank and trust company which is a member of
the Federal Reserve System, (iii) Swineford National Bank, a national banking
association which is a member of the Federal Reserve System, (iv) Lafayette
Bank, a Pennsylvania bank and trust company which is not a member of the Federal
Reserve System, (v) FNB Bank, National Association, a national banking
association which is a member of the Federal Reserve System, (vi) Great Valley
Savings Bank, a Pennsylvania stock savings bank which is not a member of the
Federal Reserve System, (vii) Hagerstown Trust Company, a Maryland trust company
which is not a member of the Federal Reserve System, (viii) Delaware National
Bank, a national banking association which is a member of the Federal Reserve
System, (ix) The Bank of Gloucester County, a New Jersey bank which is not a
member of the Federal Reserve System, and (x) The Woodstown National Bank &
Trust Company, a national banking association which is a member of the Federal
Reserve System. In addition, FFC has four wholly-owned nonbank direct
subsidiaries: (1) Fulton Financial Realty Company, which holds title to or
leases certain properties on which Fulton Bank and Farmers Trust Bank maintain
branch offices or other facilities, (2) Fulton Life Insurance Company, which
engages in the business of reinsuring credit life, accident and health insurance
that is directly related to extensions of credit by FFC's bank subsidiaries, (3)
Central Pennsylvania Financial Corp., which owns certain non-banking
subsidiaries holding interests in real estate and certain limited partnership
interests in partnerships invested in low and moderate income housing projects
and (4) FFC Management, Inc., which owns certain securities.
The principal executive offices of FFC are located at One Penn Square, P.O.
Box 4887, Lancaster, Pennsylvania 17604, and FFC's telephone number is (717)
291-2411.
The Peoples Bank of Elkton: The Peoples Bank of Elkton ("PBE") is a Maryland
--------------------------
chartered commercial bank that maintains its headquarters in Elkton, Maryland.
PBE operates two banking offices in Cecil County, Maryland. PBE is an FDIC-
insured bank and is not a member of the Federal Reserve System. As of March 31,
1997, PBE had total assets of approximately $92 million, and held total deposits
of approximately $80 million.
The principal executive offices of PBE are located at 130 North Street
Elkton, Maryland 21921, and PBE's telephone number is (410) 398-3900.
Required Vote
-------------
The affirmative vote of shareholders holding at least two-thirds of the
issued and outstanding shares of PBE Common Stock given at a duly convened
meeting of the shareholders of PBE is required in order to approve the Merger
Agreement. As of June 6, 1997 the directors and executive officers of PBE and
their affiliates owned beneficially approximately 28,015 of the outstanding
shares (12.15%) of PBE Common Stock. It is anticipated that the executive
officers and directors of PBE will vote (in their respective capacities as
shareholders of PBE) their shares of PBE Common Stock in favor of the proposal
to adopt the Merger Agreement. As of June 6, 1997, the directors and executive
officers of FFC and their affiliates did not own any shares of PBE Common Stock.
See GENERAL INFORMATION--SPECIAL MEETING OF PBE SHAREHOLDERS--Shares Outstanding
and Principal Holders Thereof; and INFORMATION CONCERNING THE PEOPLES BANK OF
ELKTON.
2
<PAGE>
Terms of the Merger
-------------------
Under the terms of the Merger Agreement: (i) FFC will organize a Maryland
bank ("PBE Interim Bank") as a wholly-owned subsidiary of FFC and cause PBE
Interim Bank to become a party to the Merger Agreement, (ii) PBE will be merged
with and into PBE Interim Bank, (iii) PBE Interim Bank will survive the Merger
and operate as a wholly-owned subsidiary of FFC after the Merger under the name
"The Peoples Bank of Elkton," and (iv) each of the outstanding shares of PBE
Common Stock will be converted into 4.158 shares of FFC Common Stock PBE's
shareholders will receive cash in lieu of fractional shares of FFC Common Stock.
See THE MERGER.
Conversion and Exchange of Shares of PBE Common Stock
-----------------------------------------------------
On the effective date of the Merger (the "Effective Date"), which is
expected to occur during the third or fourth quarter of 1997, each share of PBE
Common Stock then issued and outstanding will be converted into the right to
receive 4.158 shares of FFC Common Stock.
The Conversion Ratio and all pro forma and FFC historical per share
information herein have been adjusted to reflect a 10% stock dividend declared
by FFC on May 1, 1997, payable on June 13, 1997, to shareholders of record on
May 23, 1997. The Conversion Ratio is subject to further adjustment in the
event of a stock dividend or similar transaction involving FFC Common Stock
prior to the Effective Date. No fractional shares of FFC Common Stock will be
issued in connection with the Merger. In lieu of the issuance of any fractional
share to which any former PBE shareholder would otherwise be entitled, each such
former shareholder of PBE will receive in cash an amount equal to the fair
market value of his or her fractional interest, which shall be determined by
multiplying such fraction by the Closing Market Price. The Closing Market Price
is defined in the Merger Agreement as the average of the per share closing bid
prices for FFC Common Stock, rounded up to the nearest $.125, for the ten (10)
trading days immediately preceding the date which is two (2) business days
before the Effective Date of the Merger, as reported on the Nasdaq National
Market. See THE MERGER.
Each former shareholder of PBE will be required to surrender to FFC the
certificates representing PBE Common Stock held by him or her in accordance with
the instructions which will be sent to him or her immediately following the
Effective Date. Upon proper surrender of his or her PBE Common Stock
certificates, each such former shareholder of PBE will be promptly issued a
stock certificate representing the whole number of shares of FFC Common Stock
into which such shareholder's shares of PBE Common Stock shall have been
converted, together with a check in the amount of any cash, without interest, to
which he or she is entitled in lieu of the issuance of a fractional share. FFC
may withhold dividends payable after the Effective Date to any former
shareholder of PBE who has received written instructions from FFC but has not at
that time surrendered his or her PBE Common Stock certificates. Any dividends
so withheld will be paid, without interest, to any such former shareholder of
PBE upon the proper surrender of his or her PBE Common Stock certificates. See
THE MERGER--Conversion and Exchange of Shares, and the Merger Agreement attached
as Exhibit A to this Proxy Statement/Prospectus. PLEASE DO NOT SEND ANY STOCK
CERTIFICATES AT THIS TIME.
Reasons for the Merger
----------------------
The Boards of Directors of FFC and PBE have determined that the Merger is in
the best interests of both organizations. In the case of FFC, the acquisition
of PBE will enable FFC to expand its operations in Maryland. FFC considers
Maryland to be an attractive area for expansion of its business and believes
that the acquisition of PBE will result in a
3
<PAGE>
favorable diversification of FFC's assets and earnings. FFC believes PBE's
market is similar to many of the markets that FFC's subsidiary banks currently
serve, i.e., markets with strong small business and agriculture components.
PBE's market area is also a natural extension of the market of one of FFC's
banking subsidiaries, Fulton Bank; Fulton Bank's Oxford, Pennsylvania branch
office is approximately fifteen miles from Elkton, Maryland.
PBE's Board of Directors has concluded that, in the rapidly changing and
increasingly competitive market for financial services, it can compete more
effectively as part of a larger banking organization with more resources and a
wider range of products and services than those which PBE currently offers.
Through the Merger, PBE believes it can expand its resources and its range of
products and services on an accelerated timetable as compared to reliance solely
on internal growth. In general, PBE is entering into the Merger because it
believes it can better maximize its shareholders' return through an affiliation
with a larger, more diversified financial institution. PBE's Board of Directors
believes that FFC's greater resources will enable PBE to remain competitive and
to offer expanded services to its customers and the communities it serves. In
particular, PBE believes FFC's strong small business services will further
enhance PBE's reputation in this area.
In addition, the Merger with FFC will increase the liquidity of the stock
held by PBE's shareholders by exchanging it for stock in a larger banking
organization that is listed on the Nasdaq National Market. FFC anticipates that
PBE will retain a strong degree of autonomy which will enable it to preserve its
commitment to community-oriented banking.
In considering the Merger, PBE's Board of Directors considered, among other
things, the financial terms of the Merger, the structure of the transaction, the
historic and financial performance of FFC, and the opinion of its financial
advisors as to the fairness of the transaction, from a financial point of view,
to PBE shareholders.
See THE MERGER--Background of the Merger; Reasons for the Merger;
Recommendations of the PBE Board; and Additional Reasons for the Merger.
Opinion of PBE's Financial Advisor
----------------------------------
PBE engaged Berwind Financial, L.P. ("Berwind") to act as its financial
advisor for the purpose of evaluating the financial terms of the Merger. Berwind
has delivered to PBE's Board of Directors an opinion stating as of the date of
the opinion, the financial terms of the Merger are fair to the shareholders of
PBE from a financial point of view. A copy of Berwind's opinion is attached to
this Proxy Statement/Prospectus as Exhibit B and should be read in its entirety
with respect to the assumptions made and the other matters considered by Berwind
in rendering its opinion. See THE MERGER--Opinion of Financial Advisor.
Management and Operations Following the Merger
----------------------------------------------
Under the terms of the Merger Agreement, PBE will merge with and into PBE
Interim Bank and PBE Interim Bank will survive the Merger and operate as a
wholly-owned banking subsidiary of FFC under the name "The Peoples Bank of
Elkton." See THE MERGER -- Management and Operations following the Merger.
Following the Merger, the Board of Directors of FFC will consist of the same
persons who are members of the Board of Directors of FFC immediately before the
Merger, each of whom will serve until his or her successor is elected and has
qualified.
4
<PAGE>
Immediately following the Merger, the Board of Directors of PBE will consist
of the same persons who are members of the Board of Directors of PBE immediately
before the Merger, each of whom will serve until his or her successor is elected
and has qualified.
Effective Date
--------------
The Merger will become effective on the date of issuance of the Certificate
of Merger issued by the Maryland Commissioner of Financial Regulation, or on
such later date specified in the Certificate of Merger, and will occur as soon
as reasonably practicable after all applicable conditions to the consummation of
the Merger have been met or waived. FFC and PBE presently intend to consummate
the Merger during the third or fourth quarter of 1997, assuming that PBE's
shareholders adopt the Merger Agreement, all required regulatory approvals are
obtained, all applicable waiting periods have expired, and all other conditions
have been met or waived as of the closing of the Merger. See THE MERGER--
Effective Date.
Termination of the Merger Agreement
-----------------------------------
Either FFC or PBE may terminate the Merger Agreement and cancel the Merger
if (i) the other party has committed a material breach of any representation,
warranty or covenant contained in the Merger Agreement which breach results in a
material and adverse change as to the other party and has not cured such breach
within thirty (30) days after receiving written notice thereof, or (ii) all
applicable conditions have not been satisfied by January 31, 1998. FFC and PBE
may also terminate the Merger Agreement and cancel the Merger by mutual consent
in writing. See THE MERGER--Conditions, Amendment and Termination.
Comparison of Shareholder Rights
--------------------------------
Upon consummation of the Merger, the shareholders of PBE will become
shareholders of FFC. There are differences between the rights of holders of PBE
Common Stock and FFC Common Stock. These differences arise from (i) differences
between the respective state and federal laws applicable to PBE and FFC, and
(ii) differences between the Articles of Incorporation and Bylaws of PBE and the
Articles of Incorporation and Bylaws of FFC. The material differences between
PBE Common Stock and FFC Common Stock include the following: (i) FFC has adopted
a Shareholder Rights Plan, which provides FFC's shareholders with certain stock-
related rights in the event of a hostile takeover, but may also have the effect
of discouraging such a takeover, while PBE has not adopted any such plan; (ii)
FFC Common Stock is registered under the 1934 Act and is traded on the Nasdaq
National Market, while PBE Common Stock is not registered under the 1934 Act and
is not actively traded in an organized market; (iii) the Articles of
Incorporation of FFC do not grant preemptive rights while PBE shareholders,
pursuant to Maryland law, have such rights (with exceptions); (iv) shareholders
of FFC are not entitled to dissenters' or appraisal rights in the event of a
business combination, while the shareholders of PBE are entitled to such rights;
(v) the Bylaws of FFC establish a Board of Directors divided into three classes,
with members of each class elected for a three-year term that is staggered with
the terms of the members of the other two classes, while PBE's directors are all
elected for one-year terms; and (vi) the Articles of Incorporation of FFC
provide for substantial amounts of authorized but unissued capital stock,
including a class of preferred stock whose rights and privileges may be
determined prior to issuance by FFC's Board of Directors, while PBE authorized
capital stock only includes common stock. See INFORMATION CONCERNING FULTON
FINANCIAL CORPORATION AND
5
<PAGE>
DESCRIPTION OF FFC COMMON STOCK--Antitakeover Provisions; Comparison of
Shareholder Rights.
Restrictions on Resales by Affiliates
-------------------------------------
The resale of shares of FFC Common Stock received in connection with the
Merger by persons who are executive officers, directors or ten percent
shareholders of PBE will be subject to certain restrictions. See THE MERGER--
Restrictions on Resale of FFC Common Stock Held by Affiliates of PBE.
Federal Income Tax Consequences
-------------------------------
The Merger is structured to qualify as a tax-free reorganization under
Section 368 of the Internal Revenue Code of 1986, as amended. Accordingly, no
taxable gain or loss will be recognized by the shareholders of PBE upon their
receipt of FFC Common Stock in exchange for PBE Common Stock, except to the
extent that any shareholders of PBE receive cash in lieu of the issuance of
fractional shares of FFC Common Stock or elect to exercise dissenters' rights of
appraisal. An opinion has been provided by Barley, Snyder, Senft & Cohen, LLP,
counsel for FFC, confirming these and certain other federal income tax
consequences of the Merger. However, each shareholder of PBE is urged to consult
his or her own tax advisor concerning the particular tax consequences of the
Merger as they affect his or her individual circumstances. See THE MERGER--
Federal Income Tax Consequences.
Accounting Treatment
--------------------
Consummation of the Merger is subject to the condition that the Merger can
be treated as a pooling-of-interests for financial accounting purposes. FFC
currently intends to exercise its right to cancel the Merger if such condition
could not be satisfied. Neither FFC nor PBE is presently aware of any reason why
the Merger would not qualify for pooling-of-interests accounting treatment. See
THE MERGER--Accounting Treatment.
Dissenters' Rights
------------------
The shareholders of PBE are entitled to exercise dissenters' rights,
assuming the Merger is consummated, in accordance with the provisions of FI,
Sections 3-718 through 3-721 of the Maryland Banking Laws. FFC has the right to
terminate the Merger Agreement if PBE shareholders exercise dissenters' rights
with respect to 10% or more of the PBE Common Stock. Additionally, the exercise
of such rights by holders of an aggregate of 10% or more of the PBE Common Stock
could affect the ability of FFC to use "pooling-of-interests" accounting
treatment. See THE MERGER--Rights of Dissenting Shareholders and Exhibit D -
Statute Relating to Dissenters' Rights.
Limitations on Negotiations; Warrant Granted to FFC
---------------------------------------------------
The Merger Agreement provides that PBE shall not, nor shall it permit any
officer, director, employee, agent, consultant or representative to: (a)
solicit, initiate or encourage any proposal for a merger with or other
acquisition of PBE, or any material portion of its assets or properties, with or
by any person other than FFC; or (b) cooperate with, or furnish any non-public
information concerning PBE to, any person in connection with such a proposal;
provided, however, that the PBE Board of Directors shall be free to take such
action as the Board of Directors determines, in good
6
<PAGE>
faith and after consultation with outside counsel, is not legally inconsistent
with its fiduciary duty.
On the day following the execution of the Merger Agreement, PBE and FFC
entered into a Warrant Agreement, dated March 19, 1997 (the "Warrant
Agreement"), a copy of which is attached hereto as Exhibit C. Pursuant to the
Warrant Agreement, PBE has issued to FFC a warrant (the "Warrant") to purchase
an aggregate of up to 45,888 shares of PBE Common Stock fully paid and non-
assessable shares of PBE Common Stock, representing approximately 19.9% of the
issued and outstanding shares of the PBE Common Stock, at a price per share
equal to $80.00, subject to adjustment as provided for in the Warrant Agreement
and the Warrant. The Warrant is exercisable only upon the occurrence of
specified events relating generally to the support by PBE of a proposal to
acquire PBE by a party other than FFC, an acquisition by a third party or group
of 25% or more of the outstanding shares of PBE Common Stock, or the failure of
PBE's shareholders to approve the Merger following the announcement by any party
other than FFC of an offer or proposal to acquire 25% or more of the outstanding
shares of PBE Common Stock and, within 12 months from the date of such meeting,
PBE engages in or enters into an agreement with respect to an Acquisition
Transaction (as such term is defined in the Warrant Agreement). To the knowledge
of PBE, no event giving rise to the right to exercise the Warrant has occurred
as of the date of this Proxy Statement/Prospectus. The execution of the Warrant
Agreement was required by FFC as a condition to its execution of the Merger
Agreement, and the effect of the Warrant Agreement is to increase the likelihood
that the Merger will occur by making it more difficult and expensive for another
party to acquire PBE. See THE MERGER--Warrant Agreement.
The foregoing provisions may have the effect of discouraging competing
offers to acquire or merge with PBE.
Conditions and Amendments
-------------------------
Consummation of the Merger is subject to various conditions and
contingencies, including, among others, approval by the shareholders of PBE,
approval by the Federal Reserve Board, approval by the Federal Deposit Insurance
Corporation, approval by the Maryland Commissioner of Financial Regulation, and
the absence of an injunction issued by a court of competent jurisdiction
enjoining the performance by FFC or PBE of any of their obligations under the
Merger Agreement.
To the extent permitted by law, the Merger Agreement may be amended at any
time before the Effective Date by a written instrument duly authorized, executed
and delivered by FFC and PBE; provided, however, that any amendment to the
Conversion Ratio shall not take effect until such amendment has been approved,
adopted or ratified by the shareholders of PBE in accordance with applicable law
(other than pursuant to the terms of the Merger Agreement in the event of a
stock dividend or similar transaction by FFC), and PBE Interim Bank shall be
permitted to join as a party to the Merger Agreement upon its formation without
execution of such joinder by FFC or PBE. See THE MERGER--Conditions, Amendment
and Termination.
Comparative Stock Prices
------------------------
On March 17, 1997, the last trading day before public announcement of the
Merger Agreement, the per share closing bid price for FFC Common Stock was
$21.82 as reported on the Nasdaq National Market ("Nasdaq"). Based on such
closing bid price for such date and the Conversion Ratio of 4.158 shares of FFC
Common Stock for each share of PBE Common Stock, the pro
7
<PAGE>
forma value of the shares of FFC Common Stock to be received in exchange for
each share of PBE Common Stock was $90.73.
There is currently no public market for the PBE Common Stock nor any
uniformly quoted price.
The foregoing historical and pro forma equivalent per share market
information is summarized in the following table:
<TABLE>
<CAPTION>
Pro Forma
Historical Equivalent
Price Per Share/1/ Price Per Share/2/
------------------ ------------------
<S> <C> <C>
FFC Common Stock
- ----------------
03/17/97 Bid Price $21.82 $ -
03/17/97 Asked Price $22.27 $ -
PBE Common Stock/3/
- ----------------
03/17/97 Bid Price $ - $90.73
03/17/97 Asked Price $ - $92.60
</TABLE>
- ------------------------------
/1/ The per share information has been adjusted to reflect a 10% stock dividend
declared by FFC on May 1, 1997, payable on June 13, 1997, to shareholders of
record on May 23, 1997.
/2/ Based upon the product of the Conversion Ratio (4.158) and the closing price
of FFC Common Stock on March 17, 1997.
/3/ There is currently no public market for the PBE Common Stock nor any
uniformly quoted price.
The closing bid and asked quotations on Nasdaq for FFC Common Stock on June
13, 1997, were $27.00 and $27.50, respectively, per share. Based on such
closing bid price for such date and the Conversion Ratio of 4.158 shares of FFC
Common Stock for each share of PBE Common Stock, the pro forma value of the
shares of FFC Common Stock to be received in exchange for each share of PBE
Common Stock was $112.27. More detailed information concerning comparative stock
prices is set forth elsewhere in this Proxy Statement/Prospectus. See
COMPARATIVE STOCK PRICES AND DIVIDENDS AND RELATED SHAREHOLDER MATTERS.
Selected Historical and Pro Forma Combined Per Share Data
---------------------------------------------------------
The following tables set forth, at the dates and for the periods indicated,
financial information relating to FFC Common Stock and PBE Common Stock on a per
share historical and pro forma combined basis. The pro forma and equivalent per
share information is presented on the basis of an exchange ratio of 4.158 shares
of FFC Common Stock for each share of PBE Common Stock. The Conversion Ratio
and all pro forma and FFC historical per share information herein have been
adjusted to reflect a 10% stock dividend declared by FFC on May 1, 1997, payable
on June 13, 1997, to shareholders of record on May 23, 1997. On February 28,
1997, FFC completed the previously announced acquisition of The Woodstown
National Bank & Trust Company ("WNB"). The transaction was accounted for as a
8
<PAGE>
pooling of interest. All of the financial information contained herein has been
restated to reflect the financial condition and results of operations of WNB.
The information set forth in the tables below should be read in conjunction
with the financial statements of FFC, including the notes thereto, which are
incorporated herein by reference, and the financial statements of PBE, including
the notes thereto, which are set forth elsewhere in this Proxy
Statement/Prospectus. See INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE;
INFORMATION CONCERNING THE PEOPLES BANK OF ELKTON. Pro forma financial
information for FFC giving effect to the proposed acquisition of PBE is not
presented in this Proxy Statement/Prospectus due to the fact that PBE would not
qualify as a "significant subsidiary" of FFC under the accounting rules of the
SEC.
9
<PAGE>
Selected Historical and Pro Forma Combined
Per Share Data (A)
<TABLE>
<CAPTION>
As of or for Three Months Ended March 31
------------------------------------------
FULTON FINANCIAL CORPORATION (FFC)
- ----------------------------------
1997 1996
---------------------------
<S> <C> <C>
Historical Per Common Share:
- ---------------------------
Average Shares Outstanding 39,543,051 39,348,887
Book Value $10.59 $9.73
Cash Dividends $0.155 $0.138
Net Income $0.39 $0.35
FFC, PBE Combined Pro Forma Per Common Share:
- --------------------------------------------
Average Shares Outstanding 40,501,869 40,307,705
Book Value $10.58 $9.73
Cash Dividends $0.156 $0.137
Net Income $0.39 $0.35
- ------------------
</TABLE>
(A) The above combined pro forma per share information is based on average
shares outstanding during the period except for the book value per share
which is based on period end shares outstanding. The number of shares in
each case has been adjusted for stock dividends by each institution through
the periods including the 10% stock dividend of FFC declared May 1, 1997,
payable June 13, 1997, to shareholders of record on May 23, 1997.
10
<PAGE>
Selected Historical and Pro Forma Combined
Per Share Data (A)
<TABLE>
<CAPTION>
FULTON FINANCIAL CORPORATION (FFC)
- ----------------------------------
As of or for the Year Ended December 31
---------------------------------------
1996 1995 1994 1993 1992
----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Historical Per Common Share:
- ---------------------------
Average Shares Outstanding 39,417,210 39,378,584 39,130,772 38,793,747 38,401,024
Book Value $10.38 $9.58 $8.63 $8.14 $7.37
Cash Dividends $0.590 $0.503 $0.445 $0.407 $0.339
Income From Operations:
Income Before Cumulative Effect
of Changes in Accounting
Principles $1.39 $1.28 $1.17 $1.06 $0.78
Effect of Changes in Accounting
Principles -- -- -- ($0.09) --
Net Income $1.39 $1.28 $1.17 $0.97 $0.78
FFC, PBE Combined Pro Forma
- ---------------------------
Per Common Share:
----------------
Average Shares Outstanding 40,376,028 40,337,402 40,089,590 39,752,565 39,359,842
Book Value $10.37 $9.60 $8.65 $8.16 $7.39
Cash Dividends $0.594 $0.502 $0.443 $0.405 $0.338
Income From Operations:
Income Before Cumulative Effect
of Changes in Accounting
Principles $1.38 $1.28 $1.16 $1.05 $0.78
Effect of Changes in Accounting
Principles -- -- -- ($0.09) --
Net Income $1.38 $1.28 $1.16 $0.96 $0.78
</TABLE>
(A) The above combined pro forma per share information is based on average
shares outstanding during the period except for the book value per share
which is based on period end shares outstanding. The number of shares in
each case has been adjusted for stock dividends and stock splits by each
institution through the periods, including the 10% stock dividend of FFC
declared May 1, 1997, payable June 13, 1997, to shareholders of record on
May 23, 1997.
11
<PAGE>
Selected Historical and Pro Forma Combined Per Share Data (A)
<TABLE>
<CAPTION>
As of or for the Three Months Ended March 31
--------------------------------------------
The Peoples Bank of Elkton (PBE) 1997 1996
- -------------------------------- --------------------------------------------
<S> <C> <C>
Historical Per Common Share:
Average Shares Outstanding 230,596 230,596
Book Value $42.82 $42.02
Cash Dividends $0.900 $0.500
Net Income $1.32 $1.25
PBE, FFC Combined Pro Forma Per
Common Share:
Book Value $44.00 $40.48
Cash Dividends $0.60 $0.57
Net Income $1.61 $1.45
</TABLE>
(A) The above combined pro forma per-share equivalent information is based on
average shares outstanding during the period except for the book value per share
which is based on period end shares outstanding. The number of shares in each
case has been adjusted for stock dividends and stock splits by each institution
through the periods including the 10% stock dividend of FFC declared May 1,
1997, payable June 13, 1997, to shareholders of record on May 23, 1997.
12
<PAGE>
Selected Historical and Pro Forma Combined Per Share Data (A)
<TABLE>
<CAPTION>
As of or for the Years Ended December 31
------------------------------------------------------------------------------
The Peoples Bank of Elkton 1996 1995 1994 1993 1992
- -------------------------- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Historical Per Common Share:
Average Shares Outstanding 230,596 230,596 230,596 230,596 230,596
Book Value $42.94 $41.85 $38.43 $37.27 $34.60
Cash Dividends $ 3.20 $ 1.89 $ 1.55 $ 1.36 $ 1.21
Income From Operations:
Income Before Cumulative Effect Of
Changes In Accounting Principles $4.53 $4.39 $3.88 $3.71 $3.17
Effect Of Changes In Accounting Principles - - - - -
Net Income $4.53 $4.39 $3.88 $3.71 $3.17
PBE, FFC Combined Pro Forma Per
Common Share:
Book Value $43.14 $39.90 $35.95 $33.93 $30.72
Cash Dividends $2.47 $2.09 $1.84 $1.68 $1.41
Income From Operations:
Income Before Cumulative Effect Of
Changes In Accounting Principles $5.75 $5.32 $4.83 $4.37 $3.29
Effect of Changes in Accounting Principles - - - ($0.36) -
Net Income $5.75 $5.32 $4.83 $4.01 $3.29
</TABLE>
(A) The above combined pro forma per-share equivalent information is based on
average shares outstanding during the period except for the book value per share
which is based on period end shares outstanding. The number of shares in each
case has been adjusted for stock dividends and stock splits by each institution
through the periods including the 10% stock dividend of FFC declared May 1,
1997, payable June 13, 1997, to shareholders of record on May 23, 1997.
13
<PAGE>
Selected Historical Financial Data
----------------------------------
The following tables present selected unaudited historical financial
data for FFC and PBE. The following information should be read in conjunction
with the financial statements of FFC, including the notes thereto, which are
incorporated herein by reference, and the financial statements of PBE, including
the notes thereto, which are set forth elsewhere in this Proxy
Statement/Prospectus. See INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE;
INFORMATION CONCERNING THE PEOPLES BANK OF ELKTON.
14
<PAGE>
Fulton Financial Corporation
Selected Historical Financial Data
(In Thousands)
<TABLE>
<CAPTION>
As of or for the Three Months Ended March 31
------------------------------------------------------
1997 1996
------------------------------------------------------
<S> <C> <C>
Summary of Operations
- ---------------------
Net interest income $42,757 $39,584
Provision for loan losses 1,794 721
------------------------------------------------------
Net interest income after provision
for loan losses 40,963 38,863
Other operating income 10,193 8,486
Other operating expense 29,249 27,768
Income tax expense 6,512 5,839
------------------------------------------------------
Net Income $15,395 $13,742
======================================================
Average Balance Sheet Totals
- -----------------------------
Total assets $4,004,262 $3,750,770
Investment securities and
money market investments 727,189 796,911
Loans and leases
(net of unearned income) 2,998,288 2,681,718
Total deposits 3,281,289 3,134,186
Long-term debt and lease obligations 55,897 32,244
Shareholders' equity 415,103 380,144
Actual Balance at Period End
- ----------------------------
Total assets $4,097,922 $3,827,477
Long-term debt and lease obligations 58,648 28,751
</TABLE>
15
<PAGE>
Fulton Financial Corporation
Selected Historical Financial Data
(In Thousands)
<TABLE>
<CAPTION>
As of or for the Year Ended December 31
----------------------------------------------------------------
1996 1995 1994 1993 1992
----------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Summary of Operations
- ---------------------
Net interest income $165,510 $153,386 $141,679 $129,840 $120,069
Provision for loan losses 5,227 3,923 2,954 6,148 16,113
----------------------------------------------------------------
Net interest income after provision
for loan losses 160,283 149,463 138,725 123,692 103,956
Other operating income 34,544 31,265 27,595 31,097 26,580
Other operating expense 116,995 110,506 103,431 100,056 91,575
Income tax expense 23,012 19,623 17,219 13,786 8,844
----------------------------------------------------------------
Income before cumulative effect 54,820 50,599 45,670 40,947 30,117
of changes in accounting principles
Cumulative effect of changes in --- --- --- (3,457) (131)
accounting principles
----------------------------------------------------------------
Net Income $54,820 $50,599 $45,670 $37,490 $29,986
================================================================
Average Balance Sheet Totals
- ----------------------------
Total assets $3,872,744 $3,625,178 $3,312,198 $3,096,368 $2,973,210
Investment securities and
money market investments 798,573 796,929 845,852 856,508 744,138
Loans and leases
(net of unearned income) 2,795,460 2,558,467 2,213,677 2,008,439 1,923,662
Total deposits 3,206,648 3,041,509 2,772,683 2,679,832 2,612,580
Long-term debt and lease obligations 29,067 31,643 17,750 11,545 15,636
Shareholders' equity 391,161 357,093 327,636 295,575 276,501
Actual Balance at Period End
- ----------------------------
Total assets $4,021,514 $3,768,851 $3,568,247 $3,167,077 $3,103,669
Long-term debt and lease obligations 49,560 34,689 27,283 13,051 16,764
</TABLE>
16
<PAGE>
The Peoples Bank of Elkton
Selected Historical Financial Data
(In Thousands)
<TABLE>
<CAPTION>
As of or for the Three Months Ended March 31
--------------------------------------------
1997 1996
------------------------------------------------------
<S> <C> <C>
Summary of Operations
- ---------------------
Net interest income $1,074 $ 997
Provision for loan losses 24 21
--------------------------------------------
Net interest income after provision
for loan losses 1,050 976
Other operating income 115 110
Other operating expense 716 642
Income tax expense 145 155
--------------------------------------------
Net Income $304 $289
============================================
Average Balance Sheet Totals
- ----------------------------
Total assets $91,139 $84,150
Investment securities and
money market investments 21,012 23,531
Loans and leases
(net of unearned income) 65,458 56,730
Total deposits 78,509 70,828
Long-term debt and lease obligations 1,683 2,692
Shareholders' equity 10,249 9,811
Actual Balance at Period End
- ----------------------------
Total assets $92,197 $85,261
Long-term debt and lease obligations 1,500 2,500
</TABLE>
17
<PAGE>
The Peoples Bank of Elkton
Selected Historical Financial Data
(In Thousands)
<TABLE>
<CAPTION>
As of or for the Year Ended December 31
-------------------------------------------------
1996 1995 1994 1993 1992
-------------------------------------------------
<S> <C> <C> <C> <C> <C>
Summary of Operations
- ---------------------
Net interest income $4,212 $3,627 $3,306 $3,177 $2,941
Provision for loan losses 334 75 120 163 121
-------------------------------------------------
Net interest income after provision
for loan losses 3,878 3,552 3,186 3,014 2,820
Other operating income 444 427 422 411 349
Other operating expense 2,756 2,372 2,185 2,046 2,027
Income tax expense 520 594 528 524 411
-------------------------------------------------
Net Income $1,046 $1,013 $895 $855 $731
=================================================
Average Balance Sheet Totals
- ----------------------------
Total assets $87,687 $80,959 $73,431 $70,218 $66,174
Investment securities and
money market investments 24,356 22,789 21,909 23,884 28,059
Loans and leases
(net of unearned income) 58,560 53,953 47,937 42,549 34,332
Total deposits 74,435 67,778 60,890 60,175 57,674
Long-term debt and lease
obligations 2,340 3,000 3,000 1,216 0
Shareholders' equity 9,912 9,295 8,802 8,273 7,721
Actual Balance at Period End
- ----------------------------
Total assets $91,962 $84,146 $77,206 $71,925 $69,848
Long-term debt and lease
obligations 2,000 3,000 3,000 3,000 0
</TABLE>
18
<PAGE>
GENERAL INFORMATION--SPECIAL MEETING OF PBE SHAREHOLDERS
--------------------------------------------------------
Introduction
- ------------
This Proxy Statement/Prospectus is being furnished to the holders of PBE
Common Stock in connection with the solicitation by PBE's Board of Directors of
proxies to be voted at the Special Meeting to be held on July 22, 1997. The
purpose of the meeting is to consider and vote upon a proposal adopted by the
Board of Directors of PBE to approve and adopt the Merger Agreement between FFC
and PBE, the terms of which are described herein.
All information set forth in this Proxy Statement/Prospectus which relates
to FFC has been provided or verified by FFC, and all information which relates
to PBE has been provided or verified by PBE.
Date, Time and Place of Special Meeting
- ---------------------------------------
The Special Meeting of the shareholders of PBE will be held on July 22,
1997, at 10:00 a.m., local time, at Singerly Fire Company Banquet Facility, 300
Newark Avenue, Elkton, Maryland.
Shareholders Entitled to Vote
- -----------------------------
The Board of Directors of PBE has fixed the close of business on June 6,
1997, as the record date (the "Record Date") for the determination of holders of
PBE Common Stock entitled to receive notice of and to vote at the Special
Meeting.
Purpose of Meeting
- ------------------
The shareholders of PBE will be asked at the Special Meeting to consider
and vote upon: (i) a proposal to approve and adopt the Merger Agreement, and
(ii) such other matters as may properly be brought before the meeting and any
adjournments thereof, including without limitation, a motion to adjourn or
postpone the Special Meeting to another time and place for the purpose of
soliciting proxies in favor of the Merger Agreement or otherwise.
Solicitation of Proxies
- -----------------------
This Proxy Statement/Prospectus is furnished in connection with the
solicitation of proxies, in the accompanying form, by the Board of Directors of
PBE for use at the Special Meeting and at any adjournments thereof. The
expenses to be incurred in soliciting proxies will be borne by PBE. In addition
to the use of the mails, the directors, officers and employees of PBE may,
without additional compensation, solicit proxies personally or by telephone or
telegram.
Quorum and Required Vote
- ------------------------
Each share of PBE Common Stock is entitled to one vote on all matters
submitted to a vote of the shareholders. The holders of two-thirds of the
outstanding shares of PBE Common Stock, present either in person or by proxy,
will constitute a quorum for the transaction of business at the Special Meeting.
The inspectors of election will treat shares of PBE Common Stock represented by
a properly signed and returned proxy as present at the Special Meeting for
purposes of determining a quorum, without regard to whether the proxy is marked
as casting a vote or abstaining. Likewise, the inspectors of election will treat
shares of PBE Common Stock represented by "broker non-votes" (i.e., shares of
PBE Common Stock held in record name by brokers or nominees as to which (i)
instructions have not been received from the
19
<PAGE>
beneficial owners or persons entitled to vote, (ii) the broker or nominee does
not have discretionary voting power under applicable rules of the National
Association of Securities Dealers, Inc. or the instrument under which it serves
in such capacity, and (iii) over which the record holder has indicated on the
proxy card or otherwise notified PBE that it does not have authority to vote
such shares on that matter) as present for purposes of determining a quorum.
The affirmative vote of shareholders holding at least two-thirds of the
issued and outstanding shares of PBE Common Stock at the Special Meeting is
required in order to approve the Merger Agreement. Abstentions and broker non-
votes will be counted as shares of PBE Common Stock that are outstanding, but
will not be counted as votes in favor of adoption of the Merger Agreement.
Consequently, abstentions and broker non-votes will have the same effect as a
vote against adoption of the Merger Agreement.
Revocation and Voting of Proxies
- --------------------------------
The execution and return of the enclosed proxy form will not affect a
shareholder's right to attend the Special Meeting and to vote in person. Any
proxy given pursuant to this solicitation may be revoked at any time before the
proxy is voted at the Special Meeting, by (i) delivering notice of revocation or
a later-dated proxy to Robert E. Noll, President, The Peoples Bank of Elkton,
130 North Street, Elkton, Maryland 21921, or (ii) appearing at the meeting and
notifying the person in charge thereof that the shareholder wishes to vote his
or her shares of PBE Common Stock in person. Unless revoked, any proxy given
pursuant to this solicitation will be voted at the Special Meeting in accordance
with the instructions thereon of the shareholder giving the proxy. In the
absence of instructions, all proxies will be voted FOR the proposal to approve
the Merger Agreement between PBE and FFC. Although the Board of Directors knows
of no other business to be presented at the Special Meeting, in the event that
any other matters are properly brought before the meeting and in the absence of
instructions to the contrary, any proxy given pursuant to this solicitation will
be voted in accordance with the recommendations of the management of PBE.
Shares Outstanding and Principal Holders Thereof
- ------------------------------------------------
As of the close of business on the Record Date, PBE had outstanding 230,596
shares of PBE Common Stock, which shares were held by 472 holders of record.
PBE has no other stock issued or outstanding. There are 45,888 shares of PBE
Common Stock reserved for issuance upon exercise of the Warrant.
As of the Record Date, the directors and executive officers of PBE and
their affiliates owned beneficially a total of 28,015 shares of PBE Common Stock
(representing approximately 12.15 percent of such shares issued and
outstanding). The executive officers and each of the directors intend to vote
their shares in favor of the proposal to approve the Merger Agreement.
To the knowledge of PBE's management, as of the Record Date, the following
persons owned of record or beneficially more than five percent of the
outstanding shares of PBE Common Stock:
20
<PAGE>
<TABLE>
<CAPTION>
================================================================================
Name & Address Number of Shares Percent
of Beneficial Owner Position Beneficially Owned of Class
------------------- -------- ------------------ ---------
================================================================================
<S> <C> <C> <C>
Charles F. Sposato Director 21,084/(1)/ 9.14%
209 Oldfield Point Circle
Elkton, Maryland 21921
================================================================================
Anthony F. Sposato - 19,386/(2)/ 8.41%
80 Molitor Road
Elkton, Maryland 21921
================================================================================
Anchar, a Maryland General Partnership - 13,809/(3)/ 5.99%
209 Oldfield Point Circle
Elkton, Maryland 21921
================================================================================
- --------------------------------------------------------------------------------
</TABLE>
/(1)/ Includes 13,809 shares held by Anchar, a Maryland General Partnership, a
partnership jointly owned with his brother, Anthony F. Sposato, and 1,810
shares owned by relatives of Mr. Sposato.
/(2)/ Includes 13,809 shares held by Anchar, a Maryland General Partnership, a
partnership jointly owned with his brother, Charles F. Sposato, and 5,577
shares owned by relatives of Mr. Sposato.
/(3)/ Shares owned have been included in shares beneficially owned by Mr.
Charles F. Sposato and Mr. Anthony F. Sposato.
Interests of Certain Persons in Matters To Be Acted Upon
- --------------------------------------------------------
Except as described in this section, the directors and executive officers
of PBE have no substantial interest in the Merger, other than in their capacity
as shareholders of PBE. As shareholders, the directors and executive officers of
PBE will be entitled to receive FFC Common Stock in exchange for their PBE
Common Stock in the same proportion and on the same terms and conditions as all
other shareholders of PBE.
Upon completion of the Merger, FFC has agreed for a period of five years
after the Effective Date to continue in office the present directors of PBE who
indicate their desire to serve. Each non-employee director of PBE shall continue
to receive director's fees from PBE on the same basis as prior to the Merger,
i.e., a quarterly stipend of $1,250 and meeting fees of $100 per Board of
Directors meeting and $50 per committee meeting (provided that FFC may direct
PBE to reduce the frequency of such meetings) and shall continue to receive such
other incidental benefits as he or she was receiving from PBE prior to the
Effective Date. Each PBE director who continues in office shall be subject to
FFC's mandatory retirement rules for directors.
FFC has agreed, following the Merger and for at least three years
thereafter to cause PBE (i) to pay compensation to each person who was employed
by PBE as of the Effective Date and who continues to be employed by PBE on or
after the Effective Date, that is at least equal to the aggregate compensation
that such person was receiving from PBE prior to the Effective Date (unless
there is a material change in the duties and responsibilities of such employee),
(ii) to provide employee benefits, including under benefit plans of PBE, to each
such person who is a full-time employee, on and after the Effective Date, that
are substantially equivalent in the aggregate to the employee benefits that such
person was receiving from PBE as a full-time employee prior to the Effective
Date, and (iii) to provide employee benefits
21
<PAGE>
to each such person who is a part-time employee, on or after the Effective
Date, that are the same as the employee benefits that are being received at the
applicable time by part-time employees of other banking subsidiaries owned by
FFC. In addition, FFC has agreed to cause PBE to honor PBE's obligations under
existing PBE employee agreements and benefit plans and FFC and PBE have agreed
that, after the Effective Date of the Merger, FFC shall cause PBE (and any
successor to PBE) to indemnify, defend, and hold harmless any person who, prior
to the Effective Date of the Merger, was an officer, director or employee of
PBE against claims (actual or threatened) brought against such person for
matters occurring prior to the Effective Date to the extent the claim is
related to the person's position and service with PBE. FFC will cause PBE to
provide such indemnification to the full extent permitted under applicable law
and the Articles of Incorporation and Bylaws of PBE and PBE shall pay expenses
in advance of the final disposition of any claim or proceeding to an
indemnified party to the full extent permitted by applicable law and the
Articles of Incorporation and Bylaws of PBE as in effect as of the date of the
Merger Agreement. However, FFC and PBE have retained the right to direct the
defense of any action and to retain counsel of FFC's choice, subject to the
right of indemnified persons to obtain other counsel under the circumstances,
and in the manner, set forth in the Merger Agreement in the event of a conflict
between the positions of PBE and an indemnified party.
FFC has also agreed to use reasonable efforts, with the cooperation of PBE,
to obtain tail coverage relating to PBE's existing directors and officers
liability insurance policy for claims arising from facts or circumstances which
occur prior to the Effective Date for those persons who are covered by such
insurance immediately prior to the Effective Date. FFC may substitute for PBE's
existing directors and officers liability insurance policy a policy or policies
of at least the same coverage and amounts containing terms and conditions that
are substantially no less advantageous.
After the Effective Date, the directors, officers and employees of PBE who
become directors, officers or employees of FFC shall have indemnification
rights with prospective application only, except for the indemnification rights
described above. Prospective coverage will be provided, to the extent
permitted under FFC's Articles of Incorporation and applicable law and under
FFC's directors and officers liability insurance policy on a basis at least
equal to the coverage provided to persons in similar positions at FFC.
Except as described above, the directors and officers of FFC do not have
any special interest in the Merger (other than in their capacity as
shareholders of FFC) and will not receive any special consideration or
compensation in connection with its consummation.
Recommendation of the Board of Directors of PBE
-----------------------------------------------
For the reasons stated in this Proxy Statement/Prospectus, the Board of
Directors of PBE has unanimously approved the Merger Agreement and believes the
Merger is in the best interests of the shareholders of PBE. Accordingly, the
Board of Directors recommends that the shareholders vote in favor of the
proposal to approve the Merger Agreement. See THE MERGER--Background of the
Merger, Reasons for the Merger; Recommendation of the Board of Directors of
PBE, and Additional Reasons for the Merger.
Certain of the directors and officers of PBE have personal interests in the
consummation of the Merger in addition to their interests as shareholders of
PBE. See Interests of Certain Persons in Matters To Be Acted Upon.
22
<PAGE>
THE MERGER
----------
General Information
- -------------------
The shareholders of PBE will be asked at the Special Meeting to consider
and vote upon a proposal to approve the Merger Agreement between FFC and PBE.
Under the Merger Agreement: (i) FFC will organize PBE Interim Bank as an interim
Maryland bank and a wholly-owned subsidiary of FFC and cause PBE Interim Bank to
become a party to the Merger Agreement, (ii) PBE will be merged with and into
PBE Interim Bank, (iii) PBE Interim Bank will survive the Merger and operate as
a wholly-owned subsidiary of FFC after the Merger under the name "The Peoples
Bank of Elkton", and (iv) each of the outstanding shares of PBE Common Stock,
par value $10.00 per share will be converted into 4.158 shares of FFC Common
Stock .
PBE is a Maryland bank. FFC is a Pennsylvania bank holding company.
Following the Merger, PBE will be a wholly-owned subsidiary of FFC without any
change in its present management or board of directors. FFC will be the parent
company of PBE, and will continue to be a registered bank holding company that
is regulated by the Federal Reserve Board.
The precise terms and conditions of the Merger are set forth in the Merger
Agreement, which is attached as Exhibit A to this Proxy Statement/Prospectus and
is incorporated herein by reference. THE DISCUSSION WHICH FOLLOWS IS INTENDED
ONLY AS A SUMMARY OF CERTAIN TERMS OF THE MERGER AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO THE FULL TEXT OF THE MERGER AGREEMENT ATTACHED AS
EXHIBIT A TO THIS PROXY STATEMENT/PROSPECTUS.
Background of the Merger
- ------------------------
From time to time since the mid 1980s PBE has been contacted by various
financial institutions regarding a possible affiliation. Generally, such
contacts had been informal in nature and did not result in the making of a
formal offer to acquire PBE.
Beginning in 1995, PBE began consulting with a financial advisor to review
with the Board of Directors possible transactions to enhance stockholder value.
Based upon advice of the financial advisor, the Board determined to investigate
the possibility of affiliating with a larger bank holding company. Formal
discussions took place during the first half of 1996 with respect to the
affiliation of PBE with a larger, out-of-state financial institution holding
company, but these discussions were eventually terminated. During the summer of
1996, PBE had a preliminary inquiry from another bank holding company although
no offer was ever made. At that time, the Board also reaffirmed its decision to
investigate an affiliation and determined to engage an investment banker to
assist in the process of selecting an affiliation partner. To facilitate the
process, the Board also established an Acquisition Committee consisting of
Directors Williams, Herman, Manlove and Sposato. After interviewing several
firms, the Board opted to engage Berwind. Berwind, after consultations with both
the Board of Directors and the Acquisition Committee, contacted several
financial institution companies to determine the level of interest in an
affiliation with Peoples. Following receipt of expressions of interest from
several companies and conduct of a due diligence review of PBE by certain of
these companies, FFC and another out-of-state bank holding company submitted
"best and final" proposals.
A special meeting of the Board of Directors was convened on February 25,
1997 and held over to February 28, 1997, to consider the two proposals.
Representatives of Berwind and special counsel also attended this meeting. In
the course of its review of these proposals, the Board authorized Berwind to
23
<PAGE>
approach each party in an effort to improve the terms of the proposals. As a
result, each party revised its proposal in certain respects. Both proposals
contemplated a tax-free, stock-for-stock exchange. As revised, FFC proposed a
fixed exchange ratio of 3.78 shares of FFC common stock for each share of PBE
common stock (the Conversion Ratio was subsequently adjusted due to the
declaration by FFC of a 10% stock dividend) which based on the closing price of
FFC's common stock on the day prior to the February 25 meeting date had a value
of $96.39 per share. The proposal of the other party contemplated an exchange
ratio to be determined within a range depending on the closing market price of
its common stock and based upon the closing price of such party's common stock
on such same date had a value of $97.56 per share. Based on their respective
closing prices on February 27, 1997 the value of the FFC transaction was $94.50
while the value of the other party's proposal was $94.98.
The Board of Directors proceeded to discuss the merits of each of the two
proposals. All of the directors, with the exception of one director, initially
indicated a preference for the other party's proposal due to a number of factors
including the greater per share pro forma equivalent dividend payment to be
received by PBE's shareholders under the other party's proposal and the marginal
difference in the per share value of the two proposals. The other director
objected to the other party's proposal due primarily to concerns regarding the
application of and basis for the range of the exchange ratio, the need for the
other party to perform due diligence and objections to terms in the proposed
form of definitive agreement. That director then informed the Board that he
could not vote to approve a transaction with the other party either as a
director or as a stockholder and, if the Board approved such a transaction, he
stated his intention to exercise his dissenters' rights of appraisal if such a
proposal was presented to the stockholders for a vote. Berwind advised the
Board that the other party would not proceed to negotiate a definitive agreement
with PBE under such circumstances.
The Board then continued its discussion regarding the proposals and noted
that, based on the position of the other party regarding the exercise of
dissenters rights, negotiation of a definitive agreement with that party would
not be possible. The directors confirmed their belief that an affiliation of PBE
with a large financial institution would be in the best interests of the
stockholders, customers and employees of PBE. The directors agreed that the
proposals of FFC and the other party were generally comparable to each other
with there being little difference in the pricing. The directors further agreed
that the FFC proposal as structured generally contemplated PBE's continued
existence following consummation of the acquisition which would be beneficial to
PBE customers and employees. The Board of Directors then unanimously authorized
negotiation of a definitive agreement with FFC based upon the terms of its
written proposal.
On March 18, 1997, the Board of Directors held a special meeting at which
the terms of the proposed agreement and warrant agreement were reviewed. Legal
counsel and representatives of Berwind were present at this meeting. Berwind
reviewed with the Board the results of its due diligence on FFC and rendered its
opinion that the proposed transaction was fair to shareholders from a financial
point of view. Counsel reviewed the terms of the definitive Merger Agreement,
the Warrant Agreement and Warrant with the Board and responded to questions
posed by the directors. The Board of Directors unanimously approved the
execution of the definitive Merger Agreement and Warrant Agreement.
24
<PAGE>
Reasons for the Merger; Recommendation of the Board of Directors
- ----------------------------------------------------------------
The Board of Directors of PBE has determined that the Merger is in the best
interests of PBE and its shareholders. In evaluating the Merger Agreement, the
Board of Directors, with the assistance of legal counsel and Berwind, considered
a variety of factors including; (i) the value being offered to shareholders by
FFC in relation to the market value, book value and earnings per share of PBE's
common stock, (ii) information concerning the financial condition, results of
operations and prospects of FFC and PBE, including the long term equity growth
potential of PBE as compared to FFC, (iii) FFC's dividend yield, earnings per
share and stock price history; (iv) the competitive environment for financial
institutions generally, (v) the financial terms of other recent business
combinations in the local financial services industry, (vi) FFC's ability to
provide comprehensive financial services in PBE's market, (vii) FFC's financial
resources to serve the lending and deposit needs of the local communities served
by PBE, thereby enhancing the related long term customer service potential for
PBE's customer service base, (viii) the fact that FFC intends to maintain PBE as
a community-oriented institution for a period of five years following the
merger, and (ix) the opinion of Berwind that the consideration to be received by
PBE's shareholders is fair from a financial point of view.
The Board of Directors of PBE unanimously recommends that the holders of
PBE Common Stock vote "FOR" approval of the Merger Agreement and the Merger.
Additional Reasons for the Merger
- ---------------------------------
Recent changes in federal and state banking laws and regulations have had a
major impact upon the banking industry in Pennsylvania, Maryland and throughout
the United States. For example, due to changes in Pennsylvania law that became
effective in March, 1990, Pennsylvania banks may establish banking offices
throughout the state, and bank holding companies located in a number of other
states may acquire Pennsylvania banks. Similarly, Maryland law permits
statewide branching by Maryland banks and also permits bank holding companies
located in other states to acquire Maryland banks under specified conditions.
In response to these and other recent changes, many mergers and consolidations
involving Pennsylvania and Maryland banks and bank holding companies have
occurred.
PBE and FFC believe that further merger activity within Pennsylvania and
Maryland is likely to occur in the future, resulting in increased concentration
levels in banking markets within Pennsylvania and Maryland and other significant
changes in the competitive environment. Mergers between Pennsylvania and
Maryland banks are currently authorized under federal law as embodied in the
Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (the
"Riegle-Neal Act"). The Riegle-Neal Act allows adequately capitalized and
managed bank holding companies to acquire banks in any state starting one year
after enactment (September 29, 1995). In addition, the Reigle-Neal Act allows
interstate bank merger transactions beginning June 1, 1997, or on any earlier
date that the relevant states pass legislation authorizing mergers with out-of-
state banks.
Both Maryland and Pennsylvania have enacted laws that permit interstate
bank mergers pursuant to the Reigle-Neal Act. Therefore, Maryland and
Pennsylvania banks currently are permitted to merge with each other. Through
interstate merger transactions, banks can acquire branches of out-of-state banks
by converting their offices into branches of the resulting bank. Under current
Maryland and Pennsylvania law, an acquiring bank in an interstate merger may
purchase individual branches (i.e., less than all of the branches) of the
selling bank.
25
<PAGE>
Under the Riegle-Neal Act, banks may also establish and operate a "de novo
branch" in any state that "opts-in" to de novo branching. Pennsylvania has
adopted a law permitting out-of-state banks to open de novo branches in
Pennsylvania, as long as the home state of each such bank would offer reciprocal
de novo branching opportunities to Pennsylvania banks. Maryland, allows out-of-
state banks to establish de novo branches within its borders. The Riegle-Neal
Act permits foreign banks to establish branches, either de novo or by merger, to
the same extent as similarly situated domestic banks. In other words, a foreign
bank may establish and operate interstate branches to the same extent that the
establishment and operation of such branches would be permitted if the foreign
bank were a national bank or state bank. All of the foregoing changes made by
the Reigle-Neal Act are expected to intensify competition in local, regional and
national banking markets.
In addition, recent changes in federal banking laws have significantly
increased the severity and complexity of federal banking regulations, as well as
the costs that banks must incur in complying with those regulations. For
example, pursuant to the Federal Deposit Insurance Corporation Improvement Act
of 1991 ("FDICIA"), the federal banking agencies have established guidelines for
real estate lending by FDIC-insured banks, including maximum loan-to-value
ratios for various types of real estate loans. FDICIA requires each FDIC-
insured bank to comply with a number of administrative standards (including
audit requirements) that are designed to enhance the bank's safety and
soundness. FDICIA also contains "Truth in Savings" provisions that require
extensive disclosures regarding the rates of interest paid and the fees charged
by FDIC-insured banks with respect to their deposit accounts. FDICIA further
provides greatly expanded authority to the federal banking agencies to impose
administrative enforcement sanctions (including cease-and-desist orders, civil
money penalties, and officer removal or suspension orders) against FDIC-insured
banks that fail to maintain adequate capital levels or that engage in unsafe or
unsound banking practices. These changes in federal law have added
significantly to the cost and complexity of operating a bank and have made it
more difficult for smaller independent banks like PBE to compete with large
banking organizations.
From the standpoint of PBE, the Merger presents an attractive opportunity
for PBE to gain access to the managerial expertise and specialized services
offered by FFC, thereby permitting PBE's banking offices to provide a broader
range of services to their customers in the face of increasing competition from
larger financial institutions. FFC will operate PBE, following the proposed
Merger, as a separate subsidiary bank and expects to retain PBE's current
executive officers and directors. While FFC will exercise an oversight role and
provide financial backing, administrative support services and other resources
to PBE, it is expected that PBE, like FFC's other subsidiary banks, will operate
as a semi-autonomous community bank. Accordingly, it is anticipated, following
the Merger, that PBE will continue to follow substantially the same policies
regarding interest rates and other terms and conditions for its deposits and
loans.
FFC believes that PBE is already satisfactorily meeting the banking needs
of the community which it serves. PBE will continue to operate as a community
bank in a market which has experienced considerable consolidation.
However, FFC expects that PBE will be able to expand its banking
activities as a result of the acquisition. PBE will be encouraged to offer such
new products and services as bank-by-phone and debit cards. In addition, FFC
expects that PBE will be able to offer additional cash management services for
its business customers and expand indirect automobile lending programs. PBE is
expected to offer bi-weekly mortgage loans and, as a result of FFC's secondary
mortgage market program, fixed rate mortgage loans. PBE will also
26
<PAGE>
be able to extend larger commercial loans in its market area by granting
participation interests in such loans to other subsidiary banks of FFC. Because
FFC shares PBE's philosophy of community banking, PBE's offices will maintain
their community orientation after the Merger. Thus, the Merger will enhance the
ability of PBE's offices to remain competitive and to satisfy local customers'
financial needs.
The Merger will benefit FFC by establishing a market presence in Cecil
County, Maryland and by increasing FFC's current market presence in Maryland.
FFC's acquisition of PBE will represent its second banking operation in
Maryland. FFC's senior management has selected Maryland as a strategic area for
expansion of its business and believes that the Merger will result in a
favorable diversification of FFC's banking operations. FFC believes PBE's market
is similar to many of the markets that FFC's subsidiary banks currently serve,
i.e., community-oriented markets with strong potential for attracting business
from consumers, small businesses and agricultural concerns. PBE's market area is
also a natural extension of the market of one of FFC's banking subsidiaries,
Fulton Bank; Fulton Bank's Oxford, Pennsylvania branch office is approximately
15 miles from Elkton, Maryland. In sum, the Merger will benefit both parties by
allowing FFC to achieve a broader geographic diversification of its operations
and by enabling PBE to affiliate with a larger multi-bank holding company that
has a significant presence in central and northeastern Pennsylvania, western
Maryland, southern Delaware and southwestern New Jersey. The Merger will thereby
place PBE in a better position to compete effectively in the rapidly changing
market for financial services.
As described above, the Boards of Directors of FFC and PBE have approved
the terms of the Merger Agreement. The Board of Directors of PBE believes that
the terms of the Merger are fair to and in the best interests of PBE and its
shareholders. PBE's Board of Directors also believes that the Merger will
enhance the ability of PBE's offices to satisfy the financial needs of their
customers and the communities which they serve.
Opinion of Financial Advisor to The Peoples Bank of Elkton
- ----------------------------------------------------------
PBE retained Berwind to act as its financial advisor and to render a
fairness opinion in connection with the Merger. Berwind rendered its opinion to
the Board of Directors of PBE that, based upon and subject to the various
considerations set forth herein, as of March 18, 1997 (the "March Opinion"), and
as of the date of this Proxy Statement/Prospectus (the "Proxy Opinion"), the
financial terms of the Merger are fair, from a financial point of view, to the
holders of PBE Common Stock.
The full text of Berwind's Proxy Opinion, which sets forth the assumptions
made, matters considered and limitations of the review undertaken, is attached
as Exhibit B to this Proxy Statement/Prospectus, is incorporated herein by
reference, and should be read in its entirety in connection with this Proxy
Statement/Prospectus. The summary of the opinion of Berwind set forth herein is
qualified in its entirety by reference to the full text of such opinion attached
as Exhibit B to this Proxy Statement/Prospectus.
Berwind was selected to act as PBE's financial advisor in connection with
the Merger based upon its qualifications, expertise and experience. Berwind has
knowledge of, and experience with, Maryland and surrounding banking markets as
well as banking organizations operating in those markets and was selected by PBE
because of its knowledge of, experience with, and reputation in the financial
services industry. Berwind, as part of its investment banking business, is
engaged regularly in the valuation of assets, securities and companies in
connection with various types of asset and security transactions, including
mergers, acquisitions, private placements, and
27
<PAGE>
valuations for various other purposes and in the determination of adequate
consideration in such transactions.
On March 18, 1997, PBE's Board of Directors approved and executed the
Merger Agreement. Prior to such approval, Berwind delivered its March Opinion to
PBE's Board of Directors stating that, as of such date, the financial terms of
the Merger were fair to the shareholders of PBE from a financial point of view.
Berwind reached the same opinion as of the date of its Proxy Opinion. No
limitations were imposed by PBE's Board of Directors upon Berwind with respect
to the investigations made or procedures followed by Berwind in rendering the
March Opinion or the Proxy Opinion.
In rendering its Proxy Opinion, Berwind: (i) reviewed the historical
financial performances, current financial positions and general prospects of PBE
and FFC; (ii) reviewed the Merger Agreement; (iii) reviewed and analyzed the
stock market performance of PBE and FFC (iv) studied and analyzed the
consolidated financial and operating data of PBE and FFC; (v) considered the
terms and conditions of the proposed Merger as compared with the terms and
conditions of comparable bank and bank holding company mergers and acquisitions;
(vi) met and/or communicated with certain members of PBE's and FFC's senior
management to discuss their respective operations, historical financial
statements, and future prospects; (vii) reviewed this Proxy Statement/
Prospectus, and (viii) conducted such other financial analysis, studies and
investigations as Berwind deemed appropriate.
In delivering its March Opinion and Proxy Opinion, Berwind assumed that in
the course of obtaining the necessary regulatory and governmental approvals for
the Merger, no restriction will be imposed on FFC that will have a material
adverse effect on the contemplated benefits of the Merger. Berwind also assumed
that there would not occur any change in applicable law or regulation that would
cause a material adverse change in the prospects or operations of FFC after the
Merger.
Berwind relied without independent verification upon the accuracy and
completeness of all of the financial and other information reviewed by and
discussed with it for purposes of its opinion. With respect to PBE's financial
forecasts reviewed by Berwind in rendering its opinion, Berwind assumed that
such financial forecasts were reasonably prepared on bases reflecting the best
currently available estimates and judgments of the management of PBE as to the
future financial performance of PBE. Berwind did not make an independent
evaluation or appraisal of the assets (including loans) or liabilities of PBE or
FFC nor was it furnished with any such appraisal. Berwind also did not
independently verify and has relied on and assumed that all allowances for loan
and lease losses set forth in the balance sheets of PBE and FFC were adequate
and complied fully with applicable law, regulatory policy and sound banking
practice as of the date of such financial statements.
The following is a summary of selected analyses prepared by Berwind and
presented to PBE's Board in connection with the March Opinion and analyzed by
Berwind in connection with the March and Proxy Opinions. In connection with
delivering its Proxy Opinion, Berwind updated certain analyses described above
to reflect current market conditions and events occurring since the date of the
March Opinion. Such reviews and updates led Berwind to conclude that it was not
necessary to change the conclusions it had reached in connection with rendering
the March Opinion.
Comparable Companies and Comparable Acquisition Transaction Analyses.
Berwind compared selected financial and operating data for PBE with those of a
peer group of selected banks and bank holding companies with assets between
28
<PAGE>
$50 million and $150 million, as of the most recent financial period publicly
available, headquartered in Cecil and surrounding Maryland, Delaware,
Pennsylvania and New Jersey counties. Financial data and operating ratios
compared in the analysis of the PBE peer group included but were not limited to:
return on average assets, return on average equity, shareholders' equity to
assets ratio and certain asset quality ratios.
Berwind also compared selected financial, operating and stock market data
for FFC with those of a peer group of selected commercial banks with assets
between $2.5 billion and $10.0 billion, as of the most recent period publicly
available, located in Delaware, Maryland, New Jersey and Pennsylvania.
Financial, operating and stock market data, ratios and multiples compared in the
analysis of the FFC peer group included but were not limited to: return on
average assets, return on average equity, shareholders' equity to asset ratios,
certain asset quality ratios, price to book value, price to tangible book value,
price to earnings (latest twelve months) and dividend yield.
Berwind also compared the multiples of book value, tangible book value and
latest twelve months' earning inherent to the Merger with the multiples paid in
recent acquisitions of banks and bank holding companies that Berwind deemed
comparable. The transactions deemed comparable by Berwind included both
interstate and intrastate acquisitions announced during the twelve month period
ended as of the date of its opinion, in which the selling institution's assets
were between $50 million and $150 million. No company or transaction, however,
used in this analysis is identical to PBE, FFC or the Merger. Accordingly, an
analysis of the result of the foregoing is not mathematical; rather, it involves
complex considerations and judgments concerning differences in financial and
operating characteristics of the companies and other factors that would affect
the public trading values of the companies or company to which they are being
compared.
Discounted Dividend Analysis. Using discounted dividend analyses, Berwind
estimated the present value of the future dividend streams that PBE could
produce over a five year period under various earnings growth assumptions.
Berwind also estimated the terminal value for PBE's Common Stock after the five
year period by applying a range of earnings multiples of PBE terminal year
earnings. The range of multiples used reflected a variety of scenarios
regarding the growth and profitability prospects of PBE. The dividend streams
and terminal values were then discounted to present value using discount rates,
reflecting different assumptions regarding the rates of return required by
holders or prospective buyers of PBE's Common Stock.
Pro Forma Contribution Analysis. Berwind analyzed the changes in the amount
of earnings, book value and dividends represented by one share of PBE stock
prior to the Merger and 4.158 shares of FFC stock after the Merger. The analysis
considered, among other things, the changes that the Merger would cause to PBE'
earnings per share, book value per share, tangible book value per share and
indicated dividends. In reviewing the pro forma combined earnings, equity and
assets of FFC based on the Merger with PBE, Berwind analyzed the contribution
that PBE would have made to the combined company's earnings, equity and assets
as of and for the period ended March 31, 1997. Berwind also reviewed the
percentage ownership that PBE shareholders would hold in the combined company.
In connection with rendering its March Opinion and Proxy Opinion, Berwind
performed a variety of financial analyses. Although the evaluation of the
fairness, from a financial point of view, of the consideration to be paid in the
Merger was to some extent a subjective one based on the experience and judgment
of Berwind and not merely the result of mathematical analysis of financial data,
Berwind principally relied on the previously discussed
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financial valuation methodologies in its determinations. Berwind believes its
analysis must be considered as a whole and that selecting portions of such
analyses and factors considered by Berwind without considering all such analyses
and factors could create an incomplete view of the process underlying Berwind's
opinion. In its analysis, Berwind made numerous assumptions with respect to
business, market, monetary and economic conditions, industry performance and
other matters, many of which are beyond PBE's and FFC's control. Any estimates
contained in Berwind's analyses are not necessarily indicative of future results
or values, which may be significantly more or less favorable than such
estimates.
In reaching its opinion as to fairness, none of the analyses performed by
Berwind was assigned a greater or lesser weighting by Berwind than any other
analysis. As a result of its consideration of the aggregate of all factors
present and analyses performed, Berwind reached the conclusion, and opined, that
the consideration to be received in the Merger as set forth in the Merger
Agreement, is fair from a financial point of view to PBE and its shareholders.
Berwind's Proxy Opinion was based solely upon the information available to
it and the economic, market and other circumstances as they existed as of the
date its Proxy Opinion was delivered; events occurring after the date of its
Proxy Opinion could materially affect the assumptions used in preparing its
Proxy Opinion. Berwind has not undertaken to reaffirm and revise its Proxy
Opinion or otherwise comment upon any events occurring after the date thereof.
Pursuant to the terms of the engagement letter dated October 16, 1996, PBE
has paid Berwind $30,000 for acting as financial advisor in connection with the
Merger including delivering its March and Proxy Opinions. In addition, PBE has
also agreed to pay Berwind approximately $213,000 upon the consummation of the
Merger. Whether or not the Merger is consummated, PBE has also agreed to
indemnify Berwind and certain related persons against certain liabilities
relating to or arising out of its engagement.
The full text of the Proxy Opinion of Berwind dated as of the date of this
Proxy Statement/Prospectus, which sets forth assumptions made and matters
considered, is attached hereto as Exhibit B. PBE' shareholders are urged to
read the Proxy Opinion in its entirety. Berwind's Proxy Opinion is directed
only to the consideration to be received by PBE's shareholders in the Merger and
does not constitute a recommendation to any holder of PBE Common Stock as to how
such holder should vote at the PBE Special Meeting.
THE FOREGOING PROVIDES ONLY A SUMMARY OF THE PROXY OPINION OF BERWIND AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE FULL TEXT OF THAT OPINION,
WHICH IS SET FORTH IN EXHIBIT B TO THIS PROXY STATEMENT/PROSPECTUS.
Conversion and Exchange of Shares
- ---------------------------------
On the Effective Date of the Merger, each share of PBE Common Stock then
issued and outstanding will automatically be converted into and become the right
to receive 4.158 shares (subject to adjustment for stock dividends, stock splits
and similar transactions) of FFC Common Stock. The Conversion Ratio and all pro
forma and FFC historical per share information herein have been adjusted to
reflect a 10% stock dividend declared by FFC on May 1, 1997, payable on June 13,
1997, to shareholders of record on May 23, 1997.
No fractional shares of FFC Common Stock will be issued in connection with
the Merger. In lieu of the issuance of any fractional share to which he or she
would otherwise be entitled, each former shareholder of PBE will receive cash in
an amount equal to the fair market value of his or her
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fractional interest, determined by multiplying such fractional interest by the
Closing Market Price of FFC Common Stock.
The Closing Market Price is defined in the Merger Agreement as the average
of the per share closing bid prices for FFC Common Stock, rounded up to the
nearest $.125, for the ten (10) trading days immediately preceding the date
which is two (2) business days before the Effective Date (the "Price
Determination Period"), as reported on the Nasdaq National Market. If Nasdaq
fails to report a closing bid price for FFC Common Stock for any trading day
during the Price Determination Period, the closing bid prices for that day shall
be equal to the average of the closing bid prices and the average of the closing
asked prices as quoted by F.J. Morrissey & Company, Inc. and by Ryan, Beck &
Co., or if these two firms are not then making a market in FFC Common Stock, by
two brokerage firms who are then making a market in FFC Common Stock to be
selected by FFC and approved by PBE.
As soon as practicable following the Effective Date, PBE shareholders will
exchange their PBE Common Stock certificates for FFC Common Stock certificates
in accordance with the procedures described below in this section. FFC and PBE
anticipate that the Effective Date will occur during the third or fourth quarter
of 1997, assuming no difficulties are encountered in obtaining the required
regulatory approvals and all other conditions to closing are satisfied without
unexpected delay.
Following the Effective Date, each former shareholder of PBE will be
obliged to surrender to FFC the PBE Common Stock certificates held by him or
her. Detailed instructions concerning the procedure for surrendering PBE Common
Stock certificates will be sent by Fulton Bank, acting as exchange agent (the
"Exchange Agent"), to each former shareholder of PBE on or promptly after the
Effective Date. Upon proper surrender of his or her PBE Common Stock
certificates, each former shareholder of PBE will be issued a stock certificate
representing the number of whole shares of FFC Common Stock into which his or
her shares of PBE Common Stock have been converted, together with a check in the
amount of any cash, without interest, to which he or she is entitled in lieu of
the issuance of any fractional share of FFC Common Stock. SHAREHOLDERS OF PBE
SHOULD NOT SURRENDER THEIR PBE COMMON STOCK CERTIFICATES FOR EXCHANGE UNTIL THEY
RECEIVE WRITTEN INSTRUCTIONS TO DO SO FROM THE EXCHANGE AGENT. PLEASE DO NOT
SEND ANY STOCK CERTIFICATES AT THIS TIME.
Following the Effective Date, and until properly surrendered, each PBE
Common Stock certificate will be deemed for all corporate purposes to represent
the number of whole shares of FFC Common Stock which the holder would be
entitled to receive upon its surrender and the corresponding number of rights
associated with the Shareholder Rights Plan dated June 20, 1989 between FFC and
Fulton Bank (the "Rights Plan"), except that FFC may withhold dividends payable
after the Effective Date to any former shareholder of PBE who has received
written instructions from FFC but has not at that time surrendered his or her
PBE Common Stock certificates. Any dividends so withheld will be paid, without
interest, to any such former shareholder of PBE upon the proper surrender of his
or her PBE Common Stock certificates.
All PBE Common Stock certificates must be surrendered to FFC within two
years after the Effective Date. In the event that any former shareholder of PBE
does not properly surrender his or her PBE Common Stock certificates within that
time, the shares of FFC Common Stock that would otherwise have been issued to
him or her may, at the option of FFC, be sold and the net proceeds of such sale,
together with the cash (if any) to which he or she is entitled in lieu of the
issuance of a fractional share and any previously accrued and unpaid dividends,
will be held in a non-interest bearing account for his or her benefit. From and
after any such sale, the sole right of such
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former shareholder of PBE will be the right to collect such net proceeds, cash
and accumulated dividends. Subject to all applicable laws of escheat, such net
proceeds, cash and accumulated dividends will be paid to such former shareholder
of PBE, without interest, upon proper surrender of his or her PBE Common Stock
certificates.
In the event that a former PBE shareholder is unable to surrender his or
her PBE Common Stock certificates due to loss or mutilation thereof, he or she
may make a constructive surrender by following procedures comparable to those
customarily followed by FFC in issuing replacement certificates to FFC
shareholders whose FFC Common Stock certificates have been lost or mutilated.
Instructions for making a constructive surrender of lost or mutilated PBE Common
Stock certificates will be included in the written instructions to be sent by
the Exchange Agent to former PBE shareholders after the Effective Date of the
Merger.
THE FOREGOING DISCUSSION RELATING TO THE CONVERSION AND EXCHANGE OF PBE
COMMON STOCK IS ONLY A SUMMARY WHICH IS PROVIDED FOR CONVENIENCE. THE FOREGOING
DISCUSSION SHOULD BE READ IN CONJUNCTION WITH, AND IS QUALIFIED IN ITS ENTIRETY
BY, THE TERMS OF ARTICLE II OF THE MERGER AGREEMENT.
Business Pending The Effective Date
- -----------------------------------
Pursuant to the Merger Agreement, PBE is required, pending the Effective
Date, to conduct its business in the usual, regular and ordinary manner and
consistent with past practice. PBE is also required to use its best efforts to
preserve its present business organization, retain the services of its present
officers and employees, and maintain existing relationships with persons having
business dealings with it. In general, PBE may not take any action outside the
ordinary course of business without the prior written consent of FFC.
Pending the Effective Date, PBE is not permitted to declare or pay a cash
dividend on the PBE Common Stock; provided, however, that PBE may declare and
pay a dividend of up to $.90 per share of PBE Common Stock on each of
(i) June 15, 1997; (ii) September 15, 1997, provided that the Effective Date
does not occur (or is not expected to occur) on or before the record date for
the dividend on the FFC Common Stock scheduled to be paid on October 15, 1997;
(iii) December 15, 1997, provided that the Effective Date does not occur (or is
not expected to occur) on or before the record date for the dividend on the FFC
Common Stock scheduled to be paid on January 15, 1998; provided further, if the
customary payment date for the next regular cash dividend payable after the
Effective Date on the FFC Common Stock which is eligible to be received by the
former holders of PBE is more than ninety (90) days after the payment date of
the last regular cash dividend paid or to be paid on the PBE Common Stock prior
to the Effective Date (such number of days over ninety (90) days being the
"Dividend Lag Period"), then PBE may declare and set aside immediately prior to
the Effective Date, and may pay at a date it may select in its discretion, a
special pro-rata dividend (the "Special Pro-Rata Dividend"). Any such Special
Pro-Rata Dividend shall be payable in cash, and may not exceed an amount per
share which is the product of (i)its regular quarterly dividend ($0.90) times
(ii) a fraction, the numerator of which the Dividend Lag Period and the
denominator of which is ninety (90) days. Thus, for example, if the Merger is
to be consummated on August 1, 1997 and the dividend payment dates of PBE and
FFC are October 15, 1997 and November 15, 1997, respectively, the Dividend Lag
Period would be 31 days and thus PBE would be entitled to declare and pay,
immediately prior to the Effective Date, a Special Pro-Rata Dividend of $.31 per
share (its regular quarterly dividend ($.90) multiplied by .344 (31 days/90
days)).
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PBE has agreed that, pending the Effective Date, unless FFC otherwise
consents in writing, it shall (i) use all reasonable efforts to carry on its
business in, and only in, the ordinary course of business; (ii) to the extent
consistent with prudent business judgment, use all reasonable efforts to
preserve its present business organization, to retain the services of its
present officers and employees, and to maintain its relationships with
customers, suppliers and others having business dealings with PBE; (iii)
maintain all of its structures, equipment and other real property and tangible
personal property in good repair, order and condition, except for ordinary wear
and tear and damage by unavoidable casualty; (iv) use all reasonable efforts to
preserve or collect all material claims and causes of action belonging to PBE;
(v) keep in full force and effect all insurance policies now carried by PBE;
(vi) perform in all material respects each of its obligations under all material
contracts to which PBE is a party or by which PBE may be bound or which relate
to or affect its properties, assets and business; (vii) maintain its books of
account and other records in the ordinary course of business; (viii) comply in
all material respects with all statutes, laws, ordinances, rules and
regulations, decrees, orders, consent agreements, memoranda of understanding and
other federal, state, and local governmental directives applicable to PBE and to
the conduct of its business; (ix) not amend PBE's Articles of Incorporation or
Bylaws; (x) not enter into or assume any material contract, incur any material
liability or obligation, or make any material commitment, except in the ordinary
course of business; (xi) not make any material acquisition or disposition of any
properties or assets or subject any of its properties or assets to any material
lien, claim, charge, or encumbrance of any kind whatsoever; (xii) not knowingly
take or permit to be taken any action which would cause any representation or
warranty to be materially inaccurate as of the date of such action or constitute
a material breach of any covenant set forth in the Merger Agreement; (xiii)
except as permitted otherwise in the Merger Agreement, not declare, set aside or
pay any dividend or make any other distribution in respect of PBE Common Stock;
(xiv) not authorize, purchase, redeem, issue or sell (or grant options or rights
to purchase or sell) any shares of PBE Common Stock or any other equity or debt
securities of PBE other than the Warrant; (xv) not increase the rate of
compensation of, pay a bonus or severance compensation to, establish or amend
any PBE benefit plan except as required by law for, or enter into or amend any
employment obligation with, any officer, director, employee or consultant of
PBE, except that PBE may grant reasonable salary increases and bonuses to its
officers and employees in the ordinary course of business to the extent
consistent with its past practice; (xvi) not enter into any related party
transaction except in the ordinary course of business consistent with past
practice; (xvii) in determining the additions to loan loss reserves and the loan
write-offs, writedowns and other adjustments that reasonably should be made by
PBE during the fiscal year ending December 31, 1997, PBE shall consult with FFC
and shall act in accordance with generally accepted accounting principles and
PBE's customary business practices; (xviii) file with appropriate federal,
state, local and other governmental agencies all tax returns and other material
reports required to be filed, pay in full or make adequate provisions for the
payment of all taxes, interest, penalties, assessments or deficiencies shown to
be due on tax returns or by any taxing authorities and report all information on
such returns truthfully, accurately and completely; (xix) not renew any existing
contract for services, goods, equipment or the like or enter into, amend in any
material respect or terminate any contract or agreement (including without
limitation any settlement agreement with respect to litigation) that is or may
reasonably be expected to have a material adverse effect on PBE except in the
ordinary course of business consistent with past practice (provided that FFC may
not unreasonably withhold its consent to such transactions); (xx) not make any
capital expenditures other than in the ordinary course of business or as
necessary to maintain existing assets in good repair; (xxi) not make
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application for the opening or closing of any, or open or close any, branches or
automated banking facility, except with respect to the establishment of an
automated banking facility at Union Hospital; (xxii) not make any equity
investment or commitment to make such an investment in real estate or in any
real estate development project, other than in connection with foreclosures,
settlements in lieu of foreclosure or troubled loan or debt restructuring in the
ordinary course of business consistent with customary banking practice; (xxiii)
not make purchases of securities for its investment portfolio without prior
consultation with FFC; (xxiv) not extend or amend PBE's lease relating to its
"Crossroads Shopping Center" branch office without FFC's prior written consent;
or (xxv) not take any other action similar to the foregoing which would have the
effect of frustrating the purposes of the Merger Agreement or the Merger or
cause the Merger not to qualify for pooling-of-interests accounting treatment or
as a tax-free reorganization under Section 368 of the Internal Revenue Code.
The Merger Agreement provides that PBE shall not, nor shall it permit any
officer, director, employee, agent, consultant or representative to: (a)
solicit, initiate or encourage any proposal for a merger with or other
acquisition of PBE, or any material portion of its assets or properties, with or
by any person other than FFC; or (b) cooperate with, or furnish any non-public
information concerning PBE to, any person in connection with such a proposal;
provided, however, that the Board of Directors are free to take such action as
the PBE Board of Directors determines, in good faith and after consultation with
outside counsel, is not legally inconsistent with its fiduciary duty. PBE is
required to notify FFC immediately if any discussions or negotiations are sought
to be initiated, any inquiry or proposals are made, or any such information is
requested with respect to an acquisition proposal or potential acquisition
proposal or if any such proposal is received or indicated to be forthcoming.
Conditions, Amendment and Termination
- -------------------------------------
The obligations of FFC and PBE to consummate the Merger are subject to a
number of conditions and contingencies set forth in the Merger Agreement,
including, without limitation, the following: (i) approval of the Merger by the
shareholders of PBE; (ii) approval of the Merger by the Federal Reserve Board,
the Federal Deposit Insurance Corporation (the "FDIC") and by the Maryland
Commissioner of Financial Regulation; (iii) the authorization for listing on the
Nasdaq National Market of the shares of the FFC Common Stock to be issued in the
Merger; (iv) the absence of an injunction issued by a court of competent
jurisdiction enjoining the performance by FFC or PBE of any of their obligations
under the Merger Agreement; (v) the receipt of a favorable opinion of counsel
with respect to certain federal income tax consequences relating to the Merger,
which are discussed below under THE MERGER--Federal Income Tax Consequences;
(vi) the continuing accuracy in all material respects of the representations,
warranties and covenants made by FFC and PBE in the Merger Agreement; (vii) the
receipt by FFC of satisfactory agreements from shareholders of PBE who are
affiliates of PBE or FFC regarding certain actions which could affect
pooling-of-interests accounting for the Merger; (viii) the receipt of opinions
from counsel for PBE and counsel for FCC regarding certain legal matters; (ix)
effectiveness of a registration statement relating to the FFC Common Stock with
the SEC; (x) confirmation by FFC and its accountants that the Merger can be
accounted for as a pooling-of-interests for financial reporting purposes; (xi)
amendment of the lease for the "Crossroads Shopping Center" branch office of PBE
to the reasonable satisfaction of FFC; (xii) confirmation that, since December
31, 1996, there has been no material and adverse change in the condition
(financial or otherwise), assets, liabilities, business or operations or future
prospects of PBE; (xiii) appraisal rights shall have been exercised with respect
to less than 10% of the outstanding
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shares of PBE Common Stock; and (xiv) the delivery of certificates at the
closing by officers of FFC and PBE confirming satisfaction of certain of the
foregoing conditions.
To the extent permitted by law, the Merger Agreement may be amended by
mutual consent and any term or condition thereof may be waived by the party
entitled to its benefit at any time before the Effective Date, whether before or
after the approval of the Merger Agreement by PBE's shareholders and without
seeking further shareholder approval; provided, however, that the Conversion
Ratio may not be waived or amended until such amendment has been approved,
adopted or ratified by the shareholders of PBE in accordance with applicable law
(other than pursuant to the terms of the Merger Agreement in the event of a
stock dividend or similar transaction by FFC), and PBE Interim Bank shall be
permitted to join as a party to the Merger Agreement upon its formation without
execution of such joinder by FFC or PBE.
The Merger Agreement may be terminated at any time prior to the Effective
Date by the mutual written consent of FFC and PBE. In addition, the Merger
Agreement may be terminated unilaterally by either FFC or PBE if (A) any
condition to the Merger has not been satisfied by January 31, 1998, or (B) the
other party has committed a material breach of any representation, warranty or
covenant contained in the Merger Agreement which breach results in a material
and adverse change as to the other party and has not cured such breach within
thirty (30) days after receiving written notice thereof.
Effective Date of the Merger
- ----------------------------
The Merger will become effective on the date of issuance of the Certificate
of Merger issued by the Maryland Commissioner of Financial Regulation. FFC and
PBE presently intend to consummate the Merger during the third or fourth quarter
of 1997, assuming that the Merger has been approved by PBE's shareholders, all
required regulatory approvals have been obtained, and all other conditions to
closing have been satisfied or waived by that time. The Merger Agreement
provides that the closing of the Merger shall be held within thirty (30) days
after the receipt of all required regulatory approvals and the expiration of all
applicable waiting periods. See THE MERGER--Conditions, Amendment and
Termination.
Management and Operations Following the Merger
- ----------------------------------------------
On the Effective Date, PBE will merge with and into PBE Interim Bank, a
newly created wholly-owned subsidiary of FFC. PBE Interim Bank will survive the
Merger and operate as a wholly-owned subsidiary of FFC after the Merger under
the name "The Peoples Bank of Elkton," and the shareholders of PBE will become
shareholders of FFC.
The Merger Agreement provides that, for a period of five (5) years after
the Effective Date, FFC shall (subject to the right of FFC and the directors of
PBE to terminate such obligations as a result of regulatory considerations, safe
and sound banking practices, the exercise of their fiduciary duties by FFC's
directors, the failure of PBE to substantially achieve budget goals established
for FFC's banking subsidiaries in any fiscal year in which FFC achieves such
goals on a consolidated basis, or FFC's acquisition of a financial institution
located in Maryland) (i) preserve the business structure of PBE as a Maryland
bank; (ii) preserve the present name of PBE; and (iii) continue in office the
present directors of PBE who indicate their desire to serve (the "PBE Continuing
Directors"), provided, that (A) each non-employee PBE Continuing Director shall
continue to receive director's fees from PBE on the same basis as prior to the
Merger, i.e., a quarterly stipend of $1,250 and meeting fees of $100 per Board
of Directors meeting and $50 per committee
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meeting (provided that FFC may direct PBE to reduce the frequency of such
meetings) and shall continue to receive such other incidental benefits as he or
she was receiving from PBE prior to the Effective Date (such benefits being
previously disclosed to FFC), and (B) each PBE Continuing Director shall be
subject to FFC's mandatory retirement rules for directors. Notwithstanding
anything in the Merger Agreement to the contrary, the PBE Continuing Directors,
in their exercise of their fiduciary duty as to the best interests of PBE and
FFC, may, by a majority vote of such directors, modify or waive any or all of
the foregoing provisions.
FFC has agreed, following the Merger, to cause PBE to honor its employment
obligations and to honor its obligations under PBE's existing employee benefit
plans.
Federal Income Tax Consequences
- -------------------------------
The following is a summary of the material anticipated federal income tax
consequences of the Merger. This summary is based on the federal income tax
laws as now in effect and as currently interpreted; it does not take into
account possible changes in such laws or interpretations, including amendments
to applicable statutes or regulations or changes in judicial or administrative
rulings, some of which may have retroactive effect. This summary does not
purport to address all aspects of the possible federal income tax consequences
of the Merger. In particular, and without limiting the foregoing, this summary
does not address the federal income tax consequences of the Merger to
shareholders in light of their particular circumstances or status (for example,
as foreign persons, tax-exempt entities, dealers in securities, insurance
companies and corporations, among others). Nor does this summary address any
consequences of the Merger under any state, local, or foreign income tax laws.
Shareholders, therefore, are urged to consult their own tax advisors as to the
specific tax consequences to them of the Merger, including tax-return-reporting
requirements, the application and effect of federal, foreign, state, local, and
other tax laws, and the implications of any proposed changes in the tax laws.
Pursuant to the Merger Agreement, an opinion has been provided to PBE and
FFC by Barley, Snyder, Senft & Cohen, LLP, counsel for FFC, which states that,
for federal income tax purposes:
1. The Merger will constitute a reorganization within the meaning of
Section 368(a)(1)(A) and (a)(2)(D) of the Internal Revenue Code of
1986, as amended;
2. No gain or loss will be recognized by FFC, PBE Interim Bank or PBE by
reason of the Merger;
3. The bases of the assets of PBE immediately after the Merger will be
the same as the bases of such assets immediately prior to the Merger;
4. The holding period of the assets of PBE immediately after the Merger
will include the period during which such assets were held by PBE
prior to the Merger;
5. A holder of PBE Common Stock who receives shares of FFC Common Stock
in exchange for his or her PBE Common Stock pursuant to the
reorganization (including fractional shares of FFC Common Stock deemed
issued as described below) will not recognize any gain or loss upon
the exchange;
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6. A holder of PBE Common Stock who receives cash in lieu of a fractional
share of FFC Common Stock will be treated as if he or she received a
fractional share of FFC Common Stock pursuant to the reorganization
and FFC then redeemed such fractional share for the cash. The holder
of PBE Common Stock will recognize capital gain or loss on the
constructive redemption of the fractional share in an amount equal to
the difference between the cash received and the adjusted basis of the
fractional share;
7. The tax basis of the shares of FFC Common Stock to be received by PBE
shareholders pursuant to the Merger Agreement will be equal to the tax
basis of the shares of PBE Common Stock surrendered in exchange
therefor, decreased by the amount of cash received and increased by
the amount of any gain (and by the amount of any dividend income)
recognized on the exchange; and
8. The holding period of the shares of FFC Common Stock to be received by
the shareholders of PBE will include the period during which they held
the shares of PBE Common Stock surrendered, provided the shares of PBE
Common Stock are held as a capital asset on the date of the exchange.
THE FOREGOING IS INTENDED ONLY AS A GENERAL SUMMARY OF CERTAIN FEDERAL
INCOME TAX CONSEQUENCES OF THE MERGER UNDER PRESENT LAW. EACH SHAREHOLDER OF PBE
IS URGED TO CONSULT HIS OR HER OWN TAX ADVISOR CONCERNING THE PARTICULAR TAX
CONSEQUENCES OF THE MERGER AS THEY AFFECT HIS OR HER INDIVIDUAL CIRCUMSTANCES,
INCLUDING THE IMPACT OF ANY APPLICABLE ESTATE, GIFT, STATE, LOCAL, FOREIGN OR
OTHER TAX.
Accounting Treatment
- --------------------
The Merger Agreement contemplates that the Merger will be treated as a
pooling-of-interests for financial accounting purposes. If FFC would be required
to purchase more than ten percent of the outstanding shares of PBE Common Stock
for cash or if other conditions arise which would prevent the Merger from being
treated as a pooling-of-interests for financial accounting purposes, FFC has the
right to terminate the Merger Agreement and to cancel the Merger. FFC presently
intends to exercise its right of termination if the Merger could not be treated
as a pooling-of-interests for financial accounting purposes.
Although it has no intention of doing so, FFC could choose to waive its
right of termination and go forward with the proposed merger even if the merger
could not be treated as a pooling-of-interests for financial accounting
purposes. In that event, the following would occur: (i) the merger between PBE
and a subsidiary of FFC would be treated as a purchase transaction under
financial accounting principles; (ii) FFC would file a post-effective amendment,
presenting revised financial disclosures and updated information, to the
registration statement of which this Proxy Statement/Prospectus is a part; and
(iii) PBE's management would resolicit proxies from PBE's shareholders.
Rights of Dissenting Shareholders
- ---------------------------------
Under Maryland banking law, a shareholder of a bank is generally entitled
to demand and receive payment of the fair value of his or her stock if, among
other things, the bank merges with another bank. If the Merger between PBE and a
subsidiary of FFC is approved, holders of PBE Common Stock who vote against the
Merger and who comply with the provisions of Maryland banking law regarding
dissenters' rights will be entitled to receive the fair value of
37
<PAGE>
their shares of PBE Common Stock, in cash, if the transaction becomes effective.
Maryland law provides that FFC, as the successor in the merger between PBE
and a subsidiary of FFC, may offer to pay in cash to the shareholders of PBE who
object to the merger, not more than what FFC considers to be the fair value of
the shares of PBE Common Stock as of the date of the Special Meeting. Any PBE
shareholder who accepts such an offer by FFC is barred under Maryland law from
receiving the appraised value of his or her PBE shares.
In accordance with the provisions of Financial Institutions, Sections 3-718
through 3-721 of the Maryland Banking Laws, attached as Exhibit D to this Proxy
Statement/Prospectus, any shareholder of PBE who voted his or her shares against
the Merger and wishes to exercise dissenters' rights with respect to the Merger
must, within thirty days of the Effective Date, make a written demand for
payment on FFC, as the successor in the Merger, and surrender his or her PBE
stock certificates.
Such written demand should be addressed to Robert E. Noll, President, The
Peoples Bank of Elkton, 130 North Street, Elkton, Maryland 21921. The objecting
shareholder must vote against the Merger.
The fair value of the shares of PBE Common Stock surrendered shall be
determined as of the date of the Special Meeting of PBE shareholders approving
the Merger. The determination of fair value shall be made by three appraisers,
chosen as follows: (i) one chosen by the owners of two-thirds of the shares
involved, (ii) one chosen by the Board of Directors of FFC, and (iii) one chosen
by the other two appraisers. The fair value to which any two appraisers agree
shall govern. The appraisers shall give notice of the fair value determination
to FFC and to each shareholder who has made demand for the determination.
Under Maryland banking law, a shareholder who is dissatisfied with the fair
value determination of the appraisers may notify the Maryland State Bank
Commissioner within five days after the notice of the appraisers has been given.
The Commissioner shall have the shares reappraised, and such reappraisal shall
be final and binding as to the value of the shares of PBE Common Stock of the
dissatisfied shareholder.
If the appraisal to be made by the three appraisers is not completed within
ninety days of the Effective Date of the Merger, the Commissioner shall have an
appraisal made, and this appraisal shall be final and binding as to the value of
the shares of all objecting shareholders.
Under Maryland law, FFC, as the successor in the Merger, shall pay the
expenses of each appraisal that is required to be made.
THE FOREGOING DISCUSSION IS ONLY A SUMMARY OF THE RIGHTS AND OBLIGATIONS OF
A DISSENTING SHAREHOLDER AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE
PROVISIONS OF FI, SECTIONS 3-718 THROUGH 3-721 OF THE MARYLAND BANKING LAWS,
WHICH ARE REPRODUCED AND SET FORTH IN FULL IN EXHIBIT D TO THIS PROSPECTUS/PROXY
STATEMENT.
Pursuant to the Merger Agreement, FFC has the right to terminate such
Agreement and to cancel the proposed merger if PBE shareholders exercise
dissenters' rights with respect to 10% or more shares of PBE Common Stock. FFC
negotiated for this right of termination in order to limit the amount of cash
that would be paid to PBE shareholders in connection with the proposed merger
and to provide greater assurance that the merger would be treated as a pooling-
of-interests for financial accounting purposes. FFC could waive this
38
<PAGE>
right of termination but has no present intention to do so. See THE MERGER--
Conditions, Amendment and Termination, and THE MERGER--Accounting Treatment.
Restrictions on Resale of FFC Common Stock Held By Affiliates of PBE
- --------------------------------------------------------------------
The shares of FFC Common Stock to be issued upon consummation of the Merger
have been registered with the SEC under the Securities Act of 1933 (the "1933
Act") and, following the Merger, may be freely resold or otherwise transferred
by all former shareholders of PBE, except those former shareholders who are
deemed to be "affiliates" of PBE within the meaning of SEC Rules 144 and 145.
In general terms, any person who is an executive officer, director or ten
percent or greater shareholder of PBE at the time of the Special Meeting may be
deemed to be an affiliate of PBE for purposes of SEC Rules 144 and 145.
FFC Common Stock received by persons who are deemed to be affiliates of PBE
may be resold during the one year following the Effective Date only: (i) in
compliance with the provisions of SEC Rule 145(d), (ii) in compliance with the
provisions of another applicable exemption from the registration requirements of
the 1933 Act, or (iii) pursuant to an effective registration statement filed
with the SEC. In very general terms, SEC Rule 145(d) would permit an affiliate
of PBE to sell shares of FFC Common Stock received by him or her in connection
with the Merger in ordinary brokerage transactions, subject to certain
limitations on the number of shares of FFC Common Stock which may be sold during
any consecutive three-month period. After the one-year period, the affiliates of
PBE who are not affiliates of FFC may resell their shares without restriction.
Notwithstanding the foregoing, in order to comply with the SEC's rules on
pooling-of-interests accounting treatment, an affiliate of PBE (as a general
rule and subject to an exception in the case of certain de minimis sales) may
-- -------
not sell any shares of FFC Common Stock received by him or her in exchange for
his or her shares of PBE Common Stock until after the publication of financial
results covering at least thirty days of post-Merger combined operations of FFC.
Under the terms of the Merger Agreement, each person who may be deemed to
be an affiliate of PBE is required, prior to the closing of the Merger, to
deliver to FFC an agreement, in form and substance satisfactory to FFC,
acknowledging and agreeing to abide by the limitations imposed by the 1933 Act
and the rules of the SEC thereunder regarding the sale or other disposition of
the shares of FFC Common Stock to be received by him or her pursuant to the
Merger.
Warrant Agreement
- -----------------
On the day following the execution of the Merger Agreement, PBE and FFC
executed a Warrant Agreement, dated March 19, 1997 (the "Warrant Agreement"). A
copy of the Warrant Agreement is attached as Exhibit C to this Proxy Statement.
The following description of the Warrant Agreement does not purport to be
complete and is qualified in its entirety by reference to the Warrant Agreement,
which is incorporated herein in its entirety.
Pursuant to the Warrant Agreement, PBE issued to FFC a warrant (the
"Warrant") to purchase from PBE up to 45,888 fully paid and non-assessable
shares of PBE Common Stock at a price per share equal to $80.00, subject to
adjustment as provided for in the Warrant Agreement (such exercise price, as so
adjusted, is referred to herein as the "Exercise Price"). The execution of the
Warrant Agreement was required by FFC as a condition to its execution of the
Merger Agreement, and the effect of the Warrant Agreement is to increase
39
<PAGE>
the likelihood that the Merger will occur by making it more difficult and
expensive for another party to acquire PBE.
The Warrant may be exercised in whole or in part at any time or from time
to time on or after the occurrence of an Exercise Event (as defined below) until
termination of the Warrant Agreement. So long as the Warrant is owned by FFC, it
may be exercised for no more than the number of shares of PBE Common Stock equal
to 45,888 (subject to adjustment as described below) less the number of shares
of PBE Common Stock at the time owned by FFC.
Under the terms of the Warrant and the Warrant Agreement, FFC may exercise
the Warrant, without PBE's consent, under the following circumstances (each an
"Exercise Event"): if (A) (I) FFC is not in material breach of the agreement or
covenants contained in the Warrant Agreement or the Merger Agreement and (II) no
preliminary or permanent injunction or other order against the delivery of
shares covered by the Warrant issued by any court of competent jurisdiction in
the United States shall be in effect and (B) upon or after the occurrence of any
of the following: (i) a knowing and intentional breach of any representation,
warranty, or covenant set forth in the Merger Agreement by PBE which would
permit a termination of the Merger Agreement by FFC pursuant to Section
8.1(b)(i) thereof which is not cured and which occurs following a proposal from
any person (other than FFC) to engage in an Acquisition Transaction; (ii) the
failure of PBE's shareholders to approve the Merger Agreement at a meeting
called for such purpose if at the time of such meeting there has been a public
announcement (including a public regulatory filing) by any person (other than
FFC) of an offer or proposal to effect an Acquisition Transaction (as defined
below) and, within twelve (12) months from the date of such shareholder's
meeting, PBE engages in, or enters into a written agreement with respect to, an
Acquisition Transaction; (iii) the acquisition by any person of beneficial
ownership of 25% or more of the PBE Common Stock (before giving effect to any
exercise of the Warrant); (iv) PBE shall have entered into an agreement, letter
of intent, or other written understanding with any person (other than FFC)
providing for such person (A) to engage in an Acquisition Transaction or (B) to
negotiate with PBE with respect to an Acquisition Transaction; or (v)
termination, or attempted termination, of the Merger Agreement by PBE under
Section 5.7 of the Merger Agreement (relating to the exercise by the directors
of PBE of their fiduciary duty) following receipt of a written proposal to
engage in an Acquisition Transaction from a third party. For purposes of the
Warrant Agreement, "Acquisition Transaction" means (x) a merger or consolidation
or statutory share exchange or any similar transaction involving PBE, (y) a
purchase, lease or other acquisition of all or substantially all of the assets
of PBE or (z) a purchase or other acquisition of beneficial ownership of
securities representing 25% or more of the voting power of PBE.
The Warrant may be exercised by presentation and surrender thereof to PBE
at its principal office accompanied by (i) a written notice of exercise, (ii)
payment of the Exercise Price for the number of shares of PBE Common Stock
specified in such notice, and (iii) a certificate of the holder of the Warrant
(the "Holder") specifying the event or events which have occurred and which
entitle the Holder to exercise the Warrant. Upon such presentation and
surrender, PBE shall issue promptly to the Holder the number of shares of PBE
Common Stock to which the Holder is entitled. If the Warrant is exercised in
part, PBE will, upon surrender of the Warrant for cancellation, execute and
deliver a new Warrant entitling the Holder to purchase the balance of the shares
of PBE Common Stock issuable thereunder.
Generally, in the event of any change in the outstanding shares of PBE
Common Stock by reason of a stock dividend, stock split or stock
reclassification, the number and kind of shares or securities subject to the
40
<PAGE>
Warrant and the Exercise Price shall be appropriately and equitably adjusted so
that the Holder shall receive upon exercise of the Warrant the number and class
of shares or other securities or property that the Holder would have received in
respect of the shares of PBE Common Stock that could have been purchased upon
exercise of the Warrant if the Warrant could have been and had been exercised
immediately prior to such event. If, at any time after the Warrant may be
exercised or sold by FFC, PBE has received a written request from FFC, PBE shall
prepare, file and keep effective and current any governmental approvals required
in connection with the Warrant and/or the shares of PBE Common Stock issued or
issuable upon exercise of the Warrant. All expenses incurred by PBE in
complying with such governmental approvals will be paid by PBE. FFC will pay
all expenses incurred by FFC in connection with such governmental approvals,
including fees and disbursements of its counsel and accountants, underwriting
discounts and commissions, and transfer taxes payable by FFC.
The Warrant and the rights conferred thereby will terminate (i) upon the
Effective Date, (ii) upon a valid termination of the Merger Agreement prior to
the occurrence of an Exercise Event, or (iii) to the extent the Warrant has not
previously been exercised, sixty (60) days after the occurrence of an Exercise
Event.
Under the Warrant Agreement, FFC has the right to require PBE to repurchase
the Warrant or, in the event the Warrant has been exercised in whole or in part,
redeem the shares obtained upon such exercise within 60 days of an Exercise
Event. In the case of a repurchase of shares obtained upon exercise of the
Warrant, the redemption price per share (the "Redemption Price") is to be equal
to the highest of: (i) the Exercise Price, (ii) the highest price paid or agreed
to be paid for any share of Common Stock by an Acquiring Person (defined as any
person who or which is the beneficial owner of 25% or more of the PBE Common
Stock) during the one year period immediately preceding the date of redemption,
and (iii) in the event of a sale of all or substantially all of PBE's assets:
(x) the sum of the price paid in such sale for such assets and the current
market value of the remaining assets of PBE as determined by a recognized
investment banking firm selected by FFC, divided by (y) the number of shares of
PBE Common Stock then outstanding. If the price paid consists in whole or in
part of securities or assets other than cash, the value of such securities or
assets shall be their then current market value as determined by a recognized
investment banking firm selected by the FFC.
In the case of a repurchase of the Warrant, the redemption price is to be
equal to the product obtained by multiplying: (i) the number of shares of PBE
Common Stock represented by the portion of the Warrant that FFC is requiring PBE
to repurchase, times (ii) the excess of the Redemption Price over the Exercise
Price.
41
<PAGE>
COMPARATIVE STOCK PRICES AND DIVIDENDS
--------------------------------------
AND RELATED SHAREHOLDER MATTERS
--------------------------------------
Common Stock of FFC
- -------------------
FFC Common Stock is traded in the over-the-counter market and is listed on
the Nasdaq National Market ("Nasdaq") under the symbol "FULT." The following
table sets forth, for the periods indicated, the high and low closing sale price
for FFC Common Stock as reported on Nasdaq and cash dividends paid per share.
<TABLE>
<CAPTION>
Cash Dividends
1995 High Low Paid Per Share
- ---- ---- --- --------------
<S> <C> <C> <C>
First Quarter $15.41 $14.27 $0.118
Second Quarter 15.91 14.84 0.126
Third Quarter 16.64 14.67 0.130
Fourth Quarter 18.80 16.12 0.130
1996
- ----
First Quarter 18.39 16.74 0.138
Second Quarter 18.86 17.05 0.150
Third Quarter 18.86 16.94 0.150
Fourth Quarter 19.55 17.50 0.152
1997
- ----
First Quarter 23.18 18.64 0.155
</TABLE>
On March 17, 1997, the last trading day before public announcement of the
Merger Agreement, the high and low quotations for FFC Common Stock were $22.27
and $21.82, respectively, and the closing bid price was $21.82 per share, as
reported on Nasdaq. On June 13, 1997, the closing bid and asked quotations for
FFC Common Stock as reported on Nasdaq were $27.00 and $27.50, respectively, per
share, and the closing sale price was $27.50 per share. As of June 13, 1997, FFC
Common Stock was held by 11,870 holders of record. The Conversion Ratio and all
pro forma and FFC historical per share information herein have been adjusted to
reflect a 10% stock dividend declared by FFC on May 1, 1997, payable on June 13,
1997, to shareholders of record on May 23, 1997. On February 28, 1997, FFC
completed the previously announced acquisition of WNB. The transaction was
accounted for as a pooling of interest. All of the financial information
contained herein has been restated to reflect the financial condition and
results of operations of WNB.
FFC has in the past paid regular quarterly cash dividends to its
shareholders on or about the 15th day of January, April, July and October of
each year.
Common Stock of PBE
- -------------------
There is currently no public market for the PBE Common Stock nor any
uniformly quoted price.
The table below reports the cash dividends paid per share of PBE Common
Stock during the periods indicated.
42
<PAGE>
<TABLE>
<CAPTION>
Cash Dividends
Paid Per Share
--------------
1995
-----
<S> <C>
First Quarter $.36
Second Quarter .36
Third Quarter .36
Fourth Quarter .81
1996
----
First Quarter .50
Second Quarter .90
Third Quarter .90
Fourth Quarter .90
1997
----
First Quarter .90
</TABLE>
As of the close of business on June 6, 1997, PBE's Common Stock was held by
approximately 472 holders of record. PBE's ability to declare or pay cash
dividends prior to the Effective Date of the Merger is limited by the Merger
Agreement. See THE MERGER -- Business Pending the Effective Date.
43
<PAGE>
INFORMATION CONCERNING FULTON FINANCIAL CORPORATION
---------------------------------------------------
AND DESCRIPTION OF FFC COMMON STOCK
-----------------------------------
General
- -------
FFC is a Pennsylvania business corporation and a registered bank holding
company with its headquarters in Lancaster, Pennsylvania. As a bank holding
company, FFC engages in a general commercial and retail banking and trust
business, and also in related financial businesses, through its bank and nonbank
subsidiaries. FFC's subsidiary banks currently operate eighty-four banking
offices in Pennsylvania, fifteen banking offices in Maryland, six banking
offices in Delaware, and twelve banking offices in New Jersey. As of March 31,
1997, FFC had consolidated total assets of approximately $4.1 billion.
The principal assets of FFC are the following ten wholly-owned bank
subsidiaries, each of which is insured by the FDIC: (i) Fulton Bank ("Fulton"),
a Pennsylvania bank and trust company which is not a member of the Federal
Reserve System, (ii) Farmers Trust Bank ("Farmers Trust"), a Pennsylvania bank
and trust company which is a member of the Federal Reserve System, (iii)
Swineford National Bank ("Swineford"), a national banking association which is a
member of the Federal Reserve System, (iv) Lafayette Bank ("Lafayette"), a
Pennsylvania bank and trust company which is not a member of the Federal Reserve
System, (v) FNB Bank, National Association ("FNB"), a national banking
association which is a member of the Federal Reserve System, (vi) Great Valley
Savings Bank ("Great Valley"), a Pennsylvania-chartered savings bank which is
not a member of the Federal Reserve System, (vii) Hagerstown Trust Company
("Hagerstown"), a Maryland trust company which is not a member of the Federal
Reserve System, (viii) Delaware National Bank ("Delaware National"), a national
banking association which is a member of the Federal Reserve System, (ix) The
Bank of Gloucester County ("Gloucester"), a New Jersey bank which is not a
member of the Federal Reserve System, and (x) The Woodstown National Bank &
Trust Company ("Woodstown"), a national banking association which is a member of
the Federal Reserve System.
In addition, FFC has the following wholly-owned direct nonbank
subsidiaries: (i) Fulton Financial Realty Company, which holds title to or
leases certain properties on which Fulton and Farmers Trust maintain branch
offices or other facilities; (ii) Fulton Life Insurance Company, which engages
in the business of reinsuring credit life, accident and health insurance that is
directly related to extensions of credit by certain of FFC's bank subsidiaries;
(iii) Central Pennsylvania Financial Corp., which owns certain non-banking
subsidiaries holding interests in real estate and (iv) FFC Management, Inc.,
which owns certain securities.
As a registered bank holding company, FFC is subject to regulation under
the federal Bank Holding Company Act of 1956, as amended, and the rules adopted
by the Board of Governors of the Federal Reserve System ("Federal Reserve
Board") thereunder. Under applicable Federal Reserve Board policies, a bank
holding company such as FFC is expected to act as a source of financial strength
for each of its subsidiary banks and to commit resources to support each
subsidiary bank in circumstances when it might not do so absent such a policy.
Any capital loans made by a bank holding company to any of its subsidiary banks
would be subordinate in right of payment to the claims of depositors and certain
other creditors of such subsidiary banks.
44
<PAGE>
The principal executive offices of FFC are located at One Penn Square, P.0.
Box 4887, Lancaster, Pennsylvania 17604, and its telephone number is
(717) 291-2411.
Loan Policies and Portfolio Quality
- -----------------------------------
FFC, through its bank subsidiaries, grants loans and makes other credit
facilities available to the general public. These extensions of credit are
structured to meet the varying needs of business, individual, and institutional
customers and include mortgages, lines of credit, term loans, leases and letters
of credit. This activity serves as a major source of revenue for FFC. However,
it also exposes FFC to potential losses upon borrower default. In order to
minimize the occurrence of loss, FFC's bank subsidiaries follow strict loan
underwriting and risk assessment policies. These policies emphasize the
financial strength and cash flow of the borrower rather than collateral value.
Although collateral continues to play an important part in lending decisions, it
is not a substitute for a borrower's underlying ability to pay. FFC's bank
subsidiaries confine their lending to customers who live, or which are based, in
their respective market areas. By geographically restricting the lending
activities of each bank subsidiary, their respective staffs can become more
knowledgeable about local market conditions and can thereby make better credit
risk assessments and, therefore, more prudent lending decisions. This superior
knowledge of local economic conditions, when combined with prudent underwriting
standards, offsets and often surmounts the potential risks arising from a
geographic concentration of credits. Management believes that FFC's loan
customer base is reasonably diversified, because FFC's subsidiary banks are
located in and do business within a broad spectrum of local communities and
regional economies located in central and northeastern Pennsylvania, western
Maryland, and southern Delaware, and southwestern New Jersey.
To counteract any problems with credit quality which do arise, FFC
maintains a proactive loan review function. This function, in combination with
the lending staff, attempts to identify deteriorating loans before they reach a
critical stage. This loan review policy not only protects FFC and its
subsidiaries from realizing greater loan losses but also, in many cases, assists
the borrower as well. Due to their underwriting criteria, FFC and its bank
subsidiaries have not made a determination to limit the availability of credit
to any segment of their customer base due to changes in general economic
conditions. FFC and its bank subsidiaries do take these conditions into
consideration when assessing individual credit risk, but each loan request is
evaluated individually.
Legal Proceedings
- -----------------
From time to time FFC and its subsidiaries are involved in routine
litigation matters that are incidental to the businesses carried on by such
entities. None of these matters is expected to have a material effect on FFC's
financial condition or operating results.
General Description of FFC Common Stock
- ---------------------------------------
The authorized capital of FFC consists exclusively of 200 million shares of
Common Stock, par value $2.50 per share, and 10 million shares of preferred
stock without par value. As of March 13, 1997, there were issued and
outstanding 39,570,979 shares of FFC Common Stock, which shares were held by
11,703 owners of record, and there were 823,686 shares issuable upon the
exercise of options. The Conversion Ratio and all pro forma and FFC historical
per share information herein have been adjusted to reflect a 10% stock dividend
declared by FFC on May 1, 1997, payable on June 13, 1997, to
45
<PAGE>
shareholders of record on May 23, 1997. No shares of preferred stock have been
issued by FFC. FFC Common Stock is listed for quotation on the over-the-counter
Nasdaq National Market under the symbol "FULT."
The holders of FFC Common Stock are entitled to one vote per share on all
matters submitted to a vote of the shareholders and may not cumulate their votes
for the election of directors. Each share of FFC Common Stock is entitled to
participate on an equal pro rata basis in dividends and other distributions.
The holders of FFC Common Stock do not have preemptive rights to subscribe for
additional shares that may be issued by FFC, and no share is entitled in any
manner to any preference over any other share. The shares of FFC Common Stock
to be issued to the shareholders of PBE pursuant to the Merger will be fully
paid and non-assessable and the holders thereof will not be subject to call or
assessment under Pennsylvania law. Fulton Bank serves as the transfer agent for
FFC.
Dividends
- ---------
The holders of FFC Common Stock are entitled to receive dividends when, as
and if declared by the Board of Directors out of funds legally available
therefor. FFC has in the past paid quarterly cash dividends to its shareholders
on or about the 15th day of January, April, July and October of each year.
The ability of FFC to pay dividends to its shareholders is dependent
primarily upon the earnings and financial condition of Fulton, Farmers Trust,
Swineford, Lafayette, FNB, Great Valley, Hagerstown, Delaware National,
Gloucester, and Woodstown. Funds for the payment of dividends on FFC Common
Stock are expected for the foreseeable future to be obtained primarily from
dividends paid to FFC by these ten bank subsidiaries, and by PBE if the Merger
is consummated, which dividends are subject to certain statutory limitations.
Under applicable state and federal laws, the dividends that may be paid by
the bank subsidiaries of FFC without prior regulatory approval are subject to
certain prescribed limitations. As state banks chartered under the Pennsylvania
Banking Code of 1965, as amended, Fulton, Farmers Trust, Lafayette and Great
Valley may pay dividends only out of accumulated net earnings and may not
declare or pay any dividend requiring a reduction of the statutorily required
surplus of the institution. In the case of national banks such as Swineford,
FNB, Delaware National and Woodstown, the approval of the Office of the
Comptroller of the Currency ("OCC") is required under federal law if the total
of all dividends declared during any calendar year would exceed the net profits
(as defined) of the bank for the year, combined with its retained net profits
(as defined) for the two preceding calendar years. As a commercial bank
organized under the laws of the state of Maryland, Hagerstown may only declare a
cash dividend from its undivided profits or (with the prior approval of the
Maryland Bank Commissioner) from its surplus in excess of 100% of its required
capital stock, in each case after providing for due or accrued expenses, losses,
interest and taxes. In addition, if Hagerstown's surplus becomes less than 100%
of its required capital stock, Hagerstown may not declare or pay any cash
dividends that exceed 90% of its net earnings until its surplus becomes 100% of
its required capital stock. As a New Jersey bank, Gloucester may not declare or
pay any dividend which would impair its capital stock or reduce its surplus to a
level of less than 50% of its capital stock or if the surplus is currently less
than 50% of the capital stock, the payment of such dividends would not reduce
the surplus of the bank. In addition to the foregoing statutory restrictions on
dividends, the Pennsylvania Department of Banking (with respect to all
Pennsylvania state-chartered banks), the FDIC (with respect to Pennsylvania
state-chartered banks that are not members of the Federal Reserve System, such
46
<PAGE>
as Fulton, Lafayette and Great Valley), the FRB (with respect to Pennsylvania
state-chartered banks that are members of the Federal Reserve System, such as
Farmers Trust), and the OCC (with respect to national banks such as Swineford,
FNB and Delaware National), also have adopted minimum capital standards and have
broad authority to prohibit a bank from engaging in unsafe or unsound banking
practices. The payment of a dividend by a bank could, depending upon the
financial condition of the bank involved and other factors, be deemed to impair
its capital or to be such an unsafe or unsound practice.
Under the restrictions set forth above, the aggregate amount available for
the payment of dividends by the ten bank subsidiaries of FFC was approximately
$141 million as of December 31, 1996.
Dividend Reinvestment Plan
- --------------------------
The holders of FFC Common Stock may elect to participate in the Fulton
Financial Corporation Dividend Reinvestment Plan (the "Dividend Reinvestment
Plan"), which is a plan administered by Fulton as the Plan Agent. Under the
Dividend Reinvestment Plan, dividends payable to participating shareholders are
paid to the Plan Agent and are used to purchase, on behalf of the participating
shareholders, additional shares of FFC Common Stock. Participating shareholders
may make additional voluntary cash payments, which are also used by the Plan
Agent to purchase, on behalf of such shareholders, additional shares of FFC
Common Stock. Shares of FFC Common Stock held for the account of participating
shareholders are voted by the Plan Agent in accordance with the instructions of
each participating shareholder as set forth in his or her proxy.
Securities Laws
- ---------------
FFC, as a business corporation, is subject to the registration and
prospectus delivery requirements of the 1933 Act and is also subject to similar
requirements under state securities laws. FFC Common Stock is registered with
the SEC under Section 12(g) of the 1934 Act, and FFC is subject to the periodic
reporting, proxy solicitation and insider trading requirements of the 1934 Act.
The executive officers, directors and ten percent shareholders of FFC are
subject to certain restrictions affecting their right to sell shares of FFC
Common Stock owned beneficially by them. Specifically, each such person is
subject to the beneficial ownership reporting requirements and to the short-
swing profit recapture provisions of Section 16 of the 1934 Act and may sell
shares of FFC Common Stock only: (i) in compliance with the provisions of SEC
Rule 144, (ii) in compliance with the provisions of another applicable exemption
from the registration requirements of the 1933 Act, or (iii) pursuant to an
effective registration statement filed with the SEC under the 1933 Act.
Antitakeover Provisions
- -----------------------
The Articles of Incorporation and Bylaws of FFC include certain provisions
which may be considered to be "antitakeover" in nature, because they may have
the effect of discouraging or making more difficult the acquisition of control
over FFC by means of a hostile tender offer, exchange offer, proxy contest or
similar transaction. These provisions are intended to protect the shareholders
of FFC (including the present shareholders of PBE, who will become shareholders
of FFC following the Merger) by providing a measure of assurance that FFC's
shareholders will be treated fairly in the event of an unsolicited takeover bid
and by preventing a successful takeover bidder from exercising its voting
control to the detriment of the other shareholders. However, the antitakeover
provisions set forth in the Articles of Incorporation and Bylaws of FFC, taken
as a whole, may discourage a hostile
47
<PAGE>
tender offer, exchange offer, proxy solicitation or similar transaction relating
to FFC Common Stock. To the extent that these provisions actually discourage
such a transaction, holders of FFC Common Stock may not have an opportunity to
dispose of part or all of their stock at a higher price than that prevailing in
the market. In addition, these provisions make it more difficult to remove, and
thereby may serve to entrench, incumbent directors and officers of FFC, even if
their removal would be regarded by some shareholders as desirable.
The provisions in the Articles of Incorporation of FFC which may be
considered to be "antitakeover" in nature include the following: (i) a provision
that provides for substantial amounts of authorized but unissued capital stock,
including a class of preferred stock whose rights and privileges may be
determined prior to issuance by FFC's Board of Directors, (ii) a provision that
does not permit shareholders to cumulate their votes for the election of
directors, (iii) a provision that requires a greater than majority shareholder
vote in order to approve certain business combinations and other extraordinary
corporate transactions, (iv) a provision that establishes criteria to be applied
by the Board of Directors in evaluating an acquisition proposal, (v) a provision
that requires a greater than majority shareholder vote in order for the
shareholders to remove a director from office without cause, (vi) a provision
that prohibits the taking of any action by the shareholders without a meeting
and eliminates the right of shareholders to call a annual meeting, (vii) a
provision that limits the right of the shareholders to amend the Bylaws, and
(viii) a provision that requires, under certain circumstances, a greater than
majority shareholder vote in order to amend the Articles of Incorporation.
The provisions of the Bylaws of FFC which may be considered to be
"antitakeover" in nature include the following: (i) a provision that limits the
permissible number of directors, (ii) a provision that establishes a Board of
Directors divided into three classes, with members of each class elected for a
three-year term that is staggered with the terms of the members of the other two
classes, and (iii) a provision that requires advance written notice as a
precondition to the nomination of any person for election to the Board of
Directors, other than in the case of nominations made by existing management.
As a Pennsylvania business corporation and a corporation registered under
the Securities Exchange Act of 1934, FFC is subject to, and may take advantage
of the protections of, the antitakeover provisions of the Pennsylvania Business
Corporation Law of 1988, as amended ("BCL"). These antitakeover provisions,
which are designed to discourage the acquisition of control over a targeted
Pennsylvania business corporation, include: (i) a provision whereby the
directors of the corporation, in determining what is in the best interests of
the corporation, may consider factors other than the economic interests of the
shareholders, such as the effect of any action upon other constituencies,
including employees, suppliers, customers, creditors and the community in which
the corporation is located; (ii) a provision that permits shareholders to demand
that a controlling person pay to them the fair value of their shares in cash
upon a change in control; (iii) a provision that restricts certain business
combinations unless there is prior approval by the directors or a supermajority
of the shareholders; (iv) a provision permitting a corporation to adopt a
shareholders rights plan; (v) a provision denying the right to vote to a person
who acquires a specified percentage of stock ownership ("control shares") unless
those voting rights are restored by a vote of disinterested shareholders; and
(vi) a provision requiring a person who acquires control shares to disgorge to
the corporation all profits from the sale of equity securities within eighteen
months thereafter. Corporations may elect to "opt out" of any or all of these
antitakeover provisions of the BCL. FFC has not
48
<PAGE>
elected to opt out of any of the protections provided by the antitakeover
statutes.
On June 20, 1989, FFC adopted a Shareholder Rights Plan (the "Rights
Plan"). The Rights Plan is intended to discourage unfair or financially
inadequate takeover proposals and abusive takeover practices and to encourage
third parties who may in the future be interested in acquiring FFC to negotiate
with FFC's Board of Directors. The Rights Plan may have the effect of
discouraging or making more difficult the acquisition of FFC by means of a
hostile tender offer, exchange offer or similar transaction. The Rights Plan is
similar to shareholder rights plans which have been adopted by many other bank
holding companies and business corporations and contains "flip-in" and "flip-
over" provisions which are typically included in plans of this kind. Each share
of FFC Common Stock to be issued in connection with the Merger will be
accompanied by one right issued pursuant to the terms of the Rights Plan, which
right will initially, and until it becomes exercisable, trade with and be
represented by the FFC Common Stock certificates to be received by the
shareholders of PBE.
The management of FFC does not presently contemplate recommending to the
shareholders the adoption of any additional antitakeover provisions.
Indemnification
- ---------------
The Bylaws of FFC provide for indemnification of its directors, officers,
employees and agents to the fullest extent permitted under the laws of the
Commonwealth of Pennsylvania, provided that the person seeking indemnification
acted in good faith, in a manner he or she reasonably believed to be in the best
interests of FFC, and without willful misconduct or recklessness. FFC has
purchased insurance to indemnify its directors, officers, employees and agents
under certain circumstances.
Insofar as indemnification for liabilities arising under the 1933 Act may
be permitted to directors, officers or persons controlling FFC pursuant to the
foregoing provisions of FFC's Bylaws, FFC has been informed that, in the opinion
of the SEC, such indemnification is against public policy as expressed in the
1933 Act and is therefore unenforceable.
Comparison of Shareholder Rights
- --------------------------------
Upon consummation of the Merger, the shareholders of PBE will become
shareholders of FFC. There are differences between the rights of holders of PBE
Common Stock and FFC Common Stock. These differences arise out of (i)
differences between the Articles of Incorporation and Bylaws of PBE and the
Articles of Incorporation and Bylaws of FFC, and (ii) differences between the
respective state and regulatory laws applicable to PBE and FFC. The most
significant differences are: (1) FFC has adopted a Shareholder Rights Plan,
which provides FFC's shareholders with certain stock-related rights in the event
of a hostile takeover but may have the effect of discouraging such a takeover
(see the section above entitled "Antitakeover Provisions"), while PBE has not
adopted any such plan; (2) FFC's Articles of Incorporation authorize the
issuance of shares of preferred stock with such rights and privileges as may be
determined by FFC's Board of Directors (although FFC currently has no plans to
issue preferred stock), while PBE's Articles of Incorporation do not authorize
the issuance of any class of preferred stock; and (3) FFC Common Stock is
registered under the 1934 Act and traded on the Nasdaq National Market, while
PBE Common Stock is not registered or actively traded.
The Articles of Incorporation and Bylaws of FFC also include a number of
other provisions which are intended to protect the shareholders of FFC
49
<PAGE>
(including the present shareholders of PBE, who will become shareholders of FFC
following the Merger) from abusive takeover practices and inadequate takeover
proposals, but which may be considered to be "antitakeover" in nature and may
serve to entrench the current management of FFC. See INFORMATION CONCERNING
FULTON FINANCIAL CORPORATION AND DESCRIPTION OF FFC COMMON STOCK--Antitakeover
Provisions.
The material differences between PBE Common Stock and FFC Common Stock and
the rights of their respective holders are summarized in the following table:
50
<PAGE>
<TABLE>
<CAPTION>
================================================================================
PBE FFC
- --------------------------------------------------------------------------------
<S> <C> <C>
Title Common Stock, $10.00 par Common Stock, $2.50 par
value per share value per share
- --------------------------------------------------------------------------------
Shares Authorized 500,000 200,000,000
- --------------------------------------------------------------------------------
Shares Issued & Outstanding 230,596 39,570,979
- --------------------------------------------------------------------------------
Preemptive Rights Yes (Subject to No
Exceptions)
- --------------------------------------------------------------------------------
Classification of Board of No Board of Directors
Directors divided into 3 classes
with 3 year terms;
one-third of directors
elected each year
- --------------------------------------------------------------------------------
Voting: Election of Non-Cumulative Non-cumulative
Directors
- --------------------------------------------------------------------------------
Voting: Other Matters One vote for each share One vote for each share
owned of record owned of record
- --------------------------------------------------------------------------------
Shareholder Rights Plan None Yes
- --------------------------------------------------------------------------------
Dissenters' Rights Yes Not generally
available, except by
resolution of the Board
of Directors
- --------------------------------------------------------------------------------
Dividend Reinvestment Plan None Open market plan
administered by Fulton
Bank as Plan Agent
- --------------------------------------------------------------------------------
Market No public market Listed for quotation on
Nasdaq National Market
- --------------------------------------------------------------------------------
Registered under 1934 Act No Yes
- --------------------------------------------------------------------------------
Limitation of Liability of No Yes
Directors for Monetary
Damages
- --------------------------------------------------------------------------------
Indemnification of Yes Yes
Directors, Officers and
Employees
- --------------------------------------------------------------------------------
Authorized Class of No Yes, which can be
Preferred Stock issued under terms and
conditions to be
determined by the Board
of Directors
- --------------------------------------------------------------------------------
Control Share Statute Yes Yes
- --------------------------------------------------------------------------------
Business Combination Yes Yes
Statute
- --------------------------------------------------------------------------------
Right of Shareholders to Yes No
call a Special Meeting
- --------------------------------------------------------------------------------
Shareholder Inspection Yes General
Rights
- --------------------------------------------------------------------------------
Right of Shareholders to Yes No
act by Written Consent
================================================================================
</TABLE>
51
<PAGE>
INFORMATION CONCERNING THE PEOPLES BANK OF ELKTON
-------------------------------------------------
Description of Business and Property
- ------------------------------------
PBE is a Maryland bank which was organized in 1923. PBE is engaged in a
general banking business, including commercial and retail banking operations, in
Cecil County, Maryland. PBE currently conducts its business through two banking
offices located in Cecil County, Maryland, consisting of its main office and one
branch location. At March 31, 1997, PBE had total deposits of approximately $80
million, total assets of approximately $92 million, shareholders equity of $10
million, total net loans of approximately $65 million and employed 45 persons on
a full-time basis and four persons on a part-time basis.
The broad range of retail and commercial banking services which PBE offers
include checking accounts, savings programs, money-market accounts, certificates
of deposit, safe deposit facilities, consumer loans programs, revolving lines of
credit, overdraft checking and extended banking hours. These services are
primarily provided to consumers and small- to mid-sized companies within the
Bank's market area. PBE focuses its lending services on commercial, consumer
and real estate lending to local borrowers. PBE attempts to establish a total
borrowing relationship with its customers, which may typically include a
commercial real estate loan, a business line of credit for working capital
needs, a mortgage loan for the borrower's residence, a consumer loan or a
revolving personal credit line.
PBE's service area consists of Cecil County, Maryland. PBE encounters
vigorous competition for market share in the communities it serves from bank
holding companies, other community banks, thrift institutions and other non-bank
financial organizations. PBE competes with banking and financial branching
systems, some from out of state, which are substantially larger and have greater
financial resources than PBE. There are approximately ten banks, savings and
loan and credit union locations, including PBE, in the general market area
serviced by PBE. The largest of these institutions had assets of over $8.9
billion and the smallest had assets of less than $11 million.
In addition to banks and other financial institutions, PBE competes for
deposits with various investment and depositary funds offered by non-banking
firms in the securities industry. There is also competition from major retail-
oriented firms who offer financial services similar to traditional services
through commercial banks without being subject to the same degree of regulation.
PBE Common Stock Market Price and Dividends
- -------------------------------------------
There is currently no public market for the PBE Common Stock nor any
uniformly quoted price.
The Merger Agreement restricts the ability of PBE to declare or pay cash
dividends. However, the Merger Agreement permits PBE to declare and pay a
dividend of up to $0.90 per share of PBE Common Stock on each of (i) June 15,
1997; (ii) September 15, 1997, provided that the Effective Date does not occur
(or is not expected to occur) on or before the record date for the dividend on
the FFC Common Stock scheduled to be paid on October 15, 1997; and (iii)
December 15, 1997, provided that the Effective Date does not occur (or is not
expected to occur) on or before the record date for the dividend on the FFC
Common Stock scheduled to be paid on January 15, 1998; provided further if the
customary payment date for the next regular cash dividend payable after the
Effective Date on the FFC Common Stock which is eligible to be received by the
former holders of PBE is more than ninety (90) days after the payment date of
the last regular cash dividend paid or to be paid on the PBE Common Stock
52
<PAGE>
prior to the Effective Date (such number of days over ninety (90) days being the
"Dividend Lag Period"), then PBE may declare and set aside immediately prior to
the Effective Date, and may pay at a date it may select in its discretion, a
special pro-rata dividend (the "Special Pro-Rata Dividend"). The Special Pro-
Rata Dividend shall be payable in cash, and shall not exceed an amount per share
which is the product of (i) the amount of the dividend permitted to be paid by
PBE pursuant to this paragraph, times (ii) a fraction, the numerator of which
the Dividend Lag Period and the denominator of which is ninety (90) days. See
THE MERGER -- Business Pending the Effective Date. Thus, for example, if the
Merger is to be consummated on August 1, 1997 and the dividend payment dates of
PBE and FFC are October 15, 1997 and November 15, 1997, respectively, the
Dividend Lag Period would be 31 days and PBE would be entitled to declare and
pay, immediately prior to the Effective Date, a Special Pro-Rata Dividend of
$.31 per share (its regular quarterly dividend ($.90) multiplied by .344 (31
days/90 days)).
Information About Directors and Executive Officers
- --------------------------------------------------
Certain information concerning shares of PBE Common Stock owned
beneficially by each director of PBE and by all directors and executive officers
of PBE as a group, as of June 6, 1997, is set forth below:
<TABLE>
<CAPTION>
==============================================================================
SHARES OF PBE COMMON STOCK
BENEFICIALLY OWNED, DIRECTLY PERCENT
NAME OF DIRECTOR AND INDIRECTLY, AS OF THE RECORD OF SHARES
DATE OUTSTANDING
==============================================================================
<S> <C> <C>
James G. Crouse 210 *
- ------------------------------------------------------------------------------
Judy E. Hart 575/1/ *
- ------------------------------------------------------------------------------
Eugene F. Herman 169/2/ *
- ------------------------------------------------------------------------------
Donald S. Hicks 1,323/3/ *
- ------------------------------------------------------------------------------
Henry W. Mason 100/4/ *
- ------------------------------------------------------------------------------
Robert E. Noll 46 *
- ------------------------------------------------------------------------------
Charles F. Sposato 21,084/6/ 9.14
- ------------------------------------------------------------------------------
David K. Williams 4,487/6/ 1.95
- ------------------------------------------------------------------------------
Executive Officers Who Are
Not Directors
- ------------------------------------------------------------------------------
Catherine A. Powell 11/7/ *
- ------------------------------------------------------------------------------
Thomas W. Lofland 10/8/ *
- ------------------------------------------------------------------------------
All Executive Officers and 28,015 12.15%
Directors as a Group
(10 persons)
- ------------------------------------------------------------------------------
* = Less than one percent.
==============================================================================
</TABLE>
- ----------------------------------------------------------------------------
/1/ Includes 475 shares owned jointly with spouse.
/2/ Includes 69 shares held in the Eugene F. Herman Self-Employed Profit
Sharing Plan and Trust.
[footnotes continued on next page]
53
<PAGE>
/3/ Includes 1,103 shares owned jointly with spouse.
/4/ Includes 50 shares owned jointly with spouse.
/5/ Includes 13,809 shares held by Anchar, a Maryland General Partnership, a
partnership jointly owned with his brother, Anthony F. Sposato, and 1,810
shares owned by relatives of Mr. Sposato
/6/ Includes 4,387 shares held in a trust.
/7/ Owned jointly with spouse.
/8/ Owned jointly with spouse.
Selected Historical Financial Data
- ----------------------------------
The following table sets forth certain selected historical financial data
for PBE for each of the five years in the period ended December 31, 1996 and for
the three month periods ended March 31, 1996 and 1997. The table should be read
in conjunction with the financial statements, footnotes and other financial
information included in this Proxy Statement/Prospectus. See INFORMATION
CONCERNING THE PEOPLES BANK OF ELKTON - PBE supplementary financial information.
54
<PAGE>
THE PEOPLES BANK OF ELKTON
Selected Historical Financial Data
(In Thousands)
<TABLE>
<CAPTION>
As of or for the Three Months Ended March 31
--------------------------------------------
1997 1996
---------------------------
<S> <C> <C>
Summary of Operations
- ---------------------
Net interest income $1,074 $997
Provision for loan losses 24 21
-----------------
Net interest income after
provision for loan losses 1,050 976
Other operating income 115 110
Other operating expense 716 642
Income tax expense 145 155
-----------------
Net Income $304 $289
=================
Average Balance Sheet Totals
- ----------------------------
Total assets $91,139 $84,150
Investment securities and
money market investments 21,012 23,531
Loans and leases
(net of unearned income) 65,458 56,730
Total deposits 78,509 70,828
Long-term debt and lease
obligations 1,683 2,692
Shareholders' equity 10,249 9,811
Actual Balance at Period End
- ----------------------------
Total assets $92,197 $85,261
Long-term debt and lease
obligations 1,500 2,500
</TABLE>
55
<PAGE>
THE PEOPLES BANK OF ELKTON
Selected Historical Financial Data
(In Thousands)
<TABLE>
<CAPTION>
As of or for the Year Ended December 31
--------------------------------------------------------------
1996 1995 1994 1993 1992
--------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Summary of Operations
- ---------------------
Net interest income $4,212 $3,628 $3,306 $3,177 $2,941
Provision for loan losses 334 75 120 163 121
--------------------------------------------------------------
Net interest income after
provision for loan losses 3,878 3,553 3,186 3,014 2,820
Other operating income 444 427 422 411 349
Other operating expense 2,756 2,373 2,185 2,046 2,027
Income tax expense 520 594 528 524 411
--------------------------------------------------------------
Net Income $1,046 $1,013 $895 $855 $731
==============================================================
Average Balance Sheet Totals
- ----------------------------
Total assets $87,687 $80,959 $73,431 $70,218 $66,174
Investment securities and
money market investments 24,356 22,789 21,909 23,884 28,059
Loans and leases
(net of unearned income) 58,560 53,953 47,937 42,549 34,332
Total deposits 74,435 67,778 60,890 60,175 57,674
Long-term debt and lease
obligations 2,340 3,000 3,000 1,216 0
Shareholders' equity 9,912 9,295 8,802 8,273 7,721
Actual Balance at Period End
- ----------------------------
Total assets $91,962 $84,146 $77,206 $71,925 $69,848
Long-term debt and lease obligations 2,000 3,000 3,000 3,000 0
</TABLE>
56
<PAGE>
Management's Discussion and Analysis of Financial Condition and Results of
- --------------------------------------------------------------------------
Operations
- ----------
General
-------
The following discussion is intended to assist in understanding the
financial condition and results of operations of PBE. The information contained
herein should be read in conjunction with the audited financial statements of
PBE as of December 31, 1996 and 1995 and for the years ended December 31, 1996,
1995 and 1994 and the unaudited condensed financial statements as of March 31,
1997 and for the three months ended March 31, 1997 and 1996 and the accompanying
notes for such periods which are included as Exhibit E to this Proxy
---------
Statement/Prospectus.
Fiscal Years Ended December 31, 1996, 1995 and 1994
---------------------------------------------------
Results of Operations
---------------------
PBE reported net income of $1,045,712 for the year ended December 31, 1996
compared to $1,013,163 for the same period in 1995. Net income for 1994 was
$895,112. Earnings per share reflect the same growth pattern, increasing from
$3.88 per share in 1994 to $4.39 in 1995 and $4.53 in 1996. The number of
shares outstanding remained unchanged during the three years ended December 31,
1996 and there were no common stock equivalents. Return on average assets
(ROA), a key profitability measure, was 1.20% for 1996 in comparison to 1.26% in
1995 and 1.22% in 1994. Another important profitability measure is return on
average equity (ROE). Reported net income reflected a ROE of 10.56% in 1996
versus 10.90% in 1995 and 10.17% for 1994.
Net Interest Income/Margins. The primary source of earnings for PBE is net
---------------------------
interest income, which is the difference between income earned on interest-
earning assets, such as loans and investment securities, and interest incurred
on the interest-bearing sources, such as deposits and borrowings. The level of
net interest income is determined primarily by the average balances ("volume")
and the rate spreads between the interest-earning assets and PBE's funding
sources.
Net interest income was $4,211,863 for the year ended December 31, 1996, a
16.1% increase from the net interest income of $3,627,660 earned in 1995. Net
interest income was $3,305,448 for 1994. Earning assets averaged $82,915,315 for
1996, an 8.1% increase from $76,742,555 during 1995. Earning assets were
$69,446,912 for 1994. The increase in net interest income was due to the growth
in volume of the loan portfolio as well as increasing yields. Average loans as a
percentage of total average assets increased to 66.8% in 1996 as compared to
66.7% in 1995 and 63.0% in 1994.
Interest income on loans of $5,600,849 for 1996 increased $512,500, or
10.0%, from $5,088,349 in 1995, reflecting the increased average loan balances
of $58,559,506 for 1996 from $53,953,059 in 1995. Interest income on loans was
$4,062,524 in 1994 based on an average balance of $47,538,122.
Interest income on investment securities, including federal funds sold was
$1,453,130 for 1996 a 14.2% increase over the $1,271,901 earned in 1995 which
was 11.4% higher than the $1,141,681 earned in 1994. The average balance on
investment securities was $24,355,809 for 1996, a 6.9% increase over the average
balance of $22,789,496 for 1995. The average balance of investments was
$21,908,790 for 1994. During 1996, the investment portfolio shifted to higher
concentrations in U.S. Treasury, Government agency and municipal securities and
a reduction in corporate bonds and federal funds sold.
The key performance measure for net interest income is the "net interest
margin" or net interest income divided by average earning assets. PBE's net
57
<PAGE>
interest margin was 5.08% for 1996 and 4.73% and 4.76% for 1995 and 1994,
respectively. PBE's net interest margin is affected by loan pricing and deposit
pricing. The increased net interest margin realized in 1996 was attributable to
adding higher yielding loans.
Other Operating Revenue. Other operating revenue consists of income
-----------------------
generated from service charges on deposit accounts, as well as loan fees, wire
transfers, official check fees and collection fees. Other operating revenue for
1996 was $443,663 compared to $426,722 for 1995, a 4.0% increase. Other
operating income was $422,338 for 1994. The only significant increase in other
operating income occurred during 1996 and was the result of a $9,511 gain on the
sale of foreclosed real estate. There have been no sales of investment
securities during the three years ended December 31, 1996.
Other Expenses. Other expenses consist of non-interest expenses such as
--------------
salaries and employee benefits, occupancy expense, equipment expenses and other
operating expenses. Other expenses totaled $2,756,054 for 1996 as compared to
$2,371,963 for the same period in 1995, an increase of $384,091, or 16.2%.
Salaries and employee benefits increased to $1,511,981 in 1996 from $1,337,136
in the prior year, a $174,845 increase. The increase reflects an increased
staffing of loan officers and support staff as a result of the larger loan
portfolio. Equipment expenses also increased during 1996 from the previous year
to $234,148 from $163,531 as a result from additional depreciation and
maintenance of computer hardware and software upgrades. Other expenses
increased to $2,371,963 in 1995 from $2,184,895 in 1994. The increase of
$187,068 is largely attributable to increased salaries and benefits.
Income Taxes. PBE's effective tax rate was 33.2%, 37.0% and 37.1% for the
------------
three years ended December 31, 1996, 1995 and 1994, respectively. The two items
which have had the most significant impact in reducing the effective tax rate
have been increased earnings from tax-exempt assets and a reduction in the state
tax expense due to a tax law change at the state level.
Financial Condition
-------------------
At December 31, 1996, total assets were $91,962,452 as compared to
$84,146,248 at December 31, 1995, an increase of 9.3%. This increase was
primarily due to the $9,694,283 increase in loans which was partially offset by
the $4,725,375 decrease in the investment portfolio. The funds from the
investment portfolio were used to fund the loan growth and thereby increasing
the overall yield of earning assets.
PBE's total assets were $84,146,248 as of December 31, 1995 versus
$77,206,345 at year-end 1994, an increase of $6,939,903, or 9.0%. The increase
was attributable to loan growth and a larger investment portfolio.
Total loans, net of allowance for loan losses at December 31, 1996 were
$63,584,592, as compared to $54,172,792 at December 31, 1995, which represented
an increase of $9,411,800, or 17.4%. The increase in loans is due to PBE's
continued focus on its core lending activities consisting mainly of real estate
loans secured by first mortgages, both residential and commercial. As of
December 31, 1995, total loans, net of allowance for loan losses, were
$54,172,792, up $3,430,113, or 6.8%, from the 1994 year-end.
PBE's funding consists primarily of customer deposits. An $8,270,744
increase in total deposits was achieved as of December 31, 1996 compared to
1995. The largest portion of this increase was in more costly certificates of
deposits and other time deposits. Deposits increased from $64,723,454 as of
December 31, 1994 to $70,847,630 as of December 31, 1995. The largest portion of
this $6,124,176 was also in certificates of deposits and other time deposits.
58
<PAGE>
Composition of Loan Portfolio. Because loans are expected to produce higher
-----------------------------
yields than investment securities and other interest-earning assets, the
absolute volume of loans and the volume as a percentage of total earning assets
is an important determinant of net interest margin. Average loans as a
percentage of total average assets was 66.8%, 66.6% and 63.0% for the three
years ended December 31, 1996, 1995 and 1994, respectively.
PBE's loan portfolio composition as of December 31, 1996 reflects greater
concentrations in mortgage loans. The amounts of loans outstanding (including
unearned income) at the indicated dates for the periods are shown in the
following table by type of loan:
<TABLE>
<CAPTION>
December 31
---------------------
1996 1995
---------------------
(In thousands)
<S> <C> <C>
Commercial $ 4,297 $ 4,013
Real estate - 5,339 4,963
construction
Real estate - mortgage 49,622 41,530
Consumer 5,275 4,300
Leasing and other 10 44
---------------------
Totals $64,543 $54,850
=====================
</TABLE>
Approximately 81% of PBE's loans have adjustable rates as of December 31,
1996, the majority of which are tied to the prime rate. Interest rates on
variable rate loans adjust to the current interest rate environment, whereas
fixed rates do not permit this flexibility. If interest rates were to increase
in the future, the interest earned on the variable rate loans would improve, and
if rates were to fall, the interest earned would decline, thus impacting PBE's
income. See also the discussion under "Liquidity and Interest Rate Sensitivity"
below.
The following table sets forth certain information at December 31, 1996
regarding the dollar amount of floating and fixed rate loans maturing in PBE's
portfolio based on their contractual terms to maturity. Some of the loans may be
renewed or repaid prior to maturity. Therefore, the table should not be used as
a forecast of future cash collections.
<TABLE>
<CAPTION>
One
One Year Through More Than
or Less Five Years Five Years Total
---------------------------------------------
(In thousands)
<S> <C> <C> <C> <C>
Floating rate $26,933 $25,289 $ - $52,222
Fixed rate 3,589 5,829 2,903 12,321
---------------------------------------------
Totals $30,522 $31,118 $2,903 $64,543
=============================================
</TABLE>
Loan Quality. PBE attempts to manage the risk characteristics of its loan
------------
portfolio through various control processes, such as credit evaluation of
borrowers, establishment of lending limits and application of lending
procedures, including the holding of adequate collateral and the maintenance of
compensating balances. However, PBE seeks to rely primarily on the cash flow of
its borrowers as the principal source of repayment. Although credit policies
are designed to minimize risk, management recognizes that loan losses will occur
and that the amount of these losses will fluctuate depending on the risk
characteristics of the loan portfolio as well as general and regional economic
conditions.
59
<PAGE>
The allowance for loan losses represents a reserve for potential losses in
the loan portfolio. The adequacy of the allowance for loan losses is evaluated
periodically based on a review of all significant loans, with a particular
emphasis on non-accruing, past due and other loans that management believes
require special attention.
For significant problem loans, management's review consists of evaluation
of the financial strengths of the borrower and the guarantor, the related
collateral, and the effects of economic conditions. Specific reserves against
the remaining loan portfolio are based on analysis of historical loan loss
ratios, loan charge-offs, delinquency trends, and previous collection
experience, along with an assessment of the effects of external economic
conditions.
The allowance for loan losses has been allocated as follows to provide for
the possibility of losses being incurred within the following categories of
loans at the dates indicated:
<TABLE>
<CAPTION>
December 31
---------------------------------------
1996 1995
---------------------------------------
(Dollars in thousands)
% of % of
loans in loans in
each each
Allowance category Allowance category
--------- -------- --------- --------
<S> <C> <C> <C> <C>
Commercial $ 101 6.7% $ 91 7.3%
Real estate - construction
& mortgages 375 85.2 339 84.8
Consumer 183 8.1 145 7.9
Unallocated 300 - 102 -
--------------------------------------------
Totals $ 959 100.0% $ 677 100.0%
============================================
</TABLE>
60
<PAGE>
An analysis of PBE's loss experience is as follows:
<TABLE>
<CAPTION>
Year Ended December 31
1996 1995
(Dollars in
Thousands)
<S> <C> <C>
Loans outstanding at end of year $ 64,543 $54,800
=====================
Daily average balance of loans $ 58,560 $53,953
=====================
Balance of allowance for loan losses at
beginning of year
677 711
Loans charged-off:
Commercial 38 67
Real estate - mortgage - 19
Consumer 32 56
---------------------
Total loans charged-off 70 142
---------------------
Recoveries:
Commercial 4 3
Real estate - mortgage - 2
Consumer 14 28
---------------------
Total recoveries 18 33
---------------------
Net loans charged-off 52 109
Provision for loan losses 334 75
---------------------
Balance at end of year $ 959 $ 677
=====================
Ratio of net charge-offs during
year to average loans 0.09% 0.20%
=====================
Ratio of allowance for loan losses
to loans outstanding at end of year 1.49% 1.23%
=====================
</TABLE>
The provision for loan losses is a charge to earnings in the current period
to replenish the allowance and to maintain it at a level management has
determined to be adequate. PBE provided $334,000 and $75,000 for loan losses for
the years ended December 31, 1996 and 1995, respectively.
As of December 31, 1996, the allowance for loan losses was $959,217, as
compared with the December 31, 1995 balance of $676,734, an increase of
$282,483. Net charge-offs of $51,517 were recognized for the year ended December
31, 1996. The allowance for loan losses at December 31, 1996 represented 1.49%
of outstanding loans as compared with 1.23% as of December 31, 1995. The
increase in the percentage was justified based on the increase in the loan
portfolio and management's evaluation of the loan portfolio.
Non-performing assets are defined as non-accrual loans, accruing loans 90
days past due and real estate acquired by foreclosure. When real estate acquired
by foreclosure and held for sale is included with non-performing loans, such
real
61
<PAGE>
estate is recorded as a non-performing asset. Non-performing assets as of
December 31, 1996 and 1995 totaled approximately $220,000 and
$616,000,respectively.
The following table presents information concerning the aggregate amount of
nonaccrual, past due and restructured loans and other nonperforming assets:
<TABLE>
<CAPTION>
December 31
----------------------
1996 1995
----------------------
(In thousands)
<S> <C> <C>
Nonaccrual loans/(1) (2)/ $ - $ 23
Accruing loans past due 90 212 497
Other real estate 8 96
---------------------
Totals $ 220 $ 616
=====================
</TABLE>
(1) As of December 31, 1996, PBE had no impaired loans as defined by Statement
of Financial Accounting Standards No. 114.
(2) Accrual of interest is generally discontinued when a loan becomes 90 days
past due as to principal and interest. When interest accruals are
discontinued, interest credited to income is reversed. Nonaccrual loans are
restored to accrual status when all delinquent principal and interest
becomes current or the loan is considered secured and in the process of
collection. Certain loans that are determined to be sufficiently
collateralized or are in the process of collection may continue to accrue
interest after reaching 90 days past due.
Investment Securities. Investment securities are used, in part, as a source
---------------------
of liquidity and as a tool to manage interest rate risk. Total investment
securities (classified as either held to maturity or available for sale, but
excluding federal funds sold) as of December 31, 1996 decreased $4,725,375, or
20.0%. The decrease was attributable to higher loan demand. The total portfolio
had an average maturity of 4.82 years and an average tax-equivalent yield of
6.03%.
62
<PAGE>
The following table set forth the carrying amount of investment securities
held to maturity (HTM) and available for sale (AFS) as of the dates shown:
<TABLE>
<CAPTION>
December 31
-------------------------------------------------------------------------
1996 1995
HTM AFS Total HTM AFS Total
-------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
United States Treasury and U.S.
Government agencies and
corporations $250 $13,597 $13,847 $1,750 $ 17,513 $ 19,263
State and municipal 95 3,976 4,071 217 832 1,049
Other securities - 150 150 1,710 778 2,488
Equity securities - 288 288 - 276 276
Mortgage-backed securities - - - 4 - 4
Totals $345 $18,011 $18,356 $3,681 $ 19,399 $ 23,080
=========================================================================
</TABLE>
63
<PAGE>
The following tables set forth the maturities of investment securities at
December 31, 1996 and the weighted average yields of such securities (calculated
based upon historical cost).
<TABLE>
<CAPTION>
HELD TO MATURITY (at amortized cost)
- ----------------
MATURING
------------------------------------------------------------
After One After
But Five but
Within Within Within After Ten
One Year Five Ten Years Years
Years
------------------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C>
United States Treasury and
other U.S. Government
agencies and
corporations $ - $ 250 $ - $ -
State and municipal - 95 - -
------------------------------------------------------------
Totals $ - $ 345 $ - $ -
============================================================
AVAILABLE FOR SALE (at estimated fair value)
- ------------------
MATURING
------------------------------------------------------------
After One After
But Five but
Within Within Within After Ten
One Year Five Ten Years Years
Years
------------------------------------------------------------
(In thousands)
United States Treasury and
other U.S. Government
agencies and $ 1,250 $ 9,400 $ 2,706 $ 241
corporations
State and municipal 299 1,478 1,942 257
Other securities 150 - -
------------------------------------------------------------
Totals $ 1,699 $ 10,878 $ 4,648 $ 498
============================================================
</TABLE>
Capital Resources. Stockholders' equity was $9,902,071 as of December 31,
-----------------
1996 as compared to $9,649,669 at year-end 1995. The net increase of $252,402
was the result of $1,045,712 in net income, less cash dividends of $3.20 per
share, or $737,907. The other component of change in stockholders' equity was
$55,403 in unrealized depreciation on investment securities available for sale,
net of applicable deferred income taxes.
Stockholders' equity for 1995 was impacted by the retention of net income
of $1,013,163 less cash dividends of $435,826, or $1.89 per share, and $211,425
in unrealized appreciation in investments available for sale.
Banking regulatory authorities have implemented strict capital guidelines
directly related to the credit risk associated with an institution's assets.
Banks are required to maintain capital levels based on their "risk adjusted"
assets so that categories of assets with higher "defined" credit risks will
require more capital support than assets with lower risk. Additionally, capital
must be maintained to support certain off-balance sheet instruments.
Capital is classified as Tier I (common stockholders' equity less certain
intangible assets) and total capital (Tier I plus the allowance for loan
losses). Minimum required levels must at least equal 4% for Tier I capital and
8% for total capital. In addition, institutions must maintain a minimum of 3%
leverage capital ratio (Tier I capital to average total assets).
64
<PAGE>
PBE's capital position as of December 31, 1996 and 1995 is presented in the
following 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>
Total Capital (to Risk
Weighted Assets) $10,660 18.57% $4,592 8.00% $5,740 10.00%
Tier I Capital (to Risk
Weighted Assets) $ 9,942 17.32% $2,296 4.00% $3,444 6.00%
Tier I Capital (to
Average Assets) $ 9,942 10.94% $3,637 4.00% $4,546 5.00%
As of December 31, 1995:
Total Capital (to Risk
Weighted Assets) $10,202 21.86% $3,734 8.00% $4,667 10.00%
Tier I Capital (to Risk
Weighted Assets) $ 9,618 20.61% $1,867 4.00% $2,800 6.00%
Tier I Capital (to
Average Assets) $ 9,618 11.37% $3,384 4.00% $4,230 5.00%
</TABLE>
Liquidity and Interest Rate Sensitivity. The objectives of asset/liability
---------------------------------------
management is to enhance the growth of PBE's primary earnings component, net
interest income. Net interest income can fluctuate with significant interest
rate movements. To lessen the impact of these rate swings, management endeavors
to structure the balance sheet so that repricing opportunities exist for both
assets and liabilities in roughly equivalent amounts at approximately the same
time intervals. Imbalances in these repricing opportunities at any point in
time constitute interest rate sensitivity.
The measurement of PBE's interest rate sensitivity, or "gap," is one of the
principal techniques used in asset/liability management. Interest sensitive gap
is the dollar difference between assets and liabilities which are subject to
interest-rate pricing within a given time period, including both floating rate
or adjustable rate instruments and instruments which are approaching maturity.
The objective of PBE is to maintain a cumulative gap position of plus or minus
20% of interest earning assets over interest bearing liabilities in all time
periods out in one year. PBE manages its gap through loan pricing, deposit
pricing, and its investment portfolio.
Management oversees the asset/liability management function and meets
periodically to monitor and manage the structure of the balance sheet, control
interest rate exposure, and evaluate pricing strategies for PBE. The asset mix
of the balance sheet is continually evaluated in terms of several variables:
yield, credit quality, appropriate funding sources and liquidity. Management of
the liabilities mix of the balance sheet focuses on expanding the various
funding sources.
In theory, interest rate risk can be diminished by maintaining a nominal level
of interest rate sensitivity. In practice, this is made difficult by a number
of factors, including cyclical variation in loan demand, different impacts on
interest-sensitive assets and liabilities when interest rates change, and the
availability of
65
<PAGE>
funding sources. Interest-bearing liabilities commensurate with management's
expectations relative to market interest rates. Management generally attempts
to maintain a balance between rate-sensitive assets and liabilities as the
exposure period is lengthened to minimize the overall interest rate risk to PBE.
Cash flows from financing activities, which included funds received from new
and existing depositors, provided a large source of liquidity. PBE seeks to
rely primarily on core deposits from customers to provide stable and cost-
effective sources of funding to support asset growth. PBE also seeks to augment
such deposits with longer term and higher yielding certificates of deposit.
CD's of $100,000 or more are summarized by maturity in the table below entitled
"Deposits". Other sources of funds available to PBE include short-term
borrowings, primarily in the form of Federal Home Loan Bank (FHLB)
collateralized borrowings as well as long-term fixed rate borrowings from the
FHLB.
Quarter ended March 31, 1997 vs. Quarter ended March 31, 1996
-------------------------------------------------------------
Results of Operations
---------------------
PBE's net income for the first quarter of 1997 increased $15,000, or 5.0%, in
comparison to the net income for the first quarter in 1996. First quarter net
income of $304,000, or $1.32 share, represented a return on average assets (ROA)
of 1.35% and a return on average equity (ROE) of 12.08%. This compares to 1996
net income of $289,000, or $1.25 per share (1.39% ROA and 11.95% ROE). The
increase in net income was primarily a result of the growth in net interest
income, offset by an increase in non-interest expenses.
66
<PAGE>
Net Interest Income. Net interest income increased $78,000, or 7.8%, for the
-------------------
quarter. Overall, this increase was a result of growth in PBE's balance sheet
coupled with a slightly higher net interest margin. The following tables
summarize the components of this increase as well as the changes in average
interest-earning assets and interest-bearing liabilities and the average
interest rates thereon.
<TABLE>
<CAPTION>
Three Months
Ended March 31
--------------
Change
----------------------
1997 1996 Dollar Percent
-------------- ------------ ---------- ----------
<S> <C> <C> <C> <C>
Interest income $ 1,796,401 $ 1,691,656 $104,745 6.2%
Interest expense 722,068 694,877 27,191 3.9
-------------- ------------ ---------- ----------
Net interest income $ 1,074,333 $ 996,779 $ 77,554 7.8%
</TABLE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1997 1996 % Change
------------- ------------- ----------
<S> <C> <C> <C>
Average interest-earning assets $85,780,266 $79,789,771 7.0%
Yield on earning assets 8.30% 8.50% (2.4)
Average interest-bearing liabilities 70,217,313 $64,656,903 8.6%
Cost of interest-bearing liabilities 4.10% 4.31% (4.9)
</TABLE>
The 6.2% increase in interest income was due primarily to an increase in average
interest-earning assets during the period, partially offset by a small decrease
in yield. The majority of the growth in interest-earning assets was realized in
the loan portfolio, which grew 14.8% compared to the first quarter of 1996.
Loan growth was realized primarily in mortgage loans, which increased $7.4
million, or 15.5%, over the first quarter of 1996. The 3.9% increase in
interest expense was a result of an increase in average interest-bearing
liabilities offset by a small decline in rates. Average deposits increased $7.7
million, or 10.9%.
Provision and Allowance for Loan Losses. The provision for loan losses for
---------------------------------------
the quarter ended March 31, 1997 was $24,000 compared to $21,000 for the same
period of 1996. The allowance for loan losses as a percentage of gross loans
(net of unearned income) was 1.47% at March 31, 1997 as compared to 1.49% at
December 31, 1996. This decrease was a result of net charge-offs exceeding the
provision. The following table summarizes non-performing assets as of March 31,
1997 and December 31, 1996:
<TABLE>
<CAPTION>
March 31 Dec. 31
(Dollars in thousands) 1997 1996
------------ -----------
<S> <C> <C>
Nonaccrual loans $ 56,000 $ -
Loans 90 days past due and accruing
366,000 212,000
Other real estate owned - 8,000
------------ ----------
Total non-performing assets $422,000 $220,000
============ ==========
Non-performing assets/Total assets 0.46% 0.24%
Non-performing assets/Gross loans 0.65% 0.34%
</TABLE>
Other Income. Other income for the quarter ended March 31, 1997 was $115,000.
------------
This was an increase of $5,000, or 4.4%, over the comparable period in 1996.
This moderate increase was due mainly to an increase in ATM surcharges and
higher fee income earned on deposit accounts.
67
<PAGE>
Other Expenses. Total other expenses for the first quarter of 1997 increased
--------------
$75,000, or 11.6%, to $716,000 from $642,000 in the comparable period of 1996.
The majority of this increase was in salaries and benefits, which increased
$49,000, or 18.7%, in comparison to the first quarter of 1996. This increase was
due to the addition of a senior lending officer in the second quarter of 1996 as
well as normal merit and cost of living increases. Excluding the increase in
salaries and benefits expenses, other expenses remained fairly stable,
increasing only $26,000, or 6.8%.
Income Taxes. PBE's effective income tax rate for the quarter ended March 31,
------------
1997 was 32.3% as compared to 34.8% in the first quarter of 1996. This decrease,
which reduced income tax expense by $10,000, was a result of lower state income
taxes as the State of Maryland is phasing-in changes to the taxation of banks
over a three year period.
Financial Condition
-------------------
On March 31, 1997, PBE had total assets of $92.2 million, reflecting an
increase of $235,000 over December 31, 1996. Net loans increased $1.0 million,
or 1.6%, and investments increased $2.1 million, or 11.7%. These increases in
earning assets were funded primarily through the use of existing cash and
federal funds balances. PBE's unrealized loss on its available for sale
securities grew to approximately $250,000. This increase is a result of the
higher interest rate environment in the first quarter of 1997.
Deposits increased $610,000, or 0.8%. Additional funds generated through
deposit growth were used to reduce PBE's long-term Federal Home Loan Bank
borrowings.
Liquidity and Interest Rate Sensitivity Management. The goals of PBE's
--------------------------------------------------
asset/liability management function are to ensure adequate liquidity while
maintaining an appropriate balance between the relative sensitivity of interest-
earning assets and interest-bearing liabilities.
Adequate liquidity is provided by cash, short-term investments, securities
available for sale and scheduled payments and maturities of loans receivable and
securities held to maturity. Liquidity is also provided by deposits and short-
term borrowings.
PBE uses a rate sensitive balance sheet as its primary gap management tool.
Gap management is the method chosen to measure interest rate risk. Gap analysis
measures the effect of parallel interest rate changes on net interest income.
Savings, NOW and money market accounts are divided between rate sensitive and
non-rate sensitive. They are also spread over time periods out to one year. The
objective of PBE is to maintain a cumulative gap position of plus or minus 20%
of interest earning assets over interest bearing liabilities in all time periods
out to one year. PBE manages its gap through loan pricing, deposit pricing, and
its investment portfolio.
Capital Resources. Shareholders' equity decreased $28,000, or 0.3 % during
-----------------
the first quarter of 1997. This decrease was a result of an increase in the
unrealized holding loss on available for sale securities of approximately
$125,000. Excluding this component, total equity increased $97,000 as a result
of $1.32 per share in net income, offset by $0.90 per share in dividends for the
quarter.
Current capital guidelines measure the adequacy of a bank's capital by taking
into consideration the differences in risk associated with holding various types
of assets as well as exposure to off-balance sheet commitments. The guidelines
call for a minimum risk-based Tier I capital percentage of 4.0% and a minimum
risk-based total capital of 8.0%. Tier I capital includes common shareholders'
equity less goodwill and non-qualified intangible assets. Total capital
includes all Tier I capital components plus the allowance for loan losses.
PBE is also subject to a "leverage capital" requirement, which compares
capital (using the definition of Tier I capital) to total balance sheet assets
and is
68
<PAGE>
intended to supplement the risk based capital ratios in measuring capital
adequacy. The minimum acceptable leverage capital ratio is 3% for institutions
which are highly-rated in terms of safety and soundness and which are not
experiencing or anticipating any significant growth. Other institutions are
expected to maintain capital levels at least one or two percent above the
minimum. As of March 31, 1997, PBE's capital ratios exceeded all of the minimum
ratios as set forth above.
69
<PAGE>
Additional Statistical Disclosure
- ---------------------------------
The following tables present certain additional statistical disclosures for PBE.
Comparative Average Balance Sheets and Net Interest Income Analysis
-------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended December 31
-----------------------------------------------------------
(Dollars in thousands) 1996 1995
- --------------------------------------------------------------------------------------------------
Average Yield/ Average Yield/
------- ------ ------- ------
ASSETS Balance Interest Rate Balance Interest Rate
------- -------- ---- ------- -------- ----
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans (net of unearned income) $ 58,560 $5,601 9.56% $ 53,953 $5,088 9.43%
Investments 23,090 1,385 6.00 18,677 1,030 5.51
Federal funds sold 1,265 68 5.38 4,112 242 5.89
--------------------------------------------------------------
Total interest-earning assets 82,915 7,054 8.51 76,742 6,360 8.29
Noninterest-earning assets:
Other assets(2) 5,473 4,947
Less: Allowance for loan losses (701) (730)
---------- ----------
Total Assets $ 87,687 $ 80,959
========== ==========
</TABLE>
<TABLE>
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Interest-bearing liabilities:
NOW accounts $ 7,728 $ 140 1.81% $ 7,344 $ 170 2.31%
Money markets 13,490 450 3.34 12,435 496 3.99
Savings deposits 12,859 396 3.08 12,564 440 3.50
Certificates 27,110 1,531 5.65 22,503 1,275 5.67
IRA's 3,365 178 5.29 3,099 177 5.71
Other borrowed funds 2,810 147 5.23 3,394 174 5.13
--------------------------------------------------------------
Total interest-bearing liabilities 67,362 2,842 4.22 61,339 $2,732 4.45
Noninterest-bearing liabilities:
Demand deposits 9,869 9,824
Other 544 501
---------- ----------
Total Liabilities 77,775 71,664
Shareholders' equity 9,912 9,295
---------- ----------
Total Liabilities and
Shareholders' Equity $ 87,687 $ 80,959
========== ==========
Net interest income $4,212 $3,628
=========== ============
Net interest margin 5.08% 4.73%
========== =========
- --------------------------------------------------------------------------------------------------
</TABLE>
(1) Includes nonperforming loans.
(2) Balances reflect amortized historical cost for available for sale
securities. The related unrealized holding gain/loss on securities is
included in other assets.
70
<PAGE>
Changes in Interest Income/Expense Due to Volume and Rate Change
----------------------------------------------------------------
The following table sets forth for the periods indicated a summary of changes
in interest income and interest expense resulting from corresponding volume and
rate changes:
<TABLE>
<CAPTION>
1996 vs. 1995
Increase (decrease) due
to change in
---------------------------
Volume Rate Net
-------- ------- -------
(in thousands)
<S> <C> <C> <C>
Interest income on:
Loans (net of unearned income) $ 434 $ 79 $ 513
Investments 243 112 355
Federal funds sold (168) (6) (174)
---------------------------
Total interest-earning assets $ 509 $ 185 $ 694
===========================
Interest expense on:
NOW accounts $ 9 $ (39) $ (30)
Money markets 42 (88) (46)
Savings deposits 10 (54) (44)
Certificates 261 (5) 256
IRA's 15 (14) 1
Other borrowed funds (30) 3 (27)
---------------------------
Total interest-bearing liabilities $ 307 $(197) $ 110
===========================
</TABLE>
Note: The rate/volume variances are allocated in the table above by applying
the changes in volume times the prior period rate and by applying the
changes in rate times the current period volume on a consistent basis
throughout.
71
<PAGE>
Deposits
- --------
Maturities of time deposits of over $100,000 outstanding at December 31, 1996
are summarized as follows:
<TABLE>
<CAPTION>
Time Deposits
Over $100,000
---------------
(in thousands)
<S> <C>
Three months or less $5,022,204
Over three through six months 1,746,080
Over six through twelve months 675,632
Over twelve months 719,898
---------------
Totals 8,163,814
===============
</TABLE>
Return on Equity and Assets
- ---------------------------
The ratio of net income to average shareholders' equity and to average total
assets and certain other ratios are as follows:
<TABLE>
<CAPTION>
Year Ended
December 31
----------------
1996 1995
----------------
<S> <C> <C>
Percentage of net income to:
Average shareholders' equity 10.56% 10.90%
Average total assets 1.20% 1.26%
Percentage of dividends declared per common
share to net income per common share 70.6% 43.1%
Percentage of average shareholders' equity
to average total assets 11.30% 11.48%
</TABLE>
72
<PAGE>
Quarterly Consolidated Results of Operations
- --------------------------------------------
<TABLE>
<CAPTION>
Three Months Ended
----------------------------------------
For the Year 1996 March 31 June 30 Sept. 30 Dec. 31
- ------------------------- ----------------------------------------
(In thousands, except per-share data)
<S> <C> <C> <C> <C>
Interest income $ 1,692 $ 1,730 $ 1,797 $ 1,835
Interest expense 695 700 716 731
----------------------------------------
Net interest income 997 1,030 1,081 1,104
Provision for loan losses 21 21 21 271
Other income 110 118 107 109
Other expenses 641 621 684 810
----------------------------------------
Income before income taxes 445 506 483 132
Income taxes 154 180 180 6
Net income $ 291 $ 326 $ 303 $ 126
========================================
Per-share data:
Net income $ 1.26 $ 1.42 $ 1.31 $ 0.54
Cash dividends $ 0.50 $ 0.90 $ 0.90 $ 0.90
<CAPTION>
Three Months Ended
----------------------------------------
For the Year 1995 March 31 June 30 Sept. 30 Dec. 31
- ------------------------- ----------------------------------------
(In thousands, except per-share data)
<S> <C> <C> <C> <C>
Interest income $ 1,435 $ 1,580 $ 1,649 $ 1,696
Interest expense 601 683 724 725
----------------------------------------
Net interest income 834 897 925 971
Provision for loan losses 19 19 18 19
Other income 113 113 95 106
Other expenses 614 601 612 545
----------------------------------------
Income before income taxes 314 390 390 513
Income taxes 116 145 145 188
----------------------------------------
Net income $ 198 $ 245 $ 245 $ 325
========================================
Per-share data:
Net income $ 0.86 $ 1.06 $ 1.06 $ 1.41
Cash dividends $ 0.36 $ 0.36 $ 0.36 $ 0.81
</TABLE>
73
<PAGE>
<TABLE>
<CAPTION>
Five Year Consolidated Summary of Operations
- --------------------------------------------
For the Year
--------------------------------------------------
1996 1995 1994 1993 1992
--------------------------------------------------
(In thousands, except per-share data)
<S> <C> <C> <C> <C> <C>
Interest income $ 7,054 $ 6,360 $ 5,204 $ 5,012 $ 5,122
Interest expense 2,842 2,733 1,899 1,836 2,181
--------------------------------------------------
Net interest income 4,212 3,627 3,305 3,176 2,941
Provision for loan losses 334 75 120 163 121
Other income 444 427 422 411 349
Other expenses 2,756 2,372 2,184 2,045 2,027
--------------------------------------------------
Income before income taxes 1,566 1,607 1,423 1,379 1,142
Income taxes 520 594 528 524 411
------- ------- ------- ------- -------
Net income $ 1,046 $ 1,013 $ 895 $ 855 $ 731
==================================================
PER-SHARE DATA
- --------------
Net income $ 4.53 $ 4.39 $ 3.88 $ 3.71 $ 3.17
Cash dividends $ 3.20 $ 1.89 $ 1.55 $ 1.36 $ 1.21
-------
AT YEAR END
- -----------
Total assets $91,962 $84,146 $77,206 $71,925 $69,848
Net loans 63,585 54,173 50,743 45,012 39,028
Deposits 79,118 70,848 64,723 59,231 61,310
Long-term debt 2,000 3,000 3,000 3,000 -
Shareholders' equity 9,902 9,650 8,861 8,594 7,978
</TABLE>
74
<PAGE>
EXPERTS
-------
The financial statements of FFC as of December 31, 1996 and 1995 and for the
three years ended December 31, 1996, which are included in FFC's Annual Report
on Form 10-K for the year ended December 31, 1996 and are incorporated by
reference in this Proxy Statement/Prospectus have been audited by Arthur
Andersen LLP, independent public accountants, as indicated in their reports with
respect thereto, and are included herein in reliance upon the authority of said
firm as experts in giving said reports.
The consolidated financial statements of PBE as of December 31, 1996 and 1995
and for each of the three years in the period ended December 31, 1996, which are
included in PBE's 1996 and 1995 Annual Reports to shareholders have been audited
by Stegman & Company, independent certified public accountants, as indicated in
their reports with respect thereto, and are included herein in reliance upon the
authority of said firm as experts in accounting and auditing.
LEGAL MATTERS
-------------
The legality of the shares of FFC Common Stock to be issued in connection with
the Merger and certain other legal matters relating to the Merger will be passed
upon by the law firm of Barley, Snyder, Senft & Cohen, LLP, located in
Chambersburg, Harrisburg, Lancaster and York, Pennsylvania, which is acting as
counsel for FFC. John O. Shirk is a partner in the firm and is a member of the
Board of Directors of FFC. As of May 1, 1997, the partners and associates of
Barley, Snyder, Senft & Cohen, LLP owned beneficially and in the aggregate
approximately 25,008 shares of FFC Common Stock.
The law firm of Housley Kantarian & Bronstein, P.C., located in Washington,
D.C., has acted as counsel to PBE in connection with the Merger.
ADDITIONAL INFORMATION
----------------------
FFC has filed with the SEC a Registration Statement (No. 333-28803) with
respect to the shares of FFC Common Stock to be issued in connection with the
Merger. The Registration Statement contains certain additional information
which has been omitted from this Proxy Statement/Prospectus in accordance with
the rules and regulations of the SEC and may be examined at the offices of the
SEC at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549. Copies of
the Registration Statement may be obtained from the SEC upon payment of the
prescribed fee.
OTHER MATTERS
-------------
The Board of Directors of PBE knows of no other matters other than those
discussed in this Proxy Statement/Prospectus which will be presented at the
Special Meeting. However, if any other matters are properly brought before the
Special Meeting or any postponement or adjournment thereof, any proxy given
pursuant to this solicitation will be voted in accordance with the
recommendations of the Board of Directors of PBE.
75
<PAGE>
EXHIBIT A
AFFILIATION AND MERGER AGREEMENT
--------------------------------
<PAGE>
AFFILIATION AND MERGER AGREEMENT
BY AND BETWEEN
THE PEOPLES BANK OF ELKTON
AND
FULTON FINANCIAL CORPORATION
CONFORMED TO REFLECT THE FIRST AMENDMENT TO
AFFILIATION AND MERGER AGREEMENT DATED
AS OF
MAY 20, 1997
<PAGE>
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
Page
----
<S> <C>
ARTICLE I - ARTICLES OF MERGER.............................................. 2
------------------
Section 1.1 Articles of Merger........................................ 2
------------------
ARTICLE II - CONVERSION OF SHARES AND EXCHANGE OF STOCK
------------------------------------------
CERTIFICATES................................................... 2
------------
Section 2.1 Conversion of Shares...................................... 2
--------------------
(a) General................................................... 2
-------
(b) Antidilution Provision.................................... 2
----------------------
(c) No Fractional Shares...................................... 2
--------------------
(d) Closing Market Price...................................... 3
--------------------
Section 2.2 Exchange of Stock Certificates............................ 3
------------------------------
(a) Exchange Agent............................................ 3
--------------
(b) Surrender of Certificates................................. 3
-------------------------
(c) Dividend Withholding...................................... 4
--------------------
(d) Failure to Surrender Certificates......................... 4
---------------------------------
(e) Expenses.................................................. 4
--------
Section 2.3 Reservation of Shares..................................... 4
---------------------
Section 2.4 Taking Necessary Action................................... 4
-----------------------
Section 2.5 Press Releases............................................ 5
--------------
ARTICLE III - REPRESENTATIONS AND WARRANTIES OF PBE......................... 5
-------------------------------------
Section 3.1 Authority................................................. 5
---------
Section 3.2 Subsidiaries.............................................. 5
------------
Section 3.3 Organization and Standing................................. 5
-------------------------
Section 3.4 Capitalization............................................ 6
--------------
Section 3.5 Articles of Incorporation, Bylaws and Minute Books........ 6
--------------------------------------------------
Section 3.6 Financial Statements...................................... 6
--------------------
Section 3.7 Absence of Undisclosed Liabilities........................ 6
----------------------------------
Section 3.8 Absence of Changes........................................ 6
------------------
Section 3.9 Dividends, Distributions and Stock Purchases.............. 7
--------------------------------------------
Section 3.10 Taxes..................................................... 7
-----
Section 3.11 Title to and Condition of Assets.......................... 7
--------------------------------
Section 3.12 Contracts................................................. 8
---------
Section 3.13 Litigation and Governmental Directives.................... 8
--------------------------------------
Section 3.14 Compliance with Laws; Governmental Authorizations......... 9
-------------------------------------------------
Section 3.15 Insurance................................................. 9
---------
Section 3.16 Financial Institutions Bonds.............................. 9
----------------------------
Section 3.17 Labor Relations and Employment Agreements................. 9
-----------------------------------------
</TABLE>
<PAGE>
<TABLE>
<S> <C>
Section 3.18 Employee Benefit Plans.................................... 10
----------------------
Section 3.19 Related Party Transactions................................ 10
--------------------------
Section 3.20 No Finder................................................. 11
---------
Section 3.21 Complete and Accurate Disclosure.......................... 11
--------------------------------
Section 3.22 Environmental Matters..................................... 11
---------------------
Section 3.23 Proxy Statement/Prospectus................................ 12
--------------------------
Section 3.24 Securities Matters........................................ 12
------------------
Section 3.25 Reports................................................... 12
-------
Section 3.26 Loan Portfolio of PBE..................................... 13
---------------------
Section 3.27 Investment Portfolio...................................... 13
--------------------
Section 3.28 Regulatory Examinations................................... 13
-----------------------
ARTICLE IV - REPRESENTATIONS AND WARRANTIES OF FFC.......................... 13
-------------------------------------
Section 4.1 Authority................................................. 13
---------
Section 4.2 Organization and Standing................................. 14
-------------------------
Section 4.3 Capitalization............................................ 14
--------------
Section 4.4 Articles of Incorporation and Bylaws...................... 14
------------------------------------
Section 4.5 Subsidiaries.............................................. 14
------------
Section 4.6 Financial Statements...................................... 15
--------------------
Section 4.7 Absence of Undisclosed Liabilities........................ 15
----------------------------------
Section 4.8 Absence of Changes........................................ 15
------------------
Section 4.9 Litigation and Governmental Directives.................... 15
--------------------------------------
Section 4.10 Compliance with Laws; Governmental Authorizations......... 16
-------------------------------------------------
Section 4.11 Complete and Accurate Disclosure.......................... 16
--------------------------------
Section 4.12 Labor Relations........................................... 17
---------------
Section 4.13 Employee Benefits Plans................................... 17
-----------------------
Section 4.14 Environmental Matters..................................... 17
---------------------
Section 4.15 SEC Filings............................................... 17
-----------
Section 4.16 Proxy Statement/Prospectus................................ 17
--------------------------
Section 4.17 Accounting Treatment...................................... 18
--------------------
Section 4.18 Regulatory Approvals...................................... 18
--------------------
ARTICLE V - COVENANTS OF PBE................................................ 18
----------------
Section 5.1 Conduct of Business....................................... 18
-------------------
Section 5.2 Best Efforts.............................................. 20
------------
Section 5.3 Access to Properties and Records.......................... 20
--------------------------------
Section 5.4 Subsequent Financial Statements........................... 20
-------------------------------
Section 5.5 Update Schedules.......................................... 21
----------------
Section 5.6 Notice.................................................... 21
------
</TABLE>
-ii-
<PAGE>
<TABLE>
<S> <C>
Section 5.7 Other Proposals........................................... 21
---------------
Section 5.8 Affiliate Letters......................................... 21
-----------------
Section 5.9 No Purchases or Sales of FFC Common Stock During Price
------------------------------------------------------
Determination Period..................................... 22
--------------------
Section 5.10 Accounting Treatment...................................... 22
--------------------
Section 5.11 Dividends................................................. 22
---------
Section 5.12 Employment Obligations.................................... 23
----------------------
ARTICLE VI - COVENANTS OF FFC............................................... 23
----------------
Section 6.1 Best Efforts.............................................. 23
------------
(a) Applications for Regulatory Approval...................... 23
------------------------------------
(b) Registration Statement.................................... 23
----------------------
(c) State Securities Laws..................................... 24
---------------------
(d) Stock Listing............................................. 24
-------------
(e) PBE Interim Bank.......................................... 24
----------------
(f) Accounting Treatment...................................... 24
--------------------
Section 6.2 Access to Properties and Records.......................... 24
--------------------------------
Section 6.3 Subsequent Financial Statements........................... 24
-------------------------------
Section 6.4 Update Schedules.......................................... 25
----------------
Section 6.5 Notice.................................................... 25
------
Section 6.6 Employment Arrangements................................... 25
-----------------------
Section 6.7 No Purchase or Sales of FFC Common Stock During Price
-----------------------------------------------------
Determination Period..................................... 25
--------------------
Section 6.8 Continuation of PBE's Structure, Name and Directors....... 26
---------------------------------------------------
Section 6.9 Indemnification........................................... 26
---------------
ARTICLE VII - CONDITIONS PRECEDENT.......................................... 28
--------------------
Section 7.1 Common Conditions......................................... 28
-----------------
(a) Stockholder Approval...................................... 28
--------------------
(b) Regulatory Approvals...................................... 28
--------------------
(c) Stock Listing............................................. 28
-------------
(d) Tax Opinion............................................... 28
-----------
(e) Registration Statement.................................... 29
----------------------
(f) No Suits.................................................. 30
--------
Section 7.2 Conditions Precedent to Obligations of FFC................ 30
------------------------------------------
(a) Accuracy of Representations and Warranties................ 30
------------------------------------------
(b) Covenants Performed....................................... 30
-------------------
(c) Opinion of Counsel for PBE................................ 30
--------------------------
(d) Affiliate Agreements...................................... 30
--------------------
</TABLE>
-iii-
<PAGE>
<TABLE>
<S> <C>
(e) Financial Confirmation.................................... 31
----------------------
(f) Accountants' Letter....................................... 31
-------------------
(g) Accounting Treatment...................................... 32
--------------------
(h) Federal and State Securities and Antitrust Laws........... 32
-----------------------------------------------
(i) Dissenting Stockholders................................... 32
-----------------------
(j) Environmental Matters..................................... 32
---------------------
(k) Crossroads Branch Lease................................... 33
-----------------------
(k) Required Notices, Consents and Approvals.................. 33
----------------------------------------
(l) Closing Documents......................................... 33
-----------------
Section 7.3 Conditions Precedent to the Obligations of PBE............ 33
----------------------------------------------
(a) Accuracy of Representations and Warranties................ 33
------------------------------------------
(b) Covenants Performed....................................... 33
-------------------
(c) Opinion of Counsel for FFC................................ 33
--------------------------
(d) Fairness Opinion.......................................... 34
----------------
(e) Financial Confirmation.................................... 34
----------------------
(f) Closing Documents......................................... 34
-----------------
ARTICLE VIII - TERMINATION, AMENDMENT AND WAIVER............................ 35
---------------------------------
Section 8.1 Termination............................................... 35
-----------
(a) Mutual Consent............................................ 35
--------------
(b) Unilateral Action by FFC.................................. 35
------------------------
(c) Unilateral Action By PBE.................................. 35
------------------------
(d) By FFC.................................................... 35
------
Section 8.2 Effect of Termination..................................... 36
---------------------
(a) Effect.................................................... 36
------
(b) Limited Liability......................................... 36
-----------------
(c) Confidentiality........................................... 36
---------------
Section 8.3 Amendment................................................. 36
---------
Section 8.4 Waiver.................................................... 36
------
ARTICLE IX - RIGHTS OF DISSENTING STOCKHOLDERS OF PBE....................... 37
----------------------------------------
Section 9.1 Rights of Dissenting Stockholders of PBE.................. 37
----------------------------------------
ARTICLE X - CLOSING AND EFFECTIVE DATE...................................... 37
--------------------------
Section 10.1 Closing................................................... 37
-------
Section 10.2 Effective Date............................................ 37
--------------
</TABLE>
-iv-
<PAGE>
<TABLE>
<S> <C>
ARTICLE XI NO SURVIVAL OF REPRESENTATIONS AND WARRANTIES.................... 37
---------------------------------------------
Section 11.1 No Survival.............................................. 37
-----------
ARTICLE XII - GENERAL PROVISIONS............................................ 38
------------------
Section 12.1 Expenses................................................. 38
--------
Section 12.2 Other Mergers and Acquisitions........................... 38
------------------------------
Section 12.3 Notices.................................................. 38
-------
Section 12.4 Counterparts............................................. 39
------------
Section 12.5 Governing Law............................................ 39
-------------
Section 12.6 Parties in Interest...................................... 39
-------------------
Section 12.7 Entire Agreement......................................... 39
----------------
</TABLE>
-v-
<PAGE>
INDEX OF SCHEDULES
------------------
<TABLE>
<S> <C>
Schedule 3.1 Required Notices, Consents and Approvals
- ------------
Schedule 3.3 Organization and Standing
- ------------
Schedule 3.7 Undisclosed Liabilities
- ------------
Schedule 3.8 Changes
- ------------
Schedule 3.9 Dividends, Distributions and Stock Purchases
- ------------
Schedule 3.10 Taxes
- -------------
Schedule 3.11 Title to and Condition of Assets
- -------------
Schedule 3.12 Contracts
- -------------
Schedule 3.13 Litigations and Governmental Directives
- -------------
Schedule 3.14 Compliance with Laws; Governmental Authorizations
- -------------
Schedule 3.15 Insurance
- -------------
Schedule 3.16 Financial Institution Bonds
- -------------
Schedule 3.17 Labor Relations and Employment Agreements
- -------------
Schedule 3.18 Employee Benefit Plans
- -------------
Schedule 3.19 Related Party Transactions
- -------------
Schedule 3.20 Finders
- -------------
Schedule 3.22 Environmental Matters
- -------------
Schedule 3.26 Loan Portfolio
- -------------
Schedule 3.27 Investment Portfolio
- -------------
Schedule 4.5 Subsidiaries
- ------------
Schedule 4.7 Undisclosed Liabilities
- ------------
Schedule 4.9 Litigation and Governmental Directives
- ------------
Schedule 4.10 Compliance with Laws; Governmental Authorizations
- -------------
Schedule 4.14 Environmental Matters
- -------------
</TABLE>
<PAGE>
INDEX OF EXHIBITS
-----------------
<TABLE>
<S> <C>
Exhibit A Form of Warrant Agreement
- ---------
Exhibit B Form of Warrant
- ---------
Exhibit C Form of Articles of Merger
- ---------
Exhibit D Form of Opinion of PBE's Counsel
- ---------
Exhibit E Form of Opinion of FFC's Counsel
- ---------
</TABLE>
<PAGE>
AFFILIATION AND MERGER AGREEMENT
--------------------------------
Affiliation and Merger Agreement made as of the 18th day of March, 1997, as
amended as of May 20, 1997 (the "Agreement"), by and between FULTON FINANCIAL
CORPORATION, a Pennsylvania business corporation having its administrative
headquarters at One Penn Square, P. O. Box 4887, Lancaster, Pennsylvania 17604
("FFC"), and THE PEOPLES BANK OF ELKTON, a Maryland bank having its
administrative headquarters at 130 North Street, Elkton, Maryland 21921 ("PBE")
BACKGROUND:
-----------
FFC is a Pennsylvania bank holding company. PBE is a Maryland bank. FFC
wishes to acquire PBE, and PBE wishes to be acquired by FFC. Subject to the
terms and conditions of this Agreement, the foregoing transaction will be
accomplished by means of a merger (the "Merger") in which (i) FFC will organize
a Maryland bank ("PBE Interim Bank") as a wholly-owned subsidiary of FFC and
cause PBE Interim Bank to become a party to this Agreement, (ii) PBE will be
merged with and into PBE Interim Bank, (iii) PBE Interim Bank will survive the
Merger and operate as a wholly-owned subsidiary of FFC under the name "The
Peoples Bank of Elkton", and (iv) all of the outstanding shares of the common
stock of PBE, par value $10.00 per share ("PBE Common Stock"), will be converted
into shares of the common stock of FFC, par value $2.50 per share ("FFC Common
Stock"). Any reference to PBE after the merger of PBE with and into PBE Interim
Bank shall mean the surviving entity of said merger. In connection with the
execution of this Agreement, the parties are to enter into a Warrant Agreement
in the form of Exhibit A attached hereto (the "Warrant Agreement"), which
---------
provides for the delivery by PBE of a warrant in the form of Exhibit B attached
---------
hereto (the "Warrant") entitling FFC to purchase shares of the PBE Common Stock
in certain circumstances.
WITNESSETH:
-----------
NOW, THEREFORE, in consideration of the mutual covenants contained herein and
intending to be legally bound, the parties hereby agree as follows:
<PAGE>
ARTICLE I
ARTICLES OF MERGER
------------------
Section 1.1 Articles of Merger. Subject to the terms and conditions of this
------------------
Agreement, PBE shall merge with and into PBE Interim Bank in accordance with the
Articles of Merger substantially in the form of Exhibit C attached hereto.
---------
ARTICLE II
CONVERSION OF SHARES AND EXCHANGE OF STOCK CERTIFICATES
-------------------------------------------------------
Section 2.1 Conversion of Shares. On the Effective Date (as defined in
--------------------
Section 10.2 herein) the shares of PBE Common Stock then outstanding shall be
converted into shares of FFC Common Stock, as follows:
(a) General: Subject to the provisions of Sections 2.1(b) and
-------
2.1(c) herein, each share of PBE Common Stock issued and outstanding immediately
before the Effective Date shall, on the Effective Date, be converted into and
become, without any action on the part of the holder thereof, 4.158 (such
number, as it may be adjusted under Section 2.1(b) herein, the "Conversion
Ratio") shares of FFC Common Stock and the corresponding number of rights
associated with the Rights Agreement, dated June 20, 1989, between FFC and
Fulton Bank.
(b) Antidilution Provision: In the event that FFC shall at any
----------------------
time before the Effective Date increase or decrease the number of outstanding
shares of FFC Common Stock as a result of a: (i) stock split; (ii) stock
dividend; (iii) reverse stock split; (iv) reclassification; (v)
recapitalization; (vi) exchange of shares; or (vii) similar change in its
capital account, then the Conversion Ratio shall be proportionately adjusted
(calculated to three decimal places), so that each PBE stockholder shall receive
on the Effective Date, in exchange for his shares of PBE Common Stock, the
number of shares of FFC Common Stock as would then have been owned by him if the
Effective Date had occurred before the record date of such event (for example,
if FFC were to declare a ten percent (10%) stock dividend after the date of this
Agreement and if the record date for that stock dividend were to occur before
the Effective Date, the Conversion Ratio would be adjusted from 4.158 shares to
4.5738 shares).
(c) No Fractional Shares: No fractional shares of FFC Common
--------------------
Stock shall be issued in connection with the Merger. In lieu of the issuance of
any fractional share to which he would otherwise be entitled, each former
stockholder of PBE shall receive in cash an amount equal to the fair market
value of his fractional interest, which fair market value shall be determined by
multiplying such fraction by the Closing Market Price (as defined in Section
2.1(d) herein).
2
<PAGE>
(d) Closing Market Price: For purposes of this Agreement, the
--------------------
Closing Market Price shall be the average of the average of the per share
closing bid prices for FFC Common Stock, rounded up to the nearest $.125, for
the ten (10) trading days immediately preceding the date which is two (2)
business days before the Effective Date, as reported on the National Market
System of the National Association of Securities Dealers Automated Quotation
System ("NASDAQ"), the foregoing period of ten (10) trading days being
hereinafter sometimes referred to as the "Price Determination Period." (For
example, if September 30, 1997 were to be the Effective Date, then the Price
Determination Period would be September 15, 16, 17, 18, 19, 22, 23, 24, 25 and
26, 1997.) In the event that NASDAQ shall fail to report a closing bid price for
FFC Common Stock for any trading day during the Price Determination Period, the
closing bid price for that day shall be equal to the average of the closing bid
prices and the average of the closing asked prices as quoted: (i) by F. J.
Morrissey & Company, Inc. and by Ryan, Beck & Co.; or, (ii) in the event that
either or both of these firms are not then making a market in FFC Common Stock,
by two brokerage firms then making a market in FFC Common Stock to be selected
by FFC and approved by PBE.
Section 2.2 Exchange of Stock Certificates. PBE Common Stock certificates
------------------------------
shall be exchanged for FFC Common Stock certificates in accordance with the
following procedures:
(a) Exchange Agent: The transfer agent of FFC, Fulton Bank, shall
--------------
act as exchange agent (the "Exchange Agent") to receive PBE Common Stock
certificates from the holders thereof and to exchange such stock certificates
for FFC Common Stock certificates and (if applicable) to pay cash for fractional
shares of PBE Common Stock pursuant to Section 2.1(c) herein. The Exchange Agent
shall, as soon as practicable but in no event later than five (5) business days,
after the Effective Date, mail to each former stockholder of PBE a notice
specifying the procedures to be followed in surrendering such stockholder's PBE
Common Stock certificates.
(b) Surrender of Certificates: As promptly as possible after
-------------------------
receipt of the Exchange Agent's notice, each former stockholder of PBE shall
surrender his PBE Common Stock certificates to the Exchange Agent; provided,
--------
that if any former stockholder of PBE shall be unable to surrender his PBE
Common Stock certificates due to loss or mutilation thereof, he may make a
constructive surrender by following procedures comparable to those customarily
used by FFC for issuing replacement certificates to FFC stockholders whose FFC
Common Stock certificates have been lost or mutilated. As soon as practicable,
but in no event later than ten (10) business days, following the receipt of a
proper actual or constructive surrender of PBE Common Stock certificates from a
former PBE stockholder, the Exchange Agent shall issue to such stockholder, in
exchange therefor, an FFC Common Stock certificate representing the whole number
of shares of FFC Common Stock into which such stockholder's shares of PBE Common
Stock have been converted in accordance with this Article II, together with
3
<PAGE>
a check in the amount of any cash to which such stockholder is entitled,
pursuant to Section 2.1(c) herein, in lieu of the issuance of a fractional
share.
(c) Dividend Withholding: Dividends, if any, payable by FFC after the
--------------------
Effective Date to any former stockholder of PBE who has not prior to the payment
date surrendered his PBE Common Stock certificates may, at the option of FFC, be
withheld. Any dividends so withheld shall be paid, without interest, to such
former stockholder of PBE upon proper surrender of his PBE Common Stock
certificates.
(d) Failure to Surrender Certificates: All PBE Common Stock
---------------------------------
certificates must be surrendered to the Exchange Agent within two (2) years
after the Effective Date. In the event that any former stockholder of PBE shall
not have properly surrendered his PBE Common Stock certificates within two (2)
years after the Effective Date, the shares of FFC Common Stock that would
otherwise have been issued to him may, at the option of FFC, be sold and the net
proceeds of such sale, together with the cash (if any) to which he is entitled
in lieu of the issuance of a fractional share and any previously accrued
dividends, shall be held by the Exchange Agent in a noninterest bearing account
for his benefit. From and after any such sale, the sole right of such former
stockholder of PBE shall be the right to collect such net proceeds, cash and
accumulated dividends. Subject to all applicable laws of escheat, such net
proceeds, cash and accumulated dividends shall be paid to such former
stockholder of PBE, without interest, upon proper surrender of his PBE Common
Stock certificates.
(e) Expenses: All costs and expenses associated with the foregoing
--------
surrender and exchange procedure shall be borne by FFC.
Section 2.3 Reservation of Shares. FFC agrees that (i) prior to the
---------------------
Effective Date it will take appropriate action to reserve a sufficient number of
authorized but unissued shares of FFC Common Stock to be issued in accordance
with this Agreement, and (ii) on the Effective Date, FFC will deposit with the
Exchange Agent, for the benefit of the holders of shares of PBE Common Stock,
for exchange in accordance with this Agreement, certificates representing shares
of FFC Common Stock issuable pursuant to Section 2.1(a) herein and cash for
fractional shares pursuant to Section 2.1(c) herein.
Section 2.4 Taking Necessary Action. FFC and PBE shall take all such actions
-----------------------
as may be reasonably necessary or appropriate in order to effectuate the
transactions contemplated hereby including, without limitation, providing
information necessary for preparation of any filings needed to obtain the
regulatory approvals required to consummate the Merger. In case at any time
after the Effective Date any further action is necessary or desirable to carry
out the purposes of this Agreement and to vest FFC with full title to all
properties, assets, rights, approvals, immunities and franchises of
4
<PAGE>
PBE, the officers and directors of PBE, at the expense of FFC, shall take all
such necessary action.
Section 2.5 Press Releases. FFC and PBE agree that all press releases or
--------------
other public communications relating to this Agreement or the transactions
contemplated hereby will require consultation among FFC and PBE, unless counsel
has advised any such party that such release or other public communication must
immediately be issued and the issuing party has not been able, despite its good
faith efforts, to effect such consultation.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF PBE
-------------------------------------
PBE represents and warrants to FFC, as of the date of this Agreement as
follows:
Section 3.1 Authority. The execution and delivery of this Agreement, the
---------
Warrant Agreement and the Warrant and the performance of the transactions
contemplated herein and therein have been authorized by the Board of Directors
of PBE and, except for the approval of this Agreement by its stockholders, PBE
has taken all corporate action necessary on its part to authorize this
Agreement, the Warrant Agreement and the Warrant and the performance of the
transactions contemplated herein and therein. This Agreement, the Warrant
Agreement and the Warrant have been duly executed and delivered by PBE and,
assuming due authorization, execution and delivery by FFC, constitute valid and
binding obligations of PBE. The execution, delivery and performance of this
Agreement, the Warrant Agreement and the Warrant will not constitute a violation
or breach of or default under (i) the Articles of Incorporation or Bylaws of
PBE, (ii) any statute, rule, regulation, order, decree or directive of any
governmental authority or court applicable to PBE, subject to the receipt of all
required governmental approvals or (iii) any Material. Contract (as such term
is defined in Section 3.12 herein) to which PBE is a party or by which PBE or
any of its properties are bound, subject to PBE obtaining or making any required
notice, consent or approval as set forth on Schedule 3.1..
------------
Section 3.2 Subsidiaries. PBE owns no subsidiaries, directly or indirectly.
------------
Section 3.3 Organization and Standing. As set forth on Schedule 3.3, PBE is
------------------------- ------------
a bank that is duly organized, validly existing and in good standing under the
laws of the State of Maryland. PBE is an insured bank under the provisions of
the Federal Deposit Insurance Act, as amended (the "FDI Act"), and is not a
member of the Federal Reserve System. PBE has full power and lawful authority
to own and hold its properties and to carry on its business as presently
conducted.
5
<PAGE>
Section 3.4 Capitalization. The authorized capital of PBE consists
--------------
exclusively of 500,000 shares of PBE Common Stock, of which 230,596 shares are
validly issued, outstanding, fully paid and non-assessable, and no shares are
held as treasury shares. In addition, 45,888 (or approximately 19.9% of the
outstanding) shares of PBE Common Stock will be reserved for issuance upon
exercise of the Warrant. Except for the Warrant, there are and will be no
outstanding obligations, options or rights of any kind entitling other persons
to acquire shares of PBE Common Stock and there are no outstanding securities or
other instruments of any kind that are convertible into shares of PBE Common
Stock.
Section 3.5 Articles of Incorporation, Bylaws and Minute Books. The copies
--------------------------------------------------
of the Articles of Incorporation and Bylaws of PBE that have been delivered to
FFC are true, correct and complete. Except as previously disclosed to FFC in
writing, the minute books of PBE that have been made available to FFC for
inspection are true, correct and complete in all respects and accurately record
the actions taken by the Boards of Directors and stockholders of PBE at the
meetings documented in such minutes.
Section 3.6 Financial Statements. PBE has delivered to FFC the following
--------------------
financial statements: Balance Sheets for PBE at December 31, 1996 and 1995 and
Statements of Income, Statements of Changes in Stockholders' Equity, and
Statements of Cash Flows of PBE for the years ended December 31, 1996 and 1995
certified by Stegman & Company (the aforementioned Balance Sheet as of December
31, 1996 being hereinafter referred to as the "PBE Balance Sheet"). Each of the
foregoing financial statements fairly presents the financial condition, assets
and liabilities, and results of operations of PBE at its respective date and for
the respective periods then ended and has been prepared in accordance with
generally accepted accounting principles consistently applied, except as
otherwise noted in a footnote thereto.
Section 3.7 Absence of Undisclosed Liabilities. Except as disclosed in
----------------------------------
Schedule 3.7, or as reflected, noted or adequately reserved against in the PBE
- ------------
Balance Sheet or disclosed in the Notes thereto, at December 31, 1996, PBE had
no liabilities (whether accrued, absolute, contingent or otherwise) which were
required to be reflected, noted or reserved against in the PBE Balance Sheet
under generally accepted accounting principles or which were in any case or in
the aggregate material. Except as disclosed in Schedule 3.7, PBE has not
------------
incurred, since December 31, 1996, any such liability, other than liabilities of
the same nature as those set forth in the PBE Balance Sheet, all of which have
been reasonably incurred in the Ordinary Course of Business. For purposes of
this Agreement, the term "Ordinary Course of Business" shall mean the ordinary
course of business consistent with PBE's customary business practices.
Section 3.8 Absence of Changes. Since December 31, 1996 to the date hereof,
------------------
PBE has conducted its business in the Ordinary Course of Business and, except as
disclosed in Schedule 3.8, PBE has not undergone any changes in its condition
------------
(financial
6
<PAGE>
or otherwise), assets, liabilities, business or operations, other than changes
in the Ordinary Course of Business, which have not been, in the aggregate,
materially adverse as to PBE.
Section 3.9 Dividends, Distributions and Stock Purchases. Except as
--------------------------------------------
disclosed in Schedule 3.9, since January 1, 1997 to the date hereof, PBE has not
------------
declared, set aside, made or paid any dividend or other distribution in respect
of the PBE Common Stock, or purchased, issued or sold any shares of PBE Common
Stock.
Section 3.10 Taxes. PBE has filed all federal, state, county, municipal and
-----
foreign tax returns, reports and declarations which are required to be filed by
it as of December 31, 1996. Except as disclosed in Schedule 3.10: (i) PBE has
-------------
paid all taxes, penalties and interest which have become due pursuant thereto or
which became due pursuant to federal, state, county, municipal or foreign tax
laws applicable to the periods covered by the foregoing tax returns, (ii) PBE
has received no notice of deficiency or assessment of additional taxes, and no
tax audits are in process; and (iii) the Internal Revenue Service (the "IRS")
has not commenced or given notice of an intention to commence any examination or
audit of the federal income tax returns of PBE for any year through and
including the year ended December 31, 1995. Except as disclosed in Schedule
--------
3.10, PBE has not granted any waiver of any statute of limitations or otherwise
- ----
agreed to any extension of a period for the assessment of any federal, state,
county, municipal or foreign income tax. Except as disclosed in Schedule 3.10,
-------------
the accruals and reserves reflected in the PBE Balance Sheet are adequate to
cover all taxes (including interest and penalties, if any, thereon) that are
payable or accrued as a result of PBE's operations for all periods prior to the
date of such Balance Sheet.
Section 3.11 Title to and Condition of Assets. Except as disclosed in
--------------------------------
Schedule 3.11, PBE has good and marketable title to all material real and
- -------------
personal properties and assets reflected in the PBE Balance Sheet or acquired
subsequent to December 31, 1996 (other than property and assets disposed of in
the Ordinary Course of Business), free and clear of all liens or encumbrances of
any kind whatsoever; provided, however, that the representations and warranties
-------- -------
contained in this sentence do not cover liens or encumbrances that: (i) are
reflected in the PBE Balance Sheet or in Schedule 3.11; (ii) represent liens of
-------------
current taxes and special assessments not yet due or which, if due, may be paid
without penalty, or which are being contested in good faith by appropriate
proceedings; and (iii) represent such imperfections of title, liens,
encumbrances, zoning requirements and easements, if any, as are not substantial
in character, amount or extent and do not materially detract from the value, or
interfere with the present use, of the properties and assets subject thereto.
The material structures and other improvements to real estate, furniture,
fixtures and equipment reflected in the PBE Balance Sheet or acquired subsequent
to December 31, 1996: (A) are in good operating condition and repair (ordinary
wear and tear excepted), and (B) comply in all material respects with all
applicable laws, ordinances and regulations, including without limitation
7
<PAGE>
all building codes, zoning ordinances and other similar laws, except where any
noncompliance would not materially detract from the value, or interfere with the
present use, of such structures, improvements, furniture, fixtures and
equipment. PBE owns or has the right to use all real and personal properties
and assets that are material to the conduct of its business as presently
conducted.
Section 3.12 Contracts. Each written or oral contract entered into by PBE
---------
(other than contracts with customers reasonably entered into by PBE in the
Ordinary Course of Business) which involves aggregate payments or receipts in
excess of $50,000 per year, including without limitation every employment
contract, employee benefit plan, agreement, lease, license, indenture, mortgage
and other commitment (other than commitments to make loans) to which PBE is a
party or by which PBE or any of its properties may be bound (collectively
referred to herein as "Material Contracts") is identified in Schedule 3.12.
-------------
Except as disclosed in Schedule 3.12, all Material Contracts are valid and in
-------------
full force and effect, and all parties thereto (to PBE's knowledge in the case
of third parties to such Material Contracts) have in all material respects
performed all obligations required to be performed by them to date and are not
in default in any material respect. Schedule 3.12 identifies all Material
-------------
Contracts which require the consent or approval of third parties to the
execution and delivery of this Agreement or to the consummation of the
transactions contemplated herein.
Section 3.13 Litigation and Governmental Directives. Except as disclosed in
--------------------------------------
Schedule 3.13, (i) there is no litigation, investigation or proceeding pending,
- -------------
or to the knowledge of PBE threatened, that involves PBE, or any of its
properties and that, if determined adversely, would materially and adversely
affect the condition (financial or otherwise), assets, liabilities, business,
operations or future prospects of PBE; (ii) there are no outstanding orders,
writs, injunctions, judgments, decrees, regulations, directives, consent
agreements or memoranda of understanding issued by any federal, state or local
court or governmental authority or arbitration tribunal issued against or with
the consent of PBE that materially and adversely affect the condition (financial
or otherwise), assets, liabilities, business, operations or future prospects of
PBE, or that in any manner restrict the right of PBE to carry on its business as
presently conducted taken as a whole; and (iii) the executive officers of PBE
are not aware of any fact or condition presently existing that might give rise
to any litigation, investigation or proceeding which, if determined adversely to
PBE, would materially and adversely affect the condition (financial or
otherwise), assets, liabilities, business, operations or future prospects of PBE
or would restrict in any manner the right of PBE to carry on its business as
presently conducted. All litigation (except for bankruptcy proceedings in which
PBE has filed proofs of claim) in which PBE is involved as a plaintiff (other
than routine collection and foreclosure suits initiated in the Ordinary Course
of Business in which the amount sought to be recovered is less than $25,000) is
identified in Schedule 3.13. For the purposes of this Agreement, references to
-------------
the future prospects of a party shall be
8
<PAGE>
deemed to refer to the prospects of such party assuming its business is carried
out in the future in a manner consistent with past practices.
Section 3.14 Compliance with Laws; Governmental Authorizations. Except as
-------------------------------------------------
disclosed in Schedule 3.14 or where noncompliance would not have a material and
-------------
adverse effect upon the condition (financial or otherwise), assets, liabilities,
business, operations or future prospects of PBE: (i) to the knowledge of PBE,
PBE is in compliance with all statutes, laws, ordinances, rules, regulations,
judgments, orders, decrees, directives, consent agreements, memoranda of
understanding, permits, concessions, grants, franchises, licenses, and other
governmental authorizations or approvals applicable to PBE or to any of its
properties; and (ii) all permits, concessions, grants, franchises, licenses and
other governmental authorizations and approvals necessary for the conduct of the
business of PBE as presently conducted have been duly obtained and are in full
force and effect, and there are no proceedings pending or, to the knowledge of
PBE, threatened which may result in the revocation, cancellation, suspension or
materially adverse modification of any thereof.
Section 3.15 Insurance. As of the date hereof, all policies of insurance
---------
relating to PBE's operations (except for title insurance policies), including
without limitation all financial institutions bonds, held by or on behalf of PBE
is listed in Schedule 3.15. All such policies of insurance are in full force
-------------
and effect, and, as of the date hereof, no notices of cancellation have been
received in connection therewith.
Section 3.16 Financial Institutions Bonds. Since January, 1990, PBE has
----------------------------
continuously maintained in full force and effect one or more financial
institutions bonds listed in Schedule 3.16 insuring PBE against acts of
-------------
dishonesty by each of its employees. As of the date hereof, no claim has been
made under any such bond and PBE is not aware of any fact or condition presently
existing which might form the basis of a claim under any such bond. PBE has no
reason to believe that its present financial institutions bond or bonds will not
be renewed by its carrier on substantially the same terms as those now in
effect.
Section 3.17 Labor Relations and Employment Agreements. PBE is not a party
-----------------------------------------
to or bound by any collective bargaining agreement. PBE enjoys a good working
relationship with its employees, and there are no labor disputes pending, or to
the knowledge of PBE threatened, that might materially and adversely affect the
condition (financial or otherwise), assets, liabilities, business or operations
of PBE. Except as disclosed in Schedule 3.17, PBE has no employment contract,
-------------
severance agreement, deferred compensation agreement, consulting agreement or
similar obligation (an "Employment Obligation") with any director, officer,
employee, agent or consultant, and all such persons are serving at the will and
pleasure of PBE. Except as disclosed in Schedule 3.17, as of the Effective Date
-------------
(as defined in Section 10.2 herein), PBE will not
9
<PAGE>
have any liability for employee termination rights arising out of any Employment
Obligation.
Section 3.18 Employee Benefit Plans. All employee benefit plans, contracts
----------------------
or arrangements to which PBE is a party or by which PBE is bound, including
without limitation all pension, retirement, deferred compensation, incentive,
bonus, profit sharing, stock purchase, stock option, life insurance, death or
survivor's benefit, health insurance, sickness, disability, medical, surgical,
hospital, severance, layoff or vacation plans, contracts or arrangements, are
identified in Schedule 3.18. PBE's retirement savings plan, a contributory
-------------
defined contribution plan (the "PBE 401(k) Plan"), is exempt from tax under
Sections 401 and 501 of the Internal Revenue Code of 1986, as amended (the
"Code"), and has been maintained and operated in material compliance with all
applicable provisions of the Code and the Employee Retirement Income Security
Act of 1974, as amended ("ERISA"). Except as disclosed in Schedule 3.18, no
-------------
"prohibited transaction" (as such term is defined in the Code or in ERISA) has
occurred in respect of the PBE 401(k) Plan or any other employee benefit plan,
including, without limitation, PBE's nonqualified deferred compensation plan,
nonqualified salary continuation agreement and severance pay plan (all "employee
benefit pension plans" and all "employee welfare benefit plans", as those terms
are defined in ERISA, of PBE being collectively referred to herein as "PBE
Benefit Plans" and individually as a "PBE Benefit Plan"), to which PBE is a
party or by which PBE is bound. There have been no material breaches of
fiduciary duty by any fiduciary under or with respect to the PBE 401(k) Plan or
any other PBE Benefit Plan, and no claim is pending or, to the knowledge of PBE,
threatened with respect to any PBE Benefit Plan other than claims for benefits
made in the Ordinary Course of Business. PBE has not incurred any material
liability for any tax imposed by Section 4975 of the Code or for any penalty
imposed by the Code or by ERISA with respect to the PBE 401(k) Plan or any other
PBE Benefit Plan. There has not been any audit of any PBE Benefit Plan by the
Department of Labor, the IRS or the PBGC since January 1, 1990.
Section 3.19 Related Party Transactions. Except as disclosed in Schedule
-------------------------- --------
3.19, PBE has no contract, extension of credit, business arrangement or other
- ----
relationship of any kind with any of the following persons: (i) any executive
officer or director (including any person who has served in such capacity since
January 1, 1995) of PBE; (ii) any stockholder owning five percent (5%) or more
of the outstanding PBE Common Stock; and (iii) any "associate" (as defined in
Rule 405 of the SEC) of the foregoing persons or any business in which any of
the foregoing persons is an officer, director, employee or five percent (5%) or
greater equity owner. Each such contract or extension of credit disclosed in
Schedule 3.19, except as otherwise specifically described therein, has been made
- -------------
in the Ordinary Course of Business on substantially the same terms, including
interest rates and collateral, as those prevailing at the time for comparable
arms' length transactions with other persons that do not involve more than a
normal risk of collectability or present other unfavorable features.
10
<PAGE>
Section 3.20 No Finder. Except as disclosed in Schedule 3.20, PBE has not
--------- -------------
paid or become obligated to pay any fee or commission of any kind whatsoever to
any broker, finder, advisor or other intermediary for, on account of or in
connection with the transactions contemplated in this Agreement.
Section 3.21 Complete and Accurate Disclosure. Neither this Agreement
--------------------------------
(insofar as it relates to PBE, PBE Common Stock and the involvement of PBE in
the transactions contemplated hereby) nor any financial statement, schedule
(including without limitation its Schedules to this Agreement), certificate, or
other statement or document delivered by PBE to FFC in connection herewith
contains any statement which, at the time and in light of the circumstances
under which it is made, is false or misleading with respect to any material fact
or omits to state any material fact necessary to make the statements contained
herein or therein not false or misleading. In particular, without limiting the
generality of the foregoing sentence, the information provided and the
representations made by PBE to FFC in connection with the Registration Statement
(as defined in Section 6.1(b) herein), both at the time such information and
representations are provided and made and at the time of the effectiveness of
the Registration Statement, will be true and accurate in all material respects
and will not contain any false or misleading statement with respect to any
material fact or omit to state any material fact required to be stated therein
or necessary in order (i) to make the statements made therein not false or
misleading, or (ii) to correct any statement contained in an earlier
communication with respect to such information or representations which has
become false or misleading.
Section 3.22 Environmental Matters. Except as disclosed in Schedule 3.22,
--------------------- -------------
PBE has no knowledge that any environmental contaminant, pollutant, toxic or
hazardous waste or other similar substance has been generated, used, stored,
processed, disposed of or discharged onto any of the real estate now or
previously owned or acquired (including without limitation any real estate
acquired by means of foreclosure or exercise of any other creditor's right) or
leased by PBE. In particular, without limiting the generality of the foregoing
sentence, except as disclosed in Schedule 3.22, PBE has no knowledge that: (i)
-------------
any materials containing asbestos have been used or incorporated in any building
or other structure or improvement located on any of the real estate now or
previously owned or acquired (including without limitation any real estate
acquired by means of foreclosure or exercise of any other creditor's right) or
leased by PBE; (ii) any electrical transformers, fluorescent light fixtures with
ballasts or other equipment containing PCB's are or have been located on any of
the real estate now or previously owned or acquired (including without
limitation any real estate acquired by means of foreclosure or exercise of any
other creditor's right) or leased by PBE; or (iii) any underground storage tanks
for the storage of gasoline, petroleum products or other toxic or hazardous
wastes or similar substances are or have ever been located on any of the real
estate now or previously owned or acquired (including without limitation any
real
11
<PAGE>
estate acquired by means of foreclosure or exercise of any other creditor's
right) or leased by PBE.
Section 3.23 Proxy Statement/Prospectus. At the time the Proxy Statement/
--------------------------
Prospectus (as defined in Section 6.1(b) herein) is mailed to the stockholders
of PBE and at all times subsequent to such mailing, up to and including the
Effective Date, the Proxy Statement/Prospectus (including any pre- and post-
effective amendments and supplements thereto), with respect to all information
relating to PBE, PBE Common Stock and all actions taken and statements made by
PBE in connection with the transactions contemplated herein (except for
information provided by FFC to PBE) will: (i) comply in all material respects
with applicable provisions of the Securities Act of 1933, as amended (the "1933
Act"), and the Securities Exchange Act of 1934, as amended (the "1934 Act"), and
the applicable rules and regulations of the Securities and Exchange Commission
(the "SEC"); and (ii) not contain any statement which, at the time and in light
of the circumstances under which it is made, is false or misleading with respect
to any material fact, or omits to state any material fact that is required to be
stated therein or necessary in order (A) to make the statements therein not
false or misleading, or (B) to correct any statement in an earlier communication
with respect to the Proxy Statement/Prospectus which has become false or
misleading.
Section 3.24 Securities Matters. The PBE Common Stock is traded in the over-
------------------
the-counter market and is not registered with the FDIC under the 1934 Act. On
the date of effectiveness (in the case of any offering circular) or on the date
of mailing (in the case of any proxy statement), no offering circular or proxy
statement contained any untrue statement of a material fact or omitted to state
any material fact required to be stated therein or necessary in order to make
the statements made therein, in light of the circumstances under which they were
made, not misleading.
Section 3.25 Reports. PBE has filed all material reports, registrations and
-------
statements that are required to be filed with the FDIC, the Maryland State Bank
Commissioner and any other applicable federal, state or local governmental or
regulatory authorities and such reports, registrations and statements referred
to in this Section 3.25 were, as of their respective dates, in compliance in all
material respects with all of the statutes, rules and regulations enforced or
promulgated by the governmental or regulatory authority with which they were
filed; provided, however, that the failure to file any such report,
registration, or statement or the failure of any report, registration or
statement to comply with the applicable regulatory standard shall not be deemed
to be a breach of the foregoing representation unless such failure has or may
have a material adverse impact on PBE. PBE has furnished FFC with, or made
available to FFC, copies of all such filings made in the last three fiscal years
and in the period from January 1, 1996 through the date of this Agreement.
12
<PAGE>
Section 3.26 Loan Portfolio of PBE. Attached hereto as Schedule 3.26 is a
--------------------- -------------
list of (w) all outstanding commercial relationships, i.e. commercial loans,
commercial loan commitments and commercial letters of credit, of PBE with an
aggregate principal amount in excess of $250,000, (x) all loans of PBE
classified by PBE or any regulatory authority as "Substandard," "Doubtful" or
"Loss," (y) all commercial and mortgage loans of PBE classified as "non-
accrual," and (z) all commercial loans of PBE classified as "in substance
foreclosed."
Section 3.27 Investment Portfolio. Attached hereto as Schedule 3.27 is a
-------------------- -------------
list of all securities held by PBE for investment, showing the principal amount,
book value and market value of each security as of a recent date, and of all
short-term investments held by it as of December 31, 1996. These securities are
free and clear of all liens, pledges and encumbrances, except as shown on
Schedule 3.27.
- -------------
Section 3.28 Regulatory Examinations.
-----------------------
(a) Except as shown on Schedule 3.28, within the past five years,
-------------
except for normal examinations conducted by a regulatory agency in the regular
course of the business of PBE, no regulatory agency has initiated any proceeding
or investigation into the business or operations of PBE. PBE has received no
objection from any regulatory agency to PBE's response to any violation,
criticism or exception with respect to any report or statement relating to any
examinations of PBE which would have a materially adverse effect on PBE.
(b) PBE will not be required to divest any assets currently held by it
or discontinue any activity currently conducted as a result of the Federal
Deposit Insurance Corporation Improvement Act of 1991, any regulations
promulgated thereunder, or otherwise which would have a materially adverse
effect on PBE.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF FFC
-------------------------------------
FFC represents and warrants to PBE, as of the date of this Agreement, as
follows:
Section 4.1 Authority. The execution and delivery of this Agreement and the
---------
consummation of the transactions contemplated herein have been authorized by the
Board of Directors of FFC, and no other corporate action on the part of FFC is
necessary to authorize this Agreement or the consummation by FFC of the
transactions contemplated herein. This Agreement has been duly executed and
delivered by FFC and, assuming due authorization, execution and delivery by PBE,
constitutes a valid and binding obligation of FFC. The execution, delivery and
consummation of this Agreement will not constitute a violation or breach of or
default under (i) the Articles of Incorporation
13
<PAGE>
or Bylaws of FFC, (ii) any statute, rule, regulation, order, decree or directive
of any governmental authority or court applicable to FFC, subject to the receipt
of all required government approvals, or (iii) any agreement, contract,
memorandum of understanding, indenture or other instrument to which FFC is a
party or by which FFC or any of its properties are bound.
Section 4.2 Organization and Standing. FFC is a business corporation that is
-------------------------
duly organized, validly existing and in good standing under the laws of the
Commonwealth of Pennsylvania. FFC is a registered bank holding company under
the Bank Holding Company Act of 1956, as amended (the "BHC Act"), and has full
power and lawful authority to own and hold its properties and to carry on its
present business.
Section 4.3 Capitalization. The authorized capital of FFC consists
--------------
exclusively of 100,000,000 shares of FFC Common Stock and 10,000,000 shares of
preferred stock without par value (the "FFC Preferred Stock"). As of March 13,
1997, there were validly issued, outstanding, fully paid and non-assessable
35,973,617 shares of FFC Common Stock as of the date of this Agreement, and no
shares were held as treasury shares. No shares of FFC Preferred Stock have been
issued as of the date of this Agreement, and FFC has no present intention to
issue any shares of FFC Preferred Stock. As of March 13, 1997, there were no
outstanding obligations, options or rights of any kind entitling other persons
to acquire shares of FFC Common Stock or shares of FFC Preferred Stock and there
were no outstanding securities or other instruments of any kind convertible into
shares of FFC Common Stock or into shares of FFC Preferred Stock, except as
follows: (i) 748,806 shares of FFC Common Stock were issuable upon the exercise
of outstanding stock options granted under the FFC Incentive Stock Option Plan
and the FFC Employee Stock Purchase Plan and (ii) there are outstanding
35,973,617 Rights representing the right under certain circumstances to purchase
shares of FFC Common Stock pursuant to the terms of a Shareholder Rights
Agreement, dated June 20, 1989, entered into between FFC and Fulton Bank and
(iii) shares of FFC Common Stock reserved from time to time for issuance
pursuant to FFC's Employee Stock Purchase and Dividend Reinvestment Plans.
Section 4.4 Articles of Incorporation and Bylaws. The copies of the Articles
------------------------------------
of Incorporation, as amended, and of the Bylaws, as amended, of FFC that have
been delivered to PBE are true, correct and complete.
Section 4.5 Subsidiaries. Schedule 4.5 contains a list of all subsidiaries
------------ ------------
("Subsidiaries") which FFC owns, directly or indirectly. Except as otherwise
disclosed on Schedule 4.5: (i) FFC owns, directly or indirectly, all of the
------------
outstanding shares of capital stock of each Subsidiary, and (ii) as of the date
of this Agreement: (A) there are no outstanding obligations, options or rights
of any kind entitling persons (other than FFC or any Subsidiary) to acquire
shares of capital stock of any Subsidiary, and (B) there are no outstanding
securities or other instruments of any kind held by persons (other than
14
<PAGE>
FFC or any Subsidiary) that are convertible into shares of capital stock of any
Subsidiary. Each Subsidiary is duly organized, validly existing and in good
standing under the laws of the jurisdiction pursuant to which it is
incorporated. Each Subsidiary has full power and lawful authority to own and
hold its properties and to carry on its business as presently conducted. Each
Subsidiary which is a banking institution is an insured bank under the
provisions of the FDI Act.
Section 4.6 Financial Statements. FFC has delivered to PBE the following
--------------------
financial statements: Balance Sheets, Statements of Income, Statements of
Stockholders' Equity, and Statements of Cash Flows for the years ended December
31, 1996, 1995 and 1994, certified by Arthur Andersen LLP and set forth in the
Annual Report to the stockholders of FFC for the year ended December 31, 1996
(the Balance Sheet as of December 31, 1996 being hereinafter referred to as the
"FFC Balance Sheet"). Each of the foregoing financial statements fairly
presents the consolidated financial position, assets, liabilities and results of
operations of FFC at its respective date and for the respective periods then
ended and has been prepared in accordance with generally accepted accounting
principles consistently applied, except as otherwise noted in a footnote
thereto.
Section 4.7 Absence of Undisclosed Liabilities. Except as disclosed in
----------------------------------
Schedule 4.7 or as reflected, noted or adequately reserved against in the FFC
- ------------
Balance Sheet and disclosed in the Notes thereto, at December 31, 1996 FFC had
no material liabilities (whether accrued, absolute, contingent or otherwise)
which are required to be reflected, noted or reserved against therein under
generally accepted accounting principles or which are in any case or in the
aggregate material. Except as described in Schedule 4.7, since December 31,
------------
1996 FFC has not incurred any such liability other than liabilities of the same
nature as those set forth in the FFC Balance Sheet, all of which have been
reasonably incurred in the ordinary course of business.
Section 4.8 Absence of Changes. Since December 31, 1996, other than the
------------------
acquisition of The Woodstown National Bank & Trust Company effected on February
28, 1997, FFC has conducted its business in the Ordinary Course of Business and
has not undergone any changes in its condition (financial or otherwise), assets,
liabilities, business or operations, other than changes in the Ordinary Course
of Business, which have not been, in the aggregate, materially adverse as to
FFC.
Section 4.9 Litigation and Governmental Directives. Except as disclosed in
--------------------------------------
Schedule 4.9: (i) there is no litigation, investigation or proceeding pending,
- ------------
or to the knowledge of FFC threatened, that involves FFC or its properties and
that, if determined adversely to FFC, would materially and adversely affect the
condition (financial or otherwise), assets, liabilities, business, operations or
future prospects of FFC; (ii) there are no outstanding orders, writs,
injunctions, judgments, decrees, regulations, directives, consent agreements or
memoranda of understanding issued by any federal, state or
15
<PAGE>
local court or governmental authority or of any arbitration tribunal against FFC
which materially and adversely affect the condition (financial or otherwise),
assets, liabilities, business, operations or future prospects of FFC or restrict
in any manner the right of FFC to carry on its business as presently conducted;
and (iii) the executive officers of FFC are not aware of any fact or condition
presently existing that might give rise to any litigation, investigation or
proceeding which, if determined adversely to FFC, would materially and adversely
affect the condition (financial or otherwise), assets, liabilities, business,
operations or future prospects of FFC or restrict in any manner the right of FFC
to carry on its business as presently conducted.
Section 4.10 Compliance with Laws; Governmental Authorizations. Except as
-------------------------------------------------
disclosed in Schedule 4.10 or where noncompliance would not have a material and
-------------
adverse effect upon the condition (financial or otherwise), assets, liabilities,
business, operations or future prospects of FFC: (i) FFC and each of its
Subsidiaries are in compliance with all statutes, laws, ordinances, rules,
regulations, judgments, orders, decrees, directives, consent agreements,
memoranda of understanding, permits, concessions, grants, franchises, licenses,
and other governmental authorizations or approvals applicable to their
respective operations and properties; and (ii) all permits, concessions, grants,
franchises, licenses and other governmental authorizations and approvals
necessary for the conduct of the respective businesses of FFC and each of its
Subsidiaries as presently conducted have been duly obtained and are in full
force and effect, and there are not proceedings pending or, to the knowledge of
FFC, threatened which may result in the revocation, cancellation, suspension or
materially adverse modification of any thereof.
Section 4.11 Complete and Accurate Disclosure. Neither this Agreement
--------------------------------
(insofar as it relates to FFC, FFC Common Stock, and the involvement of FFC in
the transactions contemplated hereby) nor any financial statement, schedule
(including, without limitation, its Schedules to this Agreement), certificate or
other statement or document delivered by FFC to PBE in connection herewith
contains any statement which, at the time and under the circumstances under
which it is made, is false or misleading with respect to any material fact or
omits to state any material fact necessary to make the statements contained
herein or therein not false or misleading. In particular, without limiting the
generality of the foregoing sentence, the information provided and the
representations made by FFC to PBE in connection with the Registration Statement
(as defined in Section 6.1(b)), both at the time such information and
representations are provided and made and at the time of the Closing, will be
true and accurate in all material respects and will not contain any false or
misleading statement with respect to any material fact or omit to state any
material fact required to be stated therein or necessary in order (i) to make
the statements made not false or misleading, or (ii) to correct any statement
contained in an earlier communication with respect to such information or
representations which has become false or misleading.
16
<PAGE>
Section 4.12 Labor Relations. Neither FFC nor any of its Subsidiaries is a
---------------
party to or bound by any collective bargaining agreement. FFC and each of its
Subsidiaries enjoy good working relationships with their employees, and there
are no labor disputes pending, or to the knowledge of FFC or any Subsidiary
threatened, that might materially and adversely affect the condition (financial
or otherwise), assets, liabilities, business or operations of FFC.
Section 4.13 Employee Benefits Plans. FFC's contributory profit-sharing
-----------------------
plan, defined benefits pension plan and 401(k) plan (hereinafter collectively
referred to as the "FFC Pension Plans") are exempt from tax under Sections 401
and 501 of the Code, have been maintained and operated in compliance with all
applicable provisions of the Code and ERISA, are not subject to any accumulated
funding deficiency within the meaning of ERISA and the regulations promulgated
thereunder, and do not have any outstanding liability to the PBGC. No
"prohibited transaction" or "reportable event" (as such terms are defined in the
Code or ERISA) has occurred with respect to the FFC Pension Plans or any other
FFC employee benefit plan (each hereinafter called an "FFC Benefit Plan").
There have been no breaches of fiduciary duty by any fiduciary under or with
respect to the FFC Pension Plans or any other FFC Benefit Plan. FFC has not
incurred any liability for any tax imposed by Section 4975 of the Code or for
any penalty imposed by the Code or by ERISA with respect to the FFC Pension
Plans or any other FFC Benefit Plan.
Section 4.14 Environmental Matters. Except as disclosed in Schedule 4.14 or
--------------------- -------------
as reflected, noted or adequately reserved against in the FFC Balance Sheet, FFC
has no knowledge of any material liability relating to any environmental
contaminant, pollutant, toxic or hazardous waste or other similar substance that
has been used, generated, stored, processed, disposed of or discharged onto any
of the real estate now or previously owned or acquired (including without
limitation real estate acquired by means of foreclosure or other exercise of any
creditor's right) or leased by FFC and which is required to be reflected, noted
or adequately reserved against in FFC's consolidated financial statements under
generally accepted accounting principles.
Section 4.15 SEC Filings. No registration statement, offering circular,
-----------
proxy statement, schedule or report filed and not withdrawn, since December 31,
1991, by FFC with the SEC under the 1933 Act or the 1934 Act, on the date of
effectiveness (in the case of any registration statement or offering circular)
or on the date of filing (in the case of any report or schedule) or on the date
of mailing (in the case of any proxy statement), contained any untrue statement
of a material fact or omitted to state any material fact required to be stated
therein or necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading.
Section 4.16 Proxy Statement/Prospectus. At the time the Proxy Statement/
--------------------------
Prospectus (as defined in Section 6.1(b)) is mailed to the stockholders of PBE
and at all
17
<PAGE>
times subsequent to such mailing, up to and including the Effective Date, the
Proxy Statement/Prospectus (including any pre- and post-effective amendments and
supplements thereto), with respect to all information relating to FFC, the FFC
Common Stock, and actions taken and statements made by FFC in connection with
the transactions contemplated herein (other than information provided by PBE to
FFC), will: (i) comply in all material respects with applicable provisions of
the 1933 Act and 1934 Act and the applicable rules and regulations of the SEC
thereunder; and (ii) not contain any statement which, at the time and in light
of the circumstances under which it is made, is false or misleading with respect
to any material fact, or omits to state any material fact that is required to be
stated therein or necessary in order (A) to make the statements therein not
false or misleading, or (B) to correct any statement in an earlier communication
with respect to the Proxy Statement/Prospectus which has become false or
misleading.
Section 4.17 Accounting Treatment. To the best of FFC's knowledge after
--------------------
reasonable investigation and consultation with its advisors, and subject to any
factors beyond FFC's control, the Merger will qualify for pooling-of-interests
accounting treatment.
Section 4.18 Regulatory Approvals. FFC is not aware of any reason why any of
--------------------
the required regulatory approvals to be obtained in connection with the Merger
should not be granted by such regulatory authorities or why such regulatory
approvals should be conditioned on any requirement which would be a significant
impediment to FFC's ability to carry on its business.
ARTICLE V
COVENANTS OF PBE
----------------
From the date of this Agreement until the Effective Date, PBE covenants and
agrees to do the following:
Section 5.1 Conduct of Business. Except as otherwise consented to by FFC in
-------------------
writing, which consent will not be unreasonably withheld, PBE shall: (i) use
all reasonable efforts to carry on its business in, and only in, the Ordinary
Course of Business; (ii) to the extent consistent with prudent business
judgment, use all reasonable efforts to preserve its present business
organization, to retain the services of its present officers and employees, and
to maintain its relationships with customers, suppliers and others having
business dealings with PBE; (iii) maintain all of its structures, equipment and
other real property and tangible personal property in good repair, order and
condition, except for ordinary wear and tear and damage by unavoidable casualty;
(iv) use all reasonable efforts to preserve or collect all material claims and
causes of action belonging to PBE; (v) keep in full force and effect all
insurance policies now carried by
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PBE; (vi) perform in all material respects each of its obligations under all
Material Contracts (as defined in Section 3.12 herein) to which PBE is a party
or by which PBE may be bound or which relate to or affect its properties, assets
and business; (vii) maintain its books of account and other records in the
Ordinary Course of Business; (viii) comply in all material respects with all
statutes, laws, ordinances, rules and regulations, decrees, orders, consent
agreements, memoranda of understanding and other federal, state, and local
governmental directives applicable to PBE and to the conduct of its business;
(ix) not amend PBE's Articles of Incorporation or Bylaws; (x) not enter into or
assume any Material Contract, incur any material liability or obligation, or
make any material commitment, except in the Ordinary Course of Business; (xi)
not make any material acquisition or disposition of any properties or assets or
subject any of its properties or assets to any material lien, claim, charge, or
encumbrance of any kind whatsoever; (xii) not knowingly take or permit to be
taken any action which would cause any representation or warranty to be
materially inaccurate as of the date of such action or constitute a material
breach of any covenant set forth in this Agreement; (xiii) except as permitted
in Section 5.11 herein, not declare, set aside or pay any dividend or make any
other distribution in respect of PBE Common Stock; (xiv) not authorize,
purchase, redeem, issue or sell (or grant options or rights to purchase or sell)
any shares of PBE Common Stock or any other equity or debt securities of PBE
other than the Warrant; (xv) not increase the rate of compensation of, pay a
bonus or severance compensation to, establish or amend any PBE Benefit Plan
except as required by law (as defined in Section 3.18 herein) for, or enter into
or amend any Employment Obligation (as defined in Section 3.17 herein) with, any
officer, director, employee or consultant of PBE, except that PBE may grant
reasonable salary increases and bonuses to its officers and employees in the
Ordinary Course of Business to the extent consistent with its past practice;
(xvi) not enter into any related party transaction of the kind contemplated in
Section 3.19 herein except in the Ordinary Course of Business consistent with
past practice (as disclosed on Schedule 3.19); (xvii) in determining the
additions to loan loss reserves and the loan write-offs, writedowns and other
adjustments that reasonably should be made by PBE during the fiscal year ending
December 31, 1997, PBE shall consult with FFC and shall act in accordance with
generally accepted accounting principles and PBE's customary business practices;
(xviii) file with appropriate federal, state, local and other governmental
agencies all tax returns and other material reports required to be filed, pay in
full or make adequate provisions for the payment of all taxes, interest,
penalties, assessments or deficiencies shown to be due on tax returns or by any
taxing authorities and report all information on such returns truthfully,
accurately and completely; (xix) not renew any existing contract for services,
goods, equipment or the like or enter into, amend in any material respect or
terminate any contract or agreement (including without limitation any settlement
agreement with respect to litigation) that is or may reasonably be expected to
have a material adverse effect on PBE except in the Ordinary Course of Business
consistent with past practice (provided that FFC shall not unreasonably withhold
its consent to such transactions); (xx) not make any capital expenditures other
than in the Ordinary Course of Business or as necessary to maintain
19
<PAGE>
existing assets in good repair; (xxi) not make application for the opening or
closing of any, or open or close any, branches or automated banking
facility,except with respect to the establishment of an automated banking
facility at Union Hospital; (xxii) not make any equity investment or commitment
to make such an investment in real estate or in any real estate development
project, other than in connection with foreclosures, settlements in lieu of
foreclosure or troubled loan or debt restructuring in the Ordinary Course of
Business consistent with customary banking practice; (xxiii) not make purchases
of securities for its investment portfolio without prior consultation with FFC;
(xxiv) not extend or amend PBE's lease relating to its "Crossroads Shopping
Center" branch office (the "Crossroads Branch Lease") without FFC's prior
written consent; or (xxv) not take any other action similar to the foregoing
which would have the effect of frustrating the purposes of this Agreement or the
Merger or cause the Merger not to qualify for pooling-of-interests accounting
treatment or as a tax-free reorganization under Section 368 of the Code.
Section 5.2 Best Efforts. PBE shall cooperate with FFC and shall use its
------------
best efforts to do or cause to be done all things necessary or appropriate on
its part in order to fulfill the conditions precedent set forth in Article VII
of this Agreement and to consummate this Agreement. In particular, without
limiting the generality of the foregoing sentence, PBE shall: (i) cooperate
with FFC in the preparation of all required applications for regulatory approval
of the transactions contemplated by this Agreement and in the preparation of the
Registration Statement (as defined in Section 6.1(b)); (ii) call a meeting of
its stockholders and take, in good faith, all actions which are necessary or
appropriate on its part in order to secure the approval of this Agreement by its
stockholders at that meeting; and (iii) cooperate with FFC in making PBE's
employees reasonably available for training by FFC at PBE's facilities prior to
the Effective Date, to the extent that such training is deemed reasonably
necessary by FFC to ensure that PBE's facilities will be properly operated in
accordance with FFC's policies after the Merger.
Section 5.3 Access to Properties and Records. PBE shall give to FFC and its
--------------------------------
authorized employees and representatives (including without limitation its
counsel, accountants, economic and environmental consultants and other
designated representatives) such access during normal business hours to all
properties, books, contracts, documents and records of PBE as FFC may reasonably
request (other than information with respect to the deliberations of PBE
concerning this Agreement, the Merger and the transactions contemplated hereby),
subject to the obligation of FFC and its authorized employees and
representatives to maintain the confidentiality of all nonpublic information
concerning PBE obtained by reason of such access and subject to applicable law.
Section 5.4 Subsequent Financial Statements. Between the date of signing of
-------------------------------
this Agreement and the Effective Date, PBE shall promptly prepare and deliver to
FFC
20
<PAGE>
as soon as practicable all internal monthly and quarterly financial statements,
all quarterly and annual reports to stockholders and all reports to regulatory
authorities prepared by or for PBE (which additional financial statements and
reports are hereinafter collectively referred to as the "Additional PBE
Financial Statements"). The representations and warranties set forth in
Sections 3.6, 3.7 and 3.8 shall apply to the Additional PBE Financial
Statements.
Section 5.5 Update Schedules. PBE shall promptly disclose to FFC in writing
----------------
any change, addition, deletion or other modification to the information set
forth in its Schedules hereto; provided, however, that any such updates to the
-------- -------
Schedules shall only be required on a monthly basis except with respect to
matters which represent material changes to the Schedules.
Section 5.6 Notice. PBE shall promptly notify FFC in writing of any material
------
actions, claims, investigations, proceedings or other developments which, if
pending or in existence on the date of this Agreement, would have been required
to be disclosed to FFC in order to ensure the accuracy of the representations
and warranties set forth in this Agreement or which otherwise could materially
and adversely affect the condition (financial or otherwise), assets, liabilities
business operations or future prospects of PBE or restrict in any manner its
ability to carry on its business as presently conducted.
Section 5.7 Other Proposals. PBE shall not, nor shall it permit any of its
---------------
officers, directors, employees, agents, consultants or other representatives to:
(i) solicit, initiate or encourage any proposal for a merger or other
acquisition of PBE, or any material portion of its properties or assets, with or
by any person other than FFC, or (ii) cooperate with, or furnish any nonpublic
information concerning PBE to, any person in connection with such a proposal (an
"Acquisition Proposal"); provided, however, that the obligations of PBE and its
directors and other representatives under this Section 5.7 are subject to the
limitation that the Board of Directors shall be free to take such action as the
Board of Directors determines, in good faith and after consultation with outside
counsel, that is not legally inconsistent with its fiduciary duty. PBE will
notify FFC immediately if any discussions or negotiations are sought to be
initiated, any inquiry or proposal is made, or any such information is
requested, with respect to an Acquisition Proposal or potential Acquisition
Proposal or if any Acquisition Proposal is received or indicated to be
forthcoming.
Section 5.8 Affiliate Letters. PBE shall deliver or cause to be delivered to
-----------------
FFC, at or before the Closing, a letter from each of the executive officers and
directors of PBE (and shall use its best efforts to obtain and deliver such a
letter from each stockholder of PBE) who may be deemed to be an "affiliate" (as
that term is defined for purposes of Rules 145 and 405 promulgated by the SEC
under the 1933 Act) of PBE, in form and substance satisfactory to FFC, under the
terms of which each such officer, director or stockholder acknowledges and
agrees to abide by all limitations imposed by the 1933
21
<PAGE>
Act and by all rules, regulations and releases promulgated thereunder by the SEC
with respect to the sale or other disposition of the shares of FFC Common Stock
to be received by such person pursuant to this Agreement.
Section 5.9 No Purchases or Sales of FFC Common Stock During Price
------------------------------------------------------
Determination Period. PBE shall not, and shall use its best efforts to ensure
- --------------------
that its executive officers and directors do not, and shall use its best efforts
to ensure that each stockholder of PBE who may be deemed an "affiliate" (as
defined in SEC Rules 145 and 405) of PBE does not, purchase or sell on NASDAQ,
or submit a bid to purchase or an offer to sell on NASDAQ, directly or
indirectly, any shares of FFC Common Stock or any options, rights or other
securities convertible into shares of FFC Common Stock during the Price
Determination Period.
Section 5.10 Accounting Treatment. PBE acknowledges that FFC presently
--------------------
intends to treat the business combination contemplated by this Agreement as a
"pooling-of-interests" for financial reporting purposes. PBE shall not take
(and shall use sits best efforts not to permit any of the directors, officers,
employees, stockholders, agents, consultants or other representatives of PBE to
take) any action that would preclude FFC from treating such business combination
as a "pooling-of-interests" for financial reporting purposes.
Section 5.11 Dividends. PBE shall not declare or pay a cash dividend on the
---------
PBE Common Stock; provided, however, that PBE may declare and pay a dividend of
up to $.90 per share of PBE Common Stock on each of (i) June 15, 1997; (ii)
September 15, 1997, provided that the Effective Date does not occur (or is not
expected to occur) on or before the record date for the dividend on the FFC
Common Stock scheduled to be paid on October 15, 1997; and (iii) December 15,
1997, provided that the Effective Date does not occur (or is not expected to
occur) on or before the record date for the dividend on the FFC Common Stock
scheduled to be paid on January 15, 1998, provided further if the customary
payment date for the next regular cash dividend payable after the Effective Date
on the FFC Common Stock which is eligible to be received by the former holders
of PBE is more than ninety (90) days after the payment date of the last regular
cash dividend paid or to be paid on the PBE Common Stock prior to the Effective
Date (such number of days over ninety (90) days being the "Dividend Lag
Period"), then PBE may declare and set aside immediately prior to the Effective
Date, and may pay at a date it may select in its discretion, a special pro-rata
dividend (the "Special Pro-Rata Dividend") pursuant hereto (any such Special
Pro-Rata Dividend shall be payable in cash, and shall not exceed an amount per
share which is the product of (i) the amount of the dividend permitted to be
paid by PBE pursuant to this paragraph, times (ii) a fraction, the numerator of
which the Dividend Lag Period and the denominator of which is ninety (90) days).
Thus, for example, if the Merger is to consummated on August 1, 1997 and the
dividend payment dates of PBE and FFC are October 15, 1997 and November 15,
1997, respectively, the Dividend Lag Period would be 31 days and thus
22
<PAGE>
PBE would be entitled to declare and pay, immediately prior to the Effective
Date, a Special Pro-Rata Dividend of $.31 per share (its regular quarterly
dividend ($.90) multiplied by .344 (31 days/90 days)).
Section 5.12 Employment Obligations. Prior to the Effective Date, without
----------------------
the prior written consent of FFC, PBE shall not modify the terms of the
Employment Obligations (as defined in Section 3.17) and PBE shall not create any
new Employment Obligation.
ARTICLE VI
COVENANTS OF FFC
----------------
From the date of this Agreement until the Effective Date, or until such later
date as may be expressly stipulated in any Section of this Article VI, FFC
covenants and agrees to do the following:
Section 6.1 Best Efforts. FFC shall cooperate with PBE and shall use its
------------
best efforts to do or cause to be done all things necessary or appropriate on
its part in order to fulfill the conditions precedent set forth in Article VII
of this Agreement and to consummate this Agreement. In particular, without
limiting the generality of the foregoing sentence, FFC agrees to do the
following:
(a) Applications for Regulatory Approval: FFC shall promptly
------------------------------------
prepare and file within forty-five (45) days of the date hereof (subject to the
timely cooperation by PBE and its counsel in connection with such applications),
with the cooperation and assistance of (and after review by) PBE and its counsel
and accountants, all required applications for regulatory approval of the
transactions contemplated by this Agreement, including without limitation an
application for approval under the BHC Act, the FDI Act and the Maryland
Financial Institutions Code, as required;
(b) Registration Statement: FFC shall promptly prepare, with the
----------------------
cooperation and assistance of (and after review by) PBE and its counsel and
accountants, and file with the SEC a registration statement (the "Registration
Statement") and a proxy statement and prospectus which is prepared as a part
thereof (the "Proxy Statement/Prospectus") for the purpose of registering the
shares of FFC Common Stock to be issued to stockholders of PBE, and the
soliciting of the proxies of PBE's stockholders in favor of the Merger, under
the provisions of this Agreement. FFC may rely upon all information provided to
it by PBE in this connection and FFC shall not be liable for any untrue
statement of a material fact or any omission to state a material fact in the
Registration Statement, or in the Proxy Statement/Prospectus, if such statement
is made by FFC in reliance upon any information provided to FFC by PBE or by any
of
23
<PAGE>
its officers, agents or representatives. PBE shall not be liable for any untrue
statement of material fact or any omission to state a material fact in the
Registration Statement or the Proxy Statement/Prospectus if such statement is
made by PBE in reliance upon any information provided to PBE by FFC or by any of
its officers, agents or representatives;
(c) State Securities Laws: FFC, with the cooperation and
---------------------
assistance of PBE and its counsel and accountants, shall promptly take all such
actions as may be necessary or appropriate in order to comply with all
applicable securities laws of any state having jurisdiction over the
transactions contemplated by this Agreement;
(d) Stock Listing: FFC shall promptly take all such actions as
-------------
may be necessary or appropriate in order to list the shares of FFC Common Stock
to be issued in the Merger on NASDAQ;
(e) PBE Interim Bank. FFC shall organize PBE Interim Bank, cause
----------------
PBE Interim Bank to be a party to this Agreement and approve this Agreement as
Interim's Shareholder; and
(f) Accounting Treatment. FFC shall take no action which would
--------------------
have the effect of causing the Merger not to qualify for pooling-of-interests
accounting treatment or as a tax-free reorganization under Section 368 of the
Code.
Section 6.2 Access to Properties and Records. FFC shall give to PBE and to
--------------------------------
its authorized employees and representatives (including without limitation PBE's
counsel, accountants, economic and environmental consultants and other
designated representatives) such access during normal business hours to all
properties, books, contracts, documents and records of FFC as PBE may reasonably
request (other than information with respect to the deliberations of FFC
concerning this Agreement, the Merger and the transactions contemplated hereby
or any matter referenced by subparagraph (i) of Section 12.2 herein), subject to
the obligation of PBE and its authorized employees and representatives to
maintain the confidentiality of all nonpublic information concerning FFC
obtained by reason of such access.
Section 6.3 Subsequent Financial Statements. Between the date of signing of
-------------------------------
this Agreement and the Effective Date, FFC shall promptly prepare and deliver to
PBE as soon as practicable each Quarterly Report to FFC's stockholders and any
Annual Report to FFC's stockholders normally prepared by FFC. The
representations and warranties set forth in Sections 4.5, 4.6 and 4.7 herein
shall apply to the financial statements (hereinafter collectively referred to as
the "Additional FFC Financial Statements") set forth in the foregoing Quarterly
Reports and any Annual Report to FFC's stockholders.
24
<PAGE>
Section 6.4 Update Schedules. FFC shall promptly disclose to PBE in writing
----------------
any change, addition, deletion or other modification to the information set
forth in its Schedules to this Agreement; provided, however, that any such
-------- -------
updates to the Schedules shall only be required on a monthly basis except with
respect to matters which represent material changes to the Schedules.
Section 6.5 Notice. FFC shall promptly notify PBE in writing of any actions,
------
claims, investigations or other developments which, if pending or in existence
on the date of this Agreement, would have been required to be disclosed to PBE
in order to ensure the accuracy of the representations and warranties set forth
in this Agreement or which otherwise could materially and adversely affect the
condition (financial or otherwise), assets, liabilities, business, operations or
future prospects of FFC or restrict in any manner the right of FFC to carry on
its business as presently conducted.
Section 6.6 Employment Arrangements.
-----------------------
(a) From and after the Effective Date, FFC shall cause PBE: (i) to
honor each of the Employment Obligations (as defined in Section 3.17 herein),
and (ii) to honor PBE's obligations under the PBE Benefit Plans.
(b) On and after the Effective Date for a period of at least three
(3) years, FFC shall cause PBE to (i) pay compensation to each person who was
employed by PBE as of the Effective Date and who continues to be employed by PBE
on or after the Effective Date, that is at least equal to the aggregate
compensation that such person was receiving from PBE prior to the Effective Date
(unless there is a material change in the duties and responsibilities of such
employee), (ii) provide employee benefits, including under the PBE Benefit
Plans, to each such person who is a full-time employee, on and after the
Effective Date, that are substantially equivalent in the aggregate to the
employee benefits that such person was receiving as a full-time employee from
PBE prior to the Effective Date, and (iii) provide employee benefits to each
such person who is a part-time employee, on or after the Effective Date, that
are the same as the employee benefits that are being received at the applicable
time by part-time employees of other banking Subsidiaries owned by FFC.
Section 6.7 No Purchase or Sales of FFC Common Stock During Price
-----------------------------------------------------
Determination Period. Neither FFC nor any Subsidiary of FFC, nor any executive
- --------------------
officer or director of FFC or any Subsidiary of FFC, nor any shareholder of FFC
who may be deemed to be an "affiliate" (as that term is defined for purposes of
Rules 145 and 405 promulgated by the SEC under the 1933 Act) of FFC, shall
purchase or sell on NASDAQ, or submit a bid to purchase or an offer to sell on
NASDAQ, directly or indirectly, any shares of FFC Common Stock or any options,
rights or other securities convertible into shares of FFC Common Stock during
the Price Determination Period; provided, however, that FFC may purchase shares
-------- -------
of FFC Common Stock in the
25
<PAGE>
ordinary course of business during the Price Determination Period pursuant to
FFC's Benefit Plans or FFC's Dividend Reinvestment Plan.
Section 6.8 Continuation of PBE's Structure, Name and Directors.
---------------------------------------------------
(a) For a period of five (5) years after the Effective Date, FFC
shall (subject to the right of FFC and the PBE Continuing Directors to terminate
such obligations under this Section 6.8(a) under subsections (b) and (c) below)
(i) preserve the business structure of PBE as a Maryland bank; (ii) preserve the
present name of PBE; and (iii) continue in office the present directors of PBE
who indicate their desire to serve (the "PBE Continuing Directors"), provided,
--------
that (A) each non-employee PBE Continuing Director shall continue to receive
director's fees from PBE on the same basis as prior to the Merger, i.e. a
quarterly stipend of $1,250 and meeting fees of $100 per Board of Directors
meeting and $50 per committee meeting (provided that FFC may direct PBE to
reduce the frequency of such meetings) and shall continue to receive such other
incidental benefits as he was receiving from PBE prior to the Effective Date
(such benefits being previously disclosed to FFC) and (B) each PBE Continuing
Director shall be subject to FFC's mandatory retirement rules for directors.
(b) FFC shall have the right to terminate its obligations under
subsection (a) of this Section 6.8 as a result of (i) regulatory considerations,
(ii) safe and sound banking practices, (iii) the exercise of their fiduciary
duties by FFC's directors; (iv) the failure of PBE to achieve budget goals
established for FFC's banking subsidiaries in any fiscal year in which FFC
achieves such goals on a consolidated basis (provided that PBE shall be deemed
to have achieved its budget goals if its actual results are within ten percent
(10%) of its budget goals); or (v) FFC's acquisition of a financial institution
located in Maryland.
(c) Notwithstanding anything herein to the contrary, the PBE
Continuing Directors, in their exercise of their fiduciary duty as to the best
interests of PBE and FFC, may, by a majority vote of such directors, modify or
waive any or all of the foregoing provisions in subsection (a) of this Section
6.8.
Section 6.9 Indemnification.
---------------
(a) From and after the Effective Date of the Merger, PBE and any
successor of PBE shall, and FFC shall cause PBE and any successor to, indemnify,
defend and hold harmless each person who is now, or has been at any time prior
to the date hereof, or who becomes prior to the Effective Date of the Merger, an
officer, employee or director of PBE (the "Indemnified Parties") against all
losses, claims, damages, costs, expenses (including reasonable attorneys' fees),
liabilities or judgments or amounts that are paid in settlement (which
settlement shall require the prior written consent of FFC and PBE, which consent
shall not be unreasonably withheld) or in
26
<PAGE>
connection with any claim, action, suit, proceeding or investigation (a "Claim")
in which an Indemnified Party is, or is threatened to be made, a party or a
witness based in whole or in part out of the fact that such person is or was a
director, officer or employee of PBE if such Claim pertains to any matter of
fact arising, existing or occurring prior to the Effective Date (including,
without limitation, the Merger and other transactions contemplated by this
Agreement) regardless of whether such Claim is asserted or claimed prior to, at,
or after the Effective Date (the "Indemnified Liabilities") to the full extent
permitted under applicable law as to the date hereof or amended prior to the
Effective Date and under the Articles of Incorporation or Bylaws of PBE as in
effect as of the date hereof (and PBE shall pay expenses in advance of the full
disposition of any such action or proceeding to each of the Indemnified Parties
to the full extent permitted by applicable law and PBE's Articles of
Incorporation and Bylaws). Any Indemnified Party wishing to claim
indemnification under this provision, upon learning of any claim, shall notify
PBE and FFC (but the failure to so notify PBE and FFC shall not relieve PBE from
any liability which PBE may have under this section except to the extent PBE is
materially prejudiced thereby). In the defense of any action covered by this
Section 6.9, FFC and PBE shall have the right to direct the defense of such
action and retain counsel of its choice; provided, however, that,
notwithstanding the foregoing, the Indemnified Parties as a group may retain a
single law firm to represent them with respect to each matter under this section
if there is, under applicable standards of professional conduct, a conflict on
any significant issue between the positions of PBE and the Indemnified Parties
(the Indemnified Parties may also retain more than one law firm if there is,
under applicable standards of professional conduct, a conflict of any
significant issues between the positions of two or more Indemnified Parties).
Under no circumstances shall FFC have an obligation to advance funds to satisfy
an obligation of PBE or any successor to PBE under this Section 6.9.
(b) FFC shall use its reasonable efforts (and PBE shall cooperate in
these efforts) to obtain "tail" coverage relating to PBE's existing directors
and officers liability insurance policy (provided that FFC may substitute
therefor policies of at least the same coverage and amounts containing terms and
conditions which are substantially no less advantageous) with respect to claims
arising from facts or circumstances which occur prior to the Effective Date and
covering persons who are covered by such insurance immediately prior to the
Effective Date.
(c) From and after the Effective Date, the directors, officers and
employees of PBE who become directors, officers or employees of FFC or any of
its subsidiaries, (i) except for the indemnification rights set forth in
subparagraph (a) above, shall have indemnification rights with prospective
application only and (ii) shall be covered on a prospective basis by FFC's
directors and officers liability insurance policy on a basis at least equal to
the coverage provided to persons in similar positions at FFC. The prospective
indemnification rights shall consist of such rights to which directors, officers
or employees of FFC are entitled under the provisions of the Articles of
27
<PAGE>
Incorporation of FFC, as in effect from time to time after the Effective Date,
as applicable and provisions of applicable law as in effect from time to time
after the Effective Date.
(d) The obligations of FFC provided under this Section 6.9 are
intended to benefit, and be enforceable against, FFC directly by the Indemnified
Parties, and shall be binding on all respective successors of FFC.
ARTICLE VII
CONDITIONS PRECEDENT
--------------------
Section 7.1 Common Conditions. The obligations of the parties to consummate
-----------------
this Agreement shall be subject to the satisfaction of each of the following
common conditions prior to or as of the Closing, except to the extent that any
such condition shall have been waived in accordance with the provisions of
Section 8.4 herein:
(a) Stockholder Approval: This Agreement shall have been duly
--------------------
authorized, approved and adopted by the stockholders of PBE.
(b) Regulatory Approvals: The approval of each federal and state
--------------------
regulatory authority having jurisdiction over the transactions contemplated by
this Agreement, including without limitation, the Federal Reserve Board, the
FDIC, and the Maryland State Bank Commissioner, shall have been obtained and all
applicable waiting and notice periods shall have expired, subject to no terms or
conditions which would (i) require or could reasonably be expected to require
(A) any divestiture by FFC of a portion of the business of FFC, or any
subsidiary of FFC or (B) any divestiture by PBE of a portion of its business
which FFC in its good faith judgment believes will have a significant adverse
impact on the business or prospects of PBE or (ii) impose any condition upon
FFC, or any of its subsidiaries, which in FFC's good faith judgment (x) would be
materially burdensome to FFC and its subsidiaries taken as a whole or (y) would
significantly increase the costs incurred or that will be incurred by FFC as a
result of consummating the Merger.
(c) Stock Listing. The shares of FFC Common Stock to be issued
-------------
in the Merger shall have been authorized for listing on NASDAQ.
(d) Tax Opinion. Each of FFC and PBE shall have received an
-----------
opinion of FFC's counsel, Barley, Snyder, Senft & Cohen, LLP, reasonably
acceptable to FFC and PBE, addressed to FFC and PBE, with respect to federal tax
laws or regulations, to the effect that:
(1) The Merger will constitute a reorganization within the
meaning of Section 368(a)(1)(A) and (a)(2)(D) of the Code;
28
<PAGE>
(2) No gain or loss will be recognized by FFC, PBE Interim Bank or
PBE by reason of the Merger;
(3) The bases of the assets of PBE immediately after the Merger
will be the same as the bases of such assets immediately prior to the Merger;
(4) The holding period of the assets of PBE immediately after the
Merger will include the period during which such assets were held by PBE prior
to the Merger;
(5) A holder of PBE Common Stock who receives shares of FFC Common
Stock in exchange for his PBE Common Stock pursuant to the reorganization
(including fractional shares of FFC Common Stock deemed issued as described
below) will not recognize any gain or loss upon the exchange;
(6) A holder of PBE Common Stock who receives cash in lieu of a
fractional share of FFC Common Stock will be treated as if he received a
fractional share of FFC Common Stock pursuant to the reorganization and FFC then
redeemed such fractional share for the cash. The holder of PBE Common Stock
will recognize capital gain or loss on the constructive redemption of the
fractional share in an amount equal to the difference between the cash received
and the adjusted basis of the fractional share;
(7) The tax basis of the FFC Common Stock to be received by the
stockholders of PBE pursuant to the terms of this Agreement will be equal to the
tax basis of the PBE Common Stock surrendered in exchange therefor, decreased by
the amount of cash received and increased by the amount of any gain (and by the
amount of any dividend income) recognized on the exchange; and
(8) The holding period of the shares of FFC Common Stock to be
received by the stockholders of PBE will include the period during which they
held the shares of PBE Common Stock surrendered, provided the shares of PBE
Common Stock are held as a capital asset on the date of the exchange.
(e) Registration Statement: The Registration Statement (as defined in
----------------------
Section 6.1(b), including any amendments thereto) shall have been declared
effective by the SEC; regulatory clearance for the offering contemplated by the
Registration Statement (the "Offering") shall have been received from each state
regulatory authority having jurisdiction over the Offering; and no stop order
shall have been issued and no proceedings shall have been instituted or
threatened by any federal or state regulatory authority to suspend or terminate
the effectiveness of the Registration Statement or the Offering.
29
<PAGE>
(f) No Suits: No action, suit or proceeding shall be pending or
--------
threatened before any federal, state or local court or governmental authority or
before any arbitration tribunal which seeks to modify, enjoin or prohibit or
otherwise adversely and materially affect the transactions contemplated by this
Agreement.
Section 7.2 Conditions Precedent to Obligations of FFC. The obligations of
------------------------------------------
FFC to consummate this Agreement shall be subject to the satisfaction of each of
the following conditions prior to or as of the Closing, except to the extent
that any such condition shall have been waived by FFC in accordance with the
provisions of Section 8.4 herein:
(a) Accuracy of Representations and Warranties: All of the
------------------------------------------
representations and warranties of PBE as set forth in this Agreement, all of the
information contained in the Schedules hereto and all PBE Closing Documents (as
defined in Section 7.2(l)) shall be true and correct in all material respects as
of the Closing as if made on such date (or on the date to which it relates in
the case of any representation or warranty which expressly relates to an earlier
date); provided, that, without limiting the generality of the foregoing clause,
--------
a "material" deviation from the accuracy of PBE's representations and warranties
shall be deemed to exist for purposes of this Section 7.2(a) if, as of the
Closing, FFC shall have discovered information not previously disclosed in PBE's
Schedules or in the PBE Balance Sheet indicating that PBE has incurred or will
incur costs, expenses, losses and/or liabilities which would have a material
adverse impact on PBE's financial condition or operating results.
(b) Covenants Performed: PBE shall have performed or complied in
-------------------
all material respects with each of the covenants required by this Agreement to
be performed or complied with by it.
(c) Opinion of Counsel for PBE: FFC shall have received an
--------------------------
opinion, dated the Effective Date, from Housley Kantarian & Bronstein, P.C.,
counsel to PBE, in substantially the form of Exhibit D hereto. In rendering any
---------
such opinion, such counsel may require and, to the extent they deem necessary or
appropriate may rely upon, opinions of other counsel and upon representations
made in certificates of officers of PBE, FFC, affiliates of the foregoing, and
others.
(d) Affiliate Agreements. Stockholders of PBE who are or will be
--------------------
affiliates of PBE or FFC for the purposes of Accounting Series Release No. 135
and the 1933 Act shall have entered into agreements with FFC, in form and
substance satisfactory to FFC, reasonably necessary to assure (i) the ability
of FFC to use pooling-of-interests accounting for the Merger; and (ii)
compliance with Rule 145 under the 1933 Act.
30
<PAGE>
(e) Financial Confirmation: FFC (together with its accountants, if
----------------------
the advice of such accountants is deemed necessary or desirable by FFC) shall
have established to its reasonable satisfaction that, since December 31, 1996,
there shall not have been any material and adverse change in the condition
(financial or otherwise), assets, liabilities, business or operations or future
prospects of PBE. In particular, without limiting the generality of the
foregoing sentence, the Additional PBE Financial Statements (as defined in
Section 5.4) shall indicate that the consolidated financial condition, assets,
liabilities and results of operations of PBE as of the respective dates reported
therein do not vary adversely in any material respect from the consolidated
financial condition, assets, liabilities and results of operations presented in
the PBE Balance Sheet. For purposes of this Section 7.2(e), a material and
adverse change shall mean an event, change, or occurrence which, individually or
together with any other event, change, or occurrence, has a material adverse
impact on (i) the financial position, business, results of operations or future
prospects of PBE or (ii) the ability of PBE to perform its obligations under
this Agreement, provided that "material and adverse change" shall not be deemed
to include the impact of (a) changes in banking and similar laws of general
applicability or interpretations thereof by court of governmental authorities,
(b) changes in GAAP or regulatory accounting principles generally applicable to
banks and their holding companies, (c) actions or omissions of PBE taken with
the prior written consent of FFC in contemplation of the transactions
contemplated hereby, (d) changes in economic conditions generally affecting
financial institutions including changes in the general level of interest rates,
and (e) the direct effects of compliance with this Agreement on the operating
performance of PBE, including expenses incurred by PBE in consummating the
transactions contemplated by the Agreement (subject to disclosure herein or
FFC's prior written approval, such approval not to be unreasonably withheld, of
such expenses).
(f) Accountants' Letter. At its option, FFC shall have received a
-------------------
"comfort" letter from the independent certified public accountants for PBE,
dated (i) the effective date of the Registration Statement and (ii) the
Effective Date, in each case substantially to the effect that:
(1) it is a firm of independent public accounts with respect to
PBE and its subsidiaries within the meaning of the 1933 Act and the rules and
regulations of the SEC thereunder;
(2) in its opinion the audited financial statements of PBE
examined by it and included in the Registration Statement comply as to form in
all material respects with the applicable requirements of the 1933 Act and the
applicable published rules and regulations of the SEC thereunder with respect to
registration statements on the form employed; and
31
<PAGE>
(3) on the basis of specified procedures (which do not constitute
an examination in accordance with generally accepted audit standards),
consisting of a reading of the unaudited financial statements, if any, of PBE
included in such Registration Statement and of the latest available unaudited
financial statements of PBE, inquiries of officers responsible for financial and
accounting matters of PBE and a reading of the minutes of meetings of
stockholders and the Board of Directors of PBE, nothing has come to its
attention which causes it to believe: (i) that the financial statements, if any,
of PBE included in such Registration Statement do not comply in all material
respects with the applicable accounting requirements of the 1933 Act and the
published rules and regulations thereunder; and (ii) that any such unaudited
financial statements of PBE from which unaudited quarterly financial information
set forth in such Registration Statement has been derived, are not fairly
presented in conformity with generally accepted accounting principles applied on
a basis consistent with that of the audited financial statements.
(g) Accounting Treatment: FFC and its accountants shall have
--------------------
established to their satisfaction that, as of the Closing, the transactions
contemplated by this Agreement can be accounted for as a "pooling-of-interests"
for financial reporting purposes.
(h) Federal and State Securities and Antitrust Laws: FFC and its
-----------------------------------------------
counsel shall have determined to their satisfaction that, as of the Closing, all
applicable securities and antitrust laws of the federal government and of any
state government having jurisdiction over the transactions contemplated by this
Agreement shall have been complied with.
(i) Dissenting Stockholders: Dissenters' rights shall have been
-----------------------
exercised with respect to less than 10% of the outstanding shares of PBE Common
Stock.
(j) Environmental Matters: No environmental problem of the kind
---------------------
contemplated in Section 3.22 and not disclosed in Schedule 3.22 shall have been
-------------
discovered which would, or which potentially could, materially and adversely
affect the condition (financial or otherwise), assets, liabilities, business,
operations or future prospects of PBE, provided, that for purposes of
--------
determining the materiality of an undisclosed environmental problem or problems,
the definition of "material" shall be governed by the proviso to Section 7.2(a)
of this Agreement.
(k) Crossroads Branch Lease: PBE shall have amended the Crossroads
-----------------------
Branch Lease to the reasonable satisfaction of FFC.
32
<PAGE>
(l) Required Notices, Consents and Approvals: PBE shall have
----------------------------------------
received any material required notice, consent or approval as contemplated by
Section 3.1 herein.
(m) Closing Documents: PBE shall have delivered to FFC: (i) a
-----------------
certificate signed by PBE's President and Secretary (or other officers
reasonably acceptable to FFC) verifying that, to the best of their knowledge
after reasonable investigation, all of the representations and warranties of PBE
set forth in this Agreement are true and correct in all material respects as of
the Closing and that PBE has performed in all material respects each of the
covenants required to be performed by it under this Agreement; (ii) all consents
and authorizations of landlords and other persons that are necessary to permit
this Agreement to be consummated without violation of any lease or other
agreement to which PBE is a party or by which it or any of its properties are
bound; and (iii) such other certificates and documents as FFC and its counsel
may reasonably request (all of the foregoing certificates and other documents
being herein referred to as the "PBE Closing Documents").
Section 7.3 Conditions Precedent to the Obligations of PBE. The obligation
----------------------------------------------
of PBE to consummate this Agreement shall be subject to the satisfaction of each
of the following conditions prior to or as of the Closing, except to the extent
that any such condition shall have been waived by PBE in accordance with the
provisions of Section 8.4 herein:
(a) Accuracy of Representations and Warranties: All of the
------------------------------------------
representations and warranties of FFC as set forth in this Agreement, all of the
information contained in its Schedules and all FFC Closing Documents (as defined
in Section 7.3(f) of this Agreement) shall be true and correct in all material
respects as of the Closing as if made on such date (or on the date to which it
relates in the case of any representation or warranty which expressly relates to
an earlier date).
(b) Covenants Performed: FFC shall have performed or complied in
-------------------
all material respects with each of the covenants required by this Agreement to
be performed or complied with by FFC.
(c) Opinion of Counsel for FFC: PBE shall have received an
--------------------------
opinion from Barley, Snyder, Senft & Cohen, LLP, counsel to FFC, dated the
Effective Date, in substantially the form of Exhibit E hereto. In rendering any
---------
such opinion, such counsel may require and, to the extent they deem necessary or
appropriate may rely upon, opinions of other counsel and upon representations
made in certificates of officers of FFC, PBE, affiliates of the foregoing, and
others.
(d) Fairness Opinion: PBE shall have obtained from Berwind
----------------
Financial Group, L.P., or from another independent financial advisor selected by
the
33
<PAGE>
Board of Directors of PBE, an opinion dated within five (5) days of the Proxy
Statement/Prospectus to be furnished to the stockholders of PBE stating that the
terms of the acquisition contemplated by this Agreement are fair to the
stockholders of PBE from a financial point of view.
(e) Financial Confirmation: PBE (together with its accountants, if
----------------------
the advice of such accountants is deemed necessary or desirable by PBE) shall
have established to its reasonable satisfaction that, since December 31, 1996,
there has not been any material and adverse change in the condition (financial
or otherwise), assets, liabilities, business, operations or future prospects of
FFC. In particular, without limiting the generality of the foregoing sentence,
the Additional FFC Financial Statements shall indicate that the financial
condition, assets, liabilities and results of operations of FFC as of the
respective dates reported therein do not vary adversely in any material respect
from the financial condition, assets, liabilities and results of operations
presented in the FFC Balance Sheet. For purposes of this Section 7.3(e), a
material and adverse change shall mean an event, change, or occurrence which,
individually or together with any other event, change, or occurrence, has a
material adverse impact on (i) the consolidated financial position, business,
results of operations or future prospects of FFC or (ii) the ability of FFC to
perform its obligations under this Agreement, provided that "material and
adverse change" shall not be deemed to include the impact of (a) changes in
banking and similar laws of general applicability or interpretations thereof by
court of governmental authorities, (b) changes in GAAP or regulatory accounting
principles generally applicable to banks and their holding companies or (c)
changes in economic conditions generally affecting financial institutions
including changes in the general level of interest rates.
(f) Closing Documents: FFC shall have delivered to PBE: (i) a
-----------------
certificate signed by FFC's President and Secretary (or other officers
reasonably acceptable to PBE) verifying that, to the best of their knowledge
after reasonable investigation, all of the representations and warranties of FFC
set forth in this Agreement are true and correct in all material respects as of
the Closing and that FFC has performed in all material respects each of the
covenants required to be performed by FFC; and (ii) such other certificates and
documents as PBE and its counsel may reasonably request (all of the foregoing
certificates and documents being herein referred to as the "FFC Closing
Documents").
(g) The Exchange Agent shall have certified to PBE that it is in
receipt of (i) certificates representing a whole number of shares of FFC Common
Stock to be issued to the stockholders of PBE pursuant to this Agreement and
(ii) sufficient cash to be paid to the PBE stockholders for fractional shares.
34
<PAGE>
ARTICLE VIII
TERMINATION, AMENDMENT AND WAIVER
---------------------------------
Section 8.1 Termination. This Agreement may be terminated at any time before
-----------
the Effective Date (whether before or after the authorization, approval and
adoption of this Agreement by the stockholders of PBE) as follows:
(a) Mutual Consent: This Agreement may be terminated by mutual
--------------
consent of the parties upon the affirmative vote of a majority of each of the
Boards of Directors of PBE and FFC, followed by written notices given to the
other party.
(b) Unilateral Action by FFC: This Agreement may be terminated
------------------------
unilaterally by the affirmative vote of the Board of Directors of FFC, followed
by written notice given to PBE, if: (i) there has been a material breach by PBE
of any representation, warranty or material failure to comply with any covenant
set forth in this Agreement which breach results in a material and adverse
change as to PBE (as such standard is set forth in Sections 7.2(a) and (e)
herein) and such breach has not been cured within thirty (30) days after written
notice of such breach has been given by FFC to PBE, provided that FFC is not
then in material breach of any representation, warranty or covenant contained in
the Agreement; or (ii) any condition precedent to FFC's obligations as set forth
in Article VII of this Agreement remains unsatisfied, through no fault of FFC,
on January 31, 1998.
(c) Unilateral Action By PBE: This Agreement may be terminated
------------------------
unilaterally by the affirmative vote of a majority of the Board of Directors of
PBE, followed by written notice given to FFC, if: (i) there has been a material
breach by FFC of any representation, warranty or material failure to comply with
any covenant set forth in this Agreement which breach results in a material and
adverse change as to FFC (as such standard is set forth in Sections 7.3(a) and
(e) herein) and such breach has not been cured within thirty (30) days after
written notice of such breach has been given by PBE to FFC, provided that PBE is
not then in material breach of any representation, warranty or covenant
contained in this Agreement; or (ii) any condition precedent to PBE's
obligations as set forth in Article VII of this Agreement remains unsatisfied,
through no fault of PBE, on January 31, 1998.
(d) By FFC: By FFC if, prior to 9:30 a.m. on March 19, 1997, PBE
------
does not execute and deliver to FFC the Warrant Agreement.
Section 8.2 Effect of Termination.
---------------------
(a) Effect. In the event of a permitted termination of this
------
Agreement under Section 8.1 herein, this Agreement shall become null and void
and the transactions contemplated herein shall thereupon be abandoned, except
that the
35
<PAGE>
provisions relating to limited liability and confidentiality set forth in
Sections 8.2(b) and 8.2(c) herein shall survive such termination.
(b) Limited Liability. The termination of this Agreement in
-----------------
accordance with the terms of Section 8.1 herein shall create no liability on the
part of either party, or on the part of either party's directors, officers,
stockholders, agents or representatives, except that if this Agreement is
terminated by FFC by reason of a material breach by PBE, or if this Agreement is
terminated by PBE by reason of a material breach by FFC, and such breach
involves an intentional, willful or grossly negligent misrepresentation or
breach of covenant, the breaching party shall be liable to the nonbreaching
party for all costs and expenses reasonably incurred by the nonbreaching party
in connection with the preparation, execution and attempted consummation of this
Agreement, including the fees of its counsel, accountants, consultants and other
advisors and representatives.
(c) Confidentiality. In the event of a termination of this
---------------
Agreement, neither FFC nor PBE shall use or disclose to any other person any
confidential information obtained by it during the course of its investigation
of the other party or parties, except as may be necessary in order to establish
the liability of the other party or parties for breach as contemplated under
Section 8.2(b) herein and each party shall promptly return to the party all non-
public proprietary and business information received from such party.
Section 8.3 Amendment. To the extent permitted by law, this Agreement may be
---------
amended at any time before the Effective Date (whether before or after the
authorization, approval and adoption of this Agreement by the stockholders of
PBE), but only by a written instrument duly authorized, executed and delivered
by FFC and by PBE; provided, however, that (i) any amendment to the provisions
-------- -------
of Section 2.1 herein relating to the consideration to be received by the former
stockholders of PBE in exchange for their shares of PBE Common Stock shall not
take effect until such amendment has been approved, adopted or ratified by the
stockholders of PBE in accordance with applicable law and (ii) PBE Interim Bank
shall be permitted to join as a party to this Agreement upon its formation
without execution of such joinder by FFC or PBE.
Section 8.4 Waiver. Any term or condition of this Agreement may be waived,
------
to the extent permitted by applicable federal and state law, by the party or
parties entitled to the benefit thereof at any time before the Effective Date
(whether before or after the authorization, approval and adoption of this
Agreement by the stockholders of PBE) by a written instrument duly authorized,
executed and delivered by such party or parties.
36
<PAGE>
ARTICLE IX
RIGHTS OF DISSENTING STOCKHOLDERS OF PBE
----------------------------------------
Section 9.1 Rights of Dissenting Stockholders of PBE. The stockholders of
----------------------------------------
PBE shall be entitled to and may exercise dissenters' rights if and to the
extent they are entitled to do so under the provisions of FI (S)(S) 3-718
through 3-721 of the Financial Institutions Article, Annotated Code of Maryland.
ARTICLE X
CLOSING AND EFFECTIVE DATE
--------------------------
Section 10.1 Closing. Provided that all conditions precedent set forth in
-------
Article VII of this Agreement shall have been satisfied or shall have been
waived in accordance with Section 8.4 of this Agreement, the parties shall hold
a closing (the "Closing") at the offices of FFC at One Penn Square, Lancaster,
Pennsylvania, within thirty (30) days after the receipt of all required
regulatory approvals and after the expiration of all applicable waiting periods
on a date to be agreed upon by the parties, at which time the parties shall
deliver the PBE Closing Documents, the FFC Closing Documents, the opinions of
counsel required by Sections 7.1(d), 7.2(c) and 7.3(c) herein, and such other
documents and instruments as may be necessary or appropriate to effectuate the
purposes of this Agreement.
Section 10.2 Effective Date. The Merger shall become effective on the date
--------------
of issuance of the Certificate of Merger issued by the Maryland State Bank
Commissioner pursuant to FI (S)3-709 of the Financial Institutions Article,
Annotated Code of Maryland or on such other later date specified in the
Certificate of Merger.
ARTICLE XI
NO SURVIVAL OF REPRESENTATIONS AND WARRANTIES
---------------------------------------------
Section 11.1 No Survival. The representations and warranties of PBE and of
-----------
FFC set forth in this Agreement shall expire and be terminated on the Effective
Date by consummation of this Agreement, and no such representation or warranty
shall thereafter survive.
ARTICLE XII
GENERAL PROVISIONS
------------------
Section 12.1 Expenses. Except as provided in Section 8.2(b) herein, each
--------
party shall pay its own expenses incurred in connection with this Agreement and
the
37
<PAGE>
consummation of the transactions contemplated herein. For purposes of this
Section 12.1 herein, the cost of printing the Proxy Statement/Prospectus shall
be deemed to be an expense of FFC.
Section 12.2 Other Mergers and Acquisitions. Subject to the right of PBE to
------------------------------
refuse to consummate this Agreement pursuant to Section 8.1(c) herein by reason
of a material breach by FFC of the warranty and representation set forth in
Section 4.7 herein, nothing set forth in this Agreement shall be construed: (i)
to preclude FFC from acquiring, or to limit in any way the right of FFC to
acquire, prior to or following the Effective Date, the stock or assets of any
other financial services institution or other corporation or entity, whether by
issuance or exchange of FFC Common Stock or otherwise; (ii) to preclude FFC from
issuing, or to limit in any way the right of FFC to issue, prior to or following
the Effective Date, FFC Common Stock, FFC Preferred Stock or any other equity or
debt securities; or (iii) to preclude FFC from taking, or to limit in any way
the right of FFC to take, any other action not expressly and specifically
prohibited by the terms of this Agreement.
Section 12.3 Notices. All notices, claims, requests, demands and other
-------
communications which are required or permitted to be given under this Agreement
shall be in writing and shall be deemed to have been duly delivered if delivered
in person, transmitted by telegraph or facsimile machine (but only if receipt is
acknowledged in writing), or mailed by registered or certified mail, return
receipt requested, as follows:
(a) If to FFC, to:
Rufus A. Fulton, Jr., President
and Chief Executive Officer
Fulton Financial Corporation
One Penn Square
P.O. Box 4887
Lancaster, Pennsylvania 17604
With a copy to:
Paul G. Mattaini, Esq.
Barley, Snyder, Senft & Cohen, LLP
126 East King Street
Lancaster, PA 17602
38
<PAGE>
(b) If to PBE, to:
Robert E. Noll, President and Chief Executive Officer
The Peoples Bank of Elkton
130 North Street
Elkton, Maryland 21921
With a copy to:
Leonard S. Volin, Esq.
Housley Kantarian & Bronstein, P.C.
1220 19th Street, N.W.; Suite 700
Washington, D.C. 20036
Section 12.4 Counterparts. This Agreement may be executed simultaneously in
------------
several counterparts, each of which shall be deemed an original, but all such
counterparts together shall be deemed to be one and the same instrument.
Section 12.5 Governing Law. This Agreement shall be deemed to have been made
-------------
in, and shall be governed by and construed in accordance with the substantive
laws of, the Commonwealth of Pennsylvania.
Section 12.6 Parties in Interest. This Agreement shall be binding upon and
-------------------
inure to the benefit of the parties hereto and their respective successors,
assigns and legal representatives; provided, however, that neither party may
-------- -------
assign its rights or delegate its duties under this Agreement without the prior
written consent of the other party.
Section 12.7 Entire Agreement. This Agreement, together with the Warrant
----------------
Agreement and the Warrant being executed by the parties on the date hereof, sets
forth the entire understanding and agreement of the parties hereto and
supersedes any and all prior agreements, arrangements and understandings,
whether oral or written, relating to the subject matter hereof and thereof.
39
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Agreement to be executed by
their duly authorized officers all as of the day and year first above written.
FULTON FINANCIAL CORPORATION
By: /s/ Rufus A. Fulton, Jr.
-------------------------------------
Rufus A. Fulton, Jr., President
and Chief Executive Officer
Attest: /s/ William R. Colmery
-------------------------------------
William R. Colmery, Secretary
THE PEOPLES BANK OF ELKTON
By: /s/ David K. Williams
-------------------------------------
David K. Williams,
Chairman of the Board
Attest: /s/ Cathy C. Dunn
-------------------------------------
Cathy C. Dunn, Secretary
<PAGE>
EXHIBIT B
OPINION OF BERWIND FINANCIAL, L.P.
----------------------------------
June 18, 1997
Board of Directors
The Peoples Bank of Elkton
130 North Street
Elkton, Maryland 21921
Members of the Board:
You have requested our opinion as to the fairness, from a financial point of
view, to the shareholders of The Peoples Bank of Elkton ("Peoples") of the
financial terms of the proposed merger by and between Peoples and a wholly-owned
subsidiary of Fulton Financial Corporation ("Fulton"). The terms of the
proposed merger (the "Proposed Merger") by and between Peoples and the wholly-
owned subsidiary of Fulton are set forth in the Affiliation and Merger Agreement
dated March 18, 1997, as amended as of May 20, 1997, (the "Merger Agreement")
and provides that each outstanding share of Peoples common stock will be
converted into the right to receive 4.158 shares of Common Stock par value $2.50
per share of Fulton with cash to be paid in lieu of any fractional shares.
Berwind Financial, L.P., as part of its investment banking business, regularly
is engaged in the valuation of assets, securities and companies in connection
with various types of asset and security transactions, including mergers,
acquisitions, private placements and valuations for various other purposes, and
in the determination of adequate consideration in such transactions.
In arriving at our opinion, we have, among other things: (i) reviewed the
historical financial performances, current financial positions and general
prospects of Peoples and Fulton, (ii) reviewed the Merger Agreement, (iii)
reviewed and analyzed the stock market performance of Peoples and Fulton, (iv)
studied and analyzed the consolidated financial and operating data of Peoples
and Fulton, (v) considered the terms and conditions of the Proposed Merger
between Peoples and Fulton as compared with the terms and conditions of
comparable bank and bank holding company mergers and acquisitions, (vi) met
and/or communicated with certain members of Peoples' and Fulton's senior
management to discuss their respective operations, historical financial
statements and future prospects, and (vii) conducted such other financial
analyses, studies and investigations as we deemed appropriate.
Our opinion is given in reliance on information and representations made or
given by Peoples and Fulton, and their respective officers, directors, auditors,
counsel and other agents, and on filings, releases and other information issued
by Peoples and Fulton including financial statements, financial projections, and
stock price data as well as certain information from recognized independent
sources. We have not independently verified the information concerning Peoples
and Fulton nor other data which we have considered in our review and, for
purposes of the opinion set forth below, we have assumed and relied upon the
accuracy and completeness of all such information and data. Additionally, we
assume that the Proposed Merger is, in all respects, lawful under applicable
law.
With regard to financial and other information relating to the general
prospects of Peoples and Fulton, we have assumed that such information has been
reasonably prepared and reflects the best currently available estimates and
judgments of the managements of Peoples and Fulton as to Peoples' and Fulton's
<PAGE>
Board of Directors
June 18, 1997
Page 2
most likely future performance. In rendering our opinion, we have assumed that
in the course of obtaining the necessary regulatory approvals for the Proposed
Merger no conditions will be imposed that will have a material adverse effect on
the contemplated benefits of the Proposed Merger to Peoples.
Our opinion is based upon information provided to us by the managements of
Peoples and Fulton, as well as market, economic, financial and other conditions
as they exist and can be evaluated only as of the date hereof and speaks to no
other period. Our opinion pertains only to the financial consideration of the
Proposed Merger and does not constitute a recommendation to the Board of Peoples
and does not constitute a recommendation to Peoples' shareholders as to how such
shareholders should vote on the Proposed Merger.
Based on the foregoing, it is our opinion that, as of the date hereof, the
financial terms of the Proposed Merger by and between Peoples and Fulton is
fair, from a financial point of view, to the shareholders of Peoples.
Sincerely,
BERWIND FINANCIAL, L.P.
<PAGE>
EXHIBIT C
WARRANT AGREEMENT AND WARRANT
-----------------------------
<PAGE>
WARRANT AGREEMENT
-----------------
THIS WARRANT AGREEMENT is made March 19, 1997 by and between Fulton
Financial Corporation, a Pennsylvania business corporation ("FFC") and The
Peoples Bank of Elkton, a Maryland bank ("PBE").
W I T N E S S E T H:
- - - - - - - - - -
WHEREAS, FFC and PBE have entered into an Affiliation and Merger Agreement
dated March 18, 1997 (the "Merger Agreement"); and
WHEREAS, as a condition to FFC's entry into the Merger Agreement and in
consideration of such entry, PBE has agreed to issue to FFC, on the terms and
conditions set forth herein, a warrant entitling FFC to purchase up to an
aggregate of 45,888 shares of PBE's common stock, par value $10.00 per share
(the "Common Stock");
NOW, THEREFORE, in consideration of the execution of the Merger Agreement
and the premises herein contained, and intending to be legally bound, FFC and
PBE agree as follows:
1. Issuance of Warrant. Concurrently with the execution of the Merger
-------------------
Agreement and this Agreement, PBE shall issue to FFC a warrant in the form
attached as Exhibit A hereto (the "Warrant", which term as used herein shall
include any warrant or warrants issued upon transfer or exchange of the original
Warrant) to purchase up to 45,888 shares of Common Stock, subject to adjustment
as provided in this Agreement and in the Warrant. The Warrant shall be
exercisable at a purchase price of $80.00 per share, subject to adjustment as
provided in the Warrant (the "Exercise Price"). So long as the Warrant is
outstanding and unexercised, PBE shall at all times maintain and reserve, free
from preemptive rights, such number of authorized but unissued shares of Common
Stock as may be necessary so that the Warrant may be exercised, without any
additional authorization of Common Stock, after giving effect to all other
options, warrants, convertible securities and other rights to acquire shares of
Common Stock. PBE represents and warrants that it has duly authorized the
execution and delivery of the Warrant and this Agreement and the issuance of
Common Stock upon exercise of the Warrant. PBE covenants that the shares of
Common Stock issuable upon exercise of the Warrant shall be, when so issued,
duly authorized, validly issued, fully paid and nonassessable and subject to no
preemptive rights. The Warrant and the shares of Common Stock to be issued upon
exercise of the Warrant are hereinafter collectively referred to, from time to
time, as the "Securities." So long as the Warrant is owned by FFC, the Warrant
will in no event be exercised for more than that number of shares of Common
Stock
<PAGE>
equal to 45,888 (subject to adjustment as provided in this Agreement and in the
Warrant) less the number of shares of Common Stock at the time owned by FFC.
2. Assignment, Transfer, or Exercise of Warrant. FFC will not sell,
--------------------------------------------
assign, transfer or exercise the Warrant, in whole or in part, without the prior
written consent of PBE except (A) if (I) FFC is not in material breach of the
agreement or covenants contained in this Agreement or the Merger Agreement and
(II) no preliminary or permanent injunction or other order against the delivery
of shares covered by the Warrant issued by any court of competent jurisdiction
in the United States shall be in effect and (B) upon or after the occurrence of
any of the following: (i) a knowing and intentional breach of any
representation, warranty, or covenant set forth in the Merger Agreement by PBE
which would permit a termination of the Merger Agreement by FFC pursuant to
Section 8.1(b)(i) thereof which is not cured and which occurs following a
proposal from any person (other than FFC) to engage in an Acquisition
Transaction; (ii) the failure of PBE's shareholders to approve the Merger
Agreement at a meeting called for such purpose if at the time of such meeting
there has been a public announcement (including a public regulatory filing) by
any Person (other than FFC) of an offer or proposal to effect an Acquisition
Transaction and, within twelve (12) months from the date of such shareholder's
meeting, PBE engages in, or enters into a written agreement with respect to, an
Acquisition Transaction; (iii) the acquisition by any Person of Beneficial
Ownership of 25% or more of the Common Stock (before giving effect to any
exercise of the Warrant); (iv) PBE shall have entered into an agreement, letter
of intent, or other written understanding with any Person (other than FFC)
providing for such Person (A) to engage in an Acquisition Transaction or (B) to
negotiate with PBE with respect to an Acquisition Transaction; or (v)
termination, or attempted termination, of the Merger Agreement by PBE under
Section 5.7 of the Merger Agreement following receipt of a written proposal to
engage in an Acquisition Transaction from a third party. As used in this
Paragraph 2, the terms "Beneficial Ownership" and "Person" shall have the
respective meanings set forth in Paragraph 7(g) herein. For purposes of this
Agreement, "Acquisition Transaction" shall mean (x) a merger or consolidation of
statutory share exchange or any similar transaction involving PBE, (y) a
purchase, lease or other acquisition of all or substantially all of the assets
of PBE or (z) a purchase or other acquisition of beneficial ownership of
securities representing 25% or more of the voting power of PBE.
3. Governmental Filing, Etc.. If, at any time after the Warrant may be
-------------------------
exercised or sold, PBE shall receive a written request therefor from FFC, PBE
shall prepare, file and keep effective and current any required application or
filing to register such shares or to obtain required regulatory or other
approval for their issuance, and provide or file such documentation as may be
required by, all applicable governmental entities or agencies (any such
governmental filing(s)
-2-
<PAGE>
hereinafter collectively referred to as the "Governmental Filing"), covering, or
in connection with, the Warrant and/or the Common Stock issued or issuable upon
exercise of the Warrant. PBE shall use its best efforts to cause the
Governmental Filing to become effective and remain current. Without the prior
written consent of FFC, neither PBE nor any other holder of securities of PBE
may include any other securities in the Governmental Filing. Notwithstanding
anything herein to the contrary, FFC shall have right to request the
Governmental Filing described in this Section 3 on one occasion only.
4. Duties of PBE upon Governmental Filing. If and whenever PBE is
--------------------------------------
required by the provisions of Paragraph 3 of this Agreement to make any
Governmental Filing or to take any other action, PBE shall:
(a) prepare and file with the all applicable governmental entities or
agencies such amendments to the Governmental Filing and supplements thereto
as may be necessary to keep the Governmental Filing effective, current, and
accurate;
(b) furnish to FFC and to any underwriters of the Securities being
registered such reasonable number of copies of the Governmental Filing, any
documents contained therein, and such other documents as FFC or such
underwriters may reasonably request in order to facilitate the public
offering of the Securities;
(c) use its best efforts to register or qualify the Securities
covered by the Governmental Filing under the state securities or blue sky
laws of such jurisdictions as FFC or such underwriters may reasonably
request;
(d) notify FFC, promptly after PBE shall receive notice thereof, of
the time when the Governmental Filing has become effective or any
supplement or amendment to any document forming a part of the Governmental
Filing has been filed;
(e) notify FFC promptly of any request by any governmental entities
or agencies for the amending or supplementing of the Governmental Filing or
any document contained therein, or for additional information;
(f) prepare and file with all applicable governmental entities or
agencies promptly upon the request of FFC, any amendments or supplements to
the Governmental Filing or any document contained therein which, in the
opinion of counsel for FFC, are required under any law or regulation;
-3-
<PAGE>
(g) prepare and promptly file with all governmental entities or
agencies such amendments of or supplements to (i) the Governmental Filing
or the document contained therein; or (ii) the Governmental Filing as may
be necessary to correct any statements or omissions if, at the time when a
Governmental Filing relating to such Securities is required to be delivered
under law or regulation, any event shall have occurred as the result of
which such Governmental Filing as then in effect would include an untrue
statement of a material fact or would omit to state any material fact
required to be stated therein or necessary in order to make the statements
therein, in the light of the circumstances under which they were made, not
misleading;
(h) advise FFC, promptly after PBE shall receive notice or obtain
knowledge of the issuance of any stop order by any governmental entity or
agency suspending the effectiveness of the Governmental Filing or of any
action by any governmental entity or agency preventing the exercise of any
right or obligation hereunder or that may be exercised in connection
herewith, or the initiation or threatening of any proceeding for such
purpose, and promptly use its best efforts to prevent such action or to
obtain its withdrawal if such action should be taken; and
(i) at the request of FFC, furnish on the date or dates provided for
in any underwriting agreement: (i) an opinion or opinions of counsel for
PBE for the purposes of such Governmental Filing, addressed to the
underwriters and to FFC, covering such matters as such underwriters and FFC
may reasonably request and as are customarily covered by issuer's counsel
at that time; and (ii) a letter or letters from the independent certified
public accountants for PBE, addressed to the underwriters and to FFC,
covering such matters as such underwriters or FFC may reasonably request,
in which letters such accountants shall state (without limiting the
generality of the foregoing) that they are independent certified public
accountants within the meaning of the Securities Act of 1933, as amended
(the "Securities Act"), and that, in the opinion of such accountants, the
financial statements and other financial data of PBE included in the
Governmental Filing or any amendment or supplement thereto comply in all
material respects with the applicable accounting requirements of the
Securities Act or such other law or regulation as may be at issue.
5. Expenses of Registration. With respect to the Governmental Filing
------------------------
requested pursuant to Paragraph 3 of this Agreement, (a) PBE shall bear all
registration, filing and NASD fees, printing and engraving expenses, fees and
disbursements of its counsel and accountants and all legal fees and
disbursements and other expenses of PBE to comply with state securities or blue
sky laws of any jurisdictions in which the Securities to be offered are to be
registered or qualified; and
-4-
<PAGE>
(b) FFC shall bear all fees and disbursements of its counsel and accountants,
underwriting discounts and commissions, transfer taxes for FFC and any other
expenses incurred by FFC.
6. Indemnification. In connection with any Registration Statement or
---------------
Governmental Filing or any amendment or supplement thereto:
(a) PBE shall indemnify and hold harmless FFC, any underwriter for
FFC, and each person, if any, who controls FFC or such underwriter from and
against any and all loss, damage, liability, cost or expense to which FFC
or any such underwriter or controlling person may become subject under any
applicable law,, insofar as such loss, damage, liability, cost or expense
arises out of or is caused by any untrue statement or alleged untrue
statement of any material fact contained in the Governmental Filing, any
document contained therein or any amendment or supplement to the foregoing,
or arises out of or is based upon the omission or alleged omission to state
therein a material fact required to be stated therein or necessary in order
to make the statements therein, in light of the circumstances under which
they were made, not misleading; provided, however, that PBE will not be
-------- -------
liable in any such case to the extent that any such loss, damage,
liability, cost or expense arises out of or is based upon an untrue
statement or alleged untrue statement or omission or alleged omission so
made in conformity with information furnished by FFC, such underwriter or
such controlling person in writing specifically for use in the preparation
thereof.
(b) FFC shall indemnify and hold harmless PBE, any underwriter and
each person, if any, who controls PBE or such underwriter from and against
any and all loss, damage, liability, cost or expense to which PBE or any
such underwriter or controlling person may become subject under the
Securities Act or otherwise, insofar as such loss, damage, liability, cost
or expense arises out of or is caused by any untrue or alleged untrue
statement of any material fact contained in the Governmental Filing, any
document contained therein or any amendment or supplement to the foregoing,
or arises out of or is based upon the omission or the alleged omission to
state therein a material fact required to be stated therein or necessary in
order to make the statements therein, in light of the circumstances in
which they were made, not misleading; provided, however, that FFC will not
-------- -------
be liable in any such case to the extent that any such loss, damage,
liability, cost or expense arises out of or is based upon an untrue
statement or alleged untrue statement or omission or alleged omission so
made in conformity with information furnished by PBE, such underwriter,
such underwriter or such controlling person in writing specifically for use
in the preparation thereof.
-5-
<PAGE>
(c) Promptly after receipt by any party which is entitled to be
indemnified, pursuant to the provisions of subparagraph (a) or (b) of this
Paragraph 6, of any claim in writing or of notice of the commencement of
any action involving the subject matter of the foregoing indemnity
provisions, such indemnified party shall, if a claim in respect thereof is
to be made against the indemnifying party pursuant to the provisions of
subparagraph (a) or (b) of this Paragraph 6, promptly notify the
indemnifying party of the receipt of such claim or notice of the
commencement of such action, but the omission to so notify the indemnifying
party will not relieve it from any liability which it may otherwise have to
any indemnified party hereunder. In case any such action is brought
against any indemnified party and it notifies the indemnifying party of the
commencement thereof, the indemnifying party shall have the right to
participate in and, to the extent that it may wish, jointly with any other
indemnifying party similarly notified, to assume the defense thereof, with
counsel satisfactory to such indemnified party; provided, however, that if
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the defendants in any action include both the indemnified party or parties
and the indemnifying party and there is a conflict of interest which would
prevent counsel for the indemnifying party from also representing any
indemnified party, such indemnified party shall have the right to select
separate counsel to participate in the defense of such indemnified party.
After notice from the indemnifying party to such indemnified party of its
election so to assume the defense thereof, the indemnifying party will not
be liable to such indemnified party, pursuant to the provisions of
subparagraph (a) or (b) of this Paragraph 6, for any legal or other
expenses subsequently incurred by such indemnified party in connection with
the defense thereof, other than reasonable costs of investigation, unless
(i) such indemnified party shall have employed separate counsel in
accordance with the provisions of the preceding sentence, (ii) the
indemnifying party shall not have employed counsel satisfactory to the
indemnified party to represent the indemnified party within a reasonable
time after the notice of the commencement of the action, or (iii) the
indemnifying party has authorized the employment of counsel for the
indemnified party at the expense of the indemnifying party.
(d) If recovery is not available under the foregoing indemnification
provisions, for any reason other than as specified therein, any party
entitled to indemnification by the terms thereof shall be entitled to
obtain contribution with respect to its liabilities and expenses, except to
the extent that contribution is not permitted under Section 11(f) of the
Securities Act or such other law or regulation as may be applicable. In
determining the amount of contribution to which the respective parties are
entitled there shall be considered the parties' relative knowledge and
access to information concerning the matter with respect to which the claim
was asserted, the opportunity to correct and/or
-6-
<PAGE>
prevent any statement or omission, and any other equitable considerations
appropriate under the circumstances. FFC and PBE agree that it would not
be equitable if the amount of such contribution were determined by pro rata
or per capita allocation even if the underwriters and FFC as a group were
considered a single entity for such purpose.
7. Redemption and Repurchase Rights.
--------------------------------
(a) From and after the date on which any event described in Paragraph
2 of this Agreement occurs, the Holder as defined in the Warrant (which
shall include a former Holder), who has exercised the Warrant in whole or
in part shall have the right to require PBE to redeem some or all of the
shares of Common Stock for which the Warrant was exercised at a redemption
price per share (the "Redemption Price") equal to the highest of: (i) the
Exercise Price, (ii) the highest price paid or agreed to be paid for any
share of Common Stock by an Acquiring Person (as defined below) during the
one year period immediately preceding the date of redemption, and (iii) in
the event of a sale of all or substantially all of PBE's assets: (x) the
sum of the price paid in such sale for such assets and the current market
value of the remaining assets of PBE as determined by a recognized
investment banking firm selected by such Holder, divided by (y) the number
of shares of Common Stock then outstanding. If the price paid consists in
whole or in part of securities or assets other than cash, the value of such
securities or assets shall be their then current market value as determined
by a recognized investment banking firm selected by the Holder.
(b) From and after the date on which any event described in Paragraph
2 of this Agreement occurs, the Holder as defined in the Warrant (which
shall include a former Holder), shall have the right to require PBE to
repurchase all or any portion of the Warrant at a price (the "Warrant
Repurchase Price") equal to the product obtained by multiplying: (i) the
number of shares of Common Stock represented by the portion of the Warrant
that the Holder is requiring PBE to repurchase, times (ii) the excess of
the Redemption Price over the Exercise Price.
(c) The Holder's right, pursuant to this Paragraph 7, to require PBE
to repurchase a portion or all of the Warrant, and/or to require PBE to
redeem some or all of the shares of Common Stock for which the Warrant was
exercised, shall expire on the close of business on the 60th day following
the occurrence of any event described in Paragraph 2.
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<PAGE>
(d) The Holder may exercise its right, pursuant to this Paragraph 7,
to require PBE to repurchase all or a portion of the Warrant, and/or to
require PBE to redeem some or all of the shares of Common Stock for which
the Warrant was exercised, by surrendering for such purpose to PBE, at its
principal office within the time period specified in the preceding
subparagraph, the Warrant and/or a certificate or certificates representing
the number of shares to be redeemed accompanied by a written notice stating
that it elects to require PBE to repurchase the Warrant or a portion
thereof and/or to redeem all or a specified number of such shares in
accordance with the provisions of this Paragraph 7. As promptly as
practicable, and in any event within five business days after the surrender
of the Warrant and/or such certificates and the receipt of such notice
relating thereto, PBE shall deliver or cause to be delivered to the Holder:
(i) the applicable Redemption Price (in immediately available funds) for
the shares of Common Stock which it is not then prohibited under applicable
law or regulation from redeeming, and/or (ii) the applicable Warrant
Repurchase Price, and/or (iii) if the Holder has given PBE notice that less
than the whole Warrant is to be repurchased and/or less than the full
number of shares of Common Stock evidenced by the surrendered certificate
or certificates are to be redeemed, a new certificate or certificates, of
like tenor, for the number of shares of Common Stock evidenced by such
surrendered certificate or certificates less the number shares of Common
Stock redeemed and/or a new Warrant reflecting the fact that only a portion
of the Warrant was repurchased.
(e) To the extent that PBE is prohibited under applicable law or
regulation, or as a result of administrative or judicial action, from
repurchasing the Warrant and/or redeeming the Common Stock as to which the
Holder has given notice of repurchase and/or redemption, PBE shall
immediately so notify the Holder and thereafter deliver or cause to be
delivered, from time to time to the Holder, the portion of the Warrant
Repurchase Price and/or the Redemption Price which it is no longer
prohibited from delivering, within five business days after the date on
which PBE is no longer so prohibited; provided, however, that to the extent
-------- -------
that PBE is at the time and after the expiration of 25 months, so
prohibited from delivering the Warrant Repurchase Price and/or the
Redemption Price, in full (and PBE hereby undertakes to use its best
efforts to obtain all required regulatory and legal approvals as promptly
as practicable), PBE shall deliver to the Holder a new Warrant (expiring
one year after delivery) evidencing the right of the Holder to purchase
that number of shares of Common Stock representing the portion of the
Warrant which PBE is then so prohibited from repurchasing, and/or PBE shall
deliver to the Holder a certificate for the shares of Common Stock which
PBE is then so prohibited from redeeming, and PBE shall have no further
obligation to repurchase such
-8-
<PAGE>
new Warrant or redeem such Common Stock; and provided further, that upon
--- -------- -------
receipt of such notice and until five days thereafter the Holder may revoke
its notice of repurchase of the Warrant and/or redemption of Common Stock
by written notice to PBE at its principal office stating that the Holder
elects to revoke its election to exercise its right to require PBE to
repurchase the Warrant and/or redeem the Common Stock, whereupon PBE will
promptly redeliver to the Holder the Warrant and/or the certificates
representing shares of Common Stock surrendered to PBE for purposes of such
repurchase and/or redemption, and PBE shall have no further obligation to
repurchase such Warrant and/or redeem such Common Stock.
(f) Notwithstanding anything to the contrary herein, PBE shall be
obligated to pay any sums due FFC or any other Holders under this Paragraph
7 only upon consummation of an Acquisition Transaction referenced in
Paragraph 2 herein; provided, however, PBE's obligation to make such a
payment due to the exercise event described in clause (iii) or the
definition of Acquisition Transaction described in clause (z) of Paragraph
2 shall become binding only upon an acquisition of Beneficial Ownership of
50% or more of the PBE Common Stock or securities representing 50% or more
of the voting power of PBE.
(g) As used in this Agreement the following terms have the meanings
indicated:
(1) "Acquiring Person" shall mean any "Person" (hereinafter
defined) who or which is the "Beneficial Owner" (hereinafter defined)
of 25% or more of the Common Stock;
(2) A "Person" shall mean any individual, firm, corporation or
other entity and shall also include any syndicate or group deemed to
be a "Person" by operation of Section 13(d)(3) of the Securities
Exchange Act of 1934, as amended;
(3) A Person shall be a "Beneficial Owner", and shall have
"Beneficial Ownership", of all securities:
(i) which such Person or any of its Affiliates (as
hereinafter defined) beneficially owns, directly or indirectly;
and
(ii) which such Person or any of its Affiliates or
Associates has (1) the right to acquire (whether such right is
exercisable immediately or only after the passage of time or
otherwise)
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<PAGE>
pursuant to any agreement, arrangement or understanding or upon
the exercise of conversion rights, exchange rights, warrants or
options, or otherwise, or (2) the right to vote pursuant to any
proxy, power of attorney, voting trust, agreement, arrangement or
understanding; and
(4) "Affiliate" and "Associate" shall have the respective
meanings ascribed to such terms in Rule 12b-2 of the regulations
promulgated by the SEC under the Securities and Exchange Act of 1934,
as amended.
8. Remedies. Without limiting the foregoing or any remedies available to
--------
FFC, it is specifically acknowledged that FFC would not have an adequate remedy
at law for any breach of this Warrant Agreement and shall be entitled to
specific performance of PBE's obligations under, and injunctive relief against
any actual or threatened violation of the obligations of any Person subject to,
this Agreement.
9. Miscellaneous.
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(a) The representations, warranties, and covenants of PBE set forth
in the Merger Agreement are hereby incorporated by reference in and made a
part of this Agreement, as if set forth in full herein.
(b) This Agreement, the Warrant and the Merger Agreement set forth
the entire understanding and agreement of the parties hereto and supersede
any and all prior agreements, arrangements and understandings, whether
written or oral, relating to the subject matter hereof and thereof. No
amendment, supplement, modification, waiver, or termination of this
Agreement shall be valid and binding unless executed in writing by both
parties.
(c) This Agreement shall be deemed to have been made in, and shall be
governed by and interpreted in accordance with the substantive laws of, the
Commonwealth of Pennsylvania.
10. Termination. This Agreement, and all of PBE's obligations hereunder,
-----------
shall automatically terminate, without further action of the parties, at the
time the Warrant terminates.
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<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this instrument to be
executed by their duly authorized officers as of the day and year first above
written.
FULTON FINANCIAL CORPORATION
By:
---------------------------------
Rufus A. Fulton, Jr., President
and Chief Executive Officer
Attest:
-----------------------------
William R. Colmery, Secretary
THE PEOPLES BANK OF ELKTON
By:
---------------------------------
David K. Williams, Sr., Chairman
of the Board
Attest:
-----------------------------
Cathy C. Dunn, Secretary
<PAGE>
WARRANT
to Purchase up to 45,888 Shares of the
Common Stock, Par Value $10.00 Per Share,
of
THE PEOPLES BANK OF ELKTON
This is to certify that, for value received, Fulton Financial Corporation
("FFC") or any permitted transferee (FFC or such transferee being hereinafter
called the "Holder") is entitled to purchase, subject to the provisions of this
Warrant, from The Peoples Bank of Elkton, a Maryland trust company ("PBE"), at
any time on or after the date hereof, an aggregate of up to 45,888 fully paid
and non-assessable shares of common stock, par value $10.00 per share, of PBE
(the "Common Stock") at a price per share equal to $80.00, subject to adjustment
as herein provided (the "Exercise Price"). This Warrant is transferable only in
accordance with the terms and provisions of the Warrant Agreement (as defined
below) the terms of which are deemed incorporated herein.
1. Exercise of Warrant. Subject to the provisions hereof and the
-------------------
limitations set forth in Paragraph 2 of a Warrant Agreement of even date
herewith by and between FFC and PBE (the "Warrant Agreement"), which Warrant
Agreement was entered into in connection with an Affiliation and Merger
Agreement dated March 18, 1997 between FFC and PBE (the "Merger Agreement"),
this Warrant may be exercised in whole or in part or sold, assigned or
transferred at any time or from time to time on or after the date hereof. This
Warrant shall be exercised by presentation and surrender hereof to PBE at the
principal office of PBE, accompanied by (i) a written notice of exercise, (ii)
payment to PBE, for the account of PBE and in the form of a certified or bank
check, of the Exercise Price for the number of shares of Common Stock specified
in such notice, and (iii) a certificate of the Holder specifying the event or
events which have occurred and entitle the Holder to exercise this Warrant. The
Exercise Price for the number of shares of Common Stock specified in the notice
shall be payable in immediately available funds.
Upon such presentation and surrender, PBE shall issue promptly (and within
one business day if requested by the Holder) to the Holder or its assignee,
transferee or designee the number of shares of Common Stock to which the Holder
is entitled hereunder. PBE covenants and warrants that such shares of Common
Stock, when so issued, will be duly authorized, validly issued, fully paid and
non-assessable, and free and clear of all liens and encumbrances.
If this Warrant should be exercised in part only, PBE shall, upon surrender
of this Warrant for cancellation, execute and deliver a new Warrant evidencing
the rights of the Holder thereof to purchase the balance of the shares of Common
Stock issuable hereunder. Upon receipt by PBE of this Warrant, in proper form
for
<PAGE>
exercise, the Holder shall be deemed to be the holder of record of the shares of
Common Stock issuable upon such exercise, notwithstanding that the stock
transfer books of PBE may then be closed or that certificates representing such
shares of Common Stock shall not then be actually delivered to the Holder. PBE
shall pay all expenses, and any and all United States federal, state and local
taxes and other charges, that may be payable in connection with the preparation,
issue and delivery of stock certificates pursuant to this Paragraph 1 in the
name of the Holder or its assignee, transferee or designee.
2. Reservation of Shares; Preservation of Rights of Holder.
-------------------------------------------------------
PBE shall at all times, while this Warrant is outstanding and unexercised,
maintain and reserve, free from preemptive rights, such number of authorized but
unissued shares of Common Stock as may be necessary so that this Warrant may be
exercised without any additional authorization of Common Stock after giving
effect to all other options, warrants, convertible securities and other rights
to acquire shares of Common Stock at the time outstanding. PBE further agrees
that (i) it will not, by charter amendment or through reorganization,
consolidation, merger, dissolution or sale of assets, or by any other voluntary
act or omission, avoid or seek to avoid the observance or performance of any of
the covenants, stipulations or conditions to be observed or performed hereunder
or under the Warrant Agreement by PBE, (ii) it will promptly take all action
(including (A) complying with all premerger notification, reporting and waiting
period requirements specified in 15 U.S.C. (S)18a and the regulations
promulgated thereunder and (B) in the event that, under Section 3 of the Bank
Holding Company Act of 1956, as amended (12 U.S.C. (S)1842(a)(3)), the Change in
Bank Control Act of 1978, as amended (12 U.S.C. (S)1817(j)), or the Financial
Institutions Article, Annotated Code of Maryland (Fl (S)5-901 et. seq.) prior
approval of the Board of Governors of the Federal Reserve System (the "Board"),
the Federal Deposit Insurance Corporation (the "FDIC"), or the Maryland State
Bank Commissioner (the "Commissioner") is necessary before this Warrant may be
exercised, cooperating fully with the Holder in preparing any and all such
applications and providing such information as the Board, the FDIC or the
Commissioner may require) in order to permit the Holder to exercise this Warrant
and PBE duly and effectively to issue shares of its Common Stock hereunder, and
(iii) it will promptly take all action necessary to protect the rights of the
Holder against dilution as provided herein.
3. Fractional Shares. PBE shall not be required to issue fractional
-----------------
shares of Common Stock upon exercise of this Warrant but shall pay for any
fractional shares in cash or by certified or official bank check at the Exercise
Price.
4. Exchange or Loss of Warrant. This Warrant is exchangeable, without
---------------------------
expense, at the option of the Holder, upon presentation and surrender hereof at
the
-2-
<PAGE>
principal office of PBE for other warrants of different denominations entitling
the Holder to purchase in the aggregate the same number of shares of Common
Stock issuable hereunder. The term "Warrant" as used herein includes any
warrants for which this Warrant may be exchanged. Upon receipt by PBE of
evidence reasonably satisfactory to it of the loss, theft, destruction or
mutilation of this Warrant, and (in the case of loss, theft or destruction) of
reasonably satisfactory indemnification, and upon surrender and cancellation of
this Warrant, if mutilated, PBE will execute and deliver a new Warrant of like
tenor and date.
5. Repurchase. The Holder shall have the right to require PBE to
----------
repurchase all or any portion of this Warrant under the terms and conditions of
Paragraph 7 of the Warrant Agreement.
6. Adjustment. The number of shares of Common Stock issuable upon the
----------
exercise of this Warrant and the Exercise Price shall be subject to adjustment
from time to time as provided in this Paragraph 6.
(A) Stock Dividends, etc.
---------------------
(1) Stock Dividends. In case PBE shall pay or make a dividend or
---------------
other distribution on any class of capital stock of PBE in Common Stock, the
number of shares of Common Stock issuable upon exercise of this Warrant shall be
increased by multiplying such number of shares by a fraction of which the
denominator shall be the number of shares of Common Stock outstanding at the
close of business on the day immediately preceding the date of such distribution
and the numerator shall be the sum of such number of shares and the total number
of shares of Common Stock constituting such dividend or other distribution, such
increase to become effective immediately after the opening of business on the
day following such distribution.
(2) Subdivisions. In case outstanding shares of Common Stock shall
------------
be subdivided into a greater number of shares of Common Stock, the number of
shares of Common Stock issuable upon exercise of this Warrant at the opening of
business on the day following the day upon which such subdivision becomes
effective shall be proportionately increased, and, conversely, in case
outstanding shares of Common Stock shall each be combined into a smaller number
of shares of Common Stock, the number of shares of Common Stock issuable upon
exercise of this Warrant at the opening of business on the day following the day
upon which such combination becomes effective shall be proportionately
decreased, such increase or decrease, as the case may be, to become effective
immediately after the opening of business on the day following the date upon
which such subdivision or combination becomes effective.
-3-
<PAGE>
(3) Reclassifications. The reclassification of Common Stock into
-----------------
securities (other than Common Stock) and/or cash and/or other consideration
shall be deemed to involve a subdivision or combination, as the case may be, of
the number of shares of Common Stock outstanding immediately prior to such
reclassification into the number or amount of securities and/or cash and/or
other consideration outstanding immediately thereafter and the effective date of
such reclassification shall be deemed to be "the day upon which such subdivision
becomes effective," or "the day upon which such combination becomes effective,"
as the case may be, within the meaning of clause (2) above.
(4) Optional Adjustments. PBE may make such increases in the number
--------------------
of shares of Common Stock issuable upon exercise of this Warrant, in addition to
those required by this subparagraph (A), as shall be determined by its Board of
Directors to be advisable in order to avoid taxation so far as practicable of
any dividend of stock or stock rights or any event treated as such for federal
income tax purposes to the recipients.
(5) Adjustment to Exercise Price. Whenever the number of shares of
----------------------------
Common Stock issuable upon exercise of this Warrant is adjusted as provided in
this Paragraph 6(A), the Exercise Price shall be adjusted by a fraction in which
the numerator is equal to the number of shares of Common Stock issuable prior to
the adjustment and the denominator is equal to the number of shares of Common
Stock issuable after the adjustment.
(B) Certain Sales of Common Stock.
-----------------------------
(1) Adjustment to Shares Issuable. If and whenever PBE sells or
-----------------------------
otherwise issues (other than under circumstances in which Paragraph 6(A)
applies) any shares of Common Stock, the number of shares of Common Stock
issuable upon exercise of this Warrant shall be increased by multiplying such
number of shares by a fraction, the denominator of which shall be the number of
shares of Common Stock outstanding at the close of business on the day
immediately preceding the date of such sale or issuance and the numerator of
which shall be the sum of such number of shares and the total number of shares
constituting such sale or other issuance, such increase to become effective
immediately after the opening of business on the day following such sale or
issuance.
(2) Adjustment to Exercise Price. If and whenever PBE sells or
----------------------------
otherwise issues any shares of Common Stock (excluding any stock dividend or
other issuance not for consideration to which Paragraph 6(A) applies) for a
consideration per share which is less than the Exercise Price at the time of
such sale or other issuance, then in each such case the Exercise Price shall be
forthwith changed (but only if a reduction would result) to the price
(calculated to the nearest
-4-
<PAGE>
cent) determined by dividing: (i) an amount equal to the sum of (aa) the number
of shares of Common Stock outstanding immediately prior to such issue or sale,
multiplied by the then effective Exercise Price, plus (bb) the total
consideration, if any, received and deemed received by PBE upon such issue or
sale, by (ii) the total number of shares of Common Stock outstanding immediately
after such issue or sale.
(C) Definition. For purposes of this Paragraph 6, the term "Common
----------
Stock" shall include (1) any shares of PBE of any class or series which has no
preference or priority in the payment of dividends or in the distribution of
assets upon any voluntary or involuntary liquidation, dissolution or winding up
of PBE and which is not subject to redemption by PBE, and (2) any rights or
options to subscribe for or to purchase shares of Common Stock or any stock or
securities convertible into or exchangeable for shares of Common Stock (such
convertible or exchangeable stock or securities being hereinafter called
"Convertible Securities"), whether or not such rights or options or the right to
convert or exchange any such Convertible Securities are immediately exercisable.
For purposes of any adjustments made under Paragraph 6(A) or 6(B) as a result of
the distribution, sale or other issuance of rights or options or Convertible
Securities, the number of Shares of Common Stock outstanding after or as a
result of the occurrence of events described in Paragraph 6(A)(1) or 6(B)(1)
shall be calculated by assuming that all such rights, options or Convertible
Securities have been exercised for the maximum number of shares issuable
thereunder.
7. Notice. (A) Whenever the number of shares of Common Stock for which
------
this Warrant is exercisable is adjusted as provided in Paragraph 6, PBE shall
promptly compute such adjustment and mail to the Holder a certificate, signed by
the principal financial officer of PBE, setting forth the number of shares of
Common Stock for which this Warrant is exercisable as a result of such
adjustment having become effective.
(B) Upon the occurrence of any event which results in the Holder having the
right to require PBE to repurchase this Warrant, as provided in Paragraph 7 of
the Warrant Agreement, PBE shall promptly notify the Holder of such event; and
PBE shall promptly compute the Warrant Repurchase Price and furnish to the
Holder a certificate, signed by the principal financial officer of PBE, setting
forth the Warrant Repurchase Price and the basis and computation thereof.
8. Rights of the Holder. (A) Without limiting the foregoing or any
--------------------
remedies available to the Holder, it is specifically acknowledged that the
Holder would not have an adequate remedy at law for any breach of the provisions
of this Warrant and shall be entitled to specific performance of PBE's
obligations under, and injunctive relief against any actual or threatened
violation of the obligations of any Person (as defined in Paragraph 7 of the
Warrant Agreement) subject to, this Warrant.
-5-
<PAGE>
(B) The Holder shall not, by virtue of its status as Holder, be
entitled to any rights of a shareholder in PBE.
9. Termination. This Warrant and the rights conferred hereby shall
-----------
terminate (i) upon the Effective Date of the merger provided for in the Merger
Agreement, (ii) upon a valid termination of the Merger Agreement prior to the
occurrence of an event described in Paragraph 2 of the Warrant Agreement, or
(iii) to the extent this Warrant has not previously been exercised, 60 days
after the occurrence of an event described in Paragraph 2 of the Warrant
Agreement.
10. Governing Law. This Warrant shall be deemed to have been delivered
-------------
in, and shall be governed by and interpreted in accordance with the substantive
laws of, the Commonwealth of Pennsylvania.
Dated: March 19, 1997
THE PEOPLES BANK OF ELKTON
By:
-----------------------------------
David K. Williams, Sr., Chairman
of the Board
Attest:
-------------------------------
Cathy C. Dunn, Secretary
-6-
<PAGE>
EXHIBIT D
STATUTE RELATING TO DISSENTERS' RIGHTS
--------------------------------------
Maryland Banking Laws
Part II. Rights of Objecting Stockholders.
-------------------------------------------
(S) 3-718. Successor may offer fair value.
(a) In general. -- The successor in a consolidation, merger, or transfer of
assets may offer to pay in cash to the objecting stockholders of a constituent
bank not more than what it considers to be the fair value of their shares of
stock as of the time of the stockholders' meeting approving the transaction.
(b) Effect of acceptance. -- An objecting stockholder who accepts the offer is
barred from receiving the appraised fair value of the shares of stock under (S)
3-719 of this subtitle.
(S) 3-719. Right to fair value.
(a) General rule. -- The owner of shares of stock that were voted against a
consolidation, merger, or transfer of assets is entitled to receive the fair
value of those shares, in cash, if the transaction becomes effective.
(b) Procedure by stockholder. -- A stockholder who desires to receive payment
of the fair value for shares under this section, within 30 days after the
transaction becomes effective, shall:
(1) Make a written demand on the successor for payment; and
(2) Surrender the stock certificates.
(S)3-720. Appraisal of fair value.
(a) Basis of fair value. -- The fair value of the shares of stock shall be
determined as of the date of the stockholders' meeting approving the
consolidation, merger, or transfer of assets.
(b) Appraisers.
(1) The determination of fair value shall be made by three appraisers as
follows:
(i) One chosen by the owners of two thirds of the shares involved;
(ii) One chosen by the board of directors of the successor; and
(iii) The third chosen by the other two appraisers.
(2) The fair value to which any two appraisers agree shall govern.
(3) The appraisers shall give notice of the fair value determination to the
successor and to each stockholder who has made demand for the
determination under (S) 3-719 of this subtitle.
(c) Reappraisal.
(1) Within 5 days after the appraisers give the notice of the fair value
determination, a stockholder who is dissatisfied with that value may
notify the Commissioner.
(2) The Commissioner shall have the shares reappraised.
<PAGE>
(3) This reappraisal is final and binding as to the value of the shares of
stock of that stockholder.
(d) Appraisal by Commissioner.
(1) If the appraisal to be made under subsection (b) of this section is not
completed within 90 days after the consolidation, merger, or transfer of
assets becomes effective, the Commissioner shall have an appraisal made.
(2) This appraisal is final and binding as to the value of the shares of stock
of all objecting stockholders.
(e) Expenses of appraisals. -- The successor shall pay the expenses of each
appraisal made under this section.
(S) 3-721. Amount due is debt of successor.
Any amount due to an objecting stockholder under this Part II is a debt of the
successor.
81
<PAGE>
EXHIBIT E
FINANCIAL STATEMENTS FOR THE PEOPLES BANK OF ELKTON
INDEX
FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND 1996
Balance Sheets (Unaudited) as of March 31, 1997 and December 31, 1996
Statements of Income (Unaudited) for the Three Months Ended March 31, 1997
and March 31, 1996
Statements of Cash Flows (Unaudited) for the Three Months Ended March 31,
1996
Notes to Financial Statements
FINANCIAL STATEMENTS FOR FISCAL YEARS 1996, 1995 and 1994
Independent Auditors' Report
Balance Sheets (Audited) as of December 31, 1996, 1995 and 1994
Statements of Income (Audited) for the Fiscal Years Ended December 31, 1996,
1995 and 1994
Statements of Changes in Stockholders' Equity (Audited) for the Fiscal Years
Ended December 31, 1996, 1995 and 1994
Statements of Cash Flows (Audited) for the Fiscal Years Ended December 31,
1996, 1995 and 1994
<PAGE>
<TABLE>
<CAPTION>
THE PEOPLES BANK OF ELKTON
BALANCE SHEETS (UNAUDITED)
- -------------------------------------------------------------------------------
March 31, 1997 December 31, 1996
ASSETS
- --------------------------------------------------------------------------------
<S> <C> <C>
Cash and due from banks $ 3,991,846 $ 5,339,580
Federal funds sold 650,000 2,175,000
Investment securities:
Held to maturity (Fair value:
$364,288 in 1997
and $342,373 in 1996) 370,328 344,666
Available for sale 20,107,605 18,010,189
Loans 65,594,285 64,543,809
Less: Allowance for loan losses (962,767) (959,217)
---------------- ----------------
Net Loans 64,631,518 63,584,592
================ ================
Bank premises and equipment 930,115 951,722
Accrued interest and fees receivable 666,992 727,958
Deferred income taxes 563,363 484,894
Income taxes receivable - 44,692
Prepaid expenses and other assets 285,148 299,159
---------------- -----------------
Total Assets $92,196,915 $91,962,452
================ =================
LIABILITIES
- --------------------------------------------------------------------------------
Deposits:
Demand $10,551,124 $12,338,953
Money Market 13,475,707 12,973,790
Savings and NOW 15,411,736 16,773,075
Other time deposits 40,289,085 37,032,556
---------------- -----------------
Total Deposits 79,727,652 79,118,374
---------------- -----------------
Short-term borrowings 444,294 552,799
Federal Home Loan Bank borrowings 1,500,000 2,000,000
Accrued interest payable 365,191 211,207
Accrued income taxes 99,941 -
Other liabilities 186,181 178,001
---------------- -----------------
Total Liabilities 82,323,259 82,060,381
---------------- -----------------
STOCKHOLDERS' EQUITY
- -------------------------------------------------------------------------------
Common stock ($10.00 par)
Shares: Authorized 500,000
Issued and
Outstanding 230,596 2,305,960 2,305,960
Surplus 2,305,960 2,305,960
Undivided profits 5,426,286 5,329,987
Net unrealized depreciation on investment (164,550) (39,836)
securities available for sale
---------------- -----------------
Total Shareholders'
Equity 9,873,656 9,902,071
---------------- -----------------
Total Liabilities and
Shareholders' Equity $92,196,915 $91,962,452
================ =================
</TABLE>
- -------------------------------------------------------------------------------
See notes to financial statements
84
<PAGE>
<TABLE>
<CAPTION>
THE PEOPLES BANK OF ELKTON
STATEMENTS OF INCOME (UNAUDITED)
- --------------------------------------------------------------------------------
Three Months Ended March 31
----------------------------
1997 1996
----------------------------
INTEREST REVENUE
- --------------------------------------------------------------------------------
<S> <C> <C>
Loans, including fees $1,472,829 $1,356,289
U.S. Treasury and Government agency securities 256,789 266,384
State and municipal securities 49,165 12,113
Corporate bonds 2,062 37,595
Other investment securities 5,314 5,121
Federal funds sold 10,242 14,154
--------------- ------------
Total Interest Revenue 1,796,401 1,691,656
INTEREST EXPENSE
- --------------------------------------------------------------------------------
Deposits of $100,000 or more 131,183 99,325
Other deposits 566,210 556,330
Short-term borrowings 3,299 5,488
Federal Home Loan Bank borrowings 21,376 33,734
--------------- ------------
Total Interest Expense 722,068 694,877
Net Interest Income 1,074,333 996,779
PROVISION FOR LOAN LOSSES 24,000 21,000
--------------- ------------
Net Interest Income After Provision for Loan Losses 1,050,333 975,779
--------------- ------------
OTHER OPERATING REVENUE
- --------------------------------------------------------------------------------
Service charges on deposit accounts 93,716 94,973
Other commissions and fees 20,802 14,703
--------------- ------------
114,518 109,676
OTHER EXPENSES
- --------------------------------------------------------------------------------
Salaries 308,555 259,860
Employee benefits 85,301 80,389
Occupancy expense 43,431 38,945
Furniture and equipment expense 63,253 51,227
Other operating expense 215,744 211,318
--------------- ------------
716,284 641,739
Income Before Income Taxes 448,567 443,716
INCOME TAXES 144,733 154,446
--------------- ------------
Net Income $ 303,834 $ 289,270
=============== ============
Earnings per common share $ 1.32 $ 1.25
- --------------------------------------------------------------------------------
See notes to financial statements
</TABLE>
85
<PAGE>
<TABLE>
<CAPTION>
THE PEOPLES BANK OF ELKTON
STATEMENTS OF CASH FLOWS (UNAUDITED)
- ------------------------------------------------------------------------------
Three Months Ended
March 31
---------------------------------
1997 1996
---------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 303,834 $ 289,270
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan losses 24,000 21,000
Depreciation and amortization of
premises and equipment 49,699 50,511
Net amortization (accretion) of investment
security premiums (discounts) 1,283 (22,916)
Gain on sale of foreclosed real estate - (4,832)
Decrease (increase) in accrued interest
and fees receivable 60,966 (44,884)
Decrease in prepaid expenses and other
assets 14,011 84,582
Increase in accrued interest payable 153,984 125,514
Increase in accrued income taxes payable 144,633 140,447
Increase (decrease) in other liabilities 8,180 (17,705)
----------- -----------
Total adjustments 456,756 331,717
----------- -----------
Net cash provided by operating
activities 760,590 620,987
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities of securities held
to maturity - 755,067
Proceeds from maturities of securities
available for sale 1,750,000 6,748,933
Purchase of securities available for sale (4,077,544) (7,964,774)
Net increase in loans (1,070,926) (2,008,645)
Proceeds from sales of foreclosed real estate - 93,148
Purchase of premises and equipment (28,092) (116,615)
----------- -----------
Net cash used in investing
activities (3,426,562) (2,492,886)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net (decrease) increase in demand and savings
deposits (2,647,251) 758,867
Net increase in time deposits 3,256,529 479,477
Decrease in long-term debt (500,000) (500,000)
(Decrease) increase in short-term borrowings (108,505) 98,745
Dividends paid (207,535) (115,298)
----------- -----------
Net cash (used in) provided by
financing activities (206,762) 721,794
----------- -----------
Net Decrease in Cash and Cash Equivalents (2,872,734) (1,150,105)
Cash and Cash Equivalents at Beginning of
Period 7,514,580 4,707,334
----------- -----------
Cash and Cash Equivalents at End of Period $ 4,641,846 $ 3,557,229
=========== ===========
Supplemental Disclosures of Cash Flow Information
Cash paid during the period for:
Interest $ 565,543 $ 569,365
Income taxes $ - $ -
- ------------------------------------------------------------------------------
See notes to financial statements
</TABLE>
86
<PAGE>
THE PEOPLES BANK OF ELKTON
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
- -----------------------------------------
NOTE A - Basis of Presentation
The accompanying unaudited financial statements have been prepared in accordance
with generally accepted accounting principles for interim financial information
and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X.
Accordingly, they do not include all of the information and notes required by
generally accepted accounting principles for complete financial statements. In
the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included.
Operating results for the three month period ended March 31, 1997 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 1997.
NOTE B - Net Income Per Share
Net income per share is computed on the basis of the weighted average number of
common shares outstanding.
NOTE C - Merger With Fulton Financial Corporation
On March 18, 1997, The Peoples Bank of Elkton ("PBE") entered into an
Affiliation and Merger Agreement with Fulton Financial Corporation ("FFC").
Under the terms of the agreement, FFC will acquire each of the 230,596
outstanding shares of the common stock of PBE in exchange for 4.158 shares of
FFC's common stock.
FFC is a $4.1 billion multi-bank holding company which owns ten other banking
subsidiaries in Pennsylvania, Maryland, New Jersey and Delaware. PBE will
become FFC's second banking subsidiary in the State of Maryland. The acquisition
is subject to approval by regulatory authorities and PBE's shareholders and is
expected to close in the third or fourth quarter of 1997.
NOTE D - New Accounting Standards
Accounting for Transfers and Servicing of Financial Assets and Extinguishments
- ------------------------------------------------------------------------------
of Liabilities: Statement of Financial Accounting Standards No. 125, "Accounting
- --------------
for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities" (Statement 125) was issued in 1996 and is effective for 1997.
Statement of Financial Accounting Standards No. 127 (Statement 127) was also
issued in 1996 and amended Statement 125 by deferring for one year the effective
date for certain provisions of Statement 125. PBE adopted the applicable
provisions of Statement 125, on January 1, 1997 and intends to adopt the
remaining provisions on January 1, 1998. No material financial statement impact
is expected.
Earnings Per Share: Statement of Financial Accounting Standards No. 128,
- ------------------
"Earnings Per Share" (Statement 128) was issued in February, 1997. Statement 128
simplifies the standards for computing earnings per share (EPS) previously found
in Accounting Principles Board Opinion No. 15 and makes them comparable to
international EPS standards. It replaces the presentation of primary EPS with a
presentation of basic EPS and requires dual presentation of basic and diluted
EPS on the face of the income statement for all entities with complex capital
structures. It also requires a reconciliation of the numerator and denominator
of basic and diluted EPS. Statement 128 is effective for periods ending after
December 15, 1997 and requires restatement of all prior-period EPS data
presented. Statement 128 will not have a significant impact on the earnings per
share of PBE.
87
<PAGE>
[LETTERHEAD OF STEGMAN & COMPANY APPEARS HERE]
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
The Peoples Bank of Elkton
Elkton Maryland
We have audited the accompanying balance sheets of The Peoples Bank of
Elkton as of December 31, 1996, 1995 and 1994, and the related statements of
income, changes in stockholders' equity, and cash flows for the years then
ended. These financial statements are the responsibility of the Bank's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatements. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of The Peoples Bank of
Elkton as of December 31, 1996, 1995 and 1994, and the results of its operations
and its cash flows for the years then ended in conformity with generally
accepted accounting principles.
/s/ Stegman & Company
Towson, Maryland
January 6, 1997
5
<PAGE>
THE PEOPLES BANK OF ELKTON
BALANCE SHEETS
DECEMBER 31, 1996, 1995 AND 1994
ASSETS
<TABLE>
<CAPTION>
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
Cash and due from banks $ 5,339,580 $ 3,607,334 $ 3,919,935
Federal funds sold 2,175,000 1,100,000 4,500,000
Investments available for sale - at
fair value 18,010,189 19,398,914 12,121,940
Investments held to maturity at
amortized cost -
fair value of $342,373 (1996),
$3,690,792 (1995) and $3,662,953
(1994) 344,666 3,681,316 3,740,403
Loans 64,543,809 54,849,526 51,454,665
Less: allowance for loan losses (959,217) (676,734) (711,986)
----------- ----------- -----------
Loans - net 63,584,592 54,172,792 50,742,679
Bank premises and equipment 951,722 735,005 725,027
Accrued interest and fees receivable 727,958 725,388 573,395
Deferred income taxes 484,894 312,589 448,500
Income taxes receivable 44,692 - 17,170
Prepaid expenses and other assets 299,159 317,094 321,480
Foreclosed real estate - 95,816 95,816
----------- ----------- -----------
TOTAL ASSETS $91,962,452 $84,146,248 $77,206,345
=========== =========== ===========
</TABLE>
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Deposits:
<S> <C> <C> <C>
Demand $12,338,953 $ 9,805,411 $ 9,546,069
Money market 12,973,790 14,348,673 15,277,593
Savings and NOW 16,773,075 13,702,619 15,108,388
Other time deposits 37,032,556 32,990,927 24,791,404
----------- ----------- -----------
Total deposits 79,118,374 70,847,630 64,723,454
Short-term borrowings 552,799 276,917 314,205
Federal Home Loan Bank borrowings 2,000,000 3,000,000 3,000,000
Accrued interest payable 211,207 209,658 134,807
Accrued income taxes - 4,203 -
Other liabilities 178,001 158,171 172,972
----------- ----------- -----------
Total liabilities 82,060,381 74,496,579 68,345,438
----------- ----------- -----------
Stockholders' equity:
Common stock, par value $10.00 per
share; authorized 500,000 shares;
230,596 shares issued and outstanding
for 1996, 1995 and 1994 2,305,960 2,305,960 2,305,960
Surplus 2,305,960 2,305,960 2,305,960
Undivided profits 5,329,987 5,022,182 4,444,845
Net unrealized (depreciation)
appreciation on investment securities
available for sale (39,836) 15,567 (195,858)
----------- ----------- -----------
Total stockholders' equity 9,902,071 9,649,669 8,860,907
----------- ----------- -----------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $91,962,452 $84,146,248 $77,206,345
=========== =========== ===========
</TABLE>
See accompanying notes.
7
<PAGE>
THE PEOPLES BANK OF ELKTON
STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
1996 1995 1994
----------- ---------- -----------
<S> <C> <C> <C>
INTEREST REVENUE:
Loans, including fees $5,600,849 $5,088,349 $4,062,524
U.S. Treasury and Government
agency securities 1,157,411 746,902 445,309
State and municipal securities 105,228 12,968 20,922
Corporate bonds 101,875 248,617 514,790
Other investment securities 20,775 21,631 24,754
Federal funds sold 67,841 241,783 135,906
---------- ---------- ----------
Total interest revenue 7,053,979 6,360,250 5,204,205
---------- ---------- ----------
INTEREST EXPENSE:
Deposits of $100,000 or more 448,563 365,984 113,389
Other deposits 2,246,515 2,192,654 1,618,188
Short-term borrowings 27,260 21,481 15,680
Federal Home Loan Bank borrowings 119,778 152,471 151,500
---------- ---------- ----------
Total interest expense 2,842,116 2,732,590 1,898,757
---------- ---------- ----------
NET INTEREST INCOME 4,211,863 3,627,660 3,305,448
PROVISION FOR LOAN LOSSES 334,000 75,000 120,000
---------- ---------- ----------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 3,877,863 3,552,660 3,185,448
---------- ---------- ----------
OTHER OPERATING REVENUE:
Service charges on deposit accounts 353,885 347,490 341,686
Other commissions and fees 80,267 79,232 80,652
Gain on sale of foreclosed real estate 9,511 - -
---------- ---------- ----------
Total other operating revenue 443,663 426,722 422,338
---------- ---------- ----------
OTHER EXPENSES:
Salaries 1,185,856 1,070,844 934,208
Employee benefits 326,125 266,292 233,202
Occupancy expense 195,589 176,106 157,978
Furniture and equipment expense 234,148 163,531 155,827
Other operating expenses 814,336 695,190 703,680
---------- ---------- ----------
Total other expenses 2,756,054 2,371,963 2,184,895
---------- ---------- ----------
INCOME BEFORE INCOME TAXES 1,565,472 1,607,419 1,422,891
---------- ---------- ----------
INCOME TAXES:
Current 658,106 591,094 567,585
Deferred (138,346) 3,162 (39,806)
---------- ---------- ----------
519,760 594,256 527,779
---------- ---------- ----------
NET INCOME $1,045,712 $1,013,163 $ 895,112
========== ========== ==========
Earnings per common share $4.53 $4.39 $3.88
===== ===== =====
</TABLE>
See accompanying notes.
8
<PAGE>
THE PEOPLES BANK OF ELKTON
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
Unrealized
Appreciation
(Depreciation)
on Investment
Common Stock Securities
------------------- Undivided Available
Shares Par Value Surplus Profits for Sale
-------- ---------- ---------- ----------- --------------
<S> <C> <C> <C> <C> <C>
Balances at January 1, 1994 230,596 $2,305,960 $2,305,960 $3,907,157 $ 74,529
Net income - - - 895,112 -
Cash dividend, $1.55 per share - - - (357,424) -
Unrealized depreciation on investment
securities available for sale, net of
applicable deferred income taxes - - - - (270,387)
------- ---------- ---------- ---------- -------------
Balances at December 31, 1994 230,596 2,305,960 2,305,960 4,444,845 (195,858)
Net income - - - 1,013,163 -
Cash dividend, $1.89 per share - - - (435,826) -
Unrealized appreciation on investment
securities available for sale, net of
applicable deferred income taxes - - - - 211,425
------- ---------- ---------- ---------- -------------
Balances at December 31, 1995 230,596 2,305,960 2,305,960 5,022,182 15,567
Net income - - - 1,045,712 -
Cash dividend, $3.20 per share - - - (737,907) -
Unrealized depreciation on investment
securities available for sale, net of
applicable deferred income taxes - - - - (55,403)
------- ---------- ---------- ---------- -------------
Balances at December 31, 1996 230,596 $2,305,960 $2,305,960 $5,329,987 $ (39,836)
======= ========== ========== ========== =============
</TABLE>
See accompanying notes.
9
<PAGE>
THE PEOPLES BANK OF ELKTON
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
1996 1995 1994
------------- ------------- ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,045,712 $ 1,013,163 $ 895,112
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation and amortization 218,679 189,412 176,061
Provision for credit losses 334,000 75,000 120,000
Deferred income taxes (138,346) 3,162 (39,806)
Gain on sale of foreclosed real
estate (9,511) - -
Increase in accrued income and
other assets (55,746) (180,792) (151,827)
Increase in accrued expenses and
other liabilities 17,176 64,253 63,813
Other - net (50,617) (36,735) 112,756
------------ ------------ -----------
Net cash provided by operating
activities 1,361,347 1,127,463 1,176,109
------------ ------------ -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities of held to
maturity investment securities 3,336,650 641,910 988,015
Proceeds from maturities of
available for sale securities 21,214,064 11,950,000 11,097,000
Proceeds from sale of student loans - 463,874 -
Purchase of available for sale
investment securities (19,915,602) (19,539,140) (6,808,455)
Net increase in loans (9,795,344) (3,858,735) (5,796,965)
Purchase of bank premises and
equipment (408,976) (149,035) (144,535)
Proceeds from sale of foreclosed
real estate 213,888 - -
Purchase of foreclosed real estate (7,500) - -
------------ ------------ -----------
Net cash used in investing
activities (5,362,820) (10,491,126) (664,940)
------------ ------------ -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits 8,270,744 6,124,176 5,492,209
Net increase (decrease) in
short-term borrowings 275,882 (37,288) (542,430)
Repayment of Federal Home Loan Bank
borrowings (1,000,000) - -
Dividends paid (737,907) (435,826) (357,424)
------------ ------------ -----------
Net cash provided by financing
activities 6,808,719 5,651,062 4,592,355
------------ ------------ -----------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS 2,807,246 (3,712,601) 5,103,524
CASH AND CASH EQUIVALENTS
AT BEGINNING OF YEAR 4,707,334 8,419,935 3,316,411
------------ ------------ -----------
CASH AND CASH EQUIVALENTS
AT END OF YEAR $ 7,514,580 $ 4,707,334 $ 8,419,935
============ ============ ===========
</TABLE>
10
<PAGE>
The Peoples Bank of Elkton
Statements of Cash Flows (Continued)
For the Years Ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
Supplemental schedule of cash flows
activity:
Interest paid $2,840,567 $2,657,739 $1,870,948
========== ========== ==========
Income taxes paid $ 692,000 $ 570,000 $ 588,600
========== ========== ==========
Noncash investing activities:
Transfer from loans to other real
estate owned $ 101,061 $ - $ -
======== =========== ========
</TABLE>
See accompanying notes.
11
<PAGE>
THE PEOPLES BANK OF ELKTON
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting and reporting policies in the accompanying financial
statements conform to generally accepted accounting principles and to general
practices within the banking industry. Certain reclassifications have been
made to amounts previously reported to conform with the classifications made in
1996.
Nature of Operations
--------------------
The Bank provides a full range of banking services to individuals and
businesses through its main office and one branche in Cecil County, Maryland.
Its primary deposit products are certificates of deposit and demand, savings,
NOW and money market accounts. Its primary lending products are commercial and
consumer loans and real estate mortgages.
Use of Estimates
----------------
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
The Bank's loan portfolio consists primarily of residential and
commercial real estate mortgage loans in the Cecil County area. Accordingly,
the collectibility of a substantial portion of the Bank's loan portfolio is
susceptible to changes in the local economy and the local real estate market.
Investment Securities Available for Sale
----------------------------------------
Investment securities designated as available for sale are stated at
fair value based on quoted market prices. They represent those securities
which management may sell as part of its asset/liability strategy or that may
be sold in response to changing interest rates or liquidity needs. The cost of
securities sold is determined by the specific identification method.
Investment Securities Held to Maturity
--------------------------------------
Investment securities held to maturity are stated at amortized cost.
The Bank has the ability and intent to hold these securities until maturity.
12
<PAGE>
Loans and Allowance for Loan Losses
-----------------------------------
Loans are stated at face value less deferred origination fees and the
allowance for loan losses. Interest on loans is accrued based on the principal
amounts outstanding. The accrual of interest is discontinued when
circumstances indicate that collection is questionable. The Bank recognizes
loan origination fees as revenue over the contractual life of the loan.
The allowance for loan losses is maintained at a level which, in
management's judgment, is adequate to absorb credit losses inherent in the loan
portfolio. The amount of the allowance is based on management's evaluation of
the collectibility of the loan portfolio, including the nature of the
portfolio, credit concentrations, trends in historical loss experience,
specific impaired loans, and economic conditions. Allowances for impaired
loans are generally determined based on collateral values or the present value
of estimated cash flows. The allowance is increased by a provision for loan
losses, which is charged to expense and reduced by charge offs, net of
recoveries.
While management uses all available information to recognize loan
losses, future additions to the allowance may be necessary based on changes in
local economic conditions. In addition, regulatory agencies, as an integral
part of their examination process, periodically review the Bank's allowances
for loan losses. Such examinations could result in the Bank recognizing
additions to these allowances based on the regulator's judgments about
information available to them at the time of their examination.
Foreclosed Real Estate
----------------------
Real estate acquired through foreclosure of loans is carried at cost
or fair value minus estimated costs of disposal, whichever is lower. Fair
value is based on independent appraisals and other relevant factors. At the
time of acquisition, any excess of the loan balance over fair value is charged
to the allowance for loan losses. Gains and losses on sales of foreclosed real
estate are included in non-interest income.
Bank Premises and Equipment
---------------------------
Bank premises and equipment are recorded at cost less accumulated
depreciation. Depreciation is computed using the straight-line and accelerated
methods over the estimated useful lives of the assets.
Income Taxes
------------
Deferred tax assets and liabilities are recognized for the future
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases.
Cash and Cash Equivalents
-------------------------
For purposes of reporting cash flows, cash and cash equivalents
include cash on hand, amounts due from banks, and federal funds sold.
Generally, federal funds are purchased and sold for one-day periods.
13
<PAGE>
Earnings per Common Share
-------------------------
Earnings per common share are based on the weighted average number of
shares after giving retroactive effect to stock splits and dividends and
totaled 230,596 for 1996, 1995 and 1994.
2. ADOPTION OF RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
Impaired Loans
--------------
Effective January 1, 1995, the Corporation adopted the provisions of
Statements of Financial Accounting Standards Nos. 114 and 118, Accounting by
Creditors for Impairment of a Loan. This statement defines a loan as impaired
when, based on current information and events, it is probable that a creditor
will be unable to collect all amounts due according to the contractual terms of
a loan. If the value of the impaired loan is less than the recorded investment
in the loan. The creditor shall recognize the impairment by creating a
valuation allowance for the difference. See Note 5 for presentation of loans
which management considered impaired.
Financial Assets and Liabilities
--------------------------------
On January 1, 1997, the Bank adopted the provisions of Statement of
Financial Accounting Standards (SFAS) No. 125, Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities. This
statement provides consistent standards for distinguishing transfers of
financial assets that are sales from transfers that are secured borrowings.
The adoption of this pronouncement did not have a material impact on the
financial position of the Bank.
Long-Lived Assets
-----------------
Long-lived assets are evaluated regularly for other-than-temporary
impairment. If circumstances suggest that their value may be impaired and the
write-down would be material, an assessment of recoverability is performed
prior to any write-down of the asset. SFAS No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of,
was adopted on January 1, 1996. Implementation of this standard did not have a
significant impact on the financial condition or results of operations of the
Bank.
3. INVESTMENT SECURITIES AVAILABLE FOR SALE
The amortized cost, gross unrealized holding gains and losses and fair
values of investment securities available for sale are as follows:
<TABLE>
<CAPTION>
December 31, 1996
------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
----------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
U.S. Treasury $ 1,000,450 $ - $ 140 $ 1,000,310
U.S. Government agency 12,691,579 15,043 110,354 12,596,268
Corporate bonds 150,000 - 271 149,729
State and municipal 3,945,061 36,527 5,706 3,975,882
----------- ------- -------- -----------
Total debt securities
available for sale 17,787,090 51,570 116,471 17,722,189
Federal Home Loan Bank stock 288,000 - - 288,000
----------- ------- -------- -----------
$18,075,090 $51,570 $116,471 $18,010,189
=========== ======= ======== ===========
</TABLE>
14
<PAGE>
<TABLE>
<CAPTION>
December 31, 1995
------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
----------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
U.S. Treasury $ 5,739,267 $22,881 $ - $ 5,762,148
U.S. Government agency 11,749,962 893 - 11,750,855
Corporate bonds 777,009 540 - 777,549
Total debt securities 831,214 1,048 - 832,262
available for sale ----------- ------- -------- -----------
Equity securities 19,097,452 25,362 - 19,122,814
276,100 - - 276,100
----------- ------- -------- -----------
$19,373,552 $25,362 $ - $19,398,914
=========== ======= ======== ===========
<CAPTION>
December 31, 1994
------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
----------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
U.S. Treasury $ 4,756,354 $ - $ 83,956 $ 4,672,398
U.S. Government agency 3,250,021 - 167,685 3,082,336
Corporate bonds 4,144,756 3,105 70,555 4,077,306
----------- ------- -------- -----------
Total debt securities
available for sale 12,151,131 3,105 322,196 11,832,040
Equity securities 289,900 - - 289,900
----------- ------- -------- -----------
$12,441,031 $ 3,105 $322,196 $12,121,940
=========== ======= ======== ===========
</TABLE>
Contractual maturities for securities designated as being available for
sale at December 31, 1996 are shown below. Actual maturities will differ from
contractual maturities because borrowers may have the right to call or prepay
obligations with or without call or prepayment penalties.
<TABLE>
<CAPTION>
Amortized Fair
Cost Value
----------- -----------
<S> <C> <C>
Maturing within one year $ 1,699,169 $ 1,699,511
Maturing over one to five years 10,921,636 10,878,557
Maturing over five years to ten years 4,666,875 4,648,143
Maturing over ten years 499,410 495,978
----------- -----------
Total debt securities $17,787,090 $17,722,189
available for sale =========== ===========
</TABLE>
15
<PAGE>
4. INVESTMENT SECURITIES HELD TO MATURITY
The amortized cost and estimated market values of investment securities
held to maturity are as follows:
<TABLE>
<CAPTION>
December 31, 1996
----------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
U.S. Government agency $ 250,000 $ - $ 3,905 $ 246,095
State and municipal 94,666 1,612 - 96,278
---------- ------ ------- ----------
$ 344,666 $1,612 $ 3,905 $ 342,373
========== ====== ======= ==========
<CAPTION>
December 31, 1995
----------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
U.S. Treasury $ 499,861 $2,639 $ - $ 502,500
U.S. Government agency 1,250,971 1,998 - 1,252,969
Mortgage-backed 4,051 40 - 4,091
State and municipal 216,702 2,749 - 219,451
Corporate bonds 1,709,731 2,050 - 1,711,781
---------- ------ ------- ----------
$3,681,316 $9,476 $ - $3,690,792
========== ====== ======= ==========
<CAPTION>
December 31, 1994
----------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
U.S. Government agency $ 499,623 $ - $10,561 $ 489,062
Mortgage-backed 1,249,979 - 14,284 1,235,695
State and municipal 21,993 - 41 21,952
Corporate bonds 232,083 - 963 231,120
Time deposits - FDIC 1,736,725 1,204 52,805 1,685,124
---------- ------ ------- ----------
$3,740,403 $1,204 $78,654 $3,662,953
========== ====== ======= ==========
</TABLE>
16
<PAGE>
Contractual maturities for securities designated as being held to
maturity at December 31, 1996 are shown below. Actual maturities will differ
from contractual maturities because borrowers may have the right to call or
prepay obligations with or without call or prepayment penalties.
<TABLE>
<CAPTION>
Amortized Fair
Cost Value
--------- --------
<S> <C> <C>
Maturing over one to five years $344,666 $342,373
======== ========
</TABLE>
Securities with a book value of $11,144,006, $11,206,529 and $5,958,955
having a fair value of $11,051,374, $11,211,215 and $5,749,831 were pledged to
secure deposits as of December 31, 1996, 1995 and 1994, respectively.
There were no sales of investment securities in the years ended December
31, 1996, 1995 or 1994.
5. LOANS AND ALLOWANCE FOR LOAN LOSSES
Major classifications of loans are as follows:
<TABLE>
<CAPTION>
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Demand and time $ 4,297,349 $ 4,013,059 $ 3,592,760
Construction and land development 5,339,284 4,963,158 3,573,371
Mortgage, net of deferred loan
fees of $379,526 in 1996 and
$356,616 in 1995 and $319,788
in 1994 49,621,803 41,529,808 39,724,483
Installment 5,275,299 4,299,792 3,888,502
Student 10,074 43,709 675,549
----------- ----------- -----------
64,543,809 54,849,526 51,454,665
Allowance for loan losses 959,217 676,734 711,986
----------- ----------- -----------
Loans - net $63,584,592 $54,172,792 $50,742,679
=========== =========== ===========
Loan maturities are as follows:
Within one year $ 7,698,123 $ 7,941,029 $ 6,385,737
Over one to five years 9,116,389 7,393,623 5,003,836
Over five years 47,729,297 39,514,874 40,065,092
----------- ----------- -----------
$64,543,809 $54,849,526 $51,454,665
=========== =========== ===========
</TABLE>
17
<PAGE>
Transactions in the allowance for loan losses for the years ended
December 31 are as follows:
<TABLE>
<CAPTION>
1996 1995 1994
---------- -------- --------
<S> <C> <C> <C>
Beginning of year $ 676,734 $711,986 $645,727
Provision charged to operations 334,000 75,000 120,000
Recoveries 18,660 32,404 24,485
---------- -------- --------
1,029,394 819,390 790,212
Loans charged off 70,177 142,656 78,226
---------- -------- --------
End of year $ 959,217 $676,734 $711,986
========== ======== ========
</TABLE>
Amounts past due 90 days or more at December 31 and still accruing
interest are as follows:
<TABLE>
<CAPTION>
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Demand and time $ - $ 2,500 $109,000
Mortgage 180,370 465,703 224,781
Installment 32,468 28,928 36,284
-------- -------- --------
$212,838 $497,131 $370,065
======== ======== ========
</TABLE>
Loans in nonaccrual status at December 31, 1996, 1995 and 1994 amounted
to $-0-, $23,231 and $19,127, respectively.
On December 31, 1996, the Bank had no loans which met its criteria to be
classified as impaired. At December 31, 1995, the Bank had a loan with a
principal balance of $23,231 that was specifically classified as impaired. The
average balance of this loan was $25,000 for the year ended December 31, 1995.
The allowance for loan losses related to the impaired loan was approximately
$8,000 at December 31, 1995. The cash receipts on this loan during 1995 were
$4,393, which were applied to reduce principal and interest. The impaired loan
was placed on nonaccrual status with all previously accrued interest that was
not collected being reversed against interest income. The effect of placing
this loan on nonaccrual resulted in a $1,148 reduction to interest income for
1995.
6. BANK PREMISES AND EQUIPMENT
A summary of bank premises and equipment is as follows:
<TABLE>
<CAPTION>
Estimated
Useful Life 1996 1995 1994
------------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Land $ 65,365 $ 65,365 $ 65,365
Bank premises 5 - 40 years 1,210,083 1,001,077 1,014,882
Furniture and
equipment 5 - 15 years 978,544 778,830 1,107,583
Automobile 5 years 13,500 13,500 13,500
---------- ----------- -----------
2,267,492 1,858,772 2,201,330
Accumulated
depreciation 1,315,770 1,123,767 1,476,303
---------- ----------- -----------
$ 951,722 $ 735,005 $ 725,027
========== =========== ===========
Depreciation expense $192,003 $ 139,057 $ 127,835
========= =========== ===========
</TABLE>
18
<PAGE>
Included in other assets is software as follows:
<TABLE>
<CAPTION>
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Cost $298,483 $287,728 $256,213
Accumulated amortization 226,545 199,869 149,636
-------- -------- --------
$ 71,938 $ 87,859 $106,577
======== ======== ========
Amortization expense $ 26,676 $ 50,355 $ 48,226
======== ======== ========
</TABLE>
7. LEASE COMMITMENT
The Bank has leased a bank building from a director of the Bank. The
lease was for an initial term of ten years beginning October 31, 1975 with the
option to extend the lease for four terms of five years. The Bank has
exercised the option to extend this lease for an additional five years,
commencing October 31, 1996. The rent expense incurred for this property was
$28,438 for 1996, 1995 and 1994. Minimum lease obligations as of December 31,
1996 are as follows:
<TABLE>
<CAPTION>
<S> <C>
1997 $ 28,438
1998 28,438
1999 28,438
2000 23,698
</TABLE>
8. SHORT-TERM BORROWINGS
Short-term borrowings consist of U.S. Treasury demand notes. At December
31, 1996, the Bank had a secured reverse repurchase line of credit for
$1,000,000 and unsecured lines aggregating $2,500,000, all of which were
available at that date.
9. OTHER TIME DEPOSITS
Other time deposits include certificates of deposits in denominations of
$100,000 or more of $8,063,814, $6,962,316, $4,198,113 and as of December 31,
1996, 1995 and 1994, respectively.
10. RETIREMENT PLANS
The Bank has a defined benefit plan covering substantially all of the
employees. Benefits are based primarily on average compensation over all years
of service. The Bank makes contributions to the plan in amounts sufficient to
satisfy minimum funding standards, determined using the frozen initial
liability method. Assets of the plan are held in trust and invested in
interest-bearing deposits, U.S. Government securities and first mortgage loans.
19
<PAGE>
The following table sets forth the financial status of the plan at
December 31:
<TABLE>
<CAPTION>
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Accumulated benefit obligation:
Vested $803,210 $716,988 $527,145
Nonvested 12,242 10,927 56,823
-------- -------- --------
$815,452 $727,915 $583,968
======== ======== ========
<CAPTION>
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Fair value of plan assets $965,484 $909,938 $807,462
Projected benefit obligation 879,007 775,466 617,542
-------- -------- --------
Plan assets in excess of projected
benefit obligation 86,477 134,472 189,920
Unrecognized prior service costs (26,147) (29,789) (33,430)
Unamortized net asset at transition (7,453) (8,518) (9,583)
Unrecognized net loss or (gain) 70,881 42,392 (18,296)
-------- -------- --------
Prepaid pension expense included
in other assets $123,758 $138,557 $128,611
======== ======== ========
Net pension expense includes the
following:
<CAPTION>
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Service cost $ 71,579 $ 67,333 $ 45,274
Interest cost 60,643 48,360 44,868
Actual return on assets (47,513) (70,695) (22,132)
Net amortization and deferral (29,694) 908 (45,083)
-------- -------- --------
Net pension expense $ 55,015 $ 45,906 $ 22,927
======== ======== ========
Assumptions used in the accounting for
net pension expense were:
<CAPTION>
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Discount rates 8.0% 8.0% 8.0%
Rate of increase in compensation levels 5.5% 5.5% 5.5%
Long-term rate of return on assets 8.0% 8.0% 8.0%
</TABLE>
During 1995, the Bank initiated a profit sharing plan under the
provisions of the Internal Revenue Code Section 401(k). Eligible employees are
allowed to contribute up to 15% of their salary on a pretax basis. The Bank,
at its discretion, may contribute up to 5% of eligible employees salary.
Expense recognized for the year ended December 31, 1996 was $24,996 and $18,622
for 1995.
20
<PAGE>
11. LONG-TERM BORROWING
At December 31, 1996, long-term borrowing consists of a $2,000,000
advance from the Federal Home Loan Bank of Atlanta with interest payable at
5.15%. Principal reductions are due as follows:
<TABLE>
<S> <C>
1997 $1,000,000
1998 1,000,000
-----------
$2,000,000
==========
</TABLE>
The Bank has pledged approximately $25,000,000 of its residential first
mortgage loans as collateral for this borrowing. At December 31, 1996, the
Bank has an additional $8,000,000 available for borrowing from the Federal Home
Loan Bank of Atlanta.
12. INCOME TAXES
A reconciliation between income tax expense and taxes computed at the
statutory federal rate for the years ended December 31 follows:
<TABLE>
<CAPTION>
1996 1995 1994
---------- --------- ---------
<S> <C> <C> <C>
Tax computed at statutory rate of 34% $532,260 $546,522 $483,783
Increases (decreases) in tax resulting from:
Tax-exempt income (63,286) (33,046) (28,767)
State franchise tax, net of federal
income tax benefit 48,039 74,808 65,813
Officers' life insurance premiums 384 1,193 (914)
Other 2,363 4,779 7,864
--------- -------- --------
$519,760 $594,256 $527,779
========= ======== ========
</TABLE>
The deferred tax effects of temporary differences between financial and
taxable income are as follows:
<TABLE>
<CAPTION>
1996 1995 1994
--------- -------- --------
<S> <C> <C> <C>
Provision for loan losses $(109,230) $ 310 $(17,865)
Deferred fees on loans (8,919) (14,152) (25,577)
Depreciation (10,371) 13,157 345
Pension expense (5,514) (3,370) 3,793
Nonaccrual loan interest (450) 6,937 (502)
Other (3,862) 280 -
--------- -------- --------
$(138,346) $ 3,162 $(39,806)
========= ======== ========
</TABLE>
21
<PAGE>
At December 31, 1996, 1995 and 1994, net deferred tax assets totaled
$484,894, $312,589, and $484,894, $312,589, and $448,500, respectively and
consisted of the following:
<TABLE>
<CAPTION>
1996 1995 1994
------------------- ------------------- -------------------
Asset Liability Asset Liability Asset Liability
-------- --------- -------- --------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
Provisions for credit losses $370,449 $ - $261,219 $ - $261,529 $ -
Depreciation - 11,118 - 21,489 - 8,332
Unrealized holding (gains)
losses on investment
securities available for sale 25,065 - - 9,795 123,233 -
Loan fees 146,573 - 137,654 - 123,50 -
Pension expense - 49,937 - 55,450 - 58,820
Other 3,862 - 450 - 7,388 -
-------- ------- -------- ------- -------- ---------
$545,949 $61,055 $399,323 $86,734 $515,652 $67,152
======== ======= ======== ======= ======== =========
</TABLE>
13. RELATED PARTY TRANSACTIONS
The officers and directors of the Bank enter into loan transactions with
the Bank in the ordinary course of business. The terms of these transactions
are similar to the terms provided to other borrowers entering into similar loan
transactions. At December 31, 1996, 1995 and 1994 the total amount of such
loans outstanding was $1,667,497, $1,075,324 and $1,390,099, respectively.
14. COMMITMENTS
The Bank is a party to financial instruments with off-balance sheet risk
in the normal course of business to meet the financial needs of its customers.
These financial instruments consist of lines of credit, undisbursed
construction loans, and standby letters of credit, and involve, to varying
degrees, elements of credit risk in excess of the amount recognized in the
balance sheet. The amounts of these instruments express the extent of
involvement the Bank has in each class of financial instruments.
The Bank's exposure to loan loss from nonperformance by the other party
to these financial instruments is represented by the contractual amount of
those instruments. The Bank uses the same loan policies in making commitments
and conditional obligations as it does for on-balance sheet instruments.
The following commitments are outstanding as of December 31:
<TABLE>
<CAPTION>
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
Unfunded lines of credit $3,424,631 $4,299,556 $3,579,821
Undisbursed construction loans 2,170,321 1,123,549 1,189,462
---------- ---------- ----------
$5,594,952 $5,423,105 $4,769,283
========== ========== ==========
Standby letters of credit $559,585 $531,736 $566,647
======== ======== ========
</TABLE>
The loan risk involved in these financial instruments is essentially the
same as that involved in extending loans to customers. No amount has been
recognized by the Bank as of December 31, 1996, 1995 and 1994, as an allowance
for loan losses related to financial instruments with off-balance sheet risk.
22
<PAGE>
15. REGULATORY MATTERS
The Bank is subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory - and 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's capital amounts and
classification are also subject to qualitative judgments by the regulators
about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital
adequacy require the Bank to maintain amounts and ratios (set forth in the
table below) of total and Tier I capital (as defined in the regulations) to
risk-weighted assets (as defined), and of Tier I capital (as defined) to
average assets (as defined). Management believes, as of December 31, 1996,
that the Bank meets all capital adequacy requirements to which it is subject.
As of December 31, 1996, the most recent notification from the Federal
Deposit Insurance Corporation categorized the Bank 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. There are no
conditions or events since that notification that management believes have
changed the Bank's category.
The Bank's actual capital amounts and ratios are also presented in the
table (dollars in thousands).
<TABLE>
<CAPTION>
To Be Well
Capitalized Under
For Capital Prompt Corrective
Adequacy Action
Actual Purposes Provisions
--------------- ---------------- -----------------
Amount Ratio Amount Ratio Amount Ratio
------- ------ ------- ------- ------- ------
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1996:
Total Capital (to Risk Weighted
Assets) $10,660 18.57% $4,592 8.00% $5,740 10.00%
Tier I Capital (to Risk Weighted
Assets) $ 9,942 17.32% $2,296 4.00% $3,444 6.00%
Tier I Capital (to Average Assets) $ 9,942 10.94% $3,637 4.00% $4,546 5.00%
As of December 31, 1995:
Total Capital (to Risk Weighted
Assets) $10,202 21.86% $3,734 8.00% $4,667 10.00%
Tier I Capital (to Risk Weighted
Assets) $ 9,618 20.61% $1,867 4.00% $2,800 6.00%
Tier I Capital (to Average Assets) $ 9,618 11.37% $3,384 4.00% $4,230 5.00%
</TABLE>
23
<PAGE>
DIRECTORS
<TABLE>
<CAPTION>
<S> <C>
James G. Crouse Henry W. Mason
Judy E. Hart Robert E. Noll
Eugene F. Herman Charles F. Sposato
Donald S. Hicks David K. Williams, Sr.
Leroy Manlove
</TABLE>
FORMER DIRECTORS
<TABLE>
<CAPTION>
<S> <C> <C> <C>
G. Reynolds Ash 1938-1940* Reginald T. Lewis, Sr. 1985-1992
E. Kirk Brown, Sr. 1924-1933* Walton R. Mason 1981-1993
T. Wholley Brown 1956-1971* J. Wesley McAllister 1924-1926*
Robert E. Bryson 1966-1993 David McDowell 1938-1947*
August Carlson 1924-1926* Benjamin F. Miller 1924-1926*
John Cooper 1928-1929* John J. Minster 1924-1928*
Henry L. Constable 1924-1928* Frances M. Moore 1952-1952*
Ralph R. Crothers 1953-1975* Ira A. Moore 1947-1953*
J. Ben Decker, Sr. 1924-1933* Roy K. Neeper 1991-1995
Clarence S. Diggs 1961-1973* Robert E. Olewine, Sr. 1975-1993
Wm. Sterling Evans 1925-1947* Sylvester Preston 1942-1946*
Cecil E. Ewing 1953-1979* Lyle A. Ramer 1965-1974*
Daniel H. Garrett 1935-1938* Argus F. Robinson 1927-1992*
B. F. Harrington, Jr. 1972-1991 Guy S. Rogers 1975-1985*
Joseph F. Holt, Sr. 1935-1936* J. Reese Short 1964-1993
Dr. James L. Johnson 1972-1979* H. Ellsworth Simpers 1924-1940*
Nathan B. Karl 1935-1962* Hattie I. Simpers 1948-1956*
John Lawrence, Sr. 1924-1952* Wm. Thomas Simpers 1933-1937*
Dr. Clifton C. Laws 1924-1928* Lyman A. Spence 1948-1968*
Fred H. Leffler 1935-1953* John P. Stanley 1958-1985*
J. Wirt Willis 1924-1928*
* DECEASED
</TABLE>
EMPLOYEES
<TABLE>
<CAPTION>
<S> <C>
Rebecca A. Abromitis Thomas W. Lofland
Angelia C. Banning C. Dale Lofthouse
Sarah L. Barcus Lisa J. Lundberg
Brenda D. Berry Doris Martinez
Kathie Borkoski Kimberly R. Mason
Catherine M. Bowen June E. McClay
Deron G. Brown Ericka M. Meyer
Brandi L. Butler Bonnie Mullen
Anthony J. Candeloro Ann Myers
Michele Cooper Robert E. Noll
Diane Culver Catherine A. Powell
Marsha A. DiFilippo Nancy Powers
Wilbert Dill, Jr. Jo Anne Reeves
Cathy C. Dunn Cynthia P. Reynolds
Cheri M. DuPree Julie A. Reynolds
Jean M. Pippin-Ferrese Donna A. Scott
Gerald K. Ford Yvonne L. Titter
Melissa Goodwin Terry L. Ubil
Nancy J. Gray Julia VanHoy
Jennifer D. Harrington Catherine A. Valerino
Ann Hitman E. Bennett Wilson, Jr.
Jacklyn I. Jianniney Shirley J. Wurst
Dorothea A. Keller
</TABLE>
24
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 20. Indemnification of Directors and Officers.
-----------------------------------------
Subchapter D of Chapter 17 of the Pennsylvania Business Corporation Law of
1988, as amended (BCL), 15 Pa. C.S. (S)(S) 1741-50, provides that a business
corporation shall have the power under certain circumstances to indemnify its
directors, officers, employees and agents against certain expenses incurred by
them in connection with any threatened, pending or completed action, suit or
proceeding. A copy of Subchapter D of Chapter 17 of the BCL is attached as
Exhibit 99(d) to this Registration Statement.
Article V of the Bylaws of Fulton Financial Corporation provides for the
indemnification of its directors, officers, employees and agents in accordance
with, and to the maximum extent permitted by, the provisions of Subchapter D of
Chapter 17 of the BCL. Article V of the Bylaws of Fulton Financial Corporation,
as set forth in Exhibit 3(b) to this Registration Statement, is hereby
incorporated by reference in response to this Item 20.
Fulton Financial Corporation has purchased insurance to indemnify its
directors, officers, employees and agents under certain circumstances.
For disclosure concerning the position of the Securities and Exchange
Commission on indemnification for liabilities arising under the Securities Act
of 1933, see the Section in the Proxy Statement/Prospectus (which is included in
Part I of this Registration Statement) entitled INFORMATION CONCERNING FULTON
FINANCIAL CORPORATION AND DESCRIPTION OF FFC COMMON STOCK -- Indemnification.
Item 21. Exhibits and Financial Statement Schedules.
------------------------------------------
<TABLE>
(a) Exhibits:
--------
Number Title
------ -----
<S> <C>
2 Affiliation and Merger Agreement dated March 18, 1997,
between Fulton Financial Corporation and The Peoples
Bank of Elkton -- Furnished as Exhibit A to the Proxy
Statement/Prospectus which is included in Part I of
this Registration Statement
3(a) Articles of Incorporation of Fulton Financial
Corporation -- Incorporated by reference to Exhibit
(a)(i) of the Fulton Financial Corporation Quarterly
Report on Form 10-Q for the Quarter Ended June 30,
1987; Articles of Amendment of Fulton Financial Corporation
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Number Title
------ -----
<S> <C>
3(b) Bylaws of Fulton Financial Corporation -- Incorporated
by reference to Exhibit (a)(i) of the Fulton Financial
Corporation Quarterly Report on Form 10-Q for the
Quarter Ended June 30, 1989
4 Rights Agreement dated June 20, 1989, between Fulton
Financial Corporation and Fulton Bank -- Incorporated
by reference to Exhibit 1 of the Fulton Financial
Corporation Current Report on Form 8-K dated June 21,
1989
*5 Opinion of Barley, Snyder, Senft & Cohen, LLP
re: legality
*8 Opinion of Barley, Snyder, Senft & Cohen, LLP re: tax
matters
13 Annual Report on Form 10-K of Fulton Financial
Corporation for the Year Ending December 31, 1995 --
Incorporated by reference in the Proxy Statement/
Prospectus which is included in Part I of this
Registration Statement
*21 Subsidiaries of Fulton Financial Corporation
*23(a) Consent of Barley, Snyder, Senft & Cohen, LLP
*23(b) Consent of Arthur Andersen LLP
*23(d) Consent of Stegman & Company
*23(e) Consent of Berwind Financial, L.P.
*24 Power of Attorney
*99(a) Form of Proxy
*99(b) Letter to Shareholders of The Peoples Bank of Elkton
*99(c) Notice of Special Meeting of Shareholders of The
Peoples Bank of Elkton
*99(d) Statute Relating to Indemnification
</TABLE>
- ------------------------------------------------
* Previously filed
(b) Financial Statement Schedules:
-----------------------------
None required.
(c) Opinion of Financial Advisor:
----------------------------
Furnished as Exhibit B to the Proxy Statement/Prospectus which is included in
Part I of this Registration Statement.
<PAGE>
Item 22. Undertakings.
------------
(a) The undersigned registrant hereby undertakes as follows:
1. To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement: (i) to include any
prospectus required by Section 10(a)(3) of the Securities Act of 1933; (ii) to
reflect in the prospectus any facts or events arising after the effective date
of the registration statement (or the most recent post-effective amendment
thereof) which, individually or in the aggregate, represent a fundamental change
in the information set forth in the registration statement; and (iii) to include
any material information with respect to the plan of distribution not previously
disclosed in the registration statement or any material change to such
information in the registration statement; provided, however, that paragraphs
(a)(1)(i) and (a)(1)(ii) above do not apply if the registration statement is on
Form S-3, Form S-8 or Form F-3, and the information required to be included in a
post-effective amendment by those paragraphs is contained in periodic reports
filed with or furnished to the Commission by the registrant pursuant to Section
13 or Section 15(d) of the Securities Exchange Act of 1934 that are incorporated
by reference in the registration statement.
2. That, for the purpose of determining any liability under the Securities
Act of 1933, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
3. To remove from registration by means of a post-effective amendment any of
the securities being registered which remain unsold at the termination of the
offering.
(b) The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
registrant's annual report pursuant to Section 13(a) or Section 15(d) of the
Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to Section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in the
registration statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
(c) The undersigned registrant hereby undertakes as follows:
1. That prior to any public reoffering of the securities registered
hereunder through use of a prospectus which is a part of this registration
statement, by any person or party who is deemed to be an underwriter within the
meaning of Rule 145(c), the issuer undertakes that such reoffering prospectus
will contain the information called for by the applicable registration form with
<PAGE>
respect to reofferings by persons who may be deemed underwriters, in addition to
the information called for by the other items of the applicable form.
2. The registrant undertakes that every prospectus (i) that is filed
pursuant to the preceding paragraph, or (ii) that purports to meet the
requirements of Section 10(a)(3) of the Act and is used in connection with an
offering of securities subject to Rule 415, will be filed as a part of an
amendment to the registration statement and will not be used until such
amendment is effective, and that, for purposes of determining any liability
under the Securities Act of 1933, each such post-effective amendment shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
3. The undersigned registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Items 4, 10(b), 11, or 13 of this Form, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the registration statement through the
date of responding to the request.
The undersigned registrant hereby undertakes to supplement by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of the Securities Act of 1933, the registrant has
duly caused this amendment to registration statement to be signed on its behalf
by the undersigned, thereunto duly authorized, in the City of Lancaster,
Commonwealth of Pennsylvania on June 16, 1997.
FULTON FINANCIAL CORPORATION
Attest:/s/ William R. Colmery By:/s/ Rufus A. Fulton, Jr.
-------------------------- -------------------------------
William R. Colmery, Rufus A. Fulton, Jr., President
Secretary and Chief Executive Officer
[CORPORATE SEAL APPEARS HERE]
Pursuant to the requirements of the Securities Act of 1933, this amendment to
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Capacity Date
--------- -------- ----
<S> <C> <C>
* /s/ Jeffrey G. Albertson Director June 16, 1997
- ------------------------------
(Jeffrey G. Albertson)
* /s/ James R. Argires Director June 16, 1997
- ------------------------------
(James R. Argires)
* /s/ Donald M. Bowman, Jr. Director June 16, 1997
- ------------------------------
(Donald M. Bowman, Jr.)
* /s/ Thomas D. Caldwell, Jr. Director June 16, 1997
- ------------------------------
(Thomas D. Caldwell, Jr.)
Senior Vice President June 16, 1997
* /s/ Beth Ann L. Chivinski and Controller
- ------------------------------ (Principal Accounting
(Beth Ann L. Chivinski) Officer)
* /s/ Harold D. Chubb Director June 16, 1997
- ------------------------------
(Harold D. Chubb)
* /s/ William H. Clark, Jr. Director June 16, 1997
- ------------------------------
(William H. Clark, Jr.)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Signature Capacity Date
--------- -------- ----
<S> <C> <C>
*/s/ Frederick B. Fichthorn Director June 16, 1997
- ------------------------------
(Frederick B. Fichthorn)
*/s/ Patrick J. Freer Director June 16, 1997
- ------------------------------
(Patrick J. Freer)
*/s/ Rufus A. Fulton, Jr. President, Chief June 16, 1997
- ------------------------------ Executive Officer and
(Rufus A. Fulton, Jr.) Director
(Principal Executive
Officer)
*/s/ Eugene H. Gardner Director June 16, 1997
- ------------------------------
(Eugene H. Gardner)
*/s/ Robert D. Garner Chairman of the Board June 16, 1997
- ------------------------------ and Director
(Robert D. Garner)
*/s/ Daniel M. Heisey Director June 16, 1997
- ------------------------------
(Daniel M. Heisey)
*/s/ J. Robert Hess Director June 16, 1997
- ------------------------------
(J. Robert Hess)
*/s/ Carolyn R. Holleran Director June 16, 1997
- ------------------------------
(Carolyn R. Holleran)
*/s/ Clyde W. Horst Director June 16, 1997
- ------------------------------
(Clyde W. Horst)
*/s/ Samuel H. Jones, Jr. Director June 16, 1997
- ------------------------------
(Samuel H. Jones, Jr.)
*/s/ Bernard J. Metz, Sr. Director June 16, 1997
- ------------------------------
(Bernard J. Metz, Sr.)
Executive Vice June 16, 1997
President and Chief
*/s/ Charles J. Nugent Financial Officer
- ------------------------------ (Principal Financial
(Charles J. Nugent) Officer)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Signature Capacity Date
--------- -------- ----
<S> <C> <C>
*/s/ Arthur M. Peters, Jr. Director June 16, 1997
- ------------------------------
(Arthur M. Peters, Jr.)
*/s/ Stuart H. Raub, Jr. Director June 16, 1997
- ------------------------------
(Stuart H. Raub, Jr.)
*/s/ Donald E. Ruhl Director June 16, 1997
- ------------------------------
(Donald E. Ruhl)
*/s/ William E. Rusling Director June 16, 1997
- ------------------------------
(William E. Rusling)
Director June 16, 1997
- ------------------------------
(Mary Ann Russell)
*/s/ John O. Shirk Director June 16, 1997
- ------------------------------
(John O. Shirk)
*/s/ R. Scott Smith Executive Vice June 16, 1997
- ------------------------------ President
(R. Scott Smith)
*/s/ James K. Sperry Executive Vice June 16, 1997
- ------------------------------ President and
(James K. Sperry) Director
*/s/ Kenneth G. Stoudt Director June 16, 1997
- ------------------------------
(Kenneth G. Stoudt)
</TABLE>
* By /s/ William R. Colmery, attorney-in-fact
-------------------------------------------
<PAGE>
EXHIBIT INDEX
Required Exhibits
-----------------
<TABLE>
<CAPTION>
Number Title
------ -----
<S> <C>
2 Affiliation and Merger Agreement dated
March 18, 1997, between Fulton
Financial Corporation and The Peoples
Bank of Elkton -- Furnished as Exhibit
A to the Proxy Statement/Prospectus
which is included in Part I of this
Registration Statement
3(a) Articles of Incorporation of Fulton
Financial Corporation -- Incorporated
by reference to Exhibit (a)(i) of the
Fulton Financial Corporation Quarterly
Report on Form 10-Q for the Quarter
Ended June 30, 1987; Articles of Amendment
of Fulton Financial Corporation
3(b) Bylaws of Fulton Financial Corporation
-- Incorporated by reference to Exhibit
(a)(i) of the Fulton Financial
Corporation Quarterly Report on Form
10-Q for the Quarter Ended June 30,
1989
4 Rights Agreement dated June 20, 1989,
between Fulton Financial Corporation
and Fulton Bank -- Incorporated by
reference to Exhibit 1 of the Fulton
Financial Corporation Current Report on
Form 8-K dated June 21, 1989
5 Opinion of Barley, Snyder, Senft &
Cohen, LLP re: legality
8 Opinion of Barley, Snyder, Senft &
Cohen, LLP re: tax matters
13 Annual Report on Form 10-K for Fulton
Financial Corporation for the Year
Ending December 31, 1996 --
Incorporated by reference in the Proxy
Statement/Prospectus which is included
in Part I of this Registration
Statement
21 Subsidiaries of Fulton Financial
Corporation
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Number Title
------ -----
<S> <C>
* 23(a) Consent of Barley, Snyder, Senft &
Cohen, LLP
* 23(b) Consent of Arthur Andersen LLP
* 23(d) Consent of Stegman & Company
* 23(e) Consent of Berwind Financial, L.P.
* 24 Power of Attorney
* 99(a) Form of Proxy
* 99(b) Letter to Shareholders of The Peoples
Bank of Elkton
* 99(c) Notice of Special Meeting of
Shareholders of The Peoples Bank of
Elkton
* 99(d) Statute Relating to Indemnification
- --------------------------------------------------
</TABLE>
* Previously filed
<PAGE>
EXHIBIT 3
FULTON FINANCIAL CORPORATION
ARTICLES OF AMENDMENT - DOMESTIC BUSINESS CORPORATION
In compliance with the requirements of 15 Pa.C.S. (S)1915 (relating to
articles of amendment), the undersigned business corporation, desiring to amend
its Articles, hereby states that:
1. The name of the corporation is: Fulton Financial Corporation.
2. The (a) address of this corporation's current registered office in
this Commonwealth or (b) name of its commercial registered office provider and
the county of venue is: One Penn Square, P.O. Box 4887, Lancaster, Pennsylvania
17604, Lancaster County.
3. The statute by or under which it was incorporated is: Business
Corporation Law of 1933.
4. The date of its incorporation is: February 8, 1982.
5. The amendment shall be effective upon filing these Articles of
Amendment in the Department of State.
6. The amendment was adopted by the shareholders (or members) pursuant
to 15 Pa.C.S. (S)1914(a) and (b).
7. The amendment adopted by the corporation, set forth in full, is as
follows:
RESOLVED, that the first sentence of Article 5 of the Articles of
Incorporation of the Corporation be amended in its entirety to read as
follows:
5. The aggregate number of shares which the Corporation shall have
authority to issue is 210,000,000 shares, divided into
200,000,000 shares of Common Stock of Two and 50/100 Dollars
($2.50) par value per share and 10,000,000 shares of Preferred
Stock without par value.
